ONTARIO – Court appointed receiver not bound by contractual arbitration agreement requiring the Receiver to arbitrate in New York as such a requirement would be unfair to the debtor’s creditors and inconsistent with the Bankruptcy & Insolvency Act.
Royal Bank of Canada v. Mundo Media Ltd.
2022 ONSC 2147 April 26, 2022
Superior Court of Justice (Commercial List) (Penny J.)
Mundo Media was in receivership pursuant to section 243 of the Bankruptcy and Insolvency Act (BIA) 1985, c. B-13. The appointment order authorized the Receiver to exercise all remedies available to Mundo, to collect money owed to Mundo and to prosecute proceedings with respect to Mundo and its property. A U.S. recognition order was issued by the Delaware Bankruptcy Court in July 2019.
SPay had two 2017 contracts with Mundo under which these parties, performed services for, and invoiced, each other. Both contracts contained arbitration clauses requiring any “disputes arising out of or relating to” the agreements to be arbitrated in New York pursuant to the JAMS Comprehensive Arbitration Rules & Procedures and applying New York law: (para. 5)
The SPay receivable in the amount of $4.1 million, was Mundo’s largest receivable. The Receiver made an application in the receivership proceeding for a summary judgment motion against SPay for judgment of the outstanding amount. SPay’s position was that Mundo owed it money under the other contract and that it could assert set-off rights.
In the present case, SPay sought a stay of the proceeding in favour of arbitration.
The UNCITRAL Model Law on International Commercial Arbitration, which is incorporated by reference in the International Commercial Arbitration Act, 2017, S.O. 2017, c. 2, Sched. 5, requires the court to refer a matter to arbitration upon a party’s request if the parties and the matter in dispute are subject to an arbitration agreement and the arbitration agreement is not null and void, inoperative or incapable of being performed: Article 8(1).
The test under the ICAA for referring a matter to arbitration and staying a civil proceeding basically involves three considerations:
(a) Is there an arbitration agreement between the parties?
(b) Does the dispute arguably fall within the scope of the arbitration agreement? and
(c) Are there grounds on which the court should refuse to stay the action?
The court must grant the stay of proceedings in the receivership unless there is some cogent reason to ignore the express terms of the arbitration clause. (para. 8)
Penny J. held that the issues were whether the claims against and by the debtor Mundo are being administered by the Receiver in Ontario insolvency proceedings mean that the arbitration agreements in the contracts are null and void or inoperable or incapable of being performed and is the Receiver bound by the arbitration clause. (paras. 9-10)
As to whether the question of jurisdiction should be decided by the Ontario Court or by a New York arbitrator, Penny J. held that because the Receiver is court appointed by the Ontario Court and answerable to the Ontario court, only the Ontario court could decide the issue. (para.11)
Penny J referred to Petrowest Corporation v. Peace River Hydro Partners, 2020 BCCA 339, which has been appealed to the SCC ( decision pending at the time of this summary) and declined to follow PetroWest on the basis that there was a serious issue about whether the doctrine of separability applied to situations where a receiver was suing on a contract made by the debtor and a third party. Penny J. held that the “single proceeding model” applied to this case. (paras.13-14)
In Petrowest, the BCCA held that the courts general jurisdiction pursuant to s. 183 of the BIA did not override the legislative intent of the BC government in the BC Arbitration Act, which permits courts to stay proceedings where there is an arbitration agreement. The BCCA did not determine whether or not a receiver is an agent of the debtor in the decision and instead held the receiver was not bound by the arbitration agreement as the receiver did not step into the shoes of the debtor. Therefore, the BBCA held that a receiver is not bound by executory contracts made by the debtor and the receiver can disclaim the arbitration agreement on the basis that the arbitration agreement is a separate contract, from the main agreement, by virtue of the doctrine of separability. (para. 16).
Justice Penny went on to review the “single proceeding model” and whether or not it applied to claims made by the debtor against third parties. The model’s purpose is to shield debtors from defending multiple proceedings or jurisdictions. Penny J. stated:
“These cases stand for the proposition that claims by a debtor against party may be required to be heard in the insolvency proceedings rather than in the jurisdiction or proceedings that would otherwise have applied. The determining factor is the degree of connection of the claim to the insolvency proceedings. That degree of connection has been characterized as involving a consideration of whether the third party is a “stranger to the bankruptcy”.” (para. 27)
Penny J. rejected SPay’s argument that it was a stranger to the bankruptcy, as the claim against SPay is the largest account receivable available to the Receiver . (paras.31-34)
Penny J. found that the Receiver was seeking to realize on a significant asset of the debtor’s for the benefit of the creditors and that requiring the Receiver to commence arbitration proceedings in New York would be unfair to Mundo’s creditors. It would also be inconsistent with the objectives of the BIA, being among other things, to enhance efficiency and consistency and avoid the chaos and inefficiency of multiple proceedings and of potentially sending the Receiver “scurrying to multiple jurisdictions”.
Penny J. therefore, held that there was no conflict between the provisions of Article 8(1) of the Model Law and s. 243 of the BIA. Article 8(1) contains a limitation on the mandatory language (“shall … refer the parties to arbitration unless…”), i.e., where the arbitration clause is “inoperative”. An otherwise valid order of the Court under s. 243 of the BIA requiring adherence to the single proceeding model in favour of referral to arbitration renders the arbitration agreement inoperative. (para. 40)
The BC Court of Appeal in the Petrawest case held that arbitration agreements are always independent of the main contract. The Court focused on the doctrine of separability more than the Courts inherent jurisdiction to refuse the stay of proceeding as a result of the receivership and provisions of the BIA.
The doctrine of separability presumes that parties who have agreed to a contract that included an arbitration clause have agreed to two contracts.
The Supreme Court of Canada granted leave to appeal the Petrawest case on June 10, 2021 and the appeal was heard on January 19, 2022 and judgment is reserved as of the date of this summary. The SCC is to decide two questions:
- Whether a receiver who steps into the shoes of a party or parties to contracts that contain arbitration clauses are bound to the arbitration agreement.
- When a receiver disclaims the arbitration agreement in a contract can the receiver still pursue the substantive rights in the main contract- clarification of the meaning of the doctrine of separability.
The SCC’s pending decision in Petrawest will hopefully provide some insight into the above issues.