Tort And Fraud Claims Fall Within Arbitration Agreement: Ontario Court Of Appeal

In Haas v. Gunasekaram, 2016 ONCA 744, the Ontario Court of Appeal recently held that claims in tort and fraud, and resulting claims to set aside the agreement between the parties, were within the jurisdiction of the arbitral tribunal under an arbitration agreement. Accordingly, the court action between the parties was stayed.

This decision is important due to the pro-arbitration principles of contractual interpretation which the Court of Appeal adopted, and due to its finding that the claims in tort and fraud – which are often found to fall outside arbitration clauses – were properly within the jurisdiction of the arbitral tribunal.

Background

The four parties to the actions were shareholders in a company which started a restaurant. They entered into a shareholders agreement which contained an arbitration clause. The arbitration clause read as follows:

If at any time during the currency of this Agreement, or after the termination hereof, any dispute, difference or question shall arise, or any failure to agree as specifically hereinabove referred to, shall occur among the parties hereto or certain of them, respecting this Agreement or anything herein contained then every such dispute, difference or question or failure to agree shall be referred to a single arbitrator to be appointed by the parties to the dispute within ten (10) days of such referral… [underlining added.]

The restaurant failed and Mr. Haas brought an action against the other three shareholders claiming that he had been induced to enter into the shareholders’ agreement by fraudulent misrepresentations. The defendants brought a motion to stay the action, submitting that the claim must be dealt by way of arbitration. The judge hearing the motion dismissed it on the ground that Mr. Haas’ claims fell outside the arbitration agreement. The Court of Appeal allowed the appeal.

Decision of the Court of Appeal

The decision of the Court of Appeal contains the following elements:

  1. A broad interpretation should be given to the arbitration agreement. The court said:

    “The law favours giving effect to arbitration agreements. This is evident in both legislation and in jurisprudence……the statutory language in s. 7 of the current Arbitration Act is directory, not equivocal. It strongly favours giving effect to an arbitration agreement. This policy direction is reinforced by s. 17 of the Arbitration Act [which authorizes the arbitral tribunal to rule on its own jurisdiction]….. The same pro-arbitration orientation is found in the jurisprudence….  It is now well-established in Ontario that the court should grant a stay under art. 8(1) of the Model Law where it is ‘arguable’ that the dispute falls within the terms of an arbitration agreement…. [quoting from the decision in Gulf Canada Resources Ltd. v. Arochem International Ltd. (1992), 66 B.C.L.R. (2d) 113 (B.C.C.A.), at paras. 39-40]: ‘Only where it is clear that the dispute is outside the terms of the arbitration agreement or that a party is not a party to the arbitration agreement or that the application is out of time should the court reach any final determination in respect of such matters on an application for a stay of proceedings….Where it is arguable that the dispute falls within the terms of the arbitration agreement or where it is arguable that a party to the legal proceedings is a party to the arbitration agreement then, in my view, the stay should be granted and those matters left to be determined by the arbitral tribunal….’a deferential approach’ allowing the arbitrator to decide whether the dispute is arbitrable, absent a clear case to the contrary, ‘is consistent both with the wording of the legislation and the intention of the parties to review their disputes to arbitration.’”

  2. The court’s review of the misrepresentations alleged by Mr. Haas showed that they largely related to the defendants’ failure to perform their obligations under the shareholders’ agreement. There was only one alleged misrepresentation relating to conduct before the shareholders’ agreement, that the proposed location had a proven track record of successful restaurants. To establish his case, Mr. Haas would be relying on the contractual documents.
  3. The court considered that the arbitration agreement was “broad in scope.” It particularly referred to the words “if any dispute, difference or question shall arise, or any failure to agree as specifically hereinabove referred to, shall occur among the parties hereto or certain of them, respecting this Agreement or anything herein contained.”
  4. The court held that tort claims do not automatically fall outside an arbitration agreement. As long as “either claimant or defendant relies on the existence of a contractual obligation as a necessary element to create the claim, or to defeat it” or “the matter in dispute is referable to theinterpretation or implementation of some provision of the Agreement” or “the claim …relie[s] upon a breach of the contract as the source of the unlawfulness to ground” the claim, then a broadly based arbitration agreement applies. The court also echoed the caution cited in other cases that the court should “be wary of cases in which a party to an arbitration agreement seeks to avoid it by pleading a common law tort”
  5. The court also held that the plaintiff’s claim that fraud vitiated the agreement between the parties did not mean that the arbitral tribunal lacked jurisdiction. It just meant that the tribunal had the authority to decide that issue under section 17 of the Arbitration Act, 1991. That section enacts the competence-competence principle, namely that the arbitral tribunal has authority to decide its jurisdictional competence. In conclusion, the court said:

