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What Are The Limits Of Competence-Competence For Arbitral Tribunals?

Competence-competence is now a foundational principle of the modern law of arbitration.  According to that principle, an arbitral tribunal is competent to decide its own competence.  In other words, the tribunal has jurisdiction to decide its own jurisdiction.  That principle demands, in turn, that the arbitral tribunal, and not the court, should in the first instance decide the tribunal’s competence.

The competence-competence principle is now embedded in most arbitration statutes.  In Ontario, section 17(1) of the Ontario Arbitration Act, 1991 (the “Act”) states that the arbitral tribunal may rule on its own jurisdiction to conduct the arbitration and in that connection to rule on objections with respect to the existence or validity of the arbitration agreement.

Are there any limits to the competence-competence principle?

One limit to the competence-competence principle has recently been explored by the Ontario Court of Appeal in Shaw Satellite G.P. v. Pieckenhagen. That Court held that, at the very least, the party seeking to apply that principle must admit that it is a party to the arbitration agreement.  Failing that admission, the principle does not apply and the other party may proceed with a court action.  That decision raises the general question of what admissions a party must make about the arbitral tribunal’s jurisdiction before that party may rely on the competence-competence principle.

The background

Shaw provides television programming through satellites.  The defendants are owners of apartment buildings.  Shaw alleged that the defendants had used fictitious names and addresses to subscribe for satellite delivery of TV programs and had then re-broadcast the programs to tenants of the apartment buildings.  The programming subscription agreements prohibited any rebroadcasting, reproduction or retransmission.  Those agreements also contained in an arbitration clause.

Shaw brought an action in the Ontario Superior Court alleging fraud and other illegal activities and sought injunctive and related relief against the defendants.  The defendants brought a motion to stay the action and asserted that the dispute must be arbitrated under the arbitration clause in the agreements in which the customer subscribed for satellite television service.  However, the defendants did not assert, and refused to admit, that they were parties to the subscriber agreements or the arbitration clauses in those agreements. On that basis, the motion judge dismissed their motion and the Court of Appeal upheld that decision.

The decision

The Court of Appeal said that it was “incumbent on [the defendants] to indicate to the court that they are parties to and are bound by the Agreement to invoke s. 7(1).  To hold otherwise would enable them to take the position before an arbitrator that they are not parties to the Agreement which in our view would be entirely inappropriate.”  In effect, the Court would not allow the defendants to put everyone, including the arbitrator and the courts, through the useless exercise of staying the action, only to have the defendants go before the arbitrator and assert that the arbitrator had no jurisdiction because the defendants were not parties to the arbitration agreement.

Parties vs Matters

The motion judge had also decided the motion on another ground.  Shaw’s action was against twenty other defendants who were not alleged by Shaw to be parties to the subscriber accounts.  So while the claims against three of the defendants might arguably be governed by arbitration clauses in the subscriber agreements, the claims against the other defendants clearly were not.

The motion judge applied sub-section 7(5) of the Act which gave the motion judge discretion to grant a partial stay of the action in respect of “matters” falling within the arbitration clause and permit the action to proceed with respect to “other matters” not covered by the arbitration agreement.  The sub-section does not refer to “parties” not bound by the arbitration agreement, nor does it expressly refer to staying the entire action.  The motion judge effectively decided that “parties” and “matters” were the same thing and concluded that granting a partial stay would result in a multiplicity of proceedings that was unreasonable in the circumstances. The Court of Appeal declined to interfere with the exercise of that discretion by the motion judge.

This decision raises three important points:

First, it identifies a specific circumstance in which the competence-competence principle will not be applied: namely, if the moving party does not admit that it is a party to the arbitration agreement.  On its face, this is a common sense result which avoids the use of the principle by a party which is not really seeking in good faith to have the dispute resolved by the arbitral tribunal. Indeed, sub-section 7(1) of the Act clearly states that a motion to stay the action must be brought by “another party to the arbitration agreement”.  The purpose of the competence-competence principle and the wording of sub-section 7(1) combine to demonstrate that the principle should not be used by a party which does not admit that it is bound by the arbitration agreement.

