Supreme Court – Peace River v Petrowest Part 1: Separability Clarified? – #682

Most of the commentary about the Supreme Court of Canada’s decision of Peace River Hydro Partners v Petrowest, 2022 SCC 41, is about the interplay between arbitration law and bankruptcy/insolvency law – and my next Case Note will address that issue. However, perhaps a more important issue for arbitration law was the Court’s consideration of the doctrine of separability (although it was not relevant to the outcome). The scope of its application in Canada was uncertain following the 2020 decisions of the British Columbia Court of Appeal under appeal, Petrowest Corporation v Peace River Hydro Partners, 2020 BCCA 339, and the Supreme Court of Canada in Uber Technologies Inc. v Heller, 2020 SCC 16 (“Uber”). 

Background – In December, 2015, Peace River Hydro Partners and its related corporations (“Peace River”) were formed to design and construct a hydroelectric dam in northeastern British Columbia. They sub-contracted some of the work to Petrowest Corporation and its affiliates (“Petrowest”). On August 15, 2017, the Alberta Court of Queen’s Bench ordered Petrowest and affiliates into receivership pursuant to s. 243 of the Bankruptcy and Insolvency Act, RSC 1985, c. B-3 (BIA). On April 3, 2018, the Receiver assigned the Petrowest affiliates (but not Petrowest) into bankruptcy and became the Trustee in Bankruptcy. 

The stay application – On August 29, 2018, the Receiver/Trustee sued Peace River in British Columbia for amounts it alleged were owing to Petrowest. Peace River applied to stay the action under section 15 of the former B.C. Arbitration Act, RSBC 1996, c. 55, on the basis that the relevant contracts between the parties contained arbitration clauses. Section 15 stated that, “if a party to an arbitration agreement commences legal proceedings in a court against another party to the agreement in respect of a matter agreed to be submitted to arbitration, a party to the legal proceedings may apply… to that court to stay the legal proceedings” and that the court must order a stay, “unless it determines that the arbitration agreement is void, inoperative or incapable of being performed.”

The chambers judge exercised her “inherent jurisdiction” to dismiss Peace River’s stay application in order to promote the underlying objectives of the BIA, such as the proper administration and protection of a bankrupt’s estate, and to avoid multiple arbitrations and litigation. Peace River appealed. The B.C. Court of Appeal and the Supreme Court of Canada dismissed Peace River’s appeals, but for different reasons.

The BCCA decision – The Court of Appeal relied on the doctrine of separability in arbitration law, which it held permits an arbitration clause to be treated for all purposes as a “self-contained contract collateral to the containing contract”. According to the Court of Appeal, separability allows a receiver to disclaim an otherwise valid arbitration agreement, even though it has adopted the main contract for the purpose of suing on it (para. 55).

The Court of Appeal found that the Petrowest Receiver/Trustee had disclaimed the arbitration agreements by suing on behalf of Petrowest. Accordingly, the Receiver/Trustee was not a party to those agreements and s. 15 of the Arbitration Act was not engaged. In the alternative, if the Receiver/Trustee was a party, its disclaimer rendered the arbitration agreements “inoperative” or “incapable of being performed” within the meaning of s. 15(2) (para. 56). 

In reaching this result, the Court of Appeal relied upon some of the leading cases on separability and on Uber.

The SCC Uber decision: In that case, although the plaintiff succeeded in his argument that the arbitration clause should not be enforced because it was unconscionable, he also argued that the doctrine of separability should be applied to render the arbitration clause in his contract with Uber invalid or null and void (para. 219). 

Justice Côté – in dissent – adopted the Model Law approach to the doctrine of separability. Section 16 of the Model Law contains similar language to that in s. 15 of the 1996 B.C. Arbitration Act. Justice Côté described the doctrine as follows:

“…[224] The [B.C. 1996] Arbitration Act and the UNCITRAL Model Law codify one aspect of the doctrine, that is, the preservation of an arbitral tribunal’s jurisdiction to rule on the validity of the underlying contract on the basis that the arbitration agreement is to be treated as a separate and independent contract for such purposes. However, the separability doctrine has wider significance. More broadly, the doctrine holds that an arbitration agreement is invalidated only by a defect relating specifically to the arbitration agreement itself and not by one relating merely to the underlying contract in which that agreement is found: Fiona Trust, at paras. 32-35, per Lord Hope; Feehily, at p. 373; Born, vol. I, at pp. 351, 457 and 466-69. In effect, the separability doctrine “immunizes the arbitration clause, protecting it from flaws or defects” in the underlying contract: Feehily, at pp. 371 and 373. Nonetheless, there may be instances where the same circumstances which impugn the validity of the underlying contract also call the validity of the arbitration agreement into question: Fiona Trust, at para. 17, per Lord Hoffmann.”