    “Put simply, in cases involving arbitration agreements, fraud does not necessarily vitiate everything. It is a matter of interpretation. The arbitration agreement in this case contains broad language, referring to “any dispute, difference or question…or any failure to agree…respecting this Agreement or anything herein contained then every such dispute, difference or question or failure to agree shall be referred to a single arbitrator. There is no exclusion for tort claims, misrepresentation or fraud.”

Discussion

The Court of Appeal’s finding that the arbitration agreement was a “broad” one is useful to those relying on arbitration agreements. The court might have taken a different view. The word “arise” is not as broad as, say, “relating to”, and the words “respecting this Agreement or anything herein contained” could arguably limit the arbitration to contractual disputes, and nothing more. Nevertheless, the court held that these words established a “broad” arbitration clause.

The Court of Appeal’s conclusion that tort and fraud claims fall within the arbitration clause – at least to the extent of the arbitral tribunal’s entitlement to first determine whether they do – is very significant. This decision effectively over-rules or calls into question prior lower court decisions that, in less arbitration-friendly days, held to the contrary.

The key to the decision is, of course, the competence-competence principle. Once the tort and fraud claims arguably fall within the arbitration agreement, then the court must allow the arbitral tribunal to first decide whether they do or not. At that point, the court’s work is done, until the tribunal makes a decision on that issue which is brought back to the court for review. It is the direction of the legislature in section 17 of the Act – adopting the competence-competence principle –and the obligation of the court to apply that principle that results in the modern “hands off” attitude of courts toward arbitration. That attitude is one of the defining elements of the modern law of arbitration.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 11, parts 7 and 8.
Haas v. Gunasekaram, 2016 ONCA 744

Arbitration – jurisdiction of the arbitral tribunal – competence-competence – stay of court proceedings

Thomas G. Heintzman O.C., Q.C., FCIArb                                      October 23, 2016

www.heintzmanadr.com
www.constructionlawcanada.com

This article contains Mr. Heintzman’s personal views and does not constitute legal advice. For legal advice, legal counsel should be consulted.

No Appeal From Order Appointing An Arbitrator: Ontario Court of Appeal

In a recent decision, the Ontario Court of Appeal has held that there is no appeal from an order appointing an arbitrator. This decision highlights the legislative policy in Canada that the courts should take a hands-off approach to arbitration.

Background

In Toronto Standard Condominium Corporation No. 2130 v. York Bremner Developments Limited, the parties had entered into an agreement called the Complex Reciprocal Agreement (the “CRA”). The CRA related to the management of the common facilities, areas and services of a condominium in a development called Maple Leaf Square. The CRA contained an arbitration clause.

The Condominium Corporation issued a notice of arbitration seeking arbitration under the CRA and the Arbitration Act, 1991 and proposed a named arbitrator. The CRA required the respondents to give notice whether or not they accepted the proposed arbitrator. The responding parties failed to give such notice. The Condominium Corporation then applied to the court for the appointment of an arbitrator, nominating two persons.

