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


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