Note to readers: I’m currently at the stage of “knows enough to be dangerous” on this topic. I’ve done some research to back up my views here, but not enough to be confident that there are no significant errors. If you spot one and think I’m super wrong, please, please tell. At the same time, I think I’m being sensible enough to be worth reading!

Tomorrow the Supreme Court will hear Peace River Hydro Partners v. Petrowest Corporation, a case about whether courts should enforce an arbitration agreement in a commercial contract against a court-appointed receiver. The question the case is nominally about is “can arbitration agreements be disclaimed in insolvencies?”. In this post, I suggest that question is too broad, and should only be answered by looking at where the power to disclaim comes from. This leads to the weird result, that, precisely because of some facts emphasized by the respondent, the Court should allow the appeal.

Background

Peace River Hydro Partners (PRHP) is a partnership of three companies, including Petrowest Corp. (“Petrowest”).¹ The partners formed a contract with BC Hydro. BC Hydro then subcontracted the work to Petrowest and its subsidiaries.² In August 2017, the Alberta Court of Queen’s Bench appointed Ernst & Young (EY) as the Receiver for Petrowest and its affiliates. EY then assigned Petrowest’s subsidiaries into bankruptcy, and EY was appointed as the trustee in bankruptcy. Petrowest itself is not a bankrupt and so EY is not a trustee of Petrowest.³

EY, acting as Receiver, then sued PRHP in the BCSC for amounts they say are owed to Petrowest under contracts between Petrowest and PRHP. PRHP applied for a stay of proceedings, invoking the arbitration provisions of the contracts and s 15 of the BCAA (providing that a court must grant the stay against a “party to an arbitration agreement” for matters “agreed to be submitted to arbitration” unless the arbitration agreement is “void, inoperative or incapable of being performed”). Justice Iyer dismissed the application for a stay.⁴ PRHP appealed, and Grauer JA (writing for Bennett and Dickson JJA) dismissed the appeal.⁵ PRHP then sought and received leave from the SCC to appeal again.

Disclaimer

Various of the factums⁶ refer to EY as having “disclaimed” the arbitration agreement. This is a confusing term, because there are at least three different ways “disclaimer” appears in law:

Common law disclaimer. In a recent article, Prof. Ying Khai Liew⁷ notes that a gift or trust must be accepted to be effective and argues that the same should hold for assignment of a contract⁸. As he quotes from a 1690 case, “a man cannot have an estate put into him in spight of his teeth.”. Disclaiming a matter in this sense prevents the intended recipient from in fact taking possession of the matter.
Statutory disclaimer. Section 65.11(1) of the BIA⁹Bankruptcy and Insolvency Act, RSC 1985, c B-3, https://canlii.ca/t/543rx retrieved on 2022-01-17 and s 32(1) of the CCAA¹⁰Companies’ Creditors Arrangement Act, RSC 1985, c C-36, https://canlii.ca/t/543rw retrieved on 2022-01-17. provide that the debtor can disclaim or resiliate “any agreement to which the debtor is a party”, subject to veto by the Court. In assessing whether to allow the debtor to disclaim the agreement, the Court is to consider¹¹BIA, s 65.11(5); CCAA s 32(4):
- (a) whether the trustee [or monitor] approved the proposed disclaimer or resiliation
- (b) whether the disclaimer or resiliation would enhance the prospects of a viable proposal [or compromise or arrangement] being made in respect of the debtor; and
- (c) whether the disclaimer or resiliation would likely cause significant financial hardship to a party to the agreement.
Receivership disclaimer. In New Skeena,¹², Braidwood JA for the BCCA noted there was a Canadian jurisprudence on receivers disclaiming contracts.¹³ He also noted that disclaiming contracts is a power courts authorize the Receiver to wield under the Receivership Order.

These types of disclaimer differ in effect. Common law disclaimer, as I understand it, amounts to rejecting the transfer, not terminating an underlying agreement. The result of a disclaimer in that context would, I think, leave the property in the hands of the donor/settlor/assignor. Statutory disclaimer is another matter. Ehattesaht Holdings explained that disclaimer under the CCAA “convert[s] rights under an executory contract to a right to sue for damages flowing from breach of contract. The result is that the holder of rights under an executory contract is relegated to the status of unsecured creditor to share with other unsecured creditors in the financial misfortunes of the insolvent company.”¹⁴ As I understand it, statutory disclaimer extinguishes the contract and replaces it with a right to get monetary damages (calculated as though the contract had not been extinguished). Receivership disclaimers are also said to generate a right to sue for damages for breach of contract.¹⁵

Receivership disclaimers appear to be in a strange middle ground, where their legal basis comes from the common law, but the effect mirrors that of statutory disclaimer. An explanation (I speculate!) is that disclaimer by a court-appointed receiver will — as a matter of practicality but not law — lead to breach by the insolvent. Court-appointed receivers generally do not get given one contract (that it then disclaims) — rather, receivers are charged with taking possession of all or substantially all of the insolvent person’s property, as well as exercising control over the insolvent person’s business.¹⁶ It is likely impossible for the insolvent to perform a contract when the receiver controls the rest of their property.

