A.N. Bail Co. v. Gingras et al., [1982] 2 SCR 475

Supreme Court of Canada

A.N. Bail Co. v. Gingras et al., [1982] 2 S.C.R. 475

Date: 1982-09-28

A.N. Bail Co. Ltée (Defendant-Appellant) Appellant;

and

Paul Gingras and Jacques Gingras (Plaintiffs-Respondents) Respondents;

and

Mercure Béliveau & Cie, in the capacity of trustee Respondent in continuance of suit.

File No.: 16265.

1982: June 16; 1982: September 28.

Present: Estey, McIntyre, Chouinard, Lamer and Wilson JJ.

ON APPEAL FROM THE COURT OF APPEAL FOR QUEBEC

Bankruptcy—Contract—Contractor and subcontractor—Clause authorizing contractor to pay creditors of subcontractor directly—Payment by contractor after subcontractor’s bankruptcy—Whether such a clause can be applied after date of bankruptcy—Whether effect is to release contractor from obligations to trustee—Bankruptcy Act, R.S.C. 1970, c. B-3, ss. 47, 50, 112.

Respondent trustee claimed from appellant the balance owing under a subcontract between it and the bankrupt company. Relying on a clause of the contract, appellant after the date of the bankruptcy had paid a creditor of the bankrupt subcontractor directly. The Superior Court allowed the action and ordered the appellant to pay. The judgment was affirmed by the Court of Appeal. Hence this appeal, to determine whether such a clause can be relied on after the bankruptcy so as to authorize a debtor of the bankrupt company to pay a creditor of the latter rather than the trustee, if it chooses to do so.

Held: The appeal should be dismissed.

The payment made by appellant to the creditor of the bankrupt company did not release it from its obligation to the trustee, since from the date of the bankruptcy the debt passed into the hands of the trustee as part of the assets of the bankrupt company, and only the latter could obtain payment of it (ss. 47 and 50 of the Bankruptcy Act). There was no legal connection between appellant and the creditor of the bankrupt subcontractor, and the clause in question contained only an option which appellant reserved in its subcontract, without creating any obligation.

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Industries Saguenay Ltée v. Industries Couture Ltée, [1973] C.A. 316; In re John East Co. (1940), 21 C.B.R. 232, considered; In re Wilkinson, ex parte Fowler, [1905] 2 K.B. 713; In re Tout & Finch Ld., [1954] 1 W.L.R. (U.K.) 178, not followed; In re Rosenzweig, Goldfine’s Claim (1920), 1 C.B.R. 385; In re Prima Skirt Co., Thompsons Claim (1921), 1 C.B.R. 438; R. v. Hodges (1921), 1 C.B.R. 530, distinguished.

APPEAL from a judgment of the Quebec Court of Appeal affirming a judgment of the Superior Court. Appeal dismissed.

Normand Amyot, for the appellant.

Francine Côté and Laurent Trudeau, for the respondent trustee.

English version of the judgment of the Court delivered by

CHOUINARD J.—Respondent, the trustee in bankruptcy of Maçonnerie Montmorency Inc., claimed from appellant the balance owing under a subcontract between it and the bankrupt company.

Appellant offered and deposited $6,476.84. It now acknowledges owing a further amount of $2,500. However, it denies owing the further sum of $27,116.28 which it was ordered to pay by a judgment of the Superior Court, affirmed unanimously by the Court of Appeal.

Its contestation is based on the fact that since the bankruptcy, in reliance on a clause of the contract, it has already paid this amount directly to Tuyaux Vibrés Inc., a supplier of materials which was a creditor of Maçonnerie Montmorency Inc.

The only point at issue here is whether the contractual clause relied on can be applicable after the bankruptcy of the subcontractor Maçonnerie Montmorency Inc.

