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Statutory Interpretation - Void/Inoperative/Incapable

. Peace River Hydro Partners v. Petrowest Corp.

In Peace River Hydro Partners v. Petrowest Corp. (SCC, 2022) the Supreme Court of Canada considers the statutory interpretation of the three phrases: "void", "inoperative" and "incapable of being performed", here in an insolvency and arbitration context:
[135] But when do these narrow statutory exceptions apply? The terms “void”, “inoperative”, and “incapable of being performed” are not defined in the Arbitration Act, nor in the Model Law or the New York Convention from which they originate. It is therefore necessary to briefly define each term.

1. “Void”

[136] The meaning of the term “void” is relatively settled. An arbitration agreement will be considered void only in the rare circumstances where it is “intrinsically defective” (and therefore void ab initio) according to the usual rules of contract law, including when it is undermined by fraud, undue influence, unconscionability, duress, mistake, or misrepresentation (C. B. Lamm and J. K. Sharpe, “Inoperative Arbitration Agreements Under the New York Convention”, in E. Gaillard, D. Di Pietro and N. Leleu‑Knobil, eds., Enforcement of Arbitration Agreements and International Arbitral Awards: The New York Convention in Practice (2008), 297, at p. 300; McEwan and Herbst, at § 3:56; Casey, at ch. 3.7.1). The Supreme Court of British Columbia has confirmed that the term “void” in s. 15(2) of the Arbitration Act provides a court with a narrow discretion to decline a stay where there are “sufficient materials before the court on which to base a summary determination that the arbitration agreement itself is void” on one or more of the recognized grounds (James v. Thow, 2005 BCSC 809, 5 B.L.R. (4th) 315, at para. 99). There is no dispute that the Arbitration Agreements in the present case are not void within the meaning of s. 15(2).

2. “Inoperative”

[137] Less settled — and more significant to the case at bar — is the proper interpretation of the terms “inoperative” and “incapable of being performed”, particularly in the context of a bankruptcy or insolvency. I turn first to the meaning of “inoperative”.

[138] The term “inoperative” has no universal common law definition (Prince George (City) v. McElhanney Engineering Services Ltd. (1995), 1995 CanLII 2487 (BC CA), 9 B.C.L.R. (3d) 368 (C.A.), at para. 33, citing M. J. Mustill and S. C. Boyd, The Law and Practice of Commercial Arbitration in England (2nd ed. 1989), at pp. 464‑65). In arbitration law, however, the term has been used to describe arbitration agreements which, although not void ab initio, “have ceased for some reason to have future effect” or “have become inapplicable to the parties and their dispute” (McEwan and Herbst, at § 3:57; Lamm and Sharpe, at p. 301; see also Casey, at ch. 3.7.2).

[139] Possible reasons for finding an arbitration agreement inoperative include frustration, discharge by breach, waiver, or a subsequent agreement between the parties. The cases interpreting s. 15(2) of the Arbitration Act make it clear that matters such as inconvenience, multiple parties, intertwining of issues with non‑arbitrable disputes, possible increased cost, and potential delay generally will not, standing alone, be grounds to find an arbitration agreement inoperative (Prince George, at para. 37; MacKinnon v. National Money Mart Co., 2004 BCCA 473, 50 B.L.R. (3d) 291, at para. 34). Indeed, like all the statutory exceptions, the exception for an inoperative arbitration agreement is to be narrowly interpreted, with the party seeking to avoid arbitration bearing the heavy onus of showing that it applies. This serves “the interests of freedom of contract, international comity and expected efficiency and cost‑savings” from enforcing otherwise valid arbitration agreements (McEwan and Herbst, at § 3:57; MacKinnon, at para. 36).

[140] The application of this exception where the defendant in litigation that has been commenced is subject to bankruptcy or insolvency protection is straightforward. For instance, the making of a winding‑up order or a receivership order may be grounds for a court to find an arbitration agreement inoperative (Casey, at ch. 7.18.2; McEwan and Herbst, at § 3:57). Indeed, in either scenario, all proceedings against the debtor are stayed under the applicable bankruptcy or insolvency legislation. Accordingly, an agreement to arbitrate ceases, in most circumstances, to have effect for the future and may not be relied upon. It is inoperative, and the matter is left to be resolved in the relevant bankruptcy or insolvency proceedings.