Decision of application judge

Before the application judge, the respondents took no issue with the process of proposing an arbitrator and did not object to the individuals proposed by the Condominium Corporation to act as arbitrator. Rather, they submitted that the issues proposed to be arbitrated did not fall within the arbitration agreement, and so there was no point in appointing an arbitrator. The application judge held that there was at least one issue that arguably fell within the jurisdiction of the arbitrator and that an arbitrator should be appointed and determine his jurisdiction, and appointed one of the nominees as arbitrator.

Decision of Ontario Court of Appeal

In the appeal, the respondents sought to argue that the application judge was required to assess each of the issues raised in the notice of arbitration and to refer only those that she determined were arbitrable or at least potentially arbitrable under the arbitration agreement. However, they accepted that the application judge had authority to appoint an arbitrator. They only took issue with the scope of the matters to be referred to the arbitrator.

The Court of Appeal held that the respondents in the application were not entitled to appeal the order appointing the arbitrator. That is because section 10(2) of the Arbitration Act, 1991 states that “[t]here is no appeal from the court’s appointment of the arbitral tribunal.” Accordingly, the respondents appeal was quashed.

The Court of Appeal distinguished its prior decision in Brennan v. Dole (2005), 11 B.L.R. (4th) 169. There, the court held the purported arbitration agreement was not enforceable by the respondents against the appellants. Accordingly, there was no basis for an arbitration proceeding against the respondent, and accordingly jurisdiction at all to appoint an arbitrator.

Discussion

This decision highlights two features of the Ontario Arbitration Act, 1991.

First, the Act states in a number of places that there is no appeal from an order made by the court relating to arbitration. Thus, as noted in this decision section 10(2) says there is no appeal from an order appointing an arbitrator. Section 7(6) says that there is no appeal from a court decision about staying an action when there is an arbitration agreement between the parties. Section 15(6) says that there is no appeal from an order removing an arbitrator (except for an order concerning fees or compensation). Section 17(9) says that there is no appeal from the court’s review of a preliminary decision by the arbitral tribunal as to its jurisdiction.

Clearly, these sections represent a policy that the courts should not be involved in the arbitral process. So if there is to be a review of the arbitral decisions mentioned in these sections, then there is to be only “one kick at the can”, and no more. Since these sections do not involve matters going to the merits of the dispute, the policy is to let the matter rest with no more than one level of court review.

Second, this decision reflects another feature of arbitral law in Canada, namely deference to the arbitral tribunal’s jurisdiction, and respect for the tribunal’s competence to decide its own competence – known as the competence-competence principle. In the present case, the Ontario Court of Appeal held that, as long as it was arguable that the arbitral tribunal had authority over something in relation to the dispute, it was the arbitral tribunal – and not the court – which should first decide what that authority was. Then, a party could seek review of that decision by the court. But in the first instance, the respondent could not require the court to define the jurisdiction of the arbitral tribunal during the arbitral-appointment process.

There is a limit to that deference, however. The courts have allowed appeals if the legal issue or jurisdictional issue is clear. Thus, if a stay of a court proceeding is refused on the ground that no arbitration agreement is in place, then an appeal may be taken since the issue is entirely legal or jurisdictional. And as the Brennan v. Doyle case shows, if on a correct view of the facts and law there is no arbitration agreement applicable to the dispute, then an appeal may be taken from an order appointing an arbitrator.

All of which shows that in Ontario, both the statute and judicial policy are in favour of letting the arbitrator make the first decision about the jurisdiction of the arbitrator, but only if there is an arguable basis for that jurisdiction.

Toronto Standard Condominium Corporation No. 2130 v. York Bremner Developments Limited, 2014 ONCA 809

arbitration – appointment of arbitrators – appeal – competence-competence

Thomas G. Heintzman O.C., Q.C., FCIArb                                                         January 15, 2015

www.heintzmanadr.com

www.constructionlawcanada.com

Does Competence-Competence Apply To Domestic Arbitration?

Competence-competence is a central principle of international commercial arbitration: the tribunal has the competence to decide its own jurisdiction. This principle is embedded in Article 16 of the UNCITRAL Model Law. For this reason, a court will await the arbitral tribunal’s decision on its own jurisdiction before undertaking a review of that issue, unless the issue is one of pure law or clearly does not involve factual issues.

