One of the preconceptions that people have about the law is that resolving issues through the courts can be costly and slow. In many ways, this can be true. That is one of the reasons why other methods of dispute resolution, such as mediation and arbitration, are becoming more popular. 

HMC Lawyers provides clients with mediation and arbitration services in various areas, including commercial disputes. When parties enter into contracts, they may decide that any future conflict they can’t resolve is decided by arbitration, allowing them to avoid the cost and time associated with taking a matter to court. Arbitration might also be preferred to avoid conflict in the public domain. In some cases, one of the parties contracted to use arbitration to resolve a dispute might eventually find themselves insolvent. How does this impact a contractual agreement to arbitrate? 

If a company is no longer managing its matters, can the contract it signed with another party still be enforced? In a recent decision, the Supreme Court of Canada ruled on that question. It provided a list of factors to be considered when one party wishes to stay in court proceedings to pursue arbitration.

Parties enter contract in which they agree to arbitration

The appellant in the case was a company formed to do design and construction work on a major dam and hydroelectric generating station in British Columbia. One of the partners in the project was one of the respondents in the matter (“PW”). PW and its affiliates encountered financial difficulty two years into the project and entered receivership on August 15, 2017. The Receiver, who is also one of the respondents, was authorized to, amongst other things, collect debts owed to PW. Upon learning that the appellant owed PW money, the Receiver brought a civil claim against the appellant to obtain a judgment for the money owed. 

The appellant applied under the province’s Arbitration Act for a stay of proceedings on the grounds that any disputes between PW and the appellant were to be resolved through arbitration, not the courts. 

The relevant section of the Act states the following:

(1)   If a party to an arbitration agreement commences legal proceedings in a court against another party to the agreement in respect of a matter agreed to be submitted to arbitration, a party to the legal proceedings may apply, before filing a response to civil claim or a response to family claim or taking any other step in the proceedings, to that court to stay the legal proceedings.

(2)  In an application under subsection (1), the court must make an order staying the legal proceedings unless it determines that the arbitration agreement is void, inoperative or incapable of being performed.

At the original trial, the chambers judge found that the Receiver was a “party to the arbitration agreement” because it had acquired the contractual right to sue the appellant under the contract terms. The chamber’s judge decided to deny the application to stay the proceedings, stating that enforcing multiple arbitration agreements would result in “significant cost and delay” instead of pursuing a single judicial proceeding. 

The appellants appealed that decision but were unsuccessful once again. However, the Court of Appeal cited different reasons than the chambers judge. The Court of Appeal relied on a legal doctrine called the “doctrine of separability in arbitration law.” This doctrine allows an arbitration agreement to be a self-contained piece of a contract, which gives a party a right to remove themselves from it. In this case, the court found that the Receiver was a party to the contract but was allowed to disclaim it and pursue it in court. 

Supreme Court of Canada weighs in

The appellants were once again unsuccessful on appeal to the country’s highest court. However, much like the Court of Appeal, they had their own reasons to deny the stay. The majority decision, written by Justice Côté, found that the Receiver had become a party to the arbitration clause. The court wrote that the respondent could not take on the benefit of a contract while avoiding its obligations. In short, the Receiver’s right to sue only existed because of the contract, and that same contract required arbitration. 

The court wrote that valid arbitration agreements should generally be respected, notwithstanding any insolvency issues. The court stated that this thinking has been supported by judicial decisions and provincial and territorial legislation. In addition, parties are free to enter into contracts and should be held to those terms.  With that said, the court recognized that in certain insolvency situations, it may be necessary to turn away from arbitration in favour of a centralized judicial process. The court went on to outline the factors that should be considered when determining whether this is the case in any particular scenario. The factors are: 

(a) the effect of arbitration on the integrity of the insolvency proceedings; 

(b) the relative prejudice to the parties to the arbitration agreement and the debtor’s stakeholders; 

(c) the urgency of resolving the dispute; 

1. d) the effect of a stay of proceedings arising from the bankruptcy or insolvency proceedings; and 

(e) any other factors the court considers material in the circumstances.

The court determined that the technical prerequisites set out in the Act were met. However, in turning to the abovementioned factors, the court ruled that following the arbitration agreement would compromise the “orderly and efficient resolution of the receivership…” As a result, the appeal was denied, paving the way for the Receiver to pursue a debt collection in the courts. 

Calgary Law Firm Offering Mediation and Arbitration Services

Don’t hesitate to contact the experienced legal team at HMC Lawyers if you think your legal issue might be best served through mediation or arbitration. We would be happy to discuss your case and represent you in the way that best suits your interests and ultimate goals. We can be reached online or by phone at 1-800-480-3534.