D.I.M.S. Construction inc. (Trustee of) v. Quebec (Attorney General), 2005 SCC 52, [2005] 2 SCR 564

                                        SUPREME COURT OF CANADA

Between:

Attorney General of Quebec,

Commission de la construction du Québec and

Commission de la santé et de la sécurité du travail

Appellants

v.

Raymond Chabot Inc., in its capacity as trustee in

the bankruptcy of D.I.M.S. Construction Inc.

Respondent

‑ and ‑

Attorney General of Ontario

Intervener

Official English Translation

Coram: Bastarache, Binnie, LeBel, Deschamps, Fish, Abella and Charron JJ.

______________________________

D.I.M.S. Construction inc. (Trustee of) v. Quebec (Attorney General), [2005] 2 S.C.R. 564, 2005 SCC 52

Attorney General of Quebec,

Commission de la construction du Québec and

Commission de la santé et de la sécurité du travail                                      Appellants

v.

Raymond Chabot inc., in its capacity as trustee in

the bankruptcy of D.I.M.S. Construction inc.                                              Respondent

and

Attorney General of Ontario                                                                          Intervener

Indexed as:  D.I.M.S. Construction inc. (Trustee of) v. Quebec (Attorney General)

Neutral citation:  2005 SCC 52.

File No.:  29822.

2004:  December 8; 2005:  October 6.

Present:  Bastarache, Binnie, LeBel, Deschamps, Fish, Abella and Charron JJ.

on appeal from the court of appeal for quebec

Bankruptcy — Scheme of distribution — Right to compensation and right to retain — Provincial statutes requiring employer who retains services of contractor to pay amounts due from contractor to provincial bodies — Statutes entitling employer to be reimbursed by contractor or to retain amount paid out of sums employer owes contractor — Whether, in context of bankruptcy, provincial statutes incompatible with scheme of distribution established by federal bankruptcy legislation — Whether equitable set-off applicable in bankruptcy in Quebec — Act respecting industrial accidents and occupational diseases, R.S.Q., c. A‑3.001, s. 316 — Act respecting labour relations, vocational training and manpower management in the construction industry, R.S.Q., c. R‑20, s. 54 — Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, ss. 97(3) , 136  to 147 .

Constitutional law — Division of powers — Bankruptcy — Scheme of distribution — Provincial statutes requiring employer who retains services of contractor to pay amounts due from contractor to provincial bodies — Statutes entitling employer to be reimbursed by contractor or to retain amount paid out of sums employer owes contractor — Whether provincial statutes inapplicable or inoperative by reason of being in conflict with scheme of distribution established by federal bankruptcy legislation — Constitution Act, 1867, s. 91(21)   — Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, ss. 97(3) , 136  to 147  — Act respecting industrial accidents and occupational diseases, R.S.Q., c. A‑3.001, s. 316 — Act respecting labour relations, vocational training and manpower management in the construction industry, R.S.Q., c. R‑20, s. 54.

The Commission de la santé et de la sécurité du travail (“CSST”) established an assessment in respect of the activities of a contractor.  The contractor did not pay the assessment and the CSST required three employers that had awarded contracts to the contractor to pay the assessment pursuant to s. 316 of the Act respecting industrial accidents and occupational diseases (“AIAOD”).  The Commission de la construction du Québec (“CCQ”) also demanded that the same employers pay unpaid wages owed by the contractor, pursuant to s. 54 of the Act respecting labour relations, vocational training and manpower management in the construction industry (“ALRCI”).  One employer paid the CCQ before the contractor went bankrupt.  After the bankruptcy, the trustee demanded that the three employers pay all amounts owing for work performed by the contractor.  Two of the employers contested the claim, citing the demands for payment made by the CSST and the CCQ.  The trustee applied to the Superior Court for a declaration that s. 316 AIAOD and s. 54 ALRCI do not apply in bankruptcy.  The Superior Court dismissed the motion, but the Court of Appeal set aside that judgment.

Held:  The appeal should be allowed. Section 316 AIAOD and s. 54 ALRCI do not alter the scheme of distribution under the Bankruptcy and Insolvency Act  (“BIA ”).

In light of art. 1656(3) C.C.Q., a payment made in performance of the obligation imposed by the first paragraph of s. 316 AIAOD allows the employer to be substituted for the CSST in order to claim the amount of the assessment from the contractor.  The right to retain  referred to in the third paragraph of s. 316 adds nothing to the rights arising out of the subrogatory payment.  That paragraph eliminates any doubt as to the employer’s right to be reimbursed for the amount paid on the contractor’s behalf and, where applicable, to effect compensation between the amount the employer owes the contractor and the amount the contractor owes the employer. [27] [30-31]

The compensation mechanism authorized by s. 316 AIAOD does not go beyond the framework of s. 97(3)  BIA , which expressly recognizes certain cases of compensation.  If the employer pays the CSST before the bankruptcy, and if the mutual debts of the employer and the contractor are certain, liquid and exigible, legal compensation is effected by operation of law and the debts are extinguished up to the amount of the lesser debt (arts. 1672 and 1673 C.C.Q.).  Since the bankruptcy has not yet occurred when legal compensation is effected, the scheme of distribution under the BIA  is not affected, because the claim against the employer is not part of the property vested in the trustee.  If the employer’s payment is made before the bankruptcy but the claim is not liquid at the time of the bankruptcy, the employer may, once the claim has been appraised, rely on s. 97(3)  BIA , which dispenses with the trustee’s status as a third party for the purposes of compensation and allows compensation to be set up as if the bankrupt were the plaintiff.  The right to compensation thus has its basis in the BIA , not the civil law, which is more restrictive.  If the payment is made after the bankruptcy, this subrogatory payment cannot give rise to compensation.  Since s. 97(3) is an exception to the rule of equality between creditors, it must be interpreted narrowly.  It must therefore be read in conjunction with ss. 121 , 136(3)  and 141  BIA  as implicitly requiring that the mutual debts come into existence before the bankruptcy.  The BIA does not depart from the rules established by arts. 1651 and 1681 C.C.Q., which provide that  subrogation does not give the subrogated person any more rights than the subrogating creditor and that compensation may not be effected to the prejudice of third persons.  The employer may nevertheless file a proof of claim to avail him or herself of subrogation to be reimbursed as an ordinary creditor for the amount paid to the CSST (s. 121 BIA ). [43‑45] [49] [54-57] [72]

Section 316 AIAOD does not subvert the scheme of distribution under the BIA .  First, the right to be reimbursed is compatible with the BIA  and, second, the right to retain can be exercised only in the circumstances provided for in the BIA , which is more open to compensation than Quebec civil law.  Furthermore, from the perspective of Husky Oil, the s. 316 mechanism is compatible with the BIA .  This is not a case involving a deemed payment or an employer acting as a mere agent.  The claim accrues to the employer at the time of payment, and not by reason of the fact that the employer might be liable to pay should the contractor fail to do so.  No right is granted to the CSST, as a third party, to the detriment of the body of creditors. Only an employer who has paid may exercise the right to retain, and the CSST is not affected by the employer’s right to collect.  Finally, because s. 97(3)  BIA  must be applied in Quebec on the basis of civil law and not common law rules, equitable set-off is inapplicable in bankruptcy in Quebec. [58] [62-64]

Nor does s. 54 ALRCI subvert the scheme of distribution under the BIA .  In the case of s. 54, the wages due from a contractor constitute a solidary obligation between the contractor and the employer.  The employer who pays the wages may demand to be reimbursed by the contractor pursuant to art. 1536  C.C.Q. or may rely on legal subrogation pursuant to art. 1656(3)  C.C.Q.  The principles stated in relation to s. 316 AIAOD also apply to s. 54.  [66-73]

