Does The UNCITRAL Model Law Apply To A Claim Under The Consumer Protection Act?

The Queen’s Bench Court for Saskatchewan recently applied the Saskatchewan International Commercial Arbitration Act (SICAA) and the UNCITRAL Model law annexed to that Act and stayed an action based on the Saskatchewan Consumer Protection Act and a contract which was apparently between two Canadian entities.

The decision in Zwack v. Pocha is important for two reasons.

First, the plaintiffs’ action was stayed because another company from the state of Washington said that it was also a party to the agreement.

Second, the action was stayed despite the terms of the Saskatchewan Consumer Protection Act (CPA).  In previous cases, such as Seidel v. TELUS, plaintiffs were held to be entitled to bring claims in court under the provincial CPA despite the presence of arbitration clauses.

Accordingly, the decision in Zwack v. Pocha helps us explore the boundaries of the claims that fall within “international commercial arbitration” and are governed by the Model Law, and those that are not.

Factual Background

The plaintiffs in Saskatchewan wanted to build a cottage based upon plans and materials made by Lindal Cedar Homes, a company located in the State of Washington.  They entered into a sales agreement with Lindal’s local Saskatchewan dealer, Prairie Cedar Homes.  The sales agreement stated that Prairie Cedar Homes would sell the materials to the plaintiffs.  The agreement also stated that Lindal’s responsibility was to manufacture and ship the materials and building plans, to honour its warranty and to mediate and arbitrate disputes with the client, and that “Lindel will accept this agreement when the President/CEO of Lindal sends a written confirmation and warranty number.”  The agreement contained a clause which required any disputes to be mediated “before the American Arbitration Association (in Canada, the appropriate Provincial arbitration act)”, and if not successful, required any dispute to be arbitrated “by the American Arbitration Association(“AAA”) (in Canada, the appropriate Provincial arbitration act)”.  The agreement further stated: “If the dispute involves Lindal, mediation and arbitration will take place in King County, Washington and the laws of the state of Washington will apply.”  Lindal said that it was party to the agreement by reason of delivering a written confirmation of the agreement and a warranty.

The construction of the cottage led to acrimony between the parties. Ultimately, the parties separated and the plaintiffs engaged another contractor to complete the building.  They then sued Prairie Cedar Homes, Lindel and the original building contractor. Lindel brought a motion to stay the action based upon the arbitration clause in the agreement and the Model Law attached to SICAA.

The Decision

The judge held that the plaintiffs were bound by the arbitration clause and stayed the action. In arriving at that conclusion he noted that, while Lindel was not an original signatory to the agreement containing the arbitration clause, Lindel asserted that it was a party to that agreement by reason of its confirmation of the agreement and the warranty it issued pursuant to the agreement. The plaintiffs themselves agreed that Lindel was a party to the sales agreement; they agreed that Lindel was entitled to rely upon the arbitration clause if it was applicable; and they agreed that the SICAA applied to the issues raised in Lindal’s motion. Accordingly, these issues were conceded by the plaintiffs and were not determined by the court.

The judge also held that, in accordance with Article 16 of the Model Law, the arbitral tribunal was to decide any jurisdictional issues, not the court.  The court referred to the decision of the Supreme Court of Canada in Seidel v. TELUS 2011 SCC 15 which adopted the competence-competence principle which is directly set forth in Article 16.

The plaintiffs asserted that their claims of negligence and vicarious liability were not captured by the arbitration clause.  However, the arbitration agreement referred to “any dispute”, and the court held that the application of interpretation principles – including contra proferentum – did not remove the dispute from the ambit of the clause.  Moreover, the articles of the Model Law demonstrated the wide ambit of international commercial arbitration, which includes “all or certain” disputes, whether “contractual or otherwise.” (articles 7(1) and 16(1).

The court held that the CPA did not render the arbitration clause inapplicable to the dispute. Unlike the provisions of the British Columbia CPA which were in issue in Seidel v. TELUS, the Saskatchewan CPA makes a distinction, the court determined, between proceedings brought by the director under that Act and proceedings brought by members of the public; only the proceedings brought by the director were public interest claims.

Moreover, the court found that section 44 of the Saskatchewan CPA does not eliminate the arbitration of claims which are subject to the CPA.  Section 44(1) states that any agreement which “implies that …any right or remedy provided by this Part do not apply…or …any right or remedy provided by this Part in any way limited, modified or abrogated” is void.  Section 44(2) says: “Notwithstanding subsection (1), where the parties to a dispute pursuant to this part are able to resolve their dispute through mediation, arbitration or another process, the parties’ rights pursuant to this Part are extinguished respecting that dispute.”  The court found that “s. 44(2) expressly extinguishes Part III rights in favour of arbitration.”

Discussion

There are two interesting aspects to this decision:

The first aspect involves the related issues of whether the arbitration was truly an “international arbitration”, and whether, if the action had been brought only against the Saskatchewan agent, Prairie Cedar Homes, a stay motion would have been successful.

Section 1(3) of the Model Law attached to SICAA says that “an arbitration is international if:

(a) the parties to an arbitration agreement have, at the time of the conclusion of that agreement, their places of business in different States; or

(b) one of the following places is situated outside the State in which the parties have their places of business:

(i) the place of arbitration if determined in, or pursuant to, the arbitration agreement,

(ii) any place where a substantial part of the obligations of the commercial relationship is to be performed or the place with which the subject-matter of the dispute is most closely connected….”

One may wonder at the outset whether the SICAA and the Model Law should apply at all since the plaintiffs were not in business and were buying a cottage for their own use.  If SICAA did not apply then the Saskatchewan Arbitration Act would have applied.  As the court noted, under the Arbitration Act, the court had a discretion to stay or not stay the action while under the SICAA there was no such discretion.

Clause (a) of the Model Law raises the issue of who were parties to the arbitration agreement “at the time of the conclusion of that agreement.” Arguably, Lindel was not a party to the agreement at the time of the conclusion of the agreement, if the agreement was “concluded” when first signed by Prairie Cedar Homes.  If Lindel was not such a party, then clause (a) would not apply since the other parties were located in Saskatchewan.

Clause (b) is obviously intended to apply if all the parties have their place of business in the same State. If Lindel had not been sued, then sub-clause (b)(i) would not have applied as the place of the arbitration was not mandated to be in the state of Washington if Lindel was not sued.

Sub-clause (b)(ii) also might not apply unless Lindel’s obligations were in issue.  The state of Washington might well be the place where Lindel carried out its obligations, and the place to which the agreement was closely connected, if Lindel’s obligations were in issue.  Obviously, Washington is outside the State of the place of business of the plaintiffs and Prairie Cedar Homes, namely Saskatchewan and Canada. But if Lindel was not sued and if Lindel’s obligation were not relevant to the dispute and only the obligations of Prairie Cedar Homes were relevant, then sub-clause (b)(ii) might not be engaged.

So the facts of this case raise the interesting issue of whether, under the Model Law, the “international commercial” nature of the agreement is to be determined once and for all at the time of the agreement, or whether that nature can be determined or influenced by the location of the actual parties to the actual dispute.  If the latter is so, then plaintiffs may arguably avoid being involved in an international arbitration in another country by only suing domestic parties with domestic obligations, even though the arbitration agreement is also with international parties.

The second issue is whether the court correctly held that the CPA authorized the arbitration of claims falling within that Act, notwithstanding the plaintiffs’ objection.  Section 44(1) assumes that there is an existing agreement which that section renders void.  An arbitration agreement would be the very sort of agreement to which one could argue that the sub-section applies.

Section 44(2) says “notwithstanding section 44(1)” if the parties are “are able to resolve their dispute” through arbitration, their rights under Part III are extinguished.   It could be argued that the words “are able” refer to a dispute that is actually and consensually arbitrated; that the point of sub-section 2 was to ensure that the parties can’t have two kicks at the can; and that it was not intended to include arbitration agreements per se within subsection 2 since, if it had been so intended then the sub-section would have said “where parties to a dispute pursuant to this Part have agreed to resolve their dispute through mediation, arbitration or another process…”  It could be argued that the reference in this subsection to the ability of the parties to resolve their dispute by arbitration, not their agreement to do so, is quite striking.  Those making that argument could also submit that provincial legislatures do not have different intentions on this issue and that consumer protection legislation should be read consistently across Canada to exclude arbitration.

In the result, the decision demonstrates that the ambit of the Model Law may be a matter of controversy.  Exactly what sort of arbitration agreement is an “international commercial” arbitration agreement may be disputed, and that issue may be influenced by the nature of the dispute that arises. In addition, a controversy may arise as to whether the Model Law requires arbitration in the face of provincial consumer protection legislation.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed., chapter 10

Zwack v. Pocha 2012 SKQB 371

Arbitration – International Commercial Arbitration – Competence-Competence – Interpretation of Arbitration Agreement

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                January 4, 2013

www.constructionlawcanada.com
www.heintzmanadr.com

 

Can An Arbitration Award Be Set Aside For Unreasonableness?

If an arbitration agreement states that there is to be no appeal from the award under the agreement, can a party seek judicial review on the ground that the award is unreasonable?

In Dunsmuir v. New Brunswick, [2008] 1 S.C.R. 190, the Supreme Court of Canada set out a comprehensive analysis for the judicial review of the decisions of administrative tribunals.  The Court held that there are two tests for determining the legal validity of the decisions of those tribunals: correctness and reasonableness.  Generally speaking, the Court held that an administrative tribunal cannot, by legal error, assume a jurisdiction it does not have.  True questions of statutory jurisdiction must be correctly decided by the tribunal, and therefore may be reviewed on the basis of correctness.  All other decisions will not be set aside unless they are unreasonable, with the degree of deference being shown to the tribunal’s decision depending on the nature of the decision (the “Dunsmuir test”).

Is the unreasonableness test a proper one to apply to an arbitral award when the parties have agreed that there shall be no appeals from the award?  That is the question that was raised in the recent case of Parmalat Canada Inc. v. Ontario Teachers’ Pension Plan Board. While the court did not refer to or address this issue in its decision, this case provides a good opportunity to discuss whether the Dunsmuir test should apply to the review of an award under a commercial arbitration agreement.

Factual Background

During 2003 to 2005, Parmalat Canada refinanced itself to avoid default on its financial obligations.  Its predicament arose from the financial collapse of its Italian parent. Parmalat Canada entered into a Credit Agreement with Ontario Teachers’ Pension Plan Board (Teachers) whereby Teachers provided $530 million in financing to Parmalat Canada.

