Update: Petrowest Corporation v. Peace River Hydro Partners

In the Q4 2021 Edition of the International Restructuring Newswire, our article Enforceability of arbitration clauses challenged in Canadian receivership proceeding reported on a decision of the British Columbia Court of Appeal in Petrowest Corporation v. Peace River Hydro Partners (Petrowest).

The Petrowest decision was affirmed by the Supreme Court of Canada in November 2022.

As a result of the Petrowest decisions, parties may not be able to rely upon arbitration clauses to ensure claims advanced by a receiver of an insolvent Canadian counterparty are handled through the agreed arbitration process rather than through the insolvency court.

Background and lower court decisions

Arbitration clauses were included in various agreements, subcontracts and purchase orders involving Peace River Hydro Partners and various Petrowest entities as supplier and subcontractor.

A receiver subsequently appointed over the Petrowest entities filed a civil claim against Peace River and related entities to recover amounts allegedly owed to Petrowest by Peace River under the subcontracts and purchase orders. Instead of defending the receiver's civil claim, Peace River applied to the court to stay the receiver's civil claim under the Arbitration Act (British Columbia) based on arbitration clauses in the parties' agreements that directed these disputes to arbitration.

The British Columbia Supreme Court and the British Columbia Court of Appeal each denied Peace River's stay application, determining instead that the receiver's claims should be determined in the civil litigation process by the insolvency court notwithstanding the arbitration clauses agreed between the parties.

Supreme Court of Canada decision

On November 10, 2022, the Supreme Court of Canada upheld the decisions of the British Columbia Supreme Court and British Columbia Court of Appeal.

The decision of the Supreme Court of Canada confirms that a receiver is generally required to abide by arbitration agreements. However, a court may decline to require that a receiver pursue a claim by way of arbitration in accordance with an arbitration agreement if doing so would conflict with objectives of the Bankruptcy and Insolvency Act (BIA), such as expediency and efficiency. 

The majority of the Court noted that the Arbitration Act permits a court to determine a claim should not proceed by arbitration if the arbitration agreement is "void, inoperative, or incapable of being performed". The majority 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, Canada's BIA does 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 and potentially subjective. In this case, the majority of the Court determined that the stay was rightly denied because the "chaotic nature" of the contemplated arbitral process would undermine the expediency and efficiency objectives of the insolvency legislation.

The Court's three judge minority agreed with the majority's result but on the basis that the arbitration clauses were to be treated as separate agreements that the Receivership Order authorized the Receiver to disclaim. Indeed, the minority held that the Receiver had implicitly disclaimed the arbitration clauses by suing in Court, rather than arbitrating.

Implications

The Supreme Court of Canada's 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.

The Court's minority decision reached the same ultimate result but on a basis that would permit a receiver to avoid an arbitration clause and the necessity of arbitrating in substantially every case, using the power of disclaimer that is ubiquitously granted by the court upon the granting of a receivership order.

With the Court's majority decision 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 Court's 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 may determine the circumstances in which arbitration clauses will (or will not) be enforced in other insolvency contexts, such as restructurings under the Companies' Creditors Arrangement Act.