Who Is A Successor To A Contract?

Most commercial agreements contain a clause stating that the contract is binding upon and for the benefit of “successors.”  For example, Article 10.1 of the CCDC Cost Plus Contract states that the contract “shall enure to the benefit of and be binding on…successors”.

What does the word “successors” mean?  Who are “successors”?  Do those who enter into the contract know who the successors are?

Recently, the Ontario Court of Appeal considered this issue in Brown v. Belleville (City).  I dealt with that case in an article last week. In that article I was concerned with whether inaction could amount to acceptance of a repudiation of a contract.

Factual Background

 Let’s remind ourselves of the facts in Brown v. Belleville. In 1953, a municipality signed an agreement with a farmer under which the municipality agreed to maintain and repair a storm sewer drainage system that it had constructed on and near the farmer’s lands. Six years later, the municipality stopped maintaining and repairing the drainage system.  Over the next 50 years, the original municipality and successor municipality clearly and repeatedly repudiated the agreement.

The lands were sold from owner to owner and each owner unsuccessfully sought to have the municipality repair and maintain the drainage system.  Finally, in 2011 the then owners of the lands, the Browns, sued the municipality for breach of contract. The municipality, the Town of Belleville, defended the action on a number of grounds.  It said that the limitation period had expired because the Browns or their predecessors had long ago accepted the municipalities’ repudiation of contract. The trial judge and the Court of Appeal rejected that position. I dealt with that issue last week.

Belleville also said that the Browns had no standing to sue because they were third parties to the 1953 agreement, and that contract law does not entitle third parties to enforce agreements. Belleville also said that the Browns were not “successors” of the original farmer who entered into the agreement.  That agreement said:

“THIS INDENTURE Shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, administrators, successors and assigns.”

The agreement was never registered against the title to the land.  The City said that the agreement was never assigned or otherwise transferred to the plaintiffs or the other owners of the land after the original farmer who entered into the agreement.  The City asserted that the Browns were third parties to the original agreement and did not fall within any of the accepted  category of persons who could enforce the agreement.

Court of Appeal Decision  

 The Court of Appeal held that, on its face, the contract created a category of persons who could enforce the contract as parties to the contract, namely, successors of the owner who entered into the agreement. In that sense, the Browns did not have to demonstrate the application of the “third party beneficiary rule”. They were effectively parties as much as the original party.

The court stated it this way:

“…the broad and unqualified language of the enurement clause constitutes an express stipulation by the contracting parties that they intended the benefit of the Agreement to be shared by future owners of Mr. Sills’s lands, as his successors or assigns or by way of inheritance.  The  language  of  the  enurement  clause  unequivocally  confirms  that  the contracting parties intended and agreed that the benefit of the Agreement would extend to an aggregation or class of persons that includes successor  landowner of Mr. Sills.   On the admitted findings of the motion judge, the Browns are Mr. Sills’s successors.   In this sense, the Browns are not strangers or ‘third parties’ to the Agreement.   Rather, they step into Mr. Sills’s shoes and have standing to enfore the Agreement as against the City as if they were the original covantee(s) to the Agreement…given the intention of the contracting parties stipulated in the Agreement under the enurement clause, I conclude that ‘relaxing’ the doctrine of privity in this  case  does  not frustrate  the  reasonable expectations of  the  parties  at the  time the Agreement was formed.  To the contrary, it gives effect to them.”

Belleville relied upon a 1980 decision of the Supreme Court of Canada in Greenwood Shopping Plaza. It said that that decision precluded the Browns from relying on the 1953 agreement to which they were not a party. The Court of Appeal held that, in light of more recent decisions of the Supreme Court, the Greenwood case had been largely over-ruled. In any event, having regard to the enurement clause, the prohibition against third party enforcement of the agreement had little or no application.  If necessary, the court said that it would apply the exceptions to the rule prohibiting third party enforcement of a contract and allow the Browns to enforce the drainage agreement when they so clearly fell within the category of persons who were intended to have its benefit.

The Court of Appeal considered one further objection of Belleville, namely, that the Browns were using the 1953 agreement as a sword – to bring an action and positively enforce rights – rather than as a shield – or as a defence. In the modern cases in the Supreme Court recognizing the rights of third parties to rely on contract they had not signed, those third parties were asserting the contract as a defence.