Cases Cited

Applied:  Husky Oil Operations Ltd. v. Minister of National Revenue, [1995] 3 S.C.R. 453; not followed: Structal (1982) inc. v. Fernand Gilbert ltée, [1998] R.J.Q. 2686; referred to:  Deputy Minister of Revenue v. Rainville, [1980] 1 S.C.R. 35; Deloitte Haskins and Sells Ltd. v. Workers’ Compensation Board, [1985] 1 S.C.R. 785; Federal Business Development Bank v. Quebec (Commission de la santé et de la sécurité du travail), [1988] 1 S.C.R. 1061; British Columbia v. Henfrey Samson Belair Ltd., [1989] 2 S.C.R. 24; Prévost‑Masson v. General Trust of Canada, [2001] 3 S.C.R. 882, 2001 SCC 87; Salama v. Placements Triar inc., [2002] Q.J. No. 3372 (QL); Civ., March 2, 1829, D.1829.I.163 (Assurances v. Lanquetin); Civ., January 10, 1923, S.1924.I.257 (Chem. de fer du Midi v. Comp. d’assur. marit. l’Alborada); Sherwin-Williams Co. of Canada Ltd. v. Boiler Inspection and Insurance Co. of Canada, [1949] S.C.R. 187; Trépanier v. Plamondon, [1985] C.A. 242; Agricultural Insurance Co. v. Cité de Montréal, [1943] R.L. 151; Compagnie d’Assurance du Québec v. Dufour, [1973] C.S. 840; Forage Mercier inc. v. Société de Construction Maritime Voyageurs ltée, [1998] Q.J. No. 2190 (QL); Lefebvre (Trustee of), [2004] 3 S.C.R. 326, 2004 SCC 63; Mercure v. Marquette & Fils, [1977] 1 S.C.R. 547; In re Hil‑A‑Don Ltd.: Bank of Montreal v. Kwiat, [1975] C.A. 157; In re Le syndicat d’épargne des épiciers du Québec: Laviolette v. Mercure, [1975] C.A. 599; Goldstein v. Auerbach (1991), 51 Q.A.C. 292; Trib. corr. Auxerre, February 24, 1953, Rev. gén. ass. terr. 1953.190 (Mayet et Destoumieux v. Faillot).

Statutes and Regulations Cited

Act respecting financial assistance for education expenses, R.S.Q., c. A-13.3, s. 29.

Act respecting financial services cooperatives, R.S.Q., c. C-67.3, s. 69.

Act respecting industrial accidents and occupational diseases, R.S.Q., c. A‑3.001, ss. 306, 315, 316.

Act respecting insurance, S.Q. 1974, c. 70.

Act respecting labour relations, vocational training and manpower management in the construction industry, R.S.Q., c. R‑20, ss. 54, 82(c)(4).

Act to promote good citizenship, R.S.Q., c. C-20, s. 11.

Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, ss. 30(1) (d), 67(1) , 71(2) , 97(3) , 121 , 135 , 136  to 147 .

Building Act, R.S.Q., c. B-1.1, s. 79.2. 

Civil Code of Lower Canada, arts. 1156, 2576.

Civil Code of Québec, S.Q. 1991, c. 64, arts. 1523, 1525, 1536, 1651, 1652, 1656, 1671, 1672, 1673, 1680, 1681, 2333, 2334, 2474, 2644.

Code Napoléon, art. 1251.

Constitution Act, 1867, s. 91(21) .

Crop Insurance Act, R.S.Q., c. A-30, s. 78.1.

Education Act for Cree, Inuit and Naskapi Native Persons, R.S.Q., c. I‑14, s. 13.

Federal Law–Civil Law Harmonization Act, No. 1, S.C. 2001, c. 4 .

Health Insurance Act, R.S.Q., c. A-29, s. 18(1).

Authors Cited

Baudouin, Jean-Louis, et Pierre-Gabriel Jobin.  Les obligations, 5^e éd.  Cowansville, Qué.: Yvon Blais, 1998.

Bélanger, André.  Essai d’une théorie juridique de la compensation en droit civil québécois.  Cowansville, Québec: Yvon Blais, 2004.

Bélanger, André.  “L’application en droit civil québécois de l’inapplicable equitable set-off de common law” (1999), 78 Can. Bar Rev. 486.

Bergeron, Jean-Guy.  Les contrats d’assurance (terrestre) — lignes et entre-lignes, t. 1. Sherbrooke: Éditions SEM, 1989.

Bertrand, Charles-Auguste.  “Effets des subrogations et des transports aux assureurs” (1953), 13 R. du B. 285.

Ciotola, Pierre.  Droit des sûretés, 3^e éd.  Montréal: Éditions Thémis, 1999.

Deslauriers, Jacques.  Précis de droit des sûretés.  Montréal:  Wilson et Lafleur, 1990.

Droit civil québécois, t. 6.  Comité de rédaction, Denys-Claude Lamontagne et autres.  Montréal: Dacfo, 1993 (feuilles mobiles mises à jour mai 2003).

Duboc, Guy.  La compensation et les droits des tiers.  Paris: L.G.D.J., 1989. 

Lemieux, Marc. “La compensation dans un contexte de proposition et de faillite” (1999), 59 R. du B. 321.

Lluelles, Didier.  Précis des assurances terrestres, 3^e éd.  Montréal: Thémis, 1999.

Mestre, Jacques.  La subrogation personnelle.  Paris: Librairie générale de droit et de jurisprudence, 1979. 

Pineau, Jean, Danielle Burman et Serge Gaudet.  Théorie des obligations, 4^e éd. par Jean Pineau et Serge Gaudet.  Montréal: Thémis, 2001.

Tancelin, Maurice.  Des obligations: actes et responsabilités, 6^e éd.  Montréal: Wilson et Lafleur, 1997.

Traité de droit civil du Québec, t. 13. Par Hervé Roch et Rodolphe Paré. Montréal: Wilson et Lafleur, 1952.

Wood, Roderick J. “Turning Lead into Gold: The Uncertain Alchemy of ‘All Obligations’ Clauses” (2003), 41 Alta. L. Rev. 801.

APPEAL from a judgment of the Quebec Court of Appeal (Robert, Nuss and Lemelin JJ.A.), [2003] R.J.Q. 1104, 227 D.L.R. (4th) 629, 30 C.L.R. (3d) 81, [2003] Q.J. No. 3660 (QL), affirming a decision of Trudeau J., [2000] R.J.Q. 3056, 2000 CarswellQue 2924.  Appeal allowed.

Hugo Jean, for the appellant the Attorney General of Quebec.

Martine Sauvé, for the appellant Commission de la construction du Québec.

René Napert, for the appellant Commission de la santé et de la sécurité du travail.

Bernard Boucher et Sébastien Guy, for the respondent.

Robin K. Basu and Sarah Wright, for the intervener.

English version of the judgment of the Court delivered by

Deschamps J. —

1.     Introduction

1                                   The issue raised in the case at bar is whether the rights provided for in s. 316 of the Act respecting industrial accidents and occupational diseases, R.S.Q., c. A‑3.001 (“AIAOD”), and s. 54 of the Act respecting labour relations, vocational training and manpower management in the construction industry, R.S.Q., c. R‑20 (“ALRCI”), subvert the scheme of distribution provided for in the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B‑3  (“BIA ”).

2                                   Under s. 316 AIAOD, the Commission de la santé et de la sécurité du travail (“CSST”) may, where a contractor’s services are retained by an employer to whom the AIAOD applies, require the employer to pay an assessment due from the contractor.  The same section provides that once the employer has paid the assessment, the employer is entitled to be reimbursed by the contractor and may retain the amount paid to the CSST out of any sums he or she owes the contractor.  Section 54 ALRCI establishes a mechanism that, although based on solidarity, has the same effect; it permits the Commission de la construction du Québec (“CCQ”) to bring claims against employers for unpaid wages owed by contractors with whom they have contracted.

3                                   On November 4, 1998, the CSST established an assessment in respect of the activities of D.I.M.S. Construction inc. (“DIMS”), a contractor.  DIMS did not pay the assessment.  The CSST then demanded that three employers that had awarded contracts to DIMS pay the assessment in the proportion provided for in s. 316 AIAOD.  It claimed amounts from the Ministère des Transports du Québec (“MTQ”) on November 26, 1998, Pavage Chenail inc. (“Chenail”) on November 30, 1998, and Compagnie de pavage d’asphalte Beaver (“Beaver”), a division of Groupe Devesco ltée, on February 10, 1999.  According to the evidence in the record, none of the employers had paid the CSST when DIMS went bankrupt on April 1, 1999, after its creditors refused a proposal.