In an initial contract dated October 31, 1969 with Defence Construction (1951) Ltd., acting on behalf of the Department of National Defence, representing Her Majesty the Queen in right of Canada, appellant undertook the design and construction of vehicle storage and maintenance facili-

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ties at the Canadian Forces Base at Valcartier. Clause 21 of this contract reads:

21. (1) Her Majesty may, in order to discharge lawful obligations of and satisfy lawful claims against the Contractor or subcontractor arising out of the execution of the work, pay any amount which is due and payable to the Contractor pursuant to the Terms of Payment or is payable pursuant to section 41 of the General Conditions following a conversion of a negotiation of the security deposit directly to the obligees of and the claimants against the Contractor or the subcontractor.

(2) A payment made pursuant to subsection (1) is to the extent of the payment a discharge of Her Majesty’s liability under the contract to the Contractor.

(3) To the extent that the circumstance of the work being executed for Her Majesty permits it, the Contractor will comply with all laws in force in the Province where the work is being executed relating to payment periods, mandatory holdbacks, and creation and enforcement of mechanics’ liens or, if such Province is the Province of Quebec, the law relating to privileges.

(4) The Contractor will discharge all lawful obligations of his and will satisfy all lawful claims against him arising out of the execution of the work at least as often as the Terms of Payment require Her Majesty to discharge Her obligations to the Contractor.

(5) The Contractor will, whenever so requested by the Engineer, make a statutory declaration deposing to the existence and condition of the obligations and claims referred to in subsection (4).

By a subcontract dated December 23, 1969, appellant delegated the masonry work to Maçonnerie Montmorency Inc. It provided in clause 1:

[TRANSLATION] The Subcontractor undertakes to provide all materials and perform work as described in Clause IV hereof, relating to the construction of vehicle storage and maintenance facilities for DEFENCE CONSTRUCTION (1951) LTD., hereinafter referred to as “the Owner”, Canadian Forces Base, Valcartier, Que., in accordance with the general terms and conditions of the contract concluded between the Owner and the Contractor, and pursuant to the plans and specifications to be completed by T. PRINGLE & SON LIMITED (pursuant to bid documents of D.C.L. (1951)

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Ltd.), hereinafter referred to as the Architect/Engineer. These plans and specifications form an integral part of the contractual documents between the Owner and the Contractor, and are binding on the Subcontractor in so far as they relate to the work referred to in this subcontract, and the general terms and conditions of the contract concluded between the Contractor and the Owner are binding on the Contractor and the Subcontractor in so far as they relate and are applicable to this subcontract.

(Emphasis added.)

Respondent admitted that as a consequence of this clause, [TRANSLATION] “The general terms and conditions of the contract concluded between the Crown corporation and the general contractor, the appellant in the case at bar, of which clause 21 is a part, applied to the contract concluded between the appellant and the bankrupt, Maçonnerie Montmorency Inc.”

However, appellant did not rely directly on this clause as part of its subcontract. Rather, it argued that notwithstanding the bankruptcy, the owner could still rely on Clause 21 and make its payment directly to a subcontractor or a supplier of materials. Its submission is that as a matter of fact it paid Tuyaux Vibrés Inc. rather than the trustee at the insistence of the federal Crown. It said the following:

[TRANSLATION] … the owner, THE FEDERAL CROWN, acting through its agent “DEFENCE CONSTRUCTION” (1951) LTD., took the following position:

(a) it wished to protect the subcontractors and suppliers and to ensure that their claims would be paid; in support of its position, it cited Clause 21 of the general contract between the owner and the general contractor;

(b) it further insisted on payment being made in the ordinary course of business, that is, for it to be made directly by Appellant to the supplier: this procedure was justified by the fact that Appellant, as the general contractor, was in a better position than the owner to assess the merits and quantum of the claim by the supplier TUYAUX VIBRES INC.;

(c) the owner further clearly indicated to Appellant that it would pay the supplier TUYAUX VIBRES INC. directly if Appellant neglected to do so, and would deduct the amount so paid to TUYAUX

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VIBRES INC. from any amount which it might owe Appellant;

Indeed, it appears from the evidence that although the work had been completed and the holdbacks were due to be paid by the owner to Appellant, the owner nonetheless held back approximately $250,000.00, that is the normal holdback of $200,000.00 which was due and payable to Appellant and a further special holdback of $50,000.00, to cover the claim of the supplier TUYAUX VIBRES INC. in the amount of $27,116.28.