The competence-competence principle is also found in most domestic arbitration statutes. For example, it is stated in section 17(1) of the Ontario Arbitration Act, 1991. But section 17(2) states that the court may rule on a jurisdictional objection if, within 30 days of the arbitral tribunal making a jurisdictional deision, a party requests the court to do so.

Should the court take the same deferential attitude toward the authority of a domestic arbitral tribunal to determine its own jurisdiction that it does to an international commercial arbitration?  In Ontario Medical Association v. Willis Canada Inc., the Ontario Court of Appeal recently said that it should. In the process, however, the court did not address the second branch of the competence-competence principle and one wonders how that second branch might affect the application of that principle in future cases.

Background

Aviva provides personal and commercial insurance to the members of the Ontario Medical Association (OMA). Aviva and Willis are parties to a broker/agency agreement. Under that agreement, Willis agreed to act as agent for Aviva in the placement of the insurance to OMA members.  There is an arbitration clause in the Aviva-Willis agency agreement. The OMA is not a direct signatory to the Aviva-Willis agency agreement itself.

Under a schedule to that agreement, Aviva agrees to pay the OMA a 2 percent “over-ride” fee on the OMA portfolio. That schedule says that “the parties (inclusive of the Ontario Medical Association)” are to meet to negotiate increases to the fee based on actuarially calculated profit and loss ratios. An Addendum to the Aviva-Willis agency agreement contains an agreement to which the OMA is a party. That Addendum says that the OMA joins in the Addendum as a beneficiary of Aviva’s obligation to pay the over-ride fee and that Aviva will pay the over-ride fee to the OMA, as well as other fees called a Variable Sponsor Fee and a Policy in Force Sponsor fee.

The OMA commenced an action against Aviva and Willis alleging a breach of the obligation to pay the fees to it under the schedule and Addendum. Pursuant to section 7 of the Ontario Arbitration Act, 1991, Aviva moved to stay the action and to require the dispute to be submitted to arbitration. Willis took the opposite position, supporting the OMA’s position that the OMA is not a party to the Aviva-Willis agency agreement and is not bound by the arbitration clause in that agreement.  Willis filed a defence in the OMA’s action.

The motion judge stayed the action, holding that the arbitral tribunal must first decide the jurisdictional issue. That decision was upheld by the Ontario Court of Appeal.

The Court of Appeal’s decision

The OMA argued that the prior decisions applying the competence-competence principle were rendered under the international commercial arbitration statutes adopting the UNCITRAL Model Law (such as the decision of the Supreme Court of Canada in Dell Computer v. union des consomateurs, [2007] 2 SCR 801) and were not applicable to domestic arbitration. The Court of Appeal disagreed for several reasons.

First, it held that the regimes contained in Ontario’s domestic act and Ontario’s International Commercial Arbitration Act did not reveal any difference, or sufficient differences, to justify a different approach to competence-competence under the two statutes.

Second, the past decisions at first instance show that Ontario courts have deferred to the jurisdiction of domestic arbitral tribunals to rule on jurisdictional issues and have stayed actions on that ground.

Third, the Court of Appeal could see no policy basis for distinguishing between international commercial arbitral tribunals and domestic tribunals so far as the competence-competence principle is concerned.

Having made that decision, the Court of Appeal then held that, in any event, the appeal was barred by virtue of sub-section 7(6) of the Arbitration Act, 1991 of Ontario. That sub-section states that “there is no appeal from the court’s decision” under section 7(1).  The Court of Appeal applied the existing case law which has held that if the judge hearing the motion does grant a stay of the action then there is no appeal, but if the court does not grant a stay there is an appeal. In this case, since the motion judge had granted a stay, the Court of Appeal held that there was no appeal.

