ULCC Working Group Issues Discussion Paper On A New Uniform International Commercial Arbitration Act

In January 2013, a Working Group of the Uniform Law Conference of Canada (“ULCC”) issued a Discussion Paper with respect to proposals for a new Uniform International Commercial Arbitration Act. The Discussion Paper is intended to generate consultations by May 2013 and final approval by the ULCC in August 2013.

Background to the Discussion Paper

In 1985, The United Nations Commission on International Trade Law (UNCITRAL) adopted the UNCITRAL Model Law on International Commercial Arbitration.  The Model Law sets forth legislative provisions relating to the conduct, enforcement and recognition of arbitral awards in international commercial arbitrations. The Model law was developed so that it could be implemented by statute in each country adopting the Model Law, to provide a consistent approach among those countries to international commercial arbitrations.

The Uniform Law Conference of Canada was founded in 1918 to harmonize the laws of Canadian provinces and territories and, where, appropriate, federal laws.  The ULCC brings together government and private lawyers, analysts and law reformers to study areas in which provincial and territorial laws might benefit from harmonization. The history, study papers, discussion documents and many of the Uniform Laws which it has drafted, may be seen on the ULCC’s website: www.ulcc.ca.

In 1986, the ULCC issued a Uniform International Commercial Arbitration Act (the “Uniform ICAA” or the “existing” Act). The Uniform ICAA was intended to provide a template for the implementation of the UNCITRAL Model by Canadian provinces, territories and the federal Parliament.  In large measure, the ULCC’s Uniform ICAA was enacted across Canada. The Uniform ICAA may be seen at: https://www.ulcc.ca/en/uniform-acts-en-gb-1/462-international-commercial-arbitration-act.

The Model Law was amended by UNCITRAL in 2006. In response to these amendments to the Model Law, in August 2011 the ULCC established a Working Group to bring forward recommendations for a new Uniform ICAA (or “new Act”).  In August 2012, the ULCC authorized the preparation of a Discussion Paper for consideration by the ULCC at its meeting in August 2013.

Elements of the Discussion Paper

The Discussion Paper recently issued by the Working Group can be divided into two elements.

First, the Working Group has made recommendation on a wide ranging group of issues.

Second, the Working Group has identified further issues upon which it is seeking the view of others.

Recommendations of the Working Group

There are nine main recommendations of the Working Group:

1.      The form of the existing Act should be used in the new Act.

The existing Uniform ICAA is a relatively short statute of fifteen sections, to which the Model Law is attached as Schedule B. Also attached, as Schedule A, is the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards adopted by United Nations Conference on International Commercial Arbitration in June 1958. The existing Uniform ICAA does not incorporate domestic arbitration legislation.

In other words, the ULCC’s recommended statute for international commercial arbitration does not itself set out the effective statutory provisions and does not deal with domestic arbitration, as do the statutes in some jurisdiction (such as Quebec and the U.K.).  Rather the ULCC’s existing Uniform ICAA leaves most of the substantive provisions in the attached Model Law, and few in the enacting statute itself, and deals only with international commercial arbitration.

The Working Group recommends that this approach be used in the new statute, on the ground that it more readily identifies the Model Law as the operative document and promotes uniformity among Canadian statutes.  The Working Group recommends that, if any legislature believes that departures from the Model Law are required, those changes should be made in the statute, not the attached Model Law, and that the new Act should only deal with international, not domestic arbitration.

2.    The Working Group has tentatively recommended that all the 2006 amendments to the Model Law be incorporated into the ULCC’s new Uniform ICAA.  This approach has not been taken in every country, as some countries have selected only those amendments they thought were appropriate to adopt.  In particular, some countries have not adopted the provisions in the 2006 amendments to the Model Law relating to the interim measures which may be granted by the arbitral tribunal, on the basis that those interim powers should only be exercised by courts.  The view of the Working Group is that the granting of interim powers to the arbitral tribunal allows the tribunal, but does not compel it, to exercise those powers, and that it is better that these powers be available to arbitral tribunals, only to be exercised if appropriate.

3.    The new Act should apply only to written arbitration agreements (as does the existing Uniform ICAA) but that a flexible approach to “writing” should be taken so that agreements arising from electronic communications would be included.  The Working Group did not recommend that oral arbitration agreements be included within the new Act.