The Court of Appeal held that this distinction made no difference in the presence of the enurement clause:

 “I recognize  that London Drugs and Fraser River were cases where the third-party beneficiaries sought to rely, by way of defence, on the benefit of the contractual provisions at issue  to resist  claims  brought  against them – they  were not  seeking to  enforce  the affirmative benefit of the relevant contractual provisions….. Nonetheless, it is my view that the Browns’ status as the successors of the original covenantee under  the Agreement affords  them the  right  to seek to  enforce  the original covenantor’s contractual obligations, as against the original covenantor.   In effect, for the purpose of enforcement of the Agreement, the Browns are Mr. Sills and the City is Thurlow.  Further, insofar  as  the performance  of  the  City’s  obligations under  the Agreement are concerned, there is a clear identity of interest between Mr. Sills and the Browns.   As Mr. Sills’s successors, the Browns stood ready to comply with the activity required of them under the Agreement- the provision of access  to their lands.    In all these circumstances, the application of the principled exception to the privity rule advances the interests of justice.” (emphasis added


 The Brown v. Belleville decision answers one of the issues arising from “successor” clauses. Based on that decision, a person falling within the clause does not have to worry about the old rule that contract law does not recognize the rights of third parties.  If the contact has an enurement clause in favour of or binding on successors, then successors are parties to the contract as much as the original parties.

The next issue is:  who are successors? Clearly, based on Brown v. Belleville, a later owner of the same land that is affected by the agreement is a successor. But what about a tenant, or subtenant, of that later owner? If that tenant has exclusive possession of the affected property, and is the person who is really affected by a breach of the agreement, is that person a successor? What about the owner of other interests in the land such as owners of easements or mortgagees?

The issue becomes even more complicated when one considers building contracts.  If the main contract between the owner and the contractor states that it is binding on the “successors” of the contractor, does that word include a subcontractor?  What if the owner has given a covenant in the main contract that affects the electrical work and the contractor subcontracts the entire electrical work to an electrical subcontractor?  Is the electrical subcontractor the “successor” of the contractor?  Why not?

If the contractor assigned the electrical part of the main contract to the electrical subcontractor (if it were permitted to do so), then the enurement clause would likely apply because that clause would likely be expressed to include assignees. If the clause includes both successors and assigns, then the word “successors” must be given a wider meaning than “assisgns”, but who does it include?

A further issue is this:  if the enurement clause is also expressed to be binding on successors, then third parties may find themselves bound by obligations under the contract even though they never signed the contract. In fact, a good test as to whether the contract enures to the benefit of a third party may be whether it should be binding on that party.  Clearly, the Browns were willing to be bound by the 1953 agreement and allow Belleville access to their land to repair and maintain the drainage system, so it was not difficult to find that the Browns were successors. Similarly, a subtenant or mortgagee of the Brown’s property would be willing to grant such access, so they may well be successors.

But what parties would be willing to be bound by the contractor’s building contract with an owner?  Would a subcontractor or supplier?  Likely not, especially if that includes the payment obligations. Often the subcontract will state that the main contract is incorporated into the subcontract, but at least one line of authority holds that some of the terms of the main contract (such as arbitration, insurance and guarantee clauses) are not incorporated into the subcontract unless that intention is specifically set forth in the subcontract.

Now that the Ontario Court of Appeal has held that successors may enforce a contract if there is an enurement clause in the contract to that effect, the clause may be more powerful and dangerous than it was previously.  This may be a good reason for the meaning of “successors” to be defined in the contract. The parties may mean that it includes only the successors by virtue of corporate or bankruptcy law. If so, they can say that. But they may mean it to have a broader meaning, such as a successor in title. Again, they can say that.  If they do not, then they will leave it up to the court to decide who is bound by or may rely upon the contract.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed., chapter 1, part 2

Brown v. Belleville (City), 2013 ONCA 148  

Construction law  –  Enforcement  –  Third Parties  –  Breach of Contract

Thomas G. Heintzman O.C., Q.C., FCIArb                                                         March 29, 2013




ULCC Working Group Issues Discussion Paper On A New Uniform International Commercial Arbitration Act

In January 2013, a Working Group of the Uniform Law Conference of Canada (“ULCC”) issued a Discussion Paper with respect to proposals for a new Uniform International Commercial Arbitration Act. The Discussion Paper is intended to generate consultations by May 2013 and final approval by the ULCC in August 2013.

Background to the Discussion Paper

In 1985, The United Nations Commission on International Trade Law (UNCITRAL) adopted the UNCITRAL Model Law on International Commercial Arbitration.  The Model Law sets forth legislative provisions relating to the conduct, enforcement and recognition of arbitral awards in international commercial arbitrations. The Model law was developed so that it could be implemented by statute in each country adopting the Model Law, to provide a consistent approach among those countries to international commercial arbitrations.

