The Supreme Court of Canada has rendered its decision in Peace River Hydro Partners v. Petrowest Corp., 2022 SCC 41 giving further clarity on the interplay between arbitration and insolvency law in Canada.
The case involved the construction of a hydroelectric dam in northeastern British Columbia. Peace River, a partnership created to build the dam, subcontracted part of the work to Petrowest. With construction underway, Petrowest experienced some financial difficulties, and a receivership was ordered to oversee its assets. The receiver filed a civil claim against Peace River to recover funds for work that had allegedly already been completed. In turn, Peace River served a notice of arbitration and applied for a stay of the civil proceeding which the received opposed.
The chambers judge refused to stay the proceedings, finding that although the arbitration agreements were valid, the Court had the “inherent jurisdiction” to override an arbitration agreement and that, at any rate, the doctrine of paramountcy made the Bankruptcy and Insolvency Act (“BIA”) prevailover the Arbitration Act. The Court of Appeal also refused to stay the proceedings but on the basis that the Receiver had disclaimed the arbitration agreements by bringing a civil action. The Court of Appeal opined that this was possible as a result of the doctrine of separability, which posits that arbitration clauses are self-contained contracts, which are not invalidated if their framework agreement is found to be void ab initio.
Reasons of Justice Côté
All nine judges of the Supreme Court agreed that the stay of proceedings should be refused. Four justices joined Justice Côté’s majority opinion and three joined Justice Jamal’s concurring opinion.
Justice Côté – who had been the sole dissenting justice in another arbitration case heard by the Supreme Court, Uber Technologies Inc. v. Heller, 2020 SCC 16 – offered a novel approach to the issues raised by the case. She ruled that neither inherent jurisdiction, the paramountcy doctrine, or the doctrine of separability should lead to refusal of the stay. Rather, the arbitration agreements were “inoperable” under s. 15(2) of the British Columbia Arbitration Act.
In principle, a court must not rule on the validity of an arbitration agreement and must rather stay the action to let the arbitral tribunal rule on its own jurisdiction pursuant to the doctrine of competence-competence. A court, however, can entertain a challenge to an arbitration agreement if the question before it is a pure question of law or a question of mixed fact and law which requires only a superficial consideration of the evidentiary record. Justice Côté ruled that the interplay between the Arbitration Act and the BIA with respect to the arbitration agreements fell in the latter category.
Justice Côté considered the underlying principles of the Arbitration Act and the BIA. While the two statutes, in some respects, are polar opposites of each other – arbitration places a high value on party autonomy and limited court intervention, while the BIA heavily favours court oversight in a single proceeding – both statutes favour the efficient and expedient resolution of disputes.
Justice Côté then turned to the language of s. 15(2) of the Arbitration Act, which reads “[i]n an application [to stay proceedings] 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.”
She interpreted that an arbitration agreement is:
- void if it “is ‘intrinsically defective (and therefore void ab initio) according to the usual rules of contract law, including when it is undermined by fraud, undue influence, unconscionability, duress, mistake or misrepresentation”;
- inoperative “if although not void ab initio, [it ‘has] ceased for some reason to have future effect’ or ‘[has] become inapplicable to the parties and their dispute” – in the insolvency context, a stay of proceedings against a debtor may notably make an arbitration agreement inoperative, but it remains the court’s decision whether to refer a dispute to arbitration rather than maintaining centralized judicial oversight;”
- incapable of being performed if “the arbitral process cannot effectively be set in motion because of physical or legal impediment beyond the parties’ control”, which includes “inconsistencies, inherent contradictions, or vagueness in the arbitration agreement that cannot be remedied by interpretation or other contractual techniques”, “the non-availability of an arbitrator specified in the agreement”, “the dissolution or non-existence of the chosen arbitration institution”; or “political or other circumstances at the seat of arbitration rendering arbitration impossible”.
Having reviewed these grounds to deny a stay, Justice Côté ruled that courts have statutory jurisdiction under ss. 183(1) and 243(1)(c) BIA to find arbitration agreements inoperative:
 In my view, practicality demands that a court have the ability, in limited circumstances, to decline to enforce an arbitration agreement following a commercial insolvency. Said differently, ss. 243(1)(c) and 183(1) [BIA] provide a statutory basis on which a court may, in certain circumstances, find an arbitration agreement inoperative within the meaning of s. 15(2) of the Arbitration Act.
Justice Côté then proposed a non-exhaustive list of factors, which may bear more or less weight depending on the circumstances, to determine whether an arbitration agreement is inoperative in the future:
- The effect of arbitration on the integrity of the insolvency proceedings. Party autonomy and freedom of contract must be balanced with the need for an orderly and equitable distribution of the debtor’s assets to creditors. An arbitration agreement may therefore 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 court should have regard to the role and expertise of the court‑appointed creditor representative, if any, in managing the insolvency proceedings.
