B.C. – court asserts inherent jurisdiction under insolvency legislation to override arbitration clauses – #254

In Petrowest Corporation v. Peace River Hydro Partners, 2019 BCSC 2221, Madam Justice Nitya Iyer held that mandatory terms of B.C.’s Arbitration Act, RSBC 1996, c 55 do not prevent courts from exercising their inherent jurisdiction to refuse to stay court proceedings where provisions of the Bankruptcy and Insolvency Act, RSC 1985, c B-3 apply.  Iyer J. lists a number of factors to consider when exercising that jurisdiction.  The reasons and result mark an innovation in how courts balance respect of party autonomy endorsed by arbitral legislation with interests recognized in other legislation. Iyer J. also held that a trustee in bankruptcy is a party to an arbitration agreement when the trustee institutes litigation to enforce the terms of the main contract in which the arbitration agreement appears.

The underlying dispute stemmed from construction of B.C. Hydro’s Site C Clean Energy Project (“Site C”) in Northern B.C.  The dam and hydroelectric station is intended to provide 1,100 megawatts of capacity and approx. 5,100 gigawatt hours of energy each year to B.C.’s integrated electricity system (enough to power the equivalent of about 450,000 homes).  Construction began in summer 2015 with completion planned for 2025. For an insight into the scope of Site C’s construction, see the construction overview.

Peace River Hydro Partners (“PRHP”) contracted with B.C. Hydro to perform certain construction work for Site C. PRHP then subcontracted the work to a group of related entities comprised of (i) Petrowest Corporation; (ii) Petrowest Civil Services LP by its general partner, Petrowest GP Ltd., c.o.b. “RBEE Crushing”; (iii) Petrowest Construction LP by its general partner Petrowest GP Ltd., c.o.b. “Quigley Contracting”; (iv) Petrowest Services Rentals LP by its general partner Petrowest GP Ltd., c.o.b. “Nu-Northern Tractor Rentals”; (v) Petrowest GP Ltd., as general partner of Petrowest Civil Services LP, Petrowest Construction LP and Petrowest Services Rentals LP; and, (vi) Trans Carrier Ltd. (“Petrowest Entities”).

After signature of the subcontract, Alberta’s Court of Queen Bench in August 2017 appointed Ernst & Young Inc. (“E&Y”) as receiver and manager to Petrowest Entities.  A few months later, on April 3, 2018, E&Y assigned Petrowest Entities into bankruptcy and the court appointed E&Y as trustee in bankruptcy.

On August 29, 2018, E&Y, in its capacity as court-appointed receiver and manager, and Petrowest Entities (“Plaintiffs”) filed a civil notice of claim in Alberta’s Court of Queen’s Bench (“Action”) against PRHP, two (2) of PRHP’s partners, Acciona Infrastructure Canada Inc. and Samsung C&T Canada Ltd. and those partners’ parent corporations, Acciona Infraestructuras S.A. and Samsung C&T Corporation (“Defendants”). In their Action, Plaintiffs sought payment for performance of work under the subcontract and owing under a related guarantee signed by the parent corporations.

The disputes involved several contracts.  A December 2015 General Partnership Agreement (“Agreement”) and a Guarantee and Cross Indemnity Agreement (“Guarantee”) governed the partnership relationship between PRHP.  Despite identifying only certain entities as being partners in PRHP, the reasons also suggest that Petrowest Corporation could also be a partner in PRHP and therefore bound by the Agreement and Guarantee. At para. 7, Iyer J. notes that a dispute exists over the status of Petrowest Corporation (the parent of the other Petrowest Entities) as partner in PRHP.  In doing so, it suggests that Petrowest Corporation is also a partner in PRHP.  In addition to the Agreement and the Guarantee, certain purchase orders (“Purchase Orders”) covered some of the work PRHP subcontracted while a subcontract agreement (“Subcontract”) cover other such work. 

Defendants applied for a stay under section 15(1) of B.C.’s Arbitration Act on the basis of mandatory arbitration clauses in the contracts which Defendants asserted govern the claims.  Plaintiffs resisted, arguing that some of the claims made in the Action were not subject to the Arbitration Clauses and would have to be heard by the court.

