Ontario Court Of Appeal Upholds Decision In Popack v. Lipszyc Re: UNICTRAL Model Law

In my article on April 24, 2016, I commented upon the important decision of the Ontario Superior Court in Popack v. Lipszyc, 2015 CarswellOnt 8001, 2015 ONSC 3460. That decision has been recently upheld by the Ontario Court of Appeal.

The Court of Appeal did not address the various legal issues dealt with in my article on April 24, 2016. Rather, the Court of Appeal decided the appeal by reviewing the Superior Court’s discretion to set aside the arbitral award. The Court of Appeal held as follows:

  1. The Superior Court has a discretion, not a duty, to set aside an arbitral award if the award contravenes the UNCITRAL Model Law or the Ontario International Commercial Arbitration Act (ICAA).
  1. In exercising this discretion, there is no bright line test to determine whether an arbitral award should or should not be set aside.
  1. In exercising her discretion, the Superior Court judge was entitled to take into account the conduct of the parties and the effect of setting aside the award. In her decision, the Superior Court judge considered: that the party now complaining to the court about the award corresponded with the arbitral tribunal during its deliberations, without telling the other party, and did not expressly object to the tribunal undertaking activity of which it now complained; and the fact that a witness had died since the arbitration hearing and would not be available for a re-hearing if the arbitral award was set aside. The Court of Appeal held that the Superior Court judge was entitled to consider those matters in exercising her discretion.
  1. The Superior Court judge was not obliged to put the complaining parties’ arguments, or these other factors, into separate compartments relating to each Article of the Model Law relied upon by the applicant. Rather, the court was entitled to look at the matter from an overall perspective. The Court of Appeal said:

“I do not see how the outcome of that balancing exercise can depend on the specific label placed on the procedural error giving rise to the Article 34(2) complaint. For example, characterizing the procedural failure as a breach of Ontario “public policy” if it could be so characterized, would not, in my view, automatically make the breach more serious or tip the scale in favour of setting aside the award. Whatever label is placed on the procedural error, and whichever subsection of Article 34(2) is invoked, the essential question remains the same — what did the procedural error do to the reliability of the result, or to the fairness, or the appearance of the fairness of the process?….The application judge made no error in choosing not to give separate consideration to each of the provisions of Article 34 advanced on behalf of Mr. Popack.” (emphasis added)

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 11, parts 3(d), 6 and 11(b).

Popack v. Lipszyc, 2016 CarswellOnt 2243, 2016 ONCA 135

Arbitration – International Commercial Arbitration – review of arbitral award – discretion to set aside an arbitral award

Thomas G. Heintzman O.C., Q.C., FCIArb                                     May 18, 2016

www.constructionlawcanada.com

www.heintzmanadr.com

Can The Parties Contract Out Of The UNCITRAL Model Law?

The Model Law of the United Nations Commission on International Trade Law (UNCITRAL) applies to international commercial arbitration agreements and awards. The Model Law has been adopted in all the provinces and territories of Canada, For instance, the Model Law has been adopted in the Ontario International Commercial Arbitration Act (ICCA).

Under article 34 of the Model Law, the court of the seat of the arbitration may set aside the award of the arbitral tribunal in certain circumstances. In Popack v. Lipszyc, the Ontario Superior Court of Justice recently dealt with two questions arising under the Model Law.

First, can the parties contract out of the Model Law, and in particular article 34?

Second, does the court have a discretion to not set aside the award even if a breach of the Model Law has occurred? The court answered No to the first question and Yes to the second question, and in the exercise of its discretion declined to set aside the award.

In answering these questions, the court did not rely on any prior decisions as authoritative, so its decision appears to be a matter of first impression. Moreover, the decision on the first question appears to be contrary to another decision of the Ontario Superior Court in Noble China Inc. v. Lei (1998), 42 O.R. (3d) 69 (Ont. Gen. Div. [Commercial List]). For this reason, it is hoped that the first question will soon be considered by appellate courts in Canada.

The issues raised in this case are important due to the increasing application of the UNCITRAL Model Law in today’s shrinking commercial world. More and more construction, procurement and other business contracts involve parties from different countries. Because they do, those contracts are governed by the Model Law in those jurisdictions like Canada, which has adopted that Law. Accordingly, the parties to those contracts and their advisors must understand how the Model Law applies to arbitration under those contracts.

Background

The dispute arose between two businessmen, Mr. Popack and Mr. Lipszyc, one from Toronto and one from New York and their respective companies. Their arbitration agreement referred any dispute between them to a Rabbinical Court in New York. That Rabbinical Court, and in particular a Rabbi Schwei, dealt with the dispute for a while. Then, as a result of various events, the parties agreed that the dispute would be dealt with by a second Rabbinical Court in New York (the Arbitral Tribunal).

The arbitral agreement under which the second Rabbinical court was appointed stated that: the arbitrators did not need to explain to anyone the reasons for their decision; the decision of the Arbitral Tribunal was not open for appeal either in any religious court or any secular court; and the arbitrators had jurisdiction regarding disputes after the award including motions due to “judicial error, new evidence, etc., … to the extent permitted by law.”

The arbitral hearing commenced in January 2011 and continued intermittently until March of 2013.  The proceedings were not recorded and no transcript of the evidence was prepared. As a result, there were disputes about what actually transpired during the hearing. The Award issued in September 2013 ordered that $400,000 be paid to the applicants by the respondents. No reasons for decision were given.

After release of the Award, Mr. Popack was told by the Arbitral Tribunal that it had met with Rabbi Schwei on July 8, 2013 regarding the dispute. The parties were not notified that the Arbitral Tribunal was going to, and did, meet with Rabbi Schwei, and they were not present at that meeting. The length of the meeting was estimated at between 1.3 and 4 hours.

Mr. Popack initially acknowledged that he had heard a rumour about the meeting shortly after it took place in July, before the Award was released. The extent to which the possibility of a meeting between the Arbitral Tribunal and Rabbi Schwei had been discussed during the arbitral hearing was a matter of controversy. On July 15, 2013, after the meeting between the Arbitral Tribunal and Rabbi Schwei, Mr. Popack’s representative, Rabbi Fried, wrote to the Arbitral Tribunal. He mentioned a rumour about the meeting with Rabbi Schwei, discussed the potential subject matter of Rabbi Schwei’s testimony at the private meeting and made submissions and provided factual information about that subject matter and said that Rabbi Schwei’s testimony was worthless. The letter also provided suggested language for the hoped-for result of the arbitration and other commentary. Rabbi Fried’s letter did not make an unqualified request for a hearing if the rumour was true and requested was that “if the Rabbinical Court considers Rabbi Schwei’s testimony (which was without our knowledge)” there should be a tribunal hearing about it. Rabbi Fried’s letter was not copied to the other side and there was no response to that letter by the Arbitral Tribunal.

