The recent decision in Advanced Explorations Inc. v. Storm Capital Corp. dealt with the question of whether an arbitral tribunal has the authority to decide an issue arising out of a statutory regime over which a regulatory tribunal has specific authority. That question is a thorny jurisdiction issue in the law of arbitration. The decision was rendered by Justice Graeme Mew of the Ontario Superior Court who was, until his recent appointment to the bench, a well-known litigation counsel and arbitrator. His decision that the arbitral tribunal had authority to decide the issue is of additional interest due to his experience in the field of arbitration.
Storm Capital (“Storm”) entered into a Finder’s Fee Agreement with Advanced Explorations Inc. (“AEI”) under which Storm was to seek investors for AEI. In the Finder’s Fee Agreement, the parties agreed to resolve “any dispute, difference of opinion or question … touching on this Agreement or any part thereof” by arbitration. The arbitrator’s decision “shall be binding and conclusive on all parties in interest and no appeal shall lie there from.”
One of the investors introduced by Storm to AEI made investments in the company. AEI refused to pay Storm a finder’s fee for the investments. The parties went to arbitration and the arbitrator held that Storm was entitled to compensation. The arbitrator found that there was a nexus between Storm’s introduction and the investments and that the transactions resulted from the introduction and that therefore Storm was entitled to the finder’s fee.
The arbitrator rejected AEI’s argument that Storm was required to be registered as an LMD/EMD under the Securities Actso as to ensure that it would be compliant with the applicable securities laws (the “securities issue”).
AEI then applied to court to set aside the arbitration award and Storm filed a cross-application to enforce it. Justice Mew dismissed the application and granted the cross-application to enforce the arbitration award.
There are three important aspects of Justice Mew’s decision.
First, Justice Mew considered AEI’s submission that the award should be set aside as unreasonable. Justice Mew reviewed several conflicting decisions dealing with the question of whether the court has authority to set aside an arbitral award based upon unreasonableness, and in particular the decision of the Ontario Court of Appeal in Smyth v. Perth & Smiths Falls District Hospital (2008), 92 O.R. (3d) 656. In Smythe, the Court of Appeal considered whether the result was “reasonable” as that term has been defined in Dunsmuir v. New Brunswick, even though the parties had agreed that the arbitration would be the final determination of the issue and that there would be no appeal. Justice Mew noted that the Court of Appeal did not identify the source of its authority to review an arbitral award for reasonableness and he agreed with the view, stated by some commentators, that Smyth is “at best ambiguous” as authority for such a proposition. However, he concluded that even if Smyth was authority for an arbitrator’s award to be reviewed for reasonableness, the arbitrator’s award was reasonable for the reasons referred to by him in the balance of his decision.
Second, Justice Mew dealt with AEI’s submission that the arbitrator’s decision was wrong because the arbitrator had relied upon conduct and agreements other than the Finder’s Fee Agreement itself in interpreting that agreement and the arbitration clause in it, even though the arbitrator had found that the Finder’s Fee Agreement was “clear and unambiguous”.
Justice Mew held that the arbitrator had concluded that“ “the context and factual matrix into which the [Finder’s Fee Agreement] was born” was important to understanding the terms of the contract” and looked to a prior agreement for that reason. However, the arbitrator had “anchored AEI’s liability to Storm in the language of the Finder’s Fee Agreement, and at no point did he incorporate a term or condition from a prior contract.” Justice Mew held that “when ascribing meaning to the various terms of the contract, the arbitrator was entitled to take note of the parties’ sophistication and prior dealings with each other.”
Third, Justice Mew addressed AEI’s submission that the arbitrator usurped the role of the Ontario Securities Commission (OSC) and Toronto Stock Exchange-Ventures (TSX-V) by deciding whether Storm was required under law to be registered as a LMD/EMD. This “securities issue” pertained to whether Storm was eligible to receive compensation under the Finder’s Fee Agreement. AEI submitted this issue was “not capable of being the subject of arbitration under Ontario law.”
Justice Mew held that AEI had waived its right to raise this argument by placing the issue before the arbitrator, as it had done, and then not asserting any definitive position before the arbitrator during the hearing.
In any event, Justice Mew held that the arbitrator had the jurisdiction to decide this matter. He applied the principle of “competence-competence” which is well known to arbitration law, namely that an arbitral tribunal has jurisdiction to decide in the first instance what matters are within its jurisdiction. Here, the arbitrator had raised the question of his jurisdiction on the securities issue with the parties, and had implicitly found that he had jurisdiction when he made his award, and any review of that award would be undertaken on the standard of correctness.