The point of statutory disclaimer can be better understood by considering it in contrast to simple breach. Absent statutory disclaimer, the debtor could always breach the contract (by repudiation if nothing else). What, then, is the point of statutory disclaimer? Bellatrix gave one explanation: a party cannot unilaterally terminate a contract by breach (even repudiatory breach),¹⁷ since breach does not itself extinguish a contract.

In the normal course, a contract can only be extinguished by mutual agreement of the parties. Breach of contract can lead to the extinguishment of the contract through two “elections” by the counterparty. The first “election” occurs when the counterparty decides whether to “accept” a (repudiatory) breach as terminating the contract.¹⁸ If the party elects to accept the repudiation, the contract terminates (is extinguished) and only past claims persist. If the party rejects the repudiation, the contract does not terminate, and the future obligations of both parties continue. The counterparty can then seek a remedy for the breach; the two normal remedies are damages (normally measured as expectation damages) or specific performance.

If the appropriate remedy is expectation damages, then, if I’ve understood this correctly, the counterparty has a second election to make. The counterparty can decide whether to seek damages for only past harms or for past and future harms. If it seeks damages for past and all future harms, then the contract will be extinguished at the end of the suit. If it seeks damages for only past harms, then the contract will persist. The counterparty may wish to seek damages for only past harms when it (subjectively) expects the actual value of the contract to exceed the value it expects a court would objectively find. In this case, the counterparty would just wait for each new breach to crystallize and then seek damages after the breach has crystallized. The contract would not, then, be extinguished.

The counterparty could also seek specific performance, which would also not extinguish the contract. Specific performance can be ordered by a court when damages are not an adequate remedy.¹⁹ Examples include the transfer of unique properties (both real and personal)²⁰, annuity contracts, indemnity contracts, and otherwise contracts where the damages are unduly difficult to calculate.²¹

These two elections indicate the difference between statutory disclaimer and repudiatory breach. Statutory disclaimer is not very different from repudiatory breach in circumstances where the counterparty would extinguish the contract through one election or another (there are still some differences, due to the clarity of the statutory timelines). Statutory disclaimer, however, is significantly different where the counterparty would elect to maintain the contract. Statutory disclaimer extinguishes the contract and liquidates the value of the contract at present, removing the counterparty’s right to elect to keep the contract ongoing.

There are strong policy reasons for statutory disclaimer in an insolvency context. Statutory disclaimer makes it possible for a debtor to get out of a contract it would otherwise have to specifically perform, or where its long-run liability is uncertain. In an insolvency, creditors will generally have to take a significant haircut on their rights. When a contract is disclaimed (and a claim for damages generated), then that claim too can be compromised.²² In contrast, an un-accepted breach of contract (or grant of an order for specific performance) can make for ongoing post-filing obligations. Specific performance will make one creditor whole even while other creditors must accept less.

Overall, all of this suggests that statutory disclaimer should generally be granted for contracts where expectation damages provide an adequate remedy, but should be considered more closely by courts when the disclaimed contract would generally give rise to a right for specific performance. Whether it is appropriate to disclaim a specific performance contract should depend on just how inadequate damages are (and so how much it would penalize the creditor without compensation), how much of a haircut is expected (there is less of a case for rejecting disclaimer / ordering specific performance when everyone else is getting 2 cents on the dollar than when everyone else is getting 95 cents on the dollar), and the costs to the debtor of specifically performing. These ideas on the appropriate considerations mirror the statutory factors.²³

The same concerns do not motivate receivership disclaimer, both from a legal and a legal policy perspective.

From a legal perspective, receivership disclaimer is a right of the receiver to not be saddled with things it does not want, not a tool for overriding contractual schemes in the public interest. Receivership disclaimer can put the counterparty in breach, but it should not be able to extinguish a contract or otherwise deny a right for specific performance. This legal concern is particularly acute in the arbitration context, when the right to specific performance is statutory.²⁴ It would be surprising, to say the least, if a receiver’s common law power could trump a statute.

The policy of statutory disclaimer also shows a distinct difference between receivership disclaimer and that under the BIA and CCAA. In the CCAA and BIA, disclaimer always requires the approval of the court, and that approval takes into consideration the advice of a court officer (the trustee or monitor). By contrast, disclaimers in receivership do not require court approval. It would be passing strange if a receiver could do unilaterally what a trustee or monitor can only advise the court on. All three are officers of the court, after all. Receivers should not be seen to have more power from the common law (to act without court oversight) than trustees and monitors do under statute.

