Authors: John Martens, Jennifer Sokal, Anjali Sandhu, Mike Segstro
There’s a chance the arbitration clauses in your construction contracts may not survive an insolvency proceeding, as illustrated by a recent decision from the Supreme Court of Canada (“SCC”).
On November 10, 2022, the SCC released its decision in Peace River Hydro Partners v Petrowest Corp, 2022 SCC 41, a case that clarifies the applicability of arbitration laws in the context of receivership proceedings under the Bankruptcy and Insolvency Act (“BIA”). Although arbitration law and insolvency law are viewed by some as polar opposites, the SCC confirmed they have much in common, especially when it comes to judicial efficiency and expediency. After applying the two-stage test for staying Court proceedings in favour of arbitration proceedings, the SCC determined that the arbitration agreements in the case were inoperative because, if enforced, they would compromise the orderly and efficient resolution of the receivership proceedings which had been commenced with respect to one of the parties.
Background
The appeal involved a construction dispute between two contracting parties. The appellant, Peace River Hydro Partners (“Peace River”) was a partnership formed to build a hydroelectric dam in northeastern British Columbia (“the Project”). The respondent, Petrowest Corporation (“Petrowest”) was an Alberta-based construction company subcontracted by Peace River. The parties executed agreements (the “Arbitration Agreements”) stating that any disputes throughout their contractual relationship would be resolved through arbitration.
Petrowest encountered financial difficulties, resulting in the Alberta Court of King’s Bench ordering Petrowest and its affiliates into receivership under section 243 of the BIA. The Receiver brought a civil claim in the Supreme Court of British Columbia seeking to collect outstanding funds that were allegedly owed to Petrowest and its affiliates by Peace River.
Peace River applied to stay the civil claim under section 15 of B.C.’s Arbitration Act, which requires that the Court stay a proceeding in favour of arbitration unless the arbitration agreement is “void, inoperative or incapable of being performed.” The Receiver objected, arguing that the BIA permitted the Court to assert centralized judicial control over the matter, thereby allowing the Receiver to avoid dealing with disputes in multiple arbitrations.
Both of the lower Court decisions found in favour of the Receiver. Peace River then appealed to the SCC.
The SCC’s reasoning
The SCC agreed with the lower Courts’ conclusions and dismissed the stay application, allowing the matter to proceed as a civil claim before the Court. However, the SCC clarified that a party entering receivership, in and of itself, is not enough to void an otherwise valid arbitration agreement.
The SCC outlined two stages that must be proven in order to stay proceedings under provincial arbitration legislation across the country:
- Technical Prerequisites
In the first stage, the party applying for a stay of Court proceedings must prove that the arbitration agreement engages the mandatory stay provision in the applicable provincial arbitration statute. In this case, the relevant statutory provisions were contained in section 15 of B.C.’s Arbitration Act.
The Court stated that the party applying for a stay in favour of arbitration must establish the presence of each of the following four technical prerequisites:
- an arbitration agreement exists;
- Court proceedings have been commenced by a party to the arbitration agreement;
- the Court proceedings are in respect of a matter that the parties agreed to submit to arbitration; and
- the party applying for a stay in favour of arbitration does so before taking any step in the Court proceedings.
In order to prove the above criteria, the SCC noted that the party applying for the stay in proceedings must only establish an “arguable case” that the technical prerequisites are met. This is a lower threshold to meet than the typical standard of proof in other civil matters. If the four prerequisites are met, the Court moves to the second stage of the test.
- Statutory Exceptions
At this second stage of the test, the burden of proof shifts to the party wishing to avoid the arbitration (in Petrowest, the Receiver). The key question here is whether the party seeking to avoid arbitration has shown that one or more relevant statutory exceptions apply.
In this case, the relevant statutory exceptions were found in section 15(2) of B.C.’s Arbitration Act – namely, that a Court must stay the legal proceedings unless it determines that the arbitration agreement is void, inoperative or incapable of being performed.
In making this determination, the SCC considered the primary objectives of the BIA – namely, providing an orderly and efficient resolution to receiverships. The SCC found that arbitration agreements may be “inoperative” where enforcing them would compromise the efficient resolution of the insolvency proceedings and outlined the following list of non-exhaustive factors to consider:
- the effect of arbitration on the integrity of the insolvency proceedings;
- the relative prejudice to the parties from referring the dispute to arbitration;
- the urgency of resolving the dispute;
- the applicability of a stay of proceedings under bankruptcy or insolvency law; and
- any other factor the Court considers material in the circumstances.
Applying the test
In the case before it, the SCC applied the two-stage test outlined above to section 15 of B.C.’s Arbitration Act.
In the first stage of the test, the SCC found that Peace River had established an arguable case that all four of the technical requirements had been met and that the Receiver qualified as a party to the Arbitration Agreements. Thus, the burden shifted to the Receiver to prove that a statutory exception under section 15(2) existed in the circumstances.
In applying the second stage of the test, the SCC found that the Receiver established that the Arbitration Agreements were “inoperative” under the statute because the arbitration processes described in the agreements would compromise the orderly and efficient resolution of the receivership, contrary to the objectives of the BIA. Referring this case to arbitration in the unique circumstances of this case would have jeopardized the Receiver’s ability to maximize recovery for the creditors, given the inefficiency of multiple overlapping arbitral proceedings.
The SCC emphasized that Arbitration Agreements will not always be deemed inoperative in scenarios where a Court-appointed officer (such as a Receiver) initiates Court proceedings on behalf of a debtor. Indeed, the supervising Court in those situations may view arbitration as the most expeditious way to prove the claim initiated on the debtor’s behalf. In other words, the determination will continue to balance the parties’ interests in order to ensure the primary objectives in the BIA are not jeopardized.
Takeaways
Petrowest creates some uncertainty about whether a party to a dispute can rely upon an arbitration agreement in an insolvency context. It remains to be seen how this precedent will be interpreted in Manitoba when an arbitration agreement contained in a construction or other contract is challenged.
In insolvency situations, Courts must continue to assess the balance between arbitration agreements and parallel insolvency proceedings on a case-by-case basis, having regard to the primary objectives of bankruptcy and insolvency law.
Many construction industry stakeholders include arbitration agreements in their contracts or use standard form construction contracts that include an arbitration agreement. In cases where a construction company becomes insolvent, parties usually want to use the most efficient process to resolve matters. Parties can take comfort in the Court’s recognition that arbitration and insolvency both share the objective of judicial efficiency and expedience. It appears that, if arbitration would interfere with the efficiency of resolving the disputes facing the insolvent entity, the Court may allow the objectives of the insolvency regime to overwhelm the agreement to arbitrate.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.