The Supreme Court weighs in on the effect of receivership on a party’s Arbitration Agreements

January 4, 2023 | Sandra L. Hawes, Tessa Green

Introduction and overview

The Supreme Court of Canada’s decision in Peace River Hydro Partners v Petrowest Corp., 2022 SCC 41 [Peace River v Petrowest] clarifies whether, and in what circumstances, a contractual agreement to arbitrate should give way to the public interest in the orderly and efficient resolution of a court-ordered receivership under section 243 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the “BIA”).

In a decision released November 10, 2022, the Supreme Court unanimously held that an otherwise valid arbitration agreement may, in some circumstances, be inoperative or incapable of being performed because it would compromise the integrity of a party’s court-ordered receivership proceedings.

Background facts

Peace River Hydro Partners (“Peace River”) was a partnership formed to build a hydroelectric dam in northeastern British Columbia. In December of 2015, Peace River subcontracted certain work to Petrowest Corp., an Alberta-based construction company, and its affiliates (“Petrowest”). The contracts between the parties contained several clauses providing that disputes between the parties would be resolved through arbitration (the “Arbitration Agreements”).

Not long after the execution of the contracts containing the Arbitration Agreements, Petrowest found itself in serious financial difficulty. The Alberta Court of Queen’s Bench ordered Petrowest into receivership pursuant to s. 243 of the BIA and Ernst & Young Inc. was appointed as receiver (the “Receiver”). The Receiver brought a civil claim in the Supreme Court of British Columbia against Peace River seeking to collect money allegedly owed to Petrowest for the subcontracted work. In response, Peace River applied to stay the civil proceedings under s. 15 of BC’s Arbitration Act, R.S.B.C. 1996, c. 55 (the “Arbitration Act”) on the ground that the Arbitration Agreements governed any dispute between Petrowest and Peace River, and as such, the courts had no jurisdiction over the Receiver’s claim on behalf of Petrowest. Section 15 of the Arbitration Act states as follows:

Stay of proceedings
15(
1)  If a party to an arbitration agreement commences legal proceedings in a court against another party to the agreement in respect of a matter agreed to be submitted to arbitration, a party to the legal proceedings may apply, before filing a response to civil claim or a response to family claim or taking any other step in the proceedings, to that court to stay the legal proceedings.

(2)  In an application under subsection (1), the court must make an order staying the legal proceedings unless it determines that the arbitration agreement is void, inoperative or incapable of being performed.

The Receiver opposed the application on behalf of Petrowest arguing that the BIA authorized the court to assert centralized judicial control over the matter rather than send the Receiver to multiple arbitral forums.

Procedural history

By reasons reported at Petrowest Corporation v Peace River Hydro Partners, 2019 BCSC 2221, Justice Iyer of the BC Superior Court agreed with the Receiver and dismissed Peace River’s stay application. Justice Iyer found that the significant cost and delay inherent in the multiple arbitration proceedings required by the Arbitration Agreements, as compared to one judicial determination, was unfair to the creditors. This factor, coupled with the absence of any prejudice to the defendants, led the Court to conclude that granting the stay would significantly compromise achievement of the objectives of the BIA in relation to the bankruptcy proceedings.

Peace River appealed the Supreme Court of British Columbia decision to the British Columbia Court of Appeal. In Petrowest Corporation v Peace River Hydro Partners, 2020 BCCA 339, the Court of Appeal upheld the chambers judge’s ruling on the basis that the Receiver was not a “party” to the Arbitration Agreements within the meaning of s. 15(1) of the Arbitration Act. Further, it was also found that the doctrine of separability allowed the Receiver to disclaim the Arbitration Agreements and sue on the underlying contracts to recover payment for past performance.

Peace River appealed the Court of Appeal’s decision, seeking the Supreme Court of Canada to stay the court proceedings in favour of arbitration. The Supreme Court was tasked with addressing whether and in what circumstances an otherwise valid arbitration agreement is unenforceable under s. 15(2) of the Arbitration Act in the context of a court-ordered receivership under the BIA.

The Supreme Court of Canada’s decision & analysis

The Supreme Court unanimously dismissed the appeal by finding that the Arbitration Agreements were inoperative. Justice Côté wrote for a majority of the Court and Justice Jamal wrote concurring reasons on behalf of himself, Karakatsanis, Brown and Martin JJ.

Justice Côté, writing for a majority of the Court, concluded that s. 15 of the Arbitration Act does not require a court, in every case, to stay a civil claim brought by a court-appointed receiver where the claim is subject to a valid arbitration agreement. A court may decline to grant a stay where the party seeking to avoid arbitration establishes, 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) of the Arbitration Act.