One of the agreements which Parmalat Canda and Teacher entered into was a Liquidity Payment Agreement (“LPA”). Under the LPA, Parmalat Canada agreed to pay Teachers a Liquidity Payment equal to 10 per cent of the value of Parmalat Canada if a Liquidity Event occurred within seven years of the closing of the Credit Agreement.  That closing occurred on June 29, 2004.  The definition of Liquidity Event included an “Indirect Change of Control” which included “any Person or Persons, acting jointly and in concert, acquiring, directly or indirectly, ….securities or the right to vote securities of Parmalat Italy carrying any number of votes where thereafter a majority of the board of directors of Parmalat Italy are nominees of such Person or Persons.”

On June 28, 2011, or one day before the seventh anniversary of the closing of the Credit Agreement, a slate of director nominated by Group Lactalis S.A. was elected to the board of directors of Parmalat Italy. In March 2011, Lactalis had acquired 28.97 % of the shares of Parmalat Italy.  That purchase enabled Lactalis to elect its slate of directors, who were elected on June 28, 2011.

The Arbitration

Teachers then commenced an arbitration asserting that a Liquidity Event had occurred and that Parmalat Canada was required to pay the Liquidity Payment to Teachers.  Teachers relied upon the plain language of the agreement and asserted that, under that language, a Liquidity event had occurred and the Liquidity Payment was due to it.

Parmalat Canada took the position that a significant liquidity or realization of value must result from any transaction for it to qualify as a Liquidity Event. It argued that there must be a value realization and/or liquidity, which in turn would fund the Liquidity Payment, for a Liquidity Event to have occurred.

The Arbitrator found that the acquiring shareholder Lactalis, being able to elect its slate of directors on June 28, 2011, thereby gained control of Parmalat Italy. The Arbitrator applied the plain reading of the agreement and concluded that a Liquidity Event had occurred. Under the LPA, the decision of the Arbitrator was final and binding with no appeal.

Does Dunsmuir Apply?

Parmalat Canada applied to the Superior Court to set aside the arbitrator’s award under section 46 of the Ontario Arbitration Act, 1991.  Among other arguments, it submitted that the arbitrator’s decision was unreasonable. It relied on the Dunsmuir decision of the Supreme Court of Canada, and other decisions of the Supreme Court in which that court had applied the Dunsmuir test in its review of two arbitration decisions.  Parmalat Canada referred to my article of January 22, 2012 in which I reviewed those two decisions and discussed the potential application of Dunsmuir outside the administrative law context.

Parmalat Canada also relied upon the decision of the Ontario Court of Appeal in Smyth v. Perth and Smith Falls District Hospital (2008) 92 OR 3d 656 in which the Court of Appeal applied Dunsmuir in its review of an arbitration decision.

Smyth concerned an arbitration relating to the appointment of a doctor to the staff of a hospital. The arbitration agreement provided that there was to be no appeal to the court from the arbitrator’s decision.  The arbitrator decided that the doctor should be given the opportunity to resign or his appointment to the hospital should be terminated.  The doctor sought to have the award reviewed under section 46 of the Ontario Arbitration Act, 1991.  The superior court judge applied the test of correctness, held that the arbitrator had incorrectly exercised his jurisdiction and overturned the arbitrator’s decision.  The Court of Appeal applied Dunsmuir, held that the reasonableness test should apply, found that the arbitrator’s decision was reasonable and set aside the superior court judge’s decision.

In my article of January 22, 2012, I commented on the decisions of the Supreme Court of Canada in  Nor-Man Regional Health Authority v. Manitoba Association of Health Care Professionals, 2011 SCC 59 and Newfoundland and Labrador Nurses Union v. Newfoundland and Labrador (Treasury Board) 2011 SCC 62. In both those cases, the Supreme Court upheld a labour arbitration award applying the reasonableness standard in Dunsmuir.  I said in my article that those cases are powerful supports for person seeking to uphold arbitration awards.

None of these cases involved commercial arbitrations.  In none of these decisions did the court determine whether the reasonableness test is a proper test for the review of the decisions of arbitral tribunals under commercial arbitration agreements, particularly when the parties have agreed that there is no appeal from an arbitral decision. That issue remains to be decided by Canadian courts.

What are the arguments for and against the application of a reasonableness test to commercial arbitrations?

The Rationale For Applying Dunsmuir

The arguments for the application of a reasonableness test have been stated in Dunsmuir and the other Supreme Court of Canada decisions applying Dunsmuir.  A quote from Dunsmuir was cited in Smyth and sets out its rationale:

 Reasonableness is a deferential standard animated by the principle that underlies the development of the two previous standards of reasonableness: certain questions that come before administrative tribunals do not lend themselves to one specific, particular result. Instead, they may give rise to a number of possible, reasonable conclusions. Tribunals have a margin of appreciation within the range of acceptable and rational solutions. A court conducting a review for reasonableness inquires into the qualities that make a decision reasonable, referring both to the process of articulating the reasons and to outcomes. In judicial review, reasonableness is concerned mostly with the existence of justification, transparency and intelligibility within the decision-making process. But it is also concerned with whether the decision falls within a range of possible, acceptable outcomes which are defensible in respect of the facts and law.

 In Nor-Man, the Supreme Court of Canada explained the reason for applying the reasonable test from Dunsmuir as follows:

 The standard of reasonableness, on the other hand, normally prevails where the tribunal’s decision raises issues of fact, discretion or policy; involves inextricably intertwined legal and factual issues; or relates to the interpretation of the tribunal’s enabling (or “home”) statute or “statutes closely connected to its function, with which it will have particular familiarity” (Dunsmuir, at paras. 51 and 53-54; Smith, at para. 26).

Similarly, in Newfoundland and Labrador Nurses Union, the Supreme Court of Canada said the following in support of its application of the Dunsmuir reasonableness standard to a labour arbitrator’s decision, referring to Professor Dyzenhaus’ explanation of Dunsmuir:

 This, I think, is the context for understanding what the Court meant in Dunsmuir when it called for “justification, transparency and intelligibility”. To me, it represents a respectful appreciation that a wide range of specialized decision-makers routinely render decisions in their respective spheres of expertise, using concepts and language often unique to their areas and rendering decisions that are often counter-intuitive to a generalist. That was the basis for this Court’s new direction in Canadian Union of Public Employees, Local 963 v. New Brunswick Liquor Corp., 1979 CanLII 23 (SCC), [1979] 2 S.C.R. 227, where Dickson J. urged restraint in assessing the decisions of specialized administrative tribunals. This decision oriented the Court towards granting greater deference to tribunals, shown in Dunsmuir’s conclusion that tribunals should “have a margin of appreciation within the range of acceptable and rational solutions” (para. 47).

 These expressions of the rationale behind the reasonableness test are largely based upon the statutory jurisdiction of administrative tribunals.  Even labour arbitrators are usually exercising their authority in the context of arbitration mandated by statute. The statutory source of jurisdiction justifies the court imposing a standard of reasonableness on the arbitrator’s reasons for decision.

Does this rationale apply when the parties have quite voluntarily chosen arbitration as their dispute resolution mechanism and have agreed that there shall be no appeal to the courts?

The Rationale For Not Applying Dunsmuir

The argument that it does not can conveniently be started by examining the Ontario International Commercial Arbitration Act (ICAA) and the Model Law attached to it.  That Model Law has been adopted by many countries around the world. Pursuant to that Model Law, international commercial arbitration decisions are rendered and enforced around the world. Under Article 34(1) of the Model Law, recourse to a court against an arbitral award may be made only by an application for setting aside in accordance with that article. No right of appeal is provided in the Model Law. Article 34(2) of the Model Law says that an award may be set aside by the court only on the following grounds:

 (i) a party to the arbitration agreement was under some incapacity; or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of this State, or

(ii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case, or

(iii) the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the award which contains decisions on matters not submitted to arbitration may be set aside, or

(iv) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Law from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Law; or

(b) the court finds that:

(i) the subject-matter of the dispute is not capable of settlement by arbitration under the law of this State, or

(ii) the award is in conflict with the public policy of this State.

This is a pretty comprehensive list of grounds to set aside an award.  Yet, nothing in Article 34(2) says that the substance of the award must be correct or reasonable, or that the arbitral tribunal must be correct or reasonable except with respect to jurisdiction or one of the other matters expressly stated in Article 34(2).  Indeed, under Article 31(2) with the consent of the parties the arbitral tribunal need give no reasons. It must be assumed that the drafters of the Model Law envisaged that, sometime and somewhere, an international commercial arbitration panel might issue an award which was legally or factually incorrect or unreasonable.  But no relief on those grounds was afforded in the Model Law.

If a Canadian court is asked to apply the Dunsmuir test to an award of an international commercial arbitration, on what basis could it do so?  Would it say that simply because the award is unreasonable, then under Article 34(2)(iii) it does not fall within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration, or deals with matters not remitted to the tribunal?  Can that be said when the Model Law does not require that the award be reasonable or correct?

Of course, if there is a true jurisdictional challenge to the award, then Article 34(2) (iii) will apply and the court will have to decide that issue using an appropriate jurisdictional test.  But apart from that situation, the application of the reasonableness standard to the merits of the arbitral award does not appear to fit comfortably within Article 34.

If Canada applies a reasonableness standard to international arbitration awards outside of true jurisdictional issues, then it may apply a test that no other country applies to the Model Law, even though that Law was adopted by many countries for the purpose of uniformity.

Turning to the domestic Ontario Arbitration Act, 1991, section 46(1) states that an arbitral award may be set aside on the following grounds:

1.   A party entered into the arbitration agreement while under a legal incapacity.

2.   The arbitration agreement is invalid or has ceased to exist.

3.   The award deals with a dispute that the arbitration agreement does not cover or contains a decision on a matter that is beyond the scope of the agreement.

4.   The composition of the tribunal was not in accordance with the arbitration agreement or, if the agreement did not deal with that matter, was not in accordance with this Act.

5.   The subject-matter of the dispute is not capable of being the subject of arbitration under Ontario law.

6.   The applicant was not treated equally and fairly, was not given an opportunity to present a case or to respond to another party’s case, or was not given proper notice of the arbitration or of the appointment of an arbitrator.

7.   The procedures followed in the arbitration did not comply with this Act.

8.   An arbitrator has committed a corrupt or fraudulent act or there is a reasonable apprehension of bias.

9.   The award was obtained by fraud.

10.  The award is a family arbitration award that is not enforceable under the Family Law Act.

Once again, this section provides a very comprehensive basis for setting aside arbitral awards, but does not state that correctness and reasonableness are separate tests for doing so.  Except as a test to determine whether the arbitral tribunal had jurisdiction to determine the dispute or whether the tribunal has applied one of the other factors mentioned in section 46(1), the reasonableness test does not seem to fit well within that subsection.

