Will a court uphold your arbitration agreement?

Construction contracts often contain a hierarchy of dispute resolution provisions commencing with “without prejudice” negotiations, then mediation, and culminating in the dispute being resolved by binding arbitration, rather than traditional litigation. Section 15(1) of British Columbia’s former Arbitration Act, R.S.B.C. 1996, c.55 (the “Arbitration Act”) provides that if one party to an arbitration agreement commences a legal action, the other party can ask the court to enforce the arbitration provisions of the contract and stay the court action. Section 15(2) of the Arbitration Act provides that the court must stay the legal proceedings, unless the court determines that the arbitration agreement is void, inoperative or incapable of being performed. Recently, in Peace River Hydro Partners v Petrowest Corp. (“Peace River”)[1] the Supreme Court of Canada (the “SCC”), considered whether an arbitration agreement in a construction contract was enforceable and whether a civil action commenced by a receiver to recover payment of funds owing to Petrowest and its affiliates should be stayed.  In reaching the decision that the action could proceed, the SCC had to consider whether, and in what circumstances, a contractual arbitration agreement governed by the Arbitration Act should give way to the public interest in ensuring the orderly and efficient resolution of a court-ordered receivership pursuant to the Bankruptcy and Insolvency Act (“BIA”).[2]

Peace River Hydro Partners v Petrowest Corp., 2022 SCC 41

In this case, several businesses formed together to create a partnership called Peace River Hydro Partners (the “Partnership”) to build a hydroelectric dam in northeastern British Columbia. In 2015, the Partnership subcontracted some of its work to Petrowest Corporation (“Petrowest”), an Alberta-based construction company and its affiliates (“Petrowest Affiliates”). The construction contracts contained several provisions that stipulated that disputes under the contracts were to be resolved through arbitration (the “Arbitration Agreements”).

Within two years of commencing the work, Petrowest and the Petrowest Affiliates began to encounter financial difficulties, which led to the Alberta Court of Queen’s Bench granting a receivership order pursuant to s. 243(1) of the BIA, and appointed Ernst & Young as receiver (the “Receiver”) over their affairs.

The Receiver commenced a civil action against the Partnership in the Supreme Court of British Columbia seeking to collect the money it said was owing to Petrowest and the Petrowest Affiliates. The Partnership sought to stay the action arguing that the dispute should be resolved by arbitration in accordance with the Arbitration Agreements. The Receiver opposed the Partnership’s attempt to stop the lawsuit and argued that the BIA grants the courts the ability to exercise “centralized judicial control” over the dispute instead of sending the Receiver to multiple arbitration forums. The chambers judge agreed with the Receiver and dismissed the stay application and allowed the civil claim to proceed.[3]

In reaching that decision, the chambers judge found that s. 183 of the BIA empowered the superior court to exercise its “inherent jurisdiction to control its own processes in order to promote the objectives of the BIA.”[4] The chambers judge also noted that enforcing the Arbitration Agreements would entail multiple overlapping arbitrations and potential litigation, resulting in “significant cost and delay” when compared with a single judicial proceeding.[5] The chambers judge emphasized that the parties agreed that overriding the Arbitration Agreements “would promote the efficient and inexpensive resolution of their dispute.”[6] Therefore, the chambers judge concluded that granting a stay of the Receiver’s court action would “significantly compromise achievement of the objectives of the BIA.”[7]

The Partnership appealed that decision to the Court of Appeal for British Columbia.  In dismissing the appeal and allowing the Receiver’s civil action against the Partnership to proceed, the court reasoned that the Receiver was not a “party” to the Arbitration Agreements, and that under the doctrine of separability, the Receiver was allowed to disclaim these Arbitration Agreements and pursue its court action against the Partnership based on the underlying contracts.

The Partnership then appealed the Court of Appeal’s decision to the Supreme Court of Canada (the “SCC”).  The SCC affirmed the dismissal of the Partnership’s stay applications by the courts below and allowed the Receiver’s action against the Partnership to proceed.  In reaching its decision, the SCC first rejected the Court of Appeal’s conclusion that s. 15 of  BC’s Arbitration Act was not engaged because the Receiver was not a “party” to the Arbitration Agreements, as it was inconsistent with “a proper reading of s. 15, ordinary principles of contract law, party autonomy and the SCC’s decisions with respect to arbitration.”[8] The SCC made clear that only a court can make a finding that an arbitration agreement is inoperative or incapable of being performed.

The SCC found that although s. 15 of the Arbitration Act was engaged, the chambers judge was entitled to refuse to grant the stay sought by the Partnership.  The SCC noted that there may be circumstances where an otherwise valid arbitration agreement may be inoperative or incapable of being performed, such as where enforcing an arbitration agreement would compromise court-ordered receivership proceedings under s. 243 of the BIA and preclude the orderly and efficient resolution of the receivership.

However, the SCC confirmed that the fact that a party has entered receivership or insolvency proceedings is not, on its own, a sufficient basis to find an arbitration agreement inoperative, and the party seeking to avoid an arbitration must establish, on a balance of probabilities, that a stay of a court proceeding in favour of arbitration would compromise the integrity of the insolvency process.  The SCC set out a non-exhaustive list of factors that may assist a future court’s analysis when deciding whether uphold the arbitration agreements or render them inoperable in favour of the bankruptcy and insolvency proceeding.  These factors include, but are not limited to: (1) the effect of arbitration on the integrity of the insolvency proceedings, which are intended to minimize economic prejudice to creditors; (2) the relative prejudice to the parties to the arbitration agreement and the debtor’s stakeholders; (3) the urgency of resolving the dispute; (4) the effect of the stay of proceedings arising from the bankruptcy and insolvency proceedings under the BIA; and (5) any other factors that the court considers material in the circumstances.

When will a court uphold an arbitration agreement?

The SCC found that the facts in this case were unique and pit public policy objectives underlying the BIA against freedom of contract and party autonomy which justified departing from long standing legislative and judicial preferences for upholding arbitration agreements.  The SCC reasoned that the unique circumstances of this case warranted rendering the Arbitration Agreements inoperative within the meaning of s. 15(2) of the Arbitration Act and that sections 183 and 243 of the BIA authorize courts to do what practicality demands in the context of a receivership.

The Arbitration Act has since been replaced by the new Arbitration Act, S.B.C. 2020 c.2 (the “New Arbitration Act”).  The New Arbitration Act does not contain sections 15(1) and 15(2) and reflects a legislative preference to uphold arbitration agreements.   Section 4(a) of the New Arbitration Act provides that « [i]n matters governed by this Act, a court must not intervene unless so provided in this Act ». Similar expressions of principle are found in provincial arbitration legislation across the country. It follows that, generally speaking, the legislative intent may be that judicial intervention in commercial disputes governed by a valid arbitration clause should be the exception, not the rule.[9]  However, this case demonstrates that courts can and will exercise their authority to render arbitration agreements inoperative when warranted in the context of a bankruptcy and insolvency matter.

If you have any questions, please feel free to reach out to a member Miller Thomson’s Construction Litigation group.

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[1] Peace River Hydro Partners v. Petrowest Corp., 2022 SCC 41.

[2] Ibid at 1.

[3] Ibid at 4.

[4] Petrowest Corporation v. Peace River Hydro Partners, 2019 BCSC 2221 at 38.

[5] Ibid at 60.

[6] Ibid at 56.

[7] Ibid at 61.

[8] Supra note 1 at 6.

[9] Ibid at 50.