On Nov. 10, the top court 9-0 dismissed the bid by contractor Peace River Partners and other appellants to overturn the decision of the B.C. courts below to override mandatory arbitration clauses agreed to by the appellants and the respondent subcontractor, Petrowest Corp and its affiliates: Peace River Hydro Partners v. Petrowest Corp, 2022 SCC 41.
The Supreme Court thus green lighted Petrowest’s court-appointed receiver and manager, Ernst & Young Inc., to pursue in court its civil claim that Peace River owes more than $10 million plus interest for work done by the now-insolvent debtor, Petrowest, on the construction of the Site C hydroelectric dam in northeastern British Columbia.
The appellant Peace River had tried to stay the Petrowest lawsuit, relying on (former) ss. 15(1) and (2) of British Columbia’s Arbitration Act which state that if one party to an arbitration agreement starts a legal action, the other party can ask the court to stop the lawsuit, and the court must stay the proceedings unless it determines that the arbitration agreement is void, inoperative or incapable of being performed. Similar provisions exist in other provincial statutes across Canada.
Peace River and other defendants had formed a partnership that contracted with BC Hydro to do certain construction work on the dam project. They subcontracted the work to Petrowest and affiliates. When Petrowest encountered financial difficulties, the Alberta Court of Queen’s Bench appointed Ernst & Young as receiver of the plaintiff Petrowest entities. Afterward, the receiver filed a notice of civil claim seeking recovery of amounts allegedly owing to the Petrowest entities for performance of the subcontracted work, with the defendants moving for a stay of the claim on the basis that the mandatory arbitration clauses in the various subcontracts governed the resolution of all the plaintiffs’ claims.
Justice Suzanne Côté
“Courts should generally hold parties to their agreements to arbitrate, even if one of them has become insolvent,” Justice Côté emphasized. “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.”
However, in this case, the chambers judge correctly dismissed the stay application, Justice Côté held. “The arbitration agreements are inoperative within the meaning of s.15(2) of the Arbitration Act. Sections 243 and 183 of the BIA authorize courts to do what practicality demands in the context of a receivership. In this case, practicality demands that the arbitration agreements not be enforced, in the interest of an orderly and efficient resolution of the receivership. In short, the chaotic nature of the arbitral proceedings bargained for by the parties would compromise the integrity of the receivership, to the detriment of affected creditors and contrary to the purposes of the BIA.”
Justice Côté explained that if a stay were granted under s.15 of the Arbitration Act the receiver would need to participate in, and fund, at least four different arbitrations involving seven different sets of counterparties. The funding for this would necessarily come from the estates of Petrowest and the Petrowest Affiliates, to the detriment of their creditors. Moreover, at least some of the respondents’ claims involve entities not subject to any of the arbitration agreements, so those claims might have to have been determined by a court, in parallel with the aforementioned arbitral proceedings As well, the acts and arguments would be repeated in different forums, before different decision makers, creating piecemeal decisions and “a serious risk of conflicting outcomes.”
“The inefficient and protracted nature of the contemplated arbitral processes would plainly compromise the integrity of the receivership proceedings,” Justice Côté concluded.
For the minority, Justice Jamal explained that his primary basis for finding the arbitration agreements to be inoperative was that, by suing in court to collect the accounts receivable allegedly owing by the appellants, as authorized under the receivership order, the respondent receiver disclaimed the arbitration agreements, which were thereby rendered inoperative. “The analysis should start with the terms of the receivership order itself,” Justice Jamal stipulated. “However, to the extent that the receivership order did not authorize the receiver to sue in court, I otherwise agree with [the majority’s] reasons for concluding that ss. 183 and 243 of the BIA provided a statutory basis for the chambers judge to declare the arbitration agreements inoperative” and to dismiss Peace River’s stay application, Justice Jamal said. “As my colleague explains, in this case, requiring arbitration of the collection action would compromise the orderly and efficient resolution of the receivership.”
Justice Côté’s indexed 189-paragraph majority judgment, endorsed by Chief Justice Richard Wagner and Justices Michael Moldaver, Malcolm Rowe and Nicholas Kasirer, establishes that although arbitration agreements are generally to be respected, in certain insolvency matters, it may be necessary to preclude arbitration in favour of a centralized judicial process, when arbitration would compromise the orderly and efficient conduct of a court‑ordered receivership. In that scenario, a court may assert control over the proceedings, both to ensure the timely resolution of the parties’ dispute and to protect the orderly restructuring or dissolution of the debtor and the equal treatment of its creditors.
Justice Côté set out a two-part framework, implicit in ss. 15(1) and (2) of B.C.’s Arbitration Act and other similar provincial arbitration legislation. The two general components of that framework are (1) the technical prerequisites for a mandatory stay of court proceedings; and (2) the statutory exceptions to a mandatory stay of court proceedings.
