Contracts in Insolvency

26  Download (0)

Full text


John Birch, Cassels Brock David Ward, Cassels Brock Joseph Bellissimo, Cassels Brock Andrea Safer, Royal Bank of Canada June 25, 2013

Contracts in


slide | 2


● Introduction

● Overview of contract disclaimer under the BIAandCCAA

● Noteworthy cases on the disclaimer or assignment of contracts

● Preventative steps in dealing with counterparties (front-end due diligence and ongoing monitoring)

● Insolvency considerations in contract drafting

● Treatment of real property leases

● Treatment of personal property leases

● Source code escrow provisions (and other preventative contract clauses)


slide | 3

Introduction: Restructuring in Canada — How Is It


● Two relevant statutes:

Bankruptcy and Insolvency Act (BIA): liquidation and restructuring

Companies’ Creditors Arrangement Act (CCAA): restructuring only ● Access to the CCAAonly available for companies with more than

$5 million in debt

CCAAtypically used for more complex restructurings

CCAAand the restructuring provisions of the BIA have similar, but not identical, provisions dealing with disclaiming and assigning contracts when restructuring

Introduction: Types of Processes for Insolvent


Under the


• A proposal to one or more classes of creditors may be filed; or

• A liquidation process (bankruptcy)

Under the


• A reorganization under which a plan of compromise or arrangement may be filed.


slide | 5

Overview of Contract Disclaimer: Reorganizing

Under the




● Historically no statutory provision, but courts typically used their discretion under the CCAA to authorize the disclaiming of insolvent debtors’ agreements when the disclaimer would facilitate

restructuring plans

● Since 2009: codified provisions

● Under CCAA

● Under proposal provisions of BIA

● Policy Rationale: facilitate restructuring and avoid value destruction even if some harm suffered by contract counterparties

slide | 6

Overview of Contract Disclaimer: Reorganizing

Under the




● Since 2009 Amendments to BIAand CCAAhave codified this area and now provide for consistency between the acts

● Sections 65.11 of the BIAand 32 of the CCAAallow for disclaimers in most types of agreements by delivering a prescribed notice pursuant to a prescribed form under the acts

● Disclaimers require Monitor/Proposal Trustee approval or, alternatively, court approval


slide | 7

Overview of Contract Disclaimer:






32.(1)…a debtor company may — on notice given in the prescribed form and manner to the other parties to the agreement and the monitor — disclaim or resiliate any agreement to which the company is a party on the day on which proceedings commence under this Act. The company may not give notice unless the monitor

approves the proposed disclaimer or resiliation.


65.11(1) …a debtor in respect of whom a notice of intention was filed under section 50.4 or a proposal was filed under

subsection 62(1) may — on notice given in the prescribed form and manner to the other parties to the agreement and the trustee — disclaim or resiliate any agreement to which the debtor is a party on the day on which the notice of intention or proposal was filed. The debtor may not give notice unless the trustee approves the proposed disclaimer or resiliation.

Overview of Contract Disclaimer: The Disclaimer

Process Under the


1.Debtor proposes to disclaim contract

2.Monitor/Trustee considers disclaimer: grants or refuses consent

3.If Monitor/Trustee consents, the disclaimer takes effect 30 days after counterparty receives notice unless counterparty goes to court to block the disclaimer

4.If Monitor/Trustee refuses to consent, then court approval of disclaimer, on notice to Monitor/Trustee and counterparty, is required

5.Counterparty can make a claim in the insolvency proceeding for damages resulting from the disclaimer


slide | 9

Overview of Contract Disclaimer:

Factors to be Considered by the Court

● The court must consider the following factors, among others, in deciding whether to approve the disclaimer (in circumstances where court approval is necessary):

● Whether the Monitor/Trustee approved the proposed disclaimer;

● Whether a disclaimer would enhance the prospects of a viable proposal or plan being made; and

● Whether the counterparty would suffer significant financial hardship as a result of the disclaimer.

slide | 10

Overview of Contract Disclaimer:

Agreements That Cannot Be Disclaimed

● Eligible financial contracts (i.e., swaps and derivatives)

● Collective agreements

● Financing agreements if the debtor is the borrower


slide | 11

Special Provisions: Intellectual Property Licences

● If debtor has granted an IP licence, any disclaimer by the debtor does not affect a licensee’s ability to use the IP or benefit from a right to exclusive use over the term of the licence, as long as the licensee continues to perform its obligations.

● The licensee also has these rights during any period of automatic renewal of the licence agreement.