The Uniform Law Conference of Canada was founded in 1918 to harmonize the laws of Canadian provinces and territories and, where, appropriate, federal laws.  The ULCC brings together government and private lawyers, analysts and law reformers to study areas in which provincial and territorial laws might benefit from harmonization. The history, study papers, discussion documents and many of the Uniform Laws which it has drafted, may be seen on the ULCC’s website: www.ulcc.ca.

In 1986, the ULCC issued a Uniform International Commercial Arbitration Act (the “Uniform ICAA” or the “existing” Act). The Uniform ICAA was intended to provide a template for the implementation of the UNCITRAL Model by Canadian provinces, territories and the federal Parliament.  In large measure, the ULCC’s Uniform ICAA was enacted across Canada. The Uniform ICAA may be seen at: https://www.ulcc.ca/en/uniform-acts-en-gb-1/462-international-commercial-arbitration-act.

The Model Law was amended by UNCITRAL in 2006. In response to these amendments to the Model Law, in August 2011 the ULCC established a Working Group to bring forward recommendations for a new Uniform ICAA (or “new Act”).  In August 2012, the ULCC authorized the preparation of a Discussion Paper for consideration by the ULCC at its meeting in August 2013.

Elements of the Discussion Paper

The Discussion Paper recently issued by the Working Group can be divided into two elements.

First, the Working Group has made recommendation on a wide ranging group of issues.

Second, the Working Group has identified further issues upon which it is seeking the view of others.

Recommendations of the Working Group

There are nine main recommendations of the Working Group:

1.      The form of the existing Act should be used in the new Act.

The existing Uniform ICAA is a relatively short statute of fifteen sections, to which the Model Law is attached as Schedule B. Also attached, as Schedule A, is the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards adopted by United Nations Conference on International Commercial Arbitration in June 1958. The existing Uniform ICAA does not incorporate domestic arbitration legislation.

In other words, the ULCC’s recommended statute for international commercial arbitration does not itself set out the effective statutory provisions and does not deal with domestic arbitration, as do the statutes in some jurisdiction (such as Quebec and the U.K.).  Rather the ULCC’s existing Uniform ICAA leaves most of the substantive provisions in the attached Model Law, and few in the enacting statute itself, and deals only with international commercial arbitration.

The Working Group recommends that this approach be used in the new statute, on the ground that it more readily identifies the Model Law as the operative document and promotes uniformity among Canadian statutes.  The Working Group recommends that, if any legislature believes that departures from the Model Law are required, those changes should be made in the statute, not the attached Model Law, and that the new Act should only deal with international, not domestic arbitration.

2.    The Working Group has tentatively recommended that all the 2006 amendments to the Model Law be incorporated into the ULCC’s new Uniform ICAA.  This approach has not been taken in every country, as some countries have selected only those amendments they thought were appropriate to adopt.  In particular, some countries have not adopted the provisions in the 2006 amendments to the Model Law relating to the interim measures which may be granted by the arbitral tribunal, on the basis that those interim powers should only be exercised by courts.  The view of the Working Group is that the granting of interim powers to the arbitral tribunal allows the tribunal, but does not compel it, to exercise those powers, and that it is better that these powers be available to arbitral tribunals, only to be exercised if appropriate.

3.    The new Act should apply only to written arbitration agreements (as does the existing Uniform ICAA) but that a flexible approach to “writing” should be taken so that agreements arising from electronic communications would be included.  The Working Group did not recommend that oral arbitration agreements be included within the new Act.

4.    The new Act should not harmonize the limitation periods applicable under Canadian laws for the commencement of arbitration proceedings. Accordingly, the relevant limitation period would be determined by the parties in their agreement, or by the applicable substantive law.

5.    International arbitration awards made elsewhere in Canada should be enforceable under the new Act, to allay doubts that such awards are not “international” and not enforceable under that Act.

As a corollary, the Working Group recommended that domestic awards in other provinces should only be enforced through domestic arbitration statutes in other provinces or territories. Also, clearly being of the view that foreign domestic awards should not be enforceable through the new Act, the Working Group is seeking comments as to how this result can be best achieved.

6.    The words “Commercial Arbitration” and “Commercial Relationship” should be defined in the new Act.

7.    The Working Group considered that it might be helpful to clarify that an international commercial arbitration award may be raised by way of defence, set-off, or counterclaim in existing proceedings.  This would obviate the need to commence separate proceedings seeking recognition and enforcement.

