Canada

There are many reasons to choose Canada as the seat of international arbitrations. Canada is a desirable neutral venue with proximity to Europe, the United States and Asia. The legislative regime in Canada is modern, robust and attuned to the needs of the international commercial and arbitration communities. Canada is the home of sophisticated and experienced counsel and arbitrators who are active in the arbitration community, and well versed and trained in the law of arbitration. There are several cities in Canada that can host arbitrations at reasonable cost. And Canadian courts are consistent in according a high degree of deference to arbitral decisions and in protecting arbitration awards from an inappropriate amount of intervention in the arbitration process. Indeed, with one notable exception (in which one part of an award of an international arbitration panel was set aside),¹ there is simply no case in which a Canadian court has refused to enforce or has set aside an award of an international commercial arbitration tribunal on any of the grounds set out in the UNCITRAL Model Law. This article reviews recent cases that consider the limits of staying legal proceedings in deference to arbitration clauses where it appears the party seeking a stay in favour of arbitration may not be acting bona fide.²

The international arbitration regime in Canada
Before reviewing the cases, a brief review of the international arbitration regime in Canada is appropriate.

Canada is a federal state comprised of a federal government, 10 provinces and three territories. Property and civil rights, and the administration of justice in particular, are within provincial jurisdiction. Hence, except for limited matters particularly germane to the federal level of government,³ it is provincial legislation that governs and provides the framework for international arbitration.

International arbitration legislation in Ontario typifies that of all of the provinces. There, the International Commercial Arbitration Act, RSO 1990, c I-9 adopts, with few exceptions, the UNCITRAL Model Law. The principles provided for by the New York Convention have also been adopted. For purposes of the Model Law, Ontario is a 'state'. The primary divergences from the Model Law are that arbitrators are permitted without subsequent disqualification and with the consent of the parties to utilise mediation and conciliation in order to settle cases,⁴ in the absence of agreement by the parties the arbitrators are to apply the rules of law that they consider appropriate,⁵ and the courts are empowered to consolidate arbitration proceedings.⁶

Consistent with the foregoing, in all Canadian jurisdictions, the principles of Kompetenz-Kompetenz are applied, arbitrators are empowered to make interim awards, and, most importantly, the courts interpret arbitration clauses very broadly in order to ensure that parties do not avoid their contractual obligations to arbitrate.⁷

Insofar as court intrusion on arbitration awards is concerned, all Canadian provinces have followed the Model Law in precluding all appeals, even on pure questions of law, except, of course, where the parties have otherwise agreed.⁸ Even where the parties have agreed to permit appeals, it is noteworthy that appellate courts in Canada are generally deferential to decisions made in the first instance. Appeal courts will only reverse trial judgments (and presumably arbitral awards) where there are errors of law or 'overriding and palpable errors' on questions of fact or questions of mixed fact and law. Insofar as defences to recognition and enforcement and applications to set aside awards are concerned, articles 34 and 36 of the Model Law are incorporated into provincial law and cannot be avoided or even limited by agreement of the parties. In brief, arbitration awards can be set aside only on very limited grounds; primarily where a panel exceeds its jurisdiction, and this jurisdictional exception will apply where there is a fundamental denial of due process, or where there are breaches of the rules of natural justice, or where there is a contravention of public policy.

The Resin Systems decision
In Resin Systems,⁹ the Alberta Court of Appeal was asked to consider whether an arbitration agreement had become 'inoperative' within the meaning of the Alberta equivalent of article 8 (1) of the Model Law by reason of a refusal by the moving party to pay the advance of costs on an arbitration that had been commenced with the ICC.

The dispute arose out of two purchase agreements, both of which contained a common arbitration provision submitting all disputes to the Court of Arbitration of the ICC under its rules. The plaintiff, Resin, initiated an arbitration by a request for arbitration to the ICC in October 2006. The defendant, ISM, submitted its defences and by January 2007 an arbitrator had been appointed and a hearing was scheduled to take place in December 2007.

In February 2007, the ICC requested payment from each party of $87,500 as an advance on costs based on the calculation of Resin's claim being in excess of $27 million. ISM continued to take steps in the arbitration in defence of its claim, but refused to pay the advance costs required by the ICC on the basis of its assertion that there was a contractual limitation of damages of approximately $2.8 million, which would result in a significantly lower advance on costs being due from the parties. After having been granted two extensions of time by the ICC, in May 2007 ICM advised that it did not intend to make payment. The ICC invited Resin to substitute in paying ISM's share, but instead Resin took the position that the arbitration process was frustrated, and in June 2007 commenced a legal action in Alberta advancing essentially the same claim as had been made in the arbitration proceedings.

