Peace River Hydro Partners v. Petrowest Corp., 2020 BCCA 3392022 SCC 41 (39547)

“Peace River is a partnership formed to build a hydroelectric dam in northeastern British Columbia. Peace River subcontracted work to Petrowest, an Alberta‑based construction company, and its affiliates. The parties executed several clauses providing that disputes arising from their relationship were to be resolved through arbitration (“Arbitration Agreements”). When Petrowest encountered financial difficulties, the Alberta Court of Queen’s Bench granted an order (“Receivership Order”), pursuant to s. 243(1) of the Bankruptcy and Insolvency Act (“BIA”), appointing a receiver (“Receiver”) to manage the assets and property of Petrowest and its affiliates. The Receiver then brought a civil claim against Peace River seeking to collect funds allegedly owed to Petrowest and its affiliates for subcontracted work. Peace River applied under s. 15 of British Columbia’s Arbitration Act for a stay of proceedings on the ground that the Arbitration Agreements governed the dispute. The chambers judge dismissed the stay application and the Court of Appeal dismissed Peace River’s appeal.”

The SCC (9:0) dismissed the appeal.

Justice Côté wrote as follows (at paras. 5-10, 70-74, 118, 126, 129, 152-153, 155-156, 185):

“I would dismiss the appeal and affirm the dismissal of the stay application by the courts below. The civil claim brought by the Receiver on behalf of Petrowest and the Petrowest Affiliates may proceed. This conclusion flows from the following two‑part analysis, which is mandated by s. 15 of the Arbitration Act and outlined in further detail later in these reasons.

First, the Court of Appeal erred in concluding that s. 15 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 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.

Second, although s. 15 is 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. For example, an arbitration agreement may be inoperative if enforcing it would compromise court‑ordered receivership proceedings under s. 243 of the BIA. This may occur where the arbitration agreed to by the parties would preclude the orderly and efficient resolution of the receivership, contrary to the purposes of the BIA.

To be clear, the fact that a party has entered receivership or insolvency proceedings or is financially impecunious is not, on its own, a sufficient basis for a court to find an arbitration agreement inoperative. 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, discussed further below, 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.

Applying the above factors, I find that the chambers judge correctly dismissed the stay application. The Arbitration Agreements are inoperative within the meaning of s. 15(2) of the Arbitration Act. Sections 243 and 183 of the BIA authorize courts to do what practicality demands in the context of a receivership. In this case, practicality demands that the Arbitration Agreements not be enforced, in the interest of an orderly and efficient resolution of the receivership. 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.

I stress that this result is context‑specific. The unique facts of this case, which pit the public policy objectives underlying the BIA against freedom of contract and party autonomy, justify departing from the legislative and judicial preference for holding parties to their arbitration agreements. 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.


 

The interests of expediency and procedural flexibility inform the need for judicial specialization in the realm of bankruptcy and insolvency. Indeed, in many provinces, there are specialist judges who take carriage of restructuring proceedings and all related issues. Their expertise and “file knowledge” allow them to find the right balance of procedural formality while meeting the need for timely resolution of disputes within the overall restructuring process (McElcheran, at ¶5.85).

In sum, reliance on a decision maker with expertise in the relevant field is a core feature of both arbitration law and insolvency law, and for good reason. Specialized expertise can assist in capitalizing on other attributes that are also common to both bodies of law, such as expediency and procedural flexibility.

In many cases, the shared interests in expediency, procedural flexibility, and specialized expertise will converge through arbitration. In such a scenario, the parties should be held to their agreement to arbitrate notwithstanding ongoing insolvency proceedings. In other words, the court should grant a stay of legal proceedings in favour of arbitration, and any dispute as to the scope of the arbitration agreement or the arbitrator’s jurisdiction should be left to the arbitrator to resolve. As is evident from the foregoing, valid arbitration agreements are generally to be respected. This presumption in favour of arbitral jurisdiction is supported by this Court’s longstanding jurisprudence, the pro‑arbitration stance adopted in provincial and territorial legislation nationwide, and the foundational principle that contracting parties are free to structure their affairs as they see fit.

