When Is An Arbitration An International Commercial Arbitration?

Is an arbitration between two domestic companies arising from a contract for a shipment between two foreign countries an “international commercial arbitration” for the purposes of the UNCITRAL Model Rules, particularly if the arbitral agreement requires arbitration in a foreign location?  And if it is, does the domestic court have any residual discretion to stay the arbitration and allow the court action to proceed?

Those are the important issues which the Superior court of Ontario faced in Star Tropical Import &Export Limited v. International Management Consortium Ltd.

The facts in this case raised a conflict between the court’s sense of fairness, and the rigidity and almost total absence of discretion in the Model Rules.  How should a court resolve this conflict?

The two agreements in question were made in Canada between two companies carrying on business in Ontario. The agreements provided for the receipt of sugar in Brazil and the delivery of the sugar in Ghana.  The first contract dated November 2006 required all disputes to be settled in Paris or Zurich by arbitration under ICC Rules. The second agreement dated April 2007 stated that it replaced the first agreement and provided for arbitration under the “Refined Sugar Association” rules.  Those rules stated that disputes were to be resolved by arbitration to be held in London, U.K.

Problems with the performance of these contracts ensued.  In October 2007, Star Tropical commenced an action in Ontario against International Project and one of its officers.  In November 2007, International Project wrote to Star Tropical stating its position that the dispute must be resolved by arbitration.  But International Project took no steps to commence arbitration, and delivered no Statement of Defence in the Ontario action.  It consented to several orders reviving the Ontario action when it was struck out for the failure of the parties to advance it.

In November 2010, three years after the action was commenced with no Statement of Defence having been delivered, International Project brought a motion to stay the Ontario action on the basis that the dispute was required to be resolved by arbitration.  In its motion, International Project relied upon the stay provisions of Ontario’s domestic Arbitration Act, 1991.  It did not rely on the Ontario International Commercial Arbitrations Act (ICAA) which incorporates the UNCITRAL Model Rules.

Article 1(3) of the UNCITRAL Model Law states that an arbitration is “international” if:

(a)     at the time of the conclusion of the agreement, the parties had their places of business in different states: or

(b)(i)  the place of arbitration determined in or pursuant to the agreement is outside the    state in which the parties have their places of business; or

(b)(ii)   the place where a substantial part of the commercial relationship is to be performed, or in which the subject matter of the dispute is most closely connected, is a place outside the state in which the parties have their places of business; or

(c)   the parties have agreed that the subject matter of the agreement relates to more than    one country.

The Master of the Ontario Superior Court noted that section 2(3) of ICAA states that, despite Article 1(3) (c) of the Model Code, an arbitration conducted in Ontario between parties having their place of business in Ontario is not international only because the parties have expressly agreed that the subject matter of the agreement relates to more than one country.   While the Master said that section 2(3) helped to answer the question before the court, he did not say how that subsection could apply to the provisions of Article 1(3) other than clause (c).

The court concluded that the agreements did not give rise to “international commercial arbitrations” to which the ICAA and the Model Law applied.  The reasons for so concluding are not entirely clear.  The court appears to have decided that Article 1(3) (a) did not apply since the parties were Ontario corporations.  The Ontario court was clearly concerned about sending two parties off to arbitrate in Europe when they were both located right in Ontario.  However, Article 1(3) (b) (i) apparently applied to the facts because the state where the arbitration was to be held (France or Switzerland, or the U.K. if the second agreement applied) was not the state where the parties carried on business (Ontario or Canada).

This result could be avoided if the court were to hold that, by repeatedly using the plural word “places” in the expression “places of business” in Article 1(3), the Model Rules only intended an arbitration to be “international” if the parties are located in different states.  This conclusion does not seem appropriate since Article 1)3)(a) deals specifically with that situation and therefore the disjunctive provisions of Article 1(3)(b) and (c)  are logically not restricted to that situation.

The court did not expressly address Article 1(3(b)(ii) which also apparently applied.  The receipt (in Brazil) or delivery (in Ghana) of the sugar seems to have been substantial parts of the commercial relationship between the parties.  The states where those activities were to occur were not states in which the parties carried on their business (Ontario, Canada).  Perhaps the court considered that, since there were two places of performance, neither place predominated.  However, Article 1(3) (b) (ii) says “a substantial part of the obligation” not “the substantial part”.  Thus, an agreement may be substantially performed in several places, only one of which need be different than the parties’ place of business.

The court may also have applied a principle analogous to the forum non conveniens rule that the plaintiff’s choice of forum should prevail unless there is some other clearly preferable forum.  But Article 1(3) does not contain that principle.

The court dismissed the application to stay.  In doing so, the court applied the Ontario Arbitration Act, 1991, not the ICAA.  Section 7(2) of the Ontario domestic arbitration statute gives the court a much broader discretion to dismiss the stay motion than does the ICAA, most particularly if the motion is brought with undue delay. That particular ground is not found in the ICAA.

The motion to stay was dismissed for three reasons:

First, the motion to stay was only brought under the domestic Act, not the ICAA.   While the Master himself raised the issue of the ICAA, he appears to have been satisfied, either that the ICAA did not apply due to the factors referred to above, or that since the motion was not brought under the ICAA then he was not obliged to apply that statute.  If so, then his decision will not be applicable in the next case if the stay motion is brought under the ICAA.

Second, the delay of International Project to proceed with the arbitration disentitled it to rely upon the refined sugar association rules and to a stay under section 7(2) of the Ontario Arbitration Act, 1991.  A real question is whether this issue of delay should have been dealt with by the arbitral tribunal or the court.

Third, Star Tropical’s claim against the officer of Project International could not be arbitrated.

The Master held that the claim against International Project and the claim against its officer should be heard together by the same tribunal.  Under section 7(5) of the Ontario Act, the court had discretion to allow the two claims to be heard together by dismissing the stay motion.

This third reason is problematic for a number of reasons.  It seems to provide an open invitation to a party to an arbitration agreement to include an officer of the other party as a defendant in an action, in order to avoid arbitration.  The ICAA does not provide an exception to its rules of mandatory arbitration in relation to this circumstance.