ISM then sought a judicial stay of the legal proceedings based on the arbitration provisions in the purchase agreements. Resin took the position that the arbitration had become 'inoperative' by reason of ISM's refusal to pay advance costs to the ICC. ISM argued that the fact that Resin could pay ISM's share of the advanced costs meant that arbitration was still available, and therefore the arbitration provisions had not become 'inoperative'.

The Alberta Court of Appeal upheld a lower court decision finding that the arbitration agreements had become 'inoperative' by reason of ISM's refusal to pay advanced costs. The court noted that ISM should not be entitled to rely upon its own breach of the ICC arbitration rules, and ought to have pursued the question of the limit on liability before the arbitrator, if indeed it preferred the arbitral forum. In effect, the court held that a party seeking to obtain a stay of legal proceedings in favour of arbitration must have demonstrated a willingness to comply with the rules selected in the arbitration agreement.

The Seidel decision
In the last edition of this review, we reported on the decision of the Supreme Court of Canada in the Dell case,¹⁰ in which Canada's highest court endorsed the principle of Kompetenz-Kompetenz under the Code of Civil Procedure of Quebec, holding that, as a general rule, any challenge to an arbitrator's jurisdiction must first be resolved by the arbitrator; and that challenges solely made on legal questions may be entertained by courts subject to referral back to the arbitrator for initial determination where the application appears to be a delaying tactic or would unduly impair the conduct of the arbitration.

In a series of decisions among lower courts in Canadian common law provinces, the Dell decision has been distinguished in the context of class actions.¹¹ Of particular note for present purposes is the Seidel decision, in which Justice Masuhara of the British Columbia Supreme Court declined to stay a proposed class action in favour of arbitration notwithstanding the decision of the Supreme Court decision in Dell.

At issue in the Seidel case was the interpretation of section 15 of the Commercial Arbitration Act,¹² British Columbia's domestic commercial arbitration statute. That provision requires the court to stay legal action in favour of arbitration 'unless it determines that the arbitration is void, inoperative or incapable of being performed'. This, of course, is the same language that is used in article 8 (1) of the Model Law. However, as noted by Justice Masuhara, the remainder of the domestic commercial arbitration statute is not based on the Model Law, nor is it stated to be so in its preamble or in the legislative history.

In another case decided before Dell, the British Columbia Court of Appeal had determined that an arbitration is 'inoperative' within the meaning of section 15 of the Commercial Arbitration Act if a court determines that a class action is a preferable procedure.¹³ The question before Justice Masuhara was whether this previous Court of Appeal decision had been superseded by Dell. In Seidel, Justice Masuhara held that the Supreme Court of Canada decision in Dell was not applicable in the circumstances, notwithstanding that the question before the court in Dell was the same, namely whether a proposed class action should be stayed in favour of domestic arbitration proceedings. He did so on the basis that the Quebec provisions in the Code of Civil Procedure are differently worded (referring to arbitration agreements that are 'null' without using the further words 'and void, inoperative or incapable of being performed'), that the Quebec provision covers both international and domestic arbitrations and must be interpreted in accordance with the New York Convention and the Model Law, while the same considerations do not necessarily apply to the domestic commercial arbitration statue in British Columbia, and that the Supreme Court of Canada had not considered in Dell whether an arbitration agreement becomes 'inoperative' if a court finds that a class action is the preferable procedure.

The issues arising from the Seidel case will shortly be considered by the British Columbia Court of Appeal in a pending appeal in another case.¹⁴ It is hoped that when that appeal is decided, the court will adopt the reasoning of the Supreme Court of Canada in Dell, regarding the competence of arbitrators to decide their own jurisdiction, whether under the domestic or international commercial arbitration statutes, given that the language in them is substantially the same, and affirm the principle of Kompetenz-Kompetenz. It is also hoped that the Court of Appeal will revisit its earlier conclusion that arbitration may be rendered 'inoperative' where it is determined that a class action is the preferable procedure to resolve the dispute. This prior conclusion undermines the commercial efficacy of arbitration agreements, particularly where the arbitration in question would fall under the international statute. There is no reason in principle why an arbitrator cannot determine whether a class action is the preferable procedure (and indeed available under the arbitration agreement) in preference to the court. Moreover, the issue that appears to be motivating these decisions is the fairness of arbitration clauses in standard form consumer contracts, an issue which is better left to legislatures to resolve, as indeed has been done in Ontario and Quebec, where legislation restricting the use of arbitration clauses in consumer contracts has been enacted.¹⁵

The Reliance Insurance decision
In Reliance Insurance,¹⁶ Justice Pepall of the Ontario Superior Court of Justice was called upon to determine whether arbitration provisions in two reinsurance treaties had become 'inoperative' by reason of insolvency proceedings.

The insolvency proceedings in question were the liquidation of the Canadian branch of Reliance Insurance Company. Parallel liquidation proceedings had been initiated in Ontario and Pennsylvania in autumn 2001. Among the assets of the Canadian branch that the liquidator had been seeking to realise were the proceeds of reinsurance treaties with Swiss Re and some Lloyd's syndicates. The Swiss Re reinsurance treaty required arbitration under the Federal Arbitration Act sited in Philadelphia and the Lloyd's syndicates treaties required arbitration in London.

