January 06, 2021 Practice Points

The Power to Pursue or Disclaim Agreements

Canadian doctrine of separability allows receiver to disclaim arbitration agreement while suing on main contract.

By Daniel Urbas

In Petrowest Corporation v. Peace River Hydro Partners, 2020 BCCA 339, British Columbia’s Court of Appeal ruled that, under applicable Canadian law, a court-appointed receiver can sue on a contract while disclaiming the arbitration agreement contained in that contract. Applying the concept of separability, the court held that doing so did not allow the receiver to “pick and choose” terms in a contract but instead merely recognized that the receiver had the option to pursue or disclaim two separate agreements.

Petrowest Corporation was in receivership and its affiliates in bankruptcy. A court-appointed receiver commenced an action against appellants, claiming amounts allegedly due under agreements between appellants and Petrowest. Appellants argued that the arbitration agreement in those contracts required the court to refer the litigation to arbitration. The lower court disagreed. 

The lower court held that British Columbia’s arbitration act, RSBC 1996, does not prevent courts from exercising their inherent jurisdiction to refuse a stay of court proceedings. The lower court listed a number of factors that supported the exercise of its discretion here. 

On appeal, the court upheld the lower court’s decision but for different reasons. The court reframed the analysis, from a focus on what the court can do under the arbitration act to the status and powers of receivers/trustees. It stated in paragraph 41 that:   

The question here is not whether the court has the power to override an arbitration clause . . . [but] . . . whether the arbitration clause and requirements of [the Arbitration Act] are engaged at all. This focuses on the status and powers of the receiver/trustee, not on the powers of the court.

Appellants argued that litigation on the contracts commenced by the receiver “is in no meaningful way distinguishable from such litigation commenced directly by the respondents pre-insolvency.” The appellate court disagreed, highlighting the power of a receiver to disclaim contracts. 

The court noted that a receiver is entitled to disclaim the debtor’s executory contractual obligations but “this concept does not form a basis for allowing the receiver freedom to pick and choose among the terms of a contract the receiver seeks to enforce.” Rather, the doctrine of separability means that an agreement to arbitrate is a separate contract and, as such, can be disclaimed separately from the main contract in which it appears. The court then ruled that a court-appointed receiver can sue on a contract while disclaiming the (separate) agreement to arbitrate which it contains. 

. . . in the factual situation we are dealing with here, it is open to the receiver to disclaim the arbitration agreements notwithstanding that it has adopted the containing contracts for the purpose of suing on them. This flows from the receiver’s particular powers and position, and the separability of the arbitration agreements.

Daniel Urbas is an experienced arbitrator and mediator at Urbas Arbitral in Montreal, Quebec, Canada.

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