Arbitration and Court-Ordered Receiverships: The SCC Strikes a Delicate Balance in Peace River

For the sake of conciseness, this case comment excludes discussion of Justice Jamal’s concurring opinion. If interested, please refer to the original case for further information.

Arbitration law and bankruptcy and insolvency law are often said to be at odds with one another. The former rests upon principles of party autonomy and freedom of contract, whereas the latter favours close judicial oversight of proceedings. In Peace River Hydro Partners v Petrowest Corp., 2022 SCC 41 [Peace River], the Supreme Court of Canada (“SCC”) was tasked with reconciling these two seemingly opposed areas of law.

The Facts

Peace River Hydro Partners (“Peace River”) was a trilateral partnership created to build a hydroelectric dam in northeastern British Columbia (Peace River, paras 2, 11-12). Petrowest Corporation and its affiliates (collectively, “Petrowest”) were one member of the partnership (Peace River, paras 2, 12). This agreement included several clauses which stipulated that disputes arising from the contract would be resolved through arbitration (“Arbitration Agreements”) (Peace River, para 2). These Arbitration Agreements were not homogenous. Rather, each applied to different types of disputes and the arbitration procedures to be employed in resolving those disputes (Peace River, para 13).

Less than two years into the partnership, Petrowest faced financial difficulties and was put into receivership pursuant to s. 243(1) of the Bankruptcy and Insolvency Act, RSC 1985, c B-3 [BIA] (Peace River, paras 3, 14). Ernst & Young Inc. was Petrowest’s court-appointed receiver and manager (“Receiver”) (Peace River, para 3). The Receiver initiated a civil proceeding against Peace River for alleged funds owed to Petrowest for its work on the project (Peace River, paras 3, 16). Relying upon s. 15 of the Arbitration Act, RSBC 1996, c 55 (now the Arbitration Act, SBC 2020, c 2), Peace River applied for a stay of proceedings on the basis that a civil suit was precluded by the Arbitration Agreements (Peace River, para 3). On behalf of Petrowest, the Receiver opposed the application on the basis that the BIA empowered the court to assert control over the dispute (Peace River, para 3).

The Law

15 of the Arbitration Act deals with civil proceedings initiated despite the presence of a governing arbitration agreement. It reads:

15(1) If a party to an arbitration agreement commences legal proceedings in a court against another party to the agreement in respect of a matter agreed to be submitted to arbitration, a party to the legal proceedings may apply, before filing a response to civil claim or a response to family claim or taking any other step in the proceedings, to that court to stay the legal proceedings.

(2) In an application under subsection (1), the court must make an order staying the legal proceedings unless it determines that the arbitration agreement is void, inoperative or incapable of being performed […] (Arbitration Act, s 15)

15(1) provides a mechanism for parties to stay civil proceedings which, in their view, are exclusively governed by arbitration clauses. S. 15(2), on the other hand, gives the court discretion not to order a stay where the clause(s) are “void, inoperative or incapable of being performed” (Arbitration Act, s. 15(2)). Similar provisions exist in other pieces of provincial legislation (see: Arbitration Act, 1991, SO 1991, c 17, s 7).

The BIA is a piece of federal legislation which is the source of Canadian bankruptcy and insolvency law. S. 183 of the BIA gives provincial courts broad powers to exercise jurisdiction over bankruptcy-related proceedings. S. 243(1) gives these courts the specific power to appoint receivers to act on behalf of insolvent parties, as was done in Peace River.

The Issue

The broad question before the SCC was as follows: 

In what circumstances is an otherwise valid arbitration agreement unenforceable under s. 15(2) of the Arbitration Act in the context of a court‑ordered receivership under the BIA? (Peace River, para 32)

The Majority Opinion

Overarching Principles

Competence-Competence

Justice Côté, writing for the majority, begins by addressing the competence-competence principle, which gives precedence to the arbitration process and presumes that arbitrators have the competence to decide upon challenges to their own jurisdiction (Peace River, paras 39 & 41). The exception to this, however, is where a challenge to an arbitrator’s jurisdiction is a question of law or mixed fact and law, requiring little examination of the evidentiary record (Peace River, para 42). Such questions are within the courts’ realm of expertise (Peace River, para 42). With respect to Peace River, this exception applies since the jurisdiction question is primarily an analysis of the relevant legislation—the Arbitration Act and the BIA—supplemented by a very superficial analysis of the facts of the case (Peace River, para 43). 

