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Legal Notes: Supreme Court overturns arbitration in favour of insolvency

John Bleasby
Legal Notes: Supreme Court overturns arbitration in favour of insolvency

This column has recently examined instances where the authority or jurisdiction of an arbitrator has been challenged by a party to a construction contract.

However, as Todd Burke, co-head of the international arbitration practice group for Gowling WLG in Ottawa, writes, “The courts (have) generally adopted a ‘hands-off’ approach to preliminary questions of jurisdiction and arbitrability. The courts have also largely respected the parties’ agreement to arbitrate and choice of arbitrator by upholding arbitrators’ decisions and rejecting disguised appeals on the merits where such appeals have been excluded by the parties.”

This is why the November 2022 Supreme Court decision concerning Peace River Hydro Partner vs. Petrowest Corp. has attracted the attention of law firms across Canada. It’s a rare case where an arbitration agreement has been declared “inoperative” and set aside in favour of insolvency proceedings.

Peace River was subcontracted to Petrowest on a hydroelectric dam project in British Columbia. Multiple arbitration agreements were included in their contract. When Petrowest experienced financial problems, a receiver was appointed to manage the affairs and assets of the company and its affiliates. The receiver sued, challenging the enforceability of the arbitration agreements.

Peace River applied for a stay of that lawsuit, claiming the arbitration agreements governed the dispute.  The British Columbia Superior Court, the B.C. Court of Appeal (BCCA), and ultimately the Supreme Court of Canada, found the stay application should be dismissed.

The standoff between arbitration and insolvency represents what Osler LLP litigation partner Lauren Tomasich and associate Sarah Firestone describe as “tension between arbitration, a consensual method of dispute resolution where parties can customize their process and select their own decision-maker, and insolvency, where disputes involving the debtor are involuntarily consolidated in a single insolvency proceeding.”

Legal experts appear to agree that instances of overlap between arbitration and insolvency must be fact-based and specific to each case. Even so, staying arbitration in favour of insolvency is unusual. However, if arbitration upsets the normal flow of an insolvency proceeding, there is a risk the arbitration agreement could be ruled unenforceable.

As Gowling WLG associate James Plotkin writes, the court had concerns that included “the relative prejudice to the arbitral parties versus other stakeholders” that may not be specifically named in the contract.

“Recognizing that courts should usually enforce arbitration agreements, even in the insolvency context, the court observed that sometimes doing so risks frustrating the orderly administration of an insolvent estate to the detriment of its stakeholders.”

Tomasich and Firestone note the Supreme Court overturned the BCCA ruling concerning separability. As described by Anthony Daimsis, “The purpose of separability is to uncouple the arbitration agreement’s validity from the underlying contract’s validity, thereby safeguarding arbitral authority and reinforcing party autonomy as expressed in the parties’ original agreement to arbitrate.

“The majority was of the view that the Court of Appeal misapplied the doctrine of separability (the concept that an arbitration agreement is a distinct agreement), as it does not apply absent a challenge to the validity of the main contract or of the arbitration agreement itself, and that a consideration of separability was not required to resolve this appeal.”

Tomasich and Firestone note important similarities and differences between arbitration and insolvency.

On one hand, “Arbitration law is typically marked by party autonomy, whereas insolvency law has close judicial oversight.”

Yet there is also overlap.

“This decision really emphasizes the shared interests between the two regimes rather than their differences,” they write. “More specifically, the advantages of efficiency, expediency, procedural flexibility and decision-makers with specialized expertise all highlight that perhaps the regimes are not so different after all.”

“In some cases, enforcing an arbitration agreement will not hinder (and may even assist) the insolvency/bankruptcy policy objectives,” writes Plotkin.

“However, enforcing one or more arbitration agreements will sometimes hamper the orderly administration of a debtor’s estate, or even bring it to a grinding halt. Each case will turn on its own facts. Practicality, rather than rigid formalism, will govern the analysis.”

John Bleasby is a Coldwater, Ont.-based freelance writer. Send comments and Legal Notes column ideas to

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