Ontario – Receiver not bound by international arbitration clause with foreign seat – #626

In Royal Bank of Canada v. Mundo Media Ltd., 2022 ONSC 2147, Justice Penny found that a court-appointed receiver was not required to arbitrate claims under New York law-governed contracts that provided for JAMS arbitration seated in New York. He found that the B.C. Court of Appeal’s analysis in Petrowest Corporation v. Peace River Hydro Partners, 2020 BCCA 339, which focused on the separability of the arbitration clause, was not binding on him, and declined to follow it. Rather, Justice Penny focused on the insolvency law “single proceeding” doctrine. He found that the appointment of the receiver rendered the arbitration clause “inoperative”.

Despite the analytical East-versus-West divide (which may be resolved once the Supreme Court of Canada renders its decision in Petrowest), Justice Penny’s decision gets to the same place as the B.C. Court of Appeals: a receiver need not abide by arbitration clauses when asserting the insolvent entity’s claims against third parties.

Mundo Media is a Canadian advertising technology company. It entered into two contracts with SPay, a Delaware-incorporated, Texas-headquartered sports technology company. Those contracts were governed by New York law and provided for disputes to be decided by arbitration seated in New York, pursuant to the JAMS Comprehensive Arbitration Rules and Procedures.

Mundo was placed in court-ordered receivership pursuant to the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B. 3. The receiver alleged that SPay owed Mundo Media money and proposed to bring a motion for judgment before the Ontario court against SPay within the receivership proceedings. SPay moved pursuant to Article 8(1) of the UNCITRAL Model Law on International Commercial Arbitration (the “Model Law”), which is Schedule II to the International Commercial Arbitration Act, 2017 to stay the receiver’s motion in favour of having the claims proceed by arbitration, as provided for in the agreements.

Justice Penny framed the question before him as follows: “does the fact that claims by and against Mundo are being administered by the court-appointed Receiver in insolvency proceedings in Ontario under the BIA mean that the arbitration agreements between SPay and Mundo are rendered null and void, inoperative or incapable of being performed?

Justice Penny first rejected SPay’s argument that the question should be decided by the arbitral tribunal. He found that it would be impractical for the question to be referred to arbitration, and that only the court could determine the scope of a receiver’s powers and obligations, since a receiver is an officer of the court.

He then dismissed as irrelevant SPay’s arguments and evidence concerning the enforceability under New York law of arbitration agreements even where a party is subject to Chapter 11 or Chapter 15 bankruptcy proceedings under U.S. law.

Justice Penny then considered the B.C. Court of Appeal’s decision in Petrowest. That Court had resolved similar arguments on the basis of the doctrine of separability of the arbitration clause. It held that a receiver’s power to disclaim the debtor’s contracts also included a power to enforce the contracts but disclaim the arbitration clause. Noting that the decision was under appeal to the Supreme Court of Canada and that no decision had yet been rendered, Justice Penny stated that he was “not persuaded by the logic and reasoning” of the B.C. Court of Appeal’s decision and that the decision was not binding on him. He declined to follow it.

Justice Penny focused instead on the “single proceeding model” that applies to insolvency proceedings under the Bankruptcy and Insolvency Act. He summarized the relevant case law on this issue as stating that:

[C]laims by a debtor against a third party may be required to be heard in insolvency proceedings rather than the jurisdiction or proceedings that would otherwise applied. The determining factor is the degree of connection of the claim to the insolvency proceedings. That degree of connection has been characterized as involving a consideration of whether the third party is a ‘stranger to the bankruptcy.’”

The case law he reviewed included cases in which the third parties had sought to have the claims against them heard in the courts of other Canadian provinces or the United States, but none involved an international arbitration agreement providing for arbitration in a foreign seat.

Justice Penny then found that SPay was not a “stranger to the bankruptcy”, because the receivable was potentially the biggest claim in the insolvency proceeding. Other creditors may wish to participate in the hearing of the claim.