● See BIA section 65.11(7) and CCAA section 32(6)

Disclaimers in Bankruptcy under the


● Bankruptcy does not automatically terminate a contract other than employment contracts and contracts of a personal nature

● However, the bankrupt typically ceases to perform the contract after the bankruptcy and the counterparty treats the contract as terminated

● Counterparty can file proof of claim for damages arising out of termination of contract

● Special provisions for termination of real property leases by bankrupt lessee (discussed further later)


slide | 13

Noteworthy Cases on Assignment and Disclaimer:

Timminco Ltd.,ONSC, 2012




Section 32 of the CCAA permits a counter-party to a contract disclaimed by the debtor company to apply to court for an order that the agreement is not to be disclaimed or resiliated.

Section 32(4) sets out factors to be considered by the court, among other things, in deciding whether to make the order:

(a) Whether the monitor approved the proposed disclaimer or resiliation;

(b) Whether the disclaimer or resiliationwould enhance the prospects of a viable compromise or arrangement being made in respect of the company; and

(c) Whether the disclaimer or resiliation would likely cause significant financial hardshipto a party to the agreement.‖


October 19,


slide | 14

Timminco Ltd.,ONSC, 2012





● In 1996, Mr. J. Thomas Timmins - CEO of Timminco Limited (“Timminco”) at the time - entered into a consulting agreement with Timminco (the “Agreement”) offering to provide consulting services upon his retirement or termination.

● Mr. Timmins resigned from Timminco in 2001.

● For a decade, monthly payments under the Agreement were made consistently to Mr. Timmins.

● In March 2012, after Timminco entered CCAA proceedings, Mr. Timmins was formally notified that the Agreement was being disclaimed pursuant to s.32 of the CCAA.


October 19,



slide | 15

Timminco Ltd.,ONSC, 2012





● Was Timmincoentitled to disclaim the Agreement pursuant to s.32 of the CCAA, or was application of the provision barred because it

would not enhance the prospects of a viable compromise or plan of arrangement?

● Was Timminco barred from disclaiming the Agreement because it would result in significant financial hardshipfor Mr. Timmins?


Timmincowas entitled to disclaim the Agreement.

● Disclaiming the Agreement with Mr. Timmins would enhance the prospect of a viable plan of arrangement, and would not result in significant financial hardship for Mr. Timmins.

Timminco Ltd.,ONSC, 2012





Timmincodisclaimed the Agreement to conserve its cash flow and

facilitate a successful sale of its assets with a view to restructuring the company.

● Section 32 should be interpreted broadly to apply, not just to a viable restructuring or plan of arrangement, but also to a sales process requiring the business to carry on as a going-concern.

● This is consistent with the remedial purpose of the CCAA.

● Without the disclaimer, Mr. Timmins would have received an enhanced priority over the other unsecured creditors, which would have contravened the guiding principle of the CCAA – to treat


slide | 17

Timminco Ltd.,ONSC, 2012




Financial Hardship

● Determining whether the disclaimer of an agreement causes significant financial hardship involves an analysis on the individual circumstances and characteristics of the other contracting party.

● This is a subjective test.

● If the test were objective, debtor companies would likely be unable to disclaim most agreements, even if the counter party was large enough to absorb the financial loss.

● Nothing on the record established that Mr. Timmins, an independently wealthy individual, would suffer a significant financial hardship.

● Not disclaiming the Agreement would improve his situation at the expense of other unsecured creditors of Timminco.

slide | 18

Aveos Fleet Performance Inc., QCCS, 2012




Aveos Fleet Performance Inc. (―Aveos‖), an airplane component manufacturer, commenced Companies’ Creditors Arrangement Act

(―CCAA‖) proceedings in March, 2012, subsequently shutting down the day-to-day operations of the business and entering liquidation.

● In April, 2012, a court issued an order approving the sale of Aveos


Aveoshad previously outsourced the design and installation of its computerized human resource system to a company called N.G.A.

● Following CCAA proceedings, Aveosnotified N.G.A. that they were disclaiming their Global Masters Services Agreement (―G.M.S.A.‖) with them pursuant to s.32 of the CCAA.


slide | 19

Aveos Fleet Performance Inc., QCCS, 2012




● Was Aveos permitted to disclaim the G.M.S.A. pursuant to s.32 of the CCAA, or were they barred from doing so because they had shut down operations and commenced liquidation, thereby negating the prospect of a plan of arrangement?


Aveoswas granted approval to disclaim their agreement with N.G.A.