Looking at what the BIA says about receivers is also illuminating. Receivers’ duties are to act in good faith and in a commercially reasonable manner (BIA s 247). They thus have the discretion to decide whether breaching a contract is a commercially reasonable thing to do (a power previously held by the insolvent). Granting them also a power to unilaterally extinguish a contract (a power not previously held by the insolvent) would involve them wielding essentially a public interest power, wherein the infringement of another’s rights is justified by broader objectives (such as achieving a restructuring or fairness to other creditors). There may be times when judges can make such determinations, and insolvency is one of those times — but not mere receivers.

Pointing to the court order empowering receivers to disclaim contracts leads nowhere. Such court orders should be seen to affirm the receivers’ ability to breach the debtor’s contracts (or reject them), but do not give the receiver the ability to unilaterally extinguish contracts. These are not powers the court can give out, even with its inherent jurisdiction. Inherent jurisdiction does not give the court power to make any order appropriate in the circumstances: it is not s 11 of the CCAA.²⁵

Application to this case

The distinction between receivership disclaimer and statutory disclaimer makes the application to this case straightforward.

Here, the receiver was offered two properties: a chose in action related to breaches of contract (that occurred before the receivership), and the ongoing contract. EY disclaimed, and can disclaim, the latter, thereby putting Petrowest in a state of breach.

EY, however, purported to accept the chose for prior claims, while disclaiming the arbitration agreement. This a receiver cannot do. Its power to disclaim is the same as in common law disclaimer. As Prof. Liew described, it would be absurd if a party could destroy an arbitration agreement in that contract simply by assigning it and the assignee disclaiming the arbitration agreement. The receiver can only disclaim the arbitration agreement by disclaiming the chose in action.

The result is that the appeal should be allowed and the matter remitted to the BCSC.

Remitting the case would be appropriate for two reasons. First, a a court needs to determine whether the receiver really disclaimed the chose in action. If it did, then some of the claims should be dismissed because EY does not own the chose and so does not have the right to bring the claims (the chose then would sit, unusable for now, in the hands of Petrowest).

Second, if the receiver instead did not disclaim the chose, then some of the claims should be stayed pending arbitration. Justice Iyer was clear in her reasons that she would have to untangle further which claims should be stayed before making a global stay order.²⁶ The SCC could decide to wade into that morass itself, but dealing with the complexities of many claims and many contracts without the help of counsel (who instead, and sensibly, focused on the big legal issues) could easily get itself in a pickle. These are properly matters for the trial court.

One final point bears considering: what would happen if Petrowest were bankrupt or placed in CCAA protection? If the appeal is allowed, then this should be the next stage of litigation.

Application to this case if Petrowest were bankrupt

If Petrowest were bankrupt or had entered CCAA protection, the analysis would entirely change. If EY had been acting as a trustee or the debtor in a CCAA, disclaiming the arbitration agreement would wholly make sense.

Based on Iyer J’s reasons, it seems likely that the arbitration agreement should not be enforced. The arbitration agreement is highly costly for the debtor to perform, would harm the possibility of restructuring and the distribution of funds to other creditors, and would not be unduly prejudicial to the counterparties who wished to enforce the arbitration agreement. These are all good reasons to allow the debtor to disclaim (read: deny specific performance of) the arbitration agreement.

On this analysis (and these facts), the question of severability of the arbitration agreement does not arise. In disclaimer under the CCAA and BIA, there are in fact four properties that could be disclaimed:

(A) Petrowest’s chose in action for prior breach of contract
(B) PRHP’s chose in action to compel arbitration for prior breach
(C) Petrowest’s chose in action to compel arbitration
(D) Petrowest’s ongoing (executory) contract with PRHP.

Plainly, Petrowest would be able to pick and choose among (A), (C), and (D). The question would not²⁷ be whether the arbitration agreement is severable from the chose, but whether it is right for a court to compromise and liquidate PRHP’s prior right to specific performance. Recall, disclaimer does not extinguish PRHP’s right, but rather liquidates it. PRHP would thus be able to seek damages from Petrowest’s breach of the arbitration agreement.

Conclusion

The practical result is clearly that the arbitration agreements should not be enforced. Getting there through the current legal structure is messy, precisely because EY is only the receiver and not the trustee of Petrowest. Here’s what I hope to see come out of the case:

Acknowledgement that common law disclaimer and statutory disclaimer are different. Whatever the Court does with the matter, I hope it doesn’t pretend they’re the same and create work for future lawyers to entangle and distinguish.
Maintaining the ability of debtors in the CCAA and BIA to extinguish specific-performance contracts, including arbitration agreements, without the consent of their counterparty (but with the consent of the court!).
Getting the remedy right (i.e. not staying all of the claims and remitting instead).