Consistency Wins Again - Case Study: Royal Bank Of Canada v. Mundo Media

In Royal Bank of Canada v. Mundo Media Ltd., 2022 ONSC 2147, the Superior Court set aside an arbitration provision in favour of the parties being subject to the outstanding insolvency proceedings where all stakeholders could be represented.

Factual Background

Since 2017, Mundo Media and SPay have been in a contractual relationship whereby the two companies invoiced each other for services. When Mundo went into receivership in 2019, the court-appointed Receiver brought a successful motion for judgment to recoup $4.1 million owing from SPay. SPay brought a subsequent motion to stay the order and have the New York arbitration clause in the contract upheld. The main issue before the court was whether the arbitration clause or the single proceeding model in Ontario should apply.

Decision

Justice Penny ultimately denied the stay and held that the arbitration clause did not bind the Receiver. Relying on the judicial discretion over a forum in section 243 of the Bankruptcy and Insolvency Act, the judge ordered the single proceeding model would apply. Maintaining consistency in bankruptcy proceedings was a key factor in the decision.

SPay unsuccessfully made a two-pronged argument.

1. They were strangers to the bankruptcy. They asserted that because they were bringing a set-off defence and not a claim and would not receive a distribution from the estate, they should not be part of the bankruptcy proceedings.
   As SPay was Mundo's single largest debtor, there was little ground for this argument. A set-off in any form by SPay would impact the claims of all other Mundo debtors.
   
2. Applying the single proceeding model would frustrate its purpose by turning the model from a "shield" into a "sword" to consolidate claims against third parties.
   However, the case law, including some relied on by SPay, did not support this argument. Although rarer, there are examples of the model used for claims against third parties. Applying the model differently would undermine its purpose of creating consistency and efficiency across proceedings. Allowing SPay to avoid inclusion in the bankruptcy proceeding on this ground would allow them to obtain priority over other creditors.

Justice Penny's ruling relied in part on the motion judge's finding of fact of a strong relationship between SPay's dispute with Mundo and the receivership proceedings. So while courts can set aside an arbitration agreement in favour of the single proceeding model, it will be a fact-specific exercise.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Mr Howard Borlack
McCague Borlack LLP
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