On October 1, 2026, the Quebec Court of Appeal, in Gildan Activewear Inc. v. Berg (judgment currently available in French only), granted Gildan Activewear Inc. (Gildan) leave to appeal a decision rendered by the Superior Court of Quebec. On July 2, 2026, Justice Babak Barin of the Superior Court ordered Gildan to advance C$750,000 in defence costs to ten former directors, prompting Gildan to seek leave to appeal.
Justice Barin’s decision addresses a central question in corporate governance: when a corporation has contractually committed to advance defence costs to its directors, can it refuse to do so by alleging bad faith and insisting on a preliminary evidentiary hearing? As the Court of Appeal prepares to review the Superior Court’s decision, it is worth examining the circumstances that gave rise to the dispute.
Background
Gildan is a publicly listed Canada Business Corporations Act (CBCA) corporation headquartered in Montréal and one of the world’s leading manufacturers of everyday basic apparel. In 2024, following the board’s removal of longstanding CEO and co-founder Glenn Chamandy, a widely publicized proxy contest ensued. The contest cost more than US$70-million, making it one of the most expensive proxy contests in Canadian and U.S. corporate history, and ultimately led all three major proxy advisory firms to recommend a complete reconstitution of the board.
On May 23, 2024, four days before the annual meeting, the entire board of ten directors resigned. At the shareholder meeting, votes in favour of the dissident slate ranged from 84% to 99%, and Chamandy was reappointed as CEO. On March 7, 2025, the former directors filed an action against Gildan for approximately US$18-million in unpaid Deferred Share Units (DSUs). On November 18, 2025, Gildan responded with a defence and cross-application claiming US$50-million against the former directors for alleged breaches of fiduciary duties.
Each former director had signed an indemnification agreement (the Indemnification Agreement) containing a mandatory advancement provision requiring Gildan to advance defence costs. When the former directors requested C$750,000 in advancement of defence costs in December 2025, Gildan refused, arguing the request was premature and that it should first be permitted to demonstrate that the former directors had acted in bad faith.
Arguments of the Parties
Gildan argued that, under the CBCA’s indemnification scheme, former directors sued by the corporation cannot receive an advancement of costs without prior judicial authorization. Such authorization could only be granted after the directors satisfied the good faith conditions set out in section 124(3), thereby providing Gildan with a procedural opportunity to establish a “strong prima facie case” of bad faith before any funds be advanced. Relying on the Ontario Court of Appeal’s decision in Cytrynbaum v. Look Communications, Gildan sought to put in place a multi-step evidentiary process to demonstrate that the former directors did not meet the strong prima facie test.
As for the former directors, they submitted that the Indemnification Agreement used mandatory language (“shall advance monies”) as opposed to the permissive statutory language, and that Gildan’s obligation to advance costs was clear and unambiguous. They argued that the presumption of good faith established by the Supreme Court of Canada in Blair v. Consolidated Enfield applied at the advancement stage, and that Gildan’s proposed evidentiary process was disproportionate for what is, by its nature, a provisional application.
The Court’s Decision
The Court drew a critical distinction between indemnification — which is retrospective, providing reimbursement after the outcome of a proceeding — and advancement, which is necessarily prospective as interim funding that fills the gap until indemnification can be assessed on the merits at trial.
Central to the Court’s reasoning was a bilingual interpretation of section 124(4) of the CBCA. Justice Barin held that reading the French version first reveals a meaning obscured when one begins with the English text alone: it is the repayment of moneys advanced — not the advancing itself — that is subject to the good faith conditions of section 124(3). Under this reading, the presumption of good faith persists throughout the advancement stage until trial.
In declining to follow Cytrynbaum, the Court did not hold that a corporation can never resist advancement. Rather, Justice Barin characterized the strong prima facie test as a product of the discretion exercised by the court in the particular circumstances of that case, not as a mandatory feature of every section 124(4) application. Under the Court’s approach, the approving judge retains the widest discretion to determine, on a case-by-case basis, what evidence may be required, with challenges to advancement based on strong prima facie evidence of bad faith becoming “the very rare exception and not the norm.”
Turning to the Indemnification Agreement, the Court found its language clear and unambiguous, and held that it must defer to the clear terms of the contract. The mandatory “shall” language could not be circumvented by invoking the permissive “may” of the statute.
The Court further rejected Gildan’s proposed multi-step evidentiary process as disproportionate at the provisional stage. The Court found that Gildan faced no real exposure, noting that approximately C$26-million in unpaid DSUs remained owing to the former directors. The C$750,000 ordered represented less than 3% of the outstanding DSUs and only 1% of Gildan’s own US$50-million crossclaim. The Court ordered provisional execution notwithstanding appeal.
Subject to the decision to be rendered on appeal, contractual indemnification obligations that use mandatory language will be enforced according to their terms, and courts retain broad discretion over the evidentiary process at the advancement stage.
Key Takeaways
- Mandatory indemnification agreements are enforceable. Where a corporation has contractually committed to advance defence costs using mandatory language, it cannot circumvent that obligation by invoking the permissive language of section 124 of the CBCA. The statutory provisions establish a floor, not a ceiling, of protection. For corporations, the decision underscores the importance of carefully drafting indemnification agreements, as mandatory advancement language will be enforced according to its terms. For directors and officers, the decision provides reassurance that contractual protections will be upheld.
- Good faith is presumed at the advancement stage. Directors are presumed to have acted in good faith until proven otherwise at trial. Requiring a preliminary determination of good faith before advancing costs would undermine the very purpose of advancement.
- The strong prima facie test is not automatic. The Court declined to treat the approach adopted in Cytrynbaum as a universal rule, holding instead that the approving court retains broad discretion to determine, on a case-by-case basis, what evidence it may require before approving an advancement of defence costs. Given the significance of this ruling, the Court of Appeal has granted leave to appeal, and this question will now be addressed by an appellate court.
For more information, please contact the authors or any other member of our Corporate Governance and Capital Markets groups.
