Rent obligations in a pandemic – new tricks/ desperate efforts

MACs may be all the rage in the Covid times for getting out of M&A deals, but are there any tricks for retailers trying to getting out of rent obligations?

This week’s Canadian Business Law Blog has reported on an interesting “doing business in the midst of a pandemic” issue. Hudson’s Bay Co. (HBC) filed a lawsuit against Oxford Properties Retail Holdings, the landlord of several of its department stores, alleging a failure to operate and maintain “first class shopping centres.” HBC argues that Oxford “has refused to deliver suitable premises since reopening after COVID-19 shutdowns”…”and no longer provides a retail environment viewed as safe or attractive by the public”. HBC is not only seeking a declaration that it does not have to pay rent until these issues are fixed by the landlord but also asking for the “disgorgement” of rent paid to Yorkdale Shopping Centre Holdings Inc., Square One Shopping Centre Holdings Inc. and other Oxford subsidiaries since April of this year.

The other side of the story is that HBC has not paid rents owed to Oxford for seven months and according to Oxford, “recurring attempts to engage the company in a constructive dialogue were repeatedly ignored” by HBC. Retail stores have struggled to pay rent in the post Covid world. In the UK, many high street companies are using restructuring and other insolvency processes to deal with the situation. HBC seems to have decided to find other avenues to handle its non-payment of rent.

Pots of gold

The Supreme Court of Canada, in 9354-9186 Québec inc. v.  Callidus Capital Corp., 2020 SCC 10, has provided useful guidance on interim finance and third-party litigation funding in the context of insolvency rescue procedures. Although the decision interprets the Companies’ Creditors Arrangement Act (CCAA), the decision will be useful guidance to courts in Australia and New Zealand, while dealing with corporate insolvency cases with a view to promote rescue and restructuring.

The decision holds that litigation funding agreements may be one form of interim financing [109]. Quoting Professor Janis Sarra, the court defines interim finance as “the working capital that the debtor corporation requires in order to keep operating during restructuring proceedings, as well as to the financing to pay the costs of the workout process”. [85]

Further, the court offered a helpful pointer to distinguish between a litigation funding agreement and a plan of arrangement. This distinction is significant “because, if the agreement was in fact a plan, it would have had to be put to a creditors’ vote”. [99]

Wagner C.J and Moldaver J, writing for the court, explain the difference between the two at [102]:

For our purposes, it is sufficient to conclude that plans of arrangement require at least some compromise of creditors’ rights. It follows that a third party litigation funding agreement aimed at extending financing to a debtor company to realize on the value of a litigation asset does not necessarily constitute a plan of arrangement. We would leave it to supervising judges to determine whether, in the particular circumstances of the case before them, a particular third party litigation funding agreement contains terms that effectively convert it into a plan of arrangement. So long as the agreement does not contain such terms, it may be approved as interim financing pursuant to s. 11.2 of the CCAA.

Comparing a litigation claim to a “pot of gold” (borrowing the phrase from the Court of Appeal in its decision in Re Crystallex, 2012 ONCA 404, 293 O.A.C. 102), the court further explains at [111]:

Plans of arrangement determine how to distribute that pot. They do not generally determine what a debtor company should do to fill it. The fact that the creditors may walk away with more or less money at the end of the day does not change the nature or existence of their rights to access the pot once it is filled, nor can it be said to “compromise” those rights. When the “pot of gold” is secure — that is, in the event of any litigation or settlement — the net funds will be distributed to the creditors.

Courts in Australia and New Zealand will be dealing companies attempting to restructure under the Voluntary Administration process (or under New Zealand’s new Business Debt Hibernation process). As Scot Atkins has noted, Australian courts could consider allowing interim debt financing while exercising their discretionary power under s 447A of the Corporations Act. Third party litigation funding has already been used in Australia and to a lesser extent in New Zealand in the context of insolvency processes. Interim debt financing could be another handy tool for the COVID related insolvencies that courts will have to deal with very soon. Distinguishing such proposals from a formal plan will be important too. Canada’s Callidus Capital case will offer useful guidance in making these determinations.

Nevsun, Vedanta and modern slavery laws

In a recent post, Enrique Boon Barrera has argued that the Canadian Supreme Court’s decision in Nevsun Resources Ltd. v. Araya was likely to have a broad reach and that  “the bar for dismissing claims of violations of international human rights committed by Canadian corporations abroad is much higher”. However, he does note that “the Supreme Court did not provide guidance regarding how to operationalize these new understandings”.

I had taken a more sceptical view of the decision and blogged here and here about it. The minority judges had the better argument in my view.