8.    The new Act should clarify what is meant by “State”, in a similar fashion to that accomplished in Section 6 of Ontario’s International Commercial Arbitration Act.

9.    The new Act should emphasize the need to promote Canadian uniformity in the application of laws relating to international commercial arbitration.

Views Sought by the Working Group

 The Working Group is seeking input on a wide variety of other issues, including the following:

1.    Whether the new Act should clarify that the limitation periods for commencing arbitration proceedings under Canadian laws (if they apply) are the same for international commercial arbitrations as for court actions.

 2.    Whether there should  be a provision for interprovincial enforcement of Canadian judgments recognizing and enforcing international arbitration awards. The recent decision of the Supreme Court of Canada in Yugraneft Corp. v. Rexx Management Corp. raises the issue of whether an award in an international commercial arbitration can be enforced in one province, where the limitation period is longer, and then whether that judgment can be enforced in another province where the original award could not be enforced due to a shorter limitation period.

3.    Whether the new Act should say anything about the nationality of the chair or single arbitrator. British Columbia’s International Commercial Arbitration Act provides that the Court shall not, without the agreement of the parties appoint a sole or third arbitrator who is of the same nationality as that of any of the parties.

4.    Whether the new Act should preclude opting in or out of the Act, in whole or in part.

5.    Whether the new Act should deal with the confidentiality of arbitration proceedings.

6.    Whether the new Act should deal with retroactivity, that is, whether the new Act should apply to arbitration proceedings commenced before, or only after, the new Act comes into effect.

7.    Whether the mediation/conciliation provisions in the existing Act (section 6) should be included in the new Act.

8.    Whether an arbitration should be required to be re-commenced if the chair or one of the other arbitrators ceases to be an arbitrator (as the existing Act requires in section 7), or whether the arbitral tribunal should have the option of continuing the proceeding with the replacement arbitrator familiarizing himself or herself with the evidence already tendered.

9.    Whether any amendment needs to be made with respect to the law that governs the substance of the dispute if there is no specific choice of law by the parties.  The present Uniform Act enables the arbitral tribunal to select the law that is appropriate having regard to all the circumstances (section 8).

10.    Whether the court should have power to consolidate arbitration proceedings if the parties do not agree. Presently, the court has power only to consolidate if, at the time of the motion to consolidate, the parties agree to that consolidation (section 9 of the existing Act).


 Clearly, the issues which the Working Group and the ULCC are considering are of vital importance to international commercial arbitration in Canada. Canada must continue to modernize its arbitration regime, not only to ensure that cost effective justice is achieved in Canada but also to ensure that the world has continued confidence in Canada as a good place to do business.  For these reasons, any comments about the proposed new International Act should be forwarded to the ULCC as soon as possible. Comments can be delivered to the ULCC on the Contact form on its website: https://www.ulcc.ca/en/contact.

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                January 18, 2013



Can An Agent Claim Damages As An Owner Under A Building Contract?

Agents of contractors and subcontractors often play a role and assert rights during construction projects. This is because contractors often use agents to perform the work, and construction lien legislation recognizes their right to assert a lien for the improvement of the land.

But agents of owners do not often assert rights under a building contract. Can they do so? And if they can, can they be sued as parties to the building contract?

These issues were recently addressed in the decision of the Nova Scotia Supreme Court in Ross v. Garnett. That court held that the agent could assert a claim for damage for breach of the building contract. This decision is significant because it could dramatically widen the scope of persons who can sue or be sued through the owner’s rights under a building contract.

The background

Ross entered into a contract with Garnett to purchase a log home kit manufactured by Riverbend and to have Garnett build the home. The home was built on a lot formerly owned by Ross but transferred by him to his mother shortly before the contract with Garnett was made. The transfer occurred because Ross’s mother could obtain mortgage financing and he could not. He paid all the mortgage payments, and the other expenses relating to the construction of the home. The lot was to be re-transferred to Ross once the mortgage was paid.

Ross claimed that the home kit and construction were defective and he sued Riverbend and Garnett. The defendants asserted that Ross had not suffered damage as he was not the owner of the lot. They brought a summary judgment motion to dismiss Ross’ claim.

The decision

The motion proceeded on the basis that Ross had entered into the contract with Garnett as agent for his mother. The motion judge concluded that a contract made by an agent can be enforced by and against the agent if the agent had a demonstrable intent to be personally bound by the contract and the other party elected to so deal with the agent. The motion judge concluded that Ross could not succeed in establishing those elements at trial. Ross’ own evidence demonstrated that he acted only as trustee and agent for his mother and did not intend to be personally bound by the contract.