4                                   The CCQ demanded that the same employers pay unpaid wages owed by DIMS in respect of contracts performed for those employers.  The exact dates these demands were made do not appear in the record, except in the case of Beaver, to which one was sent on February 12, 1999.  According to one document in the record, Chenail paid the CCQ before DIMS went bankrupt.

5                                   On April 23 and 29, 1999, Raymond Chabot inc., the trustee in the bankruptcy of DIMS, demanded that the three employers pay all amounts owing for work performed by DIMS.  Chenail paid the trustee subject to a special indemnification agreement.  The MTQ and Beaver contested the trustee’s claim, citing the demands for payment made by the CSST and the CCQ.  The trustee applied to the Superior Court for a declaration that s. 316 AIAOD and s. 54 ALRCI do not apply in bankruptcy.  The trustee relied on Husky Oil Operations Ltd. v. Minister of National Revenue, [1995] 3 S.C.R. 453, in which it was held that the withholding mechanism available to employers under Saskatchewan’s Workers’ Compensation Act, 1979 had the effect of creating a priority that subverted the scheme of distribution under the BIA .

6                                   The Superior Court dismissed the trustee’s case on the ground that Quebec’s scheme differed from Saskatchewan’s scheme:  [2000] R.J.Q. 3056.  The Court of Appeal came to the opposite conclusion, finding that s. 316 AIAOD and s. 54 ALRCI violated the principles stated in Husky Oil:  [2003] R.J.Q. 1104.  The Attorney General of Quebec, the CSST and the CCQ appealed, contending that the provision authorizing the CSST and the CCQ to demand that employers pay contractors’ unpaid assessments was valid.  They raised no arguments concerning the right of employers to be reimbursed or to set up compensation.  Even though the employers are not parties to the case, both the right of the CSST and the CCQ to collect and the right to reimbursement are in issue here, because the trustee impugns s. 316 AIAOD and s. 54 ALRCI in their entirety.  However, no specific arguments based on the contracts between the employers and the contractor are in issue, nor are the rights of any third parties, such as financial institutions or surety companies, that have rights in the amounts owed by the bankrupt under its contracts.

7                                   The constitutional questions stated by this Court reflect the questions submitted to the Superior Court and the Court of Appeal:

1.    Is s. 54 of An Act respecting labour relations, vocational training and manpower management in the construction industry, R.S.Q., c. R‑20, inapplicable or inoperable in whole or in part, by reason of being in conflict with the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B‑3 , and in particular s. 136  thereof?

2.    Is s. 316 of An Act respecting industrial accidents and occupational diseases, R.S.Q., c. A‑3.001, inapplicable or inoperable in whole or in part, by reason of being in conflict with the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B‑3 , and in particular s. 136  thereof?

8                                   The appellants contest the Court of Appeal’s decision, arguing that Quebec’s scheme can be distinguished from Saskatchewan’s scheme.  They submit that the first and third paragraphs of s. 316 AIAOD set up two successive, distinct and independent steps: one establishing an obligation to pay, and the other setting out the rights of an employer who pays a contractor’s assessment.  The appellants point out that it was the right to withhold payment in respect of a deemed debt that led the Court to conclude in Husky Oil that the debt was indivisible, and that no such right exists in Quebec law.  They contend that neither the first paragraph of s. 316 AIAOD nor the civil law mechanisms upon which s. 54 ALRCI is based subvert the scheme of distribution under the BIA .

9                                   The trustee argues that the mechanisms set out in the Quebec provisions are essentially identical to the one provided for in Saskatchewan’s legislation.  The trustee adds that it would not be enough to declare that the third paragraph of s. 316 AIAOD is inapplicable, since the rules of the Civil Code of Québec, S.Q. 1991, c. 64 (“C.C.Q.”), give the first paragraph of this section the same effect as the third and make it inapplicable in bankruptcy.  To show that such a declaration would be insufficient, the trustee also submits that equitable set‑off would enable an employer who has paid the CSST or the CCQ to refuse to pay the trustee.

10                               For the reasons that follow, I am of the view that s. 316 AIAOD and s. 54 ALRCI do not subvert the scheme of distribution established by s. 136  BIA .  I would allow the appeal and restore the judgment of the Superior Court.

2.     Analysis

11                               Section 91(21)  of the Constitution Act, 1867 , gives Parliament jurisdiction over bankruptcy and insolvency.  Parliament has exercised this jurisdiction to establish a scheme for distributing the property of bankrupts (ss. 136  to 147  BIA ).

12                               This Court has on many occasions ruled on conflicts between the BIA ’s order of priority and the orders resulting from various provincial statutes:  see, inter alia, Deputy Minister of Revenue v. Rainville, [1980] 1 S.C.R. 35; Deloitte Haskins and Sells Ltd. v. Workers’ Compensation Board, [1985] 1 S.C.R. 785; Federal Business Development Bank v. Quebec (Commission de la santé et de la sécurité du travail), [1988] 1 S.C.R. 1061; British Columbia v. Henfrey Samson Belair Ltd., [1989] 2 S.C.R. 24; and Husky Oil.  Those decisions established that statutory provisions enacted by the provinces, although valid in the context of provincial law, are inapplicable in bankruptcy if they conflict with the BIA .  It is well established that the BIA  will prevail regardless of a province’s intention.  Given these principles, it is necessary to determine the effect of s. 316 AIAOD and s. 54 ALRCI.  Since there are differences between the two mechanisms, I will consider them separately.

13                               I will begin by analysing the mechanism of s. 316 AIAOD, which is based on legal subrogation and compensation.  The first step will be to review these concepts.  Next, I will discuss the interaction between the right to retain under s. 316 AIAOD and the scheme of distribution under the BIA , and will distinguish the instant case from Husky Oil.  I will also consider the application of equitable set‑off in the case at bar.  Lastly, I will discuss the mechanism of s. 54 ALRCI, which incorporates solidarity.

2.1   The Mechanism of Section 316 AIAOD

14                               Only the first and third paragraphs of s. 316 AIAOD are relevant to the proceeding before the Court.  The second paragraph merely sets out the method for calculating the amount owed by the employer.  The section reads as follows:

316.     The Commission may demand payment of the assessment due by a contractor from the employer who retains his services.

In the case of the first paragraph, the Commission may establish the amount of the assessment according to the proportion of the price agreed upon for the work corresponding to the cost of labour, rather than the wages indicated in the statement made according to section 292.

The employer who has paid the amount of the assessment is entitled to be reimbursed by the contractor concerned and the employer may retain the amount due out of the sums that he owes the contractor.

15                               The first paragraph of s. 316 AIAOD gives the CSST a recourse against an employer for an assessment due from a contractor whose services the employer has retained.  The condition that must be met for the CSST to exercise this right is that the assessment be due from the contractor.  For an assessment to be due, the CSST must establish the assessment (s. 306 AIAOD) and send the notice (s. 315 AIAOD).  Under the AIAOD, the employer is the warrantor of the assessment due from the contractor to the CSST. 

16                               The parties disagree as to the real scope of the first paragraph.  The trustee submits that the third paragraph adds nothing to the rights arising out of the employer’s payment of the contractor’s debt in accordance with the first paragraph of s. 316 AIAOD.  The appellants contend that the two paragraphs have different functions: the first deals with the right to collect and could survive even if the third paragraph, which grants a right to be reimbursed and to retain, were to be found inapplicable.  Does this last right arise automatically out of the payment of the assessment, as the trustee claims?  To answer this question, it will be necessary to review the scope of the first paragraph of s. 316 AIAOD.  After doing this, I will consider whether the right to retain subverts the scheme of distribution under the BIA  and will conclude by explaining the differences between the provisions at issue in Husky Oil and s. 316 AIAOD, and the reasons why equitable set‑off does not apply in Quebec.

