Hot Topics in Canadian Arbitration

In 1986, Canada became the first jurisdiction to adopt the UNCITRAL Model Law on International Commercial Arbitration. Canadian courts have since issued over 200 written decisions under arbitration legislation based on the Model Law.

Today, Canada not only remains an attractive jurisdiction to hold arbitrations, but its courts continue to be at the forefront of arbitration law.

This article provides a concise summary of two key Canadian arbitration cases from the past year, which should interest in-house counsel and practitioners. These decisions consider:

In Peace River Hydro Partners v Petrowest Corp., 2022 SCC 41, the Supreme Court of Canada held that an otherwise valid arbitration agreement could be rendered unenforceable in the context of a court-ordered receivership under the Bankruptcy and Insolvency Act, RSC 1985, c B-3 (BIA).

This case involved a contract to design and construct a hydroelectric dam in the Province of British Columbia. Peace River Hydro Partners(“Peace River”) subcontracted parts of that contract to the Petrowest Corp. (“Petrowest”). The parties agreed that disputes arising from their relationship would be resolved through arbitration.

Petrowest later encountered financial difficulties and was placed into receivership by court order pursuant to the BIA. The Receiver for Petrowest brought a civil claim against Peace River seeking to collect funds owed to Petrowest for the subcontracted work. Peace River applied to stay the court proceedings on the ground that the arbitration agreements governed the disputes. In the first instance, the chambers judge dismissed the stay application, and the British Columbia Court of Appeal dismissed the appeal of that decision.

In a split 5-4 decision, the Supreme Court of Canada dismissed the appeal and refused to stay the court proceeding in favour of arbitration.

Importantly, the majority decision held that the fact that a party has entered receivership or insolvency proceedings is not, on its own, sufficient to render an arbitration agreement “inoperative”.

The party seeking to avoid arbitration must establish that a stay in favour of arbitration would compromise the integrity of parallel insolvency proceedings with reference to several factors, including:

In this case, the arbitration clause was found to be inoperative because arbitration would compromise the orderly and efficient resolution of the insolvency proceedings.

The court cautioned that the analysis is a highly factual one. The court must carefully review the particular statutory regimes and arbitration agreements, while having regard to the pro‑arbitration stance adopted in arbitration legislation and jurisprudence in Canada as well as the policy imperatives underpinning bankruptcy and insolvency law.

In Escape 101 Ventures Inc. v March of Dimes Canada, 2022 BCCA 294, the British Columbia Court of Appeal held that the misapprehension of evidence going to the core of an arbitral award is an extricable error of law giving rise to a right of appeal.

This decision involved an Asset Purchase Agreement (the “Agreement”) pursuant to which March of Dimes Canada (“March of Dimes”) agreed to purchase the business assets of Escape 101 Ventures Inc. (“Escape”). The Agreement provided a formula to determine an earnout amount to be paid to Escape based on the gross revenue during a five-year term. Escape disputed the amount paid to it in one of the earnout payments. The parties appointed an arbitrator to resolve the dispute. The arbitrator dismissed Escape’s claim on the basis that the company failed to object in time to how the earnout payment was calculated.

On appeal, Escape argued that by finding that Escape had failed to object in time to the earnout payment report, the arbitrator had misapprehended the evidence of its post-contractual conduct.

Critically, March of Dimes agreed that the arbitrator erred in concluding that the Escape was out of time to object and this error was central to the Arbitrator’s reasoning and conclusions. March of Dimes argued that this was not an error of law for the purposes of an appeal under British Columbia’s Arbitration Act, SBC 2020, chapter 2 (which draws on many of the key provisions in the Model Law).

The British Columbia Court of Appeal concluded that it is an appealable error of law when an arbitrator’s determinations are based on a misapprehension of evidence that played a critical role in the arbitral award. The court remitted the issue back to the arbitrator for reconsideration. The Supreme Court of Canada recently denied an application for leave to appeal this decision.

There is a debate about how widely this decision should be interpreted, and whether it is limited to only errors that are patent on the face of the record (such as in this case where the arbitrator simply got the date wrong) or whether on appeal the courts will review issues related to the weighing or considering of evidence.

As a practical matter, any parties falling under British Columbia’s Arbitration Act and seeking to limit the scope of the court’s review have the option of expressly agreeing not to allow an appeal of an arbitral award.