The application to set aside the award was commenced by Mr. Popack and his companies in November 2013, seeking relief as a result of the meeting with Rabbi Schwei. Mr. Lipszyc then contacted the secretary to the Arbitral Tribunal and asked the secretary of the Arbitral Tribunal to write a letter about the matter.

On March 13, 2014, the Arbitral Tribunal issued a letter. Unlike the other written communications from the Arbitral Tribunal, which were in Hebrew, this letter was in English. The applicants submitted that the letter was effectively written to the court. It said, inter alia, the following:

“During the [hearing], in the presence of all parties and counsel, [Mr. Lipszyc] requested from us to meet with [Rabbi Schwei]. We granted his request and no party objected to our decision, or requested the opportunity to be present at the meeting that the Beth Din will schedule with [Rabbi Schwei]. Had any party requested to be present at the meeting with [Rabbi Schwei], we would have granted the parties request…..Although we met with [Rabbi Schwei], we confirm that the ruling and final order we issued would have been the same, even if the Beth Din meeting with [Rabbi Schwei] had not occurred….we received a fax from Rabbi S. Fried (Popack’s Rabbinical advisor) requesting, that if Bais Din will take into consideration any evidence they heard from [Rabbi Schwei], his party (Popack) is requesting a hearing with Bais Din. Accordingly since the meeting with [Rabbi Schwei] didn’t make any change in our ruling, a hearing was unnecessary. The Bais Din proceeded to issue the Final Order.”

In their application, the applicants asserted that the meeting with Rabbi Schwei violated:

Article 34(2)(a)(iv) of the Model Law which permits the court to set aside the arbitral award if the party making the application to the court “was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case”;

Article 34(2)(a)(ii) of the Model Law which permits the court to set aside the award if the applicant to the court “was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case”;

Article 34(2)(b)(ii) of the Model Law which permits the court to set aside the award if it conflicts with the “public policy of this State [in this case, Ontario].”

In support of these assertions the applicants submitted that the arbitral award violated:

Article 18 of the Model Law which requires that ‘[t]he parties shall be treated with equality and each party shall be given a full opportunity of presenting his case”;

Article 24 which stipulates that [t]he parties shall be given sufficient advance notice of any hearing and of any meeting of the arbitral tribunal for the purposes of inspection of goods, other property or documents, and that “[a]ll statements, documents or other information supplied to the arbitral tribunal by one party shall be communicated to the other party” and that “any expert report or evidentiary document on which the arbitral tribunal may rely in making its decision shall be communicated to the parties.”

Decision of the Ontario Superior Court

Justice Matheson of the Ontario Superior Court of Justice stated that there was no issue that the Arbitral Tribunal was an international tribunal seated in Ontario under the ICAA. She held that “ICAA and Model Law recognize the autonomy of parties to craft an adjudicative process of their own choosing, subject to limited exceptions.” She also held that “[b]road deference and respect must be accorded to decisions made by arbitral tribunals pursuant to the Model Law” relying on Corporacion Transnacional de Inversiones S.A. de C.V. v. STET International S.p.A., [1999] O.J. No. 3573 (Ont. S.C.J. [Commercial List]) at para. 22, aff’d [2000] O.J. No. 3408 (Ont. C.A.).

There were two issues to be decided:

  1. whether the parties had contracted out of Article 34 of the ICAA, precluding all access to the courts; and
  2. whether the meeting of the Arbitral Tribunal with Rabbi Schwei justified setting aside the award on any of the grounds submitted by the applicants.

Contracting out of Article 34

Justice Matheson held that the parties had not effectively contracted out of right to seek an order setting aside the arbitral award, provided by Article 34 of the Model Law. The decision in Noble was not authority for the proposition that the parties may contract out of Article 34. Justice Matheson’s view was that, while the Court in Noble China did state, in obiter dicta, that Article 34 is not mandatory, the findings in the rest of its decision were “all different ways of showing that parties cannot effectively contract out of Article 34 for all purposes.” Justice Matheson noted that the respondents conceded that “there are mandatory provisions in the ICAA, two of which are relied upon here. If parties can contract out of Article 34 for all purposes, there would be no jurisdiction for a court to set aside an award as a remedy for breach of these admittedly mandatory provisions.”

Justice Matheson found that none of the alleged acts of contracting out of Article 34 had that effect. The provision in the arbitration agreement that the award is not open for appeal in any religious or secular court did not address the parties’ right to seek to have the award set aside. Nor did the parties contract out of Article 34 by agreeing in the arbitration agreement’s that the Arbitral Tribunal had jurisdiction to hear disputes about interpretation of the award, compliance of the parties or re-argument due to claims of a judicial error or new evidence. None of those matters were raised in the present case. Nor was the application to set aside the arbitral award barred by the provision in the arbitration agreement that precluded a “claim” in court without permission of the Rabbinical Court, which had not been obtained. Read in the context of the ICAA, a “claim” was a substantive claim, not a claim to challenge and set aside the award.

Justice Matheson concluded this part of her reason by saying the following:

“I therefore conclude that the Arbitration Agreement does not exclude the provisions in Article 34 that the applicants seek to invoke. However, even if it purported to do so, it would not be effective in regard to either the mandatory provisions of the ICAA or any conflict with public policy….” (underlining added)

Accordingly, Justice Matheson seems to have held that, while she performed an analysis of whether the arbitration agreement had excluded the operation of Article 34, that analysis was unnecessary because the parties were incapable of contracting out of Article 34, at least so far as the enforcement of the “mandatory” provisions of ICCA and public policy.

Discretion to Refuse a Remedy

Justice Matheson found that the meeting by the Arbitral Tribunal with Rabbi Schwei “was a breach of the Arbitration Agreement and satisfies the prerequisites for potential relief under Article 34(2)(a)(iv).” Nevertheless, she held that the court’s power to set aside the award should not be exercised in this case for a number of reasons:

  1. Seriousness of the breach: The seriousness of the breach of the Model law or public policy was relevant to the exercise of the court’s discretion to set aside the award. In Justice Matheson’s view, the Arbitral Tribunal had not gone off on a frolic of its own to interview a witness. Rabbi Schwei was not a third party witness but a former adjudicator. Both parties had discussed the arbitral tribunal and the possibility of interviewing Rabbi Schwei and neither party had opposed that step being taken.
  1. Parties’ procedural choices: The parties disagreed about the discussions they had had with the Arbitral Tribunal about the interviewing of Rabbi Schwei, and about the extent to which the Arbitral Tribunal may have been led to believe that the parties consented to such an interview. However, the parties had chosen to have no transcript of the proceedings. Justice Matheson held that, while the absence of a transcript “does not excuse the failure to comply with the notice obligations, the circumstances of the request could have left the Arbitral Tribunal with the impression that they were empowered to proceed as they did.” In addition, the parties had decided not to require the Arbitral Tribunal to issue reasons for decision. As a result, Justice Matheson said that “when considering whether the evidence of Rabbi Schwei might have caused some prejudice to the applicants, I must observe that these parties agreed to arbitration without either a transcript or reasons for decision. While they were free to do so, both sides must accept the consequence that I have little information upon which to conclude that Rabbi Schwei’s evidence might have prejudiced either side. I accept the possibility of prejudice for both sides, but cannot practically go further.”
  1. Serious prejudice if the Award was set aside: Justice Matheson considered two sorts of prejudice that would arise if the award was set aside. First, the hearing would have to be held again, and eight weeks of hearing and the very expensive costs of that hearing wold be thrown away. Justice Matheson did not consider that type of prejudice to be “especially significant.” Second, a material witness – Mr. Popack’s father – had died and there was no record of his evidence. Justice Matheson considered that this fact amounted to incurable prejudice.
  1. Applicants’ own procedural conduct: Justice Matheson referred to the fact that, after the rumour about the meeting with Rabbi Schwei, Rabbi Fried’s letter to the Arbitral Tribunal only made a qualified request for a hearing “if” the Arbitral Tribunal was going to consider the evidence they had received. As well, Justice Matheson noted that “Rabbi Fried’s letter made ex parte submissions to the Arbitral Tribunal about matters relating to Rabbi Schwei and the arbitration, which also raises fairness issues.” While she ruled that Rabbi Fried’s letter did not disentitle the applicants to relief, “it augurs against granting the application.”
  1. Evidence from the Arbitral Tribunal: Justice Matheson accepted the letter from the Arbitral Tribunal as evidence, stating that she had “taken the potential frailties of this communication into account in exercising my discretion.” At the very least, the letter made it evident that there was no point in referring the dispute back to the Tribunal as the applicants requested.

Taking those factors into consideration, Justice Matheson concluded as follows:

“The breach by the Arbitral Tribunal, although significant, must be weighed against the other relevant factors discussed above including the actual prejudice that will result if the Award is set aside. Taking everything into consideration in the exercise of my discretion, I conclude that this is not an appropriate case to set aside the Award.”

Discussion

There are many aspects of this interesting decision to be discussed. Two issues will be addressed in this article.

Contracting out of the Model Law

One important issue is whether the parties to an international commercial arbitration can opt out of the provisions of the Model law. As she set out the facts and her initial discussion of the issues, Justice Matheson appears to contemplate that the parties can do so, because she undertakes an analysis of the arbitration agreement and the parties conduct, and then concludes that the parties did not agree to waive the provisions of the Model Law. But then at the end of this part of her decision, she appears to conclude that the parties cannot contract out of the “mandatory provisions” of the Model Law, and the “public policy”. She does not define which articles of the Model Law she is referring to. But she appears to clearly include Article 34 within those non-waivable provisions, on the sensible ground that if Article 34 could be waived then there would be no remedy for the breach of the other provisions of the Model Law.

With respect to Justice Matheson, the decision by Justice Lax In Re Noble China does appear to have directly held that the parties can contract out of the Model law, and in particular Article 34 of that Law. In her decision, Justice Lax said the following:

“In summary, Article 34 is not a mandatory provision of the Model Law. Parties may therefore agree to exclude any rights they may otherwise have to apply to set aside an award under this Article. They may do so as long as their agreement does not conflict with a mandatory provision of the Model Law. The arbitration agreement here does not conflict with any mandatory provision of the Model Law, nor does it confer powers on the arbitration tribunal which is in conflict with Ontario public policy. Noble’s motion to dismiss or permanently stay the Lei application is therefore granted.

Accordingly, it was on the very basis that the parties could and did contract out of the Model Law, and in particular Article 34, that Justice Lax dismissed the motion to set aside the award.

With these two decisions being in apparent conflict on this important issue, it is to be hoped that an appellate court will review this issue soon. My own view is that the better argument is that the parties to an international commercial arbitration cannot contract out of the provisions of the Model Law, other than certain specific articles, which the Model law states are waivable by the parties. The following are my reasons for this view.

The first is that the Model Law does expressly state in numerous articles that the parties can otherwise agree. Thus, Articles 3(1), 10(1), 11(2), 13(1), 17, 19(1), 21, 23(2), 24(1), 25, 28(1)-(3), 29, 31(2), 33(1). 33(1)(b) and 33(32) expressly state that the Article applies “unless the parties agree otherwise” or that the “parties are free to agree upon” other provisions, or words to the same effect. Article 4 refers to ‘‘a provision of this Law from which the parties may derogate”, and requires a party to make a timely complaint about the non-compliance, failing which that party is deemed to waive the objection. The words ‘‘unless the parties agree otherwise”, “the parties are free to agree” and “may derogate” imply that the parties may not agree otherwise or derogate from other provisions. Having stated in about 18 separate Article and sub-Articles that the parties may “otherwise agree” or are “free to agree upon” other provisions, it seems that the drafters thought they had stated which Articles and sub-Articles were non-mandatory and had thereby delineated between the mandatory and non-mandatory sections, and most unlikely they would have intended that the parties could contract out of the other provisions. If that is not so, and if the line between the two is not drawn by reference to those Articles and sub-Articles, then no clear line between the mandatory and non-mandatory Articles is apparent.

Second, a comparison to the Ontario domestic Arbitration Act, 1991 (AA) is in order. Section 3 of that Act specifically lists the section of the Act that the parties cannot waive. Section 46, which provides that the parties can apply to court to set aside the arbitral award, is one of the sections that is listed. So the parties cannot contract out of section 46 of the domestic arbitral statute – comparable to Article 34 of the Model Law. Both the AA and ICAA deal with the same subject matter – arbitration – and it seems unlikely that the Ontario legislature would provide that the parties cannot contract out of access to the courts to challenge domestic arbitration awards, but can do so in relation to international commercial arbitration awards. Similarly, it seems unlikely that having specified the provisions of the domestic statute that the parties cannot contract out of, the same legislature would intend that the parties can contract out any provisions of ICCA without that ever being mentioned.

In Noble China, Justice Lax examined these two arguments and arrived at a contrary view. In her view, the legislature could have stated in ICCA that certain articles were mandatory as it had done in the domestic Act, but did not do so. The failure of either the Model Law or ICCA to state that Article 34 was mandatory was sufficient to conclude that it was not mandatory. She rejected the argument that the words “unless otherwise agreed by the parties” or “the parties are free to agree” in some Articles meant that the other Articles were mandatory. In her view, to accept that argument would be to:

“ignore the Commentary to which recourse may be had as an aid in interpretation. It makes clear that the ‘Magna Carta’ of the Model Law and its most important provision is Article 19. By it, the parties make their own agreement, constrained only by the mandatory provisions of the Model Law which are listed in the Commentary and which each contain explicit mandatory language. This, in my view, is the structure of the Model Law and the approach to be taken in its interpretation.”