Aveos Fleet Performance Inc., QCCS, 2012




The factors set out in s.32(4) are non-exhaustive, and new considerations may arise with new cases.

Aveosshould not be precluded from disclaiming the agreement merely because they had shut down operations and commenced liquidation.

● Shedding a costly and ineffectualsystem would increase the likelihood of an eventual plan of arrangement. The disclaimer would conserve cash flow and facilitate a future going-concern sale.

● The debtor party is not required to establish the disclaimer would be necessary to a plan of arrangement.

● The disclaimer would only need to provide an advantage in

realizing a potential plan of arrangement – the fact that the debtor is in ―liquidation mode‖ does not preclude a disclaimer.


slide | 21

Ford Credit Canada Ltd. v. Welcome Ford Sales

Ltd, ABCA, 2011



● (at para. 9) ―The BIA was amended on December 15, 2009 by the addition of s. 84.1, which allows a court, upon being satisfied that certain

prerequisites are met, to grant an order assigning the rights and obligations of the bankrupt under any agreement to a purchaser, even without the consent of the counter-party to the agreement.‖

● (at para. 29) ―The position at common law was always that if one party breached a condition (and not a mere warranty) in a contract, the other party to that contract had an election, either to treat the contract as continuing and insist on future performance, or to accept the repudiation and bring the contract to an end.‖

● (At para. 30) ―The effect of s. 84.1 of the BIA is to override the common law unilateral right of the innocent party to the contract to accept the repudiation and end the contract. It has been designed to preserve the value of the estate as a whole, even if the contractual rights of some creditors, such as Ford in this case, are compromised.‖

slide | 22

Ford Credit Canada Ltd. v. Welcome Ford Sales

Ltd, ABCA, 2011



● (at para. 32) ―Section 84.1 reads in part:

(1) On application by a trustee and on notice to every party to an agreement, a court may make an order assigning the rights and obligations of a bankrupt under the agreement to any person who is specified by the court and agrees to the assignment.


(3) Subsection (1) does not apply in respect of rights and obligations that are not assignableby reason of their nature ... (4) In deciding whether to make the order, the court is to consider, among other things,

(a) whether the person to whom the rights and obligations are to be assigned is able to perform the obligations; and (b) whether it is appropriate to assign the rights and obligationsto that person.‖


slide | 23

Ford Credit Canada Ltd. v. Welcome Ford Sales

Ltd, ABCA, 2011



Relevant Facts

Welcome Ford operated an automobile dealership franchise under an agreement with Ford Motor Company of Canada (―Ford”).

Welcome Ford was indebted to Ford for $7.7 million, and was assigned into bankruptcy under the Bankruptcy and Insolvency Act(―BIA‖),

following an application made by one of its creditors - the Bank of Montreal (―BMO‖).

● Relying upon section 84.1 of the BIA, the trustee in bankruptcy

marketed and sold the dealership agreement.

● Ford refused to consent to a sale, even to one of its own dealers notwithstanding that the ultimate purchaser’s offer produced more money for creditorsthan a liquidation without a sale of the dealership agreement.

● The trustee made an application to court to approve an assignment

of the dealership agreement over Ford’s objections.

Ford Credit Canada Ltd. v. Welcome Ford Sales

Ltd, ABCA, 2011




● Could Welcome Ford’s trustee compel an assignment of the dealership agreement?

● Ford argued they could not because (a) the agreement was personal in nature; (b) the estate would not benefit from the assignment; or (c) the assignment would be inappropriate due to the inability of the proposed assignee to perform the obligations under the agreement.


● Welcome Ford was permitted to assign the agreement pursuant to s.84.1 of the BIA despite the objections of Ford


slide | 25

Ford Credit Canada Ltd. v. Welcome Ford Sales

Ltd, ABCA, 2011




● s.84.1 was intended to preserve the value of the bankrupt’s estateby allowing for the assignment of agreements to third parties for value, even though the assignment might adversely affect the financial position of the other contracting party.

● The court’s determination in permitting an assignment of a contract involves a balancing of the relative interests and prejudices between the debtor and creditor parties.

● This balancing involves an analysis of whether the assignment would benefit the value of the estate, whether the proposed assignee is capable of performing the obligations under the agreement and whether, from the perspective of the other contracting party, it would be appropriate to assign the agreement.