In this paragraph in Uber (see also paras. 221 to 223), Justice Côté recognized that the purpose of the doctrine of separability is to treat the arbitration clause as a separate agreement when there is a challenge to the tribunal’s jurisdiction based upon an allegation that the parties’ underlying agreement is invalid. However, confusion arose because Justice Côté then found (at para. 225) that for the purposes of the plaintiff’s challenge to the validity of the arbitration clause (not the main agreement), the arbitration clause should be considered an independent agreement. See also the decision of the majority in Uber at para. 96, which contributed to the confusion.

The SCC Petrowest decision – In her decision for the majority, Justice Côté (Wagner CJ and Moldaver, Rowe, and Kasirer concurring) found that the B.C. Court of Appeal had misapplied the doctrine of separability:

“[167] Separability does not apply absent a challenge to the validity of the main contract or of the arbitration agreement itself (Uber, at para. 224, per Côté J., dissenting, but not on this point). No issue is taken in this case with the validity of the Main Agreements or the Arbitration Agreements. Indeed, before the Court of Appeal, the Receiver argued that separability was “irrelevant” in this case (C.A. reasons, at para. 48). It now concedes that this Court does not need to consider separability to resolve this appeal. I accept this concession.

[168] I would add that the Court of Appeal’s approach to separability would undermine the central purpose of the Arbitration Act. In essence, the Court of Appeal held that receivers are permitted to revoke arbitration agreements unilaterally, without any judicial inquiry into their validity or enforceability. But separability is intended to safeguard arbitration agreements, not imperil them (see, e.g., T. Meshel, “Petrowest v. Peace River Hydro: The Revocability and Separability of Commercial Arbitration Agreements” (2022), 65 Can. Bus. L.J. 329). As I have explained, it is for a court — not a receiver — to determine whether an arbitration agreement is valid and enforceable according to the narrow statutory exceptions set out in s. 15(2).

Similarly, on the subject of separability, Justice Jamal (Karakatsanis, Brown, and Martin JJ concurring) stated:

[194] …The separability doctrine is recognized, for example, in s. 17(2) of the Ontario Arbitration Act, 1991, S.O. 1991, c. 17, and provides that, for the purposes of ruling on arbitral jurisdiction, an arbitration agreement “shall . . . be treated as an independent agreement that may survive even if the main agreement is found to be invalid” (see also Uber Technologies Inc. v. Heller, 2020 SCC 16, at para. 96, per Abella and Rowe JJ.). As Professor Tamar Meshel notes in her helpful article on the decision of the British Columbia Court of Appeal under appeal, the separability doctrine provides that “an arbitration clause does not necessarily become invalid merely because the underlying agreement is found to be invalid, and vice versa” (“Petrowest v. Peace River Hydro: The Revocability and Separability of Commercial Arbitration Agreements” (2022), 65 Can. Bus. L.J. 329, at p. 345 (footnote omitted)). Without the separability doctrine, “a contracting party could avoid arbitration simply by alleging that the underlying agreement was void or invalid” (Meshel, at p. 345 (footnote omitted)). I agree with Professor Meshel’s view that, because “neither party challenged the validity of the agreements in which the arbitration clauses were found, but rather only the arbitration clauses themselves”, the result is that “the separability doctrine, which simply operates to separate the validity analysis of an arbitration clause from that of the underlying agreement, [is] not relevant to [this] case” (Meshel, at p. 346 (footnote omitted)). I am not relying on the separability doctrine…”

Editor’s Notes:

First, most Canadian domestic and international arbitration legislation includes the doctrine of separability – and it is recognized at common law. The first sentence of paragraph 167 of Justice Côté’s reasons (“[s]eparability does not apply absent a challenge to the validity of the main contract or of the arbitration agreement itself” – emphasis added) can only be understood as consistent with international law on the application of the doctrine of separability by its reference to paragraph 224 of Justice Côté’s reasons in Uber, quoted above. It makes it clear that separability under the 1996 B.C. Arbitration Act and the Model Law applies only where there is a challenge to the main agreement and that an arbitration clause may be held to be invalid only by a direct challenge to it. However, Justice Jamal’s reference to para. 96 of the majority decision in Uber to support the statement that, “an arbitration agreement shall… be treated as a separate agreement that may survive even if the main agreement is to be invalid” is puzzling because that paragraph refers to separability applying where there is a challenge to the arbitration clause alone. Nonetheless, the majority decision puts Canadian law on the application of the doctrine of separability in line with international jurisprudence, including under the Model Law; the purpose of separability is to protect arbitral jurisdiction where there is a challenge to the main contract. The key cases are cited by Justice Côté in Uber

Second, for the Arbitration Matters Case Note on the decision of the BC Court of Appeal see: B.C. – doctrine of separability allows receiver to disclaim agreement to arbitrate while litigating main contract – #399.