Justice Lax concluded her analysis of Article 34 as follows:

 “As can be seen, Article 34 does not contain any of the familiar mandatory language…… Lei argues that the requirement of a full opportunity to present one’s case and equality of treatment are mandatory provisions of the Model Law under Article 18 and that violation of them constitute grounds for setting aside an award. I accept this. Lei further argues that since the parties may not derogate from those fundamental principles in an arbitration agreement, it necessarily follows that they may not derogate from the only means under the Model Law for enforcing those principles. I accept the first part of this proposition, but I do not accept the second….In this case, the arbitration agreement does not contain a waiver of the right to resist recognition and enforcement of the award as did the agreement in Food Services. However, there is waiver of the right to bring an application to set aside the award. In my opinion, the court should give effect to this. This is consistent with the philosophy and structure of the Model Law, indeed with its ‘Magna Carta’. The parties make their own agreements, so long as they do not derogate from its mandatory provisions. Article 34 is not such a provision.”

Third, the Model Law was prepared for adoption by the statute law, and enforced by the courts, of countries around the world. It seems likely that the drafters intended that the Model Law would be uniformly enforced in every country which adopted the Law since uniformity of application is the basis for one State being willing to enforce awards made in another State. It seems very unlikely that the drafters intended to leave open the possibility that the courts in one country could hold that the parties can contract out of the Model Law while the courts of another country could hold that the parties cannot, while the courts in a further country could hold that the parties are able to contract out of some provisions but not others. But that might be the result if the courts of a signatory country held that the provisions of the contract are waivable, since there is no court with world-wide jurisdiction to ensure that only one result is the right one. Only if the Model law is interpreted to mean that its provisions cannot be waived or amended, except where that is expressly stated in the Law, can uniformity of application between all signatory states be accomplished.

Fourth, in common law jurisdictions at least, prohibiting access to the courts is contrary to public policy. And as Justice Matheson noted, if Article 34 could be waived, then all of the other provisions of the Model Law could not be enforced. However, this is an argument that Justice Lax in Noble China implicitly rejected.

While none of these points, except the fourth, were referred to by Justice Matheson, she did conclude that the parties to an international commercial arbitration agreement have “the autonomy …to craft an adjudicative process of their own choosing, subject to limited exceptions”, and that Article 34 fell within the mandatory exceptions. However, it is submitted that the better way to state this proposition is the other way around: the Model Law is mandatory subject to approximately 18 situations in which the parties may otherwise agree.

But whether this proposition is a correct statement of the law must, in view of the apparent conflict between the Noble China and Popack decisions, await the decision of an appellate court. The issue of whether one can contract out of the Model Law is obviously of great importance to international commercial arbitrations. It may also impact the acceptability of Ontario as a place for those arbitrations to be held.

In this latter regard, those interested in how contracting out of the Model law has been dealt with in other countries may wish to examine, through Google, the history of Section 21 of the Australian International Arbitration Act. The following is what I understand to be the history of that section. Up to July 6, 2010, Section 21 of that Act apparently allowed the parties to opt out of the Model Law. Then, case law and controversy developed about the meaning and effect of that section and the impact of the section on the acceptability of Australia as a place for international commercial arbitrations. In the International Arbitration Amendment Act 2010, section 21 was amended to provide that if the Model Law applies to an arbitration, then the law of a State or Territory does not apply to the arbitration. I understand that the amended section effectively forbids contracting out of the Model Law. That amended section is similar, for instance, to section 2(b) of the Ontario Arbitration Act, 1991 which states that that Act applies to an arbitration under an arbitration agreement unless ICCA applies to that arbitration.

Discretion To Refuse A Remedy

Justice Matheson’s decision provides a useful checklist of some factors that are relevant to the exercise of the court’s discretion to set aside an arbitral award. Some of these factors may be controversial – such as receiving the letter from the Arbitral Tribunal – and others may be out of the parties’ control – such as the seriousness of the breach of the arbitral agreement, Model Law or rules of natural justice.

But the procedural choices made by the parties are very much in their control. And Justice Matheson’s treatment of these choices is very interesting. In effect, she held that if the parties choose not to record the proceedings and choose not to have the arbitral tribunal deliver a reasoned decision, then they are forcefully stating that the arbitral process is final, unless there is something egregious that occurs during the arbitration. And that is because, by their choices, the parties are depriving a reviewing court of elementary tools to judge the fairness and correctness of the process and the award, and are ensuring that the evidence is not preserved for use in a re-hearing. By their choices, they have demonstrated that they are really trusting the arbitral tribunal to arrive at the right result.

Often, for the sake of expedition and expense, the parties to an arbitration may do without a transcript of the evidence. Sometimes but infrequently, they may do without a reasoned award. But when deciding to opt out of these elementary protections for procedural fairness and substantive correctness, the parties should expect a less welcome reception from the court if they later challenge the award.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 11, parts 3(d), 6 and 11(b).

Popack v. Lipszyc, 2015 CarswellOnt 8001, 2015 ONSC 3460

Arbitration – International Commercial Arbitration – review of arbitral award – contracting out of the Model Law – discretion to set aside an arbitral award

Thomas G.Heintzman O.C., Q.C., FCIArb                           April 24, 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.

 

When May A Mareva Injunction Be Issued To Enforce An International Commercial Arbitration Award?

In Sociedade-de-Fomento Industrial Private Ltd. v. Pakistan Steel Mills Corp. (Private) Ltd, the British Columbia Court of Appeal recently considered the use of a Mareva injunction to enforce an award of an international commercial arbitration. The court over-turned the lower court’s decision which had denied that remedy based upon alleged material non-disclosure. In doing so, the court’s remarks add further support for the regime of international commercial arbitration. The court also issued a caution about applying the principles relating to domestic pre-trial injunctions when enforcement is sought of a foreign arbitral award since that award is already a judgment which deserves to be respected as such, subject to the limited objections to enforcement found in the provincial International Commercial Arbitration Acts and their adoption of the UNCITRAL Model Law.