The Court held that in the context of a court-ordered receivership, an arbitration agreement may be inoperative if enforcing it would compromise the orderly and efficient resolution of the receivership.[1] This analysis is very fact-specific.[2] Justice Côté emphasized that a party in receivership or insolvency proceedings is not, on its own, a sufficient basis for a court to find an arbitration agreement inoperative.[3]

The Supreme Court explained that this conclusion flows from the following two-part analysis, which is mandated by s. 15 of the Arbitration Act.

            1) The Technical Prerequisites for a Mandatory Stay of Court Proceedings

Under the first part of the test, the applicant for a stay in favour of arbitration must only establish an “arguable case” that the technical prerequisites are met.[4] Considerations at this stage may differ depending on the jurisdiction and the nature of the arbitration. Typically, there are four technical prerequisites relevant at this stage:[5]

  1. an arbitration agreement exists;
  2. court proceedings have been commenced by a “party” to the arbitration agreement;
  3. the court proceedings are in respect of a matter that the parties agreed to submit to arbitration; and
  4. the party applying for a stay in favour of arbitration does so before taking any “step” in the court proceedings.

If all the technical prerequisites are met, the mandatory stay provision is engaged and the court should move to the second component of the analysis.

Applying this step of the test to the case, the majority of the Supreme Court found that Peace River had successfully established an arguable case that all the technical prerequisites were met.

2) The Statutory Exceptions to a Mandatory Stay of Court Proceedings

In the second part of the analysis, the party seeking to avoid the stay must establish that the arbitration agreement is “void, inoperative or incapable of being performed” on a balance of probabilities. If they fail to do so, the court must grant a stay of proceedings.[6] This analysis necessarily turns on the particular facts of the case. The Supreme Court provided a list of non-exhaustive factors for a court to consider when determining whether an arbitration agreement is “inoperative” within the meaning of s. 15(2) of the Arbitration Act, such that enforcing it would compromise the orderly and efficient resolution of insolvency proceedings, including a court-ordered receivership under s. 243 of the BIA: [7]

  1. The effect of arbitration on the integrity of the insolvency proceedings.
  2. The relative prejudice to the parties from the referral of the dispute to arbitration.
  3. The urgency of resolving the dispute.
  4. The applicability of a stay of proceedings under bankruptcy or insolvency law.
  5. Any other factor the court considers material in the circumstances.

The Court noted that each of the foregoing factors may carry different weight depending on the circumstances of the case.[8]

Applied to the facts of this case, the Supreme Court held that the Receiver succeeded in proving that the Arbitration Agreements were inoperative because to enforce them would compromise the public interest in the efficient resolution of the receivership of Petrowest. The multiple overlapping arbitral proceedings contemplated by the Arbitration Agreements, as compared to a single judicial process, was the determinative factor.

The majority of the Court also held that generally, courts should hold parties to their agreements to arbitrate even when one of them has become insolvent. To do otherwise would “not only threaten the important public policy served by enforcing arbitration agreements and thus Canada’s position as a leader in commercial arbitration, but also jeopardize the public interest in the expeditious, efficient and economical clean-up of the aftermath of a financial collapse.”[9]

Although the concurring judges agreed that the appeal should be dismissed because the Arbitration Agreements were inoperative under s. 15(2) of the Arbitration Act, they disagreed on the basis for that finding. In the concurring justices’ view, by suing in court to collect the accounts receivable, as authorized under the Receivership Order, the Receiver disclaimed the Arbitration Agreements, thus rendering them inoperative.[10] The concurring judgment focused on the interpretation of the receivership order and not on the separability doctrine. To the extent that the receivership order did not authorize the Receiver to sue in court, Jamal JJ. agreed with the majority’s reasons that the BIA provided a statutory basis for the chambers judge to declare the Arbitration Agreements inoperative and to dismiss the stay application.[11]

Practical takeaways

The Supreme Court’s decision in Peace River v Petrowest confirms that superior courts across Canada have statutory jurisdiction pursuant to the BIA to hold that arbitration agreements are inoperative, taking the necessary steps to meet the objectives of the BIA, which favor an orderly and efficient resolution through a single judicial proceeding. However, despite the Court’s finding in this decision, it was made clear that each case will turn on its specific facts and the province’s governing arbitration legislation.

Receivers seeking to avoid the application of arbitration agreements should obtain legal advice that considers the facts of the specific case and the relevant legislation.

Miller Thomson’s Commercial Litigation and Restructuring & Insolvency groups are able to assist in navigating this area of law, the applicability of the Peace River v Petrowest decision, and in the pursuit or defence of legal action when an arbitration provision is present.

 

[1] Peace River v Petrowest at para 34.

[2] Ibid at para 10.

[3] Ibid at para 8.

[4] Ibid at para 84.

[5] Ibid at para 83.

[6] Ibid at para 88.

[7] Ibid at para 155.

[8] Ibid at para 156.

[9] Ibid at para 10.

[10] Ibid at para 191.

[11] Ibid at para 198.

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