Competence-competence is a central principle of international commercial arbitration: the tribunal has the competence to decide its own jurisdiction. This principle is embedded in Article 16 of the UNCITRAL Model Law. For this reason, a court will await the arbitral tribunal’s decision on its own jurisdiction before undertaking a review of that issue, unless the issue is one of pure law or clearly does not involve factual issues.

The competence-competence principle is also found in most domestic arbitration statutes. For example, it is stated in section 17(1) of the Ontario Arbitration Act, 1991. But section 17(2) states that the court may rule on a jurisdictional objection if, within 30 days of the arbitral tribunal making a jurisdictional deision, a party requests the court to do so.

Should the court take the same deferential attitude toward the authority of a domestic arbitral tribunal to determine its own jurisdiction that it does to an international commercial arbitration?  In Ontario Medical Association v. Willis Canada Inc., the Ontario Court of Appeal recently said that it should. In the process, however, the court did not address the second branch of the competence-competence principle and one wonders how that second branch might affect the application of that principle in future cases.

Background

Aviva provides personal and commercial insurance to the members of the Ontario Medical Association (OMA). Aviva and Willis are parties to a broker/agency agreement. Under that agreement, Willis agreed to act as agent for Aviva in the placement of the insurance to OMA members.  There is an arbitration clause in the Aviva-Willis agency agreement. The OMA is not a direct signatory to the Aviva-Willis agency agreement itself.

Under a schedule to that agreement, Aviva agrees to pay the OMA a 2 percent “over-ride” fee on the OMA portfolio. That schedule says that “the parties (inclusive of the Ontario Medical Association)” are to meet to negotiate increases to the fee based on actuarially calculated profit and loss ratios. An Addendum to the Aviva-Willis agency agreement contains an agreement to which the OMA is a party. That Addendum says that the OMA joins in the Addendum as a beneficiary of Aviva’s obligation to pay the over-ride fee and that Aviva will pay the over-ride fee to the OMA, as well as other fees called a Variable Sponsor Fee and a Policy in Force Sponsor fee.

The OMA commenced an action against Aviva and Willis alleging a breach of the obligation to pay the fees to it under the schedule and Addendum. Pursuant to section 7 of the Ontario Arbitration Act, 1991, Aviva moved to stay the action and to require the dispute to be submitted to arbitration. Willis took the opposite position, supporting the OMA’s position that the OMA is not a party to the Aviva-Willis agency agreement and is not bound by the arbitration clause in that agreement.  Willis filed a defence in the OMA’s action.

The motion judge stayed the action, holding that the arbitral tribunal must first decide the jurisdictional issue. That decision was upheld by the Ontario Court of Appeal.

The Court of Appeal’s decision

The OMA argued that the prior decisions applying the competence-competence principle were rendered under the international commercial arbitration statutes adopting the UNCITRAL Model Law (such as the decision of the Supreme Court of Canada in Dell Computer v. union des consomateurs, [2007] 2 SCR 801) and were not applicable to domestic arbitration. The Court of Appeal disagreed for several reasons.

First, it held that the regimes contained in Ontario’s domestic act and Ontario’s International Commercial Arbitration Act did not reveal any difference, or sufficient differences, to justify a different approach to competence-competence under the two statutes.

Second, the past decisions at first instance show that Ontario courts have deferred to the jurisdiction of domestic arbitral tribunals to rule on jurisdictional issues and have stayed actions on that ground.

Third, the Court of Appeal could see no policy basis for distinguishing between international commercial arbitral tribunals and domestic tribunals so far as the competence-competence principle is concerned.

Having made that decision, the Court of Appeal then held that, in any event, the appeal was barred by virtue of sub-section 7(6) of the Arbitration Act, 1991 of Ontario. That sub-section states that “there is no appeal from the court’s decision” under section 7(1).  The Court of Appeal applied the existing case law which has held that if the judge hearing the motion does grant a stay of the action then there is no appeal, but if the court does not grant a stay there is an appeal. In this case, since the motion judge had granted a stay, the Court of Appeal held that there was no appeal.

Comments

The Court of Appeal could have dismissed the appeal based solely on sub-section 7(6) and said no more.  For this reason, the first part of its judgment could be considered to be obiter dicta and not binding in future cases. However, the Court clearly made a conscious decision to deal with the competence-competence issue, and indeed it did so in its decision prior to addressing the sub-section 7(6) issue. So it will be difficult to argue that its decision about competence-competence is not binding in Ontario.

