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Peace River v Petrowest: SCC Avoids Conflict Between Arbitration and Bankruptcy Law, and Clarifies Separability?

18 minute read

The important issues in the case

Peace River Hydro Partners v Petrowest, 2022 SCC 41, concerned the tension between the Court’s supervisory power over all proceedings brought by a receiver/trustee under the Bankruptcy and Insolvency Act, RSC 1985, c. B-3 (BIA) and party autonomy to contract out of the courts. Petrowest’s Receiver/Trustee sued Peace River in British Columbia for amounts it alleged were owing to Petrowest under their contracts. Peace River applied to stay the action on the basis that the contracts contained arbitration clauses, which required that disputes be resolved by arbitration. The Receiver/Trustee opposed the stay application on the ground that the BIA authorized the Court to assert centralized judicial control over the matters under the “single proceeding model” rather than sending the Receiver/Trustee to multiple arbitral forums. The B.C. Supreme Court and the B.C. Court of Appeal dismissed the stay application and allowed the action to proceed – for different reasons. A unanimous Supreme Court of Canada agreed with the result but was split 5-4 on the reasons.

The majority of the Court held the arbitration clauses at issue were “inoperative” because enforcing them would compromise the orderly and efficient resolution of the receivership. The minority found that the language of the Receivership Order empowered the Receiver/Trustee to disclaim the arbitration clauses.

While this was a significant development in the law, perhaps a more important issue for arbitration law (although it was not relevant to the outcome) was the Court’s consideration of the doctrine of separability, the application of which has been uncertain since Uber Technologies Inc. v Heller, 2020 SCC 16 (Uber) and has now been clarified.

The Court also addressed other significant issues:

  • the shifting burden of a proof when there is an application for a stay of court proceedings on the basis that the parties agreed to arbitrate (paras. 76-90);
  • what constitutes “taking a step in the proceedings” that would disqualify a defendant from obtaining a stay (paras. 96-99), and
  • whether a receiver/trustee is a “party” to an arbitration agreement signed by the debtor (paras. 100-118).

In this case comment, I address all of these issues in turn. It is also useful to review paras. 131-145 of the majority decision, which sets out in what circumstances, generally, an arbitration agreement be found to be “void, inoperative, or incapable of being performed.”

Background context

In December 2015, Peace River Hydro Partners and its related corporations (“Peace River”) were formed to design and construct a hydroelectric dam in northeastern British Columbia. They sub-contracted some of the work to Petrowest Corporation and its affiliates (“Petrowest”). On August 15, 2017, the Alberta Court of Queen’s Bench ordered Petrowest and affiliates into receivership pursuant to s. 243 of the BIA. On April 3, 2018, the Receiver assigned the Petrowest affiliates (but not Petrowest) into bankruptcy and became the Trustee in Bankruptcy. On August 29, 2018, the Receiver/Trustee sued Peace River in British Columbia. Peace River applied to stay the action pursuant to the (former) B.C. Arbitration Act, RSBC 1996, c. 55, on the basis that the relevant contracts between the parties contained arbitration clauses.

The Supreme Court of Canada decision addressed the following issues.

Issue One: The interplay between the Arbitration Act and the BIA

Section 15 of the British Columbia (former) Arbitration Act, RSBC 1996 c. 55, required a stay of proceedings where a party to an arbitration agreement has commenced a court proceeding in respect of a matter to be submitted to arbitration unless the arbitration agreement is “void, inoperative, or incapable of being performed.”

The majority decision of Côté J. (Wagner CJ and Moldaver, Rowe, and Kasirer concurring) considered the tension between arbitration law, which favours party autonomy and allows parties to contract for a private tribunal to resolve their disputes, and insolvency law, which provides a single forum for the orderly resolution of the competing rights and objectives of individual stakeholders of insolvent businesses. However, arbitration law and insolvency law also have much in common:  efficiency and expediency, procedural flexibility, and decision-makers with specialized expertise. Justice Côté found that the arbitration clauses at issue were “inoperative” because enforcing them would compromise the orderly and efficient resolution of the receivership. Authority for this arises from the statutory jurisdiction conferred on provincial superior courts under ss. 243(1) and 183(1) of the BIA.  This interpretation of the stay provision also ensures that provincial arbitration legislation and federal bankruptcy legislation are not in conflict, which would have to be resolved through the doctrine of federal paramountcy.