● The Alberta Court of Appeal ultimately held that an assignment of the dealer contract was for the benefit of the estate and that the proposed assignee, an existing and successful Ford dealer, was capable of performing the contract.

slide | 26

Ford Credit Canada Ltd. v. Welcome Ford Sales

Ltd, ABCA, 2011




● the assignment would benefit Welcome Ford’ estate because the consideration was of a value sufficient to satisfy Welcome Ford’s debts to BMO, leaving a surplus to be dispersed among the unsecured creditors

● the franchise agreement was not personal in nature because it was not entered into with Welcome Ford based on special personal characteristics or confidences

● the assignee was capable of performing the agreement, evidenced by its successful operation of a different profitable Ford dealership

● other factors to determine appropriatenessinclude whether the assignment would remedy earlier breaches, and if the rights and remedies of Ford would be preserved


Contracts in Insolvency

Preventative and Remedial Steps in

Dealing with Counterparties


Andrea Safer

Senior Counsel, RBC Law Group

Provide legal support to Procurement as well as other RBC businesses and functional groups that enter into commercial contracts.

Draft and negotiate various business-to-business products and services contracts with a focus on information technology-related agreements, including contracts for the procurement of hardware, software and related services and outsourcing agreements

Ensure that RBC is adequately protected from risks associated with its vendor and service provider counterparties experiencing an insolvency event


Before entering into a contractual arrangement, ensure that the counterparty is financially sound

 Upfront risk assessment and due-diligence

 Undertake risk assessment in areas such as reputational risk, information security, business continuity and financial risk:

– What is the potential impact to client should the counterparty become insolvent?

– Risk Assessment should impact the due diligence required and the internal approval level required to proceed with the arrangement

Impact of Counterparty Insolvency

Vendor vs customer impact:

 Vendor:

– Impact of losing the payment stream: – Size and scope of contract – Structure of payments – Ability to easily replace contract

 Customer:

– impact/disruption to process or service being provided – Negligible/some impact/significant impact:

– Size and scope of contract – Number of other providers – Ability to easily replace contract


Due diligence:

Obtain an independent risk rating such as a credit bureau report of public debt rating

Financial disclosure at counterparty selection stage:

In the past 5 years, has your company experienced any major debt restructure or bankruptcy proceedings?

In the last fiscal year, what was your:

market value of equity

working capital

earnings before interest & tax

net sales

retained earnings

total assets and total liabilities

What level of protection is required?

 Size and scope of contract

 Parental Guarantee

– Vendor: payment guarantee – Customer:

– Performance guarantee – Financial support – Guarantee of indemnities

 Ongoing financial monitoring/disclosure

 Termination rights


Post-contractual Ongoing monitoring

Access to Financial Information:

– Ongoing obligation to provide financial information about party and its affiliates, as is reasonably necessary to be able to verify party’s ability to carry out its obligations under the Agreement

– Information can include audited or unaudited information prepared by party’s external auditors

– obligation of party to make its external auditors available to answer questions you may have from time to time about the financial information

 Consequences of poor financial information – Right to guarantee

– Changes to payment terms, term of contract – Termination rights

Remedial Steps

Termination Rights

Termination for Convenience

Termination upon occurrence of credit-related events:

– is or becomes bankrupt or insolvent

– becomes subject to the insolvency or bankruptcy laws of any jurisdiction in which it carries on business

– fails or declares its inability to pay amounts owed when they become due – winds up or passes a resolution to wind up or otherwise ceases to carry on its

ordinary business, voluntarily or otherwise

– causes the appointment of a receiver or custodian to take possession of its assets

– arranges with its creditors or applies to an administrator or court of competent jurisdiction for protection from its creditors

becomes, or party has reasonable grounds for believing (based on the financial information provided or otherwise) that the counterparty may imminently become, for any reason, incapable of continuing to perform its obligations under the Agreement


slide | 35

Insolvency Considerations in Contract Drafting

Key Insolvency Provisions Relevant to Contracts

● Upon CCAA/BIA filing ―no person may terminate or amend any agreement, including a security agreement, with the insolvent person, or claim an accelerated payment, or a forfeiture of the term, under any agreement, including a security agreement, with the insolvent person, by reason only [of the insolvency filing or the person’s insolvency]‖ (BIA ss.65.1(1) and 84.2(1); CCAA – ―Initial Order‖)

● In cases of leases and licenses, the prohibition is expanded to include non-payment of pre-filing rent, royalties or other similar payments as excluded basis for termination (BIA ss.65.1(2) and 84.2(2))

Insolvency Considerations in Contract Drafting


Key Insolvency Provisions Relevant to Contracts – (cont’d)

