Cineplex suing Cineworld, claims COVID-19 not an excuse for breach of contract

Cineworld backed out of purchase in what Cineplex characterized as 'buyer's remorse'

Cineplex suing Cineworld, claims COVID-19 not an excuse for breach of contract
Termination of contract must be in good faith

After Cineworld backed out of a deal to purchase the company, Cineplex is seeking damages, claiming COVID-19, shifts in the theatre industry and changes in law were expressly excluded as termination grounds in their agreement.

This case is ongoing before the Ontario Superior Court. Representing Cineworld is Paul Steep and Shane D’Souza of McCarthy Tétrault LLP. Goodmans LLP’s Alan Mark, Julie Rosenthal and Peter Kolla are counsel for Cineplex.

"This case is significant because the court will not only need to assess whether Cineworld's delay and ultimate decision to back out of the transaction complied with the terms of the agreement, but it will also need to determine whether Cineworld's actions amounted to a breach of its duty of honest performance," says Eli Lederman, a commercial litigator and partner at Lenczner Slaght, who was not involved in the case.

"Given that the scope of the duty of honest performance has been recently expanded by the Supreme Court of Canada, the trial judge may consider the motivation and reasoning behind Cineworld's actions in determining whether its conduct amounted to a breach of the duty."

In December 2019, Cineworld agreed to purchase Cineplex for approximately $2.8 billion, including the repayment or refinancing of Cineplex’s debt obligations.

But Cineworld suffered from “buyer’s remorse,” said Cineplex in its statement of claim. The would-be purchaser’s alleged reasons for terminating the agreement were industry-wide changes, COVID-19 and changes in law. But these did not excuse Cineworld from its contractual obligations, said the plaintiff.

Cineplex claims that the parties specifically agreed that such risk was considered and allocated to Cineworld, and therefore, these would not provide a basis for termination. Cineplex also alleges that it abided by its contractual obligations under the agreement despite the challenges brought about by the COVID-19 pandemic. It further alleges that Cineworld delayed and ultimately prevented the approval required by the Investment Canada Act (R.S.C. 1985 c.28 (1st Supp.)) (ICA), as the agreement involved the acquisition of control of a Canadian business by a non-Canadian investor.

Cineworld, on the other hand, said it terminated the agreement because Cineplex had deviated from the ordinary course and past practice – acts committed even before COVID-19 arose or was expected to impact the Canadian market. Cineworld claims that Cineplex failed to make payments to landlords, film distributors and other suppliers, fracturing crucial commercial relationships it was obliged to preserve. Cineplex also implemented strict cash management strategies and created new sources of indebtedness. This was not only outside the ordinary course, but such restructuring of finances, Cineworld argues, was also Cineplex merely hiding its debts so that it would be shouldered by Cineworld after purchase.

Cineworld also alleges that it made good faith efforts to seek ICA approval. Shortly after the purchase’s announcement on December 31, 2019, Cineworld filed its Application for Review, initiating the approval review process. However, the Ministers tasked to review the application repeatedly extended the waiting period with consent of both parties to allow sufficient time for discussions. Cineworld alleged that despite serious concerns about Cineplex’s compliance with the arrangement agreement, Cineplex had continued to seek ICA Approval until its withdrawal on June 12, 2020.

In response, Cineplex claims that it was focussed on taking all necessary steps to honour the terms of the agreement. Cineplex claims it would collaborate with its landlords, film studios and suppliers, to address the impact of the pandemic, including deferment of payments and restructuring of leases, which was unlikely to damage these relationships. Further, Cineplex alleges that Cineworld did not use its reasonable best efforts to obtain approval under the ICA, but rather unreasonably delayed its dealings.

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