Supreme Court of Canada rules construction arbitration agreement "inoperative" in the face of insolvency proceedings

The Supreme Court of Canada's ("SCC") recent decision in Peace River Hydro Partners v. Petrowest Corp., 2022 SCC 41 ("Peace River") provides salient guidance to the construction industry about the enforceability of arbitration agreements in the context of a court-ordered receivership pursuant to the Bankruptcy and Insolvency Act, RSC, 1985, c. B-3 (the "BIA").

In Peace River, the SCC clarified that a stay of proceedings in favour of arbitration may be refused if enforcing an arbitration agreement would hinder an otherwise orderly and efficient resolution of a bankruptcy or insolvency proceeding. Determining whether such agreements hinder a smooth resolution is fact-driven and will be determined on a case-by-case basis.

Key takeaways

The majority's decision provides yet another authoritative position in the long line of cases that emphasize deference to arbitration agreements. The majority decision illustrates that arbitration and insolvency are more similar than not and thus arbitration agreements are otherwise enforceable in the insolvency context.

Nevertheless, the majority's reasoning still brings about uncertainty in practice. In most instances, parallel proceedings will bring about extrajudicial costs and will likely deplete resources to the detriment of creditors—which bankruptcy and insolvency legislation seeks to prevent. It remains to be interpreted in subsequent decisions when precisely a court will find it appropriate to have parallel proceedings. It is likely this situation will arise again as arbitration agreements continue to gain popularity, especially in the construction industry, and in particular a time when insolvencies are on the rise, given the current economic climate.

It is also noteworthy that although Peace River was within the context of British Columbia's arbitration legislation, the majority specifically noted that arbitration legislation across Canada is similar and the principles underlying its decision has broad application.

Background

Peace River Hydro Partners ("PRHP") is a partnership formed to build a hydroelectric dam in Northeastern British Columbia. As part of this project, PRHP subcontracted certain work to Petrowest Corporation ("Petrowest"), an Alberta-based construction company. Within the subcontract agreement between the two construction entities, the parties agreed to arbitrate any future disputes (the "Arbitration Agreements").

Approximately half way through the construction project, Petrowest began experiencing financial troubles. As a result, the Alberta Court of Queen's Bench granted an order ("Receivership Order") pursuant to section 243(1) of the BIA. A Receiver was appointed to manage Petrowest's assets and properties. The Receiver subsequently brought a civil claim against PRHP seeking to collect on funds owed to Petrowest for works performed pursuant to the subcontract agreement. In response, PRHP applied under section 15 of British Columbia's Arbitration Act, [SBC 2020] (the "Arbitration Act") seeking a stay of proceedings, arguing that the Arbitration Agreements governed the dispute.

Lower court and Court of Appeal decisions

On application, the chambers judge refused to stay the civil proceedings. The first issue before the chambers judge was whether section 15 of the Arbitration Act was engaged. If so, the second issue to be determined was whether the court had jurisdiction to stay the proceeding, notwithstanding the application of section 15(2) of the Arbitration Act.

On the first issue, the chambers judge held that section 15 of the Arbitration Act was engaged. The chambers judge found that all four elements of the section 15 test were met to bring about a mandatory stay:

1. The Receiver was a "party to an arbitration agreement" within the meaning of section 15(1). The Receiver acquired contractual rights via section 71 of the BIA.
2. Peace River had not taken a "step in the proceedings" before bringing its stay application—an undertaking to file a defence without invoking the rules of court does not meet such a threshold.

3. Some of the claims as brought by the Arbitrator were caught under the Arbitration Agreements.

4. At least some of the Arbitration Agreements were not "void, inoperative, or incapable of performance within the meaning" of section 15(2) of the Arbitration Act.

As such, the chambers judge dismissed the stay application, holding that section 183 of the BIA empowers superior courts to disrupt private contractual rights when doing so would bring about fairness and expediency in bankruptcy or insolvency processes.

PRHP appealed the ruling of the chambers judge to the British Columbia Court of Appeal. The Court of Appeal dismissed PRHP appeal—however, its reasoning differed from that of the chambers judge.

The Court of Appeal cautioned that "inherent jurisdiction" should only be invoked rarely, and that it cannot be used to negate an unambiguous legislative will. With this in mind, the Court of Appeal relied on the doctrine of separability in arbitration law: "an arbitration clause to be treated as a "self‑contained contract collateral to the containing contract"".^[i]

In applying the doctrine of separability, the Court of Appeal held that the Receiver had disclaimed the Arbitration Agreements by bringing a civil claim. By doing so, the Receiver was not a party to those agreements and therefore section 15 of the Arbitration Act did not apply. As such, a stay in favour of arbitration was refused.

