Supreme Court – Peace River v Petrowest Part 2: no conflict between arbitration, bankruptcy law – #687

In Peace River Hydro Partners v Petrowest, 2022 SCC 41, the central issue was whether a receiver/trustee in bankruptcy may disclaim the arbitration clause in a contract and sue in the courts when it seeks to enforce the debtor’s contractual rights against third parties. The case concerned the tension between the court’s supervisory power over all proceedings brought by a receiver/trustee under the Bankruptcy and Insolvency Act (BIA) RSC 1985, c. B-3, and party autonomy to contract out of the courts. Section 15 of the British Columbia (former) Arbitration Act, RSBC 1996 c. 55 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”. The Supreme Court of Canada dismissed the stay application of the defendant sued by the receiver/trustee, but split 5-4 on the reasons. The majority found that the arbitration clauses at issue were “inoperative” because enforcing them would compromise the orderly and efficient resolution of the receivership. This authority arises from the statutory jurisdiction conferred on provincial superior courts under ss. 243(1) and 183(1) of the BIA. It found that this interpretation of the stay provision ensures that provincial arbitration legislation and federal bankruptcy legislation are not in conflict. The minority found that the specific language of the “template” Receivership Order authorized the Receiver/Trustee to disclaim the arbitration agreements, rendering them inoperative.

However, the Court also addressed other significant issues:

  • whether the Court should determine the jurisdiction issue or refer it to arbitration under the principle of competence- competence (paras. 37-43);
  • the shifting burden of a proof on a motion for a stay of court proceedings on the basis that the parties agreed to arbitrate (paras. 76-90);
  • what constitutes “taking a step in the proceedings” that would disqualify a defendant from obtaining a stay of court proceedings (paras. 96-99);
  • whether a receiver/trustee is a “party” to an arbitration agreement signed by the debtor (paras. 100-118); 
  • whether a receiver/trustee can disclaim an arbitration clause and sue on the main agreement (paras. 123 and 197); and
  • when does the doctrine of separability between the arbitration clause and the main contract apply (paras. 119-125; 167-168; and 194)?

The latter issue, which involves a fundamental doctrine in arbitration law, was profiled in an earlier Case Note:  Peace River v Petrowest Part 1: Separability Clarified? – #682.

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 BIA. On April 3, 2018, the Receiver assigned the Petrowest affiliates (but not Petrowest) into bankruptcy and became the Trustee in Bankruptcy. 

The dispute – 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 on the basis that the relevant contracts between the parties contained arbitration clauses. Petrowest opposed the application on the ground that the BIA authorized the court to assert centralized judicial control over the matters under the “single proceeding model”, rather than sending the Receiver/Trustee to multiple arbitral forums. All three levels of court dismissed Peace River’s stay motion, but for different reasons. The Supreme Court of Canada summarized the proceedings below at paras. 19-31. The Court was unanimous in the result, but split 5-4 on the reasons.

The majority decision of Côté J. (Wagner CJ and Moldaver, Rowe, and Kasirer JJ. concurring) – The majority emphasized that the facts in this case were unique in that they pitted the public policy objectives underlying the BIA against freedom of contract and party autonomy, which justified a departure from the legislative and judicial preference for holding parties to their arbitration agreements.

Central to Justice Côté’s decision was s. 15 of the 1996 B.C Arbitration Act, which provided 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 for a stay before taking a step in the proceedings, which must be granted unless the court determines that the arbitration agreement is “void, inoperative or incapable of being performed”. A court may find an arbitration agreement “inoperative” under s. 15(2) because of a receivership without creating a conflict between the Arbitration Act and the BIA which would have to be resolved through the doctrine of federal paramountcy. There is a tension between arbitration law, which favours party autonomy and allows parties to contract for a private tribunal to resolve their disputes, and insolvency law, which provides a single forum for the orderly resolution of the competing rights and objectives of individual stakeholders of insolvent businesses. However, arbitration law and insolvency law also have much in common:  efficiency and expediency; procedural flexibility; and decision-makers with specialized expertise. A court may take control of a court-ordered receivership and an arbitration agreement may be inoperative if enforcing it would compromise the orderly and efficient resolution of the receivership. The court’s authority arises from ss. 243(1) and 183(1) of the BIA, which confer broad statutory jurisdiction on superior courts in bankruptcy and insolvency matters to ensure an orderly and efficient distribution of an insolvent debtor’s assets to creditors. 

Whether this new principle applies in any case is a very fact-specific analysis, which is why Justice Côté suggested (at paras. 124 and 125) that a receiver/trustee seek directions from the court before bringing an action. In considering whether an arbitration agreement is inoperative in this context, the court may consider the following non-exhaustive list of factors:  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. Applying these factors to this case, Justice Côté found that enforcing the arbitration agreements would compromise the orderly and efficient resolution of the receivership proceedings because it would result in at least four different arbitrations involving seven different sets of counterparties, which the parties would not likely agree to consolidate and which would compromise the integrity of the receivership proceedings. Further, there was some urgency because there could be no distribution to Petrowest’s creditors until all disputes were resolved.

The other key issues addressed by Justice Côté were as follows.

First, the Court was entitled to resolve the question of arbitral jurisdiction, rather than referring it to the arbitrator without offending the competence-competence principle. See Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34, at para. 70. The appeal involved questions of mixed fact and law, but all that was required was the interpretation of arbitration and insolvency legislation and a superficial consideration of the evidentiary record.

