Arbitrations And Receiverships: Do They Need To Be Legally Distant? – Litigation, Mediation & Ar…

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Canada:

Arbitrations And Receiverships: Do They Need To Be Legally Distant?

Case Study: Petrowest Corporation v. Peace River Hydro Partner


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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.

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.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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