Comments

The Court of Appeal could have dismissed the appeal based solely on sub-section 7(6) and said no more.  For this reason, the first part of its judgment could be considered to be obiter dicta and not binding in future cases. However, the Court clearly made a conscious decision to deal with the competence-competence issue, and indeed it did so in its decision prior to addressing the sub-section 7(6) issue. So it will be difficult to argue that its decision about competence-competence is not binding in Ontario.

The unusual aspect of this decision is that the Court of Appeal only addressed half of the competence-competence principle. The second half of the principle states that the court can allow the action to proceed if the jurisdictional issue is one entirely of law, or if the questions of fact require only superficial consideration of the documentary evidence in the record (Dell, at paras. 84-85)

This second part of the competence-competence principle is particularly important in relation to whether the contract and the arbitration clause is binding on a third party.  Usually, an arbitration clause is not binding on a third party to the contract, so that if it is asserted that a third party is bound by the contract or the arbitration clause, that issue can be first addressed as a legal issue by the court, and the court is not obliged to allow it to be first addressed by the arbitral tribunal.  Indeed, the issue of whether a third party is bound by a contract is a fundamental issue in court-developed contract law.  Whether a third party is bound by a dispute resolution regime seems like a perfect issue for a court to rule upon, rather than to have this issue first decided by the arbitral tribunal and later, almost inevitably, by a court on a motion to set aside the tribunal’s jurisdictional decision. The Court of Appeal in the present case did not refer to any facts which would make it unsuitable for the court to decide the issue.

The Court of Appeal’s failure to refer to and apply the second branch of the competence-competence principle can be contrasted with its decision in Ontario v. Imperial Tobacco Canada Limited, 2011 ONCA 525.  There, the same court considered whether the court or the arbitral tribunal should consider the jurisdictional issue of whether an agreement containing an arbitration clause was binding on a third party. I dealt with that decision in my article dated August 28, 2011.

The agreement in Ontario v. Imperial Tobacco was a Comprehensive Settlement Agreement (CSA) between the governments of Canada and the provinces and Imperial Tobacco, settling an action by the governments against Imperial Tobacco as a result of cross-border smuggling and releasing the claims in that action.  The CSA contained an arbitration clause. Later, Imperial Tobacco was sued in a class action by the Ontario Flue-Cured Tobacco Growers’ Marketing Board (the Board) on behalf of tobacco farmers who alleged that Imperial Tobacco had unlawfully paid lower prices to the Tobacco Board for tobacco exported from Canada and smuggled back into Canada.  Imperial Tobacco took the position with the governments that the Tobacco Board was an entity claiming through a releasing entity.  Imperial Tobacco argued that the release in the CSA was effective against the governments in terms of certain consequences under the CSA and against the Board or its claim.

In response, the government of Ontario brought an application in the Ontario Superior Court for a declaration that the release in the CSA did not have the effect asserted by Imperial Tobacco. Imperial Tobacco 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 reversed that decision in part, holding that the right of Imperial Tobacco to rely upon the release in relation to the Tobacco Board’s action should be decided in court because the Board was not a party to the CSA and therefore would not be heard in the arbitration, and its rights might be fundamentally affected by the determination of the right asserted by Imperial Tobacco in an arbitration proceeding to which the Board was not a party.

Ironically, in Ontario v. Imperial Tobacco, the Court of Appeal did not deal with the issue of whether it had jurisdiction under sub-section 7(6) to hear the appeal. Since the motion judge had dismissed the action and sent the dispute to arbitration, the Court of Appeal had no jurisdiction to make its decision, according to its later decision in OMA v. Willis. And in OMA v. Willis, the Court of Appeal did not deal with the second branch of competence-competence, and in Ontario v. Imperial Tobacco where it did, it arrived at the opposite effective result, namely that the dispute should be heard by the court when the issue involves a third party to an arbitration agreement.

