Petrowest Corporation v Peace River Hydro Partners, 2019 BCSC 2221

Is a receiver bound to arbitration clauses in contracts a debtor was party to?

The defendants formed a partnership that contracted with BC Hydro to do certain construction work on a project in northern British Columbia. They then subcontracted the work to the plaintiffs. In April 2018, the plaintiffs (comprised of a parent company and its affiliates) were assigned into bankruptcy. Ernst and Young, the other remaining plaintiff, was subsequently appointed as Receiver and trustee in bankruptcy. 

Following the appointment, the plaintiffs filed a notice of civil claim seeking recovery of amounts allegedly owing for performance of the subcontracted work. The defendants sought a stay of the claim on the ground that mandatory arbitration clauses (the “Arbitration Clauses”) in the various subcontracts governed the resolution of all of the plaintiffs’ claims.

The plaintiffs argued that the Receiver was not a party to the agreements containing the Arbitration Clauses and, therefore, was not bound by the debtor’s contracts. Further, as a court appointed officer, the plaintiffs argued that the Receiver has the powers and obligations conferred under the Bankruptcy and Insolvency Act (the “BIA“) permitting it to request the court to exercise its inherent jurisdiction to displace private contractual rights in order to achieve the objectives of the BIA. 

The defendants argued that because the Receiver and the other plaintiffs were advancing contractual claims, they were bound by the agreements and the Arbitration Clauses. The plaintiffs could not rely only on those contractual clauses that favour them and, at the same time, maintain that other provisions of the same contracts did not apply.

Section 15 of the Arbitration Act requires the court to enforce valid arbitration agreements by staying court proceedings commenced in breach of such agreements. The Receiver acquired the contractual rights of the plaintiffs to sue on the agreements through the bankruptcy order. In that sense, the Receiver is a party to the agreements.

The language in the Arbitration Clauses was clearly mandatory. Accordingly, the Court held that the Arbitration Clauses were not void, inoperative or incapable of performance, and s. 15 of the Arbitration Act was engaged in this case.

Section 11 of the Companies Creditors Arrangement Act empowers the court to override an arbitration clause and the otherwise mandatory requirement in s. 15(2) of the Arbitration Act. There is no equivalent provision in the BIA. However, s. 183 of the BIA confers jurisdiction on the superior courts to disrupt private contractual rights, implying that the BIA empowers the court to avoid the operation of s. 15 of the Arbitration Act in appropriate circumstances. 

There are two preconditions to the Court exercising its inherent jurisdiction:
  • the BIA must be silent on a point or not have dealt with a matter exhaustively; and
  • after balancing competing interests, the benefit of granting the relief must outweigh the relative prejudice to those affected by it.
The following additional factors must also guide a court’s assessment:
  • the stage of the proceedings and the effect of such an order on them;
  • the need to maintain the integrity of the bankruptcy process;
  • the realistic alternatives in the circumstances;
  • the impact on the trust claimants and the trust property as well as on other creditors; and
  • the anticipated time and costs involved.
Here, there was no evidence that enforcing the Arbitration Clauses would derail the insolvency proceedings or fundamentally threaten their integrity. Nor was there evidence that the defendants were using the Arbitration Clauses for some ulterior purpose damaging to the plaintiffs. Nevertheless, consideration of the relevant factors tipped the balance in favour of overriding the Arbitration Clauses.

The plaintiffs’ claim sought over $10M against the defendants, excluding interest. A claim in this amount is of significance to the creditors, and both their interest and the integrity of the bankruptcy process are promoted by timely and cost-effective determination of the plaintiffs’ claim. This claim would need to be resolved before any distribution of assets can take place.

If the Arbitration Clauses are not overridden, following the language of the Agreements, four arbitration processes will be required. Further, some percentage of the claims under the Purchase Orders do not contain express arbitration clauses. Any claims that are found not to be governed by arbitration clauses would have to be determined by a court. Overriding the Arbitration Clauses would promote the efficient and inexpensive resolution of their dispute. A single judicial process would be faster and less expensive than four arbitrations and a possible court case.

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. This factor, coupled with the absence of any prejudice to the defendants, led the Court to conclude that granting the stay sought by the defendants would significantly compromise achievement of the objectives of the BIA. The Court dismissed the stay application.
CounselJim Schmidt and Kelsey Meyer of Bennett Jones LLP for the plaintiffs and David De Groot of Burnet, Duckworth & Palmer LLP for the defendants



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