He held that there was “no material difference” between the circumstances of the other cases reviewed and the case before him. In his words: “The fact that the competing jurisdiction here is a potential commercial arbitration in New York is a distinction without a difference. Choice of forum, including international commercial arbitration, is a significant, but not a controlling, factor in the assessment of the applicability of the single proceeding model.

Therefore, he concluded that 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.’

He also noted that SPay would not suffer any prejudice from this approach, because all the procedural protections of an arbitration would be available before the Ontario courts.

He ended his analysis with one paragraph about the stay provision in Article 8(1) of the Model Law. He noted that the language of Article 8(1) is mandatory, but stated “[a]n otherwise valid order of the Court under s. 243 of the BIA requiring adherence to the single proceeding model in favour of referral to arbitration renders the arbitration agreement inoperative.” He did not include an analysis of the meaning of the term “inoperative” or how it has been used in other contexts.

He therefore dismissed SPay’s motion to stay the receiver’s motion for judgment brought within the insolvency proceeding.

Contributor Notes:

First, the Supreme Court of Canada’s decision in Petrowest may well quickly render this decision obsolete, but unlike Petrowest, this case involved an international arbitration agreement.

Justice Penny focused his analysis on the interplay between the Bankruptcy and Insolvency Act and the Model Law as enacted by the Ontario legislature, which involved finding the right balance between legal frameworks created by two Canadian statutes – one federal, one provincial. It is perhaps not surprising that the federal insolvency regime would “win” over the provincial arbitration regime in an effort to ensure that insolvency proceedings are resolved as efficiently as possible and balancing the interests of all stakeholders, as Parliament intended.

But what if Justice Penny had considered this from an international law perspective? Canada is a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”), to which 169 countries around the world are also party. Article II.3 of the New York Convention provides that “the court of a Contracting State, when seized of an action in a matter in respect of which the parties have made an agreement in writing within the meaning of this article, shall, at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.” This approach would pit Canada’s public international law obligations to its fellow New York Convention contracting states against the federal insolvency regime, rather than the federal insolvency regime against the provincial arbitration regime.

Second, the “inoperative” language in Article II.3 of the New York Convention is identical to that in Article 8(1) of the Model Law, so Justice Penny may have reached the same result even had he considered the New York Convention. But perhaps not. The case law that Justice Penny reviewed in his summary of the “single proceeding model” did not include proceedings involving international arbitration clauses subject to the New York Convention. They involved cases in which the third parties had argued that it would be more convenient for the claims against them to be heard in a different court.

Third, those of us following the Petrowest case would have liked to know why Justice Penny found that “there is a serious question about whether the doctrine of separability has any application…”, the meaning of the term “inoperative” in both the New York Convention and the Model Law, and why an order appointing a receiver renders an arbitration agreement inoperative within the meaning of those instruments.

Let me conclude by posing a series of rhetorical questions and fact tweaking in an effort to prompt some analytical debate on these topics:

  • What if this same decision had been rendered by the insolvency courts of a country whose courts do not enjoy the same international reputation as that enjoyed by Canadian courts?
  • What if a Canadian company was forced to defend itself before the insolvency courts of one of those countries?
  • What if that company had never agreed to be subject to the jurisdiction of those courts and had nothing to do with those countries except for the fact that it entered into a cross-border contract with a party from there which happened to later become the subject of insolvency proceedings?
  • Does the idea that a foreign party would face no “prejudice” by litigating in the national court of the opposing party depend upon the national court in question? What about the fact that the national court of the insolvent counterparty is the one who decides that the foreign party faces no prejudice by being forced to litigate there?

Does the answer to those questions affect our view of the analysis?

Fourth, for previous Arbitration Matters Case Notes which deal with the Petrowest case see Case Note B.C. – court asserts inherent jurisdiction under insolvency legislation to override arbitration clauses – #254 and B.C. – doctrine of separability allows receiver to disclaim agreement to arbitrate while litigating main contract – #399.