However, the motion judge held that there was a second exception to the rule that an agent cannot sue on a contract made by the agent’s principal. Under this exception, the agent can sue on the contract if he has a “special interest” in the contract. A special interest could be shown if the agent has “some special property in the subject matter of the contract, or a lien upon it, or some special interest in the completion of the contract”, citing Fridman on The Law of Agency. The motion judge held that Ross had an arguable “special interest” in the contract between Ross’ mother and Garnett and therefore his claim could not be dismissed on a summary judgment motion.

The importance of this decision

This decision is important for those interested in building contracts because it has the potential to significantly widen the scope of the contracting parties on the owner’s side of the contract. The decision seems problematic from several standpoints.

First, the concept of “special interest” seems to be suitable to determine whether the agent has suffered damage, but it seems unsuitable to determine whether the agent is a party to the building contract. Without a “special interest” it would seem difficult for the agent to assert any loss. Combined with an initial entitlement to sue based upon a demonstrated intention to be a party to the contract from the inception, a “special interest” may provide the necessary loss which will give rise to a claim to damages. But it is more difficult to understand how a “special interest” can make the agent a party to the owner’s contract and entitle the agent to sue on that contact.

Second, if a “special interest” of an agent gives rise to a separate entitlement by the agent to enforce the building contract, then the contract should be as enforceable against the agent as by the agent. So the concept of “special interest” may create a whole new and dangerous basis of liability for owner’s agents.

Third, “special interest” appears to be an imprecise basis to create a pool of persons who have rights or obligations under a building contract. Who falls within the pool? Do the architects, engineers and consultants of the owner fall within it? Do they fall within it if they have an interest in the property? Do they have a “special interest” if they have a contingent interest in the success of the project, for example if the price of their services is influenced by the ultimate cost of the project? If so, is it advisable or inadvisable for a consultant to take an interest in the property or in the project, if that interest may allow rights to be asserted by or against the consultant under the building contract? And is it necessary for the contractor to inquire as to what agents of the owner have a “special interest” in the building contract?

The answer to these questions will await future cases about the rights or obligations of owners’ agents under building contracts.

Ross v. Garnett, 2012 NSSC 132

Building contract – consultants – enforcement – third parties

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


Conduct After An Arbitration Award May Nullify That Award

A party to a contract may terminate the contract and then start an arbitration to confirm the validity of the termination.  If the arbitral tribunal grants such a declaration, then that party better watch out that it doesn’t continue to treat the contract as still continuing.  If it does, it may waive the termination, and the arbitration will be for naught.  So held the Saskatchewan Court of Queen’s Bench in Subway Franchise System of Canada Ltd. v. Laich.  Clearly, this decision is of considerable importance in construction projects, franchise agreements or in other ongoing contractual relationships.

The Background

In 2003, Subway entered into a franchise agreement with Laich for a Subway store in La Ronge, Saskatchewan.  In 2009, Subway terminated the franchise agreement.  The franchise agreement contained an arbitration clause providing for the arbitration of disputes in Connecticut.  In May 2010, the arbitrator upheld the termination of the franchise agreement by Subway.

Subway then sought to enforce that award in Saskatchewan pursuant to the Saskatchewan International Commercial Arbitration Act (ICAA), and statues relating to landlord and tenant and enforcement of foreign judgments.  In 2011, the Saskatchewan Court held that the award would not be enforced because Subway had continued to treat the franchise agreement as outstanding after the arbitration award.

The Court held that Subway had met the requirements of the Model Law in the ICAA.  The Court also found that no objections to the award could be raised since no request for recourse against the award had been brought within the time specified in the Model Law.  Nevertheless, the Court held that the arbitral award was not enforceable because, after the award, both parties continued to operate pursuant to the provisions of the franchise agreement.  Laich continued to make all remittances and there was no change in the support given by Subway to the franchise operation.   Laich continued to pay the royalties due under the franchise agreement.  In what was undoubtedly a form letter, Subway wrote to Laich extending “congratulations on a job well done”.

The Saskatchewan Court found that, by its conduct, Subway had “waived the termination decision by the arbitrator as it continued to work with and support the respondent in a profitable partnership.”

The Court also refused to enforce the arbitral award for damages, being $250 per day during the period that Subway did not recover possession.  The Court refused to enforce this award because to do so would doubly compensate Subway which had, during that period, received the remittances and royalties from Laich.  The Court also dismissed Subway’s application for possession of the premises.