In the context of the Canadian insolvency proceedings, both Swiss Re and the Lloyd's syndicates took the position that they were entitled to reduce the amounts owing under the reinsurance treaties by certain set-offs. The Canadian liquidator of Reliance scheduled a court hearing to determine the validity of the set-off claims. Both Swiss Re and the Lloyd's syndicates moved to stay that hearing in favour of the arbitration provisions in the reinsurance treaties.

Justice Pepall found that the arbitration agreements had become 'inoperative' because of the insolvency of Reliance's Canadian branch. In this regard she noted the automatic stay of proceedings attendant upon the initiation of liquidation proceedings under the Canadian Winding Up and Restructuring Act, and referred to previous cases where it had been held that an automatic stay of proceedings under other insolvency legislation had the effect of staying extrajudicial proceedings such as arbitration. She also found that it would be inconsistent with the purpose of the Winding Up and Restructuring Act for there to be a multiplicity of proceedings dealing with recovery of the insolvent estate.

Justice Pepall went on to decline to lift or vary the insolvency stay in order to permit the arbitration agreements to be put into effect, again because of the potential for a multiplicity of proceedings and inconsistent rulings.

***

While Canada remains an arbitration-friendly jurisdiction, these cases indicate that the willingness of Canadian courts to stay judicial proceedings in favour of arbitration may be limited where the facts are particularly unsympathetic towards the party seeking the stay or indicate a lack of bona fide intention to arbitrate. In general, however, it remains the case that arbitration proceedings may be conducted in any of Canada's provinces with assurance that the courts will give affect to the terms of arbitration agreements, that the courts will lend assistance where required in order to assist the securing of pre-hearing evidence, and the courts will accord deference to the arbitral tribunal's pronouncements on their own competence, all consistent with the provisions of the New York Convention and UNCITRAL Model Law.

Notes
1. Resin Systems Inc v Industrial Services & Machine Inc, 2008 ABCA 104; Seidel v Telus Communications Inc, 2008 BCSC 933; Attorney General of Canada v Reliance Insurance Company, 2007 CanLII 41899 (Ont SCJ).
2. Jardine Lloyd Thompson Inc v SJO Catlin, [2006] AJ No. 32 (Alta. C.A.), and Dell Computer Corporation v Union des consommaterurs and Olivier Dumoulin, 2007 SCC 34 (Sup Ct Canada).
3. The federal Commercial Arbitration Act RSC 1985, c 17 (2nd Supplement) applies to international and domestic arbitrations where one of the parties is the Crown, a department of the federal government or where the subject-matter of the arbitration relates to marine or maritime matters.
4. Section 3.
5. Section 6.
6. Section 7. The acts of the other provinces are: Alberta: International Commercial Arbitration Act, RSA 2000, c I-5; British Columbia: International Commercial Arbitration Act, RSBC 1996, c 233; Manitoba: International Commercial Arbitration Act, CCSM c C-151; New Brunswick: International Commercial Arbitration Act, SNB 1986, c 112.2; Newfoundland and Labrador: International Commercial Arbitration Act, RSN 1990, c I-15; Northwest Territories and Nunavut: International Commercial Arbitration Act, RSNWT 1988, c I-6; Nova Scotia: International Commercial Arbitration Act, RSNS 1989, c 234; Prince Edward Island: International Commercial Arbitration Act, RSPEI 1988, c I-5; Quebec: An Act to Amend the Civil Code and the Code of Civil Procedure in Respect of Arbitration, SQ 1986, c 73; Saskatchewan: International Commercial Arbitration Act, SS 1988-89, c I-10.2; Yukon: International Commercial Arbitration Act, RSY 2002, c 123.
7. Desputeaux v Editions Chouette (1978) Inc, [2003] SCR 178
8. Generally, in domestic arbitrations, appeals are permitted on questions of law where prior leave is obtained, with the applicant having to establish a degree of importance that transcends the immediate result in the award under appeal.
9. supra.
10. supra, 2007 SCC 34.
11. MacKinnon v National Money Mart Co et al, 2008 BCSC 710; leave to appeal granted 2008 BCCA 292; Smith Estate v National Money Mart Co, 2008 CarswellOnt 3310 (SCJ); Seidel, supra.
12. RSBC 1996 c 55.
13. McKinnon v National Money Mart Co, 2004 BCCA 573.
14. McKinnon v National Money Mart Co, 2000 BCCA 292.
15. Consumer Protection Act (Quebec), RSQ, c. P40-1, S 11.1; Consumer Protection Act, 2002 (Ontario), SO 2002, c30, S8(1)
16. supra.