The Supreme Court of Canada, in its recent decision on Peace River Hydro Partners v. Petrowest Corp., 2022 SCC 41 clarifies whether and in what circumstances a contractual agreement to arbitrate governed by the Arbitration Act, R.S.B.C. 1996, c.55, should give way to the public interest in the orderly and efficient resolution of a court-ordered receivership under s. 243 of the Bankruptcy and Insolvency Act, R.C.S. 1985, c. B-3. A court may decline to grant a stay where the party seeking to avoid arbitration establishes that the arbitration agreement at issue is “void, inoperative or incapable of being performed” within the meaning of s. 15(2)” (See para. 34 of the Decision). In the context of bankruptcy and insolvency law, an arbitration agreement may be inoperative if enforcing it would compromise the orderly and efficient resolution of the receivership. It is worth to note that the Supreme Court of Canada reminds us that the exercise required to determine if a stay of proceedings should be granted in favour of arbitration is highly factual.
Appellant Peace River was formed to build a hydroelectric dam in northeastern British Columbia. Appellant Peace River subcontracted work to Respondent Petrowest, an Alberta-based construction company, and its affiliates. The Partnership Agreements contain the Arbitration Agreements (See the “Appendix” of the Decision) in which the parties agree to refer disputes arising from their relationship to arbitration. When Respondent Petrowest encountered financial difficulties, the Alberta Court Queen’s Bench granted an order (“Receivership Order”), according to s. 243(1) BIA, appointing a Receiver to manage the assets and property of Petrowest and its affiliates. The Receiver then brought a civil claim against Appellant Peace River seeking to collect funds allegedly owed to Respondent Petrowest and its affiliates for subcontracted work. Appellant Peace River applied under s.15 of the Arbitration Act for a stay of proceeding on the ground that the Arbitration Agreements of the parties governed the dispute. The chambers judge dismissed the stay application and the Court of Appeal dismissed Appellant Peace River’s Appeal. The Supreme Court of Canada dismissed Appellant Peace River’s Appeal in November 2022.
Main Issue to Analyse
Why does the Supreme Court of Canada hold that the Arbitration Agreements at issue are inoperative?
The Supreme Court dismisses the appeal and affirms the dismissal of the stay application by the courts below. The Arbitration Agreement are considered inoperative in the present case. This conclusion flows from the two-part framework, which is mandated by s.15 of the Arbitration Act: (a) the technical prerequisites for a mandatory stay of court proceedings; and (b) the statutory exceptions to a mandatory stay of court proceedings (See paras. 76 to 83 of the Decision). The Supreme Court finds that the Appellant Peace River discharges its burden to prove that all the technical prerequisites are met. However, the Supreme Court notes that the court proceedings are not automatically stayed in favour of arbitration where those technical prerequisites are satisfied. Rather, the court is required to move to the second component to assess if Respondent Petrowest manages to prove that one of the statutory exceptions applies, such that a stay should be refused.
S. 15 (2) of the Arbitration Act stipulates that the court must make an order staying the legal proceedings unless it determines that the arbitration agreement is “void, inoperative or incapable of being performed”.
Define “Void, inoperative or incapable of being performed”
An arbitration agreement will be considered void only in the rare circumstances where it is “intrinsically defective”. An arbitration agreement is void when it is undermined by fraud, undue influence, unconscionability, duress, mistake, or misrepresentation (See para. 136 of the Decision).
An arbitration agreement will be considered inoperative when it has ceased for some reason to have future effect or has become inapplicable to the parties and their dispute (See para. 138 of the Decision). For example, an arbitration agreement would become inoperative due to frustration, discharge by breach, waiver or a subsequent agreement between the parties. The application of this exception where the debtor/defendant in litigation that has been commenced is subject to bankruptcy or insolvency protection is straightforward. For example, the making of a winding-up order or a receivership order may be grounds for a court to find an arbitration agreement inoperative (See Casey, J. Brian, Arbitration Law of Canada: Practice and Procedure, 3rd ed. Huntington, N.Y.: Juris, 2017 at ch. 7.18.2). In this context, an agreement to arbitrate may cease, in most circumstances, to have effect for the future and may not be relied upon. The court is required to assess, in light of all the circumstances, whether to refer the matter to arbitration or to maintain centralized judicial oversight (See Canada (Attorney General) v. Reliance Insurance Company, 2007 CanLII 41899 (ON SC)).
An arbitration agreement is considered “incapable of being performed” where the “the arbitral process cannot effectively be set in motion” because of a physical or legal impediment beyond the parties’ control (See para. 144 of the Decision). Physical impediments may include the following: (a) inconsistencies, inherent contradictions, or vagueness in the arbitration agreement that cannot be remedied by interpretation or other contractual techniques; (b) the non-availability of the arbitrator specified in the agreement; (c) the dissolution or non-existence of the chosen arbitration institution; or (d) political or other circumstances at the seat of arbitration rendering arbitration impossible. An example for legal impediment can be found in Seidel v. TELUS Communications Inc., 2011 SCC 15: an arbitration agreement may be incapable of being performed because the subject matter of the dispute is covered by an express legislative override of the parties’ right to arbitrate.