Section 46 is found within a particular statutory setting as a separate test.  Section 6 says that courts shall not intervene except for express statutory purposes.  Section 45(1) provides a right to seek leave to appeal from an arbitral award unless the parties have agreed otherwise.  Section 45(2) and (3) allow the parties to agree on an appeal on questions of law and fact.  So the parties are afforded by statute the broadest right to agree on recourse to the courts to review the award.  When the parties agree that there will be no appeal, they know that the award could possibly be in error or unreasonable, but they chose expedition and finality over legal perfection.  In that context, a review of the decision based on reasonableness –outside the pure jurisdictional context under section 45(1).3 – seems difficult to justify.

The Parmalat Decision

Returning to the Parmalat Canada decision, Parmalat Canada argued that the interpretation of the LPA was unreasonable as it allegedly did not take into account the meaning of the word “liquidity” and common sense need for a transaction or other liquidity event to fund the Liquidity Event.  Fitting that argument within the specific grounds for review found in section 46 of the Arbitration Act, 1991 was the challenge.  Justice Cumming found that the arbitrator’s decision was reasonable so he did not have to decide whether the award could be set aside if it was unreasonable.

Conclusion

The challenge for those who support the application of the Dunsmuir test to commercial arbitrations is to show that the administrative law rational for Dunsmuir applies to commercial arbitrations, and that the test can be useful or justified notwithstanding the limited right of courts to review awards of domestic and international arbitrations.

The challenge for those who oppose the application of Dunsmuir to commercial arbitration awards is to show that the administrative law rational for Dunsmuir does not apply in the commercial arbitration setting, and that the grounds for reviewing a commercial arbitration are sufficiently and definitively stated in the arbitration statutes and leave no need or room for Dunsmuir except in relation to true jurisdictional issues.

So far, there has been no real debate on these issues. In Smyth, the Dunsmuir test was applied to an arbitration in a hospital setting, as a convenient and apparently governing authority but without considering whether the rationale and the statutory setting justified that application outside a pure jurisdictional dispute. Let the debate begin.

See Heintzman and Goldsmith on Canadian Building Contracts (4th ed.), chapter 10

Parmalat Canada Inc. v. Ontario Teachers’ Pension Plan Board, 2012 ONSC 5981

Arbitration  –  Review of Award  –  Jurisdiction of Arbitral Tribunal  –  Reasonableness

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                November 24, 2012

www.heintzmanadr.com

www.constructionlawcanada.com

Six Points To Consider Before Commencing An Arbitration

On October 10, 2012, I gave a speech at an Advocates’ Society program.  The program was  entitled Arbitration is the New Black.  My presentation focused on seven issues which should be addressed when a party is contemplating the commencement of an arbitration.

Starting the arbitration seems like the easiest thing in the world.  After all, the parties already have an arbitration agreement which provides for the arbitration.  So what is the big deal?

That approach can lead to real problems.  The commencement of arbitration is as important a step in the proceeding as the commencement of an action in court.  In fact, it’s more important because in the case of arbitration, there is no court in which to issue the initiating document.  Therefore, no court official determines that the document initiating the arbitration is proper.  The party starting the arbitration may be lulled into a false sense of security by the arbitration agreement and may be unaware of the formalities and the choices that are inherent in the arbitral process.

Here are Seven Points to Consider before Commencing an Arbitration:

1.      The limitation period

Some may think that the arbitration is not subject to limitation periods. It is. A limitation period for an arbitral claim may be established in two ways.

First, the arbitration agreement may itself contain a limitation period.  For example, insurance policies often contain limitation periods.  If the period is missed, the claim may be lost.

Second, an arbitral claim will be governed by the general law of limitation of actions.  In Ontario, section 52(1) of the domestic Arbitration Act, 1991 provides that the law with respect to limitation periods applies to an arbitration as if the arbitration were an action and the claim made in the arbitration were a cause of action.  Section 4 of the Ontario Limitations Act, 2002 establishes a general limitation period of two years from the date of discovery of the claim. So, unless another statutory limitation period applies, a domestic arbitral claim governed by Ontario law must be commenced within two years of the discovery of the claim.

As far as international commercial arbitrations are concerned, the Ontario International Commercial Arbitration Act (ICAA) does not establish a limitation period for the commencement of an arbitral claim nor refer to a general limitation period.  If the arbitral claim is subject to Ontario law, then the Ontario Limitations Act, 2002 will presumably apply. There may be arguments about which limitation law applies to a claim in an international commercial arbitration.  The law of the place of the arbitration or the substantive law applicable to the contract are two candidates and the debate may be resolved differently by the courts in different jurisdictions.  So the limitation issue may have to be considered carefully in international commercial arbitrations.

Before leaving the limitation issue, it is well to remember that there is a limitation issue at the other end of the arbitration proceeding, namely, the limitation period for the enforcement of the award. For domestic arbitrations, section 52(3) of the Ontario Arbitration Act, 1991 provides that an application to enforce the award must be made within two years of the date that the applicant receives the award.

The Ontario ICAA does not contain a limitation period for the enforcement of the award. The general two year general limitation period in Ontario Limitations Act, 2002 will presumably apply if the award is sought to be enforced in Ontario.  In Yugraneft Corp. v. Rexx Management Corp., [2010] 1 SCR 649, the Supreme Court of Canada held that Alberta’s general two year limitation period applied to the enforcement in Alberta of an international commercial arbitration award made in Russia. Alberta had no limitation period that specifically applied to international arbitrations.  The Supreme Court held that the application for enforcement of the foreign arbitral award was an application for a “remedial order” within the meaning of the Alberta limitation statute, and therefore subject to the two year limitation period together with the discoverability rule.  It was not a judgment or court order subject to the 10 year period.

The mediation period

 A contract containing an arbitration clause may also contain a mediation clause.  The mediation clause may affect the commencement of the arbitration in two ways.

First, the mediation may be a precondition to the commencement of the arbitration.  If it is, the arbitration may be premature if mediation is not undertaken.  However, the mediation clause may be a permissible procedure, not a required procedure.  In this case, the failure or refusal of the parties, or one of them, to participate in mediation will not be a bar to the commencement of the claim.

Second, and as a corollary to the first point, if the mediation is, or is not, conducted, the limitation period can be affected.  If mediation is a requirement then the limitation period will not commence until the mediation is completed.  If the mediation is not required, then the limitation period will be running while the parties are fussing about mediation.

These issues were dealt with by the Ontario Court of Appeal recently in L-3 Communications Spar Aerospace Limited v. CAE Inc., 2011 ONCA 435, 2010 ONSC 4133, (reviewed by me in www.heintzmanadr.com, July 17, 2011) and Federation Insurance Co of Canada v. Markt Insurance Co of Canada, 2012 ONCA 218 (reviewed by me in www.heintzmanadr.com, May 5, 2012).

In the first case, mediation was held to be required.  Therefore, the cause of action did not accrue until the mediation was conducted, and therefore the action was still commenced in time.  In the second case, mediation was held not to be required.  Accordingly, the limitation period was running during the mediation and had expired by the time that the arbitration was commenced.

In Ontario, section 11 of the Limitations Act, 2002 provides that the limitation period does not run during any period in which the parties have agreed to have an independent third party resolve the claim or assist them in resolving it. The section does not necessarily avoid the issue of whether there was an agreement to mediate and whether that agreement requires mandatory mediation.

A further complicating factor is whether the mediation agreement is enforceable.  In Sulamerica CIA Nacional De Seguros SA & Ors v Enesa Engenharia SA & Ors [2012] EWCA Civ 638 (which I reviewed in www.heintzmanadr.com, July 5, 2012) the English Court of Appeal held that a mediation clause is not enforceable unless the clause contains a minimum amount of procedural certainty.  The Ontario Court of Appeal’s decisions referred to above did not consider this issue. We can expect some party to assert in the future that the mediation agreement was not enforceable and therefore the limitation period was running during the mediation and expired before the arbitral claim was commenced.

 2.      The Commencement of Arbitration

The claimant in the arbitration must make sure that it uses the proper document and procedure to start the arbitration.  If it does not, then no arbitration will have been commenced and the limitation period may expire in the meantime.

Section 23 of the Ontario Arbitration Act, 1991 states three ways in which an arbitration may be commenced:

first, by serving a notice to appoint or participate in appointment of the arbitrator

second, by serving a notice requiring another party to appoint the arbitrator and

third by serving a notice demanding arbitration

Under article 21 of the Model Law attached to the Ontario ICAA, the arbitral proceeding is commenced by a request for that dispute to be referred to arbitration being received by the respondent.

The decision of the Ontario Court of Appeal in Penn-Co Canada (2003) Ltd. V. Constance Lake First Nation, 2012 ONCA 430; (reviewed by me in www.heintzmanadr.com, August 27, 2012) is a reminder of the importance of serving the right document.  One of the parties had undertaken a good deal of activity relating to the arbitration, including the commencement of court proceedings.  But the Court of Appeal held that it had not served a document qualifying as the commencement of the arbitration. Its later attempt to do so was served outside the limitation period.

3.      Objection to Jurisdiction

An objection to jurisdiction must be made on a timely basis. Under section 17(3) of the domestic Ontario Arbitration Act, 1991, the objection must be made no later than the beginning of the hearing, or if there is no hearing, no later than the first occasion on which the party submits a statement to the tribunal.  In addition, the objection to jurisdiction must be made as soon as the jurisdictional matter is raised, although the tribunal has the authority to consider a later objection if it considers the delay to be justified.

Under Article 16(2) of the Model Law attached to the Ontario ICAA, a plea that the arbitral tribunal does not have jurisdiction must be raised no later than the submission of the statement of defence, and a plea that the arbitral tribunal is exceeding the scope of its authority must be raised as soon as the matter alleged to be beyond the scope of its authority is raised during the arbitral proceedings. The arbitral tribunal has authority to admit a later plea if it considers the delay justified.

These time limits are not necessarily the same. In particular, the claimant should be aware of the requirement in the Ontario ICAA to raise a pre-existing jurisdictional objection at time of the delivery of the Statement of Defence.

4.      Appointing the arbitral tribunal

a.      Need for speedy appointment

Before the arbitral tribunal is appointed, there is no way to determine anything within the arbitration.  The respondent cannot be compelled to deliver a defence.  An order that the proceeding has been validly commenced cannot be obtained, and other interlocutory matters cannot be dealt with. So appointing the arbitral tribunal is a key step in the arbitration.

