Written by Connor Jonsson
A natural tension exists where a company that is subject to insolvency proceedings (such as bankruptcy) is also a party to an arbitration agreement. In such cases, there may be conflicting decisions issued by the arbitrator and the insolvency court, or there may be disagreement about which forum has the authority to hear the dispute. The modern view has tended to be that agreements to arbitrate should be honored, consistent with the principles of party autonomy and freedom of contract. Insolvency procedures, however, favour a centralized judicial process and can override certain pre-insolvency agreements in order to achieve objectives in the best interests of creditors. In a much-anticipated decision, the Supreme Court of Canada (SCC) recently weighed in on these conflicting principles in Peace River Hydro Partners v. Petrowest Corp., and, in doing so, addressed a key intersection of insolvency and arbitration law.
The Appellant, Peace River Hydro, was a partnership formed to build a hydroelectric dam in northeastern British Columbia that subcontracted the respondent Petrowest to perform certain work on the dam. The parties agreed that disputes arising from their relationship were to be resolved through arbitration. Peace River Hydro soon found itself in significant financial trouble and was ordered by the court into receivership, pursuant to s. 243 of the Bankruptcy and Insolvency Act (the “BIA”). The receiver brought a civil claim seeking to collect money owed to Petrowest by Peace River Hydro for the benefit of the creditors of Petrowest. Peace River Hydro made a request to the court to halt the legal proceedings under section 15 of British Columbia’s Arbitration Act, arguing that the dispute was covered by the arbitration agreements in place. The lower court denied this request and the decision was upheld on appeal.
The question before the Court was whether the lower court erred in dismissing the stay of proceedings requested by Peace River. Section 15 of the British Columbia Arbitration Act, RSBC 1996 c. 55 (as it then was), requires a stay of proceedings where a party to an arbitration agreement has commenced a court proceeding in respect of a matter to be submitted to arbitration. There are narrow exceptions to this general rule, namely where the agreement is void, inoperative, or incapable of being performed.
The SCC undertook a two-stage analysis. First, that the party applying for a stay of proceedings must establish that the relevant provisions in the arbitration statues applies to the arbitration agreement. The analysis began with an assessment of whether the technical prerequisites for establishing an “arguable case” was proven by Peace River Hydro. The four technical prerequisites are: there must be an arbitration agreement; the court proceedings must have been commenced by a party to the agreement; the court proceedings must be in respect of a matter that the parties agreed to submit to arbitration; and the party applying for a stay must do so before taking any step in the court proceedings. Justice Wagner, writing for the majority, found that the necessary requirements outlined in section 15(1) of the Arbitration Act were met. The dispute in question was related to a contract and was covered by valid arbitration agreements. Peace River Hydro also showed that the court-appointed Receiver was a party to the arbitration agreements and had not yet taken any steps in the proceedings. Justice Wagner concluded that the court must grant a stay in favour of arbitration unless the agreements were found to be void, inoperative, or impossible to perform.
The second stage of the analysis assessed whether any exceptions apply. Section 15(2) gives a court the power to refuse a stay by finding that an arbitration agreement has become inoperative or incapable of being performed, where arbitration would compromise the orderly and efficient resolution of a receivership. This stage of analysis will always turn on the particular factual scenario before the court. The SCC laid out a list of non-exhaustive factors to consider:
- The effect of arbitration on the integrity of the insolvency proceedings.
- The relative prejudice to the parties caused by resolving the dispute via 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.
In the case at bar, the SCC agreed with the lower courts that the arbitration agreements were inoperative, as the multiple arbitration processes outlined in the agreements would disrupt the orderly and efficient resolution of the receivership, in direct opposition to the objectives of the BIA. The majority noted that while the importance of party autonomy and the freedom to contract is acknowledged, referring the dispute to arbitration in this specific situation would harm the Receiver’s ability to recover assets for creditors and to move forward with certainty for Petrowest and its affiliates.
While there is an inherent tension between the two, the Court noted that there are important commonalities between arbitration law and insolvency law, with both prioritizing efficiency, flexibility, and the use of specialized decision makers. Of course, they may come into conflict in cases where ongoing insolvency proceedings necessitate a centralized judicial process in order to protect the orderly restructuring or dissolution of a debtor and the fair treatment of its creditors. In most cases, valid arbitration agreements should be upheld and exceptions to this general principle should be narrowly interpreted on a factual basis. The preference for arbitral jurisdiction is supported by court precedent, provincial and territorial legislation, and the principle of party autonomy. However, the SCC made clear that practicality demands that a court have the ability, in limited circumstances, to decline to enforce an arbitration agreement following a commercial insolvency in the name of efficiency and expediency.
 Peace River Hydro Partners v. Petrowest Corp., 2022 SCC 41 [Peace River].
 Peace River, supra note 1 at para 2.
 Peace River, supra note 1 at para 2.
 Peace River, supra note 1 at para 3.
 It should be noted that in between the time the arbitration agreement was entered into and the SCC decision was released, BC introduced new arbitration legislation. For the purposes of this case, the new act contains the same relevant provisions as the old act.
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