In a unanimous decision, with concurring reasons, the Supreme Court of Canada (SCC) has rendered its long-anticipated judgment regarding the intersection of insolvency and domestic arbitration law in Peace River Hydro Partners v. Petrowest Corp., 2022 SCC 41. The decision is significant as the use of arbitration for resolution of commercial disputes continues to increase both domestically and internationally and it is not unusual in the current economic context for a commercial party that has agreed to arbitration to find itself in a dispute with an insolvent or bankrupt counterparty.
The SCC dismissed the appeal, thereby affirming the lower courts' decisions to allow the receiver to continue to prosecute the debtor's claims through the courts despite the existence of mandatory arbitration clauses. The Court in Petrowest held that insolvency courts have a broad jurisdiction under the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the "BIA"), including to direct the manner in which claims are decided, even in the face of a mandatory arbitration agreement. The Court made clear, however, that in finding in favour of the receiver, it did so on the basis of the unique factual circumstances of the case and the fact that a party has entered receivership or insolvency proceedings is not, on its own, a sufficient basis to avoid an otherwise valid agreement to arbitrate.
- A receiver cannot disclaim an arbitration agreement so as to render it "void, inoperative or incapable of being performed" under s. 15(2) of the Arbitration Act, RSBC 1996, c. 55 (the "Arbitration Act").
- S. 15 of the Arbitration Act does not invariably require a court to stay a lawsuit brought by a court-appointed receiver when there has been an agreement to arbitrate. A court may decline to grant a stay where the party seeking to avoid arbitration establishes that the arbitration agreement at issue is "void, inoperative or incapable of being performed" within the meaning of s. 15(2).
- A receivership court has the jurisdiction to find an arbitration agreement to be inoperative if enforcing it would compromise the orderly and efficient resolution of the receivership.
- Whether an arbitration agreement will be found to be inoperative pursuant to s. 15 of the Arbitration Act will be a fact specific inquiry, informed by the public interest in the efficient resolution of the receivership.
The appellant partnership, Peace River Hydro Partners ("Peace River") was formed to build a hydroelectric dam in northern British Columbia. As part of the partnership agreement, Peace River agreed to subcontract certain work to the respondent, Petrowest Corporation ("Petrowest") and its affiliates. The agreements contained arbitration clauses. Before long, Petrowest found itself in financial difficulties and Petrowest and its affiliates were placed in receivership pursuant to s. 243 of the BIA.
The receiver started a civil claim on behalf of Petrowest and its affiliates to recover receivables owed under the partnership agreement and various purchase orders and subcontracts. Peace River applied to stay the claim pursuant to s. 15 of the Arbitration Act. The receiver opposed the stay application arguing that the BIA authorized the court to assert centralized judicial control over the matter rather than send the receiver to multiple arbitral forums.
The Supreme Court of British Columbia dismissed the application, finding that the court had jurisdiction to hold that the receiver ought not to be bound by the arbitration clauses and be forced to undergo multiple arbitration proceedings that could otherwise be resolved in one litigation proceeding, which would conflict with the objectives of the BIA favouring an efficient resolution of receivership proceedings. Peace River appealed. The British Columbia Court of Appeal dismissed the appeal, finding that the doctrine of separability allowed the receiver to disclaim the arbitration agreements while still suing on the underlying contracts. Peace River appealed to the SCC.
The Supreme Court's Decision
The SCC was tasked with deciding whether and in what circumstances an otherwise valid arbitration agreement can be unenforceable under s. 15(2) of the Arbitration Act in the context of a court-ordered receivership. The majority of the Court concluded that on the facts of the case the arbitration agreements at issue fell within the "inoperative" exception in s. 15(2) of the Arbitration Act, as enforcing them would compromise the orderly and efficient resolution of the receivership. In so holding, the Court noted that to hold otherwise would compromise the public interest in the efficient resolution of the receivership.
The Majority applied a two-part test in resolving the appeal. First, the party in favor of arbitration must establish the technical pre-requisites for a stay of proceedings under s. 15(1) of the Arbitration Act: (a) an arbitration agreement exists; (b) court proceedings have been commenced by a "party" to the arbitration agreement; (c) the court proceedings are in respect of a matter that the parties agreed to submit to arbitration; and (d) the party applying for a stay in favour of arbitration does so before taking any "step" in the court proceedings. If all of the technical pre-requisites are met, the burden shifts to the party seeking to avoid arbitration to establish on a balance of probabilities that the arbitration agreement at issue is void, inoperative, or incapable of being performed within the meaning of s. 15(2).
