On May 5, 2005 the Supreme Court of Canada refused leave to appeal in the matter of Standard Life Insurance Company (“Standard”) vs. Famous Players Cinemas Inc. (“Famous Players”).  The Court of Appeal rendered judgment on December 3rd, 2004 in favour of Famous Players, dismissing Standard’s legal proceeding against Famous Players.

The Court of Appeal confirmed that a debtor (Famous Players) is not prevented from exercising a contractual right which could adversely affect the assignee (Standard Life) of the debtor’s debt. In this case, Famous Players transacted with its landlord to cancel a lease without the consent of the mortgage lender (Standard). The transaction was entered into even though Famous Players had constructive knowledge of a landlord’s contractual undertaking (which post-dated the lease) to its lender not to cancel the lease or accept rental payments in advance. 

Standard Life, the mortgage lender, delivered to Famous Players copies of the mortgage documents which contained the foregoing covenants.  Several years later, following a fire in the premises, Famous Players entered into an agreement with its landlord providing for a substantial payment as compensation for the fire damages and for the cancellation of the lease.  Eventually, the landlord defaulted on its mortgage with Standard Life who attempted to exercise its recourses under the mortgage document, including the collection of rent and the sale of the building.  Without Famous Players as a tenant Standard Life suffered a substantial loss on the foreclosure.

Standard Life sued Famous Players in damages invoking the doctrine in the Supreme Court judgement of Trudel vs. Clairol Inc. of Canada (1975) 2 S.C.R. 236 claiming that Famous Players had either incited or participated with the landlord in a breach of the latter’s contract with Standard Life and was therefore liable in damages.

In its reasons,  the Court of Appeal stated that since the lease foresaw the possibility of cancellation arising from the destruction of the premises, the assignment or hypothecation of that lease by the landlord to Standard Life could not render the obligations of Famous Players more onerous, by subjecting the transaction to the consent of Standard.

In addition, the Court of Appeal underlined that in order for the doctrine in Clairol vs. Trudel to apply, it was necessary to prove bad faith and the Court of Appeal, contrary to the trial judge found that there was no evidence on the record of such bad faith.  Moreover, since the promulgation of the Civil Code of Québec in 1994, and since no default had been invoked by Standard Life, the payment made by Famous Players to its landlord to cancel the lease was opposable to Standard Life.

Famous Players Cinemas Inc. was represented by Mark Schrager before the Court of Appeal and by Mark Schrager and Louis-Martin O’Neill before the Supreme Court of Canada. Both are partners at Davies Ward Phillips & Vineberg LLP.