Second, the framework in the statutory stay provision requires the party seeking a stay to show an “arguable case” or establish a “prima facie basis” that the arbitration agreement at issue has engaged the mandatory stay provision in the applicable provincial arbitration statute. Then, the party opposing the stay must show that one or more of the statutory exceptions apply – in this case, that the arbitration agreement was “void, inoperative, or incapable of being performed”.

Third, looking at the technical requirements of s. 15, the statutory stay provision at issue, Justice Côté found that by undertaking to file a defence, Peace River did not take a “step in the proceeding” which would disqualify it from seeing a stay under s. 15, because that did not constitute an election to proceed with the action. 

Fourth, a receiver/trustee can be considered a “party” to a pre-existing arbitration agreement and may be bound to its terms through the ordinary operation of contract law. Both a receiver and a trustee in bankruptcy advance claims through the debtor and “step into the shoes of” the debtor. They have no independent cause of action and must take all the benefits and burdens of the contract. 

Justice Côté rejected the Receiver/Trustee’s argument that the definition of “party” in s. 2(1) of the B.C. International Commercial Arbitration Act, R.S.B.C. 1996, c. 233 (“ICAA”), which includes “a person claiming through or under a party” to an arbitration agreement necessarily requires a narrower interpretation of the word “party” in the domestic legislation, which removed this language and did not define the word. Justice Côté looked and the common law and applied a principle of statutory interpretation, which required her to read the Arbitration Act and the ICCA harmoniously, particularly because they relate to the same subject matter. Finally, interpreting the Arbitration Act to include a receiver/trustee as a “party” was consistent with the central purpose of the Arbitration Act and the fundamental principles of party autonomy, limited court intervention, and competence-competence. Otherwise, it would prevent arbitration whenever a contracting party entered receivership. In this case, it was at least “arguable” that the Receiver/Trustee was a party.

Sixth, a receiver/trustee could not unilaterally disclaim an arbitration agreement to render it “null, void, or incapable of being performed”.

The minority decision of Jamal J. (Karakatsanis, Brown, and Martin JJ. concurring) – Justice Jamal agreed that the application for a stay of proceedings should be dismissed because the arbitration agreements were inoperative.

However, he disagreed on the reasons for that finding. He found that the legal effect of the Receiver/Trustee suing in court was to disclaim reliance upon the arbitration clauses – which was expressly authorized by the language in the Receivership Order in this case. Justice Jamel found support for this in his interpretation of the language in the “template” Receivership Order itself (at para. 192).

Justice Jamal stated that, to the extent that the Receivership Order did not authorize the Receiver to sue in court, he agreed with Justice Côté’s reasons.

The unanimous Court dismissed Peace River’s appeal.

Editor’s Notes:

There is much to digest in this decision.

First, it has the potential for direct application throughout Canada in the international arbitration context, since all provinces have adopted the Model Law (although not all have adopted the 2006 amendments), which contains the same stay exception language as in the former B.C. Arbitration Act. At para. 109, Justice Côté acknowledged Canada’s international obligations – she referred to the importance of the “presumptive enforceability and overall predictability of arbitration agreements, which was the purpose for Canada ratifying the New York Convention and for British Columbia adopting the Model Law”. And yet, what if the stay application had been brought under the Model Law or New York Convention, rather than s. 15 of the 1996 B.C. domestic Arbitration Act? There are different policy and legislative factors at play. It is unclear how Canada’s international obligations would affect the analysis, specifically, whether Canada’s obligations under international arbitration law would give way to Canada’s federal bankruptcy regime, or what the outcome would have been if the bankruptcy proceedings had been foreign. Myriam Seers has mused about some of these implications in her Case Note for Arbitration Matters on the Royal Bank of Canada v Mundo Media Ltd., 2022 ONSC 217 case: Ontario – Receiver not bound by international arbitration clause with foreign seat – #626

Second, in the domestic arbitration context, the language from the former B.C. Arbitration Act has been carried into the current B.C. Arbitration Act, SBC 2020, c. 2. But it is not clear what application Petrowest will have in other provinces, whose domestic legislation provides for an exception to the mandatory stay where the arbitration clause is “invalid” or “null”. 

Third, in the domestic context, Justice Côté’s recognition of the similarities between the objectives of arbitration and bankruptcy/insolvency proceedings is important to arbitration practice. She has managed to achieve a balance that does not create a conflict that would have to be resolved by the principle of paramountcy. In doing so, she has preserved the fundamental arbitration principle of party autonomy by carving out a limited exception based upon policy considerations. It remains to be seen how easy it will be for lower courts to apply this exception, given that it is factually driven and that the Petrowest case was, according to Justice Côté, “unique”.

Fourth, this decision will affect bankruptcy and insolvency practice, including proceedings under the Companies’ Creditors Arrangement Act, RSC 1985, c. C-36. (See para. 63 of decision.) There are likely to be changes to the language of standard term receivership orders to adopt the reasoning of the minority decision and explicitly empower (or not) a receiver/trustee to disclaim an arbitration agreement and thereby make it inoperative. Also, as suggested by Justice Côté (at paras. 14 to 124) there will be motions for directions on whether, in each case, a receiver/trustee is bound by an arbitration clause in the debtor’s contract.

Finally, it is useful to review paras. 131-145 of the majority decision, which sets out in what circumstances, generally, an arbitration agreement may be found to be “void, inoperative, or incapable of being performed”.