4.    The new Act should not harmonize the limitation periods applicable under Canadian laws for the commencement of arbitration proceedings. Accordingly, the relevant limitation period would be determined by the parties in their agreement, or by the applicable substantive law.

5.    International arbitration awards made elsewhere in Canada should be enforceable under the new Act, to allay doubts that such awards are not “international” and not enforceable under that Act.

As a corollary, the Working Group recommended that domestic awards in other provinces should only be enforced through domestic arbitration statutes in other provinces or territories. Also, clearly being of the view that foreign domestic awards should not be enforceable through the new Act, the Working Group is seeking comments as to how this result can be best achieved.

6.    The words “Commercial Arbitration” and “Commercial Relationship” should be defined in the new Act.

7.    The Working Group considered that it might be helpful to clarify that an international commercial arbitration award may be raised by way of defence, set-off, or counterclaim in existing proceedings.  This would obviate the need to commence separate proceedings seeking recognition and enforcement.

8.    The new Act should clarify what is meant by “State”, in a similar fashion to that accomplished in Section 6 of Ontario’s International Commercial Arbitration Act.

9.    The new Act should emphasize the need to promote Canadian uniformity in the application of laws relating to international commercial arbitration.

Views Sought by the Working Group

 The Working Group is seeking input on a wide variety of other issues, including the following:

1.    Whether the new Act should clarify that the limitation periods for commencing arbitration proceedings under Canadian laws (if they apply) are the same for international commercial arbitrations as for court actions.

 2.    Whether there should  be a provision for interprovincial enforcement of Canadian judgments recognizing and enforcing international arbitration awards. The recent decision of the Supreme Court of Canada in Yugraneft Corp. v. Rexx Management Corp. raises the issue of whether an award in an international commercial arbitration can be enforced in one province, where the limitation period is longer, and then whether that judgment can be enforced in another province where the original award could not be enforced due to a shorter limitation period.

3.    Whether the new Act should say anything about the nationality of the chair or single arbitrator. British Columbia’s International Commercial Arbitration Act provides that the Court shall not, without the agreement of the parties appoint a sole or third arbitrator who is of the same nationality as that of any of the parties.

4.    Whether the new Act should preclude opting in or out of the Act, in whole or in part.

5.    Whether the new Act should deal with the confidentiality of arbitration proceedings.

6.    Whether the new Act should deal with retroactivity, that is, whether the new Act should apply to arbitration proceedings commenced before, or only after, the new Act comes into effect.

7.    Whether the mediation/conciliation provisions in the existing Act (section 6) should be included in the new Act.

8.    Whether an arbitration should be required to be re-commenced if the chair or one of the other arbitrators ceases to be an arbitrator (as the existing Act requires in section 7), or whether the arbitral tribunal should have the option of continuing the proceeding with the replacement arbitrator familiarizing himself or herself with the evidence already tendered.

9.    Whether any amendment needs to be made with respect to the law that governs the substance of the dispute if there is no specific choice of law by the parties.  The present Uniform Act enables the arbitral tribunal to select the law that is appropriate having regard to all the circumstances (section 8).

10.    Whether the court should have power to consolidate arbitration proceedings if the parties do not agree. Presently, the court has power only to consolidate if, at the time of the motion to consolidate, the parties agree to that consolidation (section 9 of the existing Act).

Conclusion

 Clearly, the issues which the Working Group and the ULCC are considering are of vital importance to international commercial arbitration in Canada. Canada must continue to modernize its arbitration regime, not only to ensure that cost effective justice is achieved in Canada but also to ensure that the world has continued confidence in Canada as a good place to do business.  For these reasons, any comments about the proposed new International Act should be forwarded to the ULCC as soon as possible. Comments can be delivered to the ULCC on the Contact form on its website: https://www.ulcc.ca/en/contact.

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                January 18, 2013

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Arbitration Clause Is A Separate Enforceable Agreement

What happens when an arbitration clause is contained within a commercial agreement that one party says never came into existence or is unenforceable? And what if the dispute involves persons who are not parties to the commercial agreement? Is the arbitration clause still enforceable? Yes, the Ontario Court of Appeal recently said in Kolios v. Vranich.

The Background

The dispute arose from a shareholders agreement which contained an arbitration clause. Vranich commenced an action in the Ontario Superior Court and sued both parties to the shareholders agreement and other parties. Kolios moved to stay the action so far as the claim against parties to the shareholders’ agreement, asserting that that claim must be dealt with by arbitration. Vranich said that the parties had never reached an agreement on a schedule to the shareholders’ agreement relating to shareholders loans, and therefore had never reached an agreement on the whole agreement.

