CANADA – Enforceability of arbitration agreement – Section 15 of the BC Arbitration Act does not require a court to stay a civil claim brought by a court-appointed receiver in every case where the claim is subject to a valid arbitration agreement. Where arbitration would compromise the orderly and efficient conduct of a court-ordered receivership, an otherwise valid arbitration agreement may be inoperative and unenforceable. The Court’s analysis as to whether to stay an action in favour of arbitration is fact-specific.

Peace River Hydro Partners v. Petrowest Corp. 2022 SCC 41
2022 SCC 41 (November 10, 2022)
SCC Wagner C.J. and Moldaver, Karakatsanis, Côté,
Brown, Rowe, Martin, Kasirer and Jamal JJ.

Facts

Peace River subcontracted work on the construction of a hydroelectric dam in British Columbia to Petrowest and its affiliates. The contracts between the parties contained agreements to arbitrate any disputes (“Arbitration Agreements”). Petrowest later fell into “dire financial straits”. The Alberta Court of Queen’s Bench appointed a receiver under section 243(1) of the Bankruptcy and Insolvency Act (“BIA”) to manage the assets and property of Petrowest and its affiliates. The Receiver brought a civil claim against Peace River to collect funds it alleged were owed to Petrowest and its affiliates. Peace River responded with an application under section 15 of the BC Arbitration Act for a stay on the basis that the Arbitration Agreements governed the dispute. (para. 3)

The BC Superior Court dismissed the stay application. The BC Court of Appeal upheld that decision.

The SCC upheld the dismissal of the stay application in the courts below. (para. 5)

Majority Reasons

Côté J., writing for a majority of the SCC, described the tension between arbitration and insolvency law regarding the forum in which the dispute is to be resolved in the context of an insolvency dispute that involves an arbitration agreement. (para. 48) The tension arises between the general view that where there is a valid arbitration agreement, judicial intervention in a commercial dispute should be the exception, and the fact that insolvency proceedings are “creatures of statute subject to close judicial oversight”. (paras. 49-51)

The majority held that there is also much in common between arbitration law and insolvency law, particularly the priority of efficiency and expediency, procedural flexibility, and specialized decision-makers. (paras. 10 and 59-71)  In many cases, the parties should be held to their agreement to arbitrate insolvency proceedings. The fact that a party is in receivership or insolvency proceedings, or is financially impecunious, on its own, is not a sufficient basis for a court to find an arbitration agreement inoperative. (para. 8) However, where, as in the case at bar, “arbitration would compromise the orderly and efficient conduct of a court-ordered receivership”, a “centralized judicial process” that precludes arbitration may be necessary. (para. 9) The Court stressed that this result was “context-specific” and based on the unique facts of the case at bar. (para. 10)

Section 15 of the B.C. Arbitration Act  (“the Act”)  does not require that a civil claim brought by a court-appointed receiver be stayed in every case where there is a valid arbitration agreement. Under section 15(2) of the Act, the court may refuse a stay where the agreement at issue is “void, inoperative or incapable of being performed”. Where enforcing the arbitration agreement would “compromise court-ordered receivership proceedings”, an otherwise valid arbitration agreement may be inoperative. (para. 7)

The majority found that the Court of Appeal erred in its conclusion that s. 15 of the Act was not engaged because the Receiver was not a “party” to the Arbitration Agreements. The Court held that to allow the Receiver to avoid arbitration on the basis that it was not a party to the debtor’s pre-existing agreement to arbitrate would be “a proper reading of s. 15, ordinary principles of contract law, party autonomy, and this Court’s longstanding jurisprudence with respect to arbitration.” (para. 6) It also held that neither disclaimer nor the doctrine of separability permit receivers to unilaterally render an otherwise valid agreement to arbitrate “inoperative” or “incapable of being performed” under s. 15. (para. 6) It is only a court that can make those findings.

The “competence-competence” principle is not absolute. While arbitrators should generally be allowed to first rule on their own jurisdiction, a court may resolve a jurisdictional challenge that involves a pure question of law or questions of mixed fact and law that only require “superficial consideration of the evidentiary record”. (para. 42)

Côté J. set out a two-component framework for determining the highly factual question of whether a stay of proceedings should be granted in favour of arbitration. The components are to remain “analytically distinct” because they involve a shifting burden of proof (paras. 76-79):

• First, the applicant must establish an “arguable case” that the technical prerequisites under the applicable arbitration legislation for a mandatory stay of court proceedings exist, which typically will be the following:
  1. There is an arbitration agreement;
  2. Court proceedings were commenced by a party to the agreement;
  3. The court proceedings involve a matter that the parties agreed would be resolved by arbitration; and
  4. The applicant applied for a stay before it took any steps in the court proceeding; ( 83 and 84) and

• If the applicant discharges its burden under the first component, the burden shifts to the respondent to demonstrate that a statutory exception to a mandatory stay of court proceedings applies. ( 87-90)

In the context of the insolvency proceeding before the court to which section 15 of the Arbitration Act applied, the majority provided the following non-exhaustive list of factors that could be considered when assessing whether the arbitration agreement should be found to be void, inoperative or incapable of being performed:

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. ( 155)

The majority emphasized that the party seeking to avoid arbitration “bears a heavy onus to establish a clear case of inoperability or incapacity to perform the impugned arbitration agreement” on a balance of probabilities. (para. 156)

On the facts of this case, Côté J. held that the chambers judge correctly dismissed the stay application on the basis that the Arbitration Agreements were inoperative within the meaning of s. 15 of the Act. Under sections 243 and 183 of the Bankruptcy and Insolvency Act, the court is authorized to “do what practicality demands in the context of a receivership”, which in this case demands that the Arbitration Agreements not be enforced “in the interest of an orderly and efficient resolution of the receivership”. The Court held that: “In short, the chaotic nature of the arbitral proceedings bargained for by the parties would compromise the integrity of the receivership, to the detriment of affected creditors and contrary to the purposes of the BIA.” (para. 9)

Minority Reasons

While the minority of the SCC agreed that the appeal should be dismissed because the Arbitration Agreements were inoperative under section 15(2) of the Act, they disagreed with the primary basis for finding the agreements inoperative. Instead, Jamal J., writing for the minority, held that the starting point should be the Receivership Order. (paras. 190-191) The terms of that Order authorized the Receiver to “disclaim” the Arbitration Agreements and sue in court for amounts owed to Petrowest. (paras. 192-193)

Jamal J. disagreed with the majority’s finding that the Court should not interpret the Receivership Order because the issue “was not squarely before the Court” and was “not fully argued by the parties.” (para. 196) In his view, the issue was “debated” both in written and oral submissions and was thus before the Court.

The minority did agree with the majority that a receiver could not “unilaterally ‘revoke’ an otherwise valid arbitration agreement.” Only a court could make a finding that the agreement was inoperative or incapable of being performed. (para. 197)