Part II — D.I.M.S. Construction inc. (Trustee of) v. Quebec (Attorney General)
Ending a Debate: Application of the Principle of Complementarity by the Supreme Court of Canada
Philippe Denault, Counsel
Department of Justice Canada
- 1. Summary of the Decision
- 2. Reference to the Civil Law in the Bankruptcy Context
- 3. General Conclusions
On October 6, 2005, the Supreme Court of Canada rendered an important decision relating to bijuralism. Through this decision, the highest court in the land has put an end to the debate among authors and judges on the application of the rules of equitable set-off in the field of bankruptcy in Quebec. Even more significant, the judgment confirms that the civil law applies to supplement a federal statute, the Bankruptcy and Insolvency Act, when the provisions of that statute are incomplete in relation to private law. This is an important clarification and, given how clear the Supreme Court's message about the complementary sources of federal private law is, it may also be an indication of the approach that should be taken with other federal statutes.
1. Summary of the Decision
The Supreme Court had to consider two statutes enacted by the Quebec legislature, the Act respecting industrial accidents and occupational diseases and the Act respecting labour relations, vocational training and manpower management in the construction industry. It had to determine whether section 316 A.I.A.O.D. and section 54 A.L.R.C.I. were inapplicable or inoperable in whole or in part by reason of being in conflict with the Bankruptcy and Insolvency Act. Those sections require an employer who retains the services of a contractor to pay the assessments owed by the contractor to the Commission de la santé et de la sécurité du travail (hereinafter “CSST”) or the wages due to the Commission de la construction du Québec (hereinafter “CCQ”). They also provide that the employer is entitled to be reimbursed and to retain the amount paid out of the sums the employer owes the contractor. With respect to the right to retain and the right to compensation in particular, the Court had to determine whether, in the bankruptcy context, they subverted the scheme of distribution provided for in section 136 B.I.A.
In this case, the CSST and the CCQ were claiming from three employers the unpaid assessments and wages, respectively, owed by a contractor, D.I.M.S. Construction inc. (hereinafter “D.I.M.S.”). After D.I.M.S. declared bankruptcy, the trustee demanded that the three employers pay the amounts owing for work performed by D.I.M.S. The employers contested the trustee's claim, citing the demands for payment made by the CSST and the CCQ. The trustee therefore applied to the Superior Court of Quebec for a declaration that section 316 A.I.A.O.D. and section 54 A.L.R.C.I., which provided for the employers' right to retain, did not apply in bankruptcy. The trustee argued that this mechanism available to employers created a priority that subverted the scheme of distribution under the Bankruptcy and Insolvency Act. The Superior Court dismissed the trustee's case, but the Court of Appeal ruled in the trustee's favour. The Attorney General of Quebec, the CSST and the CCQ therefore appealed to the Supreme Court of Canada.
The Supreme Court held that section 316 A.I.A.O.D. and section 54 A.L.R.C.I. do not subvert the scheme of distribution provided for in section 316 B.I.A. (para. 10). It found that payment of the assessment due by the contractor allows the employer to be subrogated to the CSST's rights and to demand in return that the contractor pay the amount of the assessment (para. 26). The right to retain provided for in the third paragraph of section 316 A.I.A.O.D. is merely a reiteration of the right to compensation arising out of that legal subrogation (para. 30). Moreover, civil law compensation as sanctioned by section 316 A.I.A.O.D. does not go beyond the framework of subsection 97(3) B.I.A., which expressly provides for the application of the rules of compensation. The only circumstances in which the right to retain can be exercised in the bankruptcy context are those provided for in the Bankruptcy and Insolvency Act, which is more open to compensation than Quebec civil law (para. 58).