Section 7(1) of the Ontario Arbitrations Act, 1991 (the Act), provides that, subject to certain exceptions, if a party to an arbitration agreement commences a proceeding in respect of a matter to be submitted to arbitration, the court shall stay the action. The Ontario Superior Court dismissed an application to stay the action under this sub-section. The Ontario Court of Appeal allowed the appeal and stayed the action against the defendants who were parties to the shareholders agreement, and allowed the action to proceed against the defendants who were not parties to that agreement.

The Court of Appeal applied two sub-sections of the Act. Section 17(1) provides that the arbitral tribunal has authority to determine its own jurisdiction and in doing so, to rule on the validity or existence of the arbitration agreement. This sub-section introduces into Ontario law the now well-know principle of “competence-competence”, that is, that an arbitral tribunal is competent to decide its own competence.

The Court of Appeal also applied Section 17(2) which says that, if an arbitration agreement forms part of a main agreement, then the arbitration agreement shall be treated as an independent agreement for the purposes of a ruling on jurisdiction, even if the main agreement is invalid.

Based on these sub-sections, the Ontario Court of Appeal held that it was up to the arbitral tribunal to decide the question of the validity of the shareholders agreement, not the court. In so holding, the Court of Appeal noted that Vranich did not assert that the shareholders agreement was invalid or void ab initio.

Moreover, the fact that the action would proceed against other defendants did not disturb the Court of Appeal since those other defendants had not sought a stay. The Court of Appeal did not mention sub-section 7(5) of the Act but that sub-section expressly authorizes the court to stay that part of an action which is dealt with in an arbitration agreement, and allow to proceed to trial the balance of the action not covered by the arbitration agreement.

This decision of the Court of Appeal demonstrates the sea change that has taken place in Canada with respect to the stay of actions based upon arbitration agreements. A generation ago, a Canadian court would have had no hesitation in permitting an action to proceed when some of the allegations or some of the parties were not subject to the arbitration agreement. Three fundamental changes have occurred.

First, Section 7(1) uses the “shall” word and thereby mandates arbitration, unless very specific exceptions apply. The courts are reading those exceptions very narrowly. Before 1992, the Arbitration Acts of Ontario used the “may” word and gave the courts discretion to stay or not stay an action brought in the face of an arbitration clause. In those days, the courts were usually prepared to exercise that discretion in favour of the action proceeding and not the arbitration.

Second and as noted above, the Act now clearly addresses, in section 17, many of the former objections to arbitration and provides the arbitrator with the jurisdiction to determine them, even in the face of objections that the main agreement or the arbitration agreement is unenforceable or that the dispute involves persons who are not parties to the agreement. These sections effectively drive all disputes about the subject matter or its arbitrability back to the arbitral tribunal.

Third, the attitude of Canadian judges has fundamentally changed. Judges do not now consider that courts are the superior means of adjudicating disputes. Indeed, they recognize that courts have become so expensive and time-consuming that parties are well advised to go elsewhere to have their dispute resolved. And when they do, judges also now give great, indeed overriding, effect to the parties’ choice to go to arbitration, and are prepared to hold the parties to their bargain.

Further Questions

Some further question remains. How will arbitrators deal with the new authority which they have to determine their own jurisdiction? Will the future track record of arbitrators’ decisions demonstrate that arbitrators are making these jurisdictional decisions responsibly? Or will arbitrators tend to rule that they have jurisdiction, so that they can continue with the arbitration? Will the legislature’s decision to hand these jurisdictional disputes to arbitrators be justified, and will arbitrator’s jurisdictional disputes be upheld by the courts? And since arbitrator’s decisions are made privately and are unknown to the public unless challenged in court, how will the track record of arbitrators relating to jurisdictional matters be judged?

Only time and judges will tell. Ironically, it will take the decisions of judges, and a developed body of judicial decisions reviewing the jurisdictional decisions of arbitrators, to determine how well arbitrators are discharging their responsibility to determine their own authority.