Although I don’t agree with Barrera’s optimistic assessment of the Nevsun judgement, there is indeed a need to address international human rights violations by corporations. The UK and Australia have modern slavery laws in place while Canada is in the initial stages of introducing one. These laws are intended to make companies pay attention to and report on human rights abuses in their supply chains. Interestingly, Nevsun had conducted a human rights impact assessment at the Bisha Mine in Eritrea and it will be interesting to see if the contents of the report become the basis of liability as was the case in the Vedanta judgement in the UK. A concern with such reports becoming the basis for parent company liability is that companies would be disincentivised from reporting honestly on these issues under the modern slavery laws.

 

FANTASTIC NEW TORTS AND WHERE TO FIND THEM – PART 3

In the latest edition of Fantastic new torts (for previous posts with this title see here and here) I circle back to Nevsun Resources Ltd. v. Araya 2020 SCC 5. (See here for a discussion of a different aspect of this judgement). Here, I discuss dissenting judges’ (Brown and Rowe JJ) excellent analysis of whether the new torts should be recognised.

New torts inspired by international law?

One of the pleadings of Eritrean workers was for the court to recognise four new torts “inspired by international law”. These are: use of forced labour; slavery; cruel, inhuman or degrading treatment; and crimes against humanity. Although the majority judgement did not rely too much on this aspect, the chambers judge and the Court of Appeal gave more weight to this pleading.

Tests

Brown and Rowe JJ, in examining this pleading or “theory of the case” as they say, discuss when Canadian common law courts should or should not recognise these new torts. The relevant principles in this regard are condensed into this:

“for a proposed nominate tort to be recognized by the courts, at a minimum it must reflect a wrong, be necessary to address that wrong, and be an appropriate subject of judicial consideration”. [237]

The rule about the tort needing to reflect a wrong means that the court is resistant to create absolute or strict liability regimes. [241] The rule of necessity implies that where alternative remedies exist, a new nominate tort need not be recognised. As Brown and Rowe JJ note, three alternative remedies exist: another tort, an independent statutory scheme, and judicial review. [238] Finally, the last rule about being an appropriate subject of judicial consideration refers to “the courts’ respect for legislative supremacy and the courts’ mandate to ensure that the law remains stable, predictable and accessible”. [242]

Two proposed torts would pass the test

Having clarified the relevant rules regarding this pleading Brown and Rowe JJ go on to conclude that two of the proposed torts fail these tests while the remaining two proposed torts would pass the tests. Even with respect to the proposed torts that pass the tests, they are of the opinion that the attempt to create such nominate torts is doomed to fail.

The proposed tort of cruel, inhuman or degrading treatment failed the necessity test because conduct captured by this proposed tort would also be captured by the torts of battery or intentional infliction of emotional distress. [245] The other proposed tort that fails is “crimes against humanity” because “it is too multifarious a category to be the proper subject of a nominate tort”. Many crimes against humanity would be already addressed under existing torts and “adopting such a tort wholesale would not be the kind of incremental change to the common law that a Canadian court ought to make”. [256]

Slavery and use of forced labour are the two proposed torts that would pass the test for recognizing a new nominate tort. Brown and Rowe JJ note that each of these proposed torts “may capture conduct not independently captured in torts such as battery, intentional infliction of emotional distress, negligence, or forcible confinement”. [247] Further, “to the extent there are non-tort alternative remedies under the criminal law, they would not restore the victim as tort law would”. [247] Finally, recognising these two new torts would not cause “unforeseeable or unknowable harm to Canadian law” because both slavery and forced labour are widely accepted to be illegal and morally reprehensible in Canada. [249]

Proposed new torts should not be recognised for the first time in this case

Having gone through the above analysis of whether the proposed new torts could be recognised, Brown and Rowe JJ go on to say that these two torts should not be recognised for the first time in the circumstances of the current case. Their reasoning is that the conduct alleged in this case occurred in a foreign territory, “where the workers had no connection to British Columbia at the time of the alleged torts, and where the British Columbian defendant has only an attenuated connection to the tort”. [251]

These aspects are relevant because the court should apply Eritrean law unless it finds that Eritrean law is “so repugnant to the fundamental morality of the Canadian legal system” that the courts would not apply it. In the former case, “judicial restraint would prevent the courts from recognizing a novel tort in Canadian law, because its application would be moot” and in the latter case “courts would be in the unfortunate position of setting out a position for the first time on these proposed new torts based on conduct that occurred in a foreign state”. [253]

Moreover, they note that recognising these new torts in such an “exceptional circumstance of a foreign state’s law being held by the court to be so repugnant to Canadian morality would be an intrusion into the executive’s dominion over foreign relations”. [259] In very categorical terms, Brown and Rowe JJ go on to note:

Our courts’ legitimacy depends on our place within the constitutional architecture of this country; Canadian courts have no legitimacy to write laws to govern matters in Eritrea, or to govern people in Eritrea. Developing Canadian law in order to respond to events in Eritrea is not the proper role of the court: that is a task that ought to be left to the executive, through the conduct of foreign relations, and to the legislatures and Parliament. [259]

This analysis is sound and the trial court will hopefully refrain from recognising the new torts in this case.