● Bankruptcy avoidance provisions in contracts are of no force or effect: ―Any provision in an agreement that has the effect of providing for, or permitting anything that, in substance, is contrary to [the above sections] is of no force or effect.‖ (BIA ss.65.1(5) and 84.2(5))

● Provisions of the CCAA ―Initial Order‖ will establish an even broader set of prohibitions and limitations under broad authority contained in s.11.02 of CCAA

● Also general ―stay‖ established under BIA and in CCAA Initial Orders that prohibits the exercise of any remedy that a creditor may have against the insolvent debtor upon a BIA/CCAA filing


slide | 37

Insolvency Considerations in Contract Drafting


Default/Termination Rights

● While ―deemed‖ or ―automatic‖ termination or enforcement provisions upon bankruptcy are of no force or effect, inclusion of termination and enforcement ―rights‖ are important

● Should be obvious, but many contracts do not provide that ―bankruptcy‖ is a default

● Important to be cognizant of how ―bankruptcy‖ is defined/described:

● ―assignment in bankruptcy‖

● ―application for bankruptcy order‖ (formerly ―bankruptcy petition‖)

● Filing of ―proposal‖ or ―notice of intention to make a proposal‖ under the BIA

● Application for relief/protection under the CCAA or granting of an order under the CCAA ● Appointment of ―private receiver‖

● Application for appointment of receiver or a receiver and manager or the appointment of a receiver or receiver and manager

● Others (WURA, wind up, dissolution, etc.)

slide | 38

Insolvency Considerations in Contract Drafting


Default/Termination Rights – (cont’d)

● Carefully consider what ―cure periods‖ apply to bankruptcy default

● Distinguishing cure rights between ―application for ...‖ and ―granting of ...‖

● Cure period to overturn/reverse bankruptcy events

● Be cautious of unintended ―double cure periods‖

● Express provisions creating right to legal and other fees upon default/ enforcement

● Provision for default interest

● Liquidated damages: genuine pre-estimate of damages vs penalty clause


slide | 39

Insolvency Considerations in Contract Drafting


Set-off Rights

● Law of set-off and compensation continues to apply in bankruptcy/ restructuring to the same extent and in the same manner outside of bankruptcy/restructuring (BIA s. 97(2) and CCAA s. 21)

● Therefore, no stay on set-off; however jurisprudence under the CCAA to ―temporally‖ stay set-off rights (Re Air Canada)

● Stay of set-off not customary in receivership (not contained in Commercial List Model Order) but may be ordered by Court in appropriate circumstances

● Preservation of set-off in BIA/CCAA includes both legal and equitable set-off

● But legal set-off complicated by ―mutuality‖ issues in bankruptcy/

receivership and equitable set-off complicated by preference considerations

● Therefore, contractual set-off provisions are best protection in event of counter-party insolvency

Insolvency Considerations in Contract Drafting


Securing Contractual Obligations

● Security not only for traditional loan arrangements

● Contract counterparty may grant security over all or part of assets to secure obligations under contract or credit extended

● Grant of security must be in writing and signed by debtor (i.e., not in unsigned standard terms and conditions)

● Grant of security less effective if not properly perfected

● Register security under PPSA

● Purchase money security interest in inventory: prior to taking possession of the goods: (a) security interest must be perfected (i.e., registered) and (b) notice must be given to other PPSA registrants


slide | 41

Treatment of Real Property Leases:

Proposals and CCAA Proceedings

Insolvent lessors cannot disclaim real property leases

BIA proposals:

Insolvent lessees can disclaim real property leases under

the CCAA and the proposal provisions of the BIA

the lessor can apply to the court to prevent the termination

of the lease

In that case, the insolvent lessee must prove that it would

not be able to make a viable proposal without disclaiming

this lease and other leases that have been disclaimed,

otherwise the court will not allow the lease to be disclaimed

CCAA: general disclaimer provisions apply

slide | 42

Treatment of Real Property Leases:

Effect of Disclaimer in BIA Proposal

Under section 65.2 (4) of the BIA,

● The lessor has no claim for accelerated rent

● The Proposal must indicate whether the lessor may file a proof of claim for actual losses from the disclaimer or the lesser of

i) The amount of rent provided for in the lease for the first year following the disclaimer plus fifteen percent of the rent for the remainder of the term after that; and

ii) Three years’ rent.


slide | 43

Treatment of Real Property Leases:

Bankrupt Lessees under the BIA

● Governed by the BIA and provincial legislation

● BIA section 136(1)(f): lessor has preferred claim for three months of rent arrears plus three months of accelerated rent

