This issue was recently considered by the Alberta Court of Appeal in A.G. Clark Holdings Ltd. v HOOPP Realty Inc.  In that case, the Alberta Court of Queen’s Bench had concluded that, since the dispute had not been dealt with by the consultant, the parties could proceed to litigation in court, and that arbitration was not mandatory. The Court of Appeal reversed and held that arbitration was mandatory.

The dispute resolution clause in question was a variant of that found in one of the standard forms of building contract used in the Canadian construction industry, namely, the CCDC 2 Stipulated Price contract.  Accordingly, the Alberta Court of Appeal’s decision provides important insight into when and whether a dispute resolution clause similar to that found in the CCDC documents will be held to be mandatory or permissive.

Background

In 1999, Clark Builders and HOOPP had entered into a Design-Build Agreement. Under that agreement, Clark was to design and build a warehouse for HOOPP, the owner. The warehouse was built in 1999 and 2000. As a result of alleged deficiencies in construction, HOOPP commenced an action against Clark in 2002 alleging breach of contract and negligence.

Clark brought a motion to stay the action and require the claim to be dealt with by arbitration. The judge hearing the motion held that the dispute resolution clause in the agreement did not mandate arbitration, and so he dismissed Clark’s motion, and Clark appealed.

The dispute resolution clause in the building contract followed, to some extent, the wording in the standard form CCDC 2 Stipulated Price Contract.  The clause in the contract stated as follows (with less relevant portions excluded, and the most relevant portions emphasized):

 Part 8 Dispute Resolution

GC 8.1 AUTHORITY OF THE CONSULTANT

8.1.1.  Differences between the parties to the Contract as to the interpretation, application, or administration of the Contract or any failure to agree where agreement between the parties is called for, collectively referred to as disputes, which are not resolved in the first instance by findings of the Consultant as provided in GC 2.1 – CONSULTANT, shall be settled in accordance with the requirements of Part 8 of the General Conditions – DISPUTE RESOLUTION. . . .

GC 8.2 NEGOTIATION, MEDIATION AND ARBITRATION. . .

8.2.3 The parties shall make all reasonable efforts to resolve their disputes by amicable negotiations and agree to provide, without prejudice, frank, candid and timely disclosure of relevant facts, information and documents to facilitate these negotiations.

8.2.4 After a period of 10 Working Days following receipt of a responding parties notice in writing of reply under paragraph 8.2.2, the parties shall request the Project Mediator to assist the parties to reach agreement on any unresolved disputes. The mediated negotiations shall be conducted in accordance with the latest edition of the Rules for Mediation of Construction Disputes …

8.2.5 If the dispute has not been resolved within ten (10) Working Days after the appointment of the Project Mediator either party may by notice to the other withdraw from the mediation process.

8.2.6 All disputes, claims and differences not settled as herein provided, arising out of or in connection with the Contract or in respect of any defined legal relationship associated with it or derived from it, shall be referred to and finally resolved by arbitration in accordance with the Alberta Arbitration Act. … [emphasis added]

During negotiation, the parties had discussed a form of dispute resolution clause that read as follows:

8.2.6 By giving notice in writing to the other party, not later than 10 Working Days after the date of termination of the mediated negotiations under paragraph 8.2.5, either party may refer the dispute to be finally resolved by arbitration … .

8.2.7 On expiration of the 10 Working Days, the arbitration agreement under paragraph 8.2.6 is not binding on the parties and, if a notice is not given under paragraph 8.2.6 within the required time, the parties may refer the unresolved dispute to the courts or to any other form of dispute resolution, including arbitration, which they have agreed to use. [emphasis added]

Those familiar with the CCDC 2 Stipulated Price Contract will recognize the latter wording as coming from General Condition 8.2 of that contract.

The Courts’ Decisions

The judge hearing the motion held that Part 8 of the agreement set out a series of steps which must be followed before the arbitration clause became applicable or mandatory. He found that only those disputes “which are not resolved in the first instance by findings of the Consultant” could proceed to the next steps in the process. Since the parties had not referred the dispute to the consultant, the judge held that the arbitration procedure had not been invoked and was not mandatory.

The Court of Appeal disagreed for two reasons:

First, that court found that the wording of Articles 8.1.1 and 8.2.6 were clear and required arbitration whether or not the parties had referred the dispute to the consultant. Article 8 contained a complete dispute resolution regime which did not require either party to refer the dispute to the consultant for it to be applicable.