Justice Mew then found that the arbitrator had the jurisdiction to deal with the securities issue and that nothing in the Ontario Securities Act (OSA) deprived the arbitrator of jurisdiction. His remarks (leaving out the citations to cases) bear repeating at some length:
“Public policy in Ontario favours respect for the parties’ decision to arbitrate. The Arbitration Act, 1991 is designed … to encourage parties to resort to arbitration as a method of resolving their disputes in commercial and other matters, and to require them to hold to that course once they have agreed to do so……If the legislature wishes to preclude an issue from being the subject of arbitration, it must expressly state this intention…It is not enough that the subject matter over which arbitration is sought be subject to regulation or concern the public order…… AEI is correct that Ontario law establishes a comprehensive regime for the regulation of securities within the province, and that the OSC and the TSX-V are given wide-ranging powers of supervision…..However, no provision in the OSA or other statute was referred to that expressly precludes arbitration on matters of securities law. I also do not read the jurisprudence to evince a public policy that an arbitrator is unable to rule on securities matters…. On the contrary, the securities regulators are not given exclusive jurisdiction to decide questions of compliance with Ontario securities law. For example, under s. 128(1), the Superior Court of Justice may issue declarations on whether a person or company has complied with the OSA and the regulations promulgated thereunder. In addition, certain decisions of the OSC may be appealed to the Divisional Court, and the court on appeal has the power to “direct the Commission to make such decision or to do such other act as the Commission is authorized and empowered to do under this Act or the regulations and as the court considers proper”: OSA, ss. 9(1), 9(5). Private parties may also bring actions to redress injuries suffered from improper securities practices (even though the OSC could bring an enforcement action for the same misconduct): see OSA, ss. 130-138.14. 70.” (emphasis added)
Justice Mew also rejected AEI’s submission that AEI should not be placed in the position of contravening the securities laws of Ontario. The evidenced did not support a finding that AEI would violate securities laws if the finder’s fees were paid. In any event:
“the fact that AEI might have to choose between compliance with the arbitration award and compliance with its regulatory obligations goes to the question, not before the court at the present time, of whether AEI would be held in contempt of court if it refuses to pay. That is a separate matter from the question of whether the arbitrator lacked the jurisdiction, as a matter of Ontario law, to rule on the Securities Issue in the first place.”
On the issue of enforcement, Justice Mew held that, under section 50(3) of the Ontario Arbitration Act, 1991, once he had rejected the grounds for setting aside the award he had no discretion to refuse enforcement of a valid and final non-family arbitration award and he ordered that it be enforced.
Each of the three issues addressed in this decision are important, but this comment will focus on the first and third.
The first issue is whether an arbitration award can be reviewed on the grounds of reasonableness. That issue was addressed by me in my blog of November 24, 2012 in which I discussed the Smyth decision. As Justice Mew mused in the present case, one is left to wonder where that authority is to be found. Section 46 of the Ontario Arbitration Act, 1991 sets forth very specifically and at some length the grounds for setting aside an arbitration award. Unreasonableness, or even an error in law, is not found in that section as a ground to set aside such an award. In the case of domestic arbitrations, the reason for that position appears to be clear: in their arbitration agreement, the parties may provide for appeals on matters of law (and fact), and if they do not then they can seek leave to appeal on a matter of law. And under the Ontario Act, they can agree that there shall be no appeals. So issues and mistakes of law are addressed as part of the arbitration process, not for setting aside arbitral awards. If there is an error or law, then the parties can appeal if they have so provided or seek leave to appeal if they have not provided at all, but not if they have specifically agreed that they cannot do so, as in this case.
The concept of review of a tribunal’s decision on the ground of unreasonableness is found in the law relating to the judicial review of the decisions of governmental officers, bodies and tribunals. As Justice Mew noted, there is no apparent source of authority for that sort of review in section 46(1) of the Ontario Arbitration Act, 1991. Hopefully an appellate court will address this issue again soon.
The third issue is of equal importance: does a regulatory regime imposed by statute preclude arbitration? Here, Justice Mew made two decisions.
First, he held that unless such a statutory regime specifically excludes arbitration or does so by necessary implication, then parties can arbitrate an issue which pertains to their agreement even if it also pertains to the statutory regime of a government regulator. This decision is of considerable importance to persons engaged in businesses which are regulated to some extent or another, which includes just about any business today. For instance, the construction industry is impacted by zoning and building bylaws, and any businesses which hire employees are subject to labour relations statutes. Justice Mew has held that those regulatory regimes do not preclude the parties putting the same issues into their contracts and having them determined by arbitration as between themselves.
The second point is one of illegality. At some point, the dispute issue may involve an alleged illegality under the regulatory regime and the arbitrator may have to decide whether the illegality is so central to the claim being made that no relief should be granted. But that is an issue to be dealt with under the law of contract dealing with illegalities, which is another subject but one which an arbitral tribunal would apparently have no difficulty in determining. And even if the remedy awarded by the arbitrator would enforce an illegality, then the court may not find the respondent to be guilty of a contempt of court if the award is not obeyed. But that does not remove the arbitrator’s jurisdiction to address the issue in the first instance.
See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed. Chapter 10, part 3.
Advanced Explorations Inc. v. Storm Capital Corp.2014 CarswellOnt 8794, 2014 ONSC 3918
Arbitration – Jurisdiction of the Arbitral Tribunal – Enforcing and Setting aside Arbitral Awards – Illegality – Waiver – Regulatory Regime
Thomas G. Heintzman O.C., Q.C., FCIArb July 18, 2014