Ontario Court of Appeal Clarifies Meaning of Eligible Financial Contracts

Androscoggin Energy LLC filed under Chapter 11 of the US Bankruptcy Code, and a section 18.6 ancillary proceeding under the Companies’ Creditors Arrangement Act (CCAA). On January 26, 2005, Justice James Farley of the Ontario Superior Court of Justice (Commercial List) dismissed the motion of AltaGas Ltd., Pengrowth Corp. and Canadian Forest Oil Ltd. (collectively, the gas suppliers), heard January 24, 2005, for a declaration that their contracts with Androscoggin were eligible financial contracts (EFCs) for the purposes of section 11.1 of the CCAA. Justice Farley also rejected the gas suppliers claim that the stay of proceedings resulting from the initial order granted pursuant to section 18.6 did not apply to these contracts. The contracts in question were long-term contracts for the supply of natural gas at fixed prices. Section 11.1 of the CCAA provides that a party to an EFC cannot be stayed from exercising certain contractual rights, including rights of termination. The Bankruptcy and Insolvency Act contains parallel provisions.

Justice Farley did not apply the definition given to “forward commodity contracts,” (one category of contracts included among EFCs), by the Alberta Court of Appeal in Re Blue Range, [2000] A.J. No. 1032. He instead shared the Alberta trial court’s concern in Re Blue Range that consideration must be given to the word “financial” in the definition of “eligible financial contracts.”

Justice Farley held that the essential relationship of the gas suppliers to Androscoggin Energy, over the terms of their respective supply contracts, was the actual physical supply of gas. As such, Justice Farley concluded that the gas
supply contracts in question were not EFCs. Justice Farley also held that, even if the contracts in question were EFCs, the contracts could not be terminated in the present circumstances, as the contracts specifically provided that they could only be terminated where Androscoggin failed to arrange for payment, and no default in payment obligations had occurred.

On February 18, 2005, (leave to appeal, leave to have the hearing of the appeal expedited, and leave to International Swaps and Derivatives Association, Inc. (ISDA) to intervene being granted) the appeal by the gas suppliers was dismissed by the Ontario Court of Appeal. While the Court of Appeal rejected any distinction between financially settled and physically settled transactions as the basis for distinguishing EFCs from other supply contracts, it nonetheless arguably narrowed the definition given to EFCs by the Alberta Court of Appeal in Re Blue Range. The Ontario Court of Appeal noted that the contracts before that court served a financial purpose unrelated to the physical settlement of the contracts. By way of contrast, the contracts before the Ontario Court of Appeal bore none of the “hallmarks” of an EFC—namely, the right to terminate the contract and the right to offset or net obligations under the contracts to determine the value of the amount of the commodity yet to be delivered in the future and to re-hedge the position in the event of an assignment in bankruptcy or a CCAA proceeding.

The Ontario Court of Appeal further noted that “mere pro forma insertion of such terms into a contract will not result in its automatic characterization as an EFC. Regard must be had to the contract as a whole to determine its character.”

Lastly, the Ontario Court of Appeal agreed with Justice Farley that even if the contracts in question were EFCs, such a characterization would not affect the rights of the gas suppliers and Androscoggin, as the terms of the contracts did not entitle the gas suppliers to terminate the contracts in the circumstances.

Androscoggin was represented by Joseph Steiner, Steven Golick and Nancy Roberts of Osler, Hoskin & Harcourt LLP. Douglas Nishimura of Burnet, Duckworth & Palmer LLP acted for Credit Suisse First Boston, agent for
Androscoggin’s secured creditors.

AltaGas was represented by Steven Leitl and Robert Frank of Macleod Dixon LLP; Justin Fogarty and Renée Brosseau of Bennett Jones LLP acted for Pengrowth and Canadian Forest with support in Calgary from Don Greenfield and Chris Simard; David Byers and Ashley John Taylor of Stikeman Elliott LLP acted for KPMG Inc. in its capacity as the information officer; and Barbara Grossman and David Mann of Fraser Milner Casgrain LLP acted for the intervener on the appeal, ISDA.


Chris D. Simard David W. Mann Joseph M. Steiner Arthur J. Stacey James M. Farley Nancy L. Roberts David R. Byers Doug S. Nishimura Steven Golick Robert Frank Steven H. Leitl Ashley John Taylor Justin R. Fogarty Donald E. Greenfield Barbara Grossman Renée B. Brosseau