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Arbitration

1. General
2. Competence-Competence Principle
3. Tort Claims and Arbitration

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1. General

Arbitrations are essentially 'private litigation', litigation contractually agreed to in case of dispute to the (attempted) exclusion of the 'local' courts (in this context, 'local' means Ontario). They can range from two or more sophisticated parties where the arbitration agreement is with respect to one (big) contact, to on the other hand 'contracts of adhesion' with one sophisticated contractor on one side and one of many (usually consumers) on the other. Arbitration is a thing of international law.

In Ontario, there is an Arbitration Act which sets out basic rules for arbitrations, a sort of 'minimum standards' to avoid the worst excesses to which the phenomenon is subject. Most of the interesting litigation involves consumer issues, where contractual provisions try to compel arbitration in international 'venues' (ie. where the case may be heard by country) that favour the large party, and other requirements that make contesting the contracts (invariably drafted by the large party) difficult for the small consumer.

Here is Ontario's Arbitration Act.

2. Competence-Competence Principle

. Haas v. Gunasekaram

In Haas v Gunasekaram (Ont CA, 2016) a shareholder investor sued the principles of a corporation for tort in negligent misrepresentation using Ontario's Superior Court. The principles moved under the Arbitration Act to declare that the matter should be resolved by the term of contractual arbitration, not in the public courts. The court explained the 'competence-competence principle', that in the event of a jurisdictional dispute between the court and the arbitration venue, that the arbitrator's ruling is paramount:
C. The Law’s approach to arbitration agreements

[9] Many cases have considered how the court should approach its task under s. 7(1) of the Arbitration Act, which provides:
7(1) If a party to an arbitration agreement commences a proceeding in respect of a matter to be submitted to arbitration under the agreement, the court in which the proceeding is commenced shall, on the motion of another party to the arbitration agreement, stay the proceeding. [Emphasis added.]
[10] The law favours giving effect to arbitration agreements. This is evident in both legislation and in jurisprudence. Section 7 of the Arbitration Act contains mandatory language, stating “the court in which the proceeding is commenced shall, on the motion of another party to the arbitration agreement, stay the proceeding” (emphasis added).

[11] The mandatory wording in s. 7 of the Arbitration Act is a change from s. 7 of the old Arbitrations Act, R.S.O. 1990, c. A.24, which gave the court discretion to stay the action:
[I]f satisfied that there is no sufficient reason why the matter should not be referred in accordance with the submission and that the applicant was at the time when the proceeding was commenced and still remains ready and willing to do all things necessary to the proper conduct of the arbitration, [the court] may make an order staying the proceeding. [Emphasis added.]
[12] As can be seen, the statutory language in s.7 of the current Arbitration Act is directory, not equivocal. It strongly favours giving effect to an arbitration agreement. This policy direction is reinforced by s. 17 of the Arbitration Act:
17(1) An arbitral tribunal may rule on its own jurisdiction to conduct the arbitration and may in that connection rule on objections with respect to the existence or validity of the arbitration agreement.

(2) If the arbitration agreement forms part of another agreement, it shall, for the purposes of a ruling on jurisdiction, be treated as an independent agreement that may survive even if the main agreement is found to be invalid.
[13] Subsection 17(1) did not exist in the 1980 or the 1990 Arbitrations Act. Subsection 17(2) codifies the common law, and establishes that an arbitration agreement can survive even where the contract in which it is found is determined to be invalid.[2]

[14] The same pro-arbitration orientation is found in the jurisprudence. In Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34 (CanLII), [2007] 2 S.C.R. 801, Deschamps J., speaking for the majority of the Supreme Court, articulated a general rule, at para. 84: “I would lay down a general rule that in any case involving an arbitration clause, a challenge to the arbitrator’s jurisdiction must be resolved first by the arbitrator.” This has become known as the “competence-competence principle”. The exception is where a “challenge to the arbitrator’s jurisdiction is based solely on a question of law, or one of mixed fact and law that requires for its disposition ‘only superficial consideration of the documentary evidence in the record’” (Dell Computer, at para. 84). See also Seidel v. Telus Communications Inc., 2011 SCC 15 (CanLII), [2011] 1 S.C.R. 531, at para. 4.

