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Court Says B.C. Receiver Can Litigate Despite Arbitration Clause

Published:

November 21, 2022

Author(s):

• Hilary Gilroy
• Andrew Kinley

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On November 10, 2022, the Supreme Court of Canada examined the interaction of arbitration and bankruptcy and insolvency proceedings, deciding a lawsuit commenced by a receiver in B.C. can continue – despite arbitration clauses to the contrary. As more businesses and entities choose arbitration over litigation to resolve their disputes, the Court’s decision in Peace River Hydro Partners v. Petrowest Corp. is a reminder that, in rare instances, an arbitration clause might be unenforceable if a party is undergoing bankruptcy and insolvency proceedings. However, financial difficulty or insolvency proceedings by a party doesn’t automatically render an arbitration clause unenforceable. Instead, it will depend on the particular facts of each case. The decision opens the door for parties, in particular receivers, to have a dispute heard before the courts notwithstanding an arbitration agreement. And, because it was based on an interpretation of the B.C. Arbitration Act, the extent to which it’s applicable beyond B.C. will depend on the specific wording of the applicable arbitration legislation.

Here’s a short rundown of Canada’s arbitration and bankruptcy and insolvency regimes, and a look at how the Court reached its decision in Peace River Hydro Partners v. Petrowest Corp.

Canada’s  Arbitration & Bankruptcy and Insolvency Regimes

An understanding of the Canadian arbitration and bankruptcy and insolvency legal regimes is helpful background to the Peace River decision.

Arbitration. Arbitration involves resolving disputes outside the court process. Like litigation before the courts, arbitration uses an adversarial approach requiring an arbitrator to render a decision that the successful party can then enforce in the same manner as a court judgment. However, unlike litigation, arbitration generally allows the parties to choose a decision-maker and control the procedure, is generally private and confidential, and parties can only challenge arbitration decisions on limited grounds. Every Canadian province and territory and the federal government has implemented specific legislation governing arbitrations in their respective jurisdictions. Parties often use arbitration to resolve commercial disputes and, like those in Peace River Hydro Partners v. Petrowest Corp., frequently include arbitration clauses in their commercial agreements. Often, where a party has agreed to arbitration and then commences litigation in the courts, the other party(ies) will ask the court to order a “stay” (stop) that litigation because the parties agreed to resolve their dispute through arbitration. This was the issue in Peace River.

Bankruptcy, Insolvency & Receivership. When businesses or consumers can’t pay most of their debts (that is, they become insolvent), they can file for bankruptcy or their creditors can appoint a receiver. Bankruptcy is the process by which, after many hurdles, a bankrupt might be discharged from their debts. Conversely, a receiver can take control of the insolvent’s property, supervise its liquidation and remit proceeds to different stakeholders. Although there are several bankruptcy and insolvency statutes and regimes in Canada, the main one is the federal Bankruptcy and Insolvency Act, the receivership provisions of which were at issue in Peace River.

The Peace River Decision

Peace River was a partnership formed to build a hydroelectric dam in British Columbia. Peace River subcontracted work to Petrowest, one of its partners. Peace River and Petrowest executed several agreements, most including an arbitration clause. Less than two years into the partnership, Petrowest was insolvent, and the court appointed a receiver. The receiver brought a lawsuit in B.C. to collect monies from Peace River. Peace River applied to the court for a stay of the lawsuit, arguing the dispute should be resolved by arbitration. The receiver opposed this order contending that the Bankruptcy and Insolvency Act authorized the Court to assert control over the matter rather than sending the receiver to multiple arbitrations. The Supreme Court of Canada agreed with the receiver and decided its lawsuit could proceed notwithstanding the arbitration clauses.

Power to Refuse Stay. The Court first explained that a receiver is a party to an arbitration agreement. Nevertheless, under the B.C. Arbitration Act, a court can refuse to grant a stay – and allow the court litigation process to continue where an arbitration agreement or clause is void, inoperative or incapable of being performed. The Court confirmed this could be the case where enforcing the arbitration agreement would compromise court-ordered receivership proceedings under the Bankruptcy and Insolvency Act by precluding the orderly and efficient administration of the receivership, contrary to that Act’s purposes.

Not Automatic. However, the Court was clear that the mere fact a party is insolvent or has entered receivership proceedings is not, on its own, sufficient to find an arbitration agreement inoperative. The party seeking to avoid arbitration must establish that a stay in favour of arbitration would compromise the integrity of the parallel insolvency proceedings, requiring consideration of various factors.

Practical Application. In this case, the Court reasoned that practicality demanded it not enforce the arbitration clauses, and that it refuse the stay, in the interest of an orderly and efficient resolution of the receivership. There were multiple agreements, with different arbitration clauses and several parties. Requiring the receiver to pursue and fund all these arbitrations would have been chaotic, harmed creditors’ interests and been contrary to the objects of the Bankruptcy and Insolvency Act. The receiver’s lawsuit was also faster and cheaper than multiple arbitrations.

Please contact your McInnes Cooper lawyer or any member of our Bankruptcy & Insolvency Team @ McInnes Cooper to discuss whether you can avoid – or enforce – an arbitration clause.

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