In its argument appellant placed great reliance on the fact that it did not voluntarily pay Tuyaux Vibrés Inc. rather than the trustee, but because of the pressure placed on it to do so by the owner. I do not for my own part see that this changes the legal position in any way. I would refer in this regard to Montgomery J.A. who, speaking for the Court of Appeal, wrote:

I do not question the good faith of the administrators of Defence Construction nor of Appellant and I have considerable sympathy for Appellant, which yielded to pressure to make this direct payment to the supplier in order to obtain full payment of the contract price due to it.

However, it is necessary to return to the fundamental question of whether such a contractual clause can be applied after the bankruptcy, so that the payment made by appellant to a creditor of the bankrupt company would have the effect of releasing appellant from its obligations to the trustee.

Whether appellant paid the supplier of materials Tuyaux Vibrés Inc. instead of the trustee because it was forced to do so by the owner who was relying on Clause 21 of the principal contract between it and appellant, or whether it did so because it relied itself on a similar clause which had become part of its subcontract with the bankrupt company, the question to be decided is still the same: can this clause be put into effect after the bankruptcy so as to authorize a debtor of the bankrupt company to pay a creditor of the latter instead of the trustee, if it chooses to do so?

Appellant submitted that the trustee takes the property of the bankrupt subject to the latter’s rights and obligations. Appellant cited various passages from Duncan and Honsberger, Bankruptcy in Canada, and from Halsbury’s Laws of England

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in support of this proposition, which was not disputed by respondent and which in my view is not at issue.

To illustrate the application of the principle, appellant referred to two judgments of Panneton J. of the Superior Court, where the latter held that the provisions of art. 1543 C.C., regarding the right to cancel a sale when payment of the price is not made, apply notwithstanding a bankruptcy, provided that, according to the second paragraph of this article, in the case of a bankruptcy the right can only be exercised within 30 days of delivery (In re Rosenzweig, Goldfine’s Claim (1920), 1 C.B.R. 385; In re Prima Skirt Co., Thompsons Claim (1921), 1 C.B.R. 438). I do not think that these judgments are in any way relevant. The right of cancellation is conferred by the Civil Code in all circumstances and its exercise is not inconsistent with the Bankruptcy Act, R.S.C. 1970, c. B-3.

I also do not regard as relevant the decision of the British Columbia Court of Appeal in R. v. Hodges (1921), 1 C.B.R. 530, in which the contract provided that in the event of a default by the contractor, the Crown would take possession of two vessels which the Court found to be subject to a lien in favour of the Crown: in that case the Crown took possession before the bankruptcy.

However, the two judgments of English courts to which appellant referred this Court are much more relevant: In re Wilkinson, ex parte Fowler, [1905] 2 K.B. 713; In re Tout & Finch Ld., [1954] 1 W.L.R. 178.

These two judgments involve situations and contractual clauses which are quite similar to those of the case at bar.

In the relevant part of his judgment in Tout & Finch, Wynn-Parry J. of the Chancery Division cites lengthy extracts from the Wilkinson case on which he relies, but without adding further reasons of his own. I shall therefore deal only with the Wilkinson judgment.

The headnote of the latter case reads as follows:

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In September, 1903, A. signed a contract with a local authority to construct sewage works at a price to be paid to him by monthly instalments, less 10 per cent., on the certificate of the engineer of the local authority; the 10 per cent., to be retained and paid to A. six months after completion of the works. The contract also provided that certain machinery for the works was to be supplied to A. by specified firms, and that (clause 54), “If the engineer shall have reasonable cause to believe that the contractor is unduly delaying proper payment to the firms supplying the machinery, he shall have power if he thinks fit to order direct payment to them.”