Justice Côté emphasized that the facts, in this case, were unique in that they pitted the public policy objectives underlying the BIA against freedom of contract and party autonomy and justified a departure from the legislative and judicial preference for holding parties to their arbitration agreements. Whether this new principle applies, in any case, is a very fact-specific analysis, in which the court may consider the following non-exhaustive list of factors: the effect of the arbitration agreement on the integrity of the insolvency proceedings; the relative prejudice to the parties from the referral of the dispute to arbitration; the urgency of resolving the dispute; and the applicability of a stay of proceedings under bankruptcy and insolvency law. Applying these factors to this case, Justice Côté found that enforcing the arbitration agreements would compromise the orderly and efficient resolution of the receivership proceedings because it would result in at least four different arbitrations involving seven different sets of counterparties, which the parties would not likely agree to consolidate and which would compromise the integrity of the receivership proceedings. Further, there was some urgency because there could be no distribution to Petrowest’s creditors until all disputes were resolved.

Issue Two: The doctrine of separability and the arbitration clauses

The BC Court of Appeal dismissed the appeal at 2022 BCCA 339, and refused a stay on the basis of the doctrine of separability in arbitration law. That Court found that separability permits an arbitration clause to be treated for all purposes as a “self-contained contract collateral to the containing contract.” This allows a receiver to disclaim an otherwise valid arbitration agreement, even though it has adopted the main contract for the purpose of suing on it (para. 55.) As a result of having done so in this case, the Receiver/Trustee was not a party to the arbitration agreements and the stay provision in s. 15 of the B.C. Arbitration Act was not engaged, or in the alternative, had rendered the arbitration clauses “inoperative” or “incapable of being performed” within the meaning of s. 15(2) (para. 56).

The B.C. Court of Appeal relied upon the Supreme Court of Canada decision in Uber Technologies v Heller, 2020 SCC 16, which unfortunately left the scope of the doctrine of separability uncertain in Canada. In that case, although the plaintiff succeeded in his argument that the arbitration clause should not be enforced because it was unconscionable, he also argued that the doctrine of separability should be applied to render the arbitration clause invalid or null and void (para. 219). Justice Côté - in dissent - adopted the Model Law approach to the principle of separability. Section 16 of the Model Law contains similar language to the former BC Arbitration Act stay provision. Justice Côté recognized that the purpose of the doctrine of separability is to treat the arbitration clause as a separate agreement when there is a challenge to the tribunal’s jurisdiction based upon an allegation that the parties’ underlying agreement is invalid (paras. 221 to 224). However, confusion arose because she found (at para. 225) that for the purposes of the plaintiff’s challenge to the validity of the arbitration clause (not the main agreement), the arbitration clause should be considered an independent agreement. See also the decision of the majority in Uber at para. 96 to the same effect.

In her decision for the majority in Petrowest, Justice Côté found that the B.C. Court of Appeal had misapplied the doctrine of separability:

“[167] Separability does not apply absent a challenge to the validity of the main contract or of the arbitration agreement itself (Uber, at para. 224, per Côté J., dissenting, but not on this point). No issue is taken in this case with the validity of the Main Agreements or the Arbitration Agreements. Indeed, before the Court of Appeal, the Receiver argued that separability was “irrelevant” in this case (C.A. reasons, at para. 48). It now concedes that this Court does not need to consider separability to resolve this appeal. I accept this concession.

[168] I would add that the Court of Appeal’s approach to separability would undermine the central purpose of the Arbitration Act. In essence, the Court of Appeal held that receivers are permitted to revoke arbitration agreements unilaterally, without any judicial inquiry into their validity or enforceability. But separability is intended to safeguard arbitration agreements, not imperil them (see, e.g., T. Meshel, “Petrowest v. Peace River Hydro: The Revocability and Separability of Commercial Arbitration Agreements” (2022), 65 Can. Bus. L.J. 329). As I have explained, it is for a court — not a receiver — to determine whether an arbitration agreement is valid and enforceable according to the narrow statutory exceptions set out in s. 15(2).”

