March 16, 2020

Encountering an Arbitration Clause in the Bankruptcy Context: What is at Stake?

Carly Williams, Marrie Shirzada & Meghan Huskisson-Snider 

 

To a much greater extent than in other areas of the law, a bankruptcy court requires flexibility to balance the interests of the various stakeholders involved and fashion pragmatic solutions to unanticipated problems that may arise in the course of the insolvency proceedings.[1]

 

In Petrowest Corporation v. Peace River Hydro Partners, the British Columbia Supreme Court attempted to reconcile the province’s Arbitration Act with the Bankruptcy and Insolvency Act. 

Factual Background

The parties entered into agreements that were subject to mandatory arbitration. After Petrowest was assigned to bankruptcy in 2017, it subsequently filed a civil notice of claim against the defendant in 2018, seeking payment for work performed under the agreement. The defendants applied for a stay under section 15(1) of the Arbitration Act, arguing that the mandatory arbitration clauses contained in the agreement governed the plaintiff’s claims. 

Overriding the Arbitration Clause

Under section 11 of the Companies CreditorsArrangement Act, the court has the power to override an arbitration clause as well as the mandatory requirement in section 15(2) of the Arbitration Actin appropriate circumstances.

Similarly, section 183 of the BIA provides the court “with such jurisdiction at law and in equity as will enable them to exercise original, auxiliary and ancillary jurisdiction in bankruptcy.” Section 183 of the BIA was interpreted in Pope & Talbot, where courts were found to have inherent jurisdiction to control their processes to achieve the objective of the BIA. This could include overriding arbitration clauses, as was done in Pope & Talbot, to avoid the operation of section 15 of the Arbitration Act. 

Application in Petrowest

Iyer J relied on Pope & Talbot and held that s. 15(2) of the Arbitration Actdoes not prevent the court from exercising its discretion to determine whether to refuse to stay proceedings where s. 183 of the BIA applies.^[2]The court held that inherent jurisdiction has limits and should be exercised sparingly to advance fairness and efficiency in the legal process.^[3]It adopted the cautious approach of Topiniski J in Residential Warranty, that while the court has the jurisdiction to craft appropriate remedies where the BIA is silent, this jurisdiction should only be exercised “where the benefit of granting the remedy to the insolvency process as a whole outweighs the prejudice to affected parties”.^[4]

Courts must weigh several concerns when deciding whether to override an arbitration clause when insolvency proceedings are ongoing, including: 

• the ability of the trustee to make distributions;
• whether the integrity of the bankruptcy process is compromised; and 
• the realistic alternatives in the circumstances, the impact on other stakeholders such as creditors, the anticipated time and the cost involved.^[5]  

In cases where the arbitration clause will hold the insolvency proceedings “hostage”, Canadian courts have exercised their discretion to override section 15 of the Arbitration Act.^[6]In Petrowest,  Iyer J concluded that the exercise of inherent jurisdiction under the BIAwas not confined to dire circumstances; it was acceptable to invoke inherent jurisdiction simply to ensure fairness and efficiency in insolvency proceedings, a fundamental objective of the BIA.

Future Implications

The court’s decision has important consequences in the insolvency context, one of a group of narrow contexts in which courts have a statutory power to override section 15 of the Arbitration Act. The emphasis in Petrowest on orderly and expeditious resolution of insolvency proceedings demonstrates that courts are comfortable intervening despite valid arbitration agreements entered into by both parties. Where pro-arbitration policy conflicts with policies favouring efficient bankruptcy processes and positive outcomes for creditors, that latter appear to win out. 

CJCA blog posts represent the individual opinions and perspectives of their authors. The Canadian Journal of Commercial Arbitration does not maintain or publish a collective or institutional view on any legal or political issue.