Under section 10 of the domestic Ontario Arbitration Act, 1991, if the parties disagree about the identity of the single arbitrator or the chair of the arbitral tribunal, the Ontario Superior Court has power to appoint the tribunal. If the Ontario ICAA applies, then under article 11(4) of the Model Law attached to that statute, the Ontario Superior Court has a similar power to appoint the arbitral tribunal.

If the arbitration is held under the auspices of one of the arbitration institutions (such as the LCIA, ICC or BCICAC), then those organizations will appoint the arbitral tribunal, subject to the input of the parties as their rules may allow. An advantage of these arbitral institutions is that their appointment process may avoid lengthy court proceedings to appoint the arbitral tribunal. A disadvantage may be the lesser input of the parties into the selection of the tribunal.

b.      Discussions with the potential arbitrators

Selecting an appropriate arbitrator or chair of the arbitral tribunal will obviously be important. Identifying and avoiding conflicts of interest of arbitrators is equally important. For this reason, there may be legitimate reasons to write to or speak with a candidate for appointment.

However, these contacts are fraught with peril as they may create circumstances that themselves give rise to an appearance of bias. Thus, if the candidate is asked his opinion about the merits of the dispute, that conversation could well prejudice the candidate’s appointment.

The Chartered Institute of Arbitrators has guidelines about this process which are very helpful. They may be viewed on the Institute’s website: www.ciarb.org.

 

 c.   Agreement Appointing Arbitrators

If the arbitrators are appointed by way of agreement, the negotiation of that agreement is a good opportunity to address issues which were not dealt with in the arbitration agreement.  With a dispute now in existence, arrangements can be put in place to ensure that the arbitration is conducted cost effectively.

Those arrangements may include: the rules of procedure, so that rules appropriate for the specific hearing are used, not the rules of court; the confidentiality of the arbitration; and choice of law.

5.      The First Pre-Hearing Meeting

A significant advantage of arbitration is that it allows the parties to use a process which is suitable for the actual dispute and which will ensure that the dispute is resolved in a cost- effective manner. The time to start that process is the first meeting with the arbitral tribunal.

At the first meeting, the following procedures can be settled:

The schedule of all events and the date of the final hearing
The nature and dates for the exchange of pleadings
The scheduling of motions
The scope of documentary production and agreement on joint books of exhibits
Limits on discovery, or elimination of discovery
Preliminary lists of witnesses, including experts
The arbitration hearing briefs
The number of days of hearing

At the end of the first pre-hearing meeting, the arbitral tribunal can issue a Procedural and Schedule Order dealing with all these matters.

In order to obtain the maximum buy-in to this process, the parties should be present in person at the first pre-hearing meeting.

6.      Interim Relief

Finally, before the arbitration is commenced, consideration should be given to the necessity to obtain interim relief.

Various factors may relate to that relief: whether the relief must be obtained against third parties; whether the opposing party will likely refuse to obey an order granting the relief; and whether the relief must be enforced outside the jurisdiction of the court or the place of the arbitration.

No simple answer can be given about whether it is better to obtain interim relief from the court or the arbitral tribunal, but an informed decision should be made about that issue. Some of the factors that may be considered include the following:

  1. If the motion for interim relief is made to the superior court, then there will be no arguments about the limits of the court’s jurisdiction since the court has plenary powers. There may be a debate about whether the arbitral tribunal has the jurisdiction to grant the particular interim relief which is being sought.

Article 17 of the Model Law attached to the Ontario ICAA says that unless otherwise agreed by the parties, the arbitral tribunal may order such interim measure of protection as the arbitral tribunal may consider necessary in respect of the subject-matter of the dispute, and appropriate security be provided in connection with that measure. Section 18(1) of the Ontario Arbitration Act, 1991 says that an arbitral tribunal may make an order for the detention, preservation or inspection of property and documents that are the subject of the arbitration or as to which a question may arise in the arbitration, and may order that security be provided in that connection.  These provisions do not purport to give the arbitral tribunal unlimited interim powers. Therefore, the respondent to the motion may assert that the arbitral tribunal does not have jurisdiction to grant the particular interim relief claimed on the motion.

2.  If it is likely that the opposite party will abide by the order and the parties simply need a preliminary ruling on a matter, and if a faster hearing can be obtained before the arbitral tribunal than before a court, then the motion likely should be brought to the arbitral tribunal.

3.  If the order must be enforced against third parties, then a motion to the court may be more appropriate because an arbitral award is not enforceable against third parties.  In Farah v. Sauvageau Holdings Inc., 2011 ONSC 1819 it was held that an arbitrator did not have authority to grant a mareva injunction against a third party. However, it still may be necessary to first obtain an order against the opposing party from the arbitral tribunal, to show that the arbitral remedy has been exhausted and that the opposing party is bound by that order.

4.  If the order must be enforced out of the jurisdiction of the place of the arbitral tribunal, a court motion may be more appropriate in order to obtain an order that another court will enforce.  An interim arbitral order which is not a final award of the arbitral tribunal may not be enforceable outside the place of the arbitration. While section 9 of the Ontario ICAA says that an order of the arbitral tribunal for an interim measure of protection is subject to the provisions of the Model Law as if it were an award, a court in another jurisdiction may not consider it to be so.  So the law of the place of the arbitration and the place where the interim order of the arbitral tribunal will have to be enforced must be considered to determine whether the interim award will be enforceable.

Commencing an arbitration is not a simple process. There are at least seven matters to consider before doing so. By thinking about them beforehand, the claimant can be ready to bring the claim to a successful conclusion, at least from a procedural standpoint.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed., chapter 10.

Arbitration  –  Commencement  –  Appointment of Arbitrators   –  Limitation Periods  –  Mediation- Jurisdiction  –  Interim Relief

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                               November 18, 2012

www.constructionlawcanada.com

www.heintzmanadr.com

Can Someone Be Compelled To Arbitrate By Estoppel?

Can the conduct of the parties after they have signed a commercial contract influence the interpretation of the arbitration agreement contained in that contract? If they take one position during the performance of the contract with respect to whether a dispute is arbitrable, can they be estopped from asserting to the contrary when a dispute actually arises?  The Albert Court of Queen’s Bench has recently answered Yes to both questions in Alberta Oil Sands Pipeline Ltd v. Canadian Oil Sands Limited.  This decision raises important issues relating to the conduct of parties leading up to arbitration, particularly under long term commercial agreements.

Background

Alberta Oil Sands Pipeline Ltd. (AOSPL) owned and operated a pipeline between Fort McMurray and Edmonton in Alberta. AOSPL entered into an agreement with Canadian Oil Sands and other companies (the Participants) which had refineries in Fort McMurray.  Under that agreement, AOSPL agreed to build a new portion of the pipeline.  However, AOSPL did not complete 4.1 kilometres of the new pipeline. The Participants said that this failure amounted to a breach of the agreement. AOSPL said that it did not, and that the existing pipeline, together with the new portion it had constructed, satisfied all of the obligations it had undertaken in the agreement. In April 2009, the parties entered into a tolling agreement preserving their right to raise claims and defences with respect to the 4.1 kilometre pipeline dispute.

Then, other disputes also arose. One related to an increased pipeline tariff imposed by AOSPL and another relating to the details of invoices submitted by AOSPL. The Participants asserted their right under the agreements to audit the books and accounts of AOSPL. As a result of the 2009 audit, the Participants submitted a claim against AOSPL. Article 18.3 of the agreement provided for arbitration of audit claims.  The Participants submitted their claim under that article. In June 2010, AOSPL submitted its response and the Participants replied to AOSPL’s response, both within the time period called for in that article. After the 180 day period for resolving disputes referred to in Article 18.3, in November 2010 the Participants delivered a notice of arbitration of their claims.

In December 2010, AOSPL commenced an action for a declaration that the audit claims were not subject to arbitration.  The Participants filed a Statement of Defence asserting that they were subject to arbitration and brought an application to stay the action.  In that motion, AOSPL asserted that the right of audit was only a right to verify its books and records from an accounting or mathematical standpoint, and not from a contractual correctness standpoint and that therefore the arbitration agreement did not apply to the Participants’ claims.  The Participants asserted that the audit and arbitration processes applied to any errors in the books and records of AOSPL.

In March 2011, AOSPL gave the Participants 60 days’ notice of the termination of the tolling agreement.  The Participants then immediately commenced an action for damages for breach of contract by reason of AOSPL’s failure to complete the 4.1 kilometres of pipeline. Both parties agreed that this claim was not an audit claim and was not arbitrable.  AOSPL brought a motion to consolidate this action with its action relating to the audit claims.

The Decision

The Court found that the arbitration clause applied to the audit claims. It held that “it is unreasonable commercially to accept that the intention of the parties was to resort to two different forums for the resolution of disputes about a single aspect of the pipeline tariff,” one relating to accounting correctness and the other relating to contractual correctness.  The court noted that the Alberta Arbitration Act specifically gave the arbitrator the authority to determine questions of law, and there was nothing in the arbitration agreement that removed that authority.

The judge also held that, if she was incorrect in that interpretation, she would arrive at the same conclusion by reference to the conduct of the parties subsequent to the making of the contract, and this is the interesting point which is addressed in this article.  The judge held that the conduct of the parties was relevant for two reasons:

First, as an aid to interpret the contract, and

Second on the ground of estoppel

The conduct of AOSPL that the judge found relevant was of two kinds.

First, during the claims process arising from the present dispute, AOSPL had followed the claims and arbitration process and only asserted that the claims were not arbitrable after they had been submitted to arbitration by the Participants.  In that process, personnel of AOSPL made statements, both within AOSPL and in meetings with the Participants, that the claims were arbitrable.

Second, AOSPL had participated in arbitration proceedings relating to audit claims in 2001, 2002 and 2005.  In 2001, when the Participants had issued a Statement of Clam with respect to audit claims, AOSPL had referred the issue to arbitration, the action was stayed and the dispute was arbitrated.

AOSPL submitted that none of this conduct was relevant due to the clause in the contract stating that there was to be no waiver of a party’s rights by virtue of its conduct. To this the judge replied that the relevance of AOSPL’s conduct was not whether it had waived any rights but the proper interpretation of the contract in light of the parties’ conduct.

As to estoppel, the judge found that AOSPL’s conduct amounted to a representation by conduct. AOSPL had participated in the claims process leading to arbitration and that amounted to a representation to the Participants that the “audit procedure …was not disputed.” If it was an essential ingredient in an estoppel that the Participants had altered their position, that alteration was present. If AOSPL had notified the Participants of its position at the outset, then the Participants would have issued a Statement of Claim immediately, and not be faced with the limitations defence that AOSPL now raised.

While silence is not always a representation, the judge concluded that silence is a representation when the parties are in a contractual relationship with each other and engaged in a dispute resolution process. In those circumstances, AOSPL had a duty to respond and to not remain silent about its position that the audit claims were not arbitrable.

