SCC holds that arbitration agreements may be inoperable if risk to receivership proceedings is posed

On November 10, in the newly released decision Peace River Hydro Partners v. Petrowest Corp., 2022 SCC 41, the Supreme Court of Canada upheld decisions of the British Columbia Supreme Court and British Columbia Court of Appeal that dismissed an application to stay claims brought by a court-appointed receiver to recover sums owing to the debtor. 

The decision confirms that a receiver is generally required to abide by arbitration agreements; however, the specific facts of a case may be such that a court can decline to stay an otherwise arbitrable claim by a receiver under provincial arbitration legislation. In particular, a court may decline to grant a stay if an arbitration agreement would conflict with objectives of the Bankruptcy and Insolvency Act (BIA), such as expediency and efficiency.  

Facts 

Arbitration clauses were included in various agreements, subcontracts and purchase orders between or involving Peace River Hydro Partners (PRHP) and various Petrowest entities (collectively, the Agreements).

The Alberta Court of Queen’s Bench appointed a receiver (Receiver) over Petrowest and its affiliates under s. 243(1) of the BIA. The Receiver then assigned Petrowest’s affiliates (but not Petrowest itself) into bankruptcy, becoming their trustee in bankruptcy. 

The Receiver filed a civil claim against PRHP and related entities (Defendants) to recover amounts allegedly owing to Petrowest and its affiliates under the Agreements. Instead of defending the Receiver’s civil claim, the Defendants applied to the British Columbia Supreme Court (BCSC) to stay the Receiver’s civil claim under s. 15(1) of the Arbitration Act (British Columbia) based on the Agreements’ arbitration clauses.

The BCSC decision

At first instance, the chambers judge concluded that the Receiver was a party to the Agreements because the Receivership Order granted it the power (and related powers) to prosecute proceedings to receive and collect amounts owing to Petrowest and its affiliates. However, the chambers judge was satisfied she had jurisdiction under s. 183 of the BIA, and inherent jurisdiction, to deny a stay under s. 15(2) of the Arbitration Act. A stay was denied because the contemplated arbitrations would “significantly compromise” the objectives of the BIA.

The BCCA decision

The British Columbia Court of Appeal (BCCA) found that a receiver is not necessarily bound by the executory contracts of the debtor, and it may choose either to adopt or disclaim such contracts. While the Receiver adopted the Agreements, it was entitled to disclaim the arbitration clauses by operation of the doctrine of “separability” pursuant to which arbitration clauses are treated not as contractual terms, but instead as separate agreements. The BCCA held that the Receiver had necessarily disclaimed the “arbitration agreements” when it filed a civil claim. As a result, there was no basis under the Agreements for the Defendants to insist on arbitration. The appeal was dismissed.

The SCC decision

At the Supreme Court of Canada (SCC), all nine justices agreed the Defendants’ appeal should be dismissed.

Côté J. (for the five-member majority) formulated a two-part framework for determining if a civil claim should be stayed in favour of arbitration:

• The applicant for a stay must establish the technical perquisites for a mandatory stay; and
• The party seeking to avoid arbitration must show on a balance of probabilities that a statutory exception applies.

In considering the technical prerequisites, Côté J. rejected the BCCA’s analysis that a receiver is not a party to the debtor’s arbitration agreements. She held that a receiver’s duty as a court officer does not preclude it from being a party to an arbitration agreement, s. 15 of the Arbitration Act does not preclude non-signatories from being considered parties, there was no principled reason why a receiver could not be a party, and a conclusion that prevented arbitration in receivership would subvert the important arbitral principle of party autonomy.

In considering statutory exceptions, Côté J. evaluated s. 15(2) of the Arbitration Act, which permits a court to dismiss a stay application if an arbitration agreement is “void, inoperative, or incapable of being performed.” Côté J. held that insolvency, on its own, is not a basis to not enforce an arbitration agreement and an arbitration agreement should be enforced in all but the clearest of cases; however, she further held that ss. 183 and 243 of the BIA provide statutory jurisdiction for a court to hold that an arbitration agreement is “inoperative” if the arbitral process would compromise the orderly and efficient conduct of a receivership.

This assessment is highly factual. In this case, a stay was rightly denied because the “chaotic nature” of the contemplated arbitral process would undermine BIA objectives, such as efficiency and expediency.

Jamal J. (for the four-member minority) wrote a short concurring decision. In his view, the Receiver was empowered by the Receivership Order to disclaim contractual rights of Petrowest and its affiliates and the legal effect of disclaimer was achieved when the Receiver filed a civil claim. Jamal J. clarified that, despite this point of divergence, he agreed with Côté J.’s analysis of the court’s jurisdiction under ss. 183 and 243 of the BIA to hold that an arbitration agreement is “inoperative” and dismiss a stay application accordingly.

Implications

The SCC majority decision confirms that a debtor’s arbitration agreements are presumptively binding on a receiver. However, a receiver may not be bound to arbitrate if the arbitral process would compromise the orderly and efficient conduct of the receivership. With this in mind, a contracting party with a strong interest in the arbitration of any claims that may be brought by the receiver of an insolvent counter-party should negotiate arbitration clauses that operate expediently and efficiently, to be in harmony with BIA objectives.

The SCC majority decision emphasizes that the application (or not) of arbitration clauses to civil claims by receivers is highly fact dependent, thereby inviting future disputes about the propriety of arbitrating on a case-by-case basis.

Future cases will determine the circumstances in which arbitration clauses will (and will not) be enforced in other insolvency contexts, such as restructurings under the Companies’ Creditors Arrangement Act.