When Is An Arbitration An International Commercial Arbitration?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The motion to stay was dismissed for three reasons:

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

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

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

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

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

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

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

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

Arbitration –  International Commercial Arbitration  –  Stay –  Competence-Competence

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

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


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