The judge then considered whether the audit claims should proceed to arbitration or be tried with the 4.1 kilometre claim. The judge refused to exercise her discretion to order that the audit claims proceed in court, for two reasons.

First, the audit and 4.1 kilometre claims were different.

Second, AOSPL had asserted a limitation defence to the audit claims if they proceeded in court. In the result, there was good reason to apply the mandatory language in section 7 of the Alberta Arbitration Act and stay AOSPL’s action brought in the face of the arbitration agreement.

Discussion

The judge’s decision to apply the principles of estoppel to an arbitration agreement is novel, but one could argue that it is heartening.   It is novel because estoppel is usually thought of as either a principle of evidence or a principle of substantive law.  In this case, estoppel was applied in a procedural setting, in the lead-up to the commencement of an arbitration.

But some will see this decision as welcome on the ground that estoppel is an ideal response when contradictory positions are taken in pre-arbitral proceedings, especially when the result is the loss of time and expense and, possibly, a limitation period.  Indeed, in the face of an assertion that a limitation period has been lost, it is hard to imagine that a court could take any other position than sustain the earlier proceeding.

Estoppel has a particular application to the commencement of arbitration proceedings. As I have commented in a recent article, it is sometimes difficult to know whether an arbitration proceeding has been commenced, or properly commenced.  There is no court office in which the arbitration claim may be issued. When the agreement requires that certain steps be taken before the arbitration is started, there is no court to rule on whether those steps have been properly taken. Even after notice of arbitration is given and before the arbitral tribunal is appointed, there is no body to rule on whether the arbitration has been properly started.  Yet time is passing and a limitation period may go by. The whole process seems dependent on each party stating a timely objection to any steps leading to the appointment of the arbitral tribunal.

Estoppel also seems appropriate when the parties have an ongoing contractual relationship.  Thus, under a labour, franchise or construction agreement, when the parties deal with each other over a period of time and are not just engaged in a one-off transaction, they make daily decisions which are instantly understood to be acceptable to the other party if there is no objection, and without turning to each other each time and saying “Right?”  True, each party is not expected to be the other party’s lawyer.  But making timely procedural objections does not seem to be too much to ask, or if not made, that the silent party live with the procedural result.

Alberta Oil Sands Pipeline Ltd v. Canadian Oil Sands Limited, 2012 ABQB 524

Arbitration – Stay of arbitration – Limitation Period – Estoppel  –  Refusal to arbitrate

Thomas G. Heintzman O.C., Q.C. FCIArb                                                                                                      September 4, 2012

www.heintzmanadr.com

www.constructionlawcanada.com

When Does An Arbitral Limitation Period Commence?

An arbitration is usually considered to be a less formal type of dispute resolution than court litigation.  For this reason it may be thought that less formal rules about limitation periods apply to arbitrations.

If you had this impression, then the recent decision of the Ontario Court of Appeal in Penn-Co Construction Canada (2003) Ltd. v. Constance Lake First Nation will quickly disabuse you of that view.  Just like a court action, unless an arbitration is started within the appropriate limitation period, the right to commence the arbitration claim will be lost. The issue may be trickier in an arbitration than in a court action since, unlike in a court action, there is no court office in which to issue the arbitration claim.  But it is still the same question: was the proceeding commenced within the limitation period?

The appeal to the Court of Appeal in the Penn-Co case was from a 2011 decision of the Ontario Superior Court.  I commented on that decision in my article of November 6, 2011.

The Legal Background

In Ontario, there are two enactments that are relevant to the limitation period for an arbitration claim.

First, the Limitations Act, 2002 says that the general limitation period in Ontario is two years from the discovery of the facts giving rise to the claim. Section 52(1) of the Ontario Arbitrations Act, 1991 (the Act) says that “the law with respect to limitation periods applies to an arbitration as if the arbitration were an action and a claim made in the arbitration were a cause of action.” So, an arbitration must be commenced within two years of the date that the would-be applicant first had knowledge of the facts giving rise to its claim.

Second, section 23 of the Act says that an arbitration may be commenced “in any way” including three particular ways:

A party to the arbitration agreement serving on the other parties to that agreement a notice to appoint or to participate in the appointment of an arbitrator under the agreement;

If a third party has the power to appoint an arbitrator, serving a notice on that third party to exercise that power, and serving the other parties with that notice;

A party serving on the other parties a notice demanding arbitration under the agreement.  (emphasis added by the Court of Appeal)

As a result, the limitation issue in the Penn-Co case was whether Constance Lake took one of these three steps before the limitation period expired.

The Background Facts

In 2003, the parties signed a standard form building contract for the construction by Penn-Co of a school for Constance Lake.  The contract contained a three-step process for resolving disputes: negotiations involving the consultant, mediation and arbitration.  By the summer of 2005, there were several alleged deficiencies in Penn-Co’s work that were the subject matter of dispute.  In December 2005, Constance Lake served a cure notice on Penn-Co. Penn-Co’s counsel responded by asking for mediation.  Then, on January 20, 2006, counsel for Constance Lake suggested that the parties dispense with the provisions under their contract and proceed directly with arbitration under an amended form of the CCDC 40 Rules for Arbitration of Construction Disputes. In response, Penn-Co’s counsel suggested that the parties proceed with a neutral third party “peer review”. However, the parties could not agree upon the terms of the peer review and by mid-2006 that process was abandoned.

In June 2007, Penn-Co commenced an action against Constance Lake.  In response, in May 2009 Constance Lake instituted a counterclaim in that action.  That counterclaim was instituted more than two years after December 2005 when, as acknowledged in its own cure notice, Constance Lake had knowledge of its claim against Penn-Co.  Penn-Co brought a motion to dismiss the counterclaim on the ground that the counterclaim was barred by the limitation period.

The Superior Court judge had held that the counterclaim was barred, and the Court of Appeal agreed.  It held that the letter of January 16, 2006 did not commence an arbitration.  It said that that this letter, and the other correspondence between the parties, amounted to “mere proposals for an arbitration agreement” and not a notice under the existing arbitration agreement which satisfied section 23 of the Act. The Court of Appeal held that the “parties failed to commence an arbitration under the building contract or any other agreement.”  Accordingly, the limitation period to do so had expired.

In these circumstances, the Court of Appeal also held that section 52(2) of the Act had no application. That sub-section gives powers to the court when it sets aside an arbitration award or terminates an arbitration or declares an arbitration to be invalid. In those circumstances, the court may order that the “period from the commencement of the arbitration to the date of the order” is to be excluded from the computation of time for limitation purposes. The Court of Appeal held that, if no arbitration was commenced, then this sub-section had no application.

Finally, the Court of Appeal held that Penn-Co was not estopped by its conduct from relying on the limitation period. None of the elements of estoppel were present.  There was no evidence that Penn-Co gave any assurance or representation that it would not rely on the limitation period, or that Constance Lake relied upon any such assurance.

Discussion

This decision is a good reminder that an arbitration is a formal proceeding and must be formally commenced. But this decision does not answer the question of what exactly such a formal commencement might encompass.

Section 23 of the Act says that an arbitration may be commenced “in any way recognized by law”.  That is just about as broad a definition as could be drafted.  One wonders what the limit of that definition might be, apart from the examples given in the section.  The legislature has said that a notice demanding arbitration is sufficient.  If that is so, and if that is included within but is not exhaustive of the definition, then something less than such a notice may amount to a commencement. The Court of Appeal has said that proposing arbitration under some other procedure or regime is not sufficient, at least until that regime is agreed to. But exactly what can amount to a “commencement” of an arbitration less than a notice of arbitration is left uncertain.

Several lessons can be learned from this decision.

One is that, before a party suggests alternatives to the arbitration agreement that is already in place, that party should first give notice of arbitration under that agreement.  Then, other dispute resolution solutions can be proposed.

The second lesson is that the institution by one party of mediation or arbitration does not protect the other party.  In the present case, Penn-Co instituted the mediation provisions of the building contract.  Whether the commencement of mediation proceedings stops the limitation period from running is open to question.  As I have commented upon in previous articles, the Ontario Court of Appeal has issued two decisions on this issue which arrived at contradictory results.  But the commencement of mediation proceedings by one party will not likely stop the running of the limitation period against the other party.

Finally, the limitation issue may not entirely deprive Constance Lake of its cause of action.  It may still be able to rely upon that cause of action by way of defence and setoff against the claim by Penn-Co.  The limitation statutes bar the commencement of a claim but not the reliance on the cause of action in any other way.

See Heintzman & Goldsmith on Canadian Building Contracts (4th ed.) at Chapter 10, part 6

Penn-Co Construction Canada (2003) Ltd. v. Constance Lake First Nation, 2012 ONCA 430

Building Contract  –  Arbitration  –  Limitation Periods  –  Commencement of Arbitration

Thomas G. Heintzman O.C., Q.C., FCIArb                                                            August 27, 2012

www.constructionlawcanada.com

www.heintzmanadr.com

When Is A Mediation Agreement Enforceable?

One of the most difficult issues in the law of alternative dispute resolution is whether a mediation clause creates an enforceable obligation.  That issue has an impact on related issues and rights.  If a party gets the issue wrong, it may miss a limitation period or affect its right to rely upon an arbitration or exclusive jurisdiction clause.

In recent articles I have discussed two recent decisions of the Ontario Court of Appeal in which that court apparently arrived at conflicting decisions about whether a mediation clause created an enforceable obligation.  The English Court of Appeal considered this issue in its recent decision in Sulamerica CIA Nacional de Seugros S.A. v. Enesa Enenharia S.A..

The Sulamerica decision is more famous for its holding that the law applicable to an arbitration clause is the law of the place that the parties designate as the seat of the arbitration, not the law that they designate as the law of the contract.  But hidden in the back of the decision is another important conclusion, namely, that a mediation clause is not valid unless it contains sufficient minimum details to make it enforceable.

In Sulamerica, the enforceability of the mediation clause affected whether the insurer had properly commenced arbitration proceedings. The insurance contract provided that the law applicable to the contract was the law of Brazil and that the courts of Brazil were the exclusive jurisdiction for the proceedings relating to the contract. In addition, the contract contained an arbitration clause, condition 12 of General Conditions of the contract, which stated that the seat of the arbitration was London, U.K..

The insurers gave notice of arbitration, asserting that the insured’s claim was not covered by the contract. The insured commenced an action in Brazil for an order that the insurers were not entitled to submit the dispute to arbitration and obtained an injunction restraining the insurers from commencing an arbitration proceeding. The insurers then applied to the court in the U.K. for an order restraining the insured from continuing with the proceedings in Brazil.