On October 12, 1904, A. was adjudicated bankrupt on his own petition. At this date the contract was substantially completed, and there was then due under it the sum of 1574l. 15s. 10d. only, of which 1349l. 17s. 8d. was retention money and 224l. 18s. 2d. was a sum payable on the engineer’s next certificate, and these two sums were claimed by the trustee in bankruptcy. At the same date A. owed 836l. 8s. 9d. in various amounts to the specified firms for machinery supplied to him for the works; and subsequently the engineer in 1905 made two orders under clause 54 directing payment of the 836l. 8s. 9d. out of the 1574l. 15s. 10d. to the firms in settlement of their accounts:

Held, that A. by presenting his own petition in bankruptcy “unduly delayed proper payment” to the machinery firms within the meaning of clause 54:

Held, also, that the power conferred by that clause on the engineer was not annulled or revoked by A.’s bankruptcy; and that the firms by virtue of the two orders of the engineer were entitled to be paid the 836l. 8s. 9d. out of the 1574l. 15s. 10d. in priority to the claim of the trustee.

Bigham J. comments on clause 54 as follows [at pp. 719-20]:

That clause, in my opinion, is inserted in the contract for the benefit, not only of the people who supply the machinery, but also of the council itself. It is very much to the interest of the council to see that contracts of this kind for public works into which they enter are carried out in a manner satisfactory to all persons who are concerned in the performance of them. The council certainly may, and no doubt frequently do, make contracts of this kind, and they make them much more advantageously when the people who supply the machinery or other goods which are to be used by the contractor in the performance of the contract know that

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there is a reasonable probability that they will be paid. The council are enabled, by inserting a clause of this kind in their contract, to give a certain amount of confidence to people who supply goods to the contractor, and in that way they are placed in a better position when they come to make contracts again than they otherwise would be; and, therefore, I say that the clause is inserted, not only in the interests of the persons who supply goods to the contractor, but also in the interests of the council themselves. Now what is the meaning of the clause? I think it means that, if the persons supplying machinery to the contractor for the purpose of the contract are not promptly and properly paid by him, they can apply to the engineer, and then it shall be competent for the engineer to intervene and, by a proper certificate given in that behalf, to require the council to pay to the machinery firms the amount of their accounts directly—that is to say, not through the hands of the contractor at all, but the money is to be paid directly by the council to the machinery firms. That is the meaning of the clause.

As regards the applicability of the clause, the judge goes on to say:

It amounts to an authority given by the contractor—that is to say, by the bankrupt in this case—to the engineer representing the council to dispose of money, which would otherwise come to the bankrupt, in a certain way under certain circumstances. It is an authority which, in my opinion, it was not competent for the bankrupt to withdraw, and it was never contemplated he should withdraw it; and, indeed, it is not contended on behalf of the trustee that the authority was one that could be lawfully withdrawn. It is an authority, therefore, which the bankruptcy of the contractor did not annul.

The judge notes that the case concerns an authorization given by the contractor, the bankrupt, to the engineer, representing the Council, to dispose of monies normally due to the bankrupt, in a certain way under certain circumstances. This authorization could not be revoked by the bankrupt and it was never expected that he would be able to revoke it. Accordingly, the judge concluded, the authorization had not been cancelled by the bankruptcy.

The judge gave no reasons for his conclusion except to say that the authorization given by the contractor was irrevocable. With respect, I cannot subscribe to that conclusion. In my opinion, the real question is whether, after the bankruptcy, this

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authorization, revocable or not, still applies so as to supersede the provisions of the Bankruptcy Act. I feel that this question must be answered in the negative.

In Industries Saguenay Ltée v. Industries Couture Ltée, [1973] C.A. 316, the Court of Appeal had to consider clauses 26 and 27 of the “General Terms and Conditions of the Contract” between the Government of Quebec and the general contractor:

[TRANSLATION] Clause 26. Requests for payment. The contractor shall submit to the architect a request in respect of each payment and, if required for a good reason, receipts or supporting documentation indicating the payments made by it for labour and materials, including materials on the site but not yet incorporated in the work, and payments made to subcontractors or in respect of any obligation to which it is subject and which, if not discharged by it, may devolve on the owner.