2.1.1    Scope of the First Paragraph of Section 316 AIAOD

17                               While the purpose of the first paragraph of s. 316 AIAOD is to give the CSST a recourse against employers, the consequences of exercising this recourse cannot be disregarded.  The employer’s payment has consequences not only for the CSST, but also for the employer and the contractor.  As a result of art. 1671 C.C.Q., paying the assessment has the effect of extinguishing the contractor’s obligation to the CSST.  Subrogation to the rights of the paid creditor is incidental to the payment and accordingly extinguishes the subrogating creditor’s rights as regards the debtor.  Under the general rules of civil law, those rights are then transferred to the person who made the payment.  Article 1651 C.C.Q. reads as follows:

1651.   A person who pays in the place of a debtor may be subrogated to the rights of the creditor.

He does not have more rights than the subrogating creditor.

18                               The first paragraph of s. 316 AIAOD appears to make the application of subrogation possible, since the employer is obliged to pay when the assessment is due from the contractor.  In this context, the employer is required to pay in the place of the original debtor and should be able to be subrogated to the rights of the creditor.

19                               The C.C.Q. provides for two types of subrogation: conventional subrogation and legal subrogation (art. 1652 C.C.Q.).  The case at bar does not involve conventional subrogation.  The only possibility is legal subrogation.  Article 1656 C.C.Q. provides that subrogation takes place by operation of law in the following five situations:

1656.   Subrogation takes place by operation of law

(1)    in favour of a creditor who pays another creditor whose claim is preferred to his because of a prior claim or a hypothec;

(2)    in favour of the acquirer of a property who pays a creditor whose claim is secured by a hypothec on the property;

(3)    in favour of a person who pays a debt to which he is bound with others or for others and which he has an interest in paying;

(4)    in favour of an heir who pays with his own funds a debt of the succession for which he was not bound;

(5)    in any other case provided by law.

20                               The legislature has explicitly spelled out the right to subrogation in a number of statutes, sometimes departing from the conditions set out in the Civil Code, sometimes not: see, inter alia, the Act to promote good citizenship, R.S.Q., c. C‑20, s. 11; the Health Insurance Act, R.S.Q., c. A‑29, s. 18(1); the Act respecting financial assistance for education expenses, R.S.Q., c. A‑13.3, s. 29; the Building Act, R.S.Q., c. B‑1.1, s. 79.2.  Because the express right to subrogation is not dealt with consistently, I conclude that the failure to mention subrogation explicitly in the first paragraph of s. 316 AIAOD does not mean that legal subrogation is unavailable under it.  Of the five cases mentioned in art. 1656 C.C.Q., the third might apply.

21                               While acknowledging the general scope of para. (3) of art. 1656 C.C.Q., Quebec commentators link this paragraph in particular to solidary or in solidum debts and to debts secured by suretyship: J.‑L. Baudouin and P.‑G. Jobin, Les obligations (5th ed. 1998), Nos. 916 to 918; J. Pineau, D. Burman and S. Gaudet, Théorie des obligations (4th ed. 2001), at p. 603, No. 336.  In the case at bar, solidarity is not mentioned in s. 316 AIAOD and cannot be presumed (art. 1525 C.C.Q.).  Nor can the employer’s obligation be characterized as being in solidum with the contractor, since the instant case does not involve two concurrent debts having the same object: Prévost‑Masson v. General Trust of Canada, [2001] 3 S.C.R. 882, 2001 SCC 87, at para. 27.  The contractor must first be obliged to pay.  It might be thought that this is a legal suretyship under art. 2334 C.C.Q., but the suretyship referred to in that article is one that a debtor must furnish when obliged to do so by the legislature:  Traité de droit civil du Québec, vol. 13, by H. Roch and R. Paré, 1952, at p. 594; Droit civil québécois (loose-leaf), vol. 6, by D.‑C. Lamontagne et al., § 2334 500, at p. 1256 602; J. Deslauriers, Précis de droit des sûretés (1990), at p. 23; P. Ciotola, Droit des sûretés (3rd ed. 1999), at p. 21.  In the case of s. 316 AIAOD, the obligation is imposed directly on the warrantor, not on the debtor.  This cannot be a true case of suretyship, since a warrantor under the AIAOD has no choice in taking on the obligation, whereas consent is an essential aspect of suretyship, which is by definition a contract (art. 2333 C.C.Q.).  The Superior Court judge’s statement of the law to the effect that s. 316 AIAOD establishes a legal suretyship is therefore wrong.

22                               To conclude that the employer’s payment to the CSST confers the benefit of legal subrogation, it would be necessary to rely on the generality of the words “bound . . . for others” used in para. (3) of art. 1656 C.C.Q.  In Salama v. Placements Triar inc., [2002] Q.J. No. 3372 (QL), the Quebec Court of Appeal, citing a passage from the work of Baudouin and Jobin, raised the possibility of giving para. (3) of art. 1656 C.C.Q. a broad scope (see also M. Tancelin, Des obligations: actes et responsabilités (6th ed. 1997), No. 1235).  The historical evolution of this provision persuades me that such an interpretation is justified.

23                               The wording of para. (3) of art. 1656 C.C.Q. is derived from art. 1156 of the Civil Code of Lower Canada, which was itself based on art. 1251 of the Code Napoléon.  The Code Napoléon restated a principle of old French law to the effect that marine underwriters were subrogated to the rights of the insured:  J. Mestre, La subrogation personnelle (1979), at p. 277, No. 240.  It was only after a century of equivocation that French courts finally conceded that subrogation could operate in cases in which the person making the payment was bound to make payment owing to a distinct source of obligation.  It was in the context of the law of damage insurance that the French case law evolved.  At first, in an 1829 decision, the Cour de cassation refused to recognize an insurer’s right to legal subrogation:  Civ., March 2, 1829, D.1829.I.163 (Assurances v. Lanquetin).

24                               Despite ruling out legal subrogation, the French courts did, however, allow insurers of damage to sue persons who caused damage, on the basis that they had committed a delictual fault causing damage to the insurer.  The Cour de cassation came full circle nearly a hundred years later, noting that subrogation in favour of insurers was accepted in maritime law: Civ., January 10, 1923, S.1924.I.257 (Chem. de fer du Midi v. Comp. d’assur. marit. l’Alborada).  This evolution caused one French commentator to remark that the French courts had in so doing [translation] “embarked on a creative tack, not hesitating to gradually break away from an overly ossified analysis of the Civil Code”:  Mestre, at p. 280, No. 245.

25                               In Quebec insurance law, the issue remained contentious until the 1974 reform, which explicitly granted the right to subrogation (Act respecting insurance, S.Q. 1974, c. 70 (which came into force on October 20, 1976), incorporated into the Civil Code of Lower Canada, art. 2576, now art. 2474 C.C.Q.):  D. Lluelles, Précis des assurances terrestres (3rd ed. 1999), at p. 337; Sherwin‑Williams Co. of Canada Ltd. v. Boiler Inspection and Insurance Co. of Canada, [1949] S.C.R. 187, at p. 191; Trépanier v. Plamondon, [1985] C.A. 242; contra:  J.‑G. Bergeron, Les contrats d’assurance (terrestre) (1989), vol. 1, at p. 423; C.‑A. Bertrand, “Effets des subrogations et des transports aux assureurs” (1953), 13 R. du B. 285; Agricultural Insurance Co. v. Cité de Montréal, [1943] R.L. 151 (Sup. Ct.); Compagnie d’Assurance du Québec v. Dufour, [1973] C.S. 840.

26                               It must be recognized that the wording of para. (3) of art. 1656 C.C.Q. does not limit the paragraph’s scope to obligations arising out of solidary or in solidum debts or debts secured by suretyship.  To exclude statute‑based obligations from its ambit is justified neither by the wording of the C.C.Q. nor by the historical evolution of the scope of the analogous provision in French law.  Consequently, employers who pay a contractor’s debt under s. 316 AIAOD may be subrogated to the rights of the CSST.  As a result of subrogation, the CSST’s right against the contractor is transferred to the employer.  On making the payment, the employer takes the place of the CSST:  Forage Mercier inc. v. Société de Construction Maritime Voyageurs ltée, [1998] Q.J. No. 2190 (QL) (C.A.).  The employer acquires the claim from the time of payment, up to the amount paid:  Pineau, Burman and Gaudet, at p. 604, No. 337, and at p. 606, No. 338.  Thus, the employer may demand that the contractor pay the amount of the assessment paid to the CSST.

