Can a receiver sue on a contract yet disclaim the contract’s arbitration clause?
The Respondents, Petrowest Corporation and certain of its affiliates, were placed into receivership. The Receiver commenced an action against the Appellants, Peace River Hydro Partners and its partners, for amounts allegedly owing to the Respondents under agreements between the Respondents and Appellants relating to the construction of a hydroelectric project. The agreements included mandatory arbitration clauses. The Appellants applied for an order to stay the action pursuant to section 15 of the BC Arbitration Act, on the ground that a resolution of the Respondents’ claims under the various agreements was subject to the mandatory arbitration clauses in those agreements.
The question on appeal was whether the Receiver was bound to arbitrate the disputes under the various contracts, or whether it could proceed instead with a single action. The question turned on the effect, if any, of the appointment of the receiver and assignments into bankruptcy on the application of section 15 of the Arbitration Act.
The chambers judge dismissed the application for a stay and allowed the receiver to continue the action. Notwithstanding section 15 of the Arbitration Act, she concluded that the court had discretion to decline a stay where section 183 of the Bankruptcy and Insolvency Act applies. She reasoned that this case involved a significant amount of money in which the bankrupts’ creditors had an interest. The difference in the cost and time involved of prosecuting the claim in court as compared to the multiple arbitration proceedings was substantial. Proceeding via arbitration would be unfair to the creditors and contrary to the objects of the BIA.
On appeal, the Appellants argued that the litigation commenced by the Receiver was indistinguishable from litigation commenced directly by the Respondents pre-insolvency. For their part, the Respondents argued that a court-appointed receiver is not bound by the contracts of the debtor corporation, and in particular, is not bound by, or a party to, the mandatory arbitration clauses. They also argued that, because the Receiver was not a party to the arbitration agreements, the arbitration agreements were inoperable.
The Court of Appeal concluded that section 15 of the Arbitration Act is not engaged when a receiver has been appointed under the provisions of the BIA and disclaims the arbitration agreements in question. A receiver owes a fiduciary duty to all stakeholders, including secured and unsecured creditors, as well as the debtor, and is a trustee and fiduciary of all the realization proceeds for all stakeholders. For that reason, a receiver is not bound by the executory contracts of the debtor and may disclaim them.
The power of the receiver to disclaim contracts illustrates the fundamental difference between the receiver/trustee and the debtor/bankrupt. Unlike the debtor/bankrupt, the receiver is an officer of the court. The receiver is not an agent of the debtor or any other parties, but “is a principal entrusted to discharge the powers granted to the receiver bona fide”.
As a result of the receivership order, the Respondents had no capacity to claim against the Appellants under their contracts. Thus, the receivership order empowered and authorized the Receiver “to initiate, prosecute and continue the prosecution of any and all proceedings…with respect to the Debtors, the Property or the Receiver”. In doing so, the Receiver acts in fulfilment of its own court-authorized and fiduciary duties, which are owed to all stakeholders—not as agent of the debtor Respondents (who were legally paralyzed from acting).
Therefore, the ‘party’ who commenced legal proceedings within the meaning of section 15 of the Arbitration Act was the Receiver. It was open to the Receiver to disclaim the arbitration agreements notwithstanding that it had adopted the contracts in which the agreements to arbitrate were contained for the purpose of suing on them. This power flowed from the Receiver’s particular powers and position, and the separability of the arbitration agreements from the main contracts.
Therefore, section 15 of the Arbitration Act was not engaged because, by exercising its power to commence these proceedings, the Receiver disclaimed the arbitration agreements. Accordingly, the action was not commenced by a party to the arbitration agreements within the meaning of section 15(1) of the Arbitration Act. In any event, due to the Receiver’s disclaimer, the arbitration agreements became “void, inoperative or incapable of being performed” within the meaning of section 15(2). As a result, the Court dismissed the appeal.
Counsel: David de Groot and Alison Scott of Burnet, Duckworth & Palmer LLP for the Appellants and Kelsey Meyer, Antonia Alisauskas and Jim Schmidt of Bennett Jones LLP for the Respondents
Judges: Bennett, Dickson and Grauer J.J.A.