Further, Justice Côté found that the Petrowest Receiver/Trustee could not unilaterally disclaim the arbitration agreement to render it “void, inoperative or incapable of being performed” to avoid arbitration in favour of what the Receiver/Trustee may have viewed as a preferable procedure. This would diminish the presumptive enforceability and overall predictability of arbitration agreements (para. 23).

Similarly, on the subject of separability, Justice Jamal in his minority decision (Karakatsanis, Brown, and Martin JJ concurring), stated:

[194]  …The separability doctrine is recognized, for example, in s. 17(2) of the Ontario Arbitration Act, 1991, S.O. 1991, c. 17, and provides that, for the purposes of ruling on arbitral jurisdiction, an arbitration agreement “shall . . . be treated as an independent agreement that may survive even if the main agreement is found to be invalid” (see also Uber Technologies Inc. v. Heller, 2020 SCC 16, at para. 96, per Abella and Rowe JJ.). As Professor Tamar Meshel notes in her helpful article on the decision of the British Columbia Court of Appeal under appeal, the separability doctrine provides that “an arbitration clause does not necessarily become invalid merely because the underlying agreement is found to be invalid, and vice versa” (“Petrowest v. Peace River Hydro: The Revocability and Separability of Commercial Arbitration Agreements” (2022), 65 Can. Bus. L.J. 329, at p. 345 (footnote omitted)). Without the separability doctrine, “a contracting party could avoid arbitration simply by alleging that the underlying agreement was void or invalid” (Meshel, at p. 345 (footnote omitted)). I agree with Professor Meshel’s view that, because “neither party challenged the validity of the agreements in which the arbitration clauses were found, but rather only the arbitration clauses themselves,” the result is that “the separability doctrine, which simply operates to separate the validity analysis of an arbitration clause from that of the underlying agreement, [is] not relevant to [this] case” (Meshel, at p. 346 (footnote omitted)). I am not relying on the separability doctrine..”

Issue Three: The shifting burden of proof

Justice Côté found that the framework in the statutory stay provision requires the party seeking a stay to show an “arguable case” or establish a “prima facie basis” that the arbitration agreement at issue has engaged the mandatory stay provision in the applicable provincial arbitration statute. Then, the party opposing the stay must show that one or more of the statutory exceptions apply – in this case, that the arbitration agreement is “void, inoperative, or incapable of being performed.”

Issue Four: “Taking a step” which bars a stay motion

Looking at the technical requirements of the stay provision, Justice Côté found that by undertaking to file a defence, Peace River did not take a “step in the proceeding” which would disqualify it from seeing a stay, because that did not constitute an election to proceed with the action.

Issue Five: A receiver/trustee is a “party” to the arbitration agreement

Justice Côté held that a receiver/trustee can be considered a “party” to a pre-existing arbitration agreement and may be bound to its terms through the ordinary operation of contract law. Both a receiver and a trustee in bankruptcy advance claims through the debtor and “step into the shoes of” the debtor;  each has no independent cause of action to assert. It would violate basic principles of contract law to permit a receiver to enforce a contract on the debtor’s behalf while avoiding the debtor’s burdens, including the obligation to arbitrate contractual disputes.”  (See para. 109.)

Justice Côté rejected the Receiver/Trustee’s argument that the definition of “party” in s. 2(1) of the B.C. International Commercial Arbitration Act, R.S.B.C. 1996, c. 233 (“ICAA”), to include “a person claiming through or under a party” to an arbitration agreement necessarily requires a narrow interpretation of the word “party” in the domestic legislation, which removed this language and did not define the word. Justice Côté found that basic principles of statutory interpretation required her to read the Arbitration Act and the ICCA harmoniously, particularly because they relate to the same subject matter. Finally, interpreting the Arbitration Act to include a receiver/trustee as a “party” is consistent with the central purpose of the Arbitration Act and the fundamental principles of party autonomy, limited court intervention, and competence-competence. Otherwise, it would prevent arbitration whenever a contracting party entered receivership. In this case, it was at least “arguable” that the Receiver/Trustee was a party.

