On November 10, 2022, the Supreme Court of Canada (SCC) released its highly anticipated decision in Peace River Hydro Partners v. Petrowest Corp.[1] In two concurring sets of reasons, all judges agreed that the appeal should be dismissed, with the effect that the pre-insolvency arbitration agreement to which Petrowest Corporation and its affiliates (collectively “Petrowest”) had freely agreed was not binding on its court-appointed receiver.
Writing for five of the nine judges, Justice Côté held that an otherwise valid arbitration agreement may, in some circumstances, be inoperative or incapable of being performed because it would compromise the integrity of court-ordered receivership proceedings as in the case at bar. While acknowledging the competence-competence principle – the golden rule that arbitrators should be allowed to rule first on their own jurisdiction – the Court held that the principle was not “absolute”. A court may resolve a challenge to the arbitrator’s jurisdiction if the challenge involves pure questions of law or, as here, questions of mixed fact and law requiring only superficial consideration of the evidentiary record. On the facts of this case, the Court concluded that the arbitration agreements should be effectively overridden in favour of a centralized judicial process, because arbitration would compromise the orderly and efficient conduct of the court-ordered receivership.
The concurring minority opinion agreed that the arbitration agreements here were “inoperative”, but for a different reason. The fairly standard receivership order had granted the receiver, among many powers, the authority to commence proceedings to collect debts owed to Petrowest. This, according to the minority opinion, had permitted the receiver to disclaim the arbitration agreements, thus rendering them inoperative.
While arbitration purists will be disappointed with this decision, they will take some solace from the new framework that the majority opinion has established for these situations. A receiver cannot unilaterally waive the arbitration agreement to render it inoperable. A receiver should, preferably, seek advice and directions from the supervising court before proceeding. Finally, the Court here was concerned with very fact specific circumstances giving rise to “chaotic arbitral processes” that would ensue if a stay was granted: at least four separate arbitrations arising from seven different sets of counterparties, with some claims not subject to arbitration, the risk of inconsistent findings and increased costs to the detriment of the Petrowest creditors. In a more straightforward situation with, say, only one arbitration agreement involving one creditor and the insolvent party, the majority has thankfully kept the door open for the arbitration agreement to remain binding on the receiver. It seems the minority view would have been more restrictive.
Background
Peace River Hydro Partners (“Peace River”) was a partnership established to undertake certain construction works of the Site C hydroelectric project in northern British Columbia. Peace River subcontracted the works to Petrowest. There were several such contracts containing various arbitration agreements. Subsequently, Petrowest was placed into court-appointed receivership.
The receiver, in its own name and in the name of Petrowest, later commenced court action against Peace River and its partners, claiming amounts allegedly owed under the various contracts and purchase orders. Peace River applied for an order staying this action in accordance with s. 15 of British Colombia’s Arbitration Act[2] on the ground that the resolution of Petrowest’s claims was subject to the mandatory arbitration agreements among the parties.
Section 15 of BC’s Arbitration Act which is similar across various jurisdictions the Country, requires the court to stay court proceedings where:
- A party to an agreement containing an arbitration clause commences legal proceedings against another party to the agreement;
- The party seeking the stay applies to the court before filing a response or taking any other step in the proceedings;
- The subject matter of the proceedings is captured under the arbitration clause; and
- The arbitration clause is not void, inoperative, or incapable of performance.
While the third bullet would later become relevant (as to whether an undertaking to file a defence constituted a “step in the proceedings” (the SCC held it did not), the case ultimately would turn on the fourth bullet, particularly the phrase “inoperative”.
British Columbia Supreme Court (BCSC) dismissed the stay of application[3]
The receiver argued that it was not a party to the agreements containing the arbitration clauses and so not bound by them. Further, as a court-appointed officer, the receiver had the powers to engage s. 183 of the Bankruptcy and Insolvency Act[4] (BIA). It permits the court to exercise its inherent jurisdiction to displace contractual rights to achieve the objectives of the BIA.