In reaching this last conclusion, the Supreme Court noted that the Bankruptcy and Insolvency Act incorporates a compensation mechanism without defining it and that provincial law must be referred to on a suppletive basis to delimit that mechanism. The civil law rules of compensation therefore apply in the province of Quebec in respect of aspects not governed by the Bankruptcy and Insolvency Act (para. 34), particularly the rule that compensation is effected by operation of law when the debts are certain, liquid and exigible (art. 1673 C.C.Q.) (para. 35). As for the rule that compensation may not be effected to the prejudice of a third person (art. 1681 C.C.Q.), subsection 97(3) B.I.A. sets up a special scheme in the bankruptcy context: compensation is effected as if the bankrupt's patrimony had not vested in the trustee; this means that the trustee cannot be considered a third person in relation to a creditor who wishes to effect compensation (para. 41).
On the basis of this analysis of compensation under the Bankruptcy and Insolvency Act with regard to the suppletive rules of the civil law, the Supreme Court then looked at three possible scenarios that can be envisaged in the context of section 316 A.I.A.O.D. and concluded that in none of them is the scheme of distribution under the Bankruptcy and Insolvency Act subverted. The three scenarios are as follows:
- Where the employer makes the payment to the CSST before the bankruptcy and the mutual debts of the employer and the contractor are certain, liquid and exigible, legal compensation is effected by operation of law under the civil law (paras. 44, 45).
- Where the employer's payment is made before the bankruptcy but the contractor's claim is not liquid at the time of the bankruptcy, compensation is effected once the claim has been appraised and thus has its basis in the Bankruptcy and Insolvency Act, not the civil law, which is more restrictive with respect to third persons (para. 49).
- Where the employer's payment is made after the bankruptcy, the subrogation effected under section 136 A.I.A.O.D. cannot give rise to compensation. In this case, to avoid creating security after the bankruptcy, subsection 97(3) B.I.A. must be read “in conjunction” with the provisions of the Bankruptcy and Insolvency Act requiring that the mutual debts come into existence before the bankruptcy (para. 55). The Bankruptcy and Insolvency Act does not depart in this respect from the rules of the civil law, which are to the same effect (paras. 52, 57).
Finally, the Supreme Court rejected two of the trustee's additional arguments. It rejected the argument, accepted by the Court of Appeal, that the right to retain provided for in section 316 A.I.A.O.D. is similar to the one created by a Saskatchewan statute and considered in Husky Oil Operations Ltd. v. M.N.R. That statute established a deemed debt mechanism and allowed sums to be withheld before the employer became a creditor, thus creating a security device in favour of the Worker's Compensation Board (para. 60). The Supreme Court found that, on the contrary, section 316 A.I.A.O.D. is compatible with the Bankruptcy and Insolvency Act: the claim accrues to the employer at the time the assessment is paid, and no right is granted to the CSST, as a third party, to the detriment of the body of creditors (para. 62).
Essentially restating its reasoning concerning the suppletive nature of the civil law in the bankruptcy context (see para. 34), the Supreme Court also rejected the trustee's argument that equitable set-off applies in Quebec and leads to the same conflict as in Husky Oil. The Supreme Court found that subsection 97(3) B.I.A. must be applied in Quebec on the basis of civil law and not common law rules. Since the suppletive law in Quebec is the civil law, equitable set-off cannot make up for the non-application of civil law compensation and cannot be introduced into that province by subsection 97(3) B.I.A. (para. 64).
2. Reference to the Civil Law in the Bankruptcy Context
As we have just seen, the Supreme Court in this case significantly clarified the way the civil law can be applied in the bankruptcy context. There are in fact two aspects to this clarification, since it results both from the recognition of the intent expressed by Parliament and from the rigorous application of the principle of complementarity of provincial private law in interpreting the Bankruptcy and Insolvency Act.
2.1. Parliament's intent
In determining the normative content of the concept of compensation in the bankruptcy context, the Supreme Court twice made a point of referring to the Federal Law-Civil Law Harmonization Act, No. 1. It did so first in paragraph 34 of its reasons, where it confirmed that the civil law rules of compensation apply on a suppletive basis to delimit the compensation mechanism provided for in the Bankruptcy and Insolvency Act. It did so a second time in paragraph 64 of its reasons, where it stated, with regard to the suppletive nature of the civil law, that the common law's equitable set-off cannot be introduced into Quebec by subsection 97(3) B.I.A. and thus make up for the non-application of civil law compensation.