This decision represents a classic conflict between the court’s perception of fairness and the strict provisions of the Model Rules.  The Model Rules were expressly drafted to stipulate the specific rules under which an international commercial arbitration is to proceed.  If a motion to stay the action is brought before or at the time of the delivery of the Statement of Defence in the action, then Article 8 of the Model Rules requires the Court to stay the action unless the arbitral agreement is null and void, inoperative or incapable of being performed. As long as the stay motion is brought no later than the deliver of the Statement of Defence, then delay and even egregious delay in advancing the arbitration or bringing the stay motion is not mentioned in the Model Rules as a ground upon which the court can decline to stay the action and force the parties to proceed by way of arbitration.  Nor is the expense and delay of two domestic corporations being forced to arbitrate their dispute in a distant country. These omissions may seem illogical and unfair, but they appear to follow from the Model Rules and, now in Ontario, from the ICAA.

In these circumstances, it is difficult to see how the court can avoid the Model Rules by adopting a discretionary approach to the stay motion.  If the delay in seeking arbitration is to be a factor, that factor is one to be applied by the arbitral tribunal.  The arbitral tribunal can consider the delay and either accept jurisdiction if it decides that it should do so, or dismiss or stay the arbitration and send the dispute back to the court system.  Pursuant to Article 8(2) of the Model Rules, the court can allow this process to unfold by staying the stay motion pending a hearing before the arbitral tribunal.  The primary role of the arbitral tribunal in this situation is consistent with the competence-competence principle now applied by Canadian courts.

In the alternative, the court might apply its own procedural law to the stay motion, found in Ontario in the Courts of Justice Act and the Rules of Civil Procedure.  Both that Act and those Rules contain specific prohibitions against undue delay and in favour of expedition.  If the court were to apply those rules on a motion to stay, then the issue would be:  which should prevail, the ICAA and the Model Rules, or the Courts of Justice Act and the Rules of Civil Procedure?  That is an issue which was not addressed in this case.

Arbitration –  International Commercial Arbitration  –  Stay –  Competence-Competence

Star Tropical Import & Export Limited v. International Management Consortium Ltd., 2011 ONSC 4005 (CanLII)

Thomas G. Heintzman, O.C., Q.C.                                                                   September 18, 2011

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www.constructionlawcanada.com

Can An Arbitrator Determine The Rights Of Non-Parties?

The Alberta Court of Appeal recently considered an arbitration award in which the arbitrator had decided the rights of non parties to the arbitration.  In MJS Recycling Inc. v. Shane Homes Limited, the Court held that the arbitrator had no authority to determine the rights of non-parties. The court set aside the award and remitted the matter back to the arbitrator for a determination in accordance with the court’s decision.  The process and logic applied by the Court provides a useful precedent for considering the powers of arbitrators and the courts when the rights of non parties are affected by an arbitral decision.

Shane was one of a number of builders that owned shares in MJS. MJS bought all of the shares in MJS owned by the builders. One of the elements of the purchase price was the builders’ agreement to use MJS for certain percentages of their waste management disposals for five years.

The share purchase agreement provided for arbitration of any disputes pursuant to the Arbitration Act of Alberta and stated that the arbitrator’s decision was final and binding and that there was no appeal on a matter of law or otherwise.

MJS alleged that Shane had failed to purchase the required amount of waste management contracts from MJS.  MJS stopped making payments to Shane under the share purchase agreement and commenced arbitration proceedings against Shane. Neither MJS nor Shane attempted to make the other builders parties to the arbitration.

The arbitrator held that, due to Shane’s failure to purchase the required percentage of waste management contracts, MJS was entitled to stop payments to all the builders and no longer owed monies to any of the builders. The arbitrator also held that MJS’s sole right was to be discharged from liability to all the builders and that MJS had no right to damages against Shane alone.

MJS brought an application to review the award. The Alberta Queen’s Bench judge held that the arbitrator had acted beyond his jurisdiction by making an award involving the rights of the non-party builders, but declined to grant any relief due to the “final and binding” and “no appeal” provisions of the share purchase agreement.

The Alberta Court of Appeal agreed that the arbitrator had acted without jurisdiction in rendering a decision which affected the rights of the non-party builders.  The Court of Appeal disagreed with the lower court’s view about the appropriate result of that finding, and held that the “final and binding” and “no appeal” provisions of the share purchase agreement did not preclude the court from setting aside the award based on jurisdictional error under section 45 of the Arbitration Act of Alberta, particularly since that section is excluded from those sections of that Act that the parties may contract out of. Once jurisdictional error was found, it followed that the court had power to set aside the award.  As the Court of Appeal said:

“It is difficult to conceive of any proper basis for allowing an award to stand that is beyond the scope of the arbitration agreement which is the foundation of an arbitrator’s jurisdiction.”

Having held that the arbitrator had acted without jurisdiction, the Court of Appeal held that (absent, presumably, disqualifying conduct of the applicant) the court was virtually obliged to grant MJS the appropriate remedy, which was to set the award aside and remit the matter to the arbitrator under section 45(8) of the Arbitration Act.  Remittal of the matter to the arbitrator was the appropriate order since the arbitrator had acted in excess of his jurisdiction which he admittedly had.  It would obviously not have been the appropriate court order if the arbitrator had no jurisdiction at all.

The way in which the Court of Appeal stated its decision to remit is interesting.  It did not tell the arbitrator how to make its award against Shane.  Rather, it stated its anticipation of the appropriate conduct of the arbitrator:

“In these circumstances, we are of the view that the matter should be remitted to the arbitrator so that he can craft a revised award within the scope of his powers. Specifically, we anticipate that his new award will reflect that MJS is only not responsible for payment to Shane …not to the other members of the Builders’ Group…..

Finally, we wish to make it clear that in remitting the matter to the arbitrator we do not intend to tie his hands with respect to the award to be made against Shane in this arbitration. We observe that his award was expressly made “subject to the Orders” therein which we have ruled exceeded his jurisdiction. It may well be that he will now see fit to grant other or further damages payable by Shane, or to grant other equitable relief, as a result of its breach.  The parties agreed to submit their dispute to arbitration and provided that the new award is within the arbitrator’s jurisdiction, we are inclined to the view of the chambers judge that they should “live with it.”

The Court of Appeal concluded its decision by remarking that, while one arbitration proceeding would have been preferable, MJS and Shane had not included the other builders in the arbitration.  Accordingly, any dispute between MJS and the other builders would have to be dealt with in a separate arbitration.