Peace River argued that the plaintiffs were advancing contractual claims arising from the agreements. They further argued, in effect, that the receiver could not pick and choose which contractual terms to enforce.[5]
The Court dismissed the application for a stay, finding that although s. 15 of the Arbitration Act was engaged, the Court had discretion to decline a stay under s. 183 of the BIA.
The Court accepted that the arbitration agreement was valid. But the Court nevertheless decided that it had the discretion to decline a stay on the ground that s. 183 of the BIA empowered the Court to exercise its inherent jurisdiction to control its own processes. The Court also observed that the case involved a significant amount of money, and the time and cost required to prosecute the claims through multiple arbitration proceedings would be substantial. The cost and delay were also unfair to the creditors and contrary to the objectives of the BIA. [6]
British Columbia Court of Appeal (BCCA) dismissed the application for other reasons[7]
Peace River appealed. Although the BCCA also dismissed the application to stay, it did so for different reasons. The BCCA concluded that s. 15 of the Arbitration Act was not engaged.[8] Further, the receiver could sue on the contracts yet disclaim the arbitration clauses.
The BCCA opined that the receiver was not an agent of the debtor or any other parties but “a principal entrusted to discharge the powers granted to the receiver bona fide”. In initiating and prosecuting proceedings, the receiver acted not as agent of Petrowest, who was “legally paralyzed from acting,” but rather acted as a fiduciary.[9] Accordingly, the party who initiated proceedings was the receiver, and not Petrowest. Further, the BCCA considered whether the receiver’s entitlement to disclaim the debtor’s executory contractual obligations extended to arbitration clauses, which raised an analysis of the doctrine of separability.
The BCCA stated that due to the doctrine of separability, arbitration clauses are not simply a term of the contract but an independent agreement. Recognizing the long history of the doctrine in the jurisprudence, the BCCA relied on Justice Côté’s dissenting opinion in Uber v. Heller,[10] who had expressed the view that arbitration clauses should be considered “autonomous and juridically independent from the main contract in which it is contained”.[11] The BCCA concluded that due to the receiver’s particular powers and position and the separability of the arbitration agreements, the receiver could disclaim the arbitration agreements although it had otherwise adopted the contracts containing those very same arbitration agreements.[12]
The Doctrine of Separability in recent decisions and commentaries
Following the Petrowest decision, other Canadian courts considered the BCCA’s approach. In the recent Mundo decision,[13] the Ontario Superior Court of Justice declined to enforce a mandatory arbitration clause on the ground that the arbitration was rendered null and void, inoperative or incapable of being performed by virtue of the debtor’s receivership and the appointment of the receiver to exercise all remedies available to the debtor.[14] In Mundo, the court declined to follow the BCCA, holding that it was “not persuaded by the logic and reasoning in it”, and “there was a serious question about whether the doctrine of separability has any application to circumstances where the receiver is asserting a contract containing an arbitration clause signed by the debtor and a third party”.[15] The court did decline to enforce the arbitration clause on the basis of the single proceeding model, to the effect that claims in an insolvency context should be held in a single proceeding in a single jurisdiction.[16] On appeal, neither party in Mundo raised an argument that relied on Petrowest, and the Ontario Court of Appeal did not comment on it in its reasons.[17]
Professor Anthony Daimsis authored a comprehensive piece on Petrowest and the doctrine of severability.[18] He postulated that the BCCA had misunderstood the separability doctrine. He pointed out that “separability does not mean that arbitration clauses found in contracts are ab inito separate agreements independent in every way from the contracts in which they are housed”.[19] Instead, the doctrine of separability is a presumption, and the arbitration agreements are presumed separate from the main contracts when necessary, i.e., when the main contract’s validity is in question. Professor Daimsis expressed concern about the BCCA’s approach that seemingly suggested that arbitration clauses in contracts are always separable and independent from the contracts in which they are contained. He cited the Yukon Zinc decision, where Petrowest had been relied on for the proposition that the doctrine of separability meant that the arbitration clause was an independent agreement that could be separately disclaimed.[20]
Professor Daimsis further pointed out that in Petrowest, the BCCA allowed the receiver to disclaim the arbitration agreement and yet retain the main contract, while there was no question as to its validity.[21] He further explained that the doctrine of separability was one of arbitration’s quintessential principles, and its function was to safeguard party autonomy.[22] Professor Daimsis acted for the intervenor Canadian Federation of Independent Business before the Supreme Court of Canada.
