Are arbitration agreements inoperative in insolvency proceedings?
The appellant, Peace River, is a partnership formed to build a hydroelectric dam in northeastern British Columbia. The respondent, Petrowest, is an Alberta‑based construction company. In December 2015, Peace River agreed to subcontract certain work to Petrowest and its affiliates (the “Petrowest Affiliates”). The parties executed several clauses providing that disputes arising from their relationship were to be resolved through arbitration (the “Arbitration Agreements”).
Petrowest soon found itself in dire financial straits. The Court ordered Petrowest and the Petrowest Affiliates into receivership pursuant to s. 243 of the BIA. The Receiver brought a civil claim seeking to collect accounts receivable allegedly owed to Petrowest and the Petrowest Affiliates by Peace River. The latter applied to stay the civil proceedings under s. 15 of the Arbitration Act on the ground that the Arbitration Agreements governed the dispute. The Receiver opposed the stay application on behalf of Petrowest and the Petrowest Affiliates, arguing that the BIA authorized the court to assert centralized judicial control over the matter, rather than send the Receiver to multiple arbitral forums.
The chambers judge agreed with the Receiver and dismissed the stay application. The Court of Appeal upheld the chambers judge’s ruling on the basis that the Receiver was not a “party” to the Arbitration Agreements within the meaning of s. 15(1) of the Arbitration Act. The Court of Appeal relied on the doctrine of separability in arbitration law, which permits an arbitration clause to be treated as a “self‑contained contract collateral to the containing contract”. According to the Court of Appeal, separability allows a receiver, as a court‑appointed fiduciary, to disclaim an otherwise valid arbitration agreement even though it has adopted the containing contract for the purpose of suing on it. The Court found that the Receiver had disclaimed the Arbitration Agreements by bringing the civil claim on behalf of Petrowest and the Petrowest Affiliates. Accordingly, the Receiver was not a party to those agreements and s. 15 of the Arbitration Act did not apply.
On appeal before the Supreme Court of Canada, the issue was in what circumstances is an otherwise valid arbitration agreement unenforceable under s. 15(2) of the Arbitration Act in the context of a court ordered receivership under the BIA? Section 15 of the Arbitration Act does not require a court, in every case, to stay a civil claim brought by a court‑appointed receiver where the claim is subject to a valid arbitration agreement. A court may decline to grant a stay where the party seeking to avoid arbitration establishes that the arbitration agreement at issue is “void, inoperative or incapable of being performed” within the meaning of s. 15(2). In the context of a court‑ordered receivership, an arbitration agreement may be inoperative if enforcing it would compromise the orderly and efficient resolution of the receivership.
Valid arbitration agreements are generally to be respected. However, in certain insolvency matters, it may be necessary to preclude arbitration in favour of a centralized judicial process. This may occur when arbitration would compromise the orderly and efficient conduct of a court ordered receivership. In such a scenario, a court may assert control over the proceedings, both to ensure the timely resolution of the parties’ dispute and to protect the public interest in the orderly restructuring or dissolution of the debtor and the equal treatment of its creditors. This authority arises from the statutory jurisdiction conferred on superior courts under ss. 243(1) and 183(1) of the BIA.
A receiver’s unilateral disclaimer cannot render an arbitration agreement void, inoperative, or incapable of being performed. Court‑appointed receivers should seek a determination of whether the arbitration agreement is void, inoperative, or incapable of being performed by bringing a motion for directions before the supervising court. Where a court appointed receiver attempts to initiate court proceedings without prior judicial approval in a dispute covered by a valid arbitration agreement, the court must decide whether to exercise its jurisdiction arising from the BIA to decline to enforce the arbitration agreement under s. 15 of the Arbitration Act. This requires a proper reading of the words “void, inoperative or incapable of being performed” in accordance with the modern approach to statutory interpretation and in light of the relevant insolvency policy interests.