This is an important decision, not only in relation to the authority of arbitrators, but also the authority of the courts.  It reminds us that:

1.   A “no appeal” and “final and binding” clause in an arbitration agreement does not in any way apply to or affect the court’s jurisdiction to grant judicial review of an arbitration award on jurisdictional grounds;

2.    (Absent specific authority to do so) an arbitrator has no power to affect the rights of non-parties; and

3.   Once a court finds that the arbitrator has made a jurisdictional error, the court must grant an effective remedy, to set aside the award, and (if the arbitrator has authority) remit the matter to the arbitrator in accordance with the court’s decision.

Arbitration –  Non-parties  –  Setting aside award:

MJS Recycling Inc. v. Shane Homes Limited,2011 ABCA 221

Thomas G. Heintzman, O.C., Q.C.                                                                       September 11, 2011

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Does The Competence-Competence Principle Apply To Third Parties To An Arbitration Agreement?

The competence of an arbitral tribunal to determine its own competence has become firmly rooted in Canadian law.  But what happens when the tribunal has to decide issues which directly affect third parties?

In Ontario v. Imperial Tobacco Canada Limited, the Court of Appeal for Ontario recently held that, in that circumstance, the principle does not require the court to allow the arbitral tribunal to first rule on its competence. This decision is of considerable importance because it involved the disputed confrontation of multiple court actions.  It may signal the future attitude of Canadian courts in favour of the resolution by courts, and not arbitrators, if jurisdictional disputes arise out of court proceedings.

The governments of Canada and the provinces brought an action against Imperial Tobacco as a result of cross-border smuggling.  That action was settled by a Comprehensive Settlement Agreement (“CSA”).  Under the CSA, Imperial Tobacco agreed to pay $350 million to the governments over 15 years in exchange for a release relating to any claims arising out of the smuggling of tobacco or Imperial Tobacco’s failure to pay taxes on smuggled or imported tobacco.

The release in the CSA contained two protections for Imperial Tobacco.  

First,  in the event of a claim by a one of the releasing entities, the release could be relied upon as a complete defence (the “release issue”).

Second, if Imperial Tobacco incurred any liabilities in any way connected to or arising out of the released claims, then the payments by Imperial Tobacco to the governments were to be proportionately reduced, and in the event of dispute, were to be paid into an escrow fund (the “escrow fund issue”).

The CSA stated that any disputes between the parties were to be arbitrated under the federal Commercial Arbitration Act.  The notice of arbitration was to be given by either the government of Canada or Imperial Tobacco, and not by the provinces, but the arbitration was to be between the parties to the CSA.

Imperial Tobacco was then sued in a class action by the Ontario Flue-Cured Tobacco Growers’ Marketing Board (the “Tobacco Board”).  The class action was on behalf of tobacco farmers.  The action alleged that Imperial Tobacco had unlawfully paid lower prices to the Tobacco Board for tobacco exported from Canada and smuggled back into Canada.  The action claimed $50 million as being the difference between what Imperial Tobacco paid and what it ought to have paid for exported tobacco.

Imperial Tobacco then gave notice under the CSA that it would pay the amounts claimed in the class action into the escrow fund. Imperial Tobacco took the position that the Tobacco Board was an entity claiming through a releasing entity and that the Tobacco Board’s claim was a claim relating to or arising from the released claims.  If Imperial Tobacco was correct, and if the Tobacco Board was bound by the CSA, then the release might well be effective against the Tobacco Board as well as the governments.

In response, the government of Ontario brought an application in the Ontario Superior Court for a declaration that Imperial Tobacco was not entitled to withhold annual payments to Ontario, taking the diametrically opposed view as to the effect of the release in relation to the Tobacco Board’s claim.

Imperial Tobacco then brought a motion to dismiss Ontario’s application on the ground that Ontario’s claim was required to be determined by arbitration.  The Superior Court judge granted the motion and dismissed Ontario’s application, holding that Ontario’s claim must be determined by arbitration.

By a majority, the Court of Appeal for Ontario allowed the appeal in part, and directed that Ontario’s application with respect to the escrow fund issue proceed to a hearing.  However, the reasons of the majority and minority are not necessarily on the same waive length so far as the reasons for doing so are concerned.

The minority judge, Justice Juriansz, held that the principle of competence-competence applied to all elements of the jurisdictional dispute. Whether or not Ontario or the Tobacco Board were parties to the CSA and the arbitration agreement in the CSA, and whether or not the Tobacco Board’s claim fell within that agreement, were not pure questions of law.  Accordingly, he held that the jurisdictional issues raised by those questions should first be determined by the arbitral tribunal in accordance with the principle of competence-competence..

The majority agreed that the competence-competence principle was at issue.  The majority also agreed that, so far as the escrow fund issue, that dispute directly affected Ontario and did not affect the Tobacco Board.  In its view, this issue only involved the question of whether Ontario was bound by the CSA, and did not involve any question of whether the Tobacco Board was bound by the CSA.  Accordingly, the challenge to the arbitrator’s jurisdiction concerning the right of Imperial Tobacco to pay the monies into the escrow fund was required to be first dealt with by the arbitral tribunal.

However, the majority arrived at a different conclusion relating to the release issue, namely the right of Imperial Tobacco to rely upon the release in relation to the Tobacco Board’s action.  In the majority’s view, that issue raised the question of whether the Tobacco Board was a party to the CSA and its arbitration provisions, and therefore bound by the arbitral proceedings and result.  In the majority’s view, that was a jurisdictional issue of a pure legal nature which, under the competence-competence principle, the court could resolve itself without referring it to the arbitral tribunal.

The majority arrived at this conclusion as follows:

“Here, no one contends that the Tobacco Board is a party to the Agreement and its arbitration provisions….There is equally no doubt that the Tobacco Board has a vital interest in the question raised by the application…The answer could provide [Imperial Tobacco] with a  complete defence to its action, or could eliminate that possibility. The arbitrator cannot resolve that question posed by the application because the Tobacco Board is not a party to the Agreement or its arbitration provisions.  The arbitrator has no jurisdiction to determine the Tobacco Board’s rights. The question asked of the court must… be determined in a forum in which the Tobacco Board has the right to participate.  Hence the application should not be stayed in preference to arbitration.”

