Can An Entire Agreements Clause Make A Party To An Agreement Also A Party To Another Agreement?

In construction projects, there will often be several agreements between the various participants. Those agreements may contain “entire agreement” clauses to ensure that the parties are bound only by the terms of the agreement they sign. But could the entire agreement clause have the opposite effect if it refers to one of the other agreements?

In One West Holdings Ltd. v. Greata Ranch Holdings Corp. the British Columbia Court of Appeal recently answered Yes to this question. As a result, the entire agreement clause became an incorporation by reference clause, incorporating an arbitration clause from one agreement into another.


Several parties joined together to buy the Greata Ranch in British Columbia and to subdivide and develop the land for resale. There were three agreements:

the limited partnership agreement between the participants (LPA);

the project management agreement between the limited partnership and the management company One West (PMA); and

the agreement to purchase the ranch (PA).  One West was not a party to the LPA or PA although it was affiliated to a company that was.

The PMA and PA each had an entire agreements clause that said that the PMA, LPA and the PA “and any documents expressly contemplated by this Agreement, constitute the entire agreement between the parties and/or affiliates of the parties and/or affiliates and supersede all previous communications, representations and agreements, whether oral or written, between the parties with respect to the subject matter hereof.…”.

The LPA had an entire agreements clause that said that “This Agreement constitutes the entire agreement between the parties hereto with respect to all of the matters herein and its execution has not been induced by, nor do any of the parties hereto rely upon or regard as material, any representations or writings whatsoever not incorporated herein and made a part hereof.”

The LPA had an arbitration clause requiring the arbitration of “all disputes arising out of or in connection with this Agreement, or in respect of any legal relationship associated therewith or derived therefrom….”  The PMA and PA had no arbitration clauses.

When disputes arose, arbitration proceedings were commenced, and One West was joined as a respondent. One West said that it could not be joined as a party to the arbitration as it was not a party to the LPA and therefore was not a party to the arbitration agreement.

The Decisions

The arbitrator held that, because of the entire agreements clause in the PMA, One West was a party to another agreement, the LPA, and therefore a party to the arbitration agreement in the LPA. On appeal, a judge of the B.C. Supreme Court disagreed, holding that the entire agreements clause in the PMA did not make One West a party to another agreement, the LPA, and to the arbitration agreement in the LPA. The B.C. Court of Appeal disagreed with that decision and agreed with the arbitrator.

The Court of Appeal’s conclusion about the entire agreement clause in the PMA was as follows:

“Article 17.1 does two things: it defines the agreement of the parties and it limits the scope of inquiry. The judge’s approach appears to eliminate the first part of the provision merely because it is called an “entire agreement” clause. It is necessary, as was done by the arbitrator, to look at the opening words of the provision: “This Agreement, the Partnership Agreement and the Purchase Agreement and any documents expressly contemplated by this Agreement, constitute the entire agreement between the parties and/or affiliates of the parties”.
There is nothing ambiguous or unclear about this language. It defines the agreement of the parties. The balance of the provision limits the sources on which the parties can rely and to which the court can look. It reflects the traditional purpose of an “entire agreement” provision, but it does not supplant the agreement of One West that the LPA is part of the agreement between the parties. That agreement contains an arbitration commitment that is binding on One West.”

In effect, the court held that, by reason of the wording of the entire agreements clause in the PMA, One West had agreed that it was a party to the LPA and the arbitration clause in that agreement.

The Court of Appeal gave a second reason for its decision:

“The scope of the arbitration commitment extends to legal relationships associated with or derived from the LPA. The “entire agreement” clause in the PMA extends to the parties and their affiliates.”

In this passage, the Court of Appeal is saying that the arbitration clause itself was sufficient to sweep One West into the arbitration as an affiliate of the party which signed the LPA, quite apart from the argument that the LPA and its arbitration clause were incorporated into the PMA through the entire agreements clause.


This decision arrives at startling conclusions about both the entire agreement and the arbitration clause. As to the former, entire agreement clauses are not usually thought of as creating new rights but as ensuring that there are no rights other than those contained in the written contract. If this is the purpose of the clause, then when the clause appears in one contract of a number of related contracts to which a number of entities are parties, the clause can be taken to mean that there are no rights in the contract other than those in the respective contract or contracts, not that new rights are created in one contract that are not otherwise there.  But that is the very argument that the court appears to have rejected.

As to the affiliate issue, the PMA and PA said that they constituted the entire agreement between the parties and/or affiliates of the parties.  So far as the reasons of the court disclose, the PMA or PA did not apparently state that they were being executed by one party on behalf of its affiliates who were thereby made a party to and bound by it.  So, again, it seems arguable that the statement about affiliates was that there were no other agreements between all these parties, not that the affiliates were parties to every agreement. But again, that seems to be the argument rejected by the court.