● Section 146 of the BIA makes provincial law applicable

Commercial Tenancies Act (Ontario) section 39(1): trustee may disclaim commercial lease of a bankrupt lessee in writing

● Trustee must disclaim within three months of bankruptcy

● Once lease is disclaimed, the lessor has no claim for rent for the remainder of the term of the lease

Treatment of Personal Property Leases in Insolvency

CCAA/BIA filings cannot prohibit a party from ―requiring

immediate payment for goods, services, use of leased or

licensed property or other valuable consideration‖

provided after the filing [CCAA s.11.01(a)/BIA

ss.65.1(4)(a) and 84.2(4)(a)]

Provisions to be narrowly construed so as to not unduly

give one creditor advantage over others

Therefore, traditional insolvency approach limits the

protection to true/operating leases, not financing/security



slide | 45

Treatment of Personal Property Leases in Insolvency (cont’d)

Key issue is whether the lease is ―payment for use‖

versus a disguised security agreement or conditional sale

Determination of the intention of the parties based on a

functional analysis of the relationship of the parties

Substance, not form, of the arrangement to be


Test for ―true lease‖ in insolvency different from tax and

accounting tests

slide | 46

Treatment of Personal Property Leases in Insolvency (cont’d)

Re Smith Brothers Contracting(Ont. 1991) adopted a “checklist” of factors to consider:

1. Option to purchase for nominal sum

2. Grant of equity or property interest

3. Nature of business of the lessor

4. Payment of sales taxes on acquisition

5. Payment of taxes incidental to ownership

6. Responsibility for insurance

7. Payment of license fees for operation

8. Risk of loss on lessee

9. Default acceleration and nature of remedies

10. Selection of equipment for lease

11. Substantial security deposit in lease

12. UCC financing statement

13. Nature of default provisions

14. Provision for liquidated damages

15. Disclaimer of warranties of fitness or merchantability


slide | 47

Treatment of Personal Property Leases in Insolvency (cont’d)

● Debate over proper use of Smith Brotherschecklist: equal weight to all factors vs primary/secondary factor approach

Re Cow Harbour Construction (Alta 2012) undertook an extensive review of the insolvency approach to determining true vs financing leases

● Decision reaffirmed the use of the Smith Brotherschecklist and confirmed that one factor cannot ―trump‖ the others

● But Court said that the proper approach is to be ―holistic‖ as opposed to a ―scientific exercise‖

● The Court is to analyze the various factors that are relevant and balance the factors in the context of the entire agreement

● In doing so, some factors might have greater weight than others

Preventative Steps


 Obligation to maintain general commercial liability insurance, professional errors and omissions insurance (and other insurance as relevant to the nature of the arrangement) with insurers licensed to do business in the United States or Canada rated at least ―A minus‖ by AM Best or Standard and Poor.

 Policies to be endorsed to provide notice in the event of cancellation, termination, or expiration (for non-renewal or otherwise), of the policies.

 Counterparty to provide, promptly after the date of execution of the Agreement, and on renewal of each policy, a certificate of insurance for each policy of insurance it is to maintain under this subsection

Business continuity obligations

 Data back up and data feeds


Source Code Escrow Arrangement

 Software licensing: ensures that customer can continue to maintain and support licensed software in the event the licensor becomes bankrupt or otherwise is unable to continue to do so

 Provides for the source code (or human readable code) for the licensed software to be placed in escrow with a third party escrow agent

 Escrow agreement provides that the source code will be released to the licensee upon the occurrence of certain events:

– Licensor no longer carrying on business – Licensor becomes bankrupt or insolvent

– Licensor no longer willing or able to support the software


Customers can seek to mitigate counterparty insolvency risk through:

 Up-front due diligence and risk assessment

 Ongoing financial disclosure obligations

 Pre-emptive contractual termination rights

 Insurance requirements


slide | 51

Q & A


This document and the information in it is for illustration only and does not constitute legal advice. The information is subject to changes in the law and the interpretation thereof. This document is not a substitute for legal or other professional advice. Users should consult

Cassels Brock & Blackwell LLP

Suite 2100, Scotia Plaza Suite 2200, HSBC Building 40 King Street West 885 West Georgia Street Toronto, ON Canada M5H 3C2 Vancouver, BC Canada V6C 3E8 Tel: 416 869 5300 Tel: 604 691 6100 Fax: 416 350 8877 Fax: 604 691 6120




Related subjects :