Second, the Court of Appeal looked at the drafts of Article 8 and held that those drafts demonstrated that the parties had contemplated a permissive arbitration regime and had discarded it in favour of a mandatory regime.  The court held that:

The notion of “Dispute Resolution” could, of course, encompass litigation, as was evident in the original form of the Agreement. The deliberate decision of the parties to remove reference to litigation from the dispute resolution provisions of the Agreement emphasizes that their mutual intention at the time of drafting was to refer disputes to arbitration rather than proceed to litigation. HOOPP’s current position, that it is entitled to bypass arbitration in favour of litigation, is coloured by that earlier decision.

The Court of Appeal effectively held that the dispute resolution clause allowed for two routes to mandatory arbitration, one after consideration by the consultant, and the other without the involvement of the consultant.  In its view, this interpretation was “rational” from two aspects.

First, it recognized that allegations of negligence could not properly be dealt with by the consultant, but could be dealt with by arbitration.

Second, it allowed the parties to go through a mediation type process with the consultant if they wished to, but did not require them to do so before proceeding to arbitration.

How does this decision affect the interpretation of GC 8.2 of the CCDC 2 Stipulated Price Contract? Some might see that provision as an “opt-in” arbitration procedure.  Under that view, arbitration is mandatory once one of the parties elects arbitration under GC 8.2.6, and the meaning of the word “may” in that clause means that one of the parties may choose, but is not required to choose, arbitration, but once chosen, arbitration is binding on both parties.  The other view might be that the word “may” means that arbitration is entirely voluntary.

What does appear clear from GC 8.2.7 of CCDC 2 Stipulated Price Contract is that, if neither of the parties asks for arbitration within the 10 day period referred to in that clause, then either party can go to court. In the Clark v HOOPP case, the Alberta Court of Appeal held that, by their amended form of dispute relation, the parties had eliminated that choice and provided for arbitration to be the only form of dispute adjudication.

Another interesting aspect of the Court of Appeal’s decision is its conclusion that Clark was permitted to appeal the motion judge’s decision. Section 7 of the Alberta Arbitration Act states that the court shall stay an action brought in breach of an arbitration agreement, subject to certain exceptions. Sub-section 7(6) states that “There is no appeal from the court’s decision under this section.” The court held that this prohibition against appeal only applies when the merits of a stay motion are being considered. If the issue is whether the motion judge mis-interpreted his or her jurisdiction to make the stay decision, then the prohibition does not apply.  The Court of Appeal held that this was the situation before it:

Only if that agreement contained a mandatory arbitration clause would s 7 of the Arbitration Act apply. The chambers judge concluded that the agreement did not contain such a clause and he did not, therefore, address the application of s 7 to these parties and this dispute. The chambers judge’s decision on that preliminary issue is subject to appeal.

Accordingly, since dispute resolution, properly interpreted, did give rise to a prohibition of a court action under section 7 of the Act, then there was a right of appeal from the motion judge’s erroneous determination of that issue.

See Heintzman and Goldsmith on Canadian Building Contracts, 4^th ed,, chapter 10, part 6

A.G. Clark Holdings Ltd. v HOOPP Realty Inc., 2013 ABCA 101.

Arbitration  -  Construction law  -  Mediation  -  Mandatory or Permissive arbitration  -  Stay of Arbitration Proceedings -  Appeal from Stay Application

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                 June 9, 2013

www.heintzmanadr.com

www.constructionlawcanada.com

The English High Court recently considered this issue in Wah (Aka Alan Tang) & Anor v Grant Thornton International Ltd & Ors. The court upheld an arbitral decision that a clause requiring mediation was not enforceable.  Therefore, the arbitration was not premature.

What is interesting about the decision is that the court did not hold that mediation clauses are per se unenforceable. Rather the court held that such a clause must have one of two qualities to be enforceable.

Either the mediation clause must provide reasonable certainty as to the beginning, the ingredients and the end of the mediation process;

Or the subject matter of the mediation must be determinable by fairness or reasonableness so that the court can infer the necessary procedural ingredients.

Finding that the mediation clause in the Grant Thornton case satisfied neither criteria, the court upheld the arbitrator’s decision that the mediation clause was ineffective.

In the alternative, the court found that the period for the mediation had expired by the time that the arbitration started. Therefore, the arbitration was validly commenced.

Background

The claimants were two partners in a Hong Kong partnership, JBPB.  That partnership was a member of the international Grant Thornton organization.  JBPB was removed as a member of the international Grant Thornton organization. The claimants sought to invoke the mediation provisions of the international Grant Thornton