Does the duty of good faith extend to contract disclaimers?
Laurentian University (“Laurentian”) experienced a financial crisis and sought protection under the Companies’ Creditors Arrangement Act. Since February 1, 2021, Laurentian has undergone an overhaul of its entire financial and operational structure in order to create a sustainable operational future for the delivery of academic services. One component of the restructuring involved Laurentian terminating its relationship with three entities: the University of Sudbury (“Sudbury”), Thornloe University (“Thornloe”) and Huntington University (“Huntington”).
Laurentian operates within a federated structure whereby it has contracts with the three Federated Universities. These Federation Agreements provide that each of Sudbury, Thornloe and Huntington agree to suspend their degree-conferring powers in favour of Laurentian. In exchange, Laurentian agreed to distribute to each of the three universities a portion of the revenue it received from the provincial government for each student. Under this arrangement, Laurentian retained a 15% service fee for its provision of central computing services, administration of pension and employee benefits, security, and student support services.
On April 1, 2021, Laurentian issued a Notice of Disclaimer pursuant to s. 32 of the CCAA in order to disclaim the Federation Agreements. Among other things, it sought to have the former students of Sudbury, Thornloe and Huntington as part of its student body so that it was no longer required to transfer the revenue it receives per student to the three federated universities. Laurentian and Huntington came to an agreement about how to dissolve their partnership. Thornloe and Sudbury proceeded with their motions to set aside the Disclaimer. This decision details the Court’s dismissal of Sudbury’s motion. The dismissal of Thornloe’s motion was dealt with in a companion decision released by Chief Justice Morawetz.
Where a party seeks an order disallowing a Notice of Disclaimer, s. 32(4) of the CCAA requires the Court to consider certain non-exhaustive factors when deciding whether or not to permit or reject the disclaimer of an agreement. Other relevant provisions in the CCAA include a requirement to act in good faith pursuant to s. 18.6. Sudbury argued that the duty of good faith in s.18.6 extends to Disclaimer Notices, and that Laurentian had acted in bad faith by attempting to disclaim the Federation Agreement.
Specifically, Sudbury alleged that Laurentian sought to use the CCAA restructuring process for a collateral and improper purpose by effectively destroying a competitor. It submitted that Laurentian could have but did not attempt alternate solutions, such as a renegotiation of its service fee, and Laurentian failed to enter into the required good faith negotiations with Sudbury.
The Court disagreed that Laurentian sought a Disclaimer of the Federation Agreements for a collateral, improper or illegitimate purpose. This was not a matter of putting a competitor out of business; it was simply a matter of putting an end to an unsustainable financial model within the context of difficult and urgent circumstances. The Federation Agreements could be legitimately disclaimed pursuant to s. 32 of the CCAA. Disallowing the Disclaimer would seriously diminish the prospects of a viable plan to be put to creditors. Any plan that allows for funds to continue to flow away from Laurentian was not viable.
The Court held that Laurentian did not have a legal duty to act in the interests of the Federated Universities. Its most significant duty was to its creditors. Laurentian engaged in two months of intensive mediation with all of its stakeholders, and managed to achieve positive results with Huntington and its unions. Failure to achieve a resolution with Thornloe and Sudbury did not mean that it was not making good faith attempts at resolution with the latter two universities.
The Disclaimer met the requirements of s. 34(2) (a) and (b) in that the Monitor approved the Disclaimer and that, without the additional revenue from Sudbury and the other federated universities, Laurentian would not be able to put forward a viable plan for its creditors. Avoiding the bankruptcy of Laurentian was in keeping with the objectives of the CCAA. A bankruptcy would displace students and faculty, and would have a detrimental effect on stakeholders, suppliers and service providers in the Sudbury community. Avoiding a bankruptcy meant, among other things, dissolving the Federation Agreements.
Accordingly, the Court dismissed Sudbury’s motion to set aside the Disclaimer.
Counsel: D.J. Miller, Mitchell Grossell, Andrew Hanrahan and Derek Harland of TGF for the Applicant/Responding Party; Ashley Taylor, Elizabeth Pillon and Ben Muller of Stikeman Elliott for the Court-appointed Monitor, Ernst & Young; Vern W. DaRe of Fogler, Rubinoff for the DIP Lender; André Claude and Ronald W. Caza, University of Sudbury Counsel for the Moving Parties
Judge: Gilmore J.