[15] This court most recently discussed the “competence-competence” principle in Ciano Trading & Services C.T. & S.R.L. v. Skylink Aviation Inc., 2015 ONCA 89 (CanLII), stating “where it is unclear if the arbitrator has jurisdiction, it is preferable to leave the issue to the arbitrator pursuant to the competence-competence principle” (at para. 7). In Dancap Productions Inc. v. Key Brand Entertainment, Inc., 2009 ONCA 135 (CanLII), 246 O.A.C. 226, at paras. 32-33, Sharpe J.A. explained:
It is now well-established in Ontario that the court should grant a stay under art. 8(1) of the Model Law where it is “arguable” that the dispute falls within the terms of an arbitration agreement. In Dalimpex Ltd. v. Janicki (2003), 2003 CanLII 34234 (ON CA), 64 O.R. (3d) 737 (C.A.), at para. 21, Charron J.A. adopted the following passage by Hinkson J.A. in Gulf Canada Resources Ltd. v. Arochem International Ltd. (1992), 1992 CanLII 4033 (BC CA), 66 B.C.L.R. (2d) 113 (B.C.C.A.), at paras. 39-40, as “the proper approach” to art. 8(1):
it is not for the court on an application for a stay of proceedings to reach any final determination as to the scope of the arbitration agreement or whether a particular party to the legal proceedings is a party to the arbitration agreement because those are matters within the jurisdiction of the arbitral tribunal. Only where it is clear that the dispute is outside the terms of the arbitration agreement or that a party is not a party to the arbitration agreement or that the application is out of time should the court reach any final determination in respect of such matters on an application for a stay of proceedings.

Where it is arguable that the dispute falls within the terms of the arbitration agreement or where it is arguable that a party to the legal proceedings is a party to the arbitration agreement then, in my view, the stay should be granted and those matters left to be determined by the arbitral tribunal.
As Charron J.A. explained in Dalimpex, at para. 22, “a deferential approach” allowing the arbitrator to decide whether the dispute is arbitrable, absent a clear case to the contrary, “is consistent both with the wording of the legislation and the intention of the parties to review their disputes to arbitration.”

3. Tort Claims and Arbitration

. Haas v. Gunasekaram

It has been argued that arbitration clauses only apply to contractual disputes between the parties, not torts. In Haas v Gunasekaram (Ont CA, 2016) this issue was considered, including the tort of fraud:
Tort claims do not automatically fall outside arbitration agreements

[32] Although Matrix was a case about a forum selection clause, not an arbitration agreement, in the course of his reasoning Sharpe J.A. pointed to several cases where the courts have required the parties to proceed to arbitration even though tort claims were involved, at paras. 16-17:
In Dalimpex Ltd. v. Janicki, (2003), 2003 CanLII 34234 (ON CA), 64 O.R. (3d) 737 (“Dalimpex”), at paras. 41-43, this court adopted and applied the test for applying a contractual provision which employs the words “disputes arising out of or in connection with” the parties’ contract used by the Alberta Court of Appeal in Kaverit Steel and Crane Ltd. v. Kone Corp. (1992), 1992 ABCA 7 (CanLII), 87 D.L.R. (4th) 129 (“Kaverit Steel”), at p. 135, leave to appeal to S.C.C. refused, [1992] S.C.C.A. No. 117, [1992] 2 S.C.R. vii. According to that test, a dispute is caught by the provision “if either claimant or defendant relies on the existence of a contractual obligation as a necessary element to create the claim, or to defeat it.” See also Woolcock at para. 23, holding that a claim is one “relating to” a contract “[s]o long as the matter in dispute is referable to the interpretation or implementation of some provision of the Agreement” (emphasis added by Sharpe J.A.).