The insured said that the law of Brazil governed the arbitration clause and that by the law of Brazil, its participation in the arbitration was voluntary, not mandatory. The insurers said that the law of England applied to the arbitration clause and that under English law, arbitration was the exclusive remedy to determine the dispute, that the jurisdiction of the arbitral tribunal was mandatory not voluntary, and that the insured would be bound by the decision of the arbitral tribunal.

The English judge of first instance held that English law applied to the arbitration clause and issued an injunction against the further prosecution of the Brazilian action by the insured, and the English Court of Appeal upheld that decision.  In doing so, the Court of Appeal may be seen as resolving a conflict of decisions in the English courts.  The result appears to be that, absent other evidence or factors, then in the face of a contest between the law of the contract and the law of the seat of the arbitration as to which law governs the arbitration clause , the latter will win out.

That part of the Sulamerica decision has been well discussed by the commentators. But there is another part of the decision which could be equally important.

Condition 11 of the insurance contract – the one immediately prior to the arbitration clause- required the parties to mediate before proceeding to arbitration. The insurer had not sought to mediate prior to instituting arbitration. The insured submitted that the mediation and arbitration clauses were part of a single dispute resolution regime, that mediation was a condition precedent to arbitration under that regime and, accordingly, the arbitration proceeding was premature and should be dismissed on that ground alone.

Condition 11 of the contract contained five paragraphs and some 31 lines, so it was not a “bare-bones” provision. It did not prescribe any particular mediation process, but it did clearly state that “the parties undertake that, prior to a reference to arbitration, they will seek to have the dispute resolved amicably by arbitration.” The clause contained an elaborate provision relating to confidentiality, stated the means by which the mediation could be terminated and stipulated a 90 day period for the mediation to be conducted from the date that one party started the mediation. The clause dealt with the sharing of the costs of the mediation. All in all, not a bad mediation clause.

But not good enough to be enforceable, according to the Court of Appeal.  It dismissed the insured’s submission on the ground that the mediation clause was not sufficiently precise to be enforced. It held as follows:

“…condition 11 does not set out any defined mediation process, nor does it refer to the procedure of a specific mediation provider. The first paragraph contains merely an undertaking to seek to have the dispute resolved amicably by mediation. No provision is made for the process by which that is to be undertaken and none of the succeeding paragraphs touch that question.  I agree with the judge, therefore, that condition 11 is not apt to create an obligation to commence or participate in a mediation process. The most that might be said is that it imposes on any party who is contemplating referring a dispute to arbitration an obligation to invite the other to join in an ad hoc mediation, but the content of even such a limited obligation is so uncertain as to render it impossible of enforcement in the absence of some defined mediation process.”

The Court of Appeal also rejected the insured’s argument that, at the very least, the insurer was required to show that, as a matter of fact, it had satisfied condition 11.  The court held that if “mediation is not defined with sufficient certainty, the condition cannot constitute a legally effective precondition to arbitration.”

This conclusion raises a number of difficulties:

First, mediation is usually considered to be a consensual process requiring no agreement on process. If that is so, it is difficult to see why certainty of process is an essential element for its validity.  In Sulamerica, the English Court of Appeal has applied to the details of the mediation process the certainty requirements found in the law of contract which relate to the making of a contract. Is that necessary or appropriate? If the mediation process is voluntary, why is the agreement to mediate not sufficient?  If a party does not want to mediate, it can immediately state that position and the mediation may be at an end, but why should the parties not be obliged to at least take that step without further agreement on the process?

There is an ongoing debate, at least in North America, about the effort that a party to a mediation agreement must demonstrate before it has complied with a duty to mediate. Some say none; some say that there must be at least some good faith effort to mediate. But the Court of Appeal appears to pre-empt that debate by requiring that the details of the mediation process must be sufficiently clear from the beginning before any obligation to mediate can come into being.

Second, it seems unlikely that most mediation clauses satisfy the “sufficient certainty” requirement established by the Court of Appeal.  In order to do so, it is likely that the mediation agreement will have to refer the mediation to an arbitral or mediation institute. Agreements to engage in ad hoc mediation may, almost by definition, be unenforceable since those sorts of agreements usually leave the parties with the flexibility to choose the mediator and the “style” and procedures adopted by a particular mediator. Even mediation institutions will have to review their rules to ensure that they are “sufficiently certain”.

Third, different courts may have different views on this issue.  Those views may have a dramatic impact on limitation periods.  If an obligation to mediate arises, then the limitation period may well be extended.

As I noted in my article dated July 17, 2011 the Ontario Court of Appeal held in L-3 Communication Spar Aerospace Limited v. CAE Inc that an enforceable obligation to mediate had arisen in that case and accordingly the cause of action did not accrue and the limitation period did not start to run until the mediation was over.

In L-3 Communications, the agreement in question contained no details about the mediation process.  It simply stated that when the parties “had not agreed” then they could proceed to arbitration.  The Ontario Court of Appeal found that was sufficient to create a duty to mediate so that the cause of action did not accrue and the limitation period did not start to run until that occurred.  Had the Ontario Court of Appeal applied the logic of the English Court of Appeal in Sulamerica, presumably it would have concluded that there was no enforceable mediation clause, and the plaintiff’s cause of action accrued once the conditions for liability had occurred without any necessity for those conditions to include mediation.

As I noted in my article dated May 5, 2012, in another decision of the Ontario Court of Appeal, Federation Insurance Co. of Canada v. Markel Insurance Co of Canada, that court held in 2012 that wording similar to that considered in the L-3 Communications decision did not give rise to an enforceable obligation to mediate.  The result in Federation Insurance appears to be different than the decision in L-3 Communications and more consistent with the decision in Sulamerica. 

All of the above may leave those drafting agreements wondering about what exactly to put into a mediation agreement to make it binding.  It may leave those suing to enforce rights under those agreements wondering whether to first start an action or mediate.  The decision to sue or mediate first may, like in Sulamerica, simply affect or delay the determination of which tribunal – court or arbitrator – is the proper tribunal. But more troubling is the limitation problem.

Making the decision to mediate, and not to commence the action, may result in the limitation period being missed.  With this risk, a party may be well advised to “sue first and mediate later”, unless the opposing party agrees to extend the limitation period in the meantime.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th edition, Chapter 10, part 6

Sulamerica CIA Nacional de Seugros S.A. v. Enesa Enenharia S.A., [2012]EWCA Civ. 648

Arbitration – Mediation – Enforceable Agreement – Choice of Law – Choice of Forum – Limitations – Insurance

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                       July 5, 2012

www.constructionlawcanada.com

www.heintzmanadr.com

How Many Times Can A Contractor Sue The Owner Under The Same Construction Contract?

Can a contractor bring several claims against the owner arising from the same building contract?  Multiple proceedings arising from the same contract certainly seem like a waste of time and money.

And even if the contractor can do so, can those claims be asserted first in arbitration and then in court litigation?  Once again, different proceedings before different tribunals seem abusive.

The Alberta Court of Appeal recently held that multiple proceedings by the contractor are justified in some circumstances.  In Hnataik v. Assured Developments Ltd, the Court held that the contractor could sue the owner after bringing an arbitration claim against the owner.  The Court allowed the court claim to proceed because that claim was different than the claim in the prior arbitration and was not reasonably known to the contractor at the time when the pleadings were delivered and evidence was led in the arbitration.

The Background

 The Hnatiuks hired Assured to build them a new house.  In 2004, the Hnatiuks sued Assured alleging a fireplace problem and other related problems. Assured brought a motion to stay the action, asserting that the claim must be arbitrated under the provincial New Home Warranty Program. The motion was not heard and the parties proceeded straight to arbitration, and the action was left in abeyance.

After the evidence was heard and during the final argument in the arbitration, the Hnatiuks became aware of mould problems in the house.   On May 15, 2006, the arbitrator rendered his decision in the Hnatiuks’ favour.

On May 29, 2006 the Hnatiuks commenced a new action based on the mould problem.  Assured delivered a Statement of Defence asserting that the Hnatiuks were obliged to arbitrate their claim and then brought a motion to stay the action but did not proceed with that motion. The Hnatuiks’ action proceeded through discovery to trial.  At the opening of trial, the trial judge raised the issue of whether the action was barred by the prior arbitration.  He decided that it was and dismissed the action based on res judicata and abuse of process.  On appeal, the Court of Appeal reversed that decision.

The Court of Appeal decided that res judicata and related doctrines did not apply for three reasons.

First, the subject matter of the arbitration claim (faulty fireplace and related issues) was not the same as the subsequent court action (mould). On this basis, the Court held that “res judicata is not made out.”  The Court said that:

“causes of action are specific…If someone sues over a particular breach of contract and then later the defendant commits a second but different breach of contract, nothing forbids a second suit over that new breach….If a building contractor twice sets fires in the same building, working under the same ongoing maintenance contract, would that be the same cause of action?  Even if the fires were five years apart?  Surely not.”

Second, issue estoppel did not apply because the issue decided in the arbitration (relating to a faulty fireplace) was not the same as the issue in the subsequent action (mould).  The Court of Appeal said: “[Assured] seems not to suggest any arbitration finding contrary to some significant fact now alleged by the plaintiffs. It lists other claims, but they are plainly different. ”

Third, the Court of Appeal held that, while res judicata and related doctrines would preclude the Hnatiuks from bringing an action based on a claim which they ought to have asserted in the arbitration, there was no evidence that established that they ought to have included the mould claim in the prior arbitration.  That issue required the Court to analyze the arbitration proceedings. The Court said the following:

“The trial judge found that the plaintiffs probably saw mould by the close of argument in the arbitration.  But there is no evidence that its extent, cause or significance could be reasonably appreciated then…..It may be that the arbitrator could have consented to stop the arbitration, add new envelope items to the submission, hold a new hearing on them and then adjudicate on all items.  But the parties agreed he did not have to.”

The Court of Appeal also noted that including the mould claim might cause real problems under the provincial scheme in which claim was being arbitrated:

Adding a whole new set of claims to the arbitration could be troublesome to the arbitrator.  There would be money problems. The New Home Warranty Program….calls for a time estimate, and for a deposit toward the arbitrator’s fees….And of course it calls for pleadings… And there would be time problems in adding a large new claim at a later stage.  The program imposes a 30-day time limit after conclusion of the hearing for the arbitrator to deliver his award and account.  The power to amend the award is narrow…. So adding a big new claim to the arbitration, after the end of the evidence would be difficult.  It might well not be possible without the consent of both parties. The defendant builder never suggested that it would have consented, and indeed hints that it would not have.”

