Eric/James 2022 Hot Topic: What is next for arbitration and insolvency? (Part 2) – #701

By James Plotkin and Eric Morgan.

Our last Case Note reviewed the Ontario Court of Appeal’s Mundo decision. Here we consider the more recent decision of Peace River Hydro Partners v Petrowest, 2022 SCC 41 (“Petrowest”).

The Supreme Court’s Decision in Petrowest

In the Petrowest decision, Petrowest Corporation (“Petrowest”) was placed in receivership. Petrowest’s receiver commenced an action in the B.C. court against Peace River Hydro Partners (“Peace River”) claiming amounts purportedly due under an agreement between Peace River, Petrowest and its affiliates. Peace River resisted, arguing that the arbitration clause in the contract required the dispute to be referred to arbitration. Peace River applied for a stay order of the court proceedings. 

The Supreme Court of Canada refused to stay the insolvency proceedings in the courts. Justice Côté’s reasoning for the majority was grounded in section 15 of the British Columbia (former) Arbitration Act, RSBC 1996 c. 55, which required a stay of proceedings where a party to an arbitration agreement has commenced a court proceeding in respect of a matter to be submitted to arbitration, unless the arbitration agreement is “void, inoperative, or incapable of being performed”.  As in the Mundo decision, the Court found the arbitration agreement to be “inoperative”. The majority found that the arbitration clauses at issue were “inoperative” because enforcing them would compromise the orderly and efficient resolution of the receivership. 

The majority’s approach is not definitive in every case, but requires a fact-specific analysis, including consideration of such factors as: the effect of the arbitration agreement 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; and the applicability of a stay of proceedings under bankruptcy and insolvency law.

See two earlier Case Notes:  Peace River v Petrowest Part 1: Separability Clarified? – #682 and Part 2: No Conflict Between Arbitration, Bankruptcy Law – #687

Contributors’ Notes:

What next following Mundo and Petrowest?

In both Mundo and Petrowest¸ the Courts reached the same conclusion, that the arbitration clauses in question were inoperative, allowing the disputes to be resolved through the insolvency proceedings supervised by the Courts. However, the decisions raise further questions that will need to be answered as the Courts, arbitrators and parties continue to find the dividing lines between insolvency and arbitration. We have set out below a few of these further implications.

  • Is Mundo still good law? As noted above, Mundo was released prior to Petrowest; the Supreme Court’s decision in Petrowest does not refer to Mundo. The Ontario courts’ approach in Mundo favoured the circumstances of an insolvency essentially rendering an arbitration clause inoperative. The Supreme Court in Petrowest, however, established a fact-specific nuanced approached which requires a court to weigh multiple factors before finding an arbitration clause to be inoperative. While strictly speaking Mundo dealt with the Ontario ICAA (Model Law) and Petrowest dealt with the former B.C. arbitration statute, there are enough similarities between the statutory regimes to question whether Mundo’s blunt approach has been overtaken by Petrowest’s nuanced approach.
  • What other factors might the Court consider when determining if an arbitration clause is inoperative? The Supreme Court set out in Petrowest a non-exhaustive list for determining whether an arbitration clause will be found to be inoperative. Some factors that were enumerated, such as the effect of the arbitration agreement on the integrity of the insolvency proceedings, are wide-ranging. It remains to be seen what other factors will be considered by other courts in the future. The challenge of the fact-specific approach based on a non-exhaustive list is that it is less predictable for parties to determine the legally proper route to take without resorting to a Court for a ruling. Moreover, the majority stated that circumstances in which the arbitration agreement will be found to be inoperative in the insolvency context will be “rare” but provided no guidance on what made the Petrowest case unique.
  • What happens in other restructuring contexts? Both Mundo and Petrowest were decided in the context of insolvency proceedings under the BIA. It remains to be seen whether and, if so, how these decisions will be applied in other restructuring contexts, such as creditor arrangements under the Companies’ Creditors Arrangement Act, RSC 1985, c C-36 (“CCAA”), though the Court in Petrowest noted that both the BIA and the CCAA accord broad judicial discretion. It also remains to be seen whether and, if so, how Petrowest is applied where the applicable arbitration statute does not contain the word “inoperative” as a basis on which to refuse to grant a stay. For example, in Alberta, the Arbitration Act, RSA 2000, c A-43 the Court may refuse to grant a stay if the arbitration agreement is “invalid” but the statute does not refer to the agreement being “inoperative”. 
  • What if a receiver/trustee seeks to arbitrate? In both these decisions, the receiver/trustee was seeking to have the disputes determined as part of the insolvency proceeding and not through arbitration. It will be interesting to see whether the Courts take a different approach where it is the receiver/trustee that is seeking to have a dispute determined through arbitration and it is the debtor or creditor that is seeking to have the dispute decided as part of the court process. Any receiver or trustee will need to consider how the Petrowest factors, including concern for the integrity of the insolvency proceeding, will be applied in the circumstances of a receiver/trustee seeking to avoid a dispute being determined as part of that proceeding.  

Is Canada pro-arbitration when it comes to insolvency? The Courts in both Mundo and Petrowest ultimately sided in their results with allowing claims that were subject to arbitration clauses to proceed through court proceedings and not through arbitration. Canada is and is seen to be a pro-arbitration jurisdiction, meaning the Courts will generally enforce arbitration clauses. That status needs some refinement when the circumstances are specifically that one of the party’s to the agreement has entered insolvency proceedings.