The single proceeding model v arbitration: the Supreme Court of Canada weighs in in Petrowest
The Supreme Court of Canada rendered its decision in Peace River Hydro Partners v Petrowest Corp, ruling that courts can refuse to stay civil proceedings instituted by a receiver under the Bankruptcy and Insolvency Act (BIA) arising out of contracts containing arbitration clauses where arbitration would compromise the orderly and efficient conduct of the receivership.
Peace River, the appellant, is a partnership constituted to construct a hydroelectric dam in British Columbia (BC). Peace River subcontracted work to the respondents, Petrowest and its affiliates. Several clauses were executed by the parties providing that disputes were to be resolved through arbitration (the Arbitration Agreements).
Petrowest encountered financial difficulties and was ordered into a court-ordered receivership pursuant to section 243 of the BIA and EY was named receiver (the Receiver). The Receiver sued Peace River before the BC courts to recover accounts payable to Petrowest. Peace River sought a stay of the civil proceedings, invoking the Arbitration Agreements and the BC Arbitration Act, which provides that the civil proceedings must be stayed in favour of arbitration, unless the court determines that “the arbitration agreement is void, inoperative or incapable of being performed”. Given the multiplicity of Arbitration Agreements, several different arbitration proceedings would be needed to resolve the dispute. The Receiver contested the stay. The Supreme Court of BC dismissed the stay application, and ruled that the dispute was to be litigated in court. Both the BC Court of Appeal and the Supreme Court of Canada dismissed Peace River’s appeals.
Two issues of interest before the Supreme Court of Canada were:
- Are arbitration clauses binding on a receiver?
- In insolvency proceedings, when should a court refuse to stay civil proceedings in favour of arbitration?
Arbitration agreements are binding on a receiver when the receiver adopts the containing contract
To determine whether the Arbitration Agreements are binding on the Receiver, the Court had to determine whether the Receiver was a “party” to the Arbitration Agreements.
The majority reasoned that when a receiver adopts a contract, they step into the shoes of the debtor as the original contracting party and thereby become a party to – and are bound by – the terms of the contract including any arbitration clauses. The question was therefore whether the Receiver had adopted the contracts containing the Arbitration Agreements. A receiver who makes a claim under or pursuant to a contract will be considered to have adopted the contract. Therefore, by suing Peace River to recover amounts owed under the containing contracts, the Receiver adopted and became a party to the containing contracts and was, as a result, bound by the Arbitration Clauses. The Court remarked that concluding otherwise would automatically neutralize arbitration clauses in the event of a bankruptcy or receivership.
It should be noted that where a receiver is appointed by the court pursuant to the BIA, the rights of counterparties against the receiver or debtor are generally stayed.
The stay of arbitration proceedings where they would interfere with the orderly and efficient conduct of the insolvency proceedings
It falls upon the party seeking to oppose a stay of civil proceedings to establish that the arbitration agreement is “void, inoperative, or incapable of being performed”. Where there are parallel insolvency proceedings, the Supreme Court recognized that a court’s inherent jurisdiction under section 183 of the BIA and its power to appoint a receiver to take any action it deems advisable under section 243(1)(c) of the BIA provide “a statutory basis on which a court may, in certain circumstances, find an arbitration agreement inoperative”. The majority of the judges held that the following factors ought to be taken into consideration when making such a determination:
- Whether the arbitration effects the integrity of the insolvency proceedings;
- Whether the balance of benefits and prejudices to the parties favors overriding the arbitration provision;
- Whether the arbitration is the more expeditious procedure;
- Whether proceedings against the debtor have been stayed;
- Any other factor the court considers material.
Ultimately, the Arbitration Agreements were found to be inoperative because their application would “compromise the orderly and efficient resolution of the receivership, contrary to the objectives of the BIA” and “jeopardize the Receiver’s ability to maximize recovery for the creditors”. Several of the trial judge’s findings formed the basis for this conclusion:
- First and foremost, there were multiple overlapping and differing arbitration clauses found in the series of agreements between Petrowest and Peace River such that four separate arbitral proceedings as well as court proceedings would be necessary to fully resolve the dispute.
- There was no real probability that parties would consolidate the arbitration proceedings, despite being able to do so.
- A single court proceeding would be cheaper and resolved faster.
The balance of interests also favored a stay as Peace River would not suffer prejudice from a dismissal of its stay application and both parties would benefit from a more expedient resolution.
The majority of the judges of the Supreme Court of Canada disagreed with the BC Court of Appeal, finding that the receiver had not disclaimed the arbitration agreement because he had not done so expressly. In any event, the majority opined that a receiver cannot unilaterally disclaim an arbitration clause, and an otherwise valid arbitration clause is without effect only when a court decides the clause is void, inoperative or incapable of being performed. The majority refused to make a determination as to whether the Receiver may have been entitled to do so pursuant to the receivership order as the issue had not been put before the court.
It should be noted that four of the nine justices of the Supreme Court of Canada broke with the majority on whether the Receiver could, pursuant to the receivership order, implicitly disclaim the Arbitration Agreements by bringing court action. The minority was of the view that the receivership order entitled the Receiver to disclaim the Arbitration Agreements, and that the Receiver’s court action against Peace River was a valid disclaimer. The minority judges reasoned that when the Receiver sued Peace River in court, the Receiver validly disclaimed the Arbitration Agreements which were severable from the containing contracts.
This decision gives rise to several practical implications applicable throughout the country:
- In the context of parallel insolvency proceedings, a court-ordered receiver will become a party to an arbitration clause if the receiver makes a claim pursuant to the containing contract.
- A court-ordered receiver cannot unilaterally nor implicitly disclaim an arbitration clause unless expressly allowed by the receivership order.
- A court-ordered receiver who wishes to sue in court under a contract containing an arbitration clause should seek a judicial determination on the matter in court, unless it has already been authorized to do so by the receivership order.
- A receiver will be authorized to sue in court when the arbitration proceedings would, compared to a determination by the court, cause delays, additional costs, inefficiencies, complexities or otherwise hamper the orderly and efficient conduct of the receivership. This may be the case where, for example:
- There are several competing arbitration clauses engaged by the dispute; or
- some agreements in dispute are subject to arbitration clauses while others are not, such that both court and arbitration proceedings are necessary for a complete resolution of the dispute.
The general rule that parties should be held to their agreements to arbitrate remains, but should be deviated from when a stay of the court proceedings would undermine the objective of the BIA to promote an orderly, efficient and expedient receivership process.