On October 10, 2012, I gave a speech at an Advocates’ Society program. The program was entitled Arbitration is the New Black. My presentation focused on seven issues which should be addressed when a party is contemplating the commencement of an arbitration.
Starting the arbitration seems like the easiest thing in the world. After all, the parties already have an arbitration agreement which provides for the arbitration. So what is the big deal?
That approach can lead to real problems. The commencement of arbitration is as important a step in the proceeding as the commencement of an action in court. In fact, it’s more important because in the case of arbitration, there is no court in which to issue the initiating document. Therefore, no court official determines that the document initiating the arbitration is proper. The party starting the arbitration may be lulled into a false sense of security by the arbitration agreement and may be unaware of the formalities and the choices that are inherent in the arbitral process.
Here are Seven Points to Consider before Commencing an Arbitration:
1. The limitation period
Some may think that the arbitration is not subject to limitation periods. It is. A limitation period for an arbitral claim may be established in two ways.
First, the arbitration agreement may itself contain a limitation period. For example, insurance policies often contain limitation periods. If the period is missed, the claim may be lost.
Second, an arbitral claim will be governed by the general law of limitation of actions. In Ontario, section 52(1) of the domestic Arbitration Act, 1991 provides that the law with respect to limitation periods applies to an arbitration as if the arbitration were an action and the claim made in the arbitration were a cause of action. Section 4 of the Ontario Limitations Act, 2002 establishes a general limitation period of two years from the date of discovery of the claim. So, unless another statutory limitation period applies, a domestic arbitral claim governed by Ontario law must be commenced within two years of the discovery of the claim.
As far as international commercial arbitrations are concerned, the Ontario International Commercial Arbitration Act (ICAA) does not establish a limitation period for the commencement of an arbitral claim nor refer to a general limitation period. If the arbitral claim is subject to Ontario law, then the Ontario Limitations Act, 2002 will presumably apply. There may be arguments about which limitation law applies to a claim in an international commercial arbitration. The law of the place of the arbitration or the substantive law applicable to the contract are two candidates and the debate may be resolved differently by the courts in different jurisdictions. So the limitation issue may have to be considered carefully in international commercial arbitrations.
Before leaving the limitation issue, it is well to remember that there is a limitation issue at the other end of the arbitration proceeding, namely, the limitation period for the enforcement of the award. For domestic arbitrations, section 52(3) of the Ontario Arbitration Act, 1991 provides that an application to enforce the award must be made within two years of the date that the applicant receives the award.
The Ontario ICAA does not contain a limitation period for the enforcement of the award. The general two year general limitation period in Ontario Limitations Act, 2002 will presumably apply if the award is sought to be enforced in Ontario. In Yugraneft Corp. v. Rexx Management Corp., [2010] 1 SCR 649, the Supreme Court of Canada held that Alberta’s general two year limitation period applied to the enforcement in Alberta of an international commercial arbitration award made in Russia. Alberta had no limitation period that specifically applied to international arbitrations. The Supreme Court held that the application for enforcement of the foreign arbitral award was an application for a “remedial order” within the meaning of the Alberta limitation statute, and therefore subject to the two year limitation period together with the discoverability rule. It was not a judgment or court order subject to the 10 year period.
The mediation period
A contract containing an arbitration clause may also contain a mediation clause. The mediation clause may affect the commencement of the arbitration in two ways.
First, the mediation may be a precondition to the commencement of the arbitration. If it is, the arbitration may be premature if mediation is not undertaken. However, the mediation clause may be a permissible procedure, not a required procedure. In this case, the failure or refusal of the parties, or one of them, to participate in mediation will not be a bar to the commencement of the claim.
Second, and as a corollary to the first point, if the mediation is, or is not, conducted, the limitation period can be affected. If mediation is a requirement then the limitation period will not commence until the mediation is completed. If the mediation is not required, then the limitation period will be running while the parties are fussing about mediation.
These issues were dealt with by the Ontario Court of Appeal recently in L-3 Communications Spar Aerospace Limited v. CAE Inc., 2011 ONCA 435, 2010 ONSC 4133, (reviewed by me in www.heintzmanadr.com, July 17, 2011) and Federation Insurance Co of Canada v. Markt Insurance Co of Canada, 2012 ONCA 218 (reviewed by me in www.heintzmanadr.com, May 5, 2012).
In the first case, mediation was held to be required. Therefore, the cause of action did not accrue until the mediation was conducted, and therefore the action was still commenced in time. In the second case, mediation was held not to be required. Accordingly, the limitation period was running during the mediation and had expired by the time that the arbitration was commenced.