She emphasized that these components must remain analytically distinct because the burden of proof shifts between them. The applicant for a stay in favour of arbitration must establish the technical prerequisites at component one. If the applicant discharges this burden, under the second component, the party seeking to avoid arbitration must show that a statutory exception applies.
Justice Côté also wrote that the “competence-competence” principle, which gives primacy to arbitration (i.e. that generally arbitrators should be allowed to rule first on their own jurisdiction), “is not absolute” and that “a court may resolve a challenge to an arbitrator’s jurisdiction if the challenge involves pure questions of law or, as in this case, questions of mixed fact and law requiring only superficial consideration of the evidentiary record.”
Kelsey Meyer, Bennett Jones
“In this case, the court-appointed receiver established that the arbitration agreements were inoperative because multiple arbitral processes would compromise the orderly and efficient resolution of the receivership, contrary to the objectives of the BIA, Meyer said.
She noted another takeaway, in the insolvency context, is that the single proceeding model favours enforcement of stakeholder rights through a centralized judicial process, and promotes the clear public interest in the expeditious, efficient and economical clean-up of the aftermath of a financial collapse.
Meyer said the judges split on the question of whether a receiver may also unilaterally disclaim an arbitration agreement, thereby rendering it void, inoperative or incapable of being performed. The minority “held that by suing in court as authorized under the receivership order, the receiver disclaimed the arbitration agreements, thus rendering them inoperative.”
Meyer said the judges agreed unanimously that the doctrine of separability did not apply in the case. The majority’s decision held that the British Columbia Court of Appeal below “misapplied the doctrine of separability, as separability does not apply absent a challenge to the validity of the main contract or of the arbitration agreement itself, and that was not an issue in this case,” Meyer explained. “The majority held that separability is intended to safeguard arbitration agreements, not imperil them.”
She said other takeaways are that “non-signatories, including a court-appointed receiver, may be parties to arbitration agreements” and that “an undertaking to file a defence, or a request for an extension of time to do so, is not a ‘step in the proceedings’ that precludes an applicant from then seeking to stay litigation in favour of arbitration.”
David de Groot, Burnet, Duckworth & Palmer
However, in the context of a receivership, the decision “creates a discretion as to whether courts should enforce arbitration agreements, which introduces uncertainty for contracting parties’ ability to enforce arbitration as their preferred method to resolve disputes against insolvent entities,” de Groot suggested. “Further, the adoption of its new test will result in applications, likely before supervising insolvency court, by receivers seeking pre-approval to advance contractual claims subject to arbitration clauses through litigation.”
He said the most significant legal aspect of the decision is that “the court held that receivers are parties to arbitration agreements and cannot unilaterally disclaim those agreements. However, the Supreme Court of Canada went on to adopt a new test under section 15(2) of the Arbitration Act, such that, in conjunction with the jurisdiction granted under section 243(1) of the Bankruptcy and Insolvency Act, a court can find an arbitration agreement ‘inoperative’ in the context of a company in receivership, after considering the following factors: (a) the effect of the arbitration on the integrity of the insolvency proceeding; (b) the relative prejudice to the parties to the arbitration agreement and the debtor’s stakeholders; (c) the urgency of resolving the dispute; (d) the effect of a stay of proceedings arising from the bankruptcy or insolvency proceedings; and (e) any other factors the court consider material in the circumstances.”
With respect to the competence-competence principle, the “five-prong test” adopted by the court “will necessarily require a case-by-case assessment of the facts of the ‘operability’ of arbitration agreements in claims advanced by receivers, which is likely to increase the extent of judicial intervention in the enforcement of arbitration agreements, through a heavily fact-dependent test,” de Groot predicted.
“It also appears that, despite existing case law making it clear that ‘inconvenience, multiple parties, intertwining of issues with non-arbitrable disputes, possible increased costs, and potential delay generally’ are not grounds to conclude that an arbitration agreement is inoperative, that these are the very types of factors that courts will now consider when assessing whether an entity in receivership should be bound by an arbitration agreement,” he said. “In this regard, the case seems to introduce two tests to interpret ‘inoperative’: one for solvent entities and another for insolvent entities in receivership.”
Justice Côté stressed that the fact that a party has entered receivership or insolvency proceedings or is financially impecunious “is not, on its own, a sufficient basis for a court to find an arbitration agreement inoperative.”
She said that a party seeking to avoid arbitration must establish, on a balance of probabilities, that a stay in favour of arbitration would compromise the integrity of the parallel insolvency proceedings.
She set out a non‑exhaustive list of factors that may assist the court’s analysis: (a) the effect of arbitration on the integrity of the insolvency proceedings, which are intended to minimize economic prejudice to creditors; (b) the relative prejudice to the parties to the arbitration agreement and the debtor’s stakeholders; (c) the urgency of resolving the dispute; (d) the effect of a stay of proceedings arising from the bankruptcy or insolvency proceedings, if applicable; and (e) any other factors the court considers material in the circumstances.
Photo of Justice Suzanne Côté by Philippe Landreville
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