So far as the arbitration clause is concerned, the court’s decision is that an entire agreements clause in one agreement (the PMA in this case) effectively operates as an “incorporation by reference” clause and brings the arbitration agreement from another agreement (the LPA in this case) into the first agreement.  This is a very significant issue for construction law.

There are many cases holding that an arbitration clause is not incorporated from one agreement into another without there being a specific incorporation of that clause. Thus, it has been held in many cases that an arbitration clause in the main contract between an owner and contractor will not be incorporated into the subcontract between the contractor and subcontractor merely because the subcontract states that the terms of the main contract are incorporated into the subcontract: it takes something much more specific to incorporate the arbitration clause from one agreement into the other.

Yet in this case, the court has held that an entire agreements clause –which on its face doesn’t appear to be an incorporation by reference clause at all– is not only an incorporation by reference clause, but it incorporates an arbitration clause from one agreement into another.

With this decision in mind, those involved in preparing building contracts will have to carefully scrutinize their entire agreement and arbitration clauses to ensure that they have the intended ambit and effect.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed., chapter 7, part 1.

One West Holdings Ltd. v. Greata Ranch Holdings Corp., 2014 Carswell BC 414, 2014 BCCA 67

Building contracts – incorporation by reference – arbitration clauses-third parties –

T.G. Heintzman O.C., Q.C., FCIArb                                           April 6, 2014

Who Is A Successor To A Contract?

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

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

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

Factual Background

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

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

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

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

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

Court of Appeal Decision  

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

The court stated it this way:

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

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

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

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

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


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

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

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

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

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

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

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

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

Brown v. Belleville (City), 2013 ONCA 148  

Construction law  –  Enforcement  –  Third Parties  –  Breach of Contract

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


Is A Third Party Obliged To Bring Its Claim Under An Arbitration Agreement

A recurring issue in arbitration law is whether a third party is bound to assert his or her claims by way of arbitration, even though the third party is not a party to the arbitration agreement. In Yaworski v. Gowling Lafleur Henderson LLP, the Alberta Court of Appeal recently held that, where a limited partnership was a party to an agreement containing an arbitration clause, the owner of the limited partnership was obliged to arbitrate any disputes arising under the agreement.


Mr. Yaworski’s limited partnership was an income partner of the law firm Gowling Lafleur Henderson between 2004 and 2009, and Mr. Yaworski worked in the Gowling firm. The agreement between Yaworski LP and the firm terminated in 2009.   Mr. Yaworski then commenced an action for breach of contract.  The action was stayed by a judge of the Albert Court of Queen’s Bench on the ground that the claim must be arbitrated. That decision was upheld in the recent decision of the Alberta Court of Appeal.

Reasons of the Court of Appeal

The Alberta Court of Appeal held that Section 7(1) of the Alberta Arbitration Act and Section 18 of the Alberta Judicature Act authorized the judge of first instance to stay Mr. Yaworski’s action.

Section 7(1) states that “if a party to an arbitration agreement commences a proceeding in a  court  in  respect  of  a  matter  in  dispute  to  be  submitted  to arbitration under the agreement,” the court shall stay the action, subject to certain exceptions.  Section 18(1) contains the court’s equitable jurisdiction to stay any proceedings when the court deems it fit to do so.  In combination, the Court of Appeal held that the court was entitled to stay the action even though it was not brought by the party to the arbitration clause, Yaworski LP.

The Court of Appeal was not prepared to allow Mr. Yaworski to escape the arbitration clause which his limited partnership had entered into. It said:

“However, arbitrations cannot be avoided by simply having a related party commence a lawsuit claiming relief with respect to arbitrable subject matter. In this case Yaworski PC and Gowlings agreed that all disputes between them was to be arbitrated.  In fact the arbitration clause is so broad as to make the issue of whether something is subject to arbitration, arbitrable….

In our view the combination of section 7 of The Arbitration Act, section 18 of the Judicature Act, and  the  court’s  inherent jurisdiction  to  control  its  own  process  to  avoid  unnecessary and duplicitous  proceedings  provided the  chambers judge with jurisdiction to stay Yaworski’s suit pending the arbitration.”

Moreover, the Court of Appeal was of the view that the real claim belonged to Yaworski LP, not Mr. Yaworski.  Therefore, the judge at first instance had been right to stay the action brought by Mr. Yaworski. In this way the proper claim, brought by Yaworski LP, could be asserted by way of arbitration, and if there was any issue about the jurisdiction to hear various claims of Mr. Yaworski and his limited partnership, the arbitrator could address them:

“[22] Our conclusion regarding the continuation of Yaworski PC as a Gowlings partner strongly suggests that at least most of the cause of action against Gowlings advanced by Yaworski in his personal suit actually rests with Yaworski PC. Again if any part of that is outside the purview of the arbitration that question can be determined by the arbitrator.