Arbitration agreement – challenging arbitral award – enforcing –

Kolios v. Vranich, 2012 ONCA 269

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

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www.constructionlawcanada.com

No Appeals From An Arbitrator’s Interim Decision Unless It Is A Final Order

The Ontario Court of Appeal has recently considered whether any appeal may be taken from a decision of an arbitral tribunal which is made prior to the final award. The Court held that no such appeal may be taken from such a decision, except if the decision amounts to a “final” order.  The decision appears to leave open the possibility of appealing an arbitral decision if it amounts to a “final order” even if it is not the final award of the tribunal: Universal Settlements International Inc. v. Duscio.

The Background

The arbitration was between the shareholders of Universal, pursuant to a shareholders’ agreement.  The arbitration agreement provided that the arbitrator had authority to make all interim, interlocutory and final decisions.  During the arbitration, the arbitrator made an interim award permitting two shareholders to purchase the shares of two other shareholders.  The parties entered into an escrow agreement requiring that the purchasers pay $1 million into escrow pending the final disposition of the arbitration.

Then the sellers of the shares brought a motion asking for the release of $290,000 of the purchase monies in order to pay their lawyer and for living expenses. The motion was granted.

Later, the purchasers brought a motion for an order requiring the repayment of these monies on the ground that the sellers’ motion had been based on fraudulent evidence.  The arbitrator granted the repayment motion, and also granted the purchasers costs of the motion, but made no finding of fraud. The sellers took the position that the costs order was subject to the bankruptcy of one of the sellers, Mr. Duscio, absent a finding of fraud.  They asserted that the arbitrator had no jurisdiction to make such a costs order and launched an application for leave to appeal to the Superior Court from the arbitrator’s cost award.

In the meantime, the purchasers brought a motion to strike out the statement of defence of the sellers on the ground that the sellers had not paid the costs award. The sellers took the position that the arbitrator had no jurisdiction to enforce payment of the costs award because of Mr. Duscio’s bankruptcy. The arbitrator held that the statement of defence of the sellers should be struck out.  The sellers amended their court application to appeal from that order of the arbitrator.

The arbitrator then proceeded to hear the arbitration in the absence of the sellers.  He held that the sellers were in breach of their fiduciary duty and had converted Universal’s monies. The arbitrator awarded the purchasers $6.1 million including interest. The purchasers then amended their court application to appeal from that further decision of the arbitrator.

The Decision

The Court of Appeal held that, under the Ontario Arbitrations Act, 1991, the authority of the Superior Court to interfere with the arbitrator’s decisions was “strictly limited” to “those few circumstances” specifically referred to in that Act.  Applying that principle, the Court of Appeal held that there was no right of appeal from the arbitrator’s decisions ordering repayment and costs because those decisions were purely interlocutory and did not involve the final determination of the rights of the parties.

However, the Court held that the arbitrator’s decision striking out the statement of defence was appealable, not because it was made without jurisdiction, but because it was unfair and resulted in the sellers not being given an opportunity to present their case, contrary to Section 46(1).6 of the Act. The Court noted that an order striking out a statement of defence has been held in Ontario to be a final order, and is therefore appealable under the Act.

Similarly, the Court of Appeal held that the final arbitration decision made without notice to the sellers was appealable because it also was a final decision, and because it was unfair and occurred without the sellers having an opportunity to respond to the allegations made against them.

The Court of Appeal held that the arbitrator had erred in striking out the sellers’ statement of defence because of their failure to comply with the costs award when compliance was neither “possible nor lawful”, and when payment of the costs award would have amounted to a preference over other creditors in the bankrupt estate.

This decision re-affirms the insistence by Ontario courts that they will only interfere with arbitral proceedings if a ground to do so is specifically set forth in the applicable arbitration statute. That aspect of the decision is a welcome re-affirmation of the simplicity of the Ontario statutory regime applicable to arbitrations.  The decision recognizes that until the arbitration proceeding is finalized, the courts have no role to play.

Final and Interlocutory Orders

However, the decision does interject into arbitral jurisprudence in Ontario the debate about the distinction between “final” and “interlocutory” orders. The Court of Appeal has held that the reference in the Ontario Arbitrations Act, 1991 to “an award” means a “final award”, not an interlocutory or procedural award that decides interim issues leading to a final award.

The distinction between “final” and “interlocutory” orders has a long and, some might say, tortured, history in Ontario procedural law. It is the basis for distinguishing between orders in the court system that can be appealed without leave (being final orders) and those orders for which leave is required (being interlocutory orders).  It appears that the present decision may allow an arbitral decision to be appealed if it qualifies as being a “final” award, even if it is not the last decision of the arbitrator which finally decides the dispute.