While this dispute may be viewed by some as a franchise dispute of little significance, the decision has an importance to construction projects and to other situations where ongoing contractual relationships may exist.

One of the parties may not be willing to take the risk of unilaterally forcing the other party off the site or out of the premises.  That party may need an arbitral (or court) decision approving its view that the other party has repudiated the contract and that it is entitled to terminate the contract.  During the period that the dispute is being dealt with by the tribunal, the innocent party will have to leave the other party in place and not disturb the contractual setting.

But the moment that the innocent party obtains such a decision, then according to the Saskatchewan Court, it must immediately stop dealing with the other party in the normal course.  It must refuse any further payments or benefits from the other party and treat the relationship as at an end.  Its failure to do so may eliminate every value that it secured from the arbitral award.

Three thoughts come to mind:

First, is this decision commercially unreasonable?  Is it consistent with modern electronic technology?  Should we expect a huge international commercial business to turn off all its normal termination procedures so that a tiny franchisee (or sub-contractor, or agency) does not slip through the termination machinery and continue to be treated as a compliant contracting party?  Even though some of us might answer No to these questions, we should expect a trial judge to be unsympathetic to the large organization in these circumstances.

Second, as a technical matter, this case may not strictly be about waiver.  The parties were apparently bound by the arbitrator’s decision that the franchise agreement had terminated due to the principles of res judicata.  Rather, the parties conduct may be seen as the re-establishment of their agreement.  By continuing to abide by the agreement, they made a new agreement.

Third, surely there are easy ways for an organization to address the problem.  It can send out a notice at the very beginning of the termination process (and better still, again immediately after the arbitration award) stating that no conduct on its behalf, including the acceptance of money, extension of services or correspondence on its behalf, shall be considered to be a waiver of its position that the agreement is terminated or a waiver of any rights under an arbitral or court award, and that if it accepts any monies from the other party it does not do so in recognition of any continuing contractual rights of the other party and holds those monies in trust to be dealt with in accordance with the arbitral decision.  That sort of letter should be a standard form in the termination documents of any contractor, franchisor or principal.

Once again, this decision is a wake-up call to everyone engaged in a dispute arising from an ongoing contract:

Don’t continue to treat the contract as ongoing after a decision confirming its termination.  If you do, then the contract may be revived and the decision may be worthless.

Arbitration   –   Enforcement   –   Waiver

Subway Franchise System of Canada Ltd. v. Laich, 2011 SKQB 249

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                       March 25, 2012


An International Commercial Arbitral Award Is Enforced Even Though It Provided No Reasons

In Canada, the obligation of a tribunal to give reasons has become one of the hallmarks of justice.  But do arbitrators have an obligation to give reasons?  Not if the parties agree that no such reasons need be given and the arbitration is an international commercial arbitration conducted pursuant to the UNCITRAL Model Law.  That is what the Ontario Superior court recently decided in Activ Financial Systems, Inc. v. Orbixa Management Services Inc.

In its 2002 decision in Sheppard and its 2003 decision in Dunsmuir, the Supreme Court of Canada has placed the obligation to give reasons at the very heart of a fair decision-making process.  As I said in my blog of January 23, 2012, the Supreme Court has effectively held that a court’s decision should be set aside for legal error if the reasons are totally inadequate.  Without adequate reasons, the person who loses does not know why.

But in the field of arbitration, some principles are not immutable.  Subject to the governing law, the parties can agree to waive the protections that the law provides.  In the field of international commercial arbitration, they can waive the obligation of the arbitral tribunal to deliver reasons.

Background Information:

The dispute in the present case arose under a software license agreement.  Activ claimed payment for software license fees during a period in which Orbixa said the agreement had been terminated.  The question was whether the agreement had been so terminated or had continued by virtue of automatic renewal, and whether a liquidated damages clause applied.

Article 31(2) of the UNCITRAL Model Law as appended to the Ontario International Commercial Arbitration Act (ICAA) provides that “the award shall state… the reasons upon which it is based, unless the parties have agreed that no reasons are to be given or the award is an award on agreed terms under article 30.”  The license agreement was governed by New York law and it provided for arbitration in New York under the Commercial Arbitration Rules of the American Arbitration Association.  Those Rules state that the “arbitrator need not render a reasoned award unless the parties request such an award in writing prior to appointment of the arbitrator or unless the arbitrator determines that a reasoned award is appropriate.”

Prior to the arbitration, the parties agreed that no reasons need be given by the tribunal.  The tribunal rendered a decision in Activ’s favour without reasons.  Activ obtained a judgment of the New York court enforcing the award.  Activ then came to Ontario to enforce the award. Orbixa opposed that enforcement on three grounds, among others.