Here, the majority concluded that the jurisdictional issue was so clear and indeed admitted that it need not be determined by the arbitral tribunal at all.  However, this conclusion seems odd in the circumstances.  The majority seems to have disposed of the issue by the assumption made in raising it.

First , if it was so clear that the Tobacco Board was not a party to the CSA, then one wonders what the jurisdictional dispute was all about in the first place.  In his decision, Justice Juriansz squarely raises the issue as to whether the Tobacco Board was a party to or bound by the CSA.  If the Tobacco Board was so clearly not a party to or bound by the CSA, and if Imperial Tobacco had admitted that fact, then one could be confident that the arbitral tribunal would so hold, and that any decision of that tribunal would not be binding on the Tobacco Board in any event.

Second, it would seem better to have one tribunal deal with both the release and escrow fund issues at the same time.  It is not clear how those two rights could be separated, and how a court or arbitral tribunal could find that the Tobacco Board’s claim falls within the CSA for one of those rights and not for the other.  Indeed, having arrived at its conclusion, one wonders why the majority did not direct both issues to be determined by the court, to save time and money and avoid conflicting decisions.

Whatever the merits of the jurisdictional dispute may be, this decision of the Ontario Court of Appeal is just the next chapter in the evolving Canadian story about the principle of competence-competence.

This chapter is about a jurisdictional dispute generated by one court action at the front end (the governments’ action against Imperial Tobacco) and another court action at the back end (the Tobacco Board’s class action).  This chapter tells us that when the dispute is so firmly rooted in court proceedings, and when the plaintiff in one action has no clear right to participate in the arbitration of the dispute, then a court will be concerned about due process and fairness.  The court will be reluctant to allow any jurisdictional disputes about the intersection of those two court cases to be dealt with by an arbitrator, even in the first instance.

Arbitration  –  Third Parties  –  Competence  –  Class Action 

Ontario v. Imperial Tobacco Canada Limited, 2011 ONCA 525

Thomas G. Heintzman, O.C., Q.C.                                                                                August 28, 2011

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Can A Party Enforce An Arbitration Award In One Court And Litigate The Issue In Another Court?

Arbitration  –  Enforcement  –  Anti-Suit Injunction

The Ontario courts have recently considered two issues with respect to the enforcement of an arbitration award:

Should the court refuse to enforce an award because the party which seeks to enforce it is taking proceedings in another jurisdiction which contradict the award?

And should an anti-suit injunction be issued against that party to stop those other proceedings?

In Accentuate Ltd v. Asigra Inc, the Ontario courts answered No.  While this result occurred in the context of an international arbitration, the result would seem to be as applicable to arbitrations under domestic construction contracts.

Accentuate is a United Kingdom company and Asigra is an Ontario company.  They entered into a contract whereby Accentuate would act as a reseller of Asigra’s products in the UK.   The contract provided that the law of Ontario governed the contract and that all disputes would be resolved by arbitration in Toronto under the UNCITRAL Arbitration Rules.

In 2006, Asigra terminated the contract, first with six months notice and then peremptorily for cause.  Accentuate gave notice that it claimed damages for wrongful termination.  While it acknowledged that its claim was to be dealt with under the arbitration provisions of the contract, it also took the position that it was entitled to certain rights under the Commercial Agents Regulations of the UK and that those rights could not be excluded by the contract.

The arbitration occurred in Toronto.  The tribunal held that it had jurisdiction to deal with the claim under the UK Commercial Agents Regulations and to determine whether those Regulations applied.  It held that those Regulations did not apply as the parties had chosen the law of Ontario to apply to their arrangements.

The arbitration tribunal awarded $14,112.32 and interest to Accentuate.  Unhappy with the amount of this award, Accentuate commenced proceedings in the UK courts based on the Regulations.  The UK court held that Accentuate was entitled to bring its claim in the UK courts, but at the time of the enforcement proceedings in Ontario the UK court had not adjudicated upon the substantive issue.

At the same time Accentuate applied to the Ontario court to enforce the award.  Asigra submitted that the Ontario court should not enforce the award at the instance of Accentuate when Accentuate was pursuing a remedy, and effectively impugning the award, in the UK courts.  Asigra argued that Accentuate’s position amounted to an abuse of process.  Asigra also asked the Ontario court to issue an anti-suit injunction against Accentuate to prohibit Accentuate from continuing with its UK action.

The Ontario Superior Court of Justice disagreed.  It held that the arbitral award was final and would not be altered by the outcome of the English proceedings.  It decided that the conduct of Accentuate did not amount to a public policy consideration that precluded Accentuate from enforcing the award.

The Ontario court also refused to issue an anti-suit injunction.  It held that this case was not one in which one tribunal had been given jurisdiction by the parties under their contract and one of the parties, Accentuate, had gone off to another jurisdiction which had improperly accepted jurisdiction.  Here, the parties had gone through the very arbitration proceedings which they both agreed should apply.  Accentuate now asserted that it had additional rights not determinable under that arbitration proceeding. The Ontario court held that it should not preclude the arbitration decision from being enforced by Accentuate in Ontario merely because Accentuate was maintaining that other claim in the United Kingdom.

The Ontario Court of Appeal dismissed the appeal.  It agreed with the Superior Court that Accentuate’s “re-litigation” in the UK of issues between the parties did not warrant a refusal by the Ontario courts to enforce the arbitral award.  The arbitration award was a final award, and Accentuate’s conduct did not amount to a policy reason for not enforcing the award.

This decision is a clear reminder of the power and effect of an arbitral award, and the direction in Article 36 of the UNCITRAL Model Law.  Unless there are strong public policy reasons for not doing so, arbitral awards must be enforced by the courts.  If they are not, then the efficacy of the whole arbitration process is undermined.

Ironically and unusually, in the present case the party which was enforcing the award was the one which was discontented with it.  That party was apparently acting contrary to the award (or at least continuing the dispute in another court) while at the same time seeking to enforce it.  But that did not change the principle.  And the principle required the court to enforce the award, whatever the result of the UK proceedings might be.

The same principle applies under domestic arbitration law.  Section 50 of the Ontario Arbitration Act, 1991 provides that, on the application of a party to a non-family arbitration, the Superior Court “shall give judgment enforcing an award” unless the award is under appeal or subject to an application to set it aside or has been set aside.  In view of this mandatory statutory direction, arbitration awards will be enforced without regard to other considerations, unless the award has been or is being impugned by appeal or judicial review.

