Competing policy objectives are engaged when a party subject to court supervised insolvency proceedings is bound by an arbitration agreement in respect of an ongoing or pending dispute. In Peace River Hydro Partners v Petrowest Corp., the Supreme Court of Canada determined that an arbitration agreement may be inoperative in such a context, but did not decide that would be the result in all such cases. Structuring arbitration agreements to align as far as possible with the policy objectives engaged in insolvency proceedings can enable arbitration and insolvency to co-exist.

Arbitration’s popularity as a forum for dispute resolution amidst the backdrop of commercial insolvency gives rise to a complex interplay, marked by tension of competing public policies. This interplay was underscored in the Supreme Court of Canada’s landmark decision in Peace River Hydro Partners v Petrowest Corp. (“Petrowest“).^[1] The decision clarified the circumstances in which insolvency proceeding may supersede an otherwise valid arbitration agreement.

Broadly speaking, insolvency and arbitration stand in contrast, given that insolvency entails a centralized proceeding whereas arbitration involves a decentralized approach to dispute resolution.^[2]  An insolvency proceeding is centralized, promoting a collective process that takes precedence over individual creditor claims.^[3] Actions against the debtor are grouped into a single proceeding within a single jurisdiction. This fosters equality among creditors by preventing scenarios where more assertive creditors secure claims at the expense of those engaging in negotiations with the debtor. Simultaneously, it enables debtors to shield themselves from defending against claims in multiple proceedings or jurisdictions, reducing prejudice to the debtor while optimizing efficiency.^[4] In contrast, arbitration operates on a decentralized model, offering strategic advantages not always available under traditional court proceedings.^[5]

In Petrowest, the Court grappled with the question of when an otherwise valid arbitration agreement is unenforceable under section 15(2) of the old Arbitration Act (British Columbia) (the “Act“) in the context of a court-ordered receivership. In receivership, Petrowest brought a civil action in BC against Peace River for accounts receivable allegedly owed. Peace River applied to stay the action.

The central issue revolved around two key questions: whether section 15(1) of the Act was engaged, and, if so, whether the court had the jurisdiction to decline the stay based on the arbitration agreements being “void, inoperative or incapable of being performed” pursuant to section 15(2). The Supreme Court of Canada endorsed dismissal of the stay, but for a different reason than the lower courts. The majority held that the doctrine of separability should not be applied to the case at hand, finding that receivers cannot unilaterally disclaim an otherwise valid arbitration agreement.^[6]

The Court articulated a two-part framework. In the first part, the applicant must prove the technical prerequisites of the mandatory stay provisions in the applicable arbitration statute. In the second part, the burden shifts to the party opposing arbitration. That party must demonstrate on a balance of probabilities that the arbitration agreement is “void, inoperative or incapable of being performed”.^[7] Failing to demonstrate this compels the court to grant a stay of proceedings in favour of the arbitration. Each case must be decided on its own facts. The Court outlined a non-exhaustive list of factors to consider:

1. The effect of arbitration on the integrity of the insolvency proceedings.
2. The relative prejudice to the parties caused by resolving the dispute via arbitration.
3. The urgency of resolving the dispute.
4. The applicability of a stay of proceedings under bankruptcy or insolvency law.
5. Any other factor the court considers material in the circumstances.^[8]

The Court deemed the arbitration agreement inoperative due to its potential interference with the systemic and efficient resolution of the insolvency proceedings. Importantly, the Court held that the mere existence of an insolvency is not an inherently adequate ground to render an arbitration agreement inoperative.

Parties may simply agree to arbitrate their disputes despite an ongoing insolvency proceeding.^[9] In doing so, parties should be cautious about the risks associated with an overtly complicated or “chaotic” arbitral proceeding, as in Petrowest. This is particularly relevant in a commercial context where parties have multiple agreements each containing its own arbitration clause. In such instances, parties may benefit from having instead a single “master” arbitration agreement which governs all disputes.

An applicant may also seek a temporary lift of the stay of the proceedings to enforce the arbitration agreement. In deciding whether to lift the stay of the proceeding, courts consider the totality of the circumstances and weigh the potential prejudice to all parties involved.^[10] To succeed in the application, the applicant should demonstrate substantial prejudice that would likely occur if the stay were continued and establish the equitable grounds for such a declaration.^[11] Implementing a simplified or expedited arbitration procedure could strengthen the case for lifting the stay. This, coupled with the courts’ recognition of the importance of party autonomy particularly in the commercial sphere, could substantially fortify the case for lifting the stay, particularly if it can be established that a successful restructuring will not be delayed by allowing the dispute to proceed separately through arbitration.^[12]

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

[2] Ibid at para 45 citing, Re U.S. Lines, Inc., 197 F.3d 631 (1999), at p. 610 [according to the SCC report]; see also Societe Nationale Algerienne v. Distrigas Corp., 80 B.R. 606 (D. Mass. 1987), at p. 61.]

[3] Alberta (Attorney General) v Moloney, 2015 SCC 51 at para 33.

[4] Mundo Media Ltd. (Re), 2022 ONCA 607 at para 52 [Mundo].

[5] Petrowest, at para 46 citing J. B. Casey, Arbitration Law of Canada: Practice and Procedure (3rd ed. 2017), at ch. 1.6.

[6] Ibid at para 6.

[7] Ibid at paras 86 and 87.

[8] Ibid at para 155.

[9] Though in some circumstances this may be subject to court approval.

[10] Alignvest Private Debt Ltd v Surefire Industries Ltd, 2015 ABQB 148 at paras 40 and 43.

[11] Alberta Energy Regulator v. Lexin Resources Ltd., 2019 ABQB 23 at paras 14-17.

[12] Petrowest, at para 10 and 50.

David Gruber is the Co-head of the Bennett Jones LLP Litigation and Dispute Resolution department, and practices in the areas of commercial arbitration and litigation, insolvency and restructuring and also sits as an arbitrator.

Andy Hur is an articled student with Bennett Jones LLP.