Canada: Enforceability of Arbitration Clauses in Insolvency Proceedings
On the 10th of June in the year 2021, A leave was granted to appeal a decision with the implications for the enforceability of alternative dispute resolution clauses in insolvency proceedings in Canada by the supreme court of Canada.
A receiver was appointed in the case of Petrowest Corp. V. Peace River Hydro Partners over Petrowest under Canada's Federal Bankruptcy and Insolvency Act (BIA).
In this case, the company was assigned into bankruptcy by the receiver later, and he was also acting as its bankruptcy trustee. Several different contracts governed all the amounts to be given to Petrowest, and each contained an arbitration agreement. The receiver/ trustee started a recovery process to recover all the payments through a single judicial process rather than through the different arbitration process as stated above. Based on British Columbia's Arbitration act, all the defendants applied for a stay of proceedings. The arbitration act and its legislative replacement allow any parties to apply to the court for a stay in proceedings whenever an Arbitration Agreement governs the disputes.
Then the stay was opposed by the receiver/trustee stating that the court should only exercise its jurisdiction and discretion to stay the proceedings.
The decision of the Supreme Court
The lower court agreed with the receiver that multiple proceedings were unnecessary and costly too. A large sum of money was at stake, and until and unless the conflicts were settled, the insolvency and administration could not have been completed. However, the lower court also found out that the arbitration agreements bound the receiver but that multiple arbitrations would have defeated the BIA's goals. Thus, the lower court denied the stay in proceedings.
The decision of the Court of Appeal
Further, the lower court's decision was appealed to the British Columbia Court of appeal, which again reached the same result. However, there were many different reasons, deciding that the receiver disclaimed the arbitration agreement and therefore the arbitration clause became void and incapable of being performed. The Court of Appeal held that it was permissible for a receiver/trustee to enforce insolvent debtors’ contracts while also displaying the arbitration agreements with those contracts.
Impact of the Decision
The reasoning which the court of appeal gave was that the receiver had disclaimed the arbitration agreement and was not a party to it; therefore, he had nothing to do with it. Furthermore, it has been stated under the arbitration act that the first requirement to stay in the proceedings is that the party bringing the proceeding must be a party to the arbitration agreement because the receiver was free to disclaim the arbitration agreement. Therefore, the defendants were unable to stay in the proceedings in favor of arbitration.
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