Background Facts

The appellant SFI is an Indian company and the respondent PSM is a Pakistani state corporation. SCI commenced an international commercial arbitration claim against PSM claiming damages for breach of a contract for the sale of iron ore. In June 2010, SFI obtained an award in the arbitration in an amount equivalent to Cdn. $8.6 million. PSM failed or refused to pay the award despite repeated demands for payment. SFI learned that PSM owned a load of coal which was to be shipped out of Vancouver. In April 2011, SFI filed a petition in the B.C. Supreme Court seeking payment of the amounts owed under the arbitral award. Before the hearing of its petition, SFI applied for and obtained an ex parte Mareva injunction restraining the use of PSM’s assets in British Columbia, including preventing the vessel from leaving British Columbia or PSM from disposing of assets aboard any vessel in British Columbia without first paying into court security for the award.

PSM alleged that SFI had wrongly obtained the ex parte injunction. It said that SFI had not explained to the judge who issued that injunction why it could not enforce the arbitral award in Pakistan, and indeed had wrongly told that judge that it would have challenges in enforcing that award in Pakistan. PSM effectively took the position that the award should be first enforced in Pakistan and only then should it be enforced in another jurisdiction. Since SFI had not yet obtained the recognition of the arbitral award from the B.C. court when it obtained the injunction, that injunction was in the nature of a Mareva injunction and a material non-disclosures about the enforcement of the award in Pakistan meant that the injunction order should be set aside, PSM argued.

The motions judge hearing the motion to set aside the injunction agreed. She held that the failure of SFI to properly explain why it couldn’t enforce the award in Pakistan amounted to material non-disclosure and she set aside the injunction.

Decision of the B.C. Court of Appeal

In allowing the appeal, the Court of Appeal undertook a detailed analysis of the law relating to international commercial arbitrations to demonstrate that the premises of the motion judge’s decision were incorrect.

First, the court noted that the enforcement of international commercial arbitration awards is not based on comity arising from a connection of the dispute or arbitral award to the regime of enforcement, in this case British Columbia. Rather, it is based upon an enforcement regime arising from an international treaty – the New York Convention. That regime requires the contracting states to enforce international arbitral awards made pursuant to the laws of another contracting state. And that enforcement is without regard to any connection of the dispute to the enforcing state, a connection which is presumed to exist for the purpose of enforcement, both for purposes of final enforcement and any interlocutory steps toward enforcement. The court said:

“The New York Convention and the enabling legislation in British Columbia recognize an international arbitration award on the same basis as if it were a domestic award originating in this province. The language of the legislation is not ambiguous in this regard. A real and substantial connection is presumed to exist. It would be illogical to ignore this presumed jurisdictional connection for interlocutory purposes, but recognize it for final judgment purposes. The statutory scheme anticipates an action to enforce the award. There are only limited grounds on which the defendant could dispute the award in a recognition action per art. V of the New York Convention and s. 36 of the International Commercial Arbitration Act. I reiterate that I do not see how a real and substantial connection could exist for some but not all purposes in pursuing the claim through to judgment and enforcement…..I conclude that the recognition and enforcement proceeding is akin to a domestic proceeding, and that the judge ought to have approached the application on the basis that it was akin to a domestic proceeding.” (emphasis added)

 

Second, the court said that the decision to issue a Mareva injunction arising from an award of an international commercial arbitration tribunal depends upon the justice and convenience in doing so. The court stated the following principles that should be applied to that decision:

The overarching factor in granting the injunction is whether doing so achieves a balance of justice and convenience between the parties… Depending on the facts of the case important factors may include the merits of the underlying claim, the risk of dissipation of the asset, the balance of convenience and the interests of third parties…In my view, the following factors militated towards a finding that the injunction was properly ordered: first, the merits of SFI’s claim were very strong, approaching certainty given the limited grounds upon which the claim could be defended; second, the assets were about to leave the jurisdiction; third, the debtor had refused to pay the award over the ten months since it had been made; and, finally, damage to the third party could be alleviated, as it was, by SFI’s fortified undertaking…. On the other side of the equation was the presumably significant inconvenience of arresting and detaining a ship with a valuable commodity on board in circumstances where the commodity’s value exceeded the amount of the Final Award. None of these latter factors persuaded the granting judge to decline the injunction application, nor did they factor into chambers judge’s analysis in a decisive way. (emphasis added)

Third, the enforcement of an international commercial arbitration award in one contracting state does not depend upon whether efforts to enforce the award have been made in another contracting state more connected to the party against whom the award was made. The court did say that the efforts to enforce the award may be relevant to a decision by the court to issue an injunction – or might be made relevant by the applicant submitting evidence about those efforts – but enforcement of the award in British Columbia did not necessarily depend upon enforcement first in Pakistan. The court said:

“The availability of enforcement proceedings in Pakistan was not in my view an entirely irrelevant factor. In some cases, but not this one, a strong case might be made out that there was no risk of dissipation because of other available enforcement proceedings. Such considerations may properly be part of the balance of convenience analysis. Where, in my view, the chambers judge erred was in her implicit assumption that there was an onus on the appellant to turn first to Pakistan’s courts because of the parties’ limited association with British Columbia…” (emphasis added)

The B.C. Court of Appeal acknowledged that the availability of enforcement proceedings in Pakistan could be a factor in determining whether a Mareva injuction should be issued. However, the court held that there had been no misrepresentation about the efforts to enforce the arbitral award in Pakistan and that the motion judge had applied the wrong test to that issue:

“[The motion judge] reviewed the appellant’s disclosure through the lens of her erroneous conclusion that the onus was on the appellant to establish it could not enforce the award in Pakistan. As I have already said that is not the test. In any event, the appellant did not say that the award could not be enforced, rather he stated that enforcement would be “challenging” which implies it could have been enforced, but with some difficulty. The analysis should have been directed more to the question of whether considering all the circumstances, it was just and convenient to grant the injunction. The judge’s balance of convenience analysis ought to have taken into account the delay that would accompany enforcement proceedings in Pakistan, as well as the considerable doubt about the enforcement of that part of the award representing interest under Pakistani law…I cannot agree with the chambers judge that the appellant failed to disclose a material fact. The amplified evidence supports the representation that enforcement of the Final Award would be challenging in Pakistan. There is no amplified evidence that materially alters the balance of convenience analysis done by the granting judge.

Discussion

This decision of the British Columbia Court of Appeal provides a strong endorsement of the enforcement regime relating to international commercial arbitration awards. The New York Convention is all about enforcement of those awards. Virtually the sole purpose of the New York Convention is to provide mechanism for the enforcement of awards in signatory countries. Without that enforcement regime, the Convention is nothing.

The proper place of a Mareva injunction in that enforcement process can be a matter of debate. On the one hand, there is an award already, so that the injunction can be seen as a post-judgment enforcement of the award. On the other hand, the award has not been recognized in the state in which it is now sought to be enforced, in this case British Columbia, so that the Mareva injunction can be seen as pre-judgment enforcement.