…

Clause 27. Certificates and payments.—If the contractor has made a request in the manner explained above, the architect shall, on the due date of each payment at the latest, issue to the contractor a certificate in accordance with clause III of the agreement, but such a certificate may provide for the holding back of sufficient amounts to protect the owner in respect of any privilege, and may be refused if the architect concludes that the payments owed to subcontractors have not been made.

Deschênes J.A., as he then was, made the following general observations in reasons concurred in by Lajoie J.A.:

[TRANSLATION] One cannot stress too strongly the importance of this matter for the construction industry, when it means contributing to the development of the public domain. A principal contractor and subcontractors are in that case deprived of the protection afforded them in the ordinary course of private business by the registration of a privilege on the immovable to which they have contributed. This is what the Supreme Court of Canada, affirming a judgment of this Court, held in Concrete Column Clamps Limited v. The city of Quebec and la Compagnie de Construction de Québec Limitée, [1940] S.C.R. 522. This Court restated the same principle in Stanton Pipes (Canada) Ltd. v. Sylvain et un Autre et la Corporation municipale de la paroisse de Ste-Anne de la Pointe au Père, [1966] Que. Q.B. 860.

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Doubtless in order to get around this situation, but without departing from the principle which places the public domain beyond the reach of a private privilege, the Crown inserted in its contract with Rivemont the provisions requiring Rivemont, for all practical purposes, to pay its subcontractors and suppliers before it could require payment by the government of the amounts stipulated in the contract.

In the normal course of things, this protection would undoubtedly be sufficient; but what happens when, as here, a subcontractor makes use of the Bankruptcy Act? Does the supplier of materials have any security, or will he be relegated to the position of an ordinary creditor and risk receiving only a part—here 25 %—of his debt, which, in private industry, would have benefited from the security subject to his privilege?

Saguenay maintained that its position was that of a secured creditor, and Couture disputed this. That is the question on which the Superior Court ruled against Saguenay.

Deschênes J.A. concluded, on the first part of the appellant’s argument:

[TRANSLATION] In any case, even if Saguenay is given the benefit of the interpretation of the contract which is most favourable to its interests, there is so far as I know no legal provision—and appellant has referred the Court to none—which has the effect of creating any preferred right in favour of Saguenay against Couture. At most, the contract becomes a means by which Saguenay can pressure Couture to make speedy payment, and which Couture can in its turn use against Rivemont. However, each party’s debt is not thereby improved or altered and the right of each creditor against his co-contractor remains a purely personal right.

A fortiori, then, there must be a negative answer to the question whether Saguenay became a secured creditor of Couture. Unquestionably, the contract at issue here never created in Saguenay’s favour “a mortgage, hypothec, pledge, charge, lien or privilege on or against the property” of Couture, “as security” for any debt which Couture might owe Saguenay.

It must follow, therefore, that Saguenay does not fall within the first part of the definition of “secured creditor” in the Bankruptcy Act.

In In re John East Co. (1940), 21 C.B.R. 232, the Ontario Department of Highways in its contract reserved the following power in the event of a default by the general contractor:

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… it shall be lawful for the department to pay such workmen the amount that may be justly owing to them and the amount of any just accounts for material and for camp and equipment supplies so furnished, or work done or accounts for equipment rented, or accounts for freight incurred and accounts for all other materials and supplies furnished, or work done and charge the same against any moneys due or to grow due to the contractor.

Urquhart J. of the Supreme Court of Ontario said, inter alia [at p. 235]:

The clause does not obligate the department to do anything. It just provides that the department may retain from the money certain amounts until satisfactory evidence is furnished that liabilities have been discharged, and secondly if any workman or material man is unpaid that it shall be lawful for the department to pay the same and charge it against the contractor’s moneys. There is no obligation on the department either to retain any money or if it does retain any money to pay the same to a contractor. Why this clause is inserted in the contract is difficult to understand. I presume that it is put in ex abundanti cautela because there is no privity between the department and the sub‑contractors and the department is not under any obligation whatever to them.

