Supreme Court of Canada refuses to enforce an arbitration agreement where it risked prejudicing creditors in insolvency proceedings

Facts

Peace River subcontracted construction work to Petrowest on a hydroelectric dam project in B.C. The relevant contracts contained various arbitration agreements. Petrowest became insolvent and was placed under receivership. The receiver commenced a court claim against Peace River for sums allegedly owing for completed work. Relying on the arbitration agreements, Peace River brought a motion before the B.C. Supreme Court to stay the receiver's claim in favour of arbitration. The Court dismissed the stay. The B.C. Court of Appeal affirmed the decision.

Decision

The Supreme Court of Canada upheld the decision dismissing the stay motion. It concluded the agreement was "inoperative" within the meaning of subsection 15(2) of B.C.'s Arbitration Act (identical in this respect to federal arbitration legislation and provincial international commercial arbitration legislation across Canada). Recognizing that courts should usually enforce arbitration agreements, even in the insolvency context, the Court observed that sometimes doing so risks frustrating the orderly administration of an insolvent estate to the detriment of its stakeholders.

In dismissing the appeal, the Court took care to correct and clarify several points of law:

  • Whether an entity is a "party" to an arbitration agreement goes beyond whether it signed the agreement. The ordinary rules of contract law apply such that subsidiaries, assignees, trustees and others claiming through or under the signatory may properly be considered parties to the arbitration agreement.
  • The separability presumption—that an arbitration agreement contained in a larger contract is presumed separate for the purposes of entertaining challenges to the arbitral tribunal's jurisdiction or the validity of the container contract or arbitration agreement—is not a basis for a receiver to disclaim only the arbitration agreement and sue on the container contract in court.
  • In the insolvency context, an arbitration agreement may become inoperative when enforcing it would disturb the broader insolvency process. Relevant factors include: (a) the effect of arbitration on the insolvency proceedings' integrity; (b) the relative prejudice to the arbitral parties versus other stakeholders; (c) urgency in resolving the dispute; (d) the effect of any statutory stay of proceedings arising from the bankruptcy/insolvency proceedings; and (e) other factors the court considers material.

Analysis

The Supreme Court and lower courts have many times affirmed a strong policy favouring the enforcement of arbitration agreements. This is rooted in respect for party autonomy, a fundamental tenet of arbitration law, which finds its voice in arbitration legislation across Canada. At the same time, bankruptcy and insolvency legislation creates a special regime aimed at streamlining the administration of a debtor's estate while taking into account the interests of all stakeholders. In some cases, enforcing an arbitration agreement will not hinder (and may even assist) the insolvency/bankruptcy policy objectives. Indeed, the Court noted that efficiency and procedural flexibility are hallmarks of both arbitration and insolvency proceedings. However, enforcing one or more arbitration agreements will sometimes hamper the orderly administration of a debtor's estate, or even bring it to a grinding halt. Each case will turn on its own facts. Practicality, rather than rigid formalism, will govern the analysis.