27                               But if the payment made in performance of the obligation imposed by the first paragraph of s. 316 AIAOD allows the employer to be substituted for the CSST in order to claim the amount of the assessment from the contractor, what does the third paragraph of the same section add?  It enunciates the right to be reimbursed and to retain.  The right to be reimbursed is nothing more than the right to demand payment.  Thus, the right to reimbursement does not add to the claim accruing to the employer by reason of legal subrogation.  What about the right to retain?  It requires a more nuanced analysis.

28                               The Quebec legislature has used the right to retain in ways that are disparate.  In some situations, it may be a right granted to a body to set off an amount owing to a person against an amount owed by that person without actually mentioning the right to compensation:  Crop Insurance Act, R.S.Q., c. A‑30, s. 78.1.  In other cases, the provision establishing the right to retain clearly states that the right is based on compensation:  Act respecting financial services cooperatives, R.S.Q., c. C‑67.3, s. 69.  At times, the right to retain is a means of collecting an assessment out of the wages owed to an employee:  s. 82(c)(4) ALRCI.  In still other cases, a body is authorized to retain an amount until an obligation to do something has been performed:  Education Act for Cree, Inuit and Naskapi Native Persons, R.S.Q., c. I‑14, s. 13.  Context is therefore essential to determining the legal nature of the right to retain granted by a given statutory provision in Quebec.

29                               The right described in the third paragraph of s. 316 AIAOD is not a general right allowing an employer to refuse to pay a debt or retain an amount until a condition imposed on another person is met.  The paragraph specifies that the right held by the employer is to retain “out of the sums that he owes the contractor” an amount equal to the amount paid by the employer to the CSST.  This right presupposes a mutual creditor‑debtor relationship between the employer and the contractor.  It also presupposes pecuniary obligations on the parts of both the employer and the contractor.  When exercising the right to retain, the employer indicates that the debt owed to him or her by the contractor is being deducted from the amount the employer owes the contractor.  In this way, the employer pays him or herself with the sums he or she owes.  The two debts are discharged.  The right to retain therefore corresponds to the right to compensation provided for in art. 1672 C.C.Q.:

1672.   Where two persons are reciprocally debtor and creditor of each other, the debts for which they are liable are extinguished by compensation, up to the amount of the lesser debt.

Compensation may not be claimed from the State, but the State may claim it.

30                               The right to retain referred to in the third paragraph of s. 316 AIAOD is thus merely a reiteration of the right to compensation arising out of the fact that the employer and the contractor have become both creditor and debtor to one another as a result of the subrogatory payment to the CSST.

31                               This analysis leads necessarily to the conclusion, which means the trustee was correct on this point, that dividing up s. 316 AIAOD and retaining only the first paragraph is not a basis for distinguishing the Quebec scheme from Saskatchewan’s scheme.  If Husky Oil is to be distinguished in this case, it is not because the rights resulting from the first and third paragraphs are distinct from and independent of one another, as the appellants contend.  What the third paragraph does is to eliminate any doubt as to the employer’s right to be reimbursed for the amount paid on the contractor’s behalf and, where applicable, to effect compensation between the amount the employer owes the contractor and the amount the contractor owes the employer.

32                               Having completed this part of the analysis, I must now determine whether the right to retain subverts the scheme of distribution under the BIA .

2.1.2    Does the Right to Retain Subvert the Scheme of Distribution Under the BIA ?

33                               The trustee submits that the right to retain effectively guarantees the payment of amounts owed and in so doing subverts the scheme of distribution under the BIA .  The syllogism put forward by the trustee is misleading.  The scheme of distribution does not operate in a vacuum.  If the BIA  recognizes the right of creditors or debtors to avail themselves of mechanisms other than the one provided for in s. 136  BIA , which sets out the scheme of distribution, a provincial statute implementing such an alternative mechanism cannot be found to be inapplicable, because it would be perfectly compatible with the BIA .  In discussing the scope of the first paragraph, we concluded that the right to retain is in fact a right to compensation.  Since the BIA  expressly recognizes certain cases of compensation, the real issue is whether the compensation mechanism authorized by the C.C.Q. and sanctioned by s. 316 AIAOD confers rights going beyond the framework of s. 97(3)  BIA , which reads as follows:

97.   . . .

(3)    The law of set‑off applies to all claims made against the estate of the bankrupt and also to all actions instituted by the trustee for the recovery of debts due to the bankrupt in the same manner and to the same extent as if the bankrupt were plaintiff or defendant, as the case may be, except in so far as any claim for set‑off is affected by the provisions of this Act respecting frauds or fraudulent preferences.

34                               The BIA thus incorporates, although without defining it, a compensation mechanism.  To delimit this mechanism, it is necessary to refer not only to the BIA  itself, but also to provincial law.  Since the enactment of the Federal Law–Civil Law Harmonization Act, No. 1, S.C. 2001, c. 4 , it has been clear that in the province of Quebec, the civil law of Quebec is the suppletive law in bankruptcy matters.  This means that in respect of aspects not governed by the BIA , the civil law rules of compensation apply.  What are those rules?

35                               Article 1672 C.C.Q. has already been quoted.  Mutual debts are extinguished up to the amount of the lesser debt.  Article 1673 C.C.Q. adds that when debts are certain, liquid and exigible, their mutual extinction takes place by operation of law.  The article reads as follows:

1673.   Compensation is effected by operation of law upon the coexistence of debts that are certain, liquid and exigible and the object of both of which is a sum of money or a certain quantity of fungible property identical in kind.

A party may apply for judicial liquidation of a debt in order to set it up for compensation.

36                               There is another rule that is essential to understanding compensation in the context of insolvency.  A debt owed to a party is an asset that is part of his or her patrimony.  Since compensation has the effect of extinguishing mutual debts, the creditors of one or the other of the mutually indebted parties may be affected by the reduction or liquidation of the asset.  Under Quebec civil law, compensation cannot be effected to the prejudice of a third person.  Article 1681 C.C.Q. reads as follows:

1681.   Compensation may neither be effected nor be renounced to the prejudice of the acquired rights of a third person.

If third persons have acquired rights before the right to compensation arises, art. 1681 C.C.Q. prohibits the application of compensation.  The debt cannot be extinguished by compensation to the prejudice of the acquired rights of a third person.  Without this rule, the asset would be reserved for one creditor — in this case, the employer — to the detriment of the principle of the equality of creditors (art. 2644 C.C.Q.), as in the case of a security:  A. Bélanger, Essai d’une théorie juridique de la compensation en droit civil québécois (2004), at p. 144; G. Duboc, La compensation et les droits des tiers (1989), at p. 8, No. 4.  In civil law, therefore, it may or may not be possible to exercise the right to retain, depending on whether or not the rights of third persons are affected.  How does this apply in bankruptcy? 

37                               In the context of bankruptcy, trustees have a dual function:  they represent both the bankrupt and the creditors.  This dual role was considered recently in Lefebvre (Trustee of), [2004] 3 S.C.R. 326, 2004 SCC 63.  Some duties are consistent with a specific characterization of the trustee as the bankrupt’s representative, so the trustee cannot be considered a third person in performing them.  In most situations, however, as de Grandpré J. remarked in Mercure v. Marquette & Fils, [1977] 1 S.C.R. 547, at p. 555, the trustee’s dual function must be borne in mind in assessing the rights and obligations of the trustee and the creditors.

38                               At the time of bankruptcy, the contractor’s claim against the employer constitutes property that is part of the patrimony that is divisible among the creditors within the meaning of s. 67  BIA :

67. (1) [Property of bankrupt] The property of a bankrupt divisible among his creditors shall not comprise

. . .

but it shall comprise

(c)    all property wherever situated of the bankrupt at the date of his bankruptcy or that may be acquired by or devolve on him before his discharge, and

(d)    such powers in or over or in respect of the property as might have been exercised by the bankrupt for his own benefit.

Section 71(2)  BIA  adds that the property vested in the trustee can no longer be alienated by the bankrupt from the date of bankruptcy:

71.   . . .