 

Arbitration – Enforcement – Anti-Suit Injunction

Accentuate Ltd v. Asigra Inc, 2010 ONSC 3364; 2011 ONCA 99 (CanLII)

Thomas G. Heintzman O.C., Q.C.                                                                                                July 24, 2011

www.constructionlawcanada.com

When Does The Negotiation End And The Limitation Period Begin For An Arbitration Claim?

Construction Law – Arbitration – Negotiations – Limitation Periods – Contract

An arbitration clause in a construction contract may be written in a way that encourages the parties to settle their differences by negotiation and agreement. But if the parties attempt to do so and fail, can one of the parties then say to the other: “Gotcha! The limitation period for your claim has now passed!” That is the issue which the Ontario Court of Appeal recently addressed in L-3 Communication Spar Aerospace Limited v. CAE Inc.

SPAR was awarded a contract to develop a hardware and software system. SPAR subcontracted some of the deliverables to CAE. SPAR was required to deliver data about those deliverables to CAE within a certain timetable. The subcontract said that if the data was not delivered within 90 days of that timetable “and the parties cannot agree to a price adjustment due to the delay….beyond the 90 days”, then CAE was relieved of its obligations under the subcontract “only to the extent that performance is not possible as a direct result of Spar to provide that information”. The subcontract then stated: “The price and other adjustments that are not agreed between the parties may be referred to arbitration” under the arbitration clause in the contract.

SPAR provided certain data to CAE, but CAE took the position that it was inadequate, and that SPAR should obtain further data from the vendors of the relevant software to SPAR. Spar refused to do so, and its refusal to do so was clear by November 2005. CAE proceeded to obtain the data from SPAR’s vendors. CAE’s evidence was that it had discussions with SPAR about settling the question of who would pay for the cost of obtaining that data.

When the cost and price issue was not settled by December 2008, CAE demanded payment for the cost of obtaining the data from SPAR’s suppliers. SPAR responded by stating that CAE’s demand was premature and that CAE was required to proceed by way of the arbitration. When CAE then delivered a Request to Arbitrate in January 2009, SPAR took the position that CAE’s arbitration claim was barred by the two year limitation period in Ontario. SPAR said that the limitation period commenced in November 2005 when SPAR unequivocally said that it would not obtain the data. SPAR commenced a court application for a declaration to that effect.

The Ontario Superior Court dismissed SPAR’s application and its decision was upheld by the Ontario Court of Appeal.

The Superior Court held that, under the wording of the subcontract, the right to arbitrate arose and the limitation period for CAE’s claim commenced, not from the date that SPAR said that it would not obtain the data, but from the date that the parties had failed to agree on a proper price adjustment. The Court held that that date was not until at least the fall of 2007, and accordingly the arbitration claim was commenced in time. The Court did not agree with CAE that the limitation period did not commence until CAE had full knowledge of the full costs of obtaining the data. But it did agree that the entitlement to arbitrate and the limitation period did not commence until “SPAR indicated its intentions to avoid any and all financial responsibility for the increased costs associated with procuring the data”.

The Court of Appeal agreed. It held that the commercially reasonable interpretation of the subcontract was that “a dispute over failure by SPAR to deliver information as required together with the cost consequences caused thereby is one that the parties were obliged to attempt to resolve between themselves. Failing agreement either party is entitled to take the dispute to arbitration.” Only then did the right to arbitrate arise and the limitation period commence running.

The Superior Court also found that, by its conduct, SPAR was estopped from asserting that the limitation period was running from November 2005. In light of its decision on the primary matter, the Ontario Court of Appeal did not deal with this issue.

Two comments can be made about this decision:

First, it is a welcome recognition of the duty to negotiate where such a duty is contained in the contract. Had the courts held that the limitation period started running from the time SPAR refused to obtain the data, the obligation to negotiate the price and costs dispute would have been effectively removed from the contract. When parties include an obligation to seek an agreement over those sorts of matters, then full recognition and effect should be given to that obligation. The only way to do so is to hold that the limitation period does not commence until that process is complete. That causes no hardship on either party, since either party can at any time state that negotiations are over and refuse to negotiate further.

Second, this decision is a reminder that it is the exception. It is the exception because most construction contracts do not contain an express duty to negotiate and attempt to agree on costs or other matters in dispute under the contract. Accordingly, in most instances it is dangerous for a party to continue to negotiate when, based upon the date of the other party’s alleged wrongful conduct or its discovery, a limitation period is looming. In most cases, the limitation period will have started to run and the party with the claim must protect its litigation rights, and then negotiate.

So there are two lessons to be learned:

First, when you are negotiating the contract and want to provide for an obligation to negotiate, expressly state that obligation in the contract and expressly state that any limitation period will only commence once the negotiations are complete.

Second, if you are in the midst of a contractual dispute and a limitation period is looming based on the date of the wrongful conduct or its discovery, then initiate the arbitration claim and negotiate later, unless you are very certain that the contract provides that the limitation period is not running in the meantime.

Construction Law  – Arbitration – Negotiations – Limitation Periods:

L-3 Communication Spar Aerospace Limited v. CAE Inc., 2010 ONSC 7133; 2011 ONCA 435 (CanLII)

Thomas G. Heintzman, O.C.,  Q.C.                                                                                           July 17, 2011
www.constructionlawcanada.com

Have You Chosen The Right Forum For A Construction Arbitration?

Construction Law –Arbitration – Appeal – Quebec  – Civil Procedure

My article on May 24, 2011, on Arbitration Appeal Rights:  Think About Them Before Signing A Contract, dealt with the rights of appeal from arbitration awards. That blog made reference to the appeal rights from arbitration awards in most Canadian provinces, but did not deal with the province of Quebec. This blog will address the appeal rights in Quebec.

In Quebec, the rights arising from an arbitration award are found in Book VII of the Code of Civil Procedure.  The Code provides for arbitration awards to be registered (“homologated”) in the Superior Court by way of a motion to the court. The court can only refuse to homologate the award upon certain specific grounds, including invalidity of the arbitration agreement, procedural irregularity, jurisdictional grounds, the dispute is not subject to arbitration under Quebec law or the award is contrary to public order. Article 946.2 states that a court examining a motion for homologation cannot inquire into the merits of the award.