In colourful words, the Court of Appeal then said:

“We cannot see any advantage in trying to hitch such a trailer to that van, especially as it is probable that the trailer would have been far bigger and slower than the van.”

The Court of Appeal then drew a line in the sand, saying that the time for a new issue to be raised in the arbitration was at the time of pleadings or at the latest, at the close of evidence. In the present circumstances, there was no basis to conclude that the Hnatiuks ought to have raised the mould issue by either of those stages of the arbitration.

So far as abuse of process, the Court of Appeal held that the application of that doctrine required that the questions in both proceedings be the same; and/or that the plaintiffs’ second action be in the nature of misconduct, lack of diligence or harassment.  The Court found none of those ingredients in the present case.

Finally, the Court of Appeal held that Assured had waived or acquiesced in the second claim being brought by way of action and not by arbitration.  While Assured pleaded that the second claim ought to have been included in the prior arbitration and served a motion to stay that action, it did not proceed with that motion and fully participated in the action.  The Court of Appeal held that Assured had “plainly” waived its right to arbitration and attorned to the jurisdiction of the court.  Moreover, under section 7 of the Alberta Arbitration Act (the Act), the court’s duty to stay the action based on an arbitration agreement does not apply if the defendant’s stay motion is “brought with undue delay.”  Here, Assured never in fact brought such a motion and the raising of the arbitration issue at trial amounted to “gross” delay.

Observations

This decision raises many issues relating to whether contractors can bring multiple claims against owners arising out of the same building project.  Contractors may want to tuck this decision away and rely on it in a variety of situations because, on its face, the decision could countenance multiple claims by contractors before multiple adjudicators arising from the same building contract.

However, a wise reading of this decision would give it a narrow application, and indeed raise serious issues for contractors.  If the issue raised in the second proceeding is the same as the issue raised in the first proceeding, then the contractor may not be able to raise the same issue in two proceedings.  If the same factual issue arises twice during a building project under the same contract, then the decision in the first proceeding may bind the parties if a second proceeding is commenced, and the contractor may be obliged to make every effort to bring the second claim within the first proceeding.

Clearly, there are two inter-related factors at work here: how similar are the two issues; and how much did the contractor know about the second issue when the first issue was being adjudicated.  In this case, the Court of Appeal found that these issues were at one extreme end of the spectrum: the two issues were very different, and the contractor knew little or nothing about the second issue when the first issue was being arbitrated .  If these factors were different, then the contractor could well be barred by the determination in the first proceeding.

Two other aspects of the decision of the Court of Appeal’s decision do raise questions.

First, the Court said that “it is far from clear” that res judicata is as readily applied to arbitral decisions as to court decisions, and that in any event “the court has a discretion not to find or enforce res judicata flowing from a tribunal’s decision.”  These remarks will be troubling to all those who maintain that the arbitral regime is not a second-class dispute resolution system and that the arbitration process should be fully supported by judicial decisions.

Second, the builder’s reliance on section 7 of the Act and “undue delay” raises the question of the proper purpose of that section.  Its apparent purpose is to deal with an existing and future proceedings and to permit a court proceeding to go forward if a stay motion is not brought expeditiously.  It seems to have nothing to do with past proceedings and the application of res judicata and related principles arising from a past decision.  Put in another way, if res judicata does apply but the question is whether those principles can be waived and have been waived, then that question does not seem to be answered by resorting to section 7.

In the result, the Hnatiuk decision contains a potpourri of issues that contractors and owners may resort to when multiple proceedings arise from the same building contract.  The decision provides us with circumstances in which multiple claims by the contractor were allowed.  It also provides a useful spectrum of conduct or events which may influence or determine whether multiple claims will be permitted in the future.  And it raises questions about how supportive the courts will be in giving effect to arbitral decisions based upon res judicata and related principles.

Hnatiuk v. Assured Developments Ltd.                                                                                                                                                                 

 Building contracts  –  arbitration  –  stay of arbitration  –  res judicata

 
Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                 June 10, 2012
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What Are The Limits Of Competence-Competence For Arbitral Tribunals?

Competence-competence is now a foundational principle of the modern law of arbitration.  According to that principle, an arbitral tribunal is competent to decide its own competence.  In other words, the tribunal has jurisdiction to decide its own jurisdiction.  That principle demands, in turn, that the arbitral tribunal, and not the court, should in the first instance decide the tribunal’s competence.

The competence-competence principle is now embedded in most arbitration statutes.  In Ontario, section 17(1) of the Ontario Arbitration Act, 1991 (the “Act”) states that the arbitral tribunal may rule on its own jurisdiction to conduct the arbitration and in that connection to rule on objections with respect to the existence or validity of the arbitration agreement.

Are there any limits to the competence-competence principle?

One limit to the competence-competence principle has recently been explored by the Ontario Court of Appeal in Shaw Satellite G.P. v. Pieckenhagen. That Court held that, at the very least, the party seeking to apply that principle must admit that it is a party to the arbitration agreement.  Failing that admission, the principle does not apply and the other party may proceed with a court action.  That decision raises the general question of what admissions a party must make about the arbitral tribunal’s jurisdiction before that party may rely on the competence-competence principle.

The background

Shaw provides television programming through satellites.  The defendants are owners of apartment buildings.  Shaw alleged that the defendants had used fictitious names and addresses to subscribe for satellite delivery of TV programs and had then re-broadcast the programs to tenants of the apartment buildings.  The programming subscription agreements prohibited any rebroadcasting, reproduction or retransmission.  Those agreements also contained in an arbitration clause.

Shaw brought an action in the Ontario Superior Court alleging fraud and other illegal activities and sought injunctive and related relief against the defendants.  The defendants brought a motion to stay the action and asserted that the dispute must be arbitrated under the arbitration clause in the agreements in which the customer subscribed for satellite television service.  However, the defendants did not assert, and refused to admit, that they were parties to the subscriber agreements or the arbitration clauses in those agreements. On that basis, the motion judge dismissed their motion and the Court of Appeal upheld that decision.

The decision

The Court of Appeal said that it was “incumbent on [the defendants] to indicate to the court that they are parties to and are bound by the Agreement to invoke s. 7(1).  To hold otherwise would enable them to take the position before an arbitrator that they are not parties to the Agreement which in our view would be entirely inappropriate.”  In effect, the Court would not allow the defendants to put everyone, including the arbitrator and the courts, through the useless exercise of staying the action, only to have the defendants go before the arbitrator and assert that the arbitrator had no jurisdiction because the defendants were not parties to the arbitration agreement.

Parties vs Matters

The motion judge had also decided the motion on another ground.  Shaw’s action was against twenty other defendants who were not alleged by Shaw to be parties to the subscriber accounts.  So while the claims against three of the defendants might arguably be governed by arbitration clauses in the subscriber agreements, the claims against the other defendants clearly were not.

The motion judge applied sub-section 7(5) of the Act which gave the motion judge discretion to grant a partial stay of the action in respect of “matters” falling within the arbitration clause and permit the action to proceed with respect to “other matters” not covered by the arbitration agreement.  The sub-section does not refer to “parties” not bound by the arbitration agreement, nor does it expressly refer to staying the entire action.  The motion judge effectively decided that “parties” and “matters” were the same thing and concluded that granting a partial stay would result in a multiplicity of proceedings that was unreasonable in the circumstances. The Court of Appeal declined to interfere with the exercise of that discretion by the motion judge.

This decision raises three important points:

First, it identifies a specific circumstance in which the competence-competence principle will not be applied: namely, if the moving party does not admit that it is a party to the arbitration agreement.  On its face, this is a common sense result which avoids the use of the principle by a party which is not really seeking in good faith to have the dispute resolved by the arbitral tribunal. Indeed, sub-section 7(1) of the Act clearly states that a motion to stay the action must be brought by “another party to the arbitration agreement”.  The purpose of the competence-competence principle and the wording of sub-section 7(1) combine to demonstrate that the principle should not be used by a party which does not admit that it is bound by the arbitration agreement.

Accordingly, in Ontario we now have a binding decision that a defendant which does not admit that it is a party to the arbitration agreement cannot rely on the competence-competence principle.

At another level, however, this issue was more nuanced that it might appear.  Clearly, the defendants did not want to admit that they were parties to the subscriber agreements.  If they had admitted that they were parties to the arbitration agreement, then they would effectively have acknowledged one of the major issues in dispute.  The questions were: could the defendant be forced to make this admission before relying on the competence-competence principle; and which is the proper tribunal to resolve the issue about whether the defendants were parties to the arbitration agreement and therefore the subscriber agreements, the court or the arbitral tribunal?

Sub-section 7(2) of the Act says that an arbitration clause shall, for the purpose of a ruling on jurisdiction, be treated as an independent agreement separate and apart from the agreement in which it is contained.  Therefore, arguably the arbitral tribunal is competent to decide who is a “party” to the main agreement.  In the net result, however, the wording of sub-section 7(1), the purpose behind the competence-competence principle and the waste of time and money in sending the dispute to the arbitral tribunal if the moving party did not admit that it was a party to the arbitration agreement, combined to make the moving party’s reliance on that principle unreasonable.

Second, this decision may reveal a broader question and a broader principle.   Can a party invoke the competence-competence principle if, for any other reason, it asserts that the arbitral tribunal does not have jurisdiction?  If not, then the competence-competence principle can only be invoked by a party that acknowledges, in all relevant respects, that the tribunal has jurisdiction.  If this is so, then the scope of the competence-competence principle may be substantially limited.

Thus, if the defendant in an action admits that he or she is a party to an arbitration clause, but asserts that the arbitral tribunal has no jurisdiction over the claim or part of the claim, can the defendant ask the court to stay the action so far as that claim or part of the claim is concerned?   Normally, one would answer Yes, because under the competence-competence and sub-section 7(1) of the Act, it is the arbitrator’s jurisdiction to first decide scope of the arbitration clause.  But what is the real difference between deciding whether the parties to the action are parties to the arbitration agreement and deciding whether the dispute falls within the arbitration agreement?  If the competence-competence principle does not apply to the first question, why does it apply to the second?

The Court of Appeal in the Shaw decision has held that the defendant seeking a stay of an action on the ground of an arbitration agreement must admit that it is a party to the arbitration agreement.  Should it not also require the defendant to admit that the dispute is governed by the arbitration agreement, at least so far as the portion of the claim that the defendant wants to have stayed and sent to arbitration? What is the point of sending the claim to the arbitral tribunal only to have the defendant assert before that tribunal that it has no jurisdiction over the claim or that part of the claim?