In Ontario, section 11 of the Limitations Act, 2002 provides that the limitation period does not run during any period in which the parties have agreed to have an independent third party resolve the claim or assist them in resolving it. The section does not necessarily avoid the issue of whether there was an agreement to mediate and whether that agreement requires mandatory mediation.
A further complicating factor is whether the mediation agreement is enforceable. In Sulamerica CIA Nacional De Seguros SA & Ors v Enesa Engenharia SA & Ors [2012] EWCA Civ 638 (which I reviewed in www.heintzmanadr.com, July 5, 2012) the English Court of Appeal held that a mediation clause is not enforceable unless the clause contains a minimum amount of procedural certainty. The Ontario Court of Appeal’s decisions referred to above did not consider this issue. We can expect some party to assert in the future that the mediation agreement was not enforceable and therefore the limitation period was running during the mediation and expired before the arbitral claim was commenced.
2. The Commencement of Arbitration
The claimant in the arbitration must make sure that it uses the proper document and procedure to start the arbitration. If it does not, then no arbitration will have been commenced and the limitation period may expire in the meantime.
Section 23 of the Ontario Arbitration Act, 1991 states three ways in which an arbitration may be commenced:
first, by serving a notice to appoint or participate in appointment of the arbitrator
second, by serving a notice requiring another party to appoint the arbitrator and
third by serving a notice demanding arbitration
Under article 21 of the Model Law attached to the Ontario ICAA, the arbitral proceeding is commenced by a request for that dispute to be referred to arbitration being received by the respondent.
The decision of the Ontario Court of Appeal in Penn-Co Canada (2003) Ltd. V. Constance Lake First Nation, 2012 ONCA 430; (reviewed by me in www.heintzmanadr.com, August 27, 2012) is a reminder of the importance of serving the right document. One of the parties had undertaken a good deal of activity relating to the arbitration, including the commencement of court proceedings. But the Court of Appeal held that it had not served a document qualifying as the commencement of the arbitration. Its later attempt to do so was served outside the limitation period.
3. Objection to Jurisdiction
An objection to jurisdiction must be made on a timely basis. Under section 17(3) of the domestic Ontario Arbitration Act, 1991, the objection must be made no later than the beginning of the hearing, or if there is no hearing, no later than the first occasion on which the party submits a statement to the tribunal. In addition, the objection to jurisdiction must be made as soon as the jurisdictional matter is raised, although the tribunal has the authority to consider a later objection if it considers the delay to be justified.
Under Article 16(2) of the Model Law attached to the Ontario ICAA, a plea that the arbitral tribunal does not have jurisdiction must be raised no later than the submission of the statement of defence, and a plea that the arbitral tribunal is exceeding the scope of its authority must be raised as soon as the matter alleged to be beyond the scope of its authority is raised during the arbitral proceedings. The arbitral tribunal has authority to admit a later plea if it considers the delay justified.
These time limits are not necessarily the same. In particular, the claimant should be aware of the requirement in the Ontario ICAA to raise a pre-existing jurisdictional objection at time of the delivery of the Statement of Defence.
4. Appointing the arbitral tribunal
a. Need for speedy appointment
Before the arbitral tribunal is appointed, there is no way to determine anything within the arbitration. The respondent cannot be compelled to deliver a defence. An order that the proceeding has been validly commenced cannot be obtained, and other interlocutory matters cannot be dealt with. So appointing the arbitral tribunal is a key step in the arbitration.
Under section 10 of the domestic Ontario Arbitration Act, 1991, if the parties disagree about the identity of the single arbitrator or the chair of the arbitral tribunal, the Ontario Superior Court has power to appoint the tribunal. If the Ontario ICAA applies, then under article 11(4) of the Model Law attached to that statute, the Ontario Superior Court has a similar power to appoint the arbitral tribunal.
If the arbitration is held under the auspices of one of the arbitration institutions (such as the LCIA, ICC or BCICAC), then those organizations will appoint the arbitral tribunal, subject to the input of the parties as their rules may allow. An advantage of these arbitral institutions is that their appointment process may avoid lengthy court proceedings to appoint the arbitral tribunal. A disadvantage may be the lesser input of the parties into the selection of the tribunal.
b. Discussions with the potential arbitrators
Selecting an appropriate arbitrator or chair of the arbitral tribunal will obviously be important. Identifying and avoiding conflicts of interest of arbitrators is equally important. For this reason, there may be legitimate reasons to write to or speak with a candidate for appointment.
However, these contacts are fraught with peril as they may create circumstances that themselves give rise to an appearance of bias. Thus, if the candidate is asked his opinion about the merits of the dispute, that conversation could well prejudice the candidate’s appointment.