There are differences between the two cases:

In OMA v Willis, the plaintiff (OMA) was the third party which sued both parties to the agreement (Aviva and Willis) in the action. In Ontario v. Imperial Tobacco, the dispute was raised by one party to the agreement (Ontario) and the other party (Imperial Tobacco) apparently did not take the position that the Board was a party to the CSA or had a right to participate in the arbitration. Does the application of the second branch of the competence-competence principle change depending on whether it is a party to the agreement or a third party who is suing in court?  Even if not, would or should it have made a difference if:

OMA had only sued Aviva – would it then have had a greater right to proceed in court; or if Imperial had agreed or argued that the Board was effectively a party to the arbitration – would it then have had a greater right to proceed in arbitration?  Does the second branch of the competence-competence principle depend on whether or not it is clear or admitted that the third party has or doesn’t have a right to participate in the arbitration?

In my article of August 28, 2011, I said that the decision in Ontario v. Imperial Tobacco was just the next chapter in the evolving Canadian story about the principle of competence-competence.  The next chapter seems to have clarified the first branch of that principle but may have turned the second branch into a mystery story.

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

Ontario Medical Association v. Willis Canada Inc. (2013), 118 O.R. (3d) 241 (C.A.)

Arbitration  –  Jurisdiction  –  Motion to Stay  –  Competence/Competence

Thomas G. Heintzman O.C., Q.C., FCIArb                                            April 20, 2014

www. heintzmanadr.com

www.constructionlawcanada.com 

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

 

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

www.constructionlawcanada.com

www.heintzmanadr.com

Should A Court Or An Arbitral Tribunal Resolve Domain Name Disputes?

The Court of Appeal for Ontario has just released its decision in Tucows.Com Co. v. Lojas Renner S.A.  This decision is a legal landmark in relation to Internet domain names. The Court held that domain names are personal property and may be the subject matter of an action which may be served on a defendant outside Ontario.

This aspect of the decision has been widely reported. But there is another aspect of the decision which is important to the law of arbitration. That issue relates to the proper response by courts when an arbitral tribunal decides not to hear a dispute.  Should the court nevertheless hold that arbitration is preferable to court proceedings and send the dispute back to arbitration?

Tucows is a Canadian company which purchased the domain name “renner.com” from Mailbank Inc., the registrant of that domain name, with the International Corporation for Assigned Names and Numbers (ICANN).  Renner is a Brazilian company which carries on business under that name in Brazil and owns the trade mark in that name in Brazil and other countries.

Renner commenced a claim against Tucows under the Uniform Names Dispute Resolution Policy (“UDRP”) maintained by ICANN.  Under the UDRP Rules, Renner selected arbitration through the World Intellectual Property Organization (”WIPO”).  Instead of responding to the arbitration, Tucows commenced an action in the Ontario Superior Court claiming a declaration of its rights in the domain name and that Renner was not entitled to a transfer of the domain name.

Tucows asked the WIPO Administrative Panel to suspend or terminate its proceedings in light of the Ontario action.  That Panel decided to do so.  It ruled that the issues in the Ontario action were substantially identical to the WIPO proceeding. The Panel cited prior decisions in which WIPO panels had deferred to courts.  It noted that there was some conflict in the decisions of past WIPO panels on the issues raised in the proceeding.  It held that a court could better deal with the factual issues and that an “authoritative court decision” on the legal issues would be of assistance.

Renner then brought a motion to stay the Ontario action.  The Superior Court stayed the action, holding that the WIPO proceeding was more suited to the resolution of the dispute and that if the Court accepted jurisdiction it would undermine the administrative process for resolving disputes over domain names.

The Court of Appeal allowed the appeal and permitted the Ontario action to proceed.  The Appeal Court observed that the UDRP Rules do not establish the UDRP procedures as the sole means to resolve disputes over domain names.  Those Rules expressly contemplate parties resolving their dispute in court proceedings.  The Court also noted that ICANN had stated that UDRP procedures are particularly suited to “abusive registration” cases, and not to legitimate trade mark or trade name disputes which are relegated by the UDRP Rules to the courts. The Court of Appeal held that the reasons of the WIPO Administrative panel for declining jurisdiction were reasonable and should be accorded deference.

