Court-appointed receiver in insolvency proceedings can sue party despite arbitration agreements: SCC

The Supreme Court of Canada confirmed today that a court-appointed receiver in an insolvency proceeding can take a party to court despite the presence of an arbitration agreement between that party and the insolvent company.

In Peace River Hydro Partners v. Petrowest Corp., 2022 SCC 41, the court dealt with the tension over what is the appropriate forum when arbitration and insolvency law intersect.

While the decision created certainty in one respect, it also produced uncertainty in another, says David de Groot, who represented Peace River Hydro Partners.

The court affirmed that arbitration agreements apply to non-signatories by operation of law, and that the statutory exceptions to their enforcement are narrow, which "generally reinforces commercial certainty," he says. But in the context of a receivership, the decision creates a discretion for the court's enforcement of arbitration agreements, which "introduces uncertainty for contracting parties' ability to enforce arbitration as their preferred method to resolve disputes against insolvent entities."

"The adoption of its new test will result in applications, likely before supervising insolvency court, by receivers seeking pre-approval to advance contractual claims subject to arbitration clauses through litigation," says de Groot, a partner at Burnet Duckworth & Palmer LLP.

“The SCC has upheld the critical importance of arbitration law in Canada,” says Laurent Debrun, a civil and commercial litigator with Spiegel Sohmer in Montreal, who acted for the intervenor, Canadian Commercial Arbitration Centre. “It has, however, carved out an exception for insolvency proceedings, recognizing to the competent court the power to refuse to refer parties to arbitration if the court finds that the arbitration agreement is inoperative in an insolvency context.”

“This will give rise to challenges and will require the court (not the arbitrator) to engage in a potentially heavy fact driven analysis of the circumstances surrounding the arbitration process in order to determine what best serves the interest of a single forum to managed insolvency proceedings.”

Contrary to the finding of the B.C. Court of Appeal, the SCC found the doctrine of separability had no application to the case, says Kelsey Meyer, a partner at Bennett Jones LLP, who acted for Petrowest.

"Separability does not apply absent a challenge to the validity of the main contract or of the arbitration agreement itself, and that was not an issue in this case," she says. "The majority held that separability is intended to safeguard arbitration agreements, not imperil them."

Section 15(1) of B.C.’s Arbitration Act states that a party to an arbitration agreement can ask the court to stay a court action brought by the other party. And under s. 15(2), the court must grant that stay unless the arbitration agreement is “void, inoperative, or incapable of being performed.”

The court was unanimous in dismissing the appeal but split 5-4 in how it arrived at that result. The two sides agreed the arbitration agreements were inoperative but disagreed about the primary basis on which they found them to be.

Justice Suzanne Côté wrote the majority reasons and found that the “chaotic nature” of the arbitration agreements in Peace River Hydro Partners  would have compromised the receivership’s “orderly and efficient resolution,” counter to the interests of creditors and contrary to the purpose of the Bankruptcy and Insolvency Act.

Section 15(2) of the Arbitration Act should be interpreted narrowly, so parties cannot sidestep arbitration just because they believe another procedure would be preferable, said Justice Côté.

Under ss. 183(1) and 243(1)(c) of the Bankruptcy and Insolvency Act, there is statutory jurisdiction for a court to find an arbitration agreement inoperative, she said. The “very expansive wording” in s. 243(1)(c), which allows a court to appoint a receiver to “take any action that the court considers advisable,” has been interpreted as providing judges “the broadest possible mandate in insolvency proceedings to enable them to react to any circumstances that may arise in relation to court-ordered receiverships.”

Practicality demands that a court be able to decline to enforce an arbitration agreement following a commercial insolvency, said Justice Côté.

She listed five factors relevant in the determination of whether an arbitration agreement is inoperative, and noted the weight of each factor will depend on the circumstances of the case:

• The effect of arbitration on the integrity of the insolvency proceedings,
• The relative prejudice to the parties to the arbitration agreement and the debtor’s stakeholders,
• The urgency of resolving the dispute
• The effect of a stay of proceedings arising from the bankruptcy or insolvency proceedings,
• And any other factors the court considers material in the circumstances.

In Peace River Hydro, the arbitration agreements contemplated multiple arbitral processes, and such a convoluted ordeal would not allow for “orderly and efficient resolution of the receivership,” said Justice Côté.

“While recognizing the importance of party autonomy and freedom of contract, referral to arbitration in the unique circumstances of the instant case would jeopardize the Receiver’s ability to maximize recovery for the creditors and to allow Petrowest and its affiliates to move forward with certainty.”

Justice Côté spoke also for Justices Richard Wagner, Michael Moldaver, Malcolm, Rowe and Nicholas Kasirer.

For Justices Andromache Karakatsanis, Russell Brown, Sheilah Martin, and Mahmud Jamal, the analysis should have begun with the terms of the receivership order. Their view was that the arbitration agreements were rendered inoperative when the receiver disclaimed them by suing in court.

The terms of the receivership order authorized the receiver to “cease to perform any contracts of Petrowest,” and as a contractual right, the arbitration agreements could be disclaimed pursuant to the receivership order, said Justice Jamal. The receivership order’s terms authorized the receiver to sue, either in court, or before an arbitrator, “based on what will best promote the orderly and efficient resolution of the receivership under the [Bankruptcy and Insolvency Act].” The receiver’s move to sue in court, and not before an arbitrator, had the legal effect of disclaiming reliance on the arbitration agreements, he said.

Peace River Hydro Partners formed to build a hydroelectric dam in B.C., and subcontracted work to the Alberta construction company, Petrowest Corp. Their business relationship included several clauses providing for the arbitration of any disputes.

But Petrowest fell on hard times and the Alberta Court of Queen’s Bench granted a receivership order under s. 243(1) of the Bankruptcy and Insolvency Act. The receiver brought a civil claim against Peace River seeking funds it allegedly owed for subcontracted work.

Peace River applied under s. 15 of B.C.’s Arbitration Act to stay the proceedings, arguing that the arbitration agreements governed the dispute. But the chambers judge dismissed the application, and that ruling was upheld at the Court of Appeal.

*More to come