First, Orbitza said the award was unenforceable since it contained no reasons.  Based on Article 31(2) of the Model Law appended to the ICAA, Perell J held that the award should be enforced in Ontario despite the absence of reasons.  He held, however, that before doing so the Court must “fairly determine…that the arbitration award did not deal with a dispute beyond the terms of the submission and that the award was not contrary to the public policy of Ontario.”  Justice Perell concluded that these conditions were satisfied in the present case.

Second, Orbitza said that the award could no longer be enforced as such since it had been rendered into a judgment of the New York Courts.  Justice Perell dismissed this objection, holding that the award still remained enforceable under the ICAA in Ontario even If the award was also enforced  in New York.

Justice Perell did agree with a third submission made by Orbitza.  Activ sought to enforce the judgment under the common law, and not pursuant to the ICAA.  Indeed, Activ first commenced its application without relying on that Act.  Justice Perell allowed Activ to amend its application to also rely on the ICAA and, as noted, enforced the award under that Act.  But he accepted Orbitza’s position that, once the ICAA was enacted, international commercial arbitration awards may only be enforced under that Act and not at common law. In his view, “it would be a source of unnecessary confusion and unnecessary expense to have two enforcement mechanisms.”

Justice Perell concluded “as a matter of statutory interpretation that it was the intention of the Legislature to introduce a complete code about the enforcement of foreign arbitration awards under the International Commercial Arbitration Act.”

The first basis for the decision raises an interesting contrast with domestic arbitral awards.  Under section 38 of the Ontario Arbitration Act, 1991, the award “shall state the reasons on which it is based” unless it is a consent award. Section 3 of that Act does not list Section 38 as one of the sections which the parties cannot vary or exclude.  Accordingly, one would think that the parties can contract out of Section 38.

The Contrast Between The Model Law and ICAA

On the other hand, Sections 3 and 38 do not expressly provide that the parties can agree that no reasons need be delivered by the tribunal.  In this respect, there could not be a starker contrast between the Model Law and the ICAA.  With this contrast in two statutes dealing with arbitration, a party opposing the enforcement of a domestic award given without reasons could argue that, in contrast to international commercial arbitral awards, the legislature made a clear choice that domestic arbitral awards must be delivered with reasons.

Moreover, Section 38 expressly states that consent awards are an exception to the obligation to give reasons.  That exception suggests that the legislature thought about the issue and provided for that exception and did not provide for an exception for “no reasons” decisions.

In support of those arguments is Section 3 of the Arbitration Act, 1991.  Section 3 says that the parties cannot exclude Section 19.  Section 19 states that “in an arbitration, the parties shall be treated equally and fairly.”  Dunsmuir and Sheppard stand for the principle that reasons for decision are an essential ingredient in the fairness of a decision-making process.

Does that mean that the parties to a domestic arbitration cannot waive the provisions of Section 38?  That argument will face the fact that Section 3 does not refer to Section 38 as an obligation which the parties cannot exclude.  And if the parties agree that no reasons need be given, then it seems difficult to argue that the absence of reasons is unfair.

See Heintzman and Goldsmith on Canadian Building Contracts (4th ed.), Chapter 10, part 3.

Arbitration  –   Absence of Reasons  –  Enforcement

Activ Financial Systems, Inc. v. Orbixa Management Services Inc., 2011 ONSC 7286

 Thomas G. Heintzman O.C., Q.C.                                                                                  February 1, 2012


Ontario’s Highest Court Upholds NAFTA Arbitration Against Mexico

The Ontario Court of Appeal has just released an important decision upholding an arbitration award under NAFTA against Mexico.  This decision shows that Canadian courts will be reluctant to interfere on jurisdictional grounds with the remedial decisions of international commercial arbitrations.

In The United Mexican States v. Cargill, Incorporated, Mexico opposed the recognition in Ontario of an award by an international commercial arbitration tribunal relating to Mexico’s protection of its refined sugar industry.  Cargill had established a business in which its wholly-owned Mexican subsidiary distributed HFCS, a low-cost substitute for caned sugar.  Cargill’s Mexican subsidiary imported HFCS from Cargill’s U.S.’s plants, and sold it to Mexican customers.  Mexico enacted a number of prohibitions which were found by the arbitration tribunal to constitute breaches of NAFTA.  As a result of those prohibitions, Cargill shut down a number of its HFCS plants and distribution centres in the U.S.A.