Third, the other issue decided by the Court of Appeal was not necessary for its decision and is likely not binding on other Ontario courts.  The decision expands the application of sub-section 7(5) of the Act to apply it to parties, not matters, falling outside the arbitration agreement.  The decision also permits the court to refuse a stay of the whole action on the ground that to do otherwise would involve a multiplicity of proceedings.

Without considering the total context in which it was made, the decision to permit the whole action to proceed might be seen to be contrary to a number of other decisions.  Generally speaking, Canadian courts have held that the mere fact that other defendants are sued in the action that are not bound by the arbitration agreement is no reason to refuse a stay of the claim against parties to that agreement that is within the arbitration agreement.  However, read in context, the decision can be readily understood as resulting from a combination of circumstances, including a moving party which did not admit that it was bound by the arbitration agreement and a large preponderance of defendants not bound by the arbitration agreement.

In the result the Shaw decision clarifies the competence-competence principle by requiring a party relying on that principle to admit that it is party to the arbitration agreement.  But it leaves open for debate the full scope of the principle and the admissions that must be made to invoke it.

Arbitration   –   Competence-Competence  –   Stay Motion  –   Parties and Subject Matter of Arbitration Agreement

Shaw Satellite G.P. v. Pieckenhagen, 2012 ONCA 192

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                      June 3, 2012

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Arbitration Clause Is A Separate Enforceable Agreement

What happens when an arbitration clause is contained within a commercial agreement that one party says never came into existence or is unenforceable? And what if the dispute involves persons who are not parties to the commercial agreement? Is the arbitration clause still enforceable? Yes, the Ontario Court of Appeal recently said in Kolios v. Vranich.

The Background

The dispute arose from a shareholders agreement which contained an arbitration clause. Vranich commenced an action in the Ontario Superior Court and sued both parties to the shareholders agreement and other parties. Kolios moved to stay the action so far as the claim against parties to the shareholders’ agreement, asserting that that claim must be dealt with by arbitration. Vranich said that the parties had never reached an agreement on a schedule to the shareholders’ agreement relating to shareholders loans, and therefore had never reached an agreement on the whole agreement.

Section 7(1) of the Ontario Arbitrations Act, 1991 (the Act), provides that, subject to certain exceptions, if a party to an arbitration agreement commences a proceeding in respect of a matter to be submitted to arbitration, the court shall stay the action. The Ontario Superior Court dismissed an application to stay the action under this sub-section. The Ontario Court of Appeal allowed the appeal and stayed the action against the defendants who were parties to the shareholders agreement, and allowed the action to proceed against the defendants who were not parties to that agreement.

The Court of Appeal applied two sub-sections of the Act. Section 17(1) provides that the arbitral tribunal has authority to determine its own jurisdiction and in doing so, to rule on the validity or existence of the arbitration agreement. This sub-section introduces into Ontario law the now well-know principle of “competence-competence”, that is, that an arbitral tribunal is competent to decide its own competence.

The Court of Appeal also applied Section 17(2) which says that, if an arbitration agreement forms part of a main agreement, then the arbitration agreement shall be treated as an independent agreement for the purposes of a ruling on jurisdiction, even if the main agreement is invalid.

Based on these sub-sections, the Ontario Court of Appeal held that it was up to the arbitral tribunal to decide the question of the validity of the shareholders agreement, not the court. In so holding, the Court of Appeal noted that Vranich did not assert that the shareholders agreement was invalid or void ab initio.

Moreover, the fact that the action would proceed against other defendants did not disturb the Court of Appeal since those other defendants had not sought a stay. The Court of Appeal did not mention sub-section 7(5) of the Act but that sub-section expressly authorizes the court to stay that part of an action which is dealt with in an arbitration agreement, and allow to proceed to trial the balance of the action not covered by the arbitration agreement.

This decision of the Court of Appeal demonstrates the sea change that has taken place in Canada with respect to the stay of actions based upon arbitration agreements. A generation ago, a Canadian court would have had no hesitation in permitting an action to proceed when some of the allegations or some of the parties were not subject to the arbitration agreement. Three fundamental changes have occurred.

First, Section 7(1) uses the “shall” word and thereby mandates arbitration, unless very specific exceptions apply. The courts are reading those exceptions very narrowly. Before 1992, the Arbitration Acts of Ontario used the “may” word and gave the courts discretion to stay or not stay an action brought in the face of an arbitration clause. In those days, the courts were usually prepared to exercise that discretion in favour of the action proceeding and not the arbitration.

Second and as noted above, the Act now clearly addresses, in section 17, many of the former objections to arbitration and provides the arbitrator with the jurisdiction to determine them, even in the face of objections that the main agreement or the arbitration agreement is unenforceable or that the dispute involves persons who are not parties to the agreement. These sections effectively drive all disputes about the subject matter or its arbitrability back to the arbitral tribunal.

Third, the attitude of Canadian judges has fundamentally changed. Judges do not now consider that courts are the superior means of adjudicating disputes. Indeed, they recognize that courts have become so expensive and time-consuming that parties are well advised to go elsewhere to have their dispute resolved. And when they do, judges also now give great, indeed overriding, effect to the parties’ choice to go to arbitration, and are prepared to hold the parties to their bargain.

Further Questions

Some further question remains. How will arbitrators deal with the new authority which they have to determine their own jurisdiction? Will the future track record of arbitrators’ decisions demonstrate that arbitrators are making these jurisdictional decisions responsibly? Or will arbitrators tend to rule that they have jurisdiction, so that they can continue with the arbitration? Will the legislature’s decision to hand these jurisdictional disputes to arbitrators be justified, and will arbitrator’s jurisdictional disputes be upheld by the courts? And since arbitrator’s decisions are made privately and are unknown to the public unless challenged in court, how will the track record of arbitrators relating to jurisdictional matters be judged?

Only time and judges will tell. Ironically, it will take the decisions of judges, and a developed body of judicial decisions reviewing the jurisdictional decisions of arbitrators, to determine how well arbitrators are discharging their responsibility to determine their own authority.

Arbitration agreement – challenging arbitral award – enforcing –

Kolios v. Vranich, 2012 ONCA 269

Thomas G. Heintzman O.C., Q.C., FCIArb May 20, 2012

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No Appeals From An Arbitrator’s Interim Decision Unless It Is A Final Order

The Ontario Court of Appeal has recently considered whether any appeal may be taken from a decision of an arbitral tribunal which is made prior to the final award. The Court held that no such appeal may be taken from such a decision, except if the decision amounts to a “final” order.  The decision appears to leave open the possibility of appealing an arbitral decision if it amounts to a “final order” even if it is not the final award of the tribunal: Universal Settlements International Inc. v. Duscio.

The Background

The arbitration was between the shareholders of Universal, pursuant to a shareholders’ agreement.  The arbitration agreement provided that the arbitrator had authority to make all interim, interlocutory and final decisions.  During the arbitration, the arbitrator made an interim award permitting two shareholders to purchase the shares of two other shareholders.  The parties entered into an escrow agreement requiring that the purchasers pay $1 million into escrow pending the final disposition of the arbitration.

Then the sellers of the shares brought a motion asking for the release of $290,000 of the purchase monies in order to pay their lawyer and for living expenses. The motion was granted.

Later, the purchasers brought a motion for an order requiring the repayment of these monies on the ground that the sellers’ motion had been based on fraudulent evidence.  The arbitrator granted the repayment motion, and also granted the purchasers costs of the motion, but made no finding of fraud. The sellers took the position that the costs order was subject to the bankruptcy of one of the sellers, Mr. Duscio, absent a finding of fraud.  They asserted that the arbitrator had no jurisdiction to make such a costs order and launched an application for leave to appeal to the Superior Court from the arbitrator’s cost award.

In the meantime, the purchasers brought a motion to strike out the statement of defence of the sellers on the ground that the sellers had not paid the costs award. The sellers took the position that the arbitrator had no jurisdiction to enforce payment of the costs award because of Mr. Duscio’s bankruptcy. The arbitrator held that the statement of defence of the sellers should be struck out.  The sellers amended their court application to appeal from that order of the arbitrator.

The arbitrator then proceeded to hear the arbitration in the absence of the sellers.  He held that the sellers were in breach of their fiduciary duty and had converted Universal’s monies. The arbitrator awarded the purchasers $6.1 million including interest. The purchasers then amended their court application to appeal from that further decision of the arbitrator.

The Decision

The Court of Appeal held that, under the Ontario Arbitrations Act, 1991, the authority of the Superior Court to interfere with the arbitrator’s decisions was “strictly limited” to “those few circumstances” specifically referred to in that Act.  Applying that principle, the Court of Appeal held that there was no right of appeal from the arbitrator’s decisions ordering repayment and costs because those decisions were purely interlocutory and did not involve the final determination of the rights of the parties.

However, the Court held that the arbitrator’s decision striking out the statement of defence was appealable, not because it was made without jurisdiction, but because it was unfair and resulted in the sellers not being given an opportunity to present their case, contrary to Section 46(1).6 of the Act. The Court noted that an order striking out a statement of defence has been held in Ontario to be a final order, and is therefore appealable under the Act.

Similarly, the Court of Appeal held that the final arbitration decision made without notice to the sellers was appealable because it also was a final decision, and because it was unfair and occurred without the sellers having an opportunity to respond to the allegations made against them.

The Court of Appeal held that the arbitrator had erred in striking out the sellers’ statement of defence because of their failure to comply with the costs award when compliance was neither “possible nor lawful”, and when payment of the costs award would have amounted to a preference over other creditors in the bankrupt estate.

This decision re-affirms the insistence by Ontario courts that they will only interfere with arbitral proceedings if a ground to do so is specifically set forth in the applicable arbitration statute. That aspect of the decision is a welcome re-affirmation of the simplicity of the Ontario statutory regime applicable to arbitrations.  The decision recognizes that until the arbitration proceeding is finalized, the courts have no role to play.

Final and Interlocutory Orders

However, the decision does interject into arbitral jurisprudence in Ontario the debate about the distinction between “final” and “interlocutory” orders. The Court of Appeal has held that the reference in the Ontario Arbitrations Act, 1991 to “an award” means a “final award”, not an interlocutory or procedural award that decides interim issues leading to a final award.

The distinction between “final” and “interlocutory” orders has a long and, some might say, tortured, history in Ontario procedural law. It is the basis for distinguishing between orders in the court system that can be appealed without leave (being final orders) and those orders for which leave is required (being interlocutory orders).  It appears that the present decision may allow an arbitral decision to be appealed if it qualifies as being a “final” award, even if it is not the last decision of the arbitrator which finally decides the dispute.

Arbitral award – challenging arbitral award – enforcement – conduct of arbitration

Universal Settlements International Inc. v. Duscio:  2012 ONCA 215

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                 May 15, 2012

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