Canadian Supreme Court provides clarification on arbitration clauses in insolvency

Canadian Supreme Court provides clarification on arbitration clauses in insolvency

The Supreme Court of Canada (the SCC) recently provided guidance on when an arbitration agreement that is otherwise legitimate may be ruled to be inoperative in the context of a court-ordered receivership under the Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3. The case in question was Peace River Hydro Partners v. Petrowest Corp., 2022 SCC 41 (Peace River) (the BIA).

BACKGROUND

When building a hydroelectric project in northeastern British Columbia, Peace River Hydro Partners (Peace River) subcontracted certain work to Petrowest Corporation (Petrowest) and its affiliates. This led to the Peace River lawsuit. Several provisions in the agreements between the parties required arbitration of any issues that may arise between them (the Arbitration Agreements).

Thereafter, Petrowest became insolvent and in accordance with the BIA, a receiver (the Receiver) was appointed to manage Petrowest's affairs. The Receiver commenced Civil action with respect to money allegedly owed to Petrowest by Peace River in the Supreme Court of British Columbia (the Court Action). On the grounds that the Arbitration Agreements regulated the dispute and that it should thus be arbitrated, Peace River filed a request to stop the Court Action.

British Columbia's domestic arbitration legislation (the Arbitration Act) and equivalent arbitration legislation throughout Canada permits the party seeking to enforce the arbitration clause to petition to stay the court process in favor of arbitration where one party to an arbitration agreement initiates legal proceedings against another party to the agreement in court regarding matters governed by the arbitration agreement. The Arbitration Act requires a stay of the legal action in this situation unless the arbitration agreement is "invalid, ineffective, or incapable of being performed".

A RECEIVERSHIP CONTEXT AND THE APPLICATION OF THE ARBITRATION ACT

The Supreme Court ruled that the Court Action should move forward since the Arbitration Agreements were rendered null and void by the specific circumstances present in Peace River. The SCC reached this decision after finding that a court need not suspend a civil claim brought by a court-appointed receiver simply because the claim is covered by a valid arbitration agreement, as required by the Arbitration Act.

In light of concurrent bankruptcy proceedings, the SCC noted, the BIA grants the court extensive jurisdiction to declare that an arbitration agreement is "inoperative." In the bankruptcy context, where a centralized judicial process is required and the party seeking to avoid the arbitration can prove that submitting the issue to arbitration will jeopardize the orderly and efficient execution of a court-ordered receivership, a court may deem an arbitration agreement to be inoperative.

The Supreme Court issued a cautionary statement that courts should use caution when deciding whether to grant a stay of a court process in favor of arbitration. The court should nonetheless give weight to the parties' agreement to arbitrate and take a lenient stance in accordance with the goals of the Arbitration Act, even if one of the parties is bankrupt. In most cases, these goals can be achieved by strictly enforcing arbitration agreements and minimizing the scope of the word "inoperative" in such agreements.

The following elements may be taken into consideration when determining whether an arbitration agreement is ineffective:

• how arbitration affects the insolvency processes' integrity, which are meant to limit economic prejudice to creditors;

• the relative prejudice to the arbitration agreement's signatories and interested parties of the debtor;

• the pressing need to resolve the conflict;

• the results of any stay of proceedings brought by bankruptcy or insolvency proceedings, if any; and

• any additional elements the court deems relevant under the circumstances.

The Supreme Court recognized the widespread consensus that arbitration and insolvency law have long been understood as embodying opposing interests. When it comes to insolvency procedures, the "single proceeding model" favors a centralized judicial process for the enforcement of stakeholder rights, whereas arbitrations are a decentralized process with little court interference. The Supreme Court, however, pointed out that there are certain parallels between arbitration and insolvency procedures. These include the fact that both areas of law value speed and efficiency, provide some leeway in terms of procedure, and frequently rely on the expertise of trained decision-makers to reach a conclusion.

The SCC determined that, given the particulars of the Peace River case, the several overlapping arbitral proceedings anticipated under the Arbitration Agreements would make it difficult for the Receiver to get the greatest amount of compensation for Petrowest's creditors. As a result, it was determined that the Arbitration Agreements were invalid under the Arbitration Act due to concerns over efficiency and swiftness.

KEY LESSONS

The SCC's ruling in Peace River is a compelling argument for the considerable latitude given to courts in bankruptcy proceedings to take actions deemed essential to achieve the goals of the insolvency legislation, which favor a "single control" model where disputes can be addressed quickly and value for creditors may be maximized. The arbitration laws varies across provinces. If a court-appointed receiver (or other insolvency professional) wants to avoid the enforcement of arbitration agreements, they should get guidance that takes into account the particulars of their case and applicable arbitration laws.

The SCC further emphasized that before initiating court proceedings in connection with a dispute pursuant to an arbitration agreement covered by the Arbitration Act, court-appointed receivers should consider seeking directions in the supervising court. On the other hand, if a receiver commences court actions without first obtaining judicial consent, the court must decide whether to exercise its legislative jurisdiction under the BIA to refuse to enforce the arbitration agreement under the Arbitration Act.