Article 947 states that the only possible recourse against an arbitral award is by way of an application for annulment. The grounds for annulling an arbitral award effectively reflect the same grounds upon which the court may refuse to homologate an award.

So, in these ways, the Code states that an arbitration award cannot be appealed nor the merits of the award questioned.  Article 940 states that these provisions of the Code, among others, are peremptory and not subject to agreement otherwise by the parties.

Similarly, a court considering an application for recognition and enforcement to homologate a foreign arbitration award cannot enquire into the merits of the dispute.

Foreign, international and domestic arbitrations are all dealt with under the same regime in Book VII of the Code.  In essence, all arbitration awards are not subject to appeal, are all subject to similar homologation procedures and all may be attacked on the grounds reflecting the grounds for homologation.

This review of Quebec Arbitral law leads nicely to a comparison of the appeal rights from international arbitral awards in the United Kingdom.  There, as in Quebec, domestic and international arbitrations are dealt with under one statutory regime, the U.K. Arbitrations Act, 1996.  But the effect has been the opposite, so far as appeal rights are concerned.  The U.K. Act permits the court to grant leave to appeal.  That appeal right is derived from statutory provisions which originally related to domestic arbitrations.   However, in Shell Egypt West Manala et al v. Dana Gas Egypt Ltd, [2009] EWHC 2097, [2010] EWHC 465, the English court granted leave to appeal from an international arbitral award conducted under the UNCITRAL rules.  Those rules provide that arbitral awards are “final and binding”.  The English court held that those words were insufficient to preclude the appeal rights under the U.K. Arbitration Act, 1996.

Returning to the Canadian landscape, there are in essence four appeal regimes relating to arbitral awards.  The most common regime relating to domestic arbitral awards is found in Alberta, Saskatchewan, Manitoba, Ontario, New Brunswick and Nova Scotia. That regime generally provides (with some variations) for an appeal to the provincial superior court with leave of that court, or if the parties have so agreed, on matters of fact, law and mixed fact and law.  In those jurisdictions, a further appeal to the provincial appeal court, or an appeal of a decision relating to an application to set aside the award or declare it invalid, is only permitted with leave.

The second regime provides for no appeal rights from arbitral awards, but imposes no specific limit on appeals from other decisions of the superior court relating to arbitral awards (such as setting aside, or declaring invalid, arbitral awards, or relating to homologation in Quebec).  That regime applies to all provincial regimes relating to international commercial arbitrations, and to domestic awards in Quebec and Newfoundland and Labrador.

The third regime is found in Prince Edward Island where, if the parties consent to an appeal in their arbitration agreement, the appeal is directly to the Appeal Division.

The forth regime is found in British Columbia, where the parties may provide for, or the court may permit by way of leave, an appeal on a question of law.

This review of appeal rights in Canada underscores the point which was made in my article of May 24, 2011.  The parties to a construction contract which contains an arbitration clause should carefully consider the rights of appeal before they sign the contract.  If the arbitration involves a serious issue of law, or if there are other good reasons to do so, consider whether to include a right of appeal.  As importantly, insert into the contract an arbitral law that allows for an appeal. The law of neighbouring provinces – for instance, Ontario and Quebec – are completely different so far as appeals are concerned. So choosing the appropriate arbitral regime is crucial.

Construction Law- Arbitration – Appeal – Quebec – Civil Procedure

Thomas G. Heintzman                                                                                   June 12, 2011

www.constructionlawcanada.com 

www.heintzmanadr.com

www.thomasgheintzman.com

Arbitration Appeal Rights: Think About Them Before Signing A Contract

Owners and contractors will normally insert an arbitration clause into their contract.  When they do so, they rarely consider their rights of appeal from an arbitral award.  The recent decision of the Ontario Court of Appeal in Kingsway Insurance Company v. Gore Mutual Insurance Company provides a good opportunity to develop a strategy towards appeal rights before signing a construction contract containing an arbitration clause.

Under the domestic Ontario Arbitration Act, an appeal of an arbitration award may be taken in two circumstances.  First, if the parties agree, then an appeal may be brought on a matter of law, fact or mixed fact and law.  Otherwise, an appeal may be brought on a matter of law with leave of the Superior Court.  In addition, of course, an application may be brought to set aside the award or for a declaration of the invalidity of the award.

In Kingsway, the Court of Appeal has held that leave to appeal is required before a further appeal may be taken from the Ontario Superior Court to the Court of Appeal for Ontario.  In arriving at this conclusion the Court resolved a statutory conflict.  Section 49 of he Ontario Arbitration Act states that leave to appeal is required from a decision of the Superior Court relating to an appeal to that Court of an arbitral award, or an application to set aside the award or a declaration of invalidity of the award.  However, section 6(1) (b) of the Ontario Courts of Justice Act states that an appeal lies to the Court of Appeal from a final decision of a judge of the Ontario Superior Court.

The Court of Appeal held that these two provisions are in direct conflict and that the conflict must be resolved in favour of the more specific provision in the Arbitration Act, being the Act which specifically governs domestic arbitrations in Ontario.

While Kingsway was not a construction law case, this ruling may be of importance to owners and contractors, particularly if they wish to preserve appeal rights relating to the arbitral decision.  Under Ontario law, the parties may include in their arbitration agreement a full appeal to the Superior Court on matters of law and fact.  If they do so, that is probably because they wish those issues to be dealt with by the Court in the usual way.  They may now be surprised to learn that the normal appeal route is not available to them, and that, despite their agreement and despite the normal situation in civil actions, they are only entitled, as of right, to one level of appeal.

The situation created by section 49 of the Ontario Arbitration Act may be contrasted with the Ontario International Commercial Arbitration Act (“ICAA”).  That Act applies to international arbitrations.  Like the ICAAs of virtually all the other provinces, the Ontario ICAA incorporates the New York UNCITRAL treaty provisions which do not countenance an appeal of the arbitral award.  Likewise, those provisions contain no provisions relating to an appeal from a decision of the Superior Court setting aside, or refusing to set aside, the award.  In these circumstances, the normal provisions of Section 6(1) (b) of the Ontario Courts of Justice Act presumably apply, as presumably would the comparable legislation in the other provinces.  Indeed, there are instances in which appeal courts in Canada have heard appeals from the provincial superior courts dealing with arbitrations under the ICAA statutes, without leave being granted.

