Ignore A Court Order At Your Peril: NL Supreme Court Orders Fully Indemnified Costs For Breach Of A CCAA Order

Darren D. O’Keefe, Partner, O’Keefe & Sullivan Lawyers

Edward Collins Contracting (“ECC”) filed for protection under the Companies' Creditors Arrangement Act (“CCAA”) in July 2022. As of early 2023, the restructuring process still involved numerous outstanding claims. On 14 March 2023, the Court issued a “Claims Process Order” outlining steps for resolution of these claims. An essential provision in this order was the "Claims Bar Date" of 27 March 2023, which, if missed by a claimant, would result in their claim being permanently extinguished and require the immediate release of any held funds.

The Claims Process Order expressly identified several claims, including the “Town of Deer Lake Claim”, involving a holdback of $59,279.41 retained by the Town of Deer Lake (the “Town”) regarding paving construction project which had been completed by ECC in 2020. The Monitor had previously sought remittance of this amount from the Town without success.

The Town did not comment on drafts of the Claims Process Order or submit a proof of claim. The Monitor made multiple attempts to solicit the Town's proof of claim, even after the deadline, but received no response, nor did the Town release the holdback funds. ECC ultimately initiated legal proceedings to compel the Town to release the holdback funds in July 2023.

Characterization of the Holdback

The parties disputed the nature of the holdback. ECC contended that the Town had unlawfully withheld a 10% holdback under the Mechanics Lien Act, despite no claims being filed within the statutory timeframe. In response, the Town claimed that the $59,279.41 represented a 15% "deficiency holdback" and argued that it utilized these funds to offset expenses incurred in remedying alleged deficiencies in ECC's work, which exceeded the holdback amount.

ECC countered that there was no contractual 15% “deficiency holdback”; rather, the holdback represented 10% of the contract value. Furthermore, the work offset against the holdback constituted warranty work which ECC had a contractual obligation to perform. ECC highlighted that the Town had asked ECC to complete this work in May 2021 but then terminated ECC’s contract on 24 hours' notice and immediately outsourced the work to a third-party contractor.

The Decision

Justice MacDonald began his oral decision by acknowledging the importance of the Claims Process Order in advancing the fundamental objectives of the CCAA, as articulated in Montréal (City) v. Deloitte Restructuring Inc., 2021 SCC 53: preventing economic losses caused by corporate liquidation, optimizing creditor recovery, ensuring fair treatment of claims, preserving ongoing business operations, shielding communities, and enhancing the overall credit system.

Justice MacDonald commended the Monitor for going “above and beyond the call of duty” while criticizing the Town’s failure to act with due diligence and for ignoring the Claims Process Order, setting a worrisome precedent which could fundamentally jeopardize the CCAA process. With regards to the holdback, Justice MacDonald concurred with ECC's position that the alleged "deficiencies" constituted contractual warranty work. He noted that the Town had failed to provide any evidence of actual deficiencies to support its arbitrary withholding of the holdback, contravening the contract's terms.

Further, the Town, as it conceded at the hearing, terminated the contract with only 24 hours' notice while ECC was onsite preparing to do the work, contrary to the contract's five-day notice requirement which was meant to inform ECC of a default and provide an opportunity to respond.

Having deliberately disregarded a court-ordered process, in defiance of the requirement for diligent and good-faith participation within the CCAA framework, and having presented no evidence to substantiate its position, Justice MacDonald ordered the Town to immediately remit to the Monitor the sum of $59,279.41, plus an additional amount reflecting the contractual rate of interest from the Claims Bar Date to the date of payment.

Costs

Both ECC and the Monitor sought full indemnity (solicitor and own client) costs for their legal and professional expenses based on the lack of merit of the Town’s claim, particularly given its size in relation to the total claims presented in the CCAA process and the expense required to deal with it due to the Town’s failure to respond to the Claims Process Order.

Justice MacDonald expressed concern that a party not being penalized for its failure to participate in CCAA proceedings, thus requiring this kind of effort and expense for claims that could have been expeditiously and cheaply resolved by the Monitor, would create a precedent that had the potential to “completely overwhelm” the effective functioning of the CCAA process.

Justice MacDonald referred to Perry vs. Heywood, [1998] NJ No 251 (NLSC), for guidance on cases where solicitor-client or full indemnity costs are appropriate. These cases involve actions taken in bad faith, baseless allegations of fraud or arson, committing fraud on the court through deceptive conduct or perjury, and employing obstructive tactics or consuming trial time on irrelevant issues to deplete the opponent's resources (para 64).

Justice MacDonald concurred with ECC that Column 3 costs would not suffice, given the dangerous precedent set by the Town's disregard of a court-ordered process. As well, despite the availability of several knowledgeable individuals, including the Mayor, who played central roles in decision-making on the project, the Town relied on a deponent with minimal personal knowledge of the case's facts to swear an affidavit that lacked any substantiating evidence. During cross examination, this deponent admitted to not being involved in contract administration, interpretation, default, and termination decisions, awarding new contracts, assessing deficiencies, or even in characterizing the claim as a deficiency holdback. All the information sworn was secondhand, rendering it unreliable. This raised significant additional concerns.

Given that the Town's failure to respond had compelled the parties to act outside the Claims Process Order, resulting in a time-consuming, meritless, and financially burdensome process, Justice MacDonald ordered solicitor and own client costs for both the Monitor and ECC. This decision was intended to emphasize the critical importance of adhering to efficient legal processes within the context of the CCAA.