The Chartered Institute of Arbitrators has guidelines about this process which are very helpful. They may be viewed on the Institute’s website: www.ciarb.org.
c. Agreement Appointing Arbitrators
If the arbitrators are appointed by way of agreement, the negotiation of that agreement is a good opportunity to address issues which were not dealt with in the arbitration agreement. With a dispute now in existence, arrangements can be put in place to ensure that the arbitration is conducted cost effectively.
Those arrangements may include: the rules of procedure, so that rules appropriate for the specific hearing are used, not the rules of court; the confidentiality of the arbitration; and choice of law.
5. The First Pre-Hearing Meeting
A significant advantage of arbitration is that it allows the parties to use a process which is suitable for the actual dispute and which will ensure that the dispute is resolved in a cost- effective manner. The time to start that process is the first meeting with the arbitral tribunal.
At the first meeting, the following procedures can be settled:
The schedule of all events and the date of the final hearing
The nature and dates for the exchange of pleadings
The scheduling of motions
The scope of documentary production and agreement on joint books of exhibits
Limits on discovery, or elimination of discovery
Preliminary lists of witnesses, including experts
The arbitration hearing briefs
The number of days of hearing
At the end of the first pre-hearing meeting, the arbitral tribunal can issue a Procedural and Schedule Order dealing with all these matters.
In order to obtain the maximum buy-in to this process, the parties should be present in person at the first pre-hearing meeting.
6. Interim Relief
Finally, before the arbitration is commenced, consideration should be given to the necessity to obtain interim relief.
Various factors may relate to that relief: whether the relief must be obtained against third parties; whether the opposing party will likely refuse to obey an order granting the relief; and whether the relief must be enforced outside the jurisdiction of the court or the place of the arbitration.
No simple answer can be given about whether it is better to obtain interim relief from the court or the arbitral tribunal, but an informed decision should be made about that issue. Some of the factors that may be considered include the following:
- If the motion for interim relief is made to the superior court, then there will be no arguments about the limits of the court’s jurisdiction since the court has plenary powers. There may be a debate about whether the arbitral tribunal has the jurisdiction to grant the particular interim relief which is being sought.
Article 17 of the Model Law attached to the Ontario ICAA says that unless otherwise agreed by the parties, the arbitral tribunal may order such interim measure of protection as the arbitral tribunal may consider necessary in respect of the subject-matter of the dispute, and appropriate security be provided in connection with that measure. Section 18(1) of the Ontario Arbitration Act, 1991 says that an arbitral tribunal may make an order for the detention, preservation or inspection of property and documents that are the subject of the arbitration or as to which a question may arise in the arbitration, and may order that security be provided in that connection. These provisions do not purport to give the arbitral tribunal unlimited interim powers. Therefore, the respondent to the motion may assert that the arbitral tribunal does not have jurisdiction to grant the particular interim relief claimed on the motion.
2. If it is likely that the opposite party will abide by the order and the parties simply need a preliminary ruling on a matter, and if a faster hearing can be obtained before the arbitral tribunal than before a court, then the motion likely should be brought to the arbitral tribunal.
3. If the order must be enforced against third parties, then a motion to the court may be more appropriate because an arbitral award is not enforceable against third parties. In Farah v. Sauvageau Holdings Inc., 2011 ONSC 1819 it was held that an arbitrator did not have authority to grant a mareva injunction against a third party. However, it still may be necessary to first obtain an order against the opposing party from the arbitral tribunal, to show that the arbitral remedy has been exhausted and that the opposing party is bound by that order.
4. If the order must be enforced out of the jurisdiction of the place of the arbitral tribunal, a court motion may be more appropriate in order to obtain an order that another court will enforce. An interim arbitral order which is not a final award of the arbitral tribunal may not be enforceable outside the place of the arbitration. While section 9 of the Ontario ICAA says that an order of the arbitral tribunal for an interim measure of protection is subject to the provisions of the Model Law as if it were an award, a court in another jurisdiction may not consider it to be so. So the law of the place of the arbitration and the place where the interim order of the arbitral tribunal will have to be enforced must be considered to determine whether the interim award will be enforceable.
Commencing an arbitration is not a simple process. There are at least seven matters to consider before doing so. By thinking about them beforehand, the claimant can be ready to bring the claim to a successful conclusion, at least from a procedural standpoint.
See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed., chapter 10.
Arbitration – Commencement – Appointment of Arbitrators – Limitation Periods – Mediation- Jurisdiction – Interim Relief
Thomas G. Heintzman O.C., Q.C., FCIArb November 18, 2012
www.heintzmanadr.com