In a recent decision Industrial Alliance Insurance and Financial Services Inc. v Wedgemount Power Limited Partnership 2018 BCSC 970, the British Columbia Superior Court confirmed that:

  • under Canada’s Bankruptcy and Insolvency Act, courts have broad powers and discretion to protect the interests of creditors and other affected parties including by staying the operation of an agreement to arbitrate if it is necessary to maximize recoveries in an insolvency proceeding.

Background

In this dispute, a receiver had been appointed by the court over Wedgemount Power Limited Partnership, Wedgemount Power (GP) Inc. and Wedgemount Power Inc. (collectively, “Wedgemount”) on the application of the primary lender and secured creditor in 2017.

Wedgemount was the owner and developer of a power generation project (the “Project”). In 2015, Wedgemount entered into an electricity purchase agreement (“Agreement”) with the British Columbia Hydro and Power Authority (“BC Hydro”). The Receiver had been working to complete the Project with the goal of selling Wedgemount’s rights under the Agreement to maximize recovery for creditors, but BC Hydro sought a court order lifting the court-ordered stay of contractual rights so that it could exercise its rights to terminate the Agreement. The Receiver responded by seeking a declaration that BC Hydro may not terminate the Agreement, and BC Hydro further countered that any declaration with respect to terminating the Agreement must be dealt with by arbitration because it had an arbitration clause.

Wedgemount’s secured creditor did not want to provide further funding until BC Hydro’s purported termination rights under the agreement were determined. If the Agreement was terminated, Wedgemount’s assets would be seriously reduced and third parties would be adversely impacted.

BC Hydro argued that the Receiver must take Wedgemount’s contracts as it finds them; it cannot take the benefit of terms it likes and avoid terms that are not to its advantage. Thus, if the Receiver wanted to dispute BC Hydro’s right to terminate, then it must do that in accordance with the rules and procedures agreed to in the Agreement which require arbitration.

The Receiver argued that it was not a party to the agreement to arbitrate and therefore it had no application. In addition, the Receiver argued that if arbitration was required then the Project would be at an end due to funding and timing constraints and BC Hydro would achieve a termination of the Agreement without any adjudication on the merits. Furthermore, the Receiver argued that acceding to BC Hydro’s argument would negate the ongoing supervision of the Court in the insolvency proceeding.

Key Issues

When the matter went before the Supreme Court of British Columbia, Justice Butler disagreed with BC Hydro that the matter had to be referred to arbitration. Justice Butler considered the following two issues:

  • Was the Receiver a party to the arbitration agreement?
  • Was the current proceeding within the scope of the arbitration agreement?

On the first issue, Justice Butler noted prior case law in New Skeena Forest Products Inc., Re v. Don Hull & Sons Contracting Ltd., 2005 BCCA 154 for proposition that where a receiver is court-appointed, it is not bound by existing contracts made by the debtor. However, the Court also noted that the argument that the receiver is not a party of the Agreement is “a difficult point of principle on which to rest [his] decision” and declined to rule that a receiver is never bound by an arbitration clause contained in a commercial agreement because that would have potentially wide-ranging implications.

Instead, Justice Butler focused on the second issue ruling that some of the issues were under the arbitration clause and others were not. The court looked to the circumstances of urgency and the impact on third parties and held that all issues, even those within the arbitration agreement, must be considered together for the proper administration of the receivership. In addition, Justice Butler noted that the court has both inherent jurisdiction and jurisdiction conferred by the BIA to disrupt contractual rights and it was appropriate to intervene in these circumstances given that there were third parties that would be adversely affected by a termination of the Project.

Outcome

As a result, the Court determined that it would hear the Receiver’s application precluding BC Hydro from terminating the Agreement. The Court ultimately held that BC Hydro could not terminate the Agreement because of Wedgemount’s failure to meet the commercial operation date deadline under the contract. The Court found that BC Hydro had represented that it would not rely on the missed deadline and was therefore estopped from relying on it. The Receiver in its court-appointed role acted on BC Hydro’s representation, and found that “it would be inequitable to allow BC Hydro to rely on such a termination right” (2018 BCSC 971). The Court of Appeal later denied an application by BC Hydro for an extension to apply for leave to appeal, finding that the leave application itself had no prospect of success (2018 BCCA 283).