On its face, this is a relatively straightforward decision. It holds the parties to an arbitration clause to their agreement and refuses to allow one party to circumvent the agreement by allowing a person controlling that party from suing personally. The decision does, however, raise a number of issues.

It seems clear that Section 7(1) of the 7(1) of the Arbitration Act would not have empowered the court to grant the stay order unless the party bringing the action can somehow be brought under that subsection. In this circumstance it seems wise to state in arbitration agreements that the parties are executing the agreement as principals, and also on behalf of, and so as to bind, the shareholders, assignees and any other persons asserting facts or issues dealt with in the agreement.

In the absence of such a provision, the party seeking the stay must rely on the general equitable powers under Section 18 of the Judicature Act. One wonders what exactly is the limit of the court’s power under this section. Is the power totally wide open?  Or was the court’s finding that the claim was really one which could only be asserted by Yaworski LP an essential ingredient to the court’s decision to stay the action?

If that is so, then there may be two results.

First, Mr. Yaworski’s action should have been dismissed on the ground that it was brought by a party which had no claim.   This is the effective decision of the Court of Appeal, as it said: “On the record Yaworski cannot make out a proper claim for summary judgment because the cause of action or at least most of it rests with Yaworski PC.”  The rest of the decision may be obiter.

Second, the Court of Appeal is effectively saying that the words “to an arbitration agreement” in Section 7(1) should not be in the subsection. The important words are “in  respect  of  a  matter  in  dispute  to  be  submitted  to arbitration”.  The Court of Appeal appears to be saying that, if the dispute falls within the arbitration agreement, then it should be arbitrated, no matter who brings the claim. That may well be a sensible reading of the subparagraph even though it eliminates four words.

See Heintzman and Goldsmith, Canadian Building Contracts (4th ed.), Chapter 10, Parts 1 and 4

Yaworski v. Gowling Lafleur Henderson LLP, 2013 ABCA 21

Arbitration   –   Stay of Court Proceedings  –  Third parties

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                           February 11, 2013

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

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

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

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

The background

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

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

The decision

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

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

The importance of this decision

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

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

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

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

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

Ross v. Garnett, 2012 NSSC 132

Building contract – consultants – enforcement – third parties

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

Does The Competence-Competence Principle Apply To Third Parties To An Arbitration Agreement?

The competence of an arbitral tribunal to determine its own competence has become firmly rooted in Canadian law.  But what happens when the tribunal has to decide issues which directly affect third parties?

In Ontario v. Imperial Tobacco Canada Limited, the Court of Appeal for Ontario recently held that, in that circumstance, the principle does not require the court to allow the arbitral tribunal to first rule on its competence. This decision is of considerable importance because it involved the disputed confrontation of multiple court actions.  It may signal the future attitude of Canadian courts in favour of the resolution by courts, and not arbitrators, if jurisdictional disputes arise out of court proceedings.

The governments of Canada and the provinces brought an action against Imperial Tobacco as a result of cross-border smuggling.  That action was settled by a Comprehensive Settlement Agreement (“CSA”).  Under the CSA, Imperial Tobacco agreed to pay $350 million to the governments over 15 years in exchange for a release relating to any claims arising out of the smuggling of tobacco or Imperial Tobacco’s failure to pay taxes on smuggled or imported tobacco.

The release in the CSA contained two protections for Imperial Tobacco.  

First,  in the event of a claim by a one of the releasing entities, the release could be relied upon as a complete defence (the “release issue”).

Second, if Imperial Tobacco incurred any liabilities in any way connected to or arising out of the released claims, then the payments by Imperial Tobacco to the governments were to be proportionately reduced, and in the event of dispute, were to be paid into an escrow fund (the “escrow fund issue”).

The CSA stated that any disputes between the parties were to be arbitrated under the federal Commercial Arbitration Act.  The notice of arbitration was to be given by either the government of Canada or Imperial Tobacco, and not by the provinces, but the arbitration was to be between the parties to the CSA.

Imperial Tobacco was then sued in a class action by the Ontario Flue-Cured Tobacco Growers’ Marketing Board (the “Tobacco Board”).  The class action was on behalf of tobacco farmers.  The action alleged that Imperial Tobacco had unlawfully paid lower prices to the Tobacco Board for tobacco exported from Canada and smuggled back into Canada.  The action claimed $50 million as being the difference between what Imperial Tobacco paid and what it ought to have paid for exported tobacco.

Imperial Tobacco then gave notice under the CSA that it would pay the amounts claimed in the class action into the escrow fund. Imperial Tobacco took the position that the Tobacco Board was an entity claiming through a releasing entity and that the Tobacco Board’s claim was a claim relating to or arising from the released claims.  If Imperial Tobacco was correct, and if the Tobacco Board was bound by the CSA, then the release might well be effective against the Tobacco Board as well as the governments.