A court may find an arbitration agreement inoperative where arbitration would compromise the orderly and efficient resolution of a receivership. The following non‑exhaustive list of factors may be relevant in determining whether a particular arbitration agreement is inoperative in this context:
- The effect of arbitration on the integrity of the insolvency proceedings;
- The relative prejudice to the parties from the referral of the dispute to arbitration;
- The urgency of resolving the dispute;
- The applicability of a stay of proceedings under bankruptcy or insolvency law; and
- Any other factor the court considers material in the circumstances.
The party seeking to avoid arbitration bears a heavy onus to establish a clear case of inoperability or incapacity to perform the impugned arbitration agreement. To discharge this onus, it must prove on a balance of probabilities that one or more of the statutory exceptions set out in s. 15(2) of the Arbitration Act apply. Otherwise, the court must grant a stay in favour of arbitration.
In this case, the Supreme Court held that the chambers judge was correct in finding that: undertaking to file a defence without invoking the rules of court is not a “step in the proceedings” within the meaning of s. 15(1); a court‑appointed receiver may be a “party” to a debtor’s pre‑existing arbitration agreement within the meaning of s. 15(1); and it had the authority to find an arbitration agreement inoperative in light of bankruptcy and insolvency proceedings pursuant to ss. 183 and 243 of the BIA. The Court of Appeal erred in holding that a court‑appointed receiver may disclaim an arbitration agreement and thereby render it “void, inoperative or incapable of being performed” within the meaning of s. 15(2).
The Court went on to apply the two‑part stay analysis under s. 15 of the Arbitration Act to the facts of this case. At the first stage of the stay analysis, the party seeking to rely on the arbitration agreement must establish an arguable case that all the technical prerequisites contemplated in s. 15(1) are met. Here, the Court found that they were met. The Arbitration Agreements existed, and the impugned civil proceedings were in respect of a contractual dispute covered by them. The Receiver was a “party” to the Arbitration Agreements, and Peace River did not take a “step in the proceedings”. Accordingly, s. 15 of the Arbitration Act was engaged and the Court was required to grant a stay in favour of arbitration unless it found the Arbitration Agreements to be “void, inoperative or incapable of being performed” under s. 15(2).
At the second stage of the s. 15 framework, the burden shifts to the party seeking to avoid arbitration to establish, on a balance of probabilities, that the arbitration agreement at issue is void, inoperative, or incapable of being performed. Here, the arbitral processes contemplated in the Arbitration Agreements would compromise the orderly and efficient resolution of the receivership, contrary to the objectives of the BIA. Arbitration would jeopardize the Receiver’s ability to maximize recovery for the creditors and to allow Petrowest and the Petrowest Affiliates to move forward with certainty. The inexpediency of the multiple overlapping arbitral proceedings contemplated in the Arbitration Agreements, as compared to a single judicial process, was the determinative factor. The Receiver would need to participate in and fund at least four different arbitrations involving “seven different sets of counterparties”. The funding for these proceedings would necessarily come from the estates of Petrowest and the Petrowest Affiliates, to the detriment of their creditors. Facts and arguments would be repeated in different forums, before different decision makers, creating piecemeal decisions and a serious risk of conflicting outcomes.
Accordingly, expediency and efficiency concerns militated strongly in favour of a finding that the enforcement of the Arbitration Agreements would compromise the objects of the BIA and that the Agreements are therefore inoperative under s. 15(2) of the Arbitration Act. The Court dismissed the appeal with costs throughout.
Judges: Wagner C.J. and Moldaver, Karakatsanis, Côté, Brown, Rowe, Martin, Kasirer and Jamal JJ.
Counsel: Burnet, Duckworth & Palmer for the appellants; Bennett Jones for the respondents; Spiegel Sohmer inc. for the intervener the Canadian Commercial Arbitration Center; Lerners for the intervener Arbitration Place; Baker & McKenzie for the intervener the Chartered Institute of Arbitrators (Canada) Inc.; Fasken Martineau DuMoulin for the intervener the Insolvency Institute of Canada; Canadian Federation of Independent Business for the intervener the Canadian Federation of Independent Business
By Matilda Lici