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SCC In Recent Petrowest Decision Says Arbitration And Insolvency Not As Different As They May Seem – Insolvency/Bankruptcy

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On November 10, 2022, the Supreme Court of Canada (SCC) released
its much awaited decision in Peace River Hydro Partners v. Petrowest
Corp
. (Petrowest). As we have discussed in previous blog
posts including a recent piece on the Ontario Court of Appeal’s
decision in Mundo Media Ltd. (Re), Canadian
courts have been faced with the tension between arbitration, a
consensual method of dispute resolution where parties can customize
their process and select their own decision-maker, and insolvency,
where disputes involving the debtor are involuntarily consolidated
in a single insolvency proceeding. In Petrowest, the SCC
provided further clarity on circumstances in which the
single-proceeding insolvency model will render an arbitration
agreement “inoperative”. More specifically, the SCC
refused to stay the civil lawsuit of a receiver in favour of
multiple arbitration agreements. Instead the arbitration agreements
were deemed to be inoperative to facilitate the insolvency process.
It was clear in the decision, however, that this determination will
depend on a highly factual analysis.

Factual background

The appellant, Peace River Hydro Partners (Peace River) is a
construction partnership formed to build a hydroelectric dam in
British Columbia. Peace River subcontracted work to the respondent,
Petrowest Corporation (Petrowest Corp), a construction company in
Alberta and its affiliates. The contracts between Peace River and
Petrowest Corp contained agreements that the parties would
arbitrate any disputes (the Arbitration Agreements). When Petrowest
Corp experienced financial difficulties,the Alberta Court of
Queen’s Bench granted an order, pursuant tos.243(1)of theBankruptcy and Insolvency Act(BIA), appointing a receiver (Receiver) to
manage the assets and property of Petrowest Corp and its
affiliates. The Receiver then brought a civil claim against Peace
River seeking to collect funds allegedly owed to Petrowest Corp and
its affiliates for subcontracted work. Peace River applied under
s.151 of British Columbia’sArbitration Act(the Act)2
for a stay of proceedings on the ground that the Arbitration
Agreements governed the dispute.Both the British Columbia Superior
Court and Court of Appeal found that the stay application should be
dismissed.

Holding

The Supreme Court of Canada held that the stay application
should be dismissed.

Reasoning

The SCC was faced with the question of in what circumstances is
an otherwise valid arbitration agreement unenforceable under s.
15(2)3 of the Act in the context of a court-ordered
receivership under the BIA. Justice Côté, writing for
the majority on behalf of Chief Justice Wagner and Justices
Moldaver, Rowe and Kasirer, followed a two-part framework for
analyzing whether to allow a stay of proceedings in favour of
arbitration:


  1. Technical prerequisites

The first part of the framework was with respect to technical
prerequisites. More specifically that the party applying for a stay
of proceedings must establish that the relevant mandatory stay
provision in the applicable arbitration statute applies to the
arbitration agreement at hand which typically involves meeting the
following four “technical prerequisites”:

  1. There must be an arbitration agreement.

  2. Court proceedings must have been started by a “party”
    to the arbitration agreement.

  3. The court proceedings must involve a matter that the parties
    agreed to resolve via arbitration, and

  4. The applicant must apply for a stay before taking any
    “step” in the court proceedings.

Notably, the applicant must make out an “arguable
case” that each prerequisite has been met and all four
prerequisites must be established to move to the second stage of
the analysis. The majority held that Peace River successfully
established an arguable case that all the technical prerequisites
were met.


