You (May Not) Get What You Bargained For: A Receivership Order Displaces An Arbitration Clause In Mundo Media

• Published date: 13 September 2022
• Subject Matter: Litigation, Mediation & Arbitration, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Arbitration & Dispute Resolution
• Law Firm: Osler, Hoskin & Harcourt LLP
• Author: Ms Mary Paterson, Mary Angela Rowe and Sarah Firestone

Arbitration is a consensual method of dispute resolution in which the parties can customize their process and even select their own decision-maker. Insolvency is the diametrically opposite scenario, where disputes involving the debtor are involuntarily consolidated before a single insolvency court. These two worlds collided before the Ontario Court of Appeal in Mundo Media Ltd (Re) (2022 ONCA 607).¹ According to the Court, the insolvency overrode the arbitration clause.

Mundo Media's receiver applied to force SPay Inc. (SPay) to pay its accounts receivable owing to Mundo Media. SPay sought a stay, arguing that the dispute should be referred to arbitration pursuant to a contractual arbitration clause, and that in any case SPay would exercise set-off rights for the whole of the accounts receivable claim ' so regardless of the outcome of the dispute, Mundo would receive no cash payment.

The Court was faced with a choice: either enforce an arbitration clause, giving effect to the parties' bargain and sending a dispute outside the insolvency court, or override the arbitration clause and have the dispute adjudicated before the insolvency court, giving effect to the "single proceeding" model. In Mundo Media, the single-proceeding model prevailed.

Takeaways

• Parties do not always get the arbitration they bargained for. Domestic and international arbitration legislation in Canada reveals a legislative intent to respect party autonomy except in "limited circumstances". When parties enter an arbitration clause in Canada, they expect "an autonomous, self-contained, self-sufficient process pursuant to which the parties agree to have their disputes resolved by an arbitrator, not by the courts."²Mundo Media illustrates the "limited circumstances" in which party autonomy is not respected and parties are not permitted the dispute resolution mechanism they bargained for. However, both courts were careful to limit Mundo Media to its facts. It remains to be seen when Canadian courts will honour the parties' bargain in the face of other insolvency scenarios.
• A set-off claim may draw the claimant into insolvency court. The "single proceeding" model is a core tenet of insolvency law providing that all litigation concerning the insolvent should be dealt with under the umbrella of one insolvency proceeding, rather than being fragmented into separate proceedings. In this case, SPay's set-off claim against Mundo Media was sufficiently connected to force the claim to be resolved...