Arbitral award – challenging arbitral award – enforcement – conduct of arbitration

Universal Settlements International Inc. v. Duscio:  2012 ONCA 215

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                 May 15, 2012

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Same Court, Different Results: When Does The Limitation Period Start For An Arbitration Claim?

When does the limitation period start for an arbitration claim?  Can the very making of the demand start the period running?  Yes, the Ontario Court of Appeal recently said in Federation Insurance Co. of Canada v. Markel Insurance Co of Canada. In so deciding, the Court of Appeal seems to have reached a conclusion which is contrary to another of its decisions in 2011.

While this decision was rendered in the context of automobile insurance, it may have wide implications for commercial arbitrations, especially under bonds or indemnity contracts.  The decision may mean that, in a wide variety of settings, the very demand by a claimant may start the limitation period running under an arbitration clause.  That is because, under the particular language of the contract in which the arbitration clause is found, the claim may be “discovered’ before or at the very time when the claim is made.  If that is so, then the claimant should start counting the very day it makes its claim.

The Background

Between April and May 2006, Federation paid statutory accident benefits (“SABS”) to its insured under an automobile policy arising from an accident which the insured had with another motorist.  Under Ontario Insurance law, Federation was entitled to recover the SABS from the other motorist’s insurer and made a request for payment from the other insurer.   More than two years later and having not been paid by Markel, Federation instituted an arbitration claim against the other insurer for payment.

The other insurer took the position that Federation’s claim was barred by Ontario’s two year limitation period.  The arbitrator agreed and dismissed Federation’s claim.  The arbitration award was upheld by the Ontario Superior Court and Court of Appeal.

The Court of Appeal held that Federation suffered a loss and had discovered that loss at the very time that it made a demand for payment from the other insurer.  It said:

[T]he first party insurer suffers a loss from the moment the second party insurer can be said to have failed to satisfy its legal obligation to satisfy the loss transfer claim… the first party insurer suffers a loss caused by the second party insurer’s omission in failing to satisfy the claim the day after the Request for Indemnification is made.

I cannot agree with the proposition that no loss is suffered until the second party insurer unequivocally denies the claim. That argument ignores the fact that once a valid request is made, the first party insurer is legally entitled to be indemnified and therefore suffers a loss each day it is out of pocket for the SABS paid to its insured. I note here that this conclusion is supported by the passage I have quoted at para. 9 from the FSCO bulletin for loss-transfer claims stating that loss-transfer claims are to be paid “promptly” upon receipt of a Request for Indemnification and that the relevant arbitral jurisprudence holds that where a first party insurer is successful in establishing a loss transfer claim, interest is payable from the date the claim was asserted.”

The Court of Appeal then considered the language in section 275(4) of the Ontario Insurance Act.   That sub-section stated that “If the insurers are unable to agree with respect to indemnification under this section, the dispute shall be resolved through arbitration under the Arbitration Act.”  (emphasis added)

The Court said that this sub-section did not require, as a precondition to the cause of action arising and the limitation period beginning to run, that the parties actually engage in discussions and actually be unable to agree.  The Court stated its decision on this point as follows:

“In my view, s. 275(4) does nothing more that stipulate that any disputes that cannot be otherwise resolved by the parties are to be resolved by arbitration rather than by litigation. Section 275(4) says: if you cannot agree, your claim is to be resolved by arbitration. It does not say: you must be able to demonstrate a failure to agree or a clear denial of your claim by the other insurer in order to commence arbitration.

I accept that the loss-transfer regime assumes that virtually all claims can and should be resolved by agreement. I accept as well that as a practical matter, insurers should be encouraged to discuss and negotiate claims. Moreover, as a practical matter, no insurer would proceed with arbitration unless it was apparent that an acceptable agreement could not be reached by negotiation. But that does not mean that as a matter of law, an insurer must be able to demonstrate a failure to agree or clear denial of the claim by the other insurer as a condition precedent to commencing a proceeding to enforce a claim for indemnification.”  (emphasis added)

Federation submitted that this approach to the arbitration clause was contrary to public policy on the ground that it would discourage negotiation and real efforts at settlement.  The Court of Appeal disagreed:

“I fully accept that parties should be discouraged from rushing to litigation or arbitration and encouraged to discuss and negotiate claims. In my view, when s. 5(1) (a) (iv) [of the Limitations Act, 2002] states that a claim is “discovered” only when “having regard to the nature of the injury, loss or damage, a proceeding would be an appropriate means to seek to remedy it”, the word “appropriate” must mean legally appropriate. To give “appropriate” an evaluative gloss, allowing a party to delay the commencement of  proceedings for some tactical or other reason beyond two years from the date the claim is fully ripened and requiring the court to assess to tone and tenor of communications in search of a clear denial would, in my opinion, inject an unacceptable element of  uncertainty into the law of limitation of actions.”