He continued [at p. 236]:

It seems to me that the trustee is the proper person to receive these moneys and administer them. I do not think there is any authority on which I can safely say that there is an equitable assignment of the money in the hands of the Government and the proceeds of the settlement which is conceded by all parties to be a very good settlement.

The judge accordingly dismissed the request of several subcontractors and supplier of materials that the monies held by the government be paid to them instead of being handed over to the trustee.

In the case at bar, the supplier of materials Tuyaux Vibrés Inc. is a complete stranger to the clause linking the owner and the general contractor, and between the latter and the bankrupt subcontractor.

Clause 21 contains only an option which the owner reserved in the principal contract, and

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appellant in its sub-contract: no obligation has been created.

There is no contract of guarantee which presupposes a contractual relationship between appellant and Tuyaux Vibrés Inc. (Civil Code, art. 1028).

There is no stipulation for the benefit of a third person, which requires that an obligation be undertaken by the promisor, whereas here neither appellant nor Defence Construction (1951) Ltd. has undertaken any obligation (Civil Code, art. 1029).

There is no novation, which would require the participation of Tuyaux Vibrés Inc.: the latter is a stranger to the contracts between Defence Construction (1951) Ltd. and appellant and between the latter and Maçonnerie Montmorency Inc. (Civil Code, arts. 1169 et seq.).

There is no delegation of payment, which assumes an obligation undertaken by the new debtor (Civil Code, art. 1173).

Finally, there is no assignment of a debt by Maçonnerie Montmorency Inc. to Tuyaux Vibrés Inc. (Civil Code, art. 1570).

There is no legal connection between Tuyaux Vibrés Inc. and appellant, nor between Tuyaux Vibrés Inc. and Defence Construction (1951) Ltd. Tuyaux Vibrés Inc. could not enforce any claim against either one or the other.

Its only claim is against the bankrupt company, Maçonnerie Montmorency Inc.

Its claim is neither preferred nor secured. Appellant indeed is not arguing the contrary.

The payment made by appellant to Tuyaux Vibrés Inc. remains a payment made on behalf of the bankrupt company, which as of the date of the bankruptcy can make no further payments (Bankruptcy Act, s. 50(5)).

From the date of the bankruptcy also, the debt of Maçonnerie Montmorency Inc. against appellant passed into the hands of the trustee as part of the property of the bankrupt company, and only the trustee can obtain payment of it (Bankruptcy Act, ss. 47, 50).

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It would be to disregard the Bankruptcy Act and deprive it of all meaning if the debtor of a bankrupt, instead of paying the trustee, were authorized, by contract or some other means, to pay one or other of the creditors of the bankrupt as he saw fit.

I adopt the conclusion of Montgomery J.A., speaking for the Court of Appeal:

The above clause of the general conditions may be perfectly valid and effective where there is no question of bankruptcy. I cannot, however, agree with Appellant that it can supplant the provisions of the Bankruptcy Act and entitle one unsecured creditor to be paid by preference, which would almost necessarily operate to the detriment of the other unsecured creditors. I regard this as contrary to the policy of the Bankruptcy Act.

Under s. 112 of the Bankruptcy Act, “Subject to this Act, all claims proved in the bankruptcy shall be paid pari passu.”

Tuyaux Vibrés Inc. was not a preferred creditor or a secured creditor, and had no claim to assert against appellant or against Defence Construction (1951) Ltd., which were under no obligation toward it: it therefore had to submit its claim to the trustee and be paid pari passu with the other claims proven in the bankruptcy.

One might query whether, instead of suing appellant, the trustee could not have claimed from Tuyaux Vibrés Inc. the monies paid to it, or whether appellant can now recover them. The Court is not required to answer these questions in this appeal. As it is, the payment made to Tuyaux Vibrés Inc. by appellant did not release the latter from its obligation to the trustee.

For these reasons, I would dismiss the appeal with costs.

Appeal dismissed with costs.

Solicitors for the appellant: Chait, Salomon, Gelber, Rein, Bronstein, Litvack, Echenberg & Upper, Montreal.

Solicitors for the respondent trustee: Langlois, Drouin & Associés, Montreal.