Arbitration and Litigation and Bankruptcy, Oh My!
November 2022 - 3 min read
What happens when a party who has agreed to arbitrate its dispute goes bankrupt? If the arbitration process compromises the efficiency of the receivership process, the Court may decide to deal with the dispute and the entire bankrupt estate through one court action. As each arbitration agreement is different, the Court must consider each dispute's unique facts and circumstances to determine if arbitration would help or hinder the bankruptcy proceedings.
Over the past number of years, economic conditions have resulted in many insolvencies. Consequently, companies are spending more time and resources on risk management in their contracts. One risk management strategy is requiring mandatory arbitration in the event of disputes. These clauses state that if a dispute arises, the parties will resolve it using an agreed-upon arbitration mechanism rather than conventional litigation. Bankruptcy proceedings are normally handled through a single judicial proceeding. So, what happens when a party who has agreed to arbitrate its disputes goes bankrupt?
In the common law provinces, arbitration agreements are governed by provincial Arbitration Acts. Bankruptcy and insolvency proceedings are set out in the federal Bankruptcy and Insolvency Act (“BIA”).
Generally, receiverships in Canada follow the “Single Proceeding Model” and only bring one court action to deal with the entire bankrupt’s estate. Arbitration can follow any procedure contemplated in an arbitration agreement.
The Supreme Court of Canada has clarified whether and in what circumstances a mandatory arbitration clause should acquiesce to judicial proceedings under a court-ordered receivership. In particular, the Supreme Court dealt with the scenario where an arbitration agreement was in place, and a party was placed into receivership. The Court considered if the receiver was bound by the arbitration agreement, or if it could bring a claim on behalf of the insolvent party in court.
The appellant, Peace River Hydro Partners (“Peace River”), is a partnership that was working to build a hydroelectric dam in British Columbia. Petrowest Corporation (“Petrowest”) is a construction company that had contracts with Peace River for work. The contracts called for any disputes to be settled through a complicated arbitration process. Petrowest subsequently experienced financial turmoil, resulting in them being placed in a court-ordered receivership. Petrowest’s receiver brought an application in the British Columbia Supreme Court seeking funds owed by Peace River under the contracts that contained the arbitration agreements.
Peace River applied for a stay of proceedings to allow the matter to be resolved in arbitration as set out in their contracts. This meant the judge had to determine whether to allow the receiver to continue their claim in court or allow the arbitration agreements to rule the day and send the matter to arbitration.
When Should Court Proceedings Under a Receivership Be Stayed in Favour of an Arbitration Agreement?
The SCC ruled that Courts have the authority “to do what practicality demands in the context of a receivership.” The original Chambers Judge was empowered to refuse a stay for arbitration purposes. To determine whether to use their authority to grant a stay, the Court must determine two things:
- Whether the arbitration agreement meets the technical prerequisites for a stay of proceedings, and
- If it meets a statutory exception for a stay of proceedings.
The SCC went on to rule that the BIA empowers courts with additional authority to grant a stay in circumstances where “arbitration would compromise the orderly and efficient resolution of a receivership,” despite an arbitration agreement not meeting a statutory exception for a stay. This clarification means that courts must consider the unique facts and circumstances of a dispute involving a bankrupt party to an arbitration agreement to determine whether arbitration would help or hinder the bankruptcy proceedings.
In bankruptcy and arbitration law, the efficiency and effectiveness of the proceedings is a major priority. In Canada, the insolvency process is known for devolving into “chaos and inefficiencies,” so courts prefer to resolve claims in the bankrupt estate through a single proceeding.
Arbitration agreements allow parties to negotiate the terms of their potential arbitration, which means they can be as simple or as complicated as the parties want. The discretion to deny the opportunity to arbitrate claims is meant to be exercised with care. It should only be exercised when the unique facts and circumstances of a dispute mean that the processes within a given arbitration agreement would be less orderly and efficient than the single proceeding usually brought under a receivership.
In the context of Peace River and Petrowest’s dispute, the arbitration agreements set out multiple overlapping arbitral proceedings, whereas the receiver for Petrowest was bringing a single application to resolve all claims against Petrowest. The Court found that the facts of this case meant that the arbitral processes in the agreements would compromise the efficiency of the receivership for Petrowest. In this case, the Court properly exercised its discretion to refuse to impose a stay of the judicial proceedings.
If you find yourself in a dispute involving bankruptcy, receiverships, arbitration agreements, or any other alternative dispute resolution mechanisms, contact Rob Rakochey, Anthony Burden, or Doug Nishimura.
Link to decision: Peace River Hydro Partners v. Petrowest Corp., 2022 SCC 41