However, in certain insolvency matters, it may be necessary to preclude arbitration in favour of a centralized judicial process. This may occur when arbitration would compromise the orderly and efficient conduct of a court‑ordered receivership. In such a scenario, a court may assert control over the proceedings, both to ensure the timely resolution of the parties’ dispute and to protect the public interest in the orderly restructuring or dissolution of the debtor and the equal treatment of its creditors. This authority arises from the statutory jurisdiction conferred on superior courts under ss. 243(1) and 183(1) of the BIA.

This exercise is necessarily a highly factual one. It 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.



Accordingly, I conclude that a court‑appointed receiver may be a party within the meaning of s. 15(1) of the Arbitration Act by claiming through or under a party to a valid arbitration agreement. In short, a receiver, like other non‑signatories, may become bound by an arbitration agreement in accordance with ordinary principles of contract law.



The final interpretive issue lies at the heart of this appeal. It boils down to the following question: Where the technical prerequisites in s. 15(1) of the Arbitration Act are met, does s. 15(2) give a court the power to refuse a stay under s. 15(2) by finding that an arbitration agreement has become “inoperative” or “incapable of being performed” because of court‑ordered receivership proceedings?



I agree with the Receiver and the above‑noted interveners. 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.

…I find that there is statutory jurisdiction arising from ss. 183(1) and 243(1)(c) of the BIA for a court to hold that an arbitration agreement is inoperative in the receivership context. It is therefore unnecessary in this case to resort to inherent jurisdiction, which is to be considered only after statutory jurisdiction is determined to be unavailable (Endean v. British Columbia, 2016 SCC 42, [2016] 2 S.C.R. 162, at para. 24; G. R. Jackson and J. Sarra, “Selecting the Judicial Tool to get the Job Done: An Examination of Statutory Interpretation, Discretionary Power and Inherent Jurisdiction in Insolvency Matters”, in J. P. Sarra, ed., Annual Review of Insolvency Law 2007 (2008), 41).

In sum, the foregoing interpretation of s. 15(2) of the Arbitration Act recognizes that the legislative and judicial preference for the enforcement of arbitration agreements is not set in stone. Rather, in limited circumstances, the BIA provides courts with jurisdiction to find an arbitration agreement inoperative in the face of parallel insolvency proceedings.

…a court may find an arbitration agreement “inoperative” within the meaning of s. 15(2) of the Arbitration Act where enforcing it would compromise the orderly and efficient resolution of insolvency proceedings, including a court‑ordered receivership under s. 243 of the BIA. The following non‑exhaustive list of factors may be relevant in determining whether a particular arbitration agreement is inoperative in this context:

  • (a) The effect of arbitration on the integrity of the insolvency proceedings. Party autonomy and freedom of contract must be balanced with the need for an orderly and equitable distribution of the debtor’s assets to creditors. An arbitration agreement may therefore be inoperative if it would lead to an arbitral process that would compromise the objective of the insolvency proceedings, namely the orderly and expeditious administration of the debtor’s property. The court should have regard to the role and expertise of the court‑appointed creditor representative, if any, in managing the insolvency proceedings.
  • (b) The relative prejudice to the parties from the referral of the dispute to arbitration. The court should override the parties’ agreement to arbitrate their dispute only where the benefit of doing so outweighs the prejudice to them.
  • (c) The urgency of resolving the dispute. The court should generally prefer the more expeditious procedure. If the effect of a stay in favour of arbitration would be to postpone the resolution of the dispute and hinder the insolvency proceedings, this militates in favour of a finding of inoperability.
  • (d) The applicability of a stay of proceedings under bankruptcy or insolvency law. Bankruptcy or insolvency legislation may impose a stay that precludes any proceedings, including arbitral proceedings, against the debtor. If such a stay applies, the debtor cannot rely on an arbitration agreement to avoid the bankruptcy or insolvency; the agreement becomes inoperative.
  • (e) Any other factor the court considers material in the circumstances.

Each of the foregoing factors may carry more or less weight depending on the circumstances of the case. But it bears repeating 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. To discharge this onus, it must prove on a balance of probabilities that one or more of the statutory exceptions set out in s. 15(2) of the Arbitration Act apply. Otherwise, the court must grant a stay in favour of arbitration.



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.”