The unusual aspect of this decision is that the Court of Appeal only addressed half of the competence-competence principle. The second half of the principle states that the court can allow the action to proceed if the jurisdictional issue is one entirely of law, or if the questions of fact require only superficial consideration of the documentary evidence in the record (Dell, at paras. 84-85)

This second part of the competence-competence principle is particularly important in relation to whether the contract and the arbitration clause is binding on a third party.  Usually, an arbitration clause is not binding on a third party to the contract, so that if it is asserted that a third party is bound by the contract or the arbitration clause, that issue can be first addressed as a legal issue by the court, and the court is not obliged to allow it to be first addressed by the arbitral tribunal.  Indeed, the issue of whether a third party is bound by a contract is a fundamental issue in court-developed contract law.  Whether a third party is bound by a dispute resolution regime seems like a perfect issue for a court to rule upon, rather than to have this issue first decided by the arbitral tribunal and later, almost inevitably, by a court on a motion to set aside the tribunal’s jurisdictional decision. The Court of Appeal in the present case did not refer to any facts which would make it unsuitable for the court to decide the issue.

The Court of Appeal’s failure to refer to and apply the second branch of the competence-competence principle can be contrasted with its decision in Ontario v. Imperial Tobacco Canada Limited, 2011 ONCA 525.  There, the same court considered whether the court or the arbitral tribunal should consider the jurisdictional issue of whether an agreement containing an arbitration clause was binding on a third party. I dealt with that decision in my article dated August 28, 2011.

The agreement in Ontario v. Imperial Tobacco was a Comprehensive Settlement Agreement (CSA) between the governments of Canada and the provinces and Imperial Tobacco, settling an action by the governments against Imperial Tobacco as a result of cross-border smuggling and releasing the claims in that action.  The CSA contained an arbitration clause. Later, Imperial Tobacco was sued in a class action by the Ontario Flue-Cured Tobacco Growers’ Marketing Board (the Board) on behalf of tobacco farmers who alleged that Imperial Tobacco had unlawfully paid lower prices to the Tobacco Board for tobacco exported from Canada and smuggled back into Canada.  Imperial Tobacco took the position with the governments that the Tobacco Board was an entity claiming through a releasing entity.  Imperial Tobacco argued that the release in the CSA was effective against the governments in terms of certain consequences under the CSA and against the Board or its claim.

In response, the government of Ontario brought an application in the Ontario Superior Court for a declaration that the release in the CSA did not have the effect asserted by Imperial Tobacco. Imperial Tobacco 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 reversed that decision in part, holding that the right of Imperial Tobacco to rely upon the release in relation to the Tobacco Board’s action should be decided in court because the Board was not a party to the CSA and therefore would not be heard in the arbitration, and its rights might be fundamentally affected by the determination of the right asserted by Imperial Tobacco in an arbitration proceeding to which the Board was not a party.

Ironically, in Ontario v. Imperial Tobacco, the Court of Appeal did not deal with the issue of whether it had jurisdiction under sub-section 7(6) to hear the appeal. Since the motion judge had dismissed the action and sent the dispute to arbitration, the Court of Appeal had no jurisdiction to make its decision, according to its later decision in OMA v. Willis. And in OMA v. Willis, the Court of Appeal did not deal with the second branch of competence-competence, and in Ontario v. Imperial Tobacco where it did, it arrived at the opposite effective result, namely that the dispute should be heard by the court when the issue involves a third party to an arbitration agreement.

There are differences between the two cases:

In OMA v Willis, the plaintiff (OMA) was the third party which sued both parties to the agreement (Aviva and Willis) in the action. In Ontario v. Imperial Tobacco, the dispute was raised by one party to the agreement (Ontario) and the other party (Imperial Tobacco) apparently did not take the position that the Board was a party to the CSA or had a right to participate in the arbitration. Does the application of the second branch of the competence-competence principle change depending on whether it is a party to the agreement or a third party who is suing in court?  Even if not, would or should it have made a difference if:

OMA had only sued Aviva – would it then have had a greater right to proceed in court; or if Imperial had agreed or argued that the Board was effectively a party to the arbitration – would it then have had a greater right to proceed in arbitration?  Does the second branch of the competence-competence principle depend on whether or not it is clear or admitted that the third party has or doesn’t have a right to participate in the arbitration?

In my article of August 28, 2011, I said that the decision in Ontario v. Imperial Tobacco was just the next chapter in the evolving Canadian story about the principle of competence-competence.  The next chapter seems to have clarified the first branch of that principle but may have turned the second branch into a mystery story.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed., chapter 10 at part 4.

Ontario Medical Association v. Willis Canada Inc. (2013), 118 O.R. (3d) 241 (C.A.)

Arbitration  –  Jurisdiction  –  Motion to Stay  –  Competence/Competence

Thomas G. Heintzman O.C., Q.C., FCIArb                                            April 20, 2014

www. heintzmanadr.com

www.constructionlawcanada.com