(i) different arbitration agreements and processes

Iyer J. noted that “[m]ost, if not all” of those contracts (“Agreements”) contained four (4) distinct, mandatory arbitration clauses (“Arbitration Clauses”) and that the wording in each differed, each applying to a different set of disputes and imposing a different arbitration process.  At para. 54, Iyer J. identifies the different processes:

a) Under the Agreement, claims between the plaintiffs, Acciona and Samsung must be decided by a three-person panel following the arbitration rules of the international chamber of commerce (“ICC Rules”);

b) Under the Guarantee, claims between the plaintiffs, Acciona, Samsung and each of their parents must be decided by a three-person panel following the ICC Rules;

c) Under the Purchase Orders, claims between the Petrowest Affiliates and PRHP must be decided by a single arbitration under the arbitration rules of the BC International Commercial Arbitration Centre (“BCICAC Rules”) following specified pre-arbitration steps; and

d) Under the Subcontract, claims between a particular Petrowest Affiliate and PRHP must be decided by a single arbitration under the BCICAC Rules following different specified pre-arbitration steps.

Two comments for (b) and (c). First, the mention of BCICAC’s “arbitration rules” omits distinguishing between BCICAC’s domestic rules, revised or not, or its international rules.  Second, the mention of “single arbitration” might likely mean “single arbitrator”.

In addition to the above, Iyer J. also stated that “some percentage” of the claims were made under purchase orders which had no arbitration clause. “The dispute between the parties about whether those claims are subject to arbitration at all could be decided by an arbitrator initially, but may be subject to judicial review. Any claims that are found not to be governed by arbitration clauses would have to be determined by a court.

(ii) E&Y is a party to the agreements (paras 15-19)

Plaintiffs argued that E&Y is not a party to the contracts, referring to New Skeena Forest Products Inc., Re v. Don Hull & Sons Contracting Ltd., 2005 BCCA 154 and Industrial Alliance Insurance and Financial Services Inc. v. Wedgemount Power Limited Partnership, 2018 BCSC 970. Iyer J. distinguished both cases.  Neither case involved a receiver which was also the trustee in bankruptcy or a receiver seeking to enforce contractual claims. Iyer J. determined that E&Y as a party to the contracts containing the Arbitration Clauses.

[19] A receiver may apply to the court to break a material contract and, in that limited sense, may not be “bound” by the contract: New Skeena at para. 17, quoting Bennett on Receiverships, 2d ed (Toronto: Carswell, 1999) at 341. However, that does not mean that the receiver is not a party to the contract within the meaning of s. 15 of the Arbitration Act. In cases such as this, where the Receiver is suing on the Agreements in its own name as the trustee, it is a party to the Agreements for the purposes of s. 15.

(iii) PRHP did not take a step in the proceedings before applying for a stay (paras 20-29)

Plaintiffs alleged that PRHP was barred from applying for a stay because it had sent a letter to Plaintiffs stating that Defendants “undertake to file a defense in due course”.  Plaintiffs likened that step to the one considered in Larc Developments Ltd. v. Levelton Engineering Ltd., 2010 BCCA 18 as a step in the proceedings  In that case, Court of Appeal distinguished between correspondence between parties and an action contemplated by rules of court, namely a demand for particulars.  See, for example, B.C.’s Supreme Court Civil Rules, BC Reg 168/2009.  “A party should not be entitled to take the benefit of the litigation process – obtaining particulars – while preserving the ability to reject that process in favour of arbitration.

Iyer J. disagreed. 

[27] That rationale does not support the plaintiffs’ position: by undertaking to provide a defense, the defendants did not rely on or invoke the Rules of Court. They communicated their intention to file a defense by a certain date. The plaintiffs’ reliance on The Dufferin Paving Co. Ltd. v. The George A. Fuller Co. of Canada Ltd., [1935] O.R. 21, 1934 CanLII 123 is misplaced. There, the court found that “an undertaking that, on the particulars being furnished and the extension of time granted, the defendant would file its statement of defence” would amount to a step in the proceedings for the purposes of the Ontario Arbitration Act. However, unlike the undertaking at issue here, the undertaking in Dufferin clearly did invoke a rule of court as it amounted to a demand for particulars. Dufferin does not suggest that simply undertaking to file a defence is a step in the proceedings.

(iv) application and validity of Arbitration Clauses presumed for application (paras 30-34)

Iyer J. presumed, for the purposes of deciding the application, that the Arbitration Clauses covered the claims made in the Action and that the Arbitration Clauses were not void, inoperative or incapable of performance.