In this decision, the Court of Appeal arrived at a result which is contrary to the result in its 2011 decision in L-3 Communication Spar Aerospace Limited v. CAE Inc (which decision was not referred to in the Federation v. Markel decision, although one of the judges sat on both cases).

I dealt with the L-3 Communication decision in my article of July 17, 2011.  In that case, the contract provided for the dates for the delivery of data relating to a hardware and software aviation system.  The contract said that: “The price and other adjustments that are not agreed between the parties may be referred to arbitration”.  Based on that language and other language in the contract, the Court of Appeal held that the limitation period did not commence until the parties had undertaken negotiations and there had been a definite inability to agree on the price and other adjustments. The Court said:

The commercially reasonable interpretation is that a dispute over failure by SPAR to deliver information as required together with the cost consequences caused thereby is one that the parties were obliged to attempt to resolve between themselves. Failing agreement either party is entitled to take the dispute to arbitration

How can these two decisions be reconciled?

In L-3 Communications, the words “not agreed between the parties” were held to mean that the limitation period did not commence before a negotiation and absence of agreement occurred.  In Federation v. Markel, the words “unable to agree” were held not to require the parties to negotiate and be unable to reach an agreement, and not to delay the commencement of the limitation period.

It seems that the only way to reconcile the two cases is to examine the process leading up to the demand in each case.  In L-3 Communications, the parties were involved in a tender process and were in direct dealings and negotiations with each other over price and other adjustments.  The language of the tender documents contemplated real efforts to agree on price and adjustments.  So the Court of Appeal was able to conclude that the words “not agree” meant that the parties were obliged to engage in an actual process of negotiation leading to non-agreement, and until that process was concluded the claim did not arise in law and the limitation period did not begin.

In Federation v. Markel, there were no ongoing dealings between the parties, apart from one insurer’s demand that the other insurer indemnify it.  There was no prior contract, tender or other relationship between the parties.  The parties were simply insurers whose insureds had been involved in a motor vehicle accident.  In this circumstance, the Court of Appeal held that the words “unable to agree” did not signify that the parties had to go through an attempt to agree as a pre-condition to the existence of a legal entitlement to payment and the commencement of the limitation period.

These decisions demonstrate the danger lurking in limitation periods relating to contract claims in general, and to claims under arbitration clauses in particular.  While the general law of limitations will apply to those arbitral claims, the terms of the contract and the terms of the arbitration clause may fundamentally affect the question of when a legal right under the contract or arbitration clause comes into existence.

All the ingredients of the cause of action may have arisen when the party with the claim makes its demand.  The party with the claim may have discovered all those ingredients when it makes its claim.  If these ingredients are in place then, unless the arbitration clause very clearly suspends the limitation period during settlement or negotiation, it may be unwise to rely on a suspension of the limitation period during that period.  Prudence may demand that the claim be issued and negotiations come later.

See  Heintzman and Goldsmith on Canadian Building Contracts (4th ed.), Chapter 6

Federation Insurance Co. of Canada v. Markel Insurance Co of Canada, 2012 CarswellOnt 4051, 2012 ONCA 218

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                            May 5, 2012

www.heintzmanadr.com

www.constructionlawcanada.com

How Correct Does An Arbitrator Have To Be?

What margin of error does an arbitrator have?  Should an arbitral tribunal’s decision be set aside if it is legally incorrect?  Or should a wider deference be shown, so that a decision will only be set aside if it is unreasonable, or perverse?

And how detailed does an arbitral decision have to be? Can it be struck down if the reasons are not adequate?

There are older appellate decisions which addressed these issues in the arbitration context.  In recent years, however, a seismic shift has occurred in administrative law relating to these issues as a result of decisions of the Supreme Court of Canada.  Do the same principles apply to the review of arbitral decisions?

