In Peace River Hydro Partners v. Petrowest Corp., the Supreme Court of Canada (SCC) refused to stay a receiver’s civil lawsuit in favour of multiple arbitration proceedings, finding the arbitration agreements were made inoperative by court order to facilitate an orderly and single insolvency process.
This case helps resolve a tension between the expedience of a single insolvency process and the presumptive enforceability of arbitration agreements.
Peace River subcontracted various Petrowest entities to work on a construction project. The Petrowest entities subsequently fell into receivership and bankruptcy. Their court-appointed receiver/trustee commenced a civil action against Peace River to collect money allegedly owed under various subcontracts containing arbitration clauses. Peace River applied to the court for a stay pursuant to s. 15 of British Columbia’s domestic Arbitration Act (“AA“). This section requires a court to stay a legal action in favour of arbitration unless the arbitration agreement is void, inoperative, or incapable of being performed.
The chambers judge and the British Columbia Court of Appeal denied the stay, but for different reasons. The SCC unanimously dismissed the appeal.
Justice Côté, writing for the majority, held that the arbitration agreement was inoperative.
Justice Côté held that the court could resolve this issue without offending the principle of competence-competence, which establishes that a “challenge to an arbitrator’s jurisdiction should generally be decided at first instance by the arbitrator.” This case represented an exception to the rule because the court could decide the issue by interpreting legislation with minimal consideration of evidence.
Justice Côté set out a two-part framework to determine whether to grant the stay in favour of arbitration.
First, the party seeking the stay has the burden to establish, on a low “arguable case” standard, the four technical prerequisites for a mandatory stay of court proceedings:
- an arbitration agreement exists;
- court proceedings have been commenced by a “party” to the arbitration agreement;
- the court proceedings are in respect of a matter that the parties agreed to submit to arbitration; and
- the party applying for a stay in favour of arbitration does so before taking any “step” in the court proceedings.
Second, the party resisting the stay has the burden to establish, on a balance of probabilities, that the arbitration agreement is “void, inoperative, or impossible of being performed.” Relevant factors include:
- the effect of arbitration 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;
- the applicability of a stay of proceedings under bankruptcy or insolvency law; and
- any other factor the court considers material in the circumstances.
The first part was met. The parties agreed that (1) and (3) existed. Regarding (2), the majority held that a court-appointed receiver can be a party to an arbitration agreement. Regarding (4), the majority held that no step in the proceeding was taken. Undertaking to file a defence was not a step in the proceeding.
The second part was also met. The majority found that the agreement was inoperative. A single insolvency process was more expedient than multiple arbitral proceedings which the Court deemed “chaotic.” The parties would suffer no prejudice from foregoing arbitration. Importantly, the majority rejected the Court of Appeal’s reasoning that the receiver was at liberty to unilaterally disclaim the arbitration agreement. Only a court can determine whether an arbitration agreement is void, inoperative, or impossible of being performed.
Justice Jamal, writing a short concurring opinion on behalf of four justices, agreed that the arbitration agreements were inoperative. However, they held that the receiver was at liberty to disclaim and render inoperative the arbitration agreement, while suing to collect debts under the underlying contracts, because the receiver was so authorized by the receivership order. They agreed with the majority that a receiver cannot unilaterally “revoke” a valid arbitration agreement. Rather, a receiver can implicitly disclaim an arbitration agreement by starting a court action pursuant to a receivership order.
- Generally, arbitration agreements will be enforced in the face of insolvency. However, a stay in favour of arbitration will be refused if enforcing the clause prevents an orderly and efficient resolution of the receivership.
- Justice Côté highlighted the shared interest between insolvency and arbitration law in efficiency and expediency, procedural flexibility, and decision makers with specialized expertise.
Disclosure: Baker McKenzie LLP acted as an intervener for the Chartered Institute of Arbitrators (Canada) Inc. during the Supreme Court of Canada hearings, whose submissions were specifically endorsed and accepted by the majority.