(v) court has discretion to refuse a stay (paras 35-42)

Iyer J. wrote that it was “well settled” that section 11 of the Companies’ Creditors Arrangement Act, RSC 1985, c C-36 (“CCAA”) authorizes a court to “override” an arbitration clause and section 15(2) of the Arbitration Act, despite its mandatory wording, relying on Luscar Ltd. v. Smoky River Coal Limited, 1999 ABCA 179, Hayes Forest Services Limited (Re), 2009 BCSC 1169 and Pope & Talbot Ltd. (Re), 2009 BCSC 1552.

Iyer J. noted that the Bankruptcy and Insolvency Act (“BIA”) contained no equivalent to the CCAA’s section 11 but that section 183 of the BIA invests courts with “such jurisdiction at law and in equity as will enable them to exercise original, auxiliary and ancillary jurisdiction in bankruptcy and in other proceedings authorized by this Act during their respective terms, as they are now, or may be hereafter, held, and in vacation and in chambers[.]”  Iyer J. further noted that the court in Pope & Talbot Ltd. (Re) affirmed that the BIA “confers jurisdiction on the superior courts to disrupt private contractual rights” and relied on that reasoning to stay operation of an arbitration clause.

Iyer J. held that “[a]lthough Pope & Talbot does not expressly refer to s. 15 of the Arbitration Act, Walker J.’s use of the court’s inherent jurisdiction to override an arbitration clause implies that the BIA empowers the court to avoid the operation of s. 15 of the Arbitration Act in appropriate circumstances.

Iyer J. concluded that section 15(2) of B.C.’s Arbitration Act does not prevent the court from exercising its discretion to determine whether to refuse to stay proceedings where section 183 of the BIA applies.  Though recognizing that an alternative might be to resolve a conflict between B.C.’s arbitration legislation and the Federal bankruptcy and insolvency legislation, invoking the paramountcy principle, she declined to consider it as the parties had not argued it.

(vi) exercise of discretion (paras 43-61)

Iyer J. acknowledged that the source of the court’s authority to override an arbitration clause differs between the CCAA and the BIA.

Iyer J. identified only two (2) cases, Industrial Alliance Insurance and Financial Services Inc. v. Wedgemount Power Limited Partnership, 2018 BCSC 970 and Pope & Talbot Ltd. (Re), which had been provided to her which involved the court exercising its inherent jurisdiction under the BIA to override an arbitration clause.  She found the both cases “concerned arbitration clauses that threatened to derail the bankruptcy process”.

In contrast to the BIA, cases decided under the CCAA appeared to focus on expense and efficiency.  Iyer J.’s reading of those cases supported her appreciation that the courts had favoured the CCAA court procedure over arbitration “because judicial resolution of the dispute was less expensive, more expeditious (particularly given the availability of judicial review of arbitrations), could be accomplished within certain time constraints, and the issues were appropriate for judicial determination”.

Iyer J.’s review of the cases lead her to recognize more situations in which the inherent jurisdiction under the BIA could be exercised.  The situations went beyond abuse of process or threat to the integrity of the insolvency process. “Concerns of fairness and efficiency are no less fundamental to the BIA than to the CCAA. To a much greater extent than in other areas of the law, a bankruptcy court requires flexibility to balance the interests of the various stakeholders involved and fashion pragmatic solutions to unanticipated problems that may arise in the course of the insolvency proceedings.

Where the BIA is silent, the court has inherent jurisdiction “to craft appropriate remedies to ensure the fair, orderly, and expeditious resolution of the proceedings before it” but do so only “where the benefit of granting the remedy to the insolvency process as a whole outweighs the prejudice to affected parties.

Re Residential Warranty Company of Canada Inc. (Bankrupt), 2006 ABQB 236, affd Kingsway General Insurance Company v. Residential Warranty Company of Canada Inc. (Trustee of), 2006 ABCA 293,

When affirming the decision in first instance, the Court of Appeal at para. 37 provided a list of non-exhaustive factors – excerpted here in abbreviated version, without the accompanying illustrations:

1.  The strength of the trust claim being asserted. … ;

2. The stage of the proceedings and the effect of such an order on them.  … ;

3. The need to maintain the integrity of the bankruptcy process.  … ;

4.  The realistic alternatives in the circumstances.  … ;

5.  The impact on the trust claimants and on the trust property as well as on other creditors.  … ;

6.  The anticipated time and costs involved.  … ;

7.  The limits that can be placed on the fees or charge; and

8.  The role that the trustee will take in the determination process.

Iyer J. acknowledged that the circumstances in the case before her were not as “dire” as those in Industrial Alliance Insurance and Financial Services Inc. v. Wedgemount Power Limited Partnership and Pope & Talbot Ltd. (Re) but that her consideration of the relevant factors “tips the balance in favour of exercising my inherent jurisdiction to override the Arbitration Clauses”.

