The Supreme Court of Canada Rules on Intersection of Insolvency and Arbitration Law

November 10, 2022

Written By Kelsey Meyer, Ciara Mackey and Adam Williams

On November 10, 2022, the Supreme Court of Canada (SCC) issued its much-anticipated decision in Peace River Hydro Partners v Petrowest Corp, 2022 SCC 41, addressing a key intersection of insolvency and arbitration law—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. The nine-member SCC panel unanimously determined (with concurring reasons) that, in this case, it must, and dismissed the appeal with costs to the Receiver. 

The decision clarifies the law on when mandatory arbitration clauses will be enforced in the context of insolvency proceedings, and is important for parties to commercial contracts, insolvency practitioners and the arbitration practice generally. As noted by the SCC, it is "not unusual now for a commercial party to find itself in a dispute governed by an arbitration agreement with an insolvent or bankrupt counterparty."

Key Takeaways

• The SCC unanimously agreed that superior courts across Canada have statutory jurisdiction pursuant to the Bankruptcy and Insolvency Act, RSC 1985 c B-3, as amended [BIA] to declare an otherwise valid arbitration agreement inoperative, and to dismiss an application for a stay of court proceedings, if enforcing the arbitration agreement would compromise the orderly and efficient resolution of insolvency proceedings, including a court-ordered receivership. There is no conflict between the provincial arbitration legislation in issue and the federal BIA giving rise to paramountcy concerns.
• The SCC outlined a non-exhaustive list of factors that may be relevant in determining whether a particular arbitration agreement is inoperative in the context of insolvency proceedings.
• 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.
• In the insolvency context, 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" (Sam Lévy & Associés Inc v Azco Mining Inc, 2001 SCC 92).
• The SCC was split on the issue of whether a receiver may also unilaterally disclaim an arbitration agreement, thereby rendering it void, inoperative or incapable of being performed. A four-justice minority decision (concurring in the result) held that by suing in court as authorized under the receivership order, the receiver disclaimed the arbitration agreements, thus rendering them inoperative.
• Pursuant to the "competence-competence" principle, generally, arbitrators rule first on their own jurisdiction, but as was held in Uber Technologies Inc v Heller, 2020 SCC 16, that principle is not absolute.
• The SCC unanimously agreed that the doctrine of separability had no application to the case. The majority decision held that the British Columbia Court of Appeal (BCCA) 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. The majority held that separability is intended to safeguard arbitration agreements, not imperil them.
• Non-signatories, including a court-appointed receiver, may be parties to arbitration agreements.
• 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.

Background

Ernst & Young Inc. is the court-appointed receiver and manager (Receiver) of Petrowest Corporation (Petrowest) and certain of its affiliates (Affiliates), having been appointed in 2017 by a receivership order granted pursuant to section 243 of the BIA. Some but not all of the Affiliates had also been assigned into bankruptcy.

Before the receivership, Petrowest had been a partner in Peace River Hydro Partners (PRHP), a partnership with Acciona Infrastructure Canada Inc. (Acciona) and Samsung C&T Canada Ltd. (Samsung) which contracted with the British Columbia Hydro and Power Authority to do work related to the Site C Clean Energy Project in northeastern British Columbia. Related to that project, PRHP entered into a subcontract and various purchase orders with some of the Affiliates.  Petrowest itself was a party to PRHP's general partnership agreement, and also entered into a guarantee and cross-indemnity agreement with the parent companies of each of Acciona and Samsung (Parent Companies). Shortly before the receivership order was granted, Acciona purported to terminate Petrowest as a partner in PRHP. 

In accordance with its court-ordered authority and duties, the Receiver sued PRHP, Acciona, Samsung, and the Parent Companies (collectively, the Defendants) to recover accounts receivable owed to Petrowest and the Affiliates under their various agreements. Despite undertaking to defend the claim, the Defendants ultimately argued that the litigation should be stayed in favour of multiple arbitrations, as a result of mandatory arbitration clauses in just some of the applicable contracts. The Defendants applied to the British Columbia Supreme Court to stay that litigation, relying on section 15 of the since-repealed Arbitration Act, RSBC 1996, c 55, which stated, in part:

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 BCSC Decision

The chambers judge dismissed the Defendants' application for a stay, finding that section 183 of the BIA conferred power on a court to control its own processes in order to promote the objects of the BIA, which include the fair, practical, efficient and relatively inexpensive mechanism for asset recovery and distribution of the estate. The Defendants had conceded that arbitration would entail multiple proceedings, with attendant practical challenges and increased costs, and the parties agreed that overriding the arbitration clauses would promote the efficient and inexpensive resolution of their dispute. The chambers judge held that on these facts, issuing a stay would be contrary to the objects of the BIA:

This case involves a significant amount of money in which the bankrupts' creditors have an interest. The difference in the cost and time involved of prosecuting the claim in court as compared to multiple arbitration proceedings is substantial. The bankruptcy order was made in April 2018. It will not be possible to distribute the proceeds of the bankrupts' estates until these disputes are resolved. I agree that the inherent jurisdiction of the court should be used sparingly. However, the significant cost and delay inherent in the multiple proceedings that would occur in this case as compared to judicial determination is unfair to the creditors and contrary to the objects of the BIA. The absence of any prejudice to the defendants is an important distinguishing factor.¹

The BCCA Decision

The Defendants appealed. The British Columbia Court of Appeal dismissed the appeal, but refused the stay on different grounds.² The appellate court determined that section 15 of the Arbitration Act did not leave room for the exercise of inherent jurisdiction and held that if the BIA granted any statutory discretion to avoid arbitration proceedings, it would create a conflict between federal and provincial legislation, requiring a paramountcy analysis. However, the Court of Appeal concluded that a court-appointed receiver is not a "party" to a debtor's arbitration agreements for the purpose of section 15 of the Arbitration Act.  Relying on Uber Technologies Inc v Heller, 2020 SCC 16, the Court of Appeal held that the Receiver could disclaim the arbitration clauses in the agreements based on the doctrine of separability (thus treating the arbitration clauses as separate agreements from the underlying agreements). 

The Defendants applied for and were granted leave to appeal to the SCC. Argument before the SCC centered on the competing goals of arbitration and insolvency legislation, the jurisdiction of the court under the BIA to find that an arbitration agreement was "inoperative" and to refuse a stay of proceedings under section 15(2) of the Arbitration Act, and whether the doctrine of separability could allow a receiver to disclaim an arbitration agreement while suing to enforce the balance of the contract. There were five interveners³ on the appeal.

The SCC Decision

In a majority decision penned by Côté J., Wagner C.J. and Moldaver, Côté, Rowe and Kasirer JJ. held that the technical prerequisites to order a stay under subsection 15(1) of the Arbitration Act were met—the contractual disputes are covered by valid arbitration agreements, the Defendants established an arguable case that the Receiver is a party to the arbitration agreements and the Defendants had not taken a step in the proceedings. As such, the key question was whether under subsection 15(2) of the Arbitration Act, the arbitration agreements were void, inoperative or incapable of being performed. The Court held that the Receiver established that the arbitration agreements are inoperative, in that the multiple arbitral processes contemplated therein would compromise the orderly and efficient resolution of the receivership, contrary to the objectives of the BIA. While recognizing the importance of party autonomy and freedom of contract, referral to arbitration in the circumstances of this case would jeopardize the Receiver’s ability to maximize recovery for the creditors and to allow Petrowest and its Affiliates to move forward with certainty.

Karakatsanis, Brown, Martin and Jamal JJ. concurred in the result that the appeal should be dismissed, as the arbitration agreements are inoperative under subsection 15(2) of the Arbitration Act, but disagreed on the basis for that finding. They held that by suing in court as authorized under the receivership order, the Receiver disclaimed the arbitration agreements, thus rendering them inoperative. In the concurring decision, Jamal J. expressly did not rely on the separability doctrine, but rather, on an interpretation of the receivership order. In the alternative, there was agreement with the majority that to the extent the receivership order did not authorize the Receiver to sue in court, the BIA provided a statutory basis for the chambers judge to declare the arbitration agreements inoperative and to dismiss the stay application. Requiring arbitration in this case would compromise the orderly and efficient resolution of the receivership. 

Bennett Jones LLP acted as counsel for the Receiver throughout these proceedings, having successfully defended the Defendants' original application and the subsequent appeals to the BCCA and the SCC.

If you have any questions about the Supreme Court of Canada's decision, please contact Kelsey Meyer, Ciara Mackey, Stephanie Clark, Paul Romaniuk or Adam Williams.

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