Eric/James’s 2022 Hot Topic: What is next for arbitration and insolvency? (Part 1) – #698

By Eric Morgan and James Plotkin.

This past year brought two important decisions about the interrelationship between arbitration and insolvency proceedings: the Supreme Court’s decision in Peace River Hydro Partners v Petrowest, 2022 SCC 41 (“Petrowest”) and the Ontario Court of Appeal’s decision in Mundo Media Ltd. (Re), 2022 ONCA 607 (“Mundo”). Both decisions, in different ways, concern the tension between judicial authority to supervise proceedings brought by a receiver or trustee under the Bankruptcy and Insolvency Act, RSC 1985, c B-3 (“BIA”) and parties’ autonomy to choose to have their disputes determined through arbitration. While the two Courts reached the same bottom-line conclusion – that the particular arbitration clauses were “inoperative” in the circumstances of an insolvency and thus not binding on receivers or trustees – the decisions leave unanswered questions about the ways that insolvency and arbitration continue to interact with each other. 

The Ontario Court of Appeal’s Mundo Decision

The Mundo decision was the first of these two significant arbitration and insolvency decisions delivered in 2022. Mundo Media Inc. was placed in receivership and the receiver subsequently filed a petition in insolvency against SPay Inc. (“SPay”) for repayment of outstanding invoices. Mundo and SPay had entered into a contract which included an arbitration clause, with the arbitration seated in New York

SPay sought to stay the insolvency proceeding as it related to SPay pursuant to the Ontario International Commercial Arbitration Act, 2017, SO 2017, c 2, Sch 5 (“ICAA”). Article 8(1) of the UNCITRAL Model Law, which is a schedule to ICAA, requires the Court to stay an action subject to an arbitration agreement unless the court determines that the arbitration agreement is “null and void, inoperative or incapable of being performed.”

At first instance, Justice Penny of the Ontario Superior Court of Justice dismissed SPay’s motion for a stay and determined that contracts stipulating arbitration did not require a court-appointed receiver to arbitrate claims. In his decision, Justice Penny applied the “single proceeding model” of bankruptcy procedures under the BIA, writing (at paragraph 38): 

Requiring the Receiver to commence arbitration proceedings in New York would be unfair to Mundo’s creditors and inconsistent with the object of the BIA to, among other things, enhance efficiency and consistency and avoid the chaos and inefficiency of multiple proceedings and of potentially sending the Receiver ‘scurrying to multiple jurisdictions’.” 

See Royal Bank of Canada v. Mundo Media Ltd., 2022 ONSC 2147 and our earlier Case Note on this decision – Receiver not bound by international arbitration clause with foreign seat #626.

SPay brought a motion for leave to appeal Justice Penny’s decision. Justice Thorburn of the Court of Appeal for Ontario found no reversible error in the motion judge’s decision, and denied leave to appeal. Justice Thorburn upheld Justice Penny’s finding that the appointment of the receiver rendered the arbitration clause “inoperative”, writing (at paragraph 37):

“Moreover, although article 8 of Schedule 2 to the ICAA requires a stay in favour of the arbitration agreement, the legislation expressly provides room for courts to “find that the agreement is … inoperative”. This express carve-out, read in conjunction with the broad discretion that courts exercise under s. 243 of the BIA in supervising bankruptcy matters, enables bankruptcy courts to preclude the operation of the ICAA by virtue of the operation of the single proceeding model.”

The appellant argued that it was a “stranger to the bankruptcy” such that the single proceeding model did not apply to it. However, Justice Thorburn upheld Justice`s Penny conclusion that SPay, as the largest debtor in bankruptcy, was far from a stranger to bankruptcy.

See Mundo Media Ltd. (Re), 2022 ONCA 607 and our earlier Case Note on this decision: Court of Appeal upholds “single proceeding” insolvency model over recourse to arbitration #660.

Contributors’ Notes:

Unfortunately, Justice Thorburn’s decision provided little guidance on the meaning of the word “inoperative” as it relates to an arbitration agreement, which provides an exception to the mandatory referral to arbitration principle. That was clarified by the Supreme Court of Canada in the Petrowest decision, which we review in Part 1 of our 2022 Hot Topics Case Note.  However, it was a domestic arbitration case (as opposed to international), where it is arguable that different policy issues were at stake. Read Part 2 for our analysis of the significance of these two cases and whether the Mundo decision is still good law.