Cargill claimed damages for both the “downstream losses” that its Mexican subsidiary suffered, and also the “upstream losses” which it suffered by reason of the closing down of its U.S. production and distribution facilities.  The arbitral tribunal awarded damages on both accounts.  In particular, in relation to the damages suffered by reason of the impact on Cargill’s U.S. plants and distribution centres, the arbitral tribunal found that those damages were caused by the prohibitions implemented by Mexico.

Since the seat of the arbitration was in Toronto, Ontario, Mexico challenged the damage award in the Ontario Superior Court.  Its position was that the arbitral tribunal had no jurisdiction to award the “upstream” damages, and its position was supported by the governments of the U.S.A. and Canada as intervenors.

Mexico argued that under Chapter 11 of NAFTA, Cargill could only recover losses as an “investor” in relation to its “investment” in Mexico.  Accordingly, Mexico argued that Cargill had no right to recover, and the arbitral tribunal had no jurisdiction to award, damages to Cargill as a U.S. producer and exporter of its product to Mexico.  The tribunal held that Cargill was an “investor”, that it had made an “investment”, that Mexico had adopted a prohibited measure and that everything else related to the measure of damages.  The tribunal found that there were no express or necessarily implied limitations on the scope and nature of the damages that could be awarded by it.

Mexico’s submissions were rejected by both the Superior Court judge who heard the initial application and the Court of Appeal.  The Court of Appeal went through a lengthy consideration of the standard of review to be applied, and basically held that if the issue was one of jurisdiction, the standard of review was “correctness”.  Having said that, the Court stated that this standard only applied in the rare case of a true jurisdictional dispute, and that a very narrow view should be taken of what amounted to a jurisdictional dispute in the case of international commercial arbitrations.

The Court of Appeal’s conclusion:

The Court of Appeal held that the arbitral tribunal had not exceeded its jurisdiction.  It arrived at that conclusion through a number of concessions by Mexico and other conclusions, such as:   Mexico’s concession that damage suffered by an investor is not limited to damage suffered in the country where the investment is located; and no territorial limitation for damages or the occurrence of damages is contained in NAFTA.

The Court concluded: “It is up to the tribunal to make findings of fact, apply the facts to the definitions, and determine whether, in any particular case, the claimed damages fall within the defined criteria.”

In particular, the Court held as follows;

“The only issue is whether the tribunal was correct in its determination that it had jurisdiction to decide the scope of damages suffered by Cargill by applying the criteria set out in the relevant articles of Chapter 11, and that there is no language in Chapter 11, or as agreed by the NAFTA Parties, that imposes a territorial limitation on those damages.  Once the court concludes that the tribunal made no error in its assumption of jurisdiction, the court does not go on to review the entire analysis to decide if the result was reasonable.”

Clearly, this decision is of great importance to arbitrations under NAFTA.  It is also of general importance under the UNCITRAL Model Law.  The Model Law was incorporated into Ontario law in the International Commercial Arbitration Act .

Everything is, of course, in the eyes of the beholder and depends upon the perspective from which one looks at the matter.  To the governments of Mexico, U.S.A. and Canada, the award of damages for activity in another country could not be the basis of a claim as an “investor” in the offending country.  From their perspective, damage was a jurisdictional issue.

But NAFTA does not quite say that loss in another country is a forbidden element of recovery. And from the perspective of the injured party, damage in the country of origin may well be a source of damage arising from an investment in the offending country.  In the absence of specific language in NAFTA removing such damage from the loss which the complainant may recover, the Court of Appeal was not able to say that the arbitral tribunal had made a jurisdictional error in awarding those damages.

There are at least three lessons to be learned from this decision:

First, Canadian courts will be very reluctant to interfere with the decisions of international commercial arbitrations.  This reluctance is due to the evident respect for those tribunals which legislatures have accorded to them.

Second, absent specific language excluding the jurisdiction of the arbitral tribunal, a Canadian court is unlikely to infer a limitation.

Third, it is very unlikely that a Canadian court will find that arbitral decisions relating to damages or other remedies contain jurisdictional error.  Once the arbitral tribunal has jurisdiction to deal with the merits of the dispute, it will require specific limitations on the tribunal’s jurisdiction for the remedial powers of the tribunal to be circumscribed.

Arbitration  –   International Arbitration  –   Enforcement-Remedies  –  Damages

The United Mexican States v. Cargill, Incorporated 2011 ONCA 622

Thomas G. Heintzman , O.C., Q.C.                                                                                                  October 14, 2011



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


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