Judicial Oversight Versus Party Autonomy and Freedom of Contract

The majority also addresses the long-standing tension between arbitration law and bankruptcy and insolvency law (Peace River, para 45). Arbitration law revolves around a highly decentralized approach to resolving legal disputes, whereas bankruptcy and insolvency law favours a highly centralized approach (Peace River, paras 45 & 48). Not only is arbitration inherently hands-off with respect to judicial involvement, but there is also a strong sense that where arbitration agreements are in place, they should be respected in order to adhere to principles of freedom of contract and party autonomy (Peace River, paras 49-50). This runs counter to bankruptcy and insolvency proceedings, which are “creatures of statute subject to close judicial oversight” (Peace River, para 51). This close judicial oversight is necessary because bankruptcy and insolvency proceedings engage important public interests (Peace River, para 52). Court-appointed receivers should be monitored to ensure they do not go beyond the scope of their already-broad broad powers (Peace River, para 57).

These differences with respect to judicial involvement cause tension because it has become increasingly common for commercial parties to be in disputes with insolvent parties which are governed by arbitration clauses (Peace River, para 48). In such situations, the contrary principles of judicial oversight and party autonomy are pitted directly against each other when picking a forum to resolve disputes.

Interpretation of S. 15 of the Arbitration Act

Technical Considerations

Prior to fleshing out the question of how exceptions operate under s. 15(2) of the Arbitration Act, the majority clarified a few elements within s. 15(1). First, the majority clarified that if a party merely undertakes to file a defence, this does not constitute a “step in the proceedings” for the purpose of excluding them from seeking redress under s. 15(2) (Peace River, para 98). Second, the majority clarified that pursuant to general principles of contract law and the underlying intent and purpose of the Arbitration Act, court-appointed receivers can be parties to their debtors’ pre-receivership arbitration agreements (Peace River, paras 111, 116, 118). 

Court-Appointed Receiverships and “Inoperability”

15(1) of the Arbitration Act compels courts to stay civil proceedings where arbitration agreements are in place, but s. 15(2) provides for exceptions where arbitration agreements are “void, inoperative or incapable of being performed” (Arbitration Act, s. 15(2) [emphasis added]). The majority finds that on some occasions, court-appointed receiverships may render arbitration clauses inoperative, thereby fulfilling the requirement of s. 15(2) and carving out an exception to the preference for arbitration (Peace River, paras 140, 144, 149). 

The majority notes that in arbitration law, “inoperability” refers to clauses which “have ceased for some reason to have future effect” or “have become inapplicable to the parties and their dispute” (Peace River, para 138). The mere presence of “inconvenience, multiple parties, intertwining of issues with non‑arbitrable disputes, possible increased cost, and potential delay generally will not, standing alone, be grounds to find an arbitration agreement inoperative” (Peace River, para 139). 

Applying this concept to receiverships, Justice Côté notes that there are some similarities between arbitration law and bankruptcy and insolvency law. Both prioritize expediency and efficiency, procedural flexibility, and the use of specialized decision-makers with tailored expertise (Peace River, paras 60, 64, 67). Where such shared priorities would be undermined by adhering to arbitration clauses, those clauses may be considered “inoperative” within the meaning of s. 15(2). Specifically, Justice Côté states that this occurs where “arbitration would compromise the orderly and efficient conduct of a court‑ordered receivership” (Peace River, para 73 [emphasis added]). To determine whether or not such a compromise has occurred, the majority provides a non-exhaustive list of considerations. These include: 

• • The effect of arbitration on the integrity of the insolvency proceedings;
  • Any prejudice to the parties;
  • The degree of urgency in resolving the dispute;
  • Any applicable stays under bankruptcy and insolvency law which may preclude arbitration; and
  • Any other factors the court deems relevant. (Peace River, para 155)

There is no one-size-fits-all approach to this analysis, but instead, it is highly contextual and to be treated on a case-by-case basis (Peace River, para 74). Moreover, the onus is heavy, wherein the party must show it is “clear” that the arbitration agreement has been rendered void, inoperative, or incapable of being performed (Peace River, paras 89, 139, 156). A successful example of inoperability in this context would be where several arbitration proceedings would have to be pursued concurrently (Peace River, para 143). An insufficient example would be a receiver’s mere initiation of a civil proceeding (Peace River, para 123). This is insufficient because it would allow parties to undermine their prior agreements and select whatever procedure is currently appealing to them (Peace River, para 123). 