At paras 53-58, Iyer J. stated the factors in favour of overriding the Arbitration Clauses including:

– the amount of money in dispute is significant to creditors’ interest and the integrity of the bankruptcy process being promoted by timely and cost-effective determination of claims;

– variety of arbitration agreements and processes, including ICC and BCICAC with one (1) or three (3) member tribunals;

– dispute over whether some claims are subject to arbitration will require an initial decision by arbitrator subject to “judicial review” and those not covered to be then determined by the court;

– the need to streamline the arbitration process coupled with the lack of evidence there is any realistic likelihood of that occurring;

– no prejudice demonstrated by Defendants if Arbitration Clauses are overridden;

– factors in Pope & Talbot Ltd. (Re) “strongly favour overriding the Arbitration Clauses”; and,

– no “potentially wide-ranging consequences” implied by Defendants.

In her closing summation, Iyer J. addressed the last factor:

This case involves a significant amount of money in which the bankrupts’ creditors have an interest. The difference in the cost and time involved of prosecuting the claim in court as compared to the multiple arbitration proceedings is substantial. The bankruptcy order was made in April 2018. It will not be possible to distribute the proceeds of the bankrupts’ estates until these disputes are resolved. I agree that the inherent jurisdiction of the court should be used sparingly. However, 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. The absence of any prejudice to the defendants is an important distinguishing factor.

Iyer J. dismissed the application for a stay.

urbitral note – Iyer J.’s reasons and result mark an original development to arbitration practice, confirming the flexibility and scope of the courts’ jurisdiction to decide if and when to support arbitration even when arbitral legislation, on its face, offers no such jurisdiction.

Iyer J. did not resort to paramountcy to resolve the conflict between (i) provincial legislation requiring the courts to hold parties to the autonomy of their bargain and (ii) the interests protected by federal insolvency legislation.  

Courts do not, even in bankruptcy, lightly ignore the express terms of parties’ contracts.  Accepting that an arbitration agreement, contained in the main contract, is treated as a separate contract, the decision endorses ignoring or “overriding” such contracts altogether while allowing the trustee to pursue claims under the main contract.  The decision confirms that (i) trustees are parties to arbitration agreements by virtue of pursuing claims under the main contract but (ii) enforcing the main contract does not require respecting compliance with the arbitration agreement. The requirement that a party to a contract must demonstrate prejudice if its contract is not enforced is not one generally applied by courts in deciding to enforce contracts, including mandatory arbitration agreements.

The scope of the Site C project is not unusual in Canada. The amount in dispute can be said to be commonplace in commercial dispute resolution and was only one of several factors considered by Iyer J. The reasoning invites parties to solicit the courts’ jurisdiction in future cases in which lesser amounts are in dispute. This decision applies the imperatives of federal BIA to disputes intertwined with undertakings to arbitrate part of the disputes and its approach will resurface elsewhere in other jurisdictions applying the BIA.   

The reasons are one of the rarer instances in which a court clearly asserts, without much challenge from the resisting Defendants, that the court process would be simpler, quicker, more economical and efficient than arbitration. 

The reasons do not turn on or challenge the quality of the individual agreements to arbitrate or the respected arbitral institutions or the rules adopted.  Rather, the court’s preference for its own process is, in part, based on the court’s view of all the arbitration agreements taken as a whole.  The value of the court process in the case stemmed from its promise to offer a unified approach. The court process was not, in and of itself, preferable to any one arbitral institution or its rules.  A different result could therefore occur in other cases in which all arbitration agreements mirrored each other and, in principle, adopt a single arbitral institution and its rules and accept consolidation of any and all arbitrations.  Drafting all the arbitration agreements with a single arbitral institution to administer the arbitrations, with a commitment in all arbitration agreements to either one (1) or three (3) arbitrators and an ability to consolidate may have an impact.