Ironically, therefore, the ICAA statutes may allow for appeals as of right from a reviewing judge’s decision in circumstance in which no such appeal as of right exists under the domestic arbitration regime. That would be ironic since ICAA is generally considered to contain an “anti-appeal” regime.

A comparison of domestic arbitration statutes across Canada reveals a somewhat diverse regime with respect to appeals from decisions of reviewing judges.  The statutes in Ontario, Alberta, Saskatchewan, Manitoba, New Brunswick and Nova Scotia generally provide a similar regime. They allow for an appeal from the arbitral award to the Superior Court with leave on a question of law (except in Nova Scotia).  They generally allow the parties to provide in the arbitration agreement for appeals without leave on matters of law, fact and mixed fact and law.  But they also generally provide that any further appeals from the reviewing or appeal decisions of the Superior Court to the Court of Appeal are only with leave.

British Columbia permits an appeal of the arbitral award to the British Columbia Supreme Court on a question of law either with leave or on consent, but does not deal with further appeals.

Newfoundland and Labrador does not expressly provide for appeals from arbitration awards and establishes no express limit on, and does not address, appeals from orders reviewing and setting aside, or refusing to review and set aside, arbitration awards.

The Prince Edward Island statute contains the novel provision, whereby if the parties provide for an appeal in the arbitration agreement, then the parties have the right to appeal directly from an arbitral award to the Appeal Division.

In these circumstances, owners and contractors who are entering into arbitration agreements should carefully consider their rights of appeal.  Perhaps, rights of appeal are the very last thing they want.  In this case they may wish to specifically state that there are to be no rights of appeal.  In some provinces (like Ontario), the parties can, in the arbitration agreement, entirely contract out of their right to an appeal even with leave, while in other provinces (like Manitoba) they cannot.

But the parties may wish to have full rights of appeal, particularly if there are serious issues of law at stake.  If so, they may want to stipulate that the arbitral law of a specific jurisdiction is to apply to their contract and select one which is the most appeal-friendly.  If this is the case, then Ontario arbitral law may have become less suitable to those parties and more suitable to parties wishing to restrict appeal rights following a hearing before the Superior Court.

See Goldsmith and Heintzman, Canadian Building Contracts (4th ed), Chapter 10

Construction Law – Arbitrations – Contract – Appeals – Civil Procedure

Kingsway Insurance Company v. Gore Mutual Insurance Company 2011 ONCA 87   https://bit.ly/jP4xi7

Thomas G. Heintzman

www.constructionlawcanada.com                                                                           May 24, 2011

Is A Subcontractor Bound By The Arbitration Clause in the Main Contract?

In a judgment delivered on May 6, 2011, Chief Justice Joseph P. Kennedy of the Nova Scotia Supreme Court dealt with a contentious issue relating to arbitration clauses in construction contracts.

Is an arbitration clause in the main contract between the owner and the contractor incorporated into a subcontract between the contractor and subcontractor?  If that incorporation occurs, then the subcontractor’s court claim must be stayed and the subcontractor must assert its claim by way of arbitration.

In Sunny Corner Enterprises Inc v. Dustex Corporation, the main contract contained an arbitration clause requiring that any dispute between the owner and contractor be arbitrated.  The subcontract was contained in a purchase order that stated that the scope of the work was to be as defined in the main contract.  The contractor argued that the purchase order sufficiently incorporated the terms of the main contract, and therefore the arbitration clause, into the subcontract.  The subcontractor acknowledged that the main contract was integral to the purchase order, but asserted that the purchase order did not specifically incorporate the arbitration clause from the main contract into the subcontract.

The Chief Justice held that the later is the proper statement of the law.  Referring to Goldsmith and Heintzman on Canadian Building Contracts (4thed), he held that an arbitration clause in the main contract will only be incorporated in the subcontract if it is specifically incorporated.  It was not sufficient to merely say in the subcontract that the main contract was an “integral” part of the subcontract.  As he pointed out, there may be many terms in the main contact which are irrelevant to the subcontractor.  He referred to an Alberta decision [Q.Q.R. Mechanical Contracting Ltd. v. Panther Controls Ltd., 2005 ABQB 58] in which a two year guarantee provision in the main contract was held not to have been incorporated into the subcontract.  Accordingly, Chief Justice Kennedy dismissed the motion to stay the action and permitted it to proceed.

There is logic and a lesson to be learned from this case. The parties to a subcontract may well intend to be bound by the conditions in the main contract relating to the actual nature and performance of the work.  After all, they need a common road map to get the project built that is consistent with the main contract.  But it is quite another thing for them to agree to be bound by consequential, remedial and procedural matters found in the main contract.  There is no inherent reason why the parties to the subcontract cannot agree to a different regime for those matters.  For a court to find that they made an agreement to be bound by the main contract about those matters, there should be specific provisions in the subcontract to that effect.

See Goldsmith and Heintzman:  Canadian Building Contracts (4thed) at Chapter 7, section 1 and Chapter 10, section 1.

Arbitration  – Construction Agreement –  Subcontract:

Sunny Corner Enterprises Inc v. Dustex Corporation, 2011 NSSC 172   https://bit.ly/kXG9Ck

Thomas G. Heintzman

https://www.constructionlawcanada.com

May 15, 2011

What Happens When a Party Refuses to Arbitrate?

A construction lawyer must keep track of the general law of contract and arbitration.  In turn, many construction cases have settled fundamental principles of the general law.  The recent decision of the UK Supreme Court in Dallah Real Estate and Tourism Holding Company v. The Ministry of Religious Affairs, Government of Pakistan is a case in point.  This decision dealt with a fundamental element in the principle of competence-competence in relation to the jurisdiction of arbitration boards.

At its heart, this case was just an ordinary construction case.  But its international dimensions may take it out of the radar screen of construction lawyers. The Plaintiff, Dallah entered into a Memorandum of Understanding with the Government of Pakistan to provide housing for pilgrims to Saudi Arabia through a 55-year lease of property with related financing.  That MOU was replaced by an agreement between Dallah and a Pakistani Trust promulgated under an ordinance of the Pakistani government.  The Trust was to be financed by contributions and savings from pilgrims and philanthropists. The Pakistani Ministry of Religious Affairs was to act as secretary of the Trust.  The agreement between Dallah and the Trust provided for arbitration under the ICC (Paris) Rules.