The BIA Provides Statutory Jurisdiction to Find an Arbitration Agreement Inoperative
S. 243 (1)(c) of the BIA provides that a court may appoint a receiver to, among other things, “take any…action that the court considers advisable”, if the court considers it ”just or convenient to do so”. Thus, s. 243 (1) of the BIA provides a court to do not only what “justice dictates” but also what “practicality demands” (See para. 148 of the Decision & Para. 57 Third Eye Capital Corporation v. Ressources Dianor Inc./Dianor Resources Inc., 2019 ONCA 508). In the court’s view, practicality demands that a court have the discretion, in limited circumstances, to decline to enforce an arbitration agreement following a commercial insolvency.
Thus, a court may find an arbitration agreement inoperative within the meaning of s. 15(2) of the Arbitration Act where enforcing it would compromise the orderly and efficient resolution of insolvency proceedings, including a court-ordered receivership under s. 243 of the BIA.
Non-exhaustive Factors in Determining if an Arbitration Agreement is Inoperative
In this Decision, the Supreme Court then provides the following non-exhaustive list of factors in determining whether a particular arbitration agreement is inoperative in the context of insolvency proceeding:
a. The effect of arbitration on the integrity of the insolvency proceedings. Party autonomy and freedom of contract must be balanced with the need for an orderly and equitable distribution of the debtor’s assets to creditors. An arbitration agreement may therefore be inoperative if it would lead to an arbitral process that would compromise the objective of the insolvency proceedings, namely the orderly and expeditious administration of the debtor’s property. The court should have regard to the role and expertise of the court‑appointed creditor representative, if any, in managing the insolvency proceedings.
b. The relative prejudice to the parties from the referral of the dispute to arbitration. The court should override the parties’ agreement to arbitrate their dispute only where the benefit of doing so outweighs the prejudice to them.
c. The urgency of resolving the dispute. The court should generally prefer the more expeditious procedure. If the effect of a stay in favour of arbitration would be to postpone the resolution of the dispute and hinder the insolvency proceedings, this militates in favour of a finding of inoperability.
d. The applicability of a stay of proceedings under bankruptcy or insolvency law. Bankruptcy or insolvency legislation may impose a stay that precludes any proceedings, including arbitral proceedings, against the debtor. If such a stay applies, the debtor cannot rely on an arbitration agreement to avoid the bankruptcy or insolvency; the agreement becomes inoperative.
e. Any other factor the court considers material in the circumstances.
The Supreme Court also states that each of the above mentioned factors may carry more or less weight depending on the circumstances of the case. The party seeking to avoid arbitration bears the burden of proof to establish a clear case of inoperability or incapacity to perform the impugned arbitration agreement. To discharge this onus, the party must prove on a balance of probabilities that one or more of the statutory exceptions set out in s. 15(2) of the Arbitration Act apply. Otherwise, the court must grant a stay in favour of arbitration.
In the present case, the Respondent Petrowest has established that the Arbitration Agreements are inoperative as the referral to arbitration in the unique circumstances of this the present case would jeopardize the Receiver’s ability to maximize the recovery for the creditors and to allow Petrowest and its affiliates to move forward with certainty. The Receiver’s affidavit evidence outlines the chaotic arbitral processes that would result if this Court were to grant a stay under s. 15 of the Arbitration Act. First, the Receiver would need to participate in and fund at least four different arbitrations involving “seven different sets of counterparties”. The funding for these proceedings would necessarily come from the estates of Petrowest and its affiliates, to the detriment of their creditors. Second, some of the respondents’ claims involve entities not subject to any of the Arbitration Agreements. Those claims may have to be determined by a court, in parallel with the arbitral proceedings described above. Thirdly, due to the protracted arbitral proceedings, facts and argument would be repeated in different forums, before different decision makers, creating piecemeal decisions and a serious risk of conflicting outcomes (See paras. 27 & 175 of the Decision).
In light of the foregoing, although the prerequisites for a mandatory stay in s. 15(1) Arbitration Act is met, enforcing the Arbitration Agreements would compromise the orderly and efficient resolution of the receivership, contrary to the purposes of the BIA. Accordingly, the Supreme Court finds that the Arbitration Agreements are inoperative within the meaning of section 15(2) Arbitration Act. The Supreme Court dismisses the appeal and affirms the dismissal of the stay application by the courts below.
- This post summarizes part of the reasoning written by the Supreme Court of Canada justice, the Honourable Suzanne Côté. It is worth to spend more time to read her complete reasoning. Furthermore, it is worth to note that the Supreme Court justice, the Honourable Mahmud Jamal drafted a concurring reasoning, which can be found in paras. 190 to 199 of the Decision.
- To save the legal costs and legal fees for the parties who are already in financial difficulties, it is highly recommended that the court-appointed receivers should seek a judicial determination by bringing a motion for directions in the supervising court before they initiate any court proceedings without prior judicial approval.
- Arbitration law and insolvency law have long been understood to embody “opposing interests”. While the bankruptcy policy exerts an inexorable pull towards centralization, the arbitration policy advocates a decentralized approach towards dispute resolution. However, the Supreme Court reminds us that there are some commonalities between arbitration law and insolvency law: efficiency and expediency, procedural flexibility, decision makers with specialized expertise. In any cases, the shared interests will converge through arbitral proceedings. However, in certain insolvency matters, it may be necessary to preclude arbitration in favour of a centralized judicial process.
(Reminder: The purpose of this article is to provide general legal information. It does not contain a full analysis of the law nor does it constitute a legal advice on the points of law discussed. To minimize the legal risk for your business, you must take specific legal advice from a lawyer on any particular matter which concerns you. Thanks for your attention.)