Supreme Court decision

A unanimous Supreme Court dismissed PRHP appeal in holding that the Arbitration Agreements were "void, inoperative, or incapable of being performed". The SCC ruled that neither (1) inherent jurisdiction; (2) the paramountcy doctrine; or (3) the doctrine of separability is the correct analysis to refuse a stay of proceedings. Rather, the majority stated that the Arbitration Agreements were simply "inoperable" pursuant to section 15(2) of the Arbitration Act.

Majority decision

Justice Côté, writing for the five-judge majority, first laid out the inherent tension between arbitration law and bankruptcy and insolvency law. The central tension is the juxtaposition between these two areas of law: insolvency adopts a centralization of proceedings whereas arbitration involves a decentralization of proceedings.

Despite this juxtaposition, the majority agreed with PRHP in that the presumption in favour of arbitration is long established in the Court's jurisprudence. But notwithstanding this presumption, the majority noted that such a presumption can be rebutted where arbitration would "compromise the orderly and efficient resolution of a receivership."^[ii]

The majority next looked at the legislative framework for declining a stay of proceedings in favour of arbitration. The majority applied the above mentioned four-part test under section 15(2) of the Arbitration Act. In applying this test to PRHP case, the majority concluded that PRHP had established an arguable case that the four-elements were satisfied for a stay of proceedings.

The majority's main takeaway was that even when one party to an arbitration agreement becomes insolvent, a deferential approach must be kept in mind. A narrow interpretation of the words "void, inoperative or incapable of being performed" must be given to promote the enforcement of arbitration agreements. On this point, the majority's decision yielded three points of significance:^[iii]

• The meaning of the term "void" is relatively settled. An arbitration agreement will be considered void only in rare circumstances.
• The term "inoperative" has no universal common law definition … In arbitration law, however, the term has been used to describe arbitration agreements which, although not void ab initio, "have ceased for some reason to have future effect" or "have become inapplicable to the parties and their dispute".
• An arbitration agreement is considered "incapable of being performed" where "the arbitral process cannot effectively be set in motion" because of a physical or legal impediment beyond the parties' control.

Bearing in mind the aforementioned, the majority nonetheless found that the superior court has broad and flexible powers under the BIA to find arbitration agreements inoperative despite a presumption in favour of arbitration. The majority made it clear that finding an arbitration agreement to be inoperative is a factual exercise. As it relates specifically to insolvency proceedings, the majority laid out the following interpretative factors that courts ought to consider when determining whether an arbitration agreement is inoperative in the context of insolvency proceedings:^[iv]

1. The effect of arbitration on the integrity of the insolvency proceedings.
2. The relative prejudice to the parties from the referral of the dispute to arbitration.
3. The urgency of resolving the dispute.
4. The applicability of a stay of proceedings under bankruptcy or insolvency law.
5. Any other factor the court considers material in the circumstances.

In reviewing the non-exhaustive list of factors as they applied to PRHP, the majority concluded that "[t]he inexpediency of the multiple overlapping arbitral proceedings contemplated in the Arbitration Agreements, as compared to a single judicial process, is the determinative factor in this case. As such, the myriad of overlapping arbitration proceedings would compromise the Receiver's ability to maximize recovery for Petrowest's creditors.

Concurring judgement

Justice Jamal, writing for the four-judge concurrence, agreed with the majority's holding, albeit based on a different rationale. The concurring judgment explained that the Receivership Order authorized the Receiver to sue in court and to receive and collect all monies and accounts as owed to Petrowest. More so, the Receiver also had the power to cease any contracts of Petrowest. Importantly, an arbitration agreement is a contractual right—as such, the Receiver is given the ability to cease that contractual right. In other words, "[t]he legal effect of the Receiver suing in court and not before an arbitrator was undoubtedly to disclaim reliance on the Arbitration Agreements."^[v]

The concurring judgment emphasized that it was not suggesting that a Receiver can unilaterally "revoke" an otherwise valid arbitration agreement. Rather, only a court can declare such an arbitration agreement inoperative.

Nevertheless, the concurring judgment stated that even if the Receivership Order did not authorize the Receiver to sue in court, the BIA provides the court with statutory jurisdiction to declare Arbitration Agreements inoperative, and thus to reject a stay of proceedings.