(2)    On a receiving order being made or an assignment being filed with an official receiver, a bankrupt ceases to have any capacity to dispose of or otherwise deal with his property, which shall, subject to this Act and to the rights of secured creditors, forthwith pass to and vest in the trustee named in the receiving order or assignment, and in any case of change of trustee the property shall pass from trustee to trustee without any conveyance, assignment or transfer.

39                               For the purposes of ss. 67(1)  and 71(2)  BIA , the trustee is consequently not only the bankrupt’s successor, but also the representative of the creditors, on behalf of whom the trustee manages and liquidates the property vested in him or her.  In this context, therefore, the trustee can be characterized primarily as a third person in relation to the bankrupt.  If only these sections were taken into consideration, compensation could not be effected after bankruptcy, because bankrupts would no longer be in a position to use their property to pay their debts.  Bankrupts would not be able to make payments or discharge debtors because they would no longer have the capacity to do so.  They would therefore be unable to effect compensation, which is a mechanism for extinguishing debts, because they would no longer be the holders of their patrimonies.  However, s. 97(3) BIA  sets up a special scheme.  Two aspects of this provision are relevant to our analysis of the right to retain under s. 316 AIAOD.

40                               First, s. 97(3) BIA  specifies that compensation applies to claims against the bankrupt’s estate.  Creditors must therefore meet the conditions set out in s. 121(1)  BIA , the relevant portion of which reads as follows:

121. (1)  All debts and liabilities, present or future, to which the bankrupt is subject on the day on which the bankrupt becomes bankrupt or to which the bankrupt may become subject before the bankrupt’s discharge by reason of any obligation incurred before the day on which the bankrupt becomes bankrupt shall be deemed to be claims provable in proceedings under this Act.

Thus, a creditor who wishes to effect compensation must be able to prove the bankrupt was subject to a debt by reason of an obligation incurred before the bankruptcy.

41                               Second, s. 97(3) BIA  provides that compensation is effected in the same manner as if the bankrupt were a plaintiff or a defendant.  Compensation is effected as if the bankrupt’s patrimony had not vested in the trustee as a result of the bankruptcy.  According to this provision, the mechanism established by s. 71(2)  BIA  does not apply in cases involving compensation.  This rule sets aside the trustee’s status as representative of the creditors.  The argument that the trustee is a third person and that the bankrupt may no longer make payments as a result of the bankruptcy cannot be used to prevent a creditor who wishes to effect compensation from doing so.

42                               Bearing in mind these particular features of s. 97(3)  BIA  and the civil law rules that supplement them, three possible scenarios can be envisaged in the context of s. 316 AIAOD.  In the first, the payment is made to the CSST before the bankruptcy, and the mutual debts are certain, liquid and exigible before the bankruptcy.  In the second hypothetical situation, the payment is made before the bankruptcy, the employer is in debt to the contractor, but one of the conditions for legal compensation is not met.  In the third scenario, the payment is made after the bankruptcy.

2.1.2.1 Payment Is Made Before the Bankruptcy, and the Mutual Debts Are Certain, Liquid and Exigible Before the Bankruptcy

43                               From the moment when the employer pays the CSST, the employer’s claim becomes certain, liquid and exigible.  As a result of subrogation, the CSST’s claim is transferred to the employer.  Since the employer’s right against the contractor arises out of the payment to the CSST, the existence of the employer’s claim is from that moment recognized, or certain.  Furthermore, since the CSST’s assessment is for a specific amount, the claim is liquid.  The claim is also exigible, since the CSST was entitled to demand payment from the employer.  If the employer is also in debt to the contractor, and if that debt is liquid and exigible, legal compensation is effected by operation of law in accordance with art. 1673 C.C.Q., which is reproduced above, and the debts are extinguished up to the amount of the lesser debt.

44                               In this context, by the operation of the rules of the C.C.Q., the employer asserts not a right to retain, but the extinction of his or her debt to the contractor.  The employer may avail him or herself of this mechanism at any time.  He or she relies on the fact that the extinction of the debt occurred at the moment the mutual debts met the conditions for legal compensation.  Since the trustee takes possession of the bankrupt’s property as it exists at the time of vesting (s. 71(2)  BIA ), the trustee will find that the bankrupt’s patrimony includes no claim against the employer.

45                               Since in this scenario the bankruptcy has not yet occurred when legal compensation is effected, the scheme of distribution is not affected, because the claim against the employer is not part of the property vested in the trustee.

2.1.2.2    Payment Is Made Before the Bankruptcy, the Employer Is in Debt to the Contractor, but One of the Conditions for Legal Compensation Is Not Met

46                               In the second scenario, the employer pays the amount of the contractor’s unpaid assessment to the CSST before the bankruptcy.  The employer’s claim, which results from subrogation, is thus certain, liquid and exigible at the time of the bankruptcy.  If one of the conditions for legal compensation is not met, it is necessarily related to the contractor’s claim against the employer.

47                               There are a number of grounds that may be available to the employer to defend against a claim by the trustee.  The employer could, for example, assert that the claim is not certain or is not exigible.  In such a case, the employer would not be relying on the right to retain, but would be asserting that the claim does not exist or is not due.  If the contractor’s claim is certain and exigible but not liquid, the contractor may, if he or she is not bankrupt, apply to a court to liquidate the debt.  In this case, the employer would be applying for judicial compensation pursuant to the second paragraph of art. 1673 C.C.Q.

48                               In civil law, however, compensation may not be effected if the rights of third persons are affected (art. 1681 C.C.Q.).  To allow compensation would be to permit a creditor to be paid in full for a claim out of his or her debt to the debtor.  If third persons have acquired rights before compensation is effected, compensation is consequently not available.

49                               In bankruptcy, the claim against the employer is an asset vested in the trustee within the meaning of s. 71(2)  BIA .  If this claim is not liquid, the trustee can have it appraised and, if there is a dispute, institute legal proceedings (s. 30(1) (d) BIA ).  The employer may also rely on the special provision in s. 97(3)  BIA , which dispenses with the trustee’s status as a third party for the purposes of compensation and allows compensation to be set up as if the bankrupt were the plaintiff.  The employer’s right to compensation thus has its basis in the BIA , not the civil law, which because of art. 1681 C.C.Q. is more restrictive.  In these circumstances, the right to retain under s. 316 AIAOD is not incompatible with the BIA , as it is merely an application of the BIA ’s provisions. 

50                               Quebec courts have on many occasions recognized the possibility of setting up compensation in bankruptcy matters:  In re Hil‑A‑Don Ltd.: Bank of Montreal v. Kwiat, [1975] C.A. 157; In re Le syndicat d’épargne des épiciers du Québec: Laviolette v. Mercure, [1975] C.A. 599; Goldstein v. Auerbach (1991), 51 Q.A.C. 292.  When the payment is made before the bankruptcy, the rights arising out of the subrogatory payment thus do not subvert the scheme of distribution under s. 136  BIA , because they can be implemented by means of a mechanism provided for in the BIA  itself, in s. 97(3) .

2.1.2.3    The Employer’s Payment Is Made After the Bankruptcy

51                               When the employer’s payment is made after the bankruptcy, the question is whether the employer can exercise the right to retain or the right to compensation in the same manner as if the payment were made before the bankruptcy.  In answering this question, it is helpful to refer to the legal relationship created by s. 316 AIAOD, which can be distinguished from the classic cases of conflicts between third persons and assignees.  This is not a case, as provided for in art. 1680 C.C.Q., in which the debtor of an assigned claim seeks to set up against the creditor/assignee the same defence that would have been set up against the original creditor.  Rather, this case concerns defences that the employer, the new creditor, wishes to set up against the contractor, the original debtor, at the time the contractor went bankrupt.  The CSST owed the contractor nothing and could not therefore set up compensation.  Following this line of reasoning, the employer was not a creditor of the contractor before the bankruptcy.  The employer did not become a creditor until the subrogatory payment was made, that is, after the bankruptcy.  The dual status of creditor and debtor did not arise until after the bankruptcy.