Issue Six: The effect of the language of the Receivership Order

Justice Jamal, for the minority, agreed that the stay application should be dismissed, but on the basis that the Receivership Order authorized the Receiver/Trustee to disclaim the arbitration agreements, rendering them inoperative. Justice Jamel found support for this in his interpretation of the language in the “template” or standard-form Receivership Order itself (at para. 192).

However, Justice Jamal stated that, to the extent that the Receivership Order did not authorize the Receiver to sue in court, he agreed with Justice Côté’s reasons.

Significance of this decision

There is much to digest in this decision.

First, it has the potential for direct application throughout Canada in the international arbitration context, since all provinces have adopted the Model Law (although not all have adopted the 2006 amendments), which contains the same stay exception language as in the former B.C. Arbitration Act. At para. 109, Justice Côté acknowledged Canada’s international obligations – she referred to the importance of the “presumptive enforceability and overall predictability of arbitration agreements, which was the purpose for Canada ratifying the New York Convention and for British Columbia adopting the Model Law.” And yet, what if the stay application had been brought under the Model Law or New York Convention rather than s. 15 of the 1996 B.C. domestic Arbitration Act? There are different policy and legislative factors at play. It is unclear how Canada’s international obligations would affect the analysis, specifically, whether Canada’s obligations under international arbitration law would give way to Canada’s federal bankruptcy regime or what the outcome would have been if the bankruptcy proceedings had been foreign. In the domestic arbitration context, the language from the former B.C. Arbitration Act has been carried into the current B.C. Arbitration Act, SBC 2020, c. 2. But it is not clear what application Petrowest will have in other provinces, whose domestic legislation provides for an exception to the mandatory stay where the arbitration clause is “invalid” or “null”.

Second, in the domestic context, Justice Côté’s recognition of the similarities between the objectives of arbitration and bankruptcy/insolvency proceedings is important to arbitration practice. She has managed to achieve a balance that does not create a conflict that would have to be resolved by the principle of paramountcy. In doing so, she has preserved the fundamental arbitration principle of party autonomy by carving out a limited exception based upon policy considerations. It remains to be seen how easy it will be for lower courts to apply this exception, given that it is factually driven and that the Petrowest case was, according to Justice Côté, “unique.”

Third, this decision will affect bankruptcy and insolvency practice, including proceedings under the Companies’ Creditors Arrangement Act, RSC 1985, c. C-36. (See para. 63.)  There are likely to be changes to the language of standard term receivership orders to adopt the reasoning of the minority decision and explicitly empower (or not) a receiver/trustee to disclaim an arbitration agreement and thereby make it inoperative. Also, as suggested by Justice Côté (at paras. 124), there will be motions for directions on whether, in each case, a receiver/trustee is bound by an arbitration clause in the debtor’s contract.

Finally, most Canadian domestic and international arbitration legislation contains the doctrine of separability and it is part of the common law,  but its application was unclear after the B.C. Court of Appeal decision in Petrowest and in the Supreme Court of Canada decision in Uber, both in 2020. The first sentence of paragraph 167 of Justice Côté’s reasons, quoted above (“[s]eparability does not apply absent a challenge to the validity of the main contract or of the arbitration agreement itself” – emphasis added), can only be understood as consistent with international law by its reference to paragraph 224 of Justice Côté’s reasons in Uber, quoted above – which  make it clear that separability under the 1996 B.C. Arbitration Act and the Model Law applies only to protect the arbitrator’s jurisdiction where there is a challenge to the main agreement and that an arbitration clause may be held to be invalid only by a direct challenge to it. However, Justice Jamal’s reference to para. 96 of the majority decision in Uber to support the statement that, “an arbitration agreement shall… be treated as a separate agreement that may survive even if the main agreement is to be invalid” is puzzling because that paragraph in Uber refers to separability applying where there is a challenge to the arbitration clause alone. Nonetheless, the majority decision puts Canadian law on the application of the doctrine of separability in line with international jurisprudence, including under the Model Law; the purpose of separability is to protect arbitral jurisdiction where there is a challenge to the main contract. The key cases are cited by Justice Côté in Uber.

*Lisa acted as counsel for the intervenor, Arbitration Place, which made submissions on the separability issue

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