The Supreme Court based these specific conclusions concerning the concept of compensation on the general observation it made in paragraph 34 with regard to bankruptcy law as a whole:
“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”. The generality of this observation is all the more significant given that Harmonization Act, No. 1 did not amend subsection 97(3) B.I.A., that the Supreme Court did not refer to any specific provision of Harmonization Act, No. 1 and that the Court also did not refer to the amendment made to the English version of subsection 97(3) by the Federal Law-Civil Law Harmonization Act, No. 2. In so
describing the principle that must govern the interpretation of the Bankruptcy and Insolvency Act when it involves a civil law question, the Supreme Court was undoubtedly recognizing the intent expressed by Parliament with respect to bijuralism and the harmonization initiative as a whole.
It should be explained what we mean here by “Parliament's intent”, since the Supreme Court referred in both paragraph 34 and paragraph 64 to the clarification resulting from Harmonization Act, No. 1 (“it has been clear …”). When the Supreme Court stated that the principle that civil law rules apply on a suppletive basis — the principle of complementarity — is no longer in any doubt in Quebec “since” the passage of that Act, it was with the implied understanding that in the past the foundations of that principle were uncertain or there was no general agreement about it among interpreters of federal legislation. As the Supreme Court suggests, the enactment of Harmonization Act, No. 1 reflects Parliament's desire to end such ambiguity. This is what the Supreme Court appears to recognize in D.I.M.S. Construction. In our view, this recognition, which is stated in general terms, as mentioned in the last paragraph, applies to all aspects of the harmonization project. It applies both to the foundations of the principle of complementarity that Parliament is asking the courts to respect and to the rules of interpretation the courts are being asked to apply. By giving effect in this way to the intent expressed by Parliament, the Supreme Court has sent a signal that legislative bijuralism must be taken into account and that solutions to private law problems must no longer be sought in a system other than the applicable system.
2.2. Application of the principle of complementarity
Beyond its statement of principle, D.I.M.S. Construction provides an exemplary demonstration of how to apply the principle of complementarity in the application of federal legislation. Basically, it is exemplary for the three reasons we will now explain, all of which relate to the fact that, in its analysis, the Supreme Court established forms of interaction among federal legislation, the civil law and the common law that are both clear and flexible.
First, D.I.M.S. Construction illustrates the essentially suppletive nature of the civil law in relation to federal law, that is, its role as the jus commune both for Quebec legislation and for federal legislation that applies in Quebec and deals with a question of private law. The Supreme Court's analysis establishes a double and perhaps even a triple connection in this regard. First, the civil law is used to define the right to retain provided for in section 316 A.I.A.O.D., particularly through the concept of subrogation. Next, the civil law is used to “delimit” (para. 34) the concept of compensation used in subsection 97(3) B.I.A. Finally, the superimposition of these two mechanisms in the bankruptcy context is what makes it possible to determine their combined effect, and specifically to determine whether the provincial scheme subverts the federal one. However, what is important in the Supreme Court's analysis is that the civil law, considered the jus commune, is able to permeate the components of federal law, to fill in the cracks in that law, so to speak. At every stage in this reasoning, the civil law remains present in the background, and it comes into play on a suppletive basis or “applies” (para. 34) in respect of aspects not governed by the Bankruptcy and Insolvency Act.
In a very nuanced way, D.I.M.S. Construction also illustrates the counterpart of the principle of complementarity, namely the possibility that Parliament will depart or “dissociate”[ 22 ] itself from provincial law in its fields of jurisdiction. Despite recognition of the principle of complementarity, the Bankruptcy and Insolvency Act is given precedence over the civil law in the course of the analysis, since the civil law can come into play only
“in respect of aspects not governed by the BIA” (para. 34). The fluidity of the civil law thus contrasts with the rigidity of federal legislation, which, in a way, serves as a restrictive application framework for the suppletive rules of provincial law. However, while the Bankruptcy and Insolvency Act retains its primacy, departures from the civil law do not
lead to the complete dissociation of the federal statute from provincial law: the content of the concept of compensation is delimited by both the Bankruptcy and Insolvency Act and the civil law; the concept has a hybrid nature that results from the integration of the civil law into the federal statute. Unlike other decisions in which the court's analysis led it to close the door to provincial law,[24 ] D.I.M.S. Construction applies the principle of complementarity in a flexible manner, making dissociation a mechanism of complementarity rather than its antithesis.