52                               In the civil law of Quebec, a person who pays in the place of a debtor has no more rights than the subrogating creditor (art. 1651 C.C.Q.) on the one hand, while on the other hand, compensation cannot be effected to the prejudice of third persons (art. 1681 C.C.Q.).  While it is difficult to liken the compensation mechanism to an additional right when considered from the standpoint of the debtor, the same cannot be said when the rights of third persons are taken into account.  There is no question that third persons would be affected by compensation should it come into play.  The effect of substituting creditors subsequent to the bankruptcy is such that the trustee must now deal with a creditor who is also a debtor of the bankruptcy, whereas the original creditor was not and would not therefore have been able to set up compensation.  The employer’s claim would, in a way, be secured by the amounts owed by the employer to the bankrupt, whereas the CSST’s claim was not.  In the civil law of Quebec, if third persons are affected, the employer cannot exercise the right to retain under s. 316 AIAOD, as this is prevented by arts. 1651 and 1681 C.C.Q.

53                               It is nevertheless helpful to again consider whether the BIA  includes provisions that have the effect of allowing employers to exercise their right to retain.  We have already seen that s. 97(3)  BIA  has two features that are relevant here: (1) the claims must be provable by means of a proof of claim, in accordance with s. 121  BIA , and (2) compensation may be effected as if the bankrupt were the plaintiff.

54                               As a result of subrogation, an employer who pays after a bankruptcy is subrogated to the rights of the CSST and may assert a claim against the bankrupt as if the bankrupt were the defendant.  Pursuant to s. 121  BIA , the employer may assert a claim to which the bankrupt is subject by reason of an obligation incurred before the bankruptcy.  Similarly, under s. 97(3)  BIA , the trustee may assert a claim against the employer for payment of a debt owed to the bankrupt as if the bankrupt were the plaintiff.  Thus, at first glance, these features of the BIA  appear to allow compensation.  As can be seen from a more thorough review, however, a subrogatory payment cannot give rise to compensation if it is made after the bankruptcy.

55                               Few commentators have shown an interest in the effects of subrogation in bankruptcy matters, and the principles of Canadian bijuralism do not permit the importation of common law rules.  The commentaries of authors from outside Quebec are nonetheless of interest for the purpose of reviewing the principles specific to the BIA  (R. J. Wood, “Turning Lead into Gold:  The Uncertain Alchemy of ‘All Obligations’ Clauses” (2003), 41 Alta. L. Rev. 801).  Section 121  BIA  allows the employer to exercise the rights that accrue to him or her by reason of the subrogatory payment.  He or she holds no rights in addition to the rights conferred by the civil law.  The employer has only those rights which the CSST could exercise.  Just as the CSST could not set up compensation, neither can the employer if third persons are affected.  Section 97(3)  BIA  does not provide that a claim may be transferred from one creditor to another so as to permit compensation where it could not otherwise be set up.  Since s. 97(3) BIA  is an exception to the rule of equality between creditors, it must be interpreted narrowly.  It must therefore be read in conjunction with ss. 121 , 136(3)  and 141  BIA  as implicitly requiring that the mutual debts come into existence before the bankruptcy.

56                               What distinguishes a pre‑bankruptcy payment from a post‑bankruptcy payment is that, in the former case, the substitution of creditors takes place before the moment when the trustee acquires the bankrupt’s property.  In the case of a post‑bankruptcy payment, the substitution occurs after the bankruptcy, and the trustee can object to it.  The general principles of the BIA  preclude any transaction that would have the effect of granting a security that did not exist before the bankruptcy.  To sum up, where subrogation is concerned, the BIA  contains no provisions that depart from the civil law and can serve as a basis for extending the scope of application of compensation.

57                               Because of the constraints inherent in the civil law, an employer may not retain the amounts paid to the CSST from the sums owed to a contractor if, when the payment was made, third parties had acquired rights.  A payment made pursuant to s. 316 AIAOD does, however, entitle an employer to avail him or herself of subrogation to be reimbursed as an ordinary creditor for the amount paid.  The right to reimbursement may be exercised in a manner respectful of the rights of third persons.  The employer may file a proof of claim, just as the CSST could have done.  This right is consistent with arts. 1651 and 1681 C.C.Q. and with s. 136  BIA .  Furthermore, in Husky Oil, the Court recognized the validity of the right to make a simple claim to the trustee to be reimbursed (p. 503).

58                               The trustee’s argument that s. 316 AIAOD subverts the scheme of distribution under the BIA  cannot therefore be accepted.  First, the right to reimbursement is compatible with the BIA  and, second, if the right to retain cannot be exercised by an employer, it is because of the inherent constraints of the civil law rules governing subrogation and compensation.  The right to retain is not in conflict with the BIA , because the only circumstances in which the right can be exercised are those provided for in the BIA , which is more open to compensation than Quebec civil law.

2.1.3           Distinction Between Quebec’s Scheme and Saskatchewan’s Scheme

59                               In accepting the trustee’s arguments, the Court of Appeal saw in s. 316 AIAOD a right similar to the one considered by this Court in Husky Oil.  The comparison is, in my view, inappropriate.  In Husky Oil, the Court considered s. 133 of the Workers’ Compensation Act, 1979, which established a deemed debt mechanism and allowed sums owed to a contractor to be withheld even before the employer’s claim against the contractor arose.  Sections 133(1) and 133(3) read as follows:

133—(1)  Where a person, whether carrying on an industry included under this Act or not, in this section referred to as the principal, contracts with any other person, in this section referred to as the contractor, for the execution by or under the contractor of the whole or any part of any work for the principal, it is the duty of the principal to ensure that any sum that the contractor or any subcontractor is liable to contribute to the fund is paid and, where the principal fails to do so and the sum is not paid, he is personally liable to pay that sum to the board.

. . .

(3)    Where the principal is liable to make payment to the board under subsection (1), he is entitled to be indemnified by any person who should have made the payment and is entitled to withhold, out of any indebtedness due to that person, a sufficient amount in respect of that indemnity.

60                               The right to withhold granted to employers under the Workers’ Compensation Act, 1979 arose at the time when the employer was liable to pay, that is, before the payment was even made.  According to the Court’s interpretation, under that Act, employers did not impair their own capital.  They acted as collection agents:  “it is [their] duty . . . to ensure that any sum that the contractor or any subcontractor is liable to contribute to the fund is paid . . .”.  The Court concluded from this that the Act established a deemed debt — as opposed to a real one — owed by the employer personally that, when combined with the right to withhold, constituted a security device that was incompatible with the BIA :

[I]t is clear that when s. 133(1) operates in combination with s. 133(3), the effect is to secure the claim of the Board against assets of the contractor.  This is accomplished through the combined operation of the statutory deemed debt imposed on the principal in the event of the contractor’s default and the right of the principal to withhold and be indemnified from monies owing to the contractor.  Thus, the combined effect of the deemed debt in s. 133(1) and set‑off in s. 133(3) secures the Board’s claim against the contractor’s assets.

                                                                  . . .

To repeat, it is the combined effect of the statutory deemed debt and the right to withhold (and then set off against) property of the bankrupt which secures the Board’s claim against property of the bankrupt.  It is for this reason that examining the constitutional validity of s. 133(1) separately from s. 133(3) fundamentally obscures the nature of the legal interest created.  Such an approach misses that this is nothing but a straightforward security device triggered by the province for securing the Board’s claim against the estate, in exactly the same way that breaking a contract of pledge into debt and bailment and examining the validity of these legal interests separately would obscure the essential character of pledge as a security device. [Emphasis in original; paras. 53 and 77.] 

61                               The Court did not reject all set‑off mechanisms.  Such an interpretation would obviously be inconsistent with the clear wording of s. 97(3)  BIA  and with the reasons for the Court’s decision:

Differently put, in the bankruptcy context, the law of set‑off simply allows a debtor of a bankrupt who is also a creditor of the bankrupt to refrain from paying the full debt owing to the estate, since it may be that the estate will only fulfil a portion, if that, of the bankrupt’s debt. Set‑off is simply a defence to the payment of a debt, not a basis for validating statutory security devices which have the effect of securing the claims of third parties against the estate. . . . [Emphasis in original; para. 73.]