The Court of Appeal held that Tucows’ claim for a declaration was a sufficient “cause of action” to fall within the Ontario Rules of Civil Procedure allowing service of the Statement of Claim outside Ontario.  The Court also held that the rights to a domain name are personal property because the rights holder “can enforce those rights against all others.”

Besides being a landmark decision relating to the Internet, this decision is also important for arbitration law.  It reminds us to ask two important questions:

First, what is the true nature and purpose of the jurisdiction of the arbitration regime?  Is that regime intended to be exclusive or not?  In the present case, the Court of Appeal was impressed by the ICANN policy that the UDRP Rules and procedures are not intended to be exclusive and are not intended to apply to legitimate trade mark disputes.

The same issue may arise under any contract, including a construction contract. The first question is not necessarily:  Does this dispute fall within the arbitration clause?  The first question may be:  Was this dispute intended to be within the exclusive jurisdiction of the arbitration tribunal?

The second question raised by this decision is:  What is the role of the arbitral tribunal in declining jurisdiction, and what is the appropriate response of the court to such a decision by an arbitral tribunal?

This case was not about whether one of the parties could decline to participate in the arbitration.  This case was about whether the arbitral tribunal could allow a party to do so.

The Supreme Court of Canada has recently adopted the competence-competence principle in relation to the determination of the jurisdiction of an arbitral tribunal: Seidel v. TELUS Communications Inc. 2011 SCC 15; Dell Computer Corp. v. Union des consummateurs (2007), 2 S.C.R. 801.  Under that principle, the arbitral tribunal is competent to rule on its own competence. Accordingly, that tribunal and not the court should first decide on the jurisdiction of the arbitral tribunal unless the jurisdictional issue is essentially a legal one.

In the present case the Court of Appeal held that the arbitral tribunal had the jurisdiction to make a decision to decline jurisdiction.  Having done so, the same competence-competence principle required the court to respect that decision and allow the Ontario action to proceed.

This decision raises two further questions:

First, if the arbitration agreement gives no discretion on the matter, can the arbitral tribunal nevertheless exercise a discretion to decline jurisdiction in favour of the court?  Likely not, since the arbitral tribunal’s declining of jurisdiction would itself amount to a jurisdictional error.

Second, if the WIPO tribunal had decided to the contrary, and insisted on dealing with the dispute, would the Ontario court have respected that decision or would it have allowed the action to proceed?  The likely answer is as follows:

If, after giving full deference to that arbitral decision, the Ontario court had concluded that the tribunal had acted within its jurisdiction, then the court would have upheld it and stayed the Ontario action.

If, on the other hand, the Ontario court had concluded that, having regard to the ICANN regime and the UDRP Rules, the WIPO tribunal had erred in jurisdiction by proceeding with the substantive dispute over trade names, then the Ontario court would likely have held that the Ontario action could proceed alongside the WIPO proceeding.

The same result could occur in any contractual dispute.  If a Canadian court concludes that the arbitral tribunal made a jurisdictional error in accepting jurisdiction over the dispute, then the court might well allow an action to proceed alongside the arbitration.

All of these issues are a consequence of the competence-competence policy adopted by Canadian courts.  Except in instances of pure legal controversy, that policy allows arbitrators, and not the courts, to initially decide the jurisdiction of the arbitral tribunal.  That policy also requires that the courts accord deference to the arbitrators’ jurisdictional decision, whether that decision is to accept or decline jurisdiction.  Implementing that policy, the Court of Appeal held that the decision of the WIPO tribunal to decline jurisdiction in favour of court proceedings should be respected and implemented.

Arbitration  –  Stay of court proceedings –  Exclusive jurisdiction   –  Competence-Competence

Tucows.Com Co. v. Lojas Renner S.A., 2011 ONCA 548

Thomas G. Heintzman, O.C., Q.C.                                                                                August 21, 2011

www.constructionlawcanada.com

www.heintzmanadr.com

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