In Kaverit Steel, the plaintiff advanced a conspiracy claim that relied upon a breach of the contract as the source of the unlawfulness to ground the conspiracy, and that was held to fall within the scope of the arbitration clause. Likewise, in Dalimpex, the claims for conspiracy and breach of fiduciary duty were mingled with claims for breach of contract and, in any event, in that case, this court declined to express any definitive view on the reach of the arbitration clause holding that determination should be left for the arbitrator.
[33] In Matrix Sharpe J.A. concluded that the tort claims being advanced did not rely on a breach of the contract prescribing the forum, leaving the plaintiff free to sue in Ontario. He stated, at para. 18:
The present case is not one where “either claimant or defendant relies on the existence of a contractual obligation as a necessary element to create the claim, or to defeat it” or where the “matter in dispute is referable to the interpretation or implementation of some provision in the agreement.”
[34] This case is readily distinguishable from Matrix, since, as I noted earlier, the motion judge’s statement, at para. 24, that “the bulk of Haas’s claims fall outside the arbitration clause” simply does not bear up under scrutiny. The bulk of the claims fall within the arbitration agreement and are clearly referable to the shareholders’ agreement.

[35] Further, I would be reluctant to agree that the presence of tort claims nullifies an arbitration agreement. Justice Laskin cautioned the court to be wary of cases in which a party to an arbitration agreement seeks to avoid it by pleading a common law tort: Piko v. Hudson’s Bay Company (1998), 1998 CanLII 6874 (ON CA), 41 O.R. (3d) 729 (C.A.), at para. 9. Although that case involved possible arbitration under a collective agreement, in my view the principle holds more broadly.

Fraud does not necessarily vitiate an arbitration agreement

[36] In Ash v. Corp. of Lloyd’s (1992), 1992 CanLII 7659 (ON CA), 9 O.R. (3d) 755 (C.A.), at para. 9, Carthy J.A. observed that “an allegation that a contract is void ab initio does not make it so until a final judgment of the court”. The court upheld the motion judge’s stay of an action against Lloyds alleging Lloyds’ fraud. Justice Carthy agreed that the strategy of alleging fraud, while depriving the defendant of the contracted choice in respect of arbitration, would impair such arbitration clauses, which he considered to be “too important in international commerce to permit that anomalous result to flow” (at para. 9). The court should lean against a result that undermines arbitration agreements.

[37] This is not a new proposition. Lord Wright said in the seminal case of Heyman v. Darwins, Ltd., [1942] A.C. 356 (H.L. (Eng.)), at p. 384:
Hence, if the question of whether the alleged contract was void for illegality, or, being voidable, was avoided because induced by fraud or misrepresentation, or on the ground of mistake, it depends on the terms of the submission whether the dispute falls within the arbitrator’s jurisdiction.
[38] In James v. Thow, 2005 BCSC 809 (CanLII), 5 B.L.R. (4th) 315, the application judge considered whether an action fell within the scope of an arbitration clause in an agreement between the plaintiff and the defendant. The plaintiff alleged fraudulent misrepresentation, breach of trust, breach of fiduciary duty and fraud. The application judge stayed the action and counterclaim, concluding, at para. 76: “I am satisfied that the issues raised by the pleadings concern disputes that arguably fall within the scope of the arbitration agreement.”

[39] Put simply, in cases involving arbitration agreements, fraud does not necessarily vitiate everything. It is a matter of interpretation. The arbitration agreement in this case contains broad language, referring to “any dispute, difference or question…or any failure to agree…respecting this Agreement or anything herein contained then every such dispute, difference or question or failure to agree shall be referred to a single arbitrator” (emphasis added). There is no exclusion for tort claims, misrepresentation or fraud.
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Sources

Cases To Be Integrated

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