On June 10, 2021, the Supreme Court of Canada granted leave to appeal a decision with implications for the enforceability of alternative dispute resolution clauses in insolvency proceedings in Canada.
In Petrowest Corp. v. Peace River Hydro Partners, a receiver was appointed over Petrowest under Canada’s federal Bankruptcy and Insolvency Act (“BIA”). In this case, the receiver later assigned the company into bankruptcy and was also acting as its bankruptcy trustee. The receiver/trustee commenced an action to recover payments owed to Petrowest from various defendants. The amounts owing to Petrowest were governed by several different contracts, each of which contained an arbitration agreement. The receiver/trustee brought an action to allow recovery of the payments via a single judicial process, rather than through the various arbitration processes stipulated in the contracts.
The defendants applied for a stay of proceedings based on British Columbia’s Arbitration Act. The Arbitration Act (and its more recent legislative replacement) allows a party to apply to a court to stay a court proceeding when the dispute was governed by an arbitration agreement. The receiver/trustee opposed the stay, arguing that the court should exercise its jurisdiction and discretion to stay the proceedings.
The BC Supreme Court Decision
The lower court sided with the receiver/trustee finding that a multiplicity of proceedings was inappropriate. A significant amount of money was at stake, multiple arbitral proceedings would be costly, and it was not possible to complete the administration of the insolvency until the disputes were resolved. The lower court found that the receiver/trustee was bound by the arbitration agreements but multiple arbitrations would frustrate the purposes of the BIA and therefore refused to grant the stay sought by the defendants to force the receiver/trustee to arbitrate the disputes.
The BC Court of Appeal Decision
The lower court decision was then appealed to the British Columbia Court of Appeal which reached the same result, though for different reasons, deciding that the receiver/trustee had, in effect, disclaimed the arbitration agreement and therefore the arbitration clause became void, inoperative or incapable of being performed. The Court of Appeal held that it was permissible for a receiver/trustee to enforce an insolvent debtor’s contracts, while also disclaiming the arbitration agreements within those contracts. In Canadian law, the doctrine of separability treats arbitration agreements as separate from the contracts that contain them. The Court of Appeal relied on non-insolvency law to support this point, including the Supreme Court of Canada’s decision in Uber Technologies Inc. v Heller, where Canada’s top court said that arbitration clauses are “judicially independent” from the main contract.
Impact of the Decision
The reasoning of the Court of Appeal was that the receiver had disclaimed the arbitration agreement, and therefore was not a party to it. Under the Arbitration Act, the first requirement to stay a proceeding is that the party bringing that proceeding must be a party to the arbitration agreement. Since the receiver/trustee was free to disclaim the arbitration agreements, the defendants were unable to meet the requirements for a stay of proceedings in favour of arbitration. As a result, the receiver/trustee’s court action was allowed to proceed, regardless of the arbitration clauses that were included in the contracts it sought to enforce.
The Court of Appeal decision has potentially wide reaching consequences for the enforceability of alternative dispute resolution clauses in Canadian insolvency proceedings. So perhaps it was of no surprise that this case will be going to the Supreme Court of Canada. The insolvency regime favours fast and cost-effective dispute resolution which, in theory, should not conflict with the principles of arbitration. However, for the lower court in Petrowest, the fact that the receiver/trustee might be forced into four separate arbitrations which had the potential to frustrate expeditious resolution was an important factor. The judge made this observation:
The defendants correctly note that the parties could agree to streamline the arbitration process; however, there is no evidence that there is any realistic likelihood of that occurring…
[T]he significant cost and delay inherent in the multiple proceedings that would occur in this case as compared to judicial determination is unfair to the creditors and contrary to the objects of the BIA…
The Supreme Court in Uber Technologies Inc. v Heller in a very different type of case involving a mandatory arbitration clause in standard form contract between driver and multinational corporation noted that “Respect for arbitration is based on its being a cost-effective and efficient method of resolving disputes. When arbitration is realistically unattainable, it amounts to no dispute resolution mechanism at all.“
It will be interesting to see whether Canada’s top court addresses the tension identified in the lower court decision that in its view arbitration in the circumstances had the potential to result in a less expeditious and cost-effective resolution and therefore was contrary to the principles of Canada’s insolvency regime. We also expect that the Supreme Court will clarify the applicability of the arbitration doctrine of separability. The outcome of this case will be closely watched by both insolvency and arbitration practitioners.