Firm News Alert

June 2021

Arbitrations and Receiverships: Do they need to be legally distant?

Case Study: Petrowest Corporation v. Peace River Hydro Partner

Howard Borlack
Howard Borlack,
Partner

Anita Zamani
Anita Zamani,
Student-at-Law

by Howard Borlack and Anita Zamani

A receiver can sue on a contract yet disclaim the contract's arbitration clause, determined the BCCA in Petrowest Corporation v. Peace River Hydro Partners 2020 BCCA 339. The defendants applied for an order to stay an action brought against them by the receiver for Petrowest, pursuant to section 15 of the BC Arbitration Act (“the Act”). The defendants appealed the chambers judge's decision that despite section 15 of the Act being engaged, section 138 of the Bankruptcy and Insolvency Act (“BIA”) empowered her with discretion to avoid operation of section 15 on the grounds that significant cost and delay would unfairly occur.

The Facts
The receiver was appointed with the task of collecting amounts allegedly owed to Petrowest by the appellants under various agreements that were subject to mandatory arbitration. Section 15 of the Act allows a party to apply to stay a legal proceeding on the basis that the agreement was subject to mandatory arbitration, and a court must make the order to stay unless the arbitration agreement is void, inoperative, or incapable of being performed.

The issue was whether the receiver could sue on the contract while disclaiming the same contract's mandatory arbitration agreement. “The question turns on the effect, if any, of the appointment of the receiver and assignments into bankruptcy pursuant to the provisions of the BIA, on the application of section 15 of the Act to the claims brought in this proceeding.”

Held
The BCCA dismissed the appeal and upheld the chambers judge's decision, despite arriving to that final decision on different grounds.

“void, inoperative, or incapable of being performed”...

The appeal court determined that section 15 of the Act was not engaged because it only applies to those who are a party to the arbitration agreement in question. A receiver differs from a debtor in that a receiver is an officer of the court, and owes a fiduciary duty to all stakeholders, including secured and unsecured creditors as well as the debtor, and they act as a trustee for all stakeholders. In this case, the receiver was not acting as a trustee or agent of Petrowest alone, but rather had a fiduciary obligation to fulfil its duties to all stakeholders. It was for this reason that the receiver was not bound to the contract of the debtor and had the power to disclaim the arbitration clause.

The BCCA also applied the doctrine of separability to arbitration agreements in determining that a receiver may disclaim the arbitration agreements notwithstanding the use of the same contract to sue the parties. As soon as the receiver commenced the proceeding, the arbitration agreement was disclaimed, making it “void, inoperative, or incapable of being performed” within the meaning of section 15(2). The remainder of the agreement was operable and could be sued on.


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