Where proceeding with an arbitration would compromise the orderly and efficient conduct of a court-ordered receivership, arbitration may give way in favour of a different process in order to protect the public interest in the orderly disposition of the debtor's assets and the equitable treatment of creditors and other stakeholders. The Majority articulated a non-exhaustive list of factors to guide future courts in determining whether an arbitration agreement is inoperative pursuant to s. 15(2) of the Arbitration Act due to parallel bankruptcy or insolvency proceedings. The weight to be placed on each factor is dependent on the circumstances of the case. The factors include:
- The effect of arbitration on the integrity of the insolvency proceedings. An arbitration agreement may be inoperative if it would lead to an arbitral process that would compromise the objective of the insolvency proceedings, namely the orderly and expeditious administration of the debtor's property.
- The relative prejudice to the parties from the referral of the dispute to arbitration. The court should only override the agreement to arbitrate where the benefit outweighs the prejudice.
- The urgency of resolving the dispute. The more expeditious procedure should be preferred. If granting a stay of proceedings in favour of arbitration will lead to a delay in the resolution of the dispute and hinder the insolvency proceedings, this militates in favour of a finding of inoperability.
- The applicability of a stay of proceedings under bankruptcy or insolvency law. Where bankruptcy or insolvency legislation imposes a stay that precludes any proceedings, including arbitral proceedings, against the debtor, any arbitration agreement becomes inoperative.
In this case, the receiver was able to establish that the arbitration agreements between Peace River and Petrowest were inoperative as to enforce them would compromise the public interest in the efficient resolution of the receivership of Petrowest and its affiliates. The multiple overlapping arbitral proceedings contemplated by the arbitration agreements, as compared to a single judicial process, was the determinative factor.
In concurring reasons, Karakatsanis, Brown, Martin and Jamal JJ., held that the receivership order authorized the receiver to either disclaim the arbitration agreements and to sue in court or go to arbitration. Faced with such an election, the legal effect of commencing a civil claim was to disclaim the arbitration agreements. The Majority expressed the view that a receiver cannot disclaim an arbitration agreement; rather it is for the receivership court to determine whether an arbitration agreement is valid and enforceable according to the "narrow statutory exceptions set out in 15(2)".
While the receiver won this battle, given the Majority's decision, including its comment that "in many cases, the shared interests in expediency, procedural flexibility, and specialized expertise will converge through arbitration", there is no certainty that receivers will win similar battles in the future. The Court made clear that in each case the question of whether an arbitration agreement will be found inoperative in the context of insolvency proceedings will very much be a fact-specific determination. In addition, since arbitration legislation varies across provinces, additional considerations may impact outcomes in other jurisdictions.
For the time being, one can expect to continue seeing litigation where arbitration agreements are sought to be enforced in insolvency proceedings. For the solicitors, parties may wish to update arbitration clauses to provide further direction and clarity as to the desired outcome in the event of one party's insolvency on the dispute resolution mechanism.
Other Takeaways from the Decision
The Majority re-affirmed the "broad and flexible powers granted to superior courts under the BIA, particularly in the receivership context", adopting, for the first time, the language from Justice Farley's decision in Canada (Minister of Indian Affairs and Northern Development) v. Curragh, Inc. (1994), 114 D.L.R. (4th) 176 (Ont. Ct. (Gen. Div.)) wherein it was held that s. 243(1)(c) of the BIA permits a court to do not only what "justice dictates" but also what "practicality demands".
In its decision, the Majority also commented that "a receiver is generally not permitted to terminate existing contracts between third parties and the debtor, but must apply to the court to discharge onerous contracts, such as those which would be unduly costly to perform". In the usual course, receivers disclaim agreements without seeking authorizations from the court, and it falls on the contractual counterparties to such agreements to dispute the disclaimer. The receiver's authority in that regard is generally set out in the receivership order itself. If the SCC was not intending by its comment to require more of a receiver in relation to the disclaimer of agreements, the decision should not create any new hurdles for receivers. However, if the Court is taken as holding that receivers must seek discrete approvals for each proposed disclaimer of a contract, this will certainly result in increased costs and inefficiencies in receivership proceedings.
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