Decision of the Supreme Court of Canada
All nine judges dismissed the appeal. All agreed that on these facts the arbitration agreements were inoperative.
The majority held that the BCCA had erred in concluding that s. 15 of the Arbitration Act was not engaged because the Receiver was not a “party” to the Arbitration Agreements. “Permitting a court‑appointed receiver to avoid arbitration on the basis that it is not a party to the debtor’s pre‑existing agreement to arbitrate is inconsistent with a proper reading of s. 15, ordinary principles of contract law, party autonomy, and this Court’s longstanding jurisprudence with respect to arbitration. Nor can a disclaimer or the doctrine of separability permit receivers to unilaterally render otherwise valid arbitration agreements “inoperative” or “incapable of being performed” within the meaning of s. 15. Only a court can make a finding that an arbitration agreement is inoperative or incapable of being performed”.[23]
However, the majority concluded that although s. 15 was engaged, the chambers judge was entitled to refuse to grant a stay under s. 15(2). An otherwise valid arbitration agreement may, in some circumstances, be inoperative or incapable of being performed: an arbitration agreement may be inoperative if enforcing it would compromise court‑ordered receivership proceedings. This may occur where the arbitration agreed to by the parties would preclude the orderly and efficient resolution of the receivership.[24]
The majority’s decision did not result, however, in an absolute rule that all receivers may disclaim arbitration agreements in all situations. Rather, the party seeking to avoid arbitration must establish, on a balance of probabilities, that a stay in favour of arbitration would compromise the integrity of the parallel insolvency proceedings. The following non‑exhaustive list of factors may assist in the court’s analysis: (a) the effect of arbitration on the integrity of the insolvency proceedings, which are intended to minimize economic prejudice to creditors; (b) the relative prejudice to the parties to the arbitration agreement and the debtor’s stakeholders; (c) the urgency of resolving the dispute; (d) the effect of a stay of proceedings arising from the bankruptcy or insolvency proceedings, if applicable; and (e) any other factors the court considers material in the circumstances.[25]
The majority “stressed” that the result here was “context-specific” and that only “the unique facts of this case, which pit the public policy objectives underlying the [Bankruptcy and Insolvency Act] against freedom of contract and party autonomy, justify departing from the legislative and judicial preference for holding parties to their arbitration agreements”. [emphasis added][26]
The majority also expressly confirmed the Court’s generally supportive approach to arbitration in Canada:
Contrary to conventional wisdom, however, arbitration law and insolvency law need not always exist at “polar extremes”. They have much in common, including an emphasis on efficiency and expediency, procedural flexibility, and expert decision‑making. These shared interests often converge through arbitration, such that granting a stay in favour of arbitration will promote the objectives of both provincial arbitration legislation and federal insolvency legislation. It is for this reason that courts should generally hold parties to their agreements to arbitrate, even if one of them has become insolvent. 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. [emphasis added][27]
Confirming the “competence-competence” principle, the majority noted that one of the exceptions was engaged here because “all that is required is the interpretation of arbitration and insolvency legislation and a superficial consideration of the evidentiary record”.[28] The Court reviewed the historical and current attitudes towards arbitration noting that in Canada the prevailing view today is that parties should be held to their contractual agreements to arbitrate. But in insolvency proceedings, other, non-private considerations are engaged because of the potential impact on many stakeholders, which has given rise to the so-called “single proceeding model” entailing a “centralized judicial process”.[29]
On the other hand, the majority confirmed that notwithstanding the differences between arbitration law and insolvency law, there were also many commonalities: efficiency and expediency; procedural flexibility; decision-makers with specialized expertise. The majority concluded that in many cases, therefore, these shared interests will “converge through arbitration” such that a stay in favour of arbitration should be granted. Indeed, “valid arbitration agreements are generally to be respected”, a presumption supported “by this Court’s longstanding jurisprudence”.[30]
The Court then turned to the core question – under what circumstances may arbitration be precluded in favour of a centralized judicial process? The overarching approach should be a “highly factual one” that “requires the court to carefully review the particular statutory regimes and arbitration agreements in play, having regard to the principles of party autonomy and freedom of contract as well as the policy imperatives underpinning bankruptcy and insolvency law”.
The Court then outlined the new test to resolve conflicts such as the one at bar[31]:
- First, the court must decide whether the applicant for a stay has established that the arbitration agreement engages the mandatory relevant statutory stay provision;
- Second, the court should then consider whether any statutory exceptions, such as whether the arbitration clause is “void, inoperative or incapable of being performed”, are engaged. The Court emphasized that a court should dismiss a stay application on the basis of a statutory exception only in a “clear” case and that where the invalidity or unenforceability of the arbitration agreement is not clear (but merely arguable), the matter should be resolved by the arbitrator. Such an approach accords due respect to arbitral jurisdiction, in light of the competence‑competence principle, as well as to the parties’ intention to refer their disputes to arbitration;
On the facts of this case, the Court then held as follows:
- An undertaking to file a defence is not a “step in the proceeding” within the meaning of s. 15(2) of the Arbitration Act. Nor is seeking an extension of time to do so;
- A receiver may be a “party” to the arbitration agreement entered into by the insolvent debtor;
- A receiver cannot disclaim an arbitration agreement so as to render it “void, inoperative or incapable of being performed”;
- The BCCA erred in its interpretation of s. 15(2) for two reasons: (i) the BCCA had rested its analysis on a palpable and overriding error in that the receiver had not disclaimed the arbitration agreements; and (ii) a receiver’s unilateral disclaimer cannot render an arbitration agreement void, inoperative, or incapable of being performed;
- Preferably, court‑appointed receivers should seek a judicial determination as to whether the relevant arbitration agreement is void, inoperative, or incapable of being performed by bringing a motion for directions before the supervising court, prior to commencing legal proceedings;
- Where a court‑appointed receiver attempts to initiate court proceedings without prior judicial approval in a dispute covered by a valid arbitration agreement, the court must decide whether to exercise its jurisdiction arising from the BIA to decline to enforce the arbitration agreement under s. 15 of the Arbitration Act. This requires a proper reading of the words “void, inoperative or incapable of being performed” in accordance with the modern approach to statutory interpretation and in light of the relevant insolvency policy interests;
- A court may find an arbitration agreement inoperative where arbitration would compromise the orderly and efficient resolution of a receivership. Accordingly, there is no conflict between the provincial Arbitration Act and the federal BIA giving rise to paramountcy concerns. Relevant factors as to whether a clause is “inoperative” include: (i) the effect of arbitration on the integrity of the insolvency proceedings; (ii) the relative prejudice to the parties from the referral of the dispute to arbitration; (iii) the urgency of resolving the dispute; (iv) the applicability of a stay of proceedings under bankruptcy or insolvency law; and (v) any other factor the court considers material in the circumstances;
- The BCCA misapplied the doctrine of separability. Separability does not apply absent a challenge to the validity of the main contract or of the arbitration agreement itself. Separability is intended to safeguard arbitration agreements, not imperil them.
Against this analysis, the majority decision then boiled down to the rather unique facts of this case:
The […] evidence outlines the chaotic arbitral processes that would result if this Court were to grant a stay under s. 15 of the Arbitration Act. First, the Receiver would need to participate in and fund at least four different arbitrations involving “seven different sets of counterparties” […]. The funding for these proceedings would necessarily come from the estates of Petrowest and the Petrowest Affiliates, to the detriment of their creditors. Second, at least some of the respondents’ claims involve entities not subject to any of the Arbitration Agreements. As the chambers judge properly recognized, these claims may have to be determined by a court, in parallel with the arbitral proceedings described above. Finally, in the scenario just described, I agree with the Receiver that “[f]acts and argument would be repeated in different forums, before different decision makers, creating piecemeal decisions and a serious risk of conflicting outcomes” […].[32]
The inefficient and protracted nature of the contemplated arbitral processes would plainly compromise the integrity of the receivership proceedings. […][33]
Further, there was no evidence of prejudice to Peace River in not enforcing the arbitration agreements. Proceeding in court was more expeditious.[34]
As indicated, the minority agreed that the arbitration agreements here were “inoperative”, but for a different reason. The fairly standard receivership order had granted the receiver, among many powers, the authority to commence proceedings to collect debts owed to Petrowest. This, according to the minority opinion, had permitted the receiver to disclaim the arbitration agreements, thus rendering them inoperative.[35]
The logic underlying this view would seem to suggest that a receiver may always disclaim an arbitration agreement, as receivership orders routinely tend to contain the clause in question. It is not clear if that was the intention. In any event, the majority opinion has offered up a seemingly more flexible approach that will produce different outcomes based on different facts. That said, the majority did indicate that the minority’s approach was not “without merit”. However, “given that the interpretation of the terms of the Receivership Order was not fully argued by the parties, and that the appeal can be resolved without addressing this issue, it is prudent to leave it to another day”.[36]
Thus, the door has been left open for further issues to arise in this area.
[1] Peace River Hydro Partners v. Petrowest Corp., 2022 SCC 41 [Petrowest-SCC].
[2] Arbitration Act, R.S.B.C. 1996, c. 55.
[3] Petrowest Corporation v Peace River Hydro Partners, 2019 BCSC 2221 [Petrowest-BCSC].
[4] Bankruptcy and Insolvency Act, R.S.C. 1985 c. B-3.
[5] Petrowest-BCSC at paras 9 and 10.
[6] Petrowest-BCSC at para 60.
[7] Petrowest Corporation v Peace River Hydro Partners, 2020 BCCA 339 [Petrowest].
[8] Petrowest at para 29.
[9] Petrowest at paras 42, 44.
[10] Uber Technologies Inc v Heller, 2020 SCC 16 [Uber v. Heller]
[11] Petrowest at para 51.
[12] Petrowest at para 55.
[13] Royal Bank of Canada v. Mundo Media Ltd., 2022 ONSC 2147 [Mundo].
[14] Mundo at para 9.
[15] Mundo at para 18.
[16] Mundo at para 38.
[17] Mundo Media Ltd. (Re), 2022 ONCA 607, footnote 1.
[18] Daimsis, Anthony R., Liquidating Separability: Peace River v Petrowest and the Meaning of Separability in Canadian Arbitration Law (August 29, 2021). (2021) 2:1 Can J Comm Arb, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3913676 or http://dx.doi.org/10.2139/ssrn.3913676.
[19] Ibid, at page 106.
[20] Yukon (Government of) v Yukon Zinc Corporation, 2021 YKCA 2 [Yukon Zinc]
[21] Supra note 19 at page 117.
[22] Ibid, at page 118.
[23] Petrowest-SCC at para 6.
[24] Petrowest-SCC at para 7.
[25] Petrowest-SCC at para 8.
[26] Petrowest-SCC at paras 9, 10.
[27] Petrowest-SCC at para 10.
[28] Petrowest-SCC at para 43.
[29] Petrowest-SCC at para 55.
[30] Petrowest-SCC at para 72.
[31] Petrowest-SCC at paras 81, 87, and 88.
[32] Petrowest-SCC at para 175.
[33] Petrowest-SCC at para 176.
[34] Petrowest-SCC at para 179.
[35] Petrowest-SCC at para 192.
[36] Petrowest-SCC at para 185.
