Ontario – First decision on jurisdiction should be made by the arbitrator unless the challenge is based on a question of law or a question that can be decided on a superficial review of the evidence.
743584 Ontario Inc. v. LAC Otelnuk Mining Ltd.
2021 ONSC 5255 (CanLII)
Master Jolley, July 20, 2021
A dispute arose under a Royalty Agreement (“Agreement”) as to whether the respondent, LAC Otelnuk Mining Ltd. (“LAC”) owed the Applicant, 743584 Ontario Inc. (“584”) royalties. LAC stopped making royalty payments to 584. LAC gave notice to 584 of LAC’s intention to abandon mining claims and thereafter a notice to appoint a liquidator. There were negotiations between the parties regarding transfer of claims which did not resolve the disputes.
584 brought a court proceeding seeking determination of the following issues i) limitation period ii) was pre-condition to arbitration met, iii) interpretation of the Agreement and iv) impact of the Liquidation of LAC pursuant to the British Columbia Business Corporations Act.
LAC then delivered a further notice to 584 and filed its notice of arbitration seeking to recoup royalty payments and a declaration it was not liable for future royalty payments.
LAC sought a stay of the 584 proceeding in favour of an arbitration pursuant to section 7 of the Ontario Arbitration Act, 1991 (“Act”).
In the Agreement the parties agreed that if they could not resolve their disputes through commercially reasonable efforts the parties would submit the questions to arbitration in Ontario. Somewhat at odds to the agreement to arbitrate, the parties also agreed they would attorn to the Ontario courts for all matters arising under the Agreement.
The parties agreed that where a proceeding is commenced in respect of a matter that is subject to an arbitration agreement, it must be stayed, subject to exceptions set out in section 7(2) of the Act.
The parties also agreed that the issue of the arbitrator’s jurisdiction is left to the arbitrator to determine pursuant to the “competence-competence” principle, subject to limited exceptions.
Master Jolley referred to the SCC decision in Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34 (CanLII) (“Dell”), where the court set out the approach that a challenge to an arbitrator’s jurisdiction must first be resolved by the arbitrator, subject to two exceptions: “where a challenge to the arbitrator’s jurisdiction is based solely on a question of law or where the question is one of mixed fact and law that requires only a superficial consideration of the documentary evidence on the record.” (at para. 20). With respect to the issues raised by 584, Master Jolley was of the view that these issues could not be resolved on a superficial review of the evidence and that review of the factual matrix of the Agreement and a determination of the parties’ intentions was required.
Master Jolley found that the questions did not fall within the exception to the “competence-competence” principle and stayed the 584 Application in favour of arbitration.
The “competence-competence” principle recognizes the power of an arbitrator to determine his/her/their jurisdiction under an arbitration agreement. In Uber Technologies Inc. v. Heller, 2020 SCC 16 (“Uber”), the SCC considered whether the “competence-competence” principle applies to a challenge to the jurisdiction of an arbitrator where the arbitration agreement is alleged to be invalid.
Uber had moved to stay a class action commenced by Heller on behalf of Uber drivers. The SCC re-affirmed the Dell framework that: 1) if the challenge to the arbitrator’s jurisdiction raised a pure question of law, the courts are free to resolve the issues of jurisdiction; 2) where questions of fact alone are in dispute, the court normally refers the case to arbitration; and 3) where there are questions of mixed fact and law in dispute, the court must refer the case to arbitration unless the relevant factual questions require “only a superficial consideration of the documentary evidence in the record [italics added].” See also Seidel v. TELUS Communications Inc., 2011 SCC 15 (CanLII) in reference to the Ontario Arbitration Act, 1991.
The SCC in Uber at para. 36, clarified what is meant by a “superficial review”: “The essential question is whether the necessary legal conclusions can be drawn from the facts or are either evident on the face of the record or undisputed by the parties”.
In Uber (para. 45) the court also considered access to justice issues and if referral back to the arbitrator for determination of the issue of jurisdiction would prevent access to justice and to the arbitration. If the challenge to an arbitrator’s jurisdiction is a tactic to delay or if it unduly impairs the arbitration proceeding, the court may refer a challenge back to the arbitral jurisdiction. However, the court should not refer a bona fide challenge to an arbitrator’s jurisdiction to the arbitrator if there is a real prospect that in doing so the challenge would not be resolved. (para. 46) In effect this creates a narrow exception to the general principle of “competence-competence”.
Where, as in the Uber case, the Court considers the agreement to arbitrate unconscionable due to the parties unequal bargaining power of the parties and unfair terms, the Court held the arbitration agreement to be invalid.