In response, the government of Ontario brought an application in the Ontario Superior Court for a declaration that Imperial Tobacco was not entitled to withhold annual payments to Ontario, taking the diametrically opposed view as to the effect of the release in relation to the Tobacco Board’s claim.

Imperial Tobacco then brought a motion to dismiss Ontario’s application on the ground that Ontario’s claim was required to be determined by arbitration.  The Superior Court judge granted the motion and dismissed Ontario’s application, holding that Ontario’s claim must be determined by arbitration.

By a majority, the Court of Appeal for Ontario allowed the appeal in part, and directed that Ontario’s application with respect to the escrow fund issue proceed to a hearing.  However, the reasons of the majority and minority are not necessarily on the same waive length so far as the reasons for doing so are concerned.

The minority judge, Justice Juriansz, held that the principle of competence-competence applied to all elements of the jurisdictional dispute. Whether or not Ontario or the Tobacco Board were parties to the CSA and the arbitration agreement in the CSA, and whether or not the Tobacco Board’s claim fell within that agreement, were not pure questions of law.  Accordingly, he held that the jurisdictional issues raised by those questions should first be determined by the arbitral tribunal in accordance with the principle of competence-competence..

The majority agreed that the competence-competence principle was at issue.  The majority also agreed that, so far as the escrow fund issue, that dispute directly affected Ontario and did not affect the Tobacco Board.  In its view, this issue only involved the question of whether Ontario was bound by the CSA, and did not involve any question of whether the Tobacco Board was bound by the CSA.  Accordingly, the challenge to the arbitrator’s jurisdiction concerning the right of Imperial Tobacco to pay the monies into the escrow fund was required to be first dealt with by the arbitral tribunal.

However, the majority arrived at a different conclusion relating to the release issue, namely the right of Imperial Tobacco to rely upon the release in relation to the Tobacco Board’s action.  In the majority’s view, that issue raised the question of whether the Tobacco Board was a party to the CSA and its arbitration provisions, and therefore bound by the arbitral proceedings and result.  In the majority’s view, that was a jurisdictional issue of a pure legal nature which, under the competence-competence principle, the court could resolve itself without referring it to the arbitral tribunal.

The majority arrived at this conclusion as follows:

“Here, no one contends that the Tobacco Board is a party to the Agreement and its arbitration provisions….There is equally no doubt that the Tobacco Board has a vital interest in the question raised by the application…The answer could provide [Imperial Tobacco] with a  complete defence to its action, or could eliminate that possibility. The arbitrator cannot resolve that question posed by the application because the Tobacco Board is not a party to the Agreement or its arbitration provisions.  The arbitrator has no jurisdiction to determine the Tobacco Board’s rights. The question asked of the court must… be determined in a forum in which the Tobacco Board has the right to participate.  Hence the application should not be stayed in preference to arbitration.”

Here, the majority concluded that the jurisdictional issue was so clear and indeed admitted that it need not be determined by the arbitral tribunal at all.  However, this conclusion seems odd in the circumstances.  The majority seems to have disposed of the issue by the assumption made in raising it.

First , if it was so clear that the Tobacco Board was not a party to the CSA, then one wonders what the jurisdictional dispute was all about in the first place.  In his decision, Justice Juriansz squarely raises the issue as to whether the Tobacco Board was a party to or bound by the CSA.  If the Tobacco Board was so clearly not a party to or bound by the CSA, and if Imperial Tobacco had admitted that fact, then one could be confident that the arbitral tribunal would so hold, and that any decision of that tribunal would not be binding on the Tobacco Board in any event.

Second, it would seem better to have one tribunal deal with both the release and escrow fund issues at the same time.  It is not clear how those two rights could be separated, and how a court or arbitral tribunal could find that the Tobacco Board’s claim falls within the CSA for one of those rights and not for the other.  Indeed, having arrived at its conclusion, one wonders why the majority did not direct both issues to be determined by the court, to save time and money and avoid conflicting decisions.

Whatever the merits of the jurisdictional dispute may be, this decision of the Ontario Court of Appeal is just the next chapter in the evolving Canadian story about the principle of competence-competence.

This chapter is about a jurisdictional dispute generated by one court action at the front end (the governments’ action against Imperial Tobacco) and another court action at the back end (the Tobacco Board’s class action).  This chapter tells us that when the dispute is so firmly rooted in court proceedings, and when the plaintiff in one action has no clear right to participate in the arbitration of the dispute, then a court will be concerned about due process and fairness.  The court will be reluctant to allow any jurisdictional disputes about the intersection of those two court cases to be dealt with by an arbitrator, even in the first instance.

Arbitration  –  Third Parties  –  Competence  –  Class Action 

Ontario v. Imperial Tobacco Canada Limited, 2011 ONCA 525

Thomas G. Heintzman, O.C., Q.C.                                                                                August 28, 2011