The British Columbia Court of Appeal effectively neutralized that debate by holding that the real question is not whether the enforcement is pre or post judgment, but whether it is just and convenient to grant such an injunction. In making that decision, the court pointed to a number of factors that are important from the standpoint of international commercial arbitration.

First, under the International Commercial Arbitration Act of British Columbia (and most Canadian provinces) and the UNCITRAL Model Law, the grounds for refusing to enforce the arbitral award are very limited. So the first question on the injunction motion –is there a strong case on the merits? – has to be answered from that perspective.

Second, the applicant for the injunction does not have to prove that the award can or cannot be enforced in another jurisdiction. While the use and availability of other enforcement remedies may be material to the judge’s decision to grant a Mareva injunction, the applicant does not have to prove that it cannot enforce the award elsewhere. This conclusion shows that the system for the enforcement of international commercial arbitration awards is truly an international system. It is not based upon a presumption that the enforcement of the award is tied to any specific jurisdiction.

See Heintzman and Goldsmith on Canadian Building Contracts, (4th ed.) chapter 10, parts 1 and 2.

Sociedade-de-Fomento Industrial Private Ltd. v. Pakistan Steel Mills Corp. (Private) Ltd, 2014 CarswellBC 1499, 2014 BCCA 205 (B.C.C.A.)

Arbitration – International Commercial Arbitration – Enforcement of Arbitral Awards -Injunctions – Mareva Injunctions

Thomas G. Heintzman O.C., Q.C., FCIArb                                                     June 29, 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

 

Supreme Court of Canada Holds: Court May Dismiss Action Based On An International Commercial Agreement Even After The Defendant Files A Defence

A very recent decision of the Supreme Court of Canada has held that a court may properly dismiss an action arising from an international commercial agreement, even after the defendant has filed a Statement of Defence:  Momentous.ca Corp. v. Canadian American Association of Professional Baseball Ltd.  This decision is important since the contracts in issue contained both a forum selection clause and an arbitration clause, and the consequence of the filing of the Statement of Defence is not the same for each of those clauses.

In holding that the action could be dismissed after the filing of a Statement of Defence, the Supreme Court effectively applied the law applicable to forum selection clauses, not the law applicable to international commercial arbitrations.

Background Facts

The decision of the Supreme Court is very short and does not refer to the background facts.  The decisions of the Ontario Court of Appeal and Ontario Superior Court of Justice set forth the facts, as do the factums in the Supreme Court.

The plaintiffs/appellants were all Ontario companies.  Except for the City of Ottawa and one other respondent, the respondents were all non-Ontario parties and resided or carried on business in the United States.

In 2008, the appellants entered into a letter agreement with the respondent Wolff whereby the appellant Rapidz Sports acquired an interest in a company controlled by Wolff which had leased the rights to membership in the Can-Am League, a baseball league operating in the USA and Canada.  Under this letter agreement, the appellant Rapidz Sport agreed to manage and operate a professional baseball team in Ottawa.

The appellants signed two agreements governing Rapidz Baseball’s entry into the Can-Am League:  a lease agreement and a League affiliation agreement.  These agreements required that disputes be arbitrated and enforced in the courts of North Carolina.  The plaintiffs also agreed to abide by the League’s by-laws.  Those bylaws contained an internal dispute resolution process requiring that any dispute between a member and the League be heard by the League’s board of directors, provided for appeal rights and stated that the dispute and appeal process “shall be the exclusive and sole remedy of all the parties thereto.”

In the 2008 season, Rapidz Baseball lost money and by September, it had ceased operations.  It asked to withdraw from the League voluntarily because of financial hardship.

The Prior and Present Proceedings

In late September 2008, the Board of the League dismissed Rapidz Baseball’s application for voluntary withdrawal.   After a hearing, the Board terminated the team’s membership.  Rapidz Baseball’s appeal from the Board’s decision was dismissed for failure to file the appeal bond required by the by-laws.  The League then called on Rapidz Baseball’s $200,000 letter of credit.

The League then brought a motion in the North Carolina General Court of Justice to confirm the Board’s “arbitration award”.  Rapidz Baseball brought a motion to dismiss the League’s motion.  The League’s motion was granted, Rapidz’s motion was dismissed, and these decisions were upheld by the North Carolina Court of Appeals.

In November 2008, Wolff made a demand on two of the appellants, Momentous and Zip respectively, for the former’s guarantee of his shareholder’s loan to one of the companies and for the latter’s indemnification for the stadium rent for 2008.  When payment was not forthcoming, Wolff sued Momentous and Zip in the North Carolina courts.  Momentous and Zip brought motions to dismiss Wolff’s actions on the basis of lack of personal jurisdiction in North Carolina.  Their motions were granted.

In August 2009, Wolff sued in Ontario for the same relief that he had sought in North Carolina.  That action was stayed pending the completion of the motion to dismiss the appellants’ action.

In January 2009, the appellants commenced the present action in Ontario alleging breach of contract and various economic torts.  The Can-Am defendants and Wolff delivered Statements of Defence, defending the action on the merits and also relying on the arbitration and choice of forum provisions in the lease agreement, League affiliation agreement and League by-laws.  The City of Ottawa delivered a notice of intent to defend.

The Can-Am League and its principals then brought a motion to dismiss the appellants’ action under Rule 21.01(3) (a) of the Rules of Civil Procedure.  They submitted that the Ontario court had no jurisdiction over the subject matter of the action.  They said that the choice of forum and arbitration clauses in the League’s by-laws and in the agreements signed by the plaintiffs required that all disputes with the League be resolved in the state of North Carolina and were subject to arbitration.  The motion judge agreed and granted the motion and dismissed the plaintiffs’ whole action.  That decision was upheld by the Ontario Court of Appeal and the Supreme Court of Canada.

Decisions of the Courts based upon the Forum Selection Clause

Each level of court held that the issue should be determined by the law applicable to forum selection clauses.  The law in Canada entitles a defendant to move to dismiss an action if the action is brought contrary to a clause in a contract which requires the action to be brought in another forum.  The case law in Canada allows that motion to dismiss to be brought even after a Statement of Defence is filed.  Accordingly, each level of court held that the defendants were entitled to bring their motion to dismiss even after they had filed a Statement of Defence.  None of the three levels of courts expressly considered whether the action could be dismissed after the Statement of Defence was delivered based solely on the arbitration clause.

Logically, if the court could dismiss the action based on either the forum selection or the arbitration clause, then the one clause which permitted such dismissal seems sufficient.  The case is important for that point alone, even though none of the courts expressly stated it.  The necessary result appears to be that a defendant is entitled to a dismissal of an action based upon a forum selection clause even in the presence of an arbitration which, by itself, might not lead to the same result.