Finally, although D.I.M.S. Construction takes a flexible view of complementarity within a single system, it sends a very firm message about the possibility of applying the common law and the civil law simultaneously in determining the suppletive sources of private law in the bankruptcy context. As we have seen, the Supreme Court rejected the trustee's argument that equitable set-off had been introduced into Quebec by subsection 97(3) B.I.A., thus putting an end to a debate on this point.[25 ] Thus, along with the fact that the Bankruptcy and Insolvency Act takes precedence over provincial law, there is a rule that reference can be made only to the civil law in the province of Quebec pursuant to the principle of complementarity:
“In Quebec, the suppletive law is Quebec civil law and, more specifically in this case, the rules governing compensation under the C.C.Q.” (para. 64). There is thus a dual limit on the application of private law in bankruptcy, since the Supreme Court has closed the door to the possibility of applying provincial sources in the federal field on a trans-systemic basis. That being said, note should nonetheless be made of the passage in which the Supreme Court referred to the commentaries of authors from other provinces in reviewing the principles specific to the Bankruptcy and Insolvency Act, saying that those commentaries were “of interest” (para. 55). After stating that
“the principles of Canadian bijuralism do not permit the importation of common law rules”, the Court cited those authors to show that the principles governing the Bankruptcy and Insolvency Act in the common law context are the same as in the civil law context as far as subrogation is concerned.
Despite the strictness of the judgment as regards the complementary sources of federal private law, some concern or even some openness was thus expressed in relation to the system that, in this case, was not applicable.
3. General Conclusions
The Supreme Court's recognition of the principle of complementarity, and the instructions it provides for its practical application, are expressly limited to the field of bankruptcy. D.I.M.S. Construction nonetheless allows us to make two more general observations about the relationship between federal legislation and provincial private law. One has to do with the nature of the principle of complementarity, while the other has to do with its impact on the uniform application of federal legislation.
The Supreme Court draws a clear parallel between suppletivity at the provincial level, that is, the application of the civil law to section 316 A.I.A.O.D., and suppletivity at the federal level, that is, the application of the civil law to the Bankruptcy and Insolvency Act. It thereby recognizes that the way federal legislation interacts with provincial private law, or at least Quebec civil law, is analogous to the way provincial legislation interacts with the Civil Code of Québec. In doing so, the Supreme Court confirms that provincial private law plays the role of jus commune in the federal legal order and that this relationship, established constitutionally and reaffirmed by Parliament in Harmonization Act, No. 1, takes precedence over judicial intervention when the sources of federal private law are being interpreted.
Moreover, by precluding reliance on equitable set-off to define the concept of compensation under subsection 97(3) B.I.A. in Quebec, the Supreme Court has implicitly acknowledged the possibility that federal legislation, here the Bankruptcy and Insolvency Act, will be applied differently from one province to another. This is a significant consequence of D.I.M.S. Construction, since the principle that federal legislation should apply uniformly is sometimes put forward by the courts when they are dealing with irreconcilable systemic differences. The approach taken by the Supreme Court therefore appears to be to the same effect as the one referred to in the last paragraph: it is up to Parliament and not the courts to amend the federal private law scheme when legislative policy requires uniformity. Although this is not explicitly acknowledged in the decision, it may be assumed that the courts will take note of it. However, it is also possible that judges will not always consistently show such deference when the issues are different.
Thus, D.I.M.S. Construction significantly clarifies the interaction between federal legislation and provincial private law. Since it unequivocally recognizes and applies the principle of complementarity and puts a decisive end to the debate on equitable set-off, this judgment by our highest court is an indispensable reference in understanding, reaffirming and implementing bijuralism in federal legislation.
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