62                               Section 316 AIAOD is consistent with the conditions placed on the application of compensation in Husky Oil.  Only an employer who has paid may exercise the right to retain.  This is not a case like Husky Oil involving a deemed payment or an employer acting as a mere agent.  Nor does this case involve, as the trustee argues, a right to retain under a suspensive condition.  The right resulting from the subrogatory payment  comes into existence only when the payment is made.  Mestre says that this rule is [translation] “obvious, and results from the very spirit of the institution, created for the benefit of those who pay the debts of others” (p. 374, No. 321).  Subject to the right under the BIA  to make a contingent claim (s. 135  BIA ), a warrantor cannot file a proof of claim before payment: Trib. corr. Auxerre, February 24, 1953, Rev. gén. ass. terr. 1953.190 (Mayet et Destoumieux v. Faillot).  The employer/warrantor may not exercise any right against the contractor/debtor before he or she has paid the CSST, the original creditor.  In civil law terms, subrogatory rights cannot be conferred under a suspensive condition: Mestre, at p. 375, No. 322.  The claim accrues to the employer at the time of payment, and not by reason of the fact that the employer might be liable to pay should the contractor fail to do so.  Moreover, no right is granted to the CSST, as a third party, to the detriment of the body of creditors.  The CSST is not affected by the employer’s right to collect.  From the perspective of Husky Oil, the mechanism of s. 316 AIAOD is compatible with the BIA . 

2.1.4      Equitable Set‑off

63                               The trustee also argues that equitable set‑off applies in bankruptcy in Quebec and leads to the same conflict as in Husky Oil.  The trustee points out that the Court of Appeal has incorporated equitable set‑off into Quebec civil law: Structal (1982) inc. v. Fernand Gilbert ltée, [1998] R.J.Q. 2686.

64                               The applicability of equitable set‑off was questionable even before the Federal Law–Civil Law Harmonization Act, No. 1 : Bélanger, at p. 153; A. Bélanger, “L’application en droit civil québécois de l’inapplicable equitable set‑off de common law” (1999), 78 Can. Bar Rev. 486; M. Lemieux, “La compensation dans un contexte de proposition et de faillite” (1999), 59 R. du B. 321.  Since that Act came into force, however, it has been clear that s. 97(3)  BIA  must be applied in Quebec on the basis of civil law and not common law rules.  Equitable set‑off cannot make up for the non‑application of civil law compensation and cannot be introduced into Quebec law by s. 97(3)  BIA .  In Quebec, the suppletive law is Quebec civil law and, more specifically in this case, the rules governing compensation under the C.C.Q.

65                               In short, the third paragraph of s. 316 AIAOD does nothing more than confirm the employer’s right to be reimbursed, be it by filing a proof of claim under s. 121  BIA  or by setting up compensation in accordance with s. 97(3)  BIA .  These two means are provided for in the BIA .  Section 316 AIAOD grants no more rights than are permitted under the BIA .  In no case is the scheme of distribution subverted.

2.2       The Mechanism of Section 54 ALRCI

66                               The trustee also seeks to have s. 54 ALRCI declared inapplicable.  This provision reads as follows:

54.  The wages due by a sub‑contractor constitute a solidary obligation between the sub‑contractor and the contractor with whom he has contracted, and between the sub‑contractor, the sub‑contractor with whom he has contracted, the contractor and every intermediary sub‑contractor.

Where the employer holds the appropriate licence issued under the Building Act (chapter B‑1.1), such solidary obligation is extinguished six months after the end of the work carried out by the employer, unless the employee concerned filed a complaint with the Commission concerning his wages, a civil action was brought, or a claim was sent by the Commission pursuant to the third paragraph of subsection 1 of section 122 before the expiry of the six‑month period.

Such solidary obligation extends to the client having contracted, directly or through an intermediary, with a contractor who does not hold the appropriate licence issued under the Building Act, in respect of the wages due by the contractor and each of his sub‑contractors.

67                               Unlike the AIAOD, which grants a right to reimbursement and a right to retain without actually referring to the mechanism under the Civil Code, the ALRCI, by using the expression “solidary obligation”, characterizes the obligation in terms that explicitly incorporate the rights and obligations provided for in the C.C.Q.’s provisions on solidarity.

68                               The CCQ’s solidary remedy entitles it to claim the amount of the wages from either the employer or the contractor, as it chooses. This is the effect of art. 1523 C.C.Q.:

1523.   An obligation is solidary between the debtors where they are obligated to the creditor for the same thing in such a way that each of them may be compelled separately to perform the whole obligation and where performance by a single debtor releases the others towards the creditor.

69                               An employer who pays the wages of a contractor’s employees may demand to be reimbursed by the contractor pursuant to art. 1536 C.C.Q.:

1536.   A solidary debtor who has performed the obligation may not recover from his co‑debtors more than their respective shares, although he is subrogated to the rights of the creditor.

With regard to the employer’s liability under s. 54 ALRCI, it is clear that the contractor remains ultimately liable for the entire debt.  The employer may therefore recover the total amount paid to the CCQ from the contractor.  Moreover, an employer who pays the CCQ may also, as is the case for payments to the CSST, rely on legal subrogation pursuant to para. (3) of art. 1656 C.C.Q.:

1656.   Subrogation takes place by operation of law

. . .

(3)     in favour of a person who pays a debt to which he is bound with others or for others and which he has an interest in paying;

70                               By virtue of the solidary obligation imposed by s. 54 ALRCI, together with the recursory action and subrogation, the employer may claim the amount paid to the CCQ from the contractor.

71                               If the payment is made before the bankruptcy, the above reasoning concerning the right to retain under s. 316 AIAOD applies.  Where an employer is in debt to the contractor and the debt meets the conditions for legal compensation, the mutual debts are extinguished by operation of law up to the amount of the lesser debt (arts. 1672 and 1673 C.C.Q.).  In such a case, the patrimony vested in the trustee at the time of bankruptcy does not include the bankrupt’s claim, which has been extinguished by legal compensation.  Where the payment is made before the bankruptcy but the contractor’s claim is not liquid, employers may avail themselves of s. 97(3)  BIA  to effect compensation between the amounts they owe and the amounts owed to them.

72                               In the case of a post‑bankruptcy payment to the CCQ, the employer will have to prove his or her claim against the estate in accordance with the rules of s. 121  BIA .  Even if the employer is in debt to the bankrupt, the BIA  does not allow the claim to be transferred to the detriment of the creditors.  The BIA does not depart from the rules established by arts. 1651 and 1681 C.C.Q., which provide that  subrogation does not give the subrogated person any more rights than the subrogating creditor and that compensation may not be effected to the prejudice of third persons.  The employer is thus limited to proving the claim without being able to set up compensation for payments made after the bankruptcy.

73                               The rules of the C.C.Q. with respect to subrogation add no new security and create no additional debts as regards the bankrupt.  The impugned provisions violate neither the letter nor the spirit of Husky Oil.  It should be noted that in that case, what was at issue was a mechanism by which employers could withhold amounts owed to debtors before being held personally liable for paying the assessments.  In a way, the employer acted as a collection agent for the Workers’ Compensation Board.  The same is not true in the case of the ALRCI, which provides that employers are personally liable for wages not paid by their contractors. 

3.         Conclusion

74                               This case was submitted to the Superior Court as a motion for directions in which a ruling was sought on the legal effect of s. 316 AIAOD and s. 54 ALRCI in the context of the BIA .  The relevant questions of law have been addressed above.  As mentioned in the facts related at the beginning of these reasons, the payments made by the employers, with the exception of Chenail’s payment to the CCQ, were not made before the bankruptcy.  The principles stated above will apply in determining the employers’ rights, and there is no need to consider the specific facts of each case, especially since the employers have chosen not to take part in the debate.

75                               For these reasons, I would allow the appeal, answer the two constitutional questions in the negative, restore the judgment of the Superior Court and dismiss the trustee’s motion, with costs against the estate.

Appeal allowed with costs.

Solicitor for the appellant the Attorney General of Quebec:  Department of Justice, Québec.

Solicitors for the appellant Commission de la construction du Québec:  Ménard, Corriveau, Montréal.

Solicitors for the appellant Commission de la santé et de la sécurité du travail:  Panneton, Lessard, Québec.

Solicitors for the respondent:  Blake, Cassels & Graydon, Montréal.

Solicitor for the intervener:  Attorney General of Ontario, Toronto.