Interestingly, however, each level of court referred to the arbitration clause as being a “forum selection” clause.  Thus, the motion judge referred to “the forum selection clause, including the arbitration clause….”  The Supreme Court of Canada said that it agreed with the Court of Appeal’s decision dismissing the action “because the parties had agreed to arbitrate and litigate disputes in another forum.”

Potential Application of the Act, the Model Law and Article 8(1)

None of the three levels of court considered the motion to dismiss based on the arbitration clause itself.  It is interesting to consider the motion from that standpoint since the result may have been entirely different, due to the application of the Ontario International Commercial Arbitration Act (the Act) and the Model Law adopted by the Act.

Was the Arbitration “International”?

Section 1 of the Model Law states that an agreement is “international” if it meets one of the listed criteria:

  • The parties have their places of business in different States at the time they enter into the agreement, or
  • The place of the arbitration is outside of the State where the parties have their place of business, or
  • The place of performance or the place where the subject matter of the dispute is connected is outside of the State in which the parties have their places of business.

Many of the facts referred to above appear to bring the arbitration clause at issue in the Momentous action within the Act.

Did Article 8(1) of the Model Law apply?

Article 8(1) of the Model Law states as follows:

“A court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.”

This article, accordingly, draws a clear time line for objecting to an action being brought in contravention of an arbitration agreement.  If the objection is made by the defendant before its first statement on the substance of the dispute, the action must be stayed and the parties must be referred to arbitration.  But the article does not expressly state what is to be done if the objection is brought later, and whether the delivery of a defence amounts to a waiver of the arbitration agreement.

This article is in contrast to section 7 of the domestic arbitration statute in Ontario, the Arbitration Act, 1991.  That section states that while generally speaking a motion to stay or dismiss an action on the basis of an arbitration agreement shall be granted, the court may refuse to stay the action if the motion is brought with “undue delay.”  No distinction is made between a motion to stay or dismiss the action brought before of after the delivery of the Statement of Defence.  This subsection has been interpreted to mean that pleading does not amount to a waiver of the arbitration agreement.

Section 7(2).4 of the present Ontario domestic may in turn be contrasted with the old law in the prior Ontario Arbitrations Act, which had stood for decades.  That Act stated that, if the defendant brought a motion to stay the action based upon an arbitration agreement, and did so “before delivering any pleading or taking any other step in the proceeding”, then the court had the discretionary power to stay the action.  The Act did not expressly state that the failure to bring the motion before pleading or taking a step in the action amounted to waiver of the submission to arbitration, but the Act was so interpreted.  Indeed, asking for particulars was held to amount to such a waiver.

Accordingly, it would seem that it is arguable that the filing a Statement of Defence does amount to a waiver of the arbitration agreement under article 8(1) of the Model Law.  That argument would be supported by the contrast to the present domestic Act, and by reference to the prior domestic Act under which, in the presence of arguably similar wording, such a pleading was held to be a waiver.

That argument might also be supported by reference to section 9(3) of the UK Arbitration Act, 1996.  That Act incorporates the Model Law, but not exactly because it applies to both domestic and international arbitrations.  Section 9(3) states that an application to stay an action based upon an arbitration agreement may not be made by a defendant “after he has taken any steps in those proceedings to answer the substantive claim.”  This sub-section apparently reflects the English understanding that the Model Law requires the stay motion to be made before a defence is delivered.  If there is some advantage to consistent applications or interpretations by Canadian, English and other courts of the regime relating to stay motions based upon arbitration agreements, then a consideration by a Canadian court of section 9(3) of the UK Act might be helpful.

If the Canadian courts should hold that the filing of a Statement of Defence is not itself a waiver of the arbitration agreement under article 8(1) of the Model Law, and that the courts have a remaining power to stay the action, then several interesting issues might arise.  First, is the power mandatory (as it is if the stay motion is made before pleading): must the stay be granted?  Or is it discretionary?  And if it is discretionary, then how is the discretion to be exercised?

If the power is discretionary, the plaintiffs/appellants in the Momentous case had a very unsympathetic case.  They had agreed to contractual provisions requiring arbitration of any disputes, and requiring court proceedings to occur, in North Carolina.  They had appeared in the arbitration proceedings in North Carolina.  They had participated in the review of the arbitration decision by two levels of court in North Carolina.  After all that, it would seem only fair that they not be permitted to raise in Ontario the very issues that had been determined in the arbitration and by the courts in North Carolina.

In these circumstances, the respondents had a strong basis to argue that the discretion ought to be exercised in their favour.  In addition, they had a strong factual record to argue that article 8(1) of the Model Law should be interpreted so as to leave discretion with the courts to stay an action after a Statement of Defence is filed.  They could well argue that such an interpretation is the correct one because even after a Statement of Defense is filed, the court should have a remaining discretion to stay the action and not allow the plaintiffs to escape the consequences of their agreements and procedural steps as arguably had occurred in this case.

The courts in the Momentous case based their decisions entirely on the forum selection issue.  As a result, they did not determine whether the arbitration clause in issue was an “international” arbitration under Article 1.  Nor did they determine the effect of Article 8(1), of the Model Law.  We will have to await another international commercial arbitration case to see which way the debate on those Articles will go.

Arbitration   –   International Commercial Arbitration   –   Stay Motion   –   Alleged Waiver of Arbitration Agreement

Momentous.ca Corp. v. Canadian American Association of Professional Baseball Ltd., 2012 SCC 9

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                     April 10, 2012

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Playing Offence, Not Defence, In International Arbitrations

What is the best way to protect the authority of international commercial arbitrations?  Is a party obliged to “play defence” and not ask the courts of the seat of the arbitration to interfere until after arbitration proceedings are commenced?  Or can a party “play offense” and ask those courts to take jurisdiction before any arbitration proceedings begin?  That is the issue which the UK Court of Appeal addressed in AES-Ust-Kamenogorsk Hydropower Plant LLP v. Ust-Kamenogorsk Hydropower Plant JSC.

The Background

The dispute related to a 20 year concession agreement between the owner and operator of a hydro-electric facility in Kazakhstan.  The original owner was the Republic of Kazakhstan.  Both the original owner and the original operator had assigned their interests to companies to which each of them was related and those companies were the parties to this English proceeding.  The companies were both Kazakhstan companies and the concession agreement was governed by Kazakhstan law.

The concession agreement contained an arbitration clause which was governed by English law.  It provided that all disputes were to be settled by ICC arbitration to be conducted in London, England.

The owner had brought previous litigation in the Kazakhstan court.  In that litigation, the Kazakhstan Supreme Court held that the arbitration clause was unenforceable under Kazakhstan law.  The operator appeared in the Kazakhstan court to contest the jurisdiction of that court.  When that court held that it had jurisdiction, the operator made submissions on the merits but at all times it contested the jurisdiction of the Kazakhstan courts.