[141] This is not to say that a court must decline a stay in favour of arbitration based on inoperability in these circumstances. As Casey notes, it “may well be that the bankruptcy judge will refer the matter to arbitration as the most expeditious way to prove the creditor’s claim” (ch. 7.18.2). As I will explain further below, the court must assess, in light of all the circumstances, whether to refer the matter to arbitration or to maintain centralized judicial oversight.

[142] It must be noted, however, that the term “inoperative” may not always cover scenarios where a court‑appointed creditor representative, like a receiver, initiates court proceedings on behalf of a debtor. This is because insolvency law generally stays legal claims brought against a debtor under court protection, while permitting claims brought on its behalf to proceed, in the interest of maximizing creditor recovery and salvaging the debtor’s business as a going concern. Again, in these circumstances, the court must assess whether to permit the receiver to proceed with the debtor’s claim in court rather than through the arbitral process bargained for by the parties.

[143] A helpful example of inoperability in the insolvency context is provided by Reliance. In that case, a liquidator appointed under the Winding‑up and Restructuring Act, R.S.C. 1985, c. W‑11 (“WURA”), initiated court proceedings to collect monies allegedly owed to the debtor by third parties. The third parties invoked their arbitration agreements with the debtor and asked the court to refer the dispute to arbitration. Pepall J. (as she then was) concluded that, in these circumstances, the arbitration agreements ceased to have future effect and were inoperative within the meaning of the applicable arbitration legislation. To hold otherwise would have compromised the “expeditious and inexpensive” resolution of the insolvency proceedings, contrary to the WURA (para. 34). Pepall J. observed that referral to arbitration would result in undue delay given the “three separate adjudications” that would be required under the arbitration agreements, and also pointed to the “attendant danger of inconsistent rulings” (para. 34).

3. “Incapable of Being Performed”

[144] An arbitration agreement is considered “incapable of being performed” where “the arbitral process cannot effectively be set in motion” because of a physical or legal impediment beyond the parties’ control (McEwan and Herbst, at § 3:58; Casey, at ch. 3.7.3; Prince George, at para. 35; Lamm and Sharpe, at p. 300; Kröll, at p. 326; van den Berg, at p. 159; D. Schramm, E. Geisinger and P. Pinsolle, “Article II”, in H. Kronke et al., eds., Recognition and Enforcement of Foreign Arbitral Awards: A Global Commentary on the New York Convention (2010), 37, at p. 108).

[145] Physical impediments rendering an arbitration agreement incapable of being performed may include the following: (a) inconsistencies, inherent contradictions, or vagueness in the arbitration agreement that cannot be remedied by interpretation or other contractual techniques; (b) the non‑availability of the arbitrator specified in the agreement; (c) the dissolution or non‑existence of the chosen arbitration institution; or (d) political or other circumstances at the seat of arbitration rendering arbitration impossible (McEwan and Herbst, at § 3:58; Casey, at ch. 3.7.3; van den Berg, at p. 159; Kröll, at pp. 330‑42). In all these circumstances, the arbitration agreement is incapable of being performed because it is impossible for the parties to obtain the specific arbitral procedures for which they bargained. Importantly, financial impecuniosity alone does not render an arbitration agreement incapable of being performed (D. St. John Sutton, J. Gill and M. Gearing, Russell on Arbitration (24th ed. 2015), at p. 379; Casey, at ch. 3.5.1; D. Joseph, Jurisdiction and Arbitration Agreements and Their Enforcement (2nd ed. 2010), at p. 355). Legal impediments may also lead to an incapacity to perform an arbitration agreement. For example, an arbitration agreement may be incapable of being performed because the subject matter of the dispute is covered by an express legislative override of the parties’ right to arbitrate (see Seidel, at para. 40).


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