- The relative prejudice to the parties from the referral of the dispute to arbitration. The court should override the parties’ agreement to arbitrate their dispute only where the benefit of doing so outweighs the prejudice to them.
- The urgency of resolving the dispute. The court should generally prefer the more expeditious procedure. If the effect of a stay in favour of arbitration would be to postpone 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. Bankruptcy or insolvency legislation may impose a stay that precludes any proceedings, including arbitral proceedings, against the debtor. If such a stay applies, the debtor cannot rely on an arbitration agreement to avoid the bankruptcy or insolvency; the agreement becomes inoperative.
- Any other factor the court considers material in the circumstances.
Applying this framework, Justice Côté found that granting a stay of proceedings to Peace River would result in a chaotic arbitral process that would require the Receiver to participate in “at least four different arbitrations involving seven different sets of counterparties”. These arbitrations would necessarily be funded in large part by Petrowest and its affiliates to the detriment of their creditors. Additionally, hearing disputes related to the insolvency in different forums would exacerbate extrajudicial costs and create a serious risk of conflicting decisions. Finally, Justice Côté found that Peace River would suffer no prejudice from proceeding in court as opposed to arbitration and no particular urgency justifies staying the proceedings in favour of arbitration. Consequently, the arbitration agreements are inoperative and the civil claim against Peace River must proceed before the Supreme Court of British Columbia.
Reasons of Justice Jamal
Justice Jamal arrived at similar conclusions as Justice Côté, but on the basis that several provisions of the Receivership Order allowed the Receiver to disclaim the arbitration agreements. In particular, the Receivership Order allowed the Receiver to
- “cease to perform any contracts of the Debtors”;
- “to receive and collect all monies and accounts now owed or hereafter owing to the Debtors and to exercise all remedies of the Debtors in collecting such monies”; and
- “to initiate, prosecute and continue the prosecution of any and all proceedings [with respect to the Property of the Debtors].”
Accordingly, the Receiver disclaimed the arbitration agreement when it filed a civil claim in the Supreme Court of British Columbia.
Justice Côté, in response to Justice Jamal, stated in her reasons that she found the Receivership Order ambiguous and admitted several plausible interpretations. Given this and its ineffectiveness on the outcome of her decision, she left the interpretation of the Order to another day.
Comments and Conclusion
The interplay of insolvency proceedings with arbitral or other parallel proceedings has been the subject of a number of decisions throughout the years. In 2001, the Supreme Court of Canada ruled in Sam Lévy & Associés Inc. v. Azco Mining Inc., 2001 SCC 92 that a creditor who is not a “stranger to the bankruptcy” has the burden of demonstrating “sufficient cause” to have the proceedings fragmented across multiple jurisdictions. In that case, the Supreme Court ruled that a civil claim originally filed in British Columbia pursuant to British Columbia law had to be heard in Quebec, since that is where the single bankruptcy proceeding was taking place. The Quebec court ultimately heard the dispute and applied British Columbia law. More recently, in 2022 Ontario Court of Appeal ruled in Re Mundo Media Ltd., 2022 ONCA 607, which dismissed an appeal from the Ontario Superior Court’s refusal to stay proceedings in favour of an arbitration in New York due to one of the parties being put under receivership and the necessity of resolving different claims under a single proceeding. The Supreme Court’s decision in Peace River confirms this ruling.
Both Justice Côté and Justice Jamal’s opinions, interestingly, ruled on an important albeit less prominent issue to the case: that a receiver constitutes a party to an arbitration agreement and steps in the shoes of the debtor who had agreed to it. Therefore, a receiver in principle is bound by an arbitration agreement between a debtor and a third-party.
A few outstanding issues remain to be clarified by future case law. First, what circumstances, if any, would be appropriate for a court to refer the parties to arbitration pursuant to their agreement in parallel to insolvency proceedings? While Justice Côté cautioned that courts should override these agreements in limited circumstances, in most cases, parallel arbitration proceedings will make extrajudicial costs swell up and deplete a debtor’s assets to the detriment of its creditors. Courts will also typically provide the most efficient forum for dispute resolution in insolvency proceedings since the single supervising judge will be familiar with the entire case and eliminate the risk of contradictory rulings. These advantages are significant and offer powerful arguments to override arbitration agreements.
Second is whether receivership orders – which lawyers tend to reuse almost like standard forms – when they allow a receiver to cease performing any contracts of a debtor, and initiate proceedings with respect to the property of a debtor also extend to arbitration agreements. With Justice Côté’s confirmation that a court has the statutory jurisdiction to rule that an arbitration agreement is inoperative under ss. 183 and 243 BIA, one could ponder whether express provisions allowing receivers to disclaim these agreements will start cropping up in receivership orders across Canada.