In its 2003 decision in Dunsmuir, the Supreme Court of Canada collapsed the various standards of review which apply to administrative tribunals into two standards.

Decisions must be correct if they truly relate to the jurisdiction of the tribunal, or relate to general questions of law about which the tribunal has no particular expertise.  If they are of that nature, then they will be set aside if they are not correct (the “correctness” standard).  All other decisions of administrative tribunals will only be set aside if, in all the circumstances, they are unreasonable (the “reasonableness” standard).

In its 2002 decision in Sheppard, the Supreme Court held that a court’s decision should be set aside for legal error if the reasons are totally inadequate.  Without adequate reasons, the person who loses does not know why.  Nor does the appeal court have a proper basis to review the original decision without adequate reasons. The “adequacy of reasons” provides a second and related basis for reviewing a decision of an inferior court or tribunal.

In two recent decisions, the Supreme Court applied the Dunsmuir and Sheppard principles to arbitral tribunals.  While both decisions relate to labour arbitrations, there is every reason to expect that the same principles will apply to commercial arbitrations.

In Nor-Man Regional Health Authority v. Manitoba Association of Health Care Professionals, the Supreme Court upheld an arbitrator’s decision in which the arbitrator had applied the principle of estoppel.  The arbitrator found that the company had breached the collective agreement.  However, he held that the union was estopped from complaining about that breach because it had failed to raise any complaint about the same conduct, and the same interpretation of the collective agreement, by the company over a 20 year period and numerous collective agreements.

The Supreme Court held that the arbitrator’s decision should be reviewed on the standard of reasonableness, not correctness, for three reasons:

First, labour arbitration decisions are normally reviewed on the reasonableness standard.

Second, the principle of estoppel is well known to labour law and highly suited to the ongoing relationships between management and its employees.

Third, (and most importantly for general arbitration law), the Supreme Court held that an arbitrator’s application of common law principles must not always meet the correctness standard.  An arbitrator’s decision applying general principles of law will only be reviewed on that standard if the decision raises legal issues “both of central importance to the legal system as a whole and outside the adjudicator’s specialized area of expertise.”  In the present circumstances, the arbitrator’s reliance on estoppel did not fall in that category.

In Newfoundland and Labrador Nurses Union v. Newfoundland and Labrador (Treasury Board), the Supreme Court upheld a labour arbitrator’s award relating to the calculation of vacation benefits.  That decision was attacked on the basis that it was unreasonable due to the paucity of reasoning in the award.  The Supreme Court applied the Dunsmuir/Sheppard principles and adopted a wide scope of reasonableness, both as to the deference to be shown to the arbitrator and the necessity for detailed reasons.  The Court held that:

The arbitrator’s decision should not be scrutinized by the court separately for adequacy of reasons and reasonableness of result.  These two ingredients are inter-related.  The court’s review process “is a more organic exercise – the reasons must be read together with the outcome and serve the purpose of showing whether the result falls within a range of possible outcomes.”

The arbitrator’s reasons need not include “all the arguments, statutory provisions, jurisprudence or other details the reviewing judge would have preferred.”  Nor need they include “an explicit finding on each constituent element, however subordinate, leading to the final conclusion.”

The reviewing court should not seek to subvert the arbitrator’s decision but supplement them by logic and reasonable inference.

The issue of adequacy of reasons cannot be boot-strapped into the standard of correctness by being labelled a matter going to procedural fairness and therefore a matter of law:  “Any challenge to the reasoning/results of the decision should therefore be made within the reasonableness analysis.”

While these decisions relate to awards of labour arbitrators, the principles they adopt are readily applicable to commercial arbitrations.  They will be particularly important in protecting a decision of a commercial arbitral tribunal from court review when it is alleged that the decision:

does not deal with all issues raised by the complaining party;

or erroneously decides or applies general principles of law;

or is unfair or outside the bounds of reasonableness.

On all these grounds, the Nor-Man and the Newfoundland and Labrador Nurses Union decisions of the Supreme Court will provide powerful support to the party seeking to uphold the award.

Nor-Man Regional Health Authority v. Manitoba Association of Health Care Professionals,  2011 SCC 59;

Newfoundland and Labrador Nurses Union v. Newfoundland and Labrador (Treasury Board) 2011 SCC 62

Arbitration – estoppel – standard of review – adequacy of reasons – challenging arbitral award

Thomas G. Heintzman O.C., Q.C.                                                                                                     January 20, 2012

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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

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