  1. Statutory exceptions

In the second part of the analysis, the party seeking to avoid
the stay must establish that the arbitration agreement is
“void, inoperative or incapable of being performed” on a
balance of probabilities. If they fail to do so, the court must
grant a stay of the proceedings. Significantly, this analysis
necessarily turns on the particular factual scenario before the
court. The SCC laid out a list of non-exhaustive factors to
consider when making this determination:

  1. The effect of arbitration on the integrity of the insolvency
    proceedings.

  2. The relative prejudice to the parties caused by resolving the
    dispute via arbitration.

  3. The urgency of resolving the dispute.

  4. The applicability of a stay of proceedings under bankruptcy or
    insolvency law, and

  5. Any other factor the court considers material in the
    circumstances.

The majority held that the Receiver succeeded in proving that
the arbitration agreements were inoperative, because arbitration
in this case would compromise the orderly and efficient
resolution of the insolvency proceedings.

Arbitration and insolvency have important commonalities

The majority specifically emphasized that arbitration and
insolvency law need not always exist at “polar extremes”.
In fact, they have much in common including an emphasis on
efficiency and expediency, procedural flexibility, and expert
decision-making. The majority also held that generally
courts should hold parties to their agreements to arbitrate even
when one of them has become insolvent
since to do otherwise
would “not only threaten the important public policy served by
enforcing arbitration agreements and thus Canada’s position as
a leader in commercial arbitration, but also jeopardize the public
interest in the expeditious, efficient, and economical clean-up of
the aftermath of a financial collapse.” (para 10)

Separability and the Receiver’s ability to disclaim the
arbitration agreements

The majority also held that contrary to the Court of
Appeal’s conclusion, disclaimer and separability do not affect
the Receiver’s status as a party to the Arbitration Agreements
(para 166). The majority was of the view that the Court of Appeal
misapplied the doctrine of separability (the concept that an
arbitration agreement is a distinct agreement) as it does not apply
absent a challenge to the validity of the main contract or of the
arbitration agreement itself and that a consideration of
separability was not required to resolve this appeal (para 167).
Additionally, the majority reasoned that it is for a court, not
a receiver
to determine whether an arbitration agreement is
valid and enforceable according to the narrow statutory exceptions
set out in s.15(2).

Concurring decision: Focus on the powers of the Receiver under
the receivership order

Justice Jamal wrote a brief concurring decision on behalf of
Justices Karakatsanis, Brown and Martin. The concurring reasons
agreed with the majority that the Arbitration Agreements are
inoperative, but reasoned that the Receiver was at liberty to
disclaim and render an arbitration agreement inoperative in view of
the language of the receivership order. However, the concurring
decision agreed with the majority that a receiver cannot
unilaterally
revoke a valid arbitration agreement by starting a
court action pursuant to a receivership.

Takeaways

This decision marks the next chapter in the case law saga of
arbitration vs. insolvency law. Arbitration law is typically marked
by party autonomy whereas insolvency law has close judicial
oversight. However, this decision really emphasizes the shared
interests
between the two regimes rather than their
differences. More specifically – the advantages of efficiency,
expediency, procedural flexibility and decision-makers with
specialized expertise all highlight that perhaps the regimes are
not so different after all. In fact, it is this same goal of
efficiency that may result ina stay being refused in the face of an
arbitration clause because insolvency proceedings are the most
efficient and effective means of resolution in the circumstances.
In that regard, it is clear from the SCC’s decision that this
determination is to be made on a case-by-case basis based on the
specific facts at hand. A stay may be refused if enforcing an
arbitration agreement prevents the orderly and efficient resolution
of a dispute; however arbitration agreements are otherwise
enforceable even in the insolvency context.

Footnotes

1 Section 15(1) under Stay of proceedings reads as
follows: “(1) If a party to an arbitration agreement commences
legal proceedings in a court against another party to the agreement
in respect of a matter agreed to be submitted to arbitration, a
party to the legal proceedings may apply, before filing a response
to civil claim or a response to family claim or taking any other
step in the proceedings, to that court to stay the legal
proceedings.”

2 Arbitration Act, RSBC 1996, c 55.

3 Section 15(2) under Stay of proceedings reads as
follows: “(2) In an application under subsection (1), the
court must make an order staying the legal proceedings unless it
determines that the arbitration agreement is void, inoperative or
incapable of being performed.”

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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