Application to Peace River

In applying this framework to Peace River, the majority finds that the Arbitration Agreements are inoperative. The determinative factor, in the majority’s view, is the multiplicity of arbitral proceedings that would arise if the Arbitration Agreements were adhered to (Peace River, para 174). The majority also notes that Peace River raised no concerns about prejudice, and both parties agreed that a court proceeding would be the most efficient, expeditious, and cost-effective way to resolve the dispute(s) (Peace River, paras 179-180). Ultimately, arbitration, compared to a singular judicial process, would compromise the orderly and efficient conduct of the Receiver on behalf of Petrowest (Peace River, para 173).

Analysis

The Arbitration Act and BIA as Inherently Compatible

The majority opinion should not be read as resolving or relieving tension between arbitration law and bankruptcy and insolvency law. Rather, Justice Côté’s reasons reveal that while the areas of law may be at odds with respect to their preferred forums, the actual pieces of legislation which animate them are entirely compatible. The Arbitration Act, via s. 15(2), makes room for various exceptions to the presumption that arbitration clauses are to be respected. S. 183 of the BIA provides courts broad jurisdiction to handle bankruptcy and insolvency disputes. In Peace River, the majority merely clarifies the circumstances in which courts’ jurisdiction pursuant to the BIA can be plugged into the exception under s. 15(2) of the Arbitration Act. In other words, the question is not which piece of legislation will trump the other in any given case, but rather, which piece of legislation properly applies. Each makes room for the other.

An Attack on Party Autonomy and Freedom of Contract?

A criticism which may be launched at Peace River is that it elevates centralized judicial processes over the important principles underlying arbitration law. As Justice Côté notes, “the mandatory nature of stay provisions across jurisdictions in Canada reflects the presumptive validity of arbitration clauses and the principle of party autonomy” (Peace River, para 88 [emphasis added]). While this criticism is understandable on its face, it is unfounded. S. 15(2) of the Arbitration Act makes clear that arbitration clauses are not infallible. Exceptions may be warranted to account for countervailing facts which render arbitration sub-optimal. To account for this while simultaneously protecting freedom of contract and party autonomy, these exceptions are “narrow” and the burden to meet them is “heavy” (Peace River, paras 133 & 139). The majority, perhaps anticipating this concern, assures us that “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” (Peace River, para 9 [emphasis added]). Insolvency does not, therefore, override arbitration law. The Arbitration Act and BIA are finely-tuned to give way to one another as needed.

Non-Insolvent Parties’ Interests

Another criticism which may be launched at Peace River is that it causes a one-sided negative effect on non-insolvent parties. In other words, parties who enter into and rely upon arbitration agreements may not get the benefit of those agreements due to another party’s insolvency. This is no fault of their own. While concerning, this is offset by the fact that in the majority opinion, room is made for non-insolvent parties’ interests. For example, the majority explicitly lists prejudice as a consideration in establishing exceptions under s. 15(2). Justice Côté stipulates, “the court should override the parties’ agreement to arbitrate their dispute only where the benefit of doing so outweighs the prejudice to them” (Peace River, para 155 [emphasis added]).

Conclusion 

In Peace River, the SCC found that where a court-ordered receivership is in play, arbitration agreements may be considered unenforceable if they compromise the orderly and efficient conduct of said receivership. This decision is significant because it has implications for commercial parties entering contracts with arbitration clauses. If bankruptcy and insolvency are a possibility, so too is the unenforceability of arbitration clauses. However, this should not be read as a threat to party autonomy and freedom of contract, but instead, as a fine balancing of those principles with the aims of bankruptcy and insolvency law.