The operator brought an application in the UK courts for a declaration that any claim arising out of the concession agreement (except tariff matters) had to be determined in accordance with the arbitration clause of that agreement.  It also sought an injunction restraining the owner from bringing any such proceedings in the Kazakhstan courts.  At the time of the application, there was no court of arbitration proceeding in existence or contemplated under the concession agreement.  The UK court of first instance granted the declaration but not the injunction and the owner appealed.

The “Just and Equitable” Principle

The UK Court of Appeal upheld the jurisdiction of the UK courts to hear the application and grant the declaration.  It did not do so based upon the general UK arbitration statute, the Arbitration Act, 1996 (the “1996 Act”).  It held that section 44 of the 1996 Act only allowed the court to grant interim injunctions in the case of urgency, or with the tribunal’s or the parties’ agreement.  None of those circumstances existed in the present case. Indeed, the operator conceded that it could not rely on section 44 in the present circumstances.

Instead, the operator relied upon the general declaratory jurisdiction of English courts found in section 37 of the Senior Courts Act.  That section authorized the court to grant an injunction if it is “just and equitable” to do so.  This authority is also found in section 101 of the Ontario Courts of Justice Act and in the judicature or procedural statutes of most common law jurisdictions.  Accordingly, the decision in Kamenogorsk is of general application in Canada and elsewhere.

One would have thought that the legislature’s policy and intention regarding anti-suit injunctions or declarations to enforce arbitration clauses would be found in the arbitration home statute, in this case the 1996 Act.  That statute did not authorize the English court to take jurisdiction to grant an anti-suit injunction or declaration in these circumstances.  If that is so, why should the court reach out to the general authority of the court to grant the declaration?

Two Reasons for “Playing Offence”

The UK Court of Appeal gave two reasons for taking jurisdiction:

First, the UK courts would, sooner or later, have to deal with the jurisdictional issue.  Accordingly, it should do so in the absence of an existing or threatened arbitral proceeding, and notwithstanding the “competence-competence” principle which appears to direct a contrary conclusion.

Second, the profound policy of UK law is to uphold arbitration proceedings.  None of the surrounding circumstances displaced the application of that policy.

The “sooner or later” principle was stated by Lord Justice Rix as follows:

“This analysis, in my respectful opinion, usefully underscores the wider picture about the autonomy of the parties and the jurisdiction of arbitrators with power to investigate their own jurisdiction: namely that, sooner or later, the question of substantive jurisdiction is likely to come before the court.  Where parties differ as to a matter as fundamental as whether they have agreed any contract, or any contract containing an arbitration clause, it is most unlikely that one or other of them will rest content with the decision of arbitrators as to either their jurisdiction or as to the parties’ rights. For one or other party is saying that there is simply no agreement that arbitrators can resolve their disputes. In such circumstances, the issue of jurisdiction is likely to come before the courts sooner or later, and when it does, it will have to be decided by the court from first principles and in the light of facts which, whatever the investigation by the arbitrators, are yet to be determined on the evidence by the court.”  (underlining added)

This reasoning is based on the profound and dynamic relationship between an arbitral tribunal and the courts of the seat of the arbitration.  The “competence-competence” principle usually means that the arbitral tribunal should be the first to exercise its jurisdiction.  Yet, ironically, it is not wrong for the court of the seat of the arbitration to first assume jurisdiction and issue such a declaration because the court’s exercise of that power is in aid of the arbitral tribunal exercising its authority and because, one way or another, the jurisdictional issue must come back to the court of the seat of the arbitration if one party objects to that jurisdiction.

Accordingly, Lord Justice Rix said:

I do not with respect agree …that it is in all circumstances necessary for a party who wishes to raise with the court an issue of the effectiveness of an arbitration clause first to commence an arbitration…. In my judgment, at any rate in a case where no arbitration has been commenced and none is intended to be commenced, but a party goes to court to ask it to protect its interest in a right to have its disputes settled in accordance with its arbitration agreement, it is open to the court to consider whether, and how best, if at all, to protect such a right to arbitrate. Whether it will assist a claimant at all, and if so, how, is a matter for its discretion: but it would to my mind be an error of principle and good sense for the court to rule that as a matter of jurisdiction, or even as a matter of the principled exercise of its discretion, it has no possible role in the protection and support of arbitration agreements in such a context.

The second principle is that the UK courts will uphold the arbitral regime against virtually all other incursions into that regime.  It is on this basis that the Court of Appeal ended its analysis:

In those circumstances, it is hard, in my judgment, to see any reason why, as a matter of jurisdiction, there should be any difficulty about the English court providing a remedy to preserve and support the right of the operator to arbitrate.. …The demand that the operator commence an arbitration solely in order to put before an arbitral tribunal an issue of substantive jurisdiction which it is to be presumed the owner would repudiate, very probably by standing aloof from the arbitration, and which, in all practical terms, could only be definitively settled by the court, seems to me to be far-fetched and unrealistic, to be creative of unnecessary expense and delay, and to put the operator under unnecessary risk that further proceedings in the Kazakhstan courts would be to its prejudice, as well as to the prejudice of the agreed process of arbitration.  None of that promotes any of the principles upon which the [Aribration Act] 1996 is founded, as set out in its section 1.  It would seem to me to be the antithesis of the principles of that Act for this court, in such circumstances, to refuse, as a matter of jurisdiction or principle, a request for assistance in the form of an anti-suit injunction.

Pro-Actively Protecting the Arbitral Regime

This judgment is a ringing endorsement of the entitlement of the courts of the seat of the arbitration to take matters into their own hands to preserve and protect the arbitral regime.  Perhaps the fact that London is the seat of many international arbitrations is a strong motive for the UK courts to adopt such a policy.  But the 1996 English Act is based on the principles of the UNCITRAL Model Law.  So the policy should be equally applicable to other common law jurisdictions.

Clearly, if the courts of countries which are not the seat of the arbitration “play offence” and issue conflicting declarations and injunctions, it would play havoc with the arbitration regime. There must be one and only one court system which exercises this supervisory “sooner or later” jurisdiction, and that is the court system of the seat of the arbitration.  For those who need the pro-active intervention of that court system to protect an arbitral regime, the Kamenogorsk decision is a powerful pronouncement.

Arbitration  –  International Commercial Arbitration  –  Declaratory Relief  –  Jurisdiction of the Court

AES-Ust-Kamenogorsk Hydropower Plant LLP v. Ust-Kamenogorsk Hydropower Plant JSC [2011] EWCA Civ 647

Thomas G. Heintzman O.C., Q.C.                                                                          February 12, 2012

www.heintzmanadr.com

www.constructionlawcanada.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