Accordingly, in Ontario we now have a binding decision that a defendant which does not admit that it is a party to the arbitration agreement cannot rely on the competence-competence principle.

At another level, however, this issue was more nuanced that it might appear.  Clearly, the defendants did not want to admit that they were parties to the subscriber agreements.  If they had admitted that they were parties to the arbitration agreement, then they would effectively have acknowledged one of the major issues in dispute.  The questions were: could the defendant be forced to make this admission before relying on the competence-competence principle; and which is the proper tribunal to resolve the issue about whether the defendants were parties to the arbitration agreement and therefore the subscriber agreements, the court or the arbitral tribunal?

Sub-section 7(2) of the Act says that an arbitration clause shall, for the purpose of a ruling on jurisdiction, be treated as an independent agreement separate and apart from the agreement in which it is contained.  Therefore, arguably the arbitral tribunal is competent to decide who is a “party” to the main agreement.  In the net result, however, the wording of sub-section 7(1), the purpose behind the competence-competence principle and the waste of time and money in sending the dispute to the arbitral tribunal if the moving party did not admit that it was a party to the arbitration agreement, combined to make the moving party’s reliance on that principle unreasonable.

Second, this decision may reveal a broader question and a broader principle.   Can a party invoke the competence-competence principle if, for any other reason, it asserts that the arbitral tribunal does not have jurisdiction?  If not, then the competence-competence principle can only be invoked by a party that acknowledges, in all relevant respects, that the tribunal has jurisdiction.  If this is so, then the scope of the competence-competence principle may be substantially limited.

Thus, if the defendant in an action admits that he or she is a party to an arbitration clause, but asserts that the arbitral tribunal has no jurisdiction over the claim or part of the claim, can the defendant ask the court to stay the action so far as that claim or part of the claim is concerned?   Normally, one would answer Yes, because under the competence-competence and sub-section 7(1) of the Act, it is the arbitrator’s jurisdiction to first decide scope of the arbitration clause.  But what is the real difference between deciding whether the parties to the action are parties to the arbitration agreement and deciding whether the dispute falls within the arbitration agreement?  If the competence-competence principle does not apply to the first question, why does it apply to the second?

The Court of Appeal in the Shaw decision has held that the defendant seeking a stay of an action on the ground of an arbitration agreement must admit that it is a party to the arbitration agreement.  Should it not also require the defendant to admit that the dispute is governed by the arbitration agreement, at least so far as the portion of the claim that the defendant wants to have stayed and sent to arbitration? What is the point of sending the claim to the arbitral tribunal only to have the defendant assert before that tribunal that it has no jurisdiction over the claim or that part of the claim?

Third, the other issue decided by the Court of Appeal was not necessary for its decision and is likely not binding on other Ontario courts.  The decision expands the application of sub-section 7(5) of the Act to apply it to parties, not matters, falling outside the arbitration agreement.  The decision also permits the court to refuse a stay of the whole action on the ground that to do otherwise would involve a multiplicity of proceedings.

Without considering the total context in which it was made, the decision to permit the whole action to proceed might be seen to be contrary to a number of other decisions.  Generally speaking, Canadian courts have held that the mere fact that other defendants are sued in the action that are not bound by the arbitration agreement is no reason to refuse a stay of the claim against parties to that agreement that is within the arbitration agreement.  However, read in context, the decision can be readily understood as resulting from a combination of circumstances, including a moving party which did not admit that it was bound by the arbitration agreement and a large preponderance of defendants not bound by the arbitration agreement.

In the result the Shaw decision clarifies the competence-competence principle by requiring a party relying on that principle to admit that it is party to the arbitration agreement.  But it leaves open for debate the full scope of the principle and the admissions that must be made to invoke it.

Arbitration   –   Competence-Competence  –   Stay Motion  –   Parties and Subject Matter of Arbitration Agreement

Shaw Satellite G.P. v. Pieckenhagen, 2012 ONCA 192

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                      June 3, 2012

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