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Canada (Attorney General) v. Reliance Insurance Co.

Issue Discussed: Arbitrability/Scope of Arbitration

Submitted by Paul Bates

Date Promulgated: September 5, 2007

Issue Decided: Whether a winding up order under Canadian law stays a contractual right to arbitrate.

In a decision largely going against the tide of Canadian law’s respect for arbitration clauses, the Ontario Superior Court of Justice ruled that a winding-up order made under federal law stays any contractual clause mandating arbitration.

The case involved a number of reinsurance treaties with arbitration clauses. The debtor insurer, Reliance Insurance Company, was subject to a winding-up order under the Canadian Winding Up and Restructuring Act, R.S.C. 1985 c. W-11. The reinsurance companies wished to arbitrate questions of set-off, while the Liquidator made a motion to have the set-off issue heard in the Ontario court. (The set-off issue was heard subsequently and is currently under reserve.)

The Court, in stating that it retained jurisdiction to rule on the underlying matter of contractual set-off, first ruled that “the agreements to arbitrate cease to have effect for the future and may not be enforced. They are inoperative.” In further refusing to lift the stay, Madam Justice Pepall held that it would make no sense to have different bodies adjudicating the same issue, because it would cause delay and a multiplicity of proceedings, contrary to the spirit of the federal legislation. The decision is proceeding to appeal.

The Court first examined whether the WURA and related winding-up order stayed the arbitration proceedings. The winding-up order, pursuant section 21 of the WURA, stated “no suit, action or other proceeding shall be proceeded with or commenced against the Liquidator…except with leave of this Court”. The court noted that numerous cases under other federal insolvency legislation interpreted “proceedings” broadly in order to comply with the legislative policy of avoiding extra-judicial remedies in such matters, including arbitration. Canadian law favours a single-control or single proceeding model for bankruptcy and insolvency matters.

The Court did not fully consider whether the parties met the requisite thresholds in the Ontario International Commercial Arbitration Act, R.S.O. 1990, c. I-9, nor did it address the Model Law on International Arbitration. Instead, Pepall J. favoured the single-control model and held that the winding-up order prevailed. There was nothing in the legislation or the contracts requiring the court to refer the set-off issue to arbitration in the face of the WURA and the winding-up order. Also notable was that the Court did not consider whether set-off – considered a defence and not a claim – was a “suit, action or other proceeding” that was caught by the legislation. The reinsurance companies were denied the benefit of the right to arbitrate.

The next question was whether the stay should be lifted to allow the set-off matter to be referred to arbitration. Pepall J. held that the Court was not prepared to lift the stay, and relied on policy reasoning for refusing to do so. The Court was concerned with delay, a multiplicity of proceedings in a winding-up matter, as well as expense for the Liquidator and the estate, depleting resources available to creditors. There were no compelling reasons, according to the Court, to allow the set-off issue to go to arbitration.

* Paul Bates is the principal of Bates Barristers in Toronto, Ontario, and is an ARIAS-U.S. certified arbitrator. Paul has extensive experience in insurance and reinsurance law, as well as a broad range of commercial litigation matters.