Arbitration and Insolvency Law: Supreme Court of Canada to Consider Whether a Receiver is Bound by an Arbitration Agreement
By Jessica L. Cameron and Jack R. Maslen
On June 10, 2021, the Supreme Court of Canada granted leave to appeal from the decision of the Court of Appeal for British Columbia in Petrowest Corporation v Peace River Hydro Partners (Petrowest)[1]. The central issue in this case is the enforceability of arbitration agreements against a court-appointed receiver. The Supreme Court of Canada will now have the final word and its decision is expected to have important implications for arbitration and insolvency practitioners alike, particularly regarding the principle of “separability” and a receiver’s “disclaimer” power.
On June 10, 2021, the Supreme Court of Canada granted leave to appeal from the decision of the Court of Appeal for British Columbia in Petrowest Corporation v Peace River Hydro Partners (Petrowest).[1] The central issue in this case is the enforceability of arbitration agreements against a court-appointed receiver. The Supreme Court of Canada will now have the final word and its decision is expected to have important implications for arbitration and insolvency practitioners alike, particularly regarding the principle of “separability” and a receiver’s “disclaimer” power.
A. Separability and the Receiver’s Disclaimer Power
The principle of separability provides that an arbitration clause must be treated as a separate and distinct contract from the substantive provisions. Thus, the arbitration clause will survive the invalidity or termination of the underlying contract. Without resort to the principle of separability, the jurisdiction of the tribunal to consider questions going to the root of the underlying contract would be significantly hindered. Separability has been recognized as a foundational principle of commercial arbitration, by various national courts, including by Madam Justice Côté of the Supreme Court of Canada in the Uber decision.[2]
Under Canadian insolvency law, a court-appointed receiver has the authority to “disclaim” executory contracts entered into by the debtor. This power is expressly set out in most receivership orders,[3] but is also entrenched in Canada’s common law.[4] A receiver’s disclaimer power is premised on the need for the receiver to maximize value for stakeholders by ending uneconomic contracts.
B. The Petrowest Decision
Petrowest concerned the insolvency of a construction company, Petrowest Corporation. Petrowest had entered into contracts with Peace River Hydro Partners (PHRP) in relation to a hydroelectric project in BC. Thereafter, Petrowest became insolvent and Ernst & Young Inc. was appointed by the Alberta Court of Queen’s Bench as the Receiver. The Receiver then sued PHRP in the Supreme Court of British Columbia, claiming that amounts were owing by PRHP. However, the contracts contained mandatory arbitration clauses and PHRP applied to the Court for an order staying the proceedings pursuant to BC’s Arbitration Act.[5] The Arbitration Act provides that a party to an arbitration agreement may apply to stay proceedings that are commenced by another party to the arbitration agreement, and the court “must” make an order staying the proceedings unless the arbitration agreement is void, inoperative or incapable of being performed.[6] The chambers judge concluded that the provisions of the Arbitration Act requiring a stay were “engaged”, but nonetheless declined to grant the stay based on the court’s inherent jurisdiction in insolvency proceedings.[7] PHRP appealed to the Court of Appeal.
In a decision released on November 30, 2020, the Court of Appeal unanimously dismissed the appeal, though not based on “inherent jurisdiction”. Rather, the Court explained that the Receiver is an officer of the court and owes fiduciary duties to all stakeholders. Accordingly, the Court confirmed that the Receiver is not bound by the executory contracts of the debtor and may disclaim such contracts.[8]
The Court of Appeal then analyzed the doctrine of separability, asking “whether arbitration clauses can be treated differently in the particular circumstances [i.e. a receivership]”.[9] In so doing, the Court acknowledged that the principle of separability typically operates to preserve (not avoid) arbitration clauses when substantive contractual provisions are impugned. Nonetheless, the Court concluded that separability is well entrenched under English and Canadian common law and ultimately provides that arbitration agreements are “independent and separable”, presumably for all purposes. Accordingly, the Court held that the Receiver was permitted to disclaim the arbitration clauses and yet sue on the substantive provisions of the subcontracts. When separability and the disclaimer power were viewed together, the Receiver was not suing on contracts that had been disclaimed (only the arbitration clause was disclaimed) nor was the Receiver bound to arbitrate (having disclaimed the arbitration clause).[10] The Petrowest decision is a significant step in the evolving relationship between the doctrine of separability and a receiver’s disclaimer power.
C. Leave to Appeal to the Supreme Court Granted
The Supreme Court of Canada has now granted PHRP’s application for leave to appeal from the Petrowest decision. It is expected that the Supreme Court will clarify when a receiver may disclaim an arbitration agreement and opine on both the doctrine of separability and the extent of a receiver’s disclaimer power in the process. Until then, receivers appear to be at liberty to disclaim pre-insolvency arbitration agreements yet still enforce the substantive contract.
[1] Petrowest Corporation v Peace River Hydro Partners, 2020 BCCA 339 [Petrowest], leave to appeal granted by Peace River Hydro Partners, et al v Petrowest Corporation, et al, 2021 CanLII 49685.
[2] Uber Technologies Inc v Heller, 2020 SCC 16, paras 220-225; see also Chapter 2,. Nigel Blackaby, Constantine Partasides QC, Alan Redfern & Martin Hunter, “Agreement to Arbitrate” in Redfern and Hunter on International Arbitration, 6th ed (Kluwer Law International: Oxford University Press 2015) ch 2 at 71-154.
[3] Alberta Template Receivership Order (February 2019 update), s 3(c).
[4] Sovereign Bank of Canada v Parsons, 1912 CarswellOnt 770 (JCPC); Frank Bennett, Bennett on Receiverships, 3rd ed (Toronto: Thomson Reuters, 2011), at 433; Canada (Attorney General) v Ernst & Young Inc, 2019 ABCA 180 at para 10.
[5] When the application was heard, in 2019, the applicable legislation was the Arbitration Act, RSBC 1996, c 55 [the Old Act], which was replaced by the Arbitration Act, SBC 2020, c 2 [the New Act] by the time the appeal to the Court of Appeal was heard.
[6] See Old Act, s 15; New Act, s 7.
[7] Petrowest Corporation v Peace River Hydro Partners, 2019 BCSC 2221 at paras 34, 60-62.
[8] Petrowest, supra note 1 at paras 37-42.
Jessica L. Cameron is a Partner in the Disputes Group at Borden Ladner Gervais LLP Calgary. Her practice focuses on commercial litigation and arbitration, with an emphasis in insolvency and restructuring.
Jack R. Maslen is a Senior Associate in the Disputes Group at Borden Ladner Gervais LLP Calgary. His practice focuses on commercial litigation and arbitration, with an emphasis in insolvency and restructuring.
