On November 10, 2022, the Supreme Court of Canada (the "SCC") released its long-awaited decision in Peace River Hydro Partners v Petrowest Corp., 2022 SCC 41 (“Peace River”), which addresses the interaction between insolvency law's single proceeding model and arbitration law’s emphasis on contractually bargained-for rights – an interaction often described as “a conflict of near polar extremes”. In Peace River, the SCC held that when the court-appointed receiver of an insolvent company seeks to collect accounts receivable from a counterparty, the counterparty may not be able to rely on an arbitration clause or agreement otherwise governing the contract if proceeding to arbitration would “compromise the orderly and efficient resolution of the receivership”.

Introduction

As the use of arbitration continues to grow in Canada, it has become increasingly common for parties to include mandatory arbitration clauses in their commercial agreements. As an expression of party autonomy and freedom of contract, courts generally hold parties to their agreement to arbitrate. The legislative and judicial preference for the enforcement of arbitration agreements is evidenced by arbitration legislation across the country that calls for a mandatory stay of court proceedings in respect of matters governed by an arbitration agreement.

On the other hand, bankruptcy and insolvency law emphasizes a “single proceeding model” that favours the enforcement of stakeholder rights through a centralized judicial process that ensures all creditors within the same class are treated equally as a group. This approach could be said to emphasize collective rights over the rights of the individual.

The competing interests of these two regimes can be difficult to reconcile – a party to an arbitration agreement will be reluctant to be dragged into an insolvency proceeding, especially when they are not a creditor. One of a receiver’s fundamental duties is to collect accounts receivable, which often comprise the largest asset class, especially for a service or construction company. What happens when a receiver starts a collection action against a party who relies on their rights to have the dispute determined in arbitration? Can such a party resist or “stay” the collection action by the receiver in order to force the dispute through arbitration?

In Peace River, the SCC found the answer to that question to be “no”. Although recognizing that parties should generally be held to their agreement to arbitrate, the SCC nonetheless held that insolvency courts may, in certain circumstances, circumvent the arbitration rights the parties contracted for.

Background

BC Hydro hired Peace River Hydro Partners ("Peace River") to perform work relating to the construction of the Site C hydroelectric dam project in northern British Columbia (the "Project"). Peace River subsequently subcontracted certain work to Petrowest Corp., an Alberta-based company, and its affiliates (collectively, "Petrowest"). Various agreements governed the work to be performed by Petrowest on the Project (the "Agreements"), all of which contained mandatory arbitration clauses, each applying to a different set of potential disputes and calling for distinct arbitration procedures.

Petrowest eventually encountered financial difficulties and was assigned into a court-appointed receivership. The Receiver then proceeded to bring a civil claim against Peace River seeking to collect funds allegedly owed to Petrowest for work completed on the Project. Peace River sought a stay of the civil proceedings pursuant to section 15 of British Columbia's former Arbitration Act, RSBC 1996, c 55 (section 7 of the new Act), in order to arbitrate the issues in accordance with the arbitration clauses contained in the Agreements.

Peace River was unsuccessful at the trial level and at the Court of Appeal for British Columbia, and further appealed this decision to the SCC. The SCC dismissed Peace River's appeal.

The Decision of the SCC

While affirming the general principle that judicial intervention in commercial disputes governed by valid arbitration agreements should be limited, the SCC nevertheless held that courts are not always required to stay civil claims brought by court-appointed receivers simply because those claims are subject to valid arbitration agreements.

The SCC held that to determine if a stay of proceedings should be granted in favour of arbitration, a two-part framework should be applied:

(1) the applicant must establish an arguable case that the “technical prerequisites” for a stay of proceedings have been met; and (if it is successful in doing so)
(2) the defendant must then establish that, on a balance of probabilities, one or more of the statutory exceptions set out in the applicable provincial arbitration statute apply.

An example of a statutory exception is the one found in section 15 of British Columbia’s former Arbitration Act, which asks whether the arbitration clause is “void, inoperative or incapable of being performed”.

The SCC endorsed a narrow interpretation of the words “void, inoperative or incapable of being performed”, stating that matters such as inconvenience, multiple parties, intertwining of issues with non-arbitrable disputes, possible increased cost, and potential delay generally will not, by themselves, be grounds to find an arbitration agreement inoperative.

However, the SCC held that sections 243(1)(c) and 183(1) of the Bankruptcy and Insolvency Act (the "BIA") give the courts statutory jurisdiction to find an arbitration agreement inoperative, in certain circumstances. A court may find an arbitration agreement inoperative where enforcing it would compromise the orderly and efficient resolution of insolvency proceedings, including a court-ordered receivership.

The SCC provided the following non-exhaustive list of factors to consider in determining whether a particular arbitration agreement is inoperative in this context:

• The effect of arbitration on the integrity of the insolvency proceedings;
• The relative prejudice of the parties to the arbitration agreement and the debtor's stakeholders;
• The urgency of resolving the dispute;
• The effect of a stay of proceedings arising from the bankruptcy or insolvency proceedings; and
• Any other factors the court considers material in the circumstances.

In applying the facts of the case, the SCC held that the Receiver would need to participate in and fund at least four different arbitrations involving seven different sets of counterparties. Referral to arbitration in the unique circumstances of this case would jeopardize the Receiver’s ability to maximize recovery for the creditors. As a result, the SCC dismissed the appeal and upheld the lower Court’s refusal of Peace River’s stay application.

Commentary

First, it should be noted that this case dealt with claims brought by a debtor. All claims brought against a debtor, including arbitral proceedings, are automatically stayed based on the applicable bankruptcy or insolvency legislation. In these situations, the arbitration agreement effectively becomes “inoperative” (as do most contractual rights held by creditors), but the supervising judge may still refer the matter to arbitration as the most expeditious way to prove the creditor’s claim.

Second, this decision also dealt specifically with court-appointed receiverships and held that sections 183(1) and 243(1)(c) of the BIA, in conjunction, give courts the power to refuse a stay, where allowing the matter to proceed to arbitration would compromise the orderly and efficient resolution of a receivership. In situations where section 243 is inapplicable (i.e., in cases where a trustee in bankruptcy is suing, or in proposal proceedings under Part III of the BIA), a court officer or debtor will only be able to rely on section 183(1) to dismiss a stay application, which was not addressed by the SCC.

Third, the SCC in Peace River was interpreting section 15 of British Columbia's Arbitration Act, which states a court must stay proceedings in the face of an arbitration agreement unless the arbitration agreement is “void, inoperative or incapable of being performed.” Not all provincial arbitration legislation contains this same wording. For example, in Ontario and Alberta, the legislation dealing with international commercial arbitrations contain this same wording of “void, inoperative or incapable of being performed.” However, the legislation in these jurisdictions related to domestic arbitration provides that a court may refuse a stay where the arbitration agreement is “invalid.” In Peace River, the SCC found that sections 183(1) and 243(1)(c) of the BIA can be used to render an arbitration agreement “inoperative”. It remains to be seen whether courts will interpret the Peace River decision as being applicable in situations governed by legislation that does not contain the specific wording of "inoperative".

Lastly, this decision comes on the heels of Mundo Media Ltd. (Re), 2022 ONCA 607, where the Ontario Court of Appeal focused on whether or not the defendant was a “stranger” to the bankruptcy in deciding whether to grant a stay of proceedings in favour of arbitration. In Mundo, the Court of Appeal held that in order to deny a stay of proceedings, the claim in issue must be sufficiently connected to the receivership proceedings so as to warrant it being dealt with concurrently. The SCC was silent on this issue in Peace River and did not expressly include this in its formulation of the new test.