With a change in government in Pakistan, no additional ordinances were promulgated and the Trust disappeared under Pakistani law.  The project collapsed and  Dallah commenced an arbitration, asserting that the Government of Pakistan was the real party to the agreement and was bound by the arbitration clause.  The Government of Pakistan asserted that it was not a party to the agreement and refused to participate in the arbitration.  Dallah appointed its nominee and the ICC appointed the other two nominees to the arbitration board.

The arbitration board sat in France.  Applying the competence-competence principle now well known to arbitration law, it held that it was competent to determine its own competence.  The board held that the Government of Pakistan was the real party to the agreement and found the Government liable under that agreement.  

Dallah then sought to enforce that arbitration award in England. The decision of the UK Supreme Court (which has replaced the House of Lords as the highest court in the United Kingdom) is of importance to construction lawyers for two reasons.

First, the Supreme Court held that the decision of the arbitration board about its own competence and jurisdiction had no effect on the UK court, and provided no support for the enforcement of the award.

Second, the Court held that, on the facts, the Government of Pakistan was not a party to the agreement and was not bound by that agreement or the arbitration clause found in it.

The Court rejected a variety of arguments that the decision of the arbitration board should be res judicata, or given some weight.  While the principle of competence-competence did allow the tribunal to make an initial decision about its competence, that principle and that decision was only valid and effective for the purpose of the arbitration tribunal itself and its decision about whether to proceed with the arbitration hearing or not.

However, if a party refused to participate in that process, as the Government of Pakistan did, it was not bound by the result, nor did principles of estoppel come into effect. The Court said: “An arbitral tribunal’s decision as to the existence of its own jurisdiction cannot therefore bind a party who has not submitted the question of arbitrability to the tribunal.”  That principle applied whether the tribunal’s award was sought to be enforced in the jurisdiction where it was made, or in another jurisdiction.

Nor was the issue affected by the tribunal’s own decision about jurisdiction. The UK Supreme Court said:   “The tribunal’s own view of its jurisdiction has no legal or evidential value, when the issue is whether the tribunal had any legitimate authority in relation to the Government at all.  This is so however full was the evidence before it and however carefully deliberated was its conclusion.”   The Court used a tennis analogy when it described Dallah’s application to enforce the award in England: “Dallah starts with the advantage of service, it does not start fifteen or thirty love up”.

This part of the decision of the UK Supreme Court is of legal significance.  The second part of its award is of some importance from a comparative fact standpoint.  The Court held that, on the evidence, the Government of Pakistan was not a party to the agreement and the arbitration clause found in that agreement.  The Court looked to:  the initial involvement of the Government in the MOU and the distancing of itself from the subsequent agreement; the separate legal existence of the Trust; the Government’s specific guarantee of certain obligations and not others, and its obtaining of counter-guarantees from the Trust and the Trustee’s bank; and the conduct of the parties in performing the agreement. The fact that the Trust never had assets did not prove that it was a mere tool of the Government since its acquisition of property was dependent on arrangements through Dallah which were never carried out.

These sorts of circumstances may be familiar to those involved in construction projects.  Often, a party of substance inserts a corporation, trust or other entity as the named contracting party.  The other party will have to be very careful to ensure that the named contracting party has the wherewithal to complete the project, or that suitable guarantees are obtained from the party of substance or from other guarantors.

In the result, a case of international proportions has some down-to earth-lessons for construction lawyers.  First, if a construction agreement contains an arbitration clause, an award under that clause is only as good as the binding effect of the agreement, unless the opposing party separately agrees to submit to the jurisdiction of the arbitrators.  Second, it is difficult to impose a construction agreement on a party which has not signed and expressly agreed to be a party to that agreement.

Arbitration – Competence-Competence  – Construction Law –  Construction Agreement – Enforcement

Dallah Real Estate and Tourism Holding Company v. The Ministry of Religious Affairs, Government of Pakistan, [2010] UKSC 46

Does A Breach of Fiduciary Duty Fall Within an Arbitration Clause?

In the recent decision, St. Pierre v. Chriscan Enterprises Ltd., the British Columbia Court of Appeal considered whether a claim by an owner against the project manager for breach of fiduciary duty fell within the wording of the arbitration clause in the project management agreement.

The arbitration clause stated that disagreements “as to the interpretation of this contract or the quality of the material or construction arranged by the project manager or any issues relating to project deficiencies” were to be arbitrated under the British Columbia Commercial Arbitration Act. 

The owner’s claim was that the project manager had arranged for some of the work to be contracted to a company in which the principal manager of the project manager, Chriscan, had an interest and that the project manager or its principal had received secret profits in this way.  The owner asserted that its fiduciary duty claim against the project manager relating to those secret profits did not fall within the arbitration clause.

The B.C. Court of Appeal disagreed.  It noted that, if the arbitration clause referred to “all disputes”, then there would be no argument and the dispute would clearly have to be arbitrated.  The Court held that, while the present arbitration clause was narrower, it still captured the dispute which depended on determining whether the relationship between the parties was a fiduciary one or not.  That issue depended upon an “interpretation of the contract” between the parties.  Accordingly, the dispute fell within the arbitration clause.

The Court held that “it is only by interpreting the contract, in its factual context, that the legal nature of their relationship and whether the appellants’ allegations have any merit can be determined”.

This decision reflects the tendency in Canadian law to include any claim within an arbitration clause which arguably falls within it.  In this case, the parties appeared to be at some pains to draft a narrow arbitration clause, yet the Court held that the clause applied to conduct quite outside the actual performance of the construction project – a secret profit allegedly earned by the project manager through a related company.  It is hard to imagine an arbitration clause and a claim which are more disassociated, yet the Court held that the claim fell within the arbitration clause.

The lesson here is that an arbitration clause in a construction project should either be drawn to encompass “all claims” in dispute, or if the parties intend to limit the disputes which may be arbitrated then those limitations should be set out in explicit exclusionary language.

St. Pierre v. Chriscan Enterprises Ltd., 2011 BCCA 97 (CanLII)  https://bit.ly/gOcu7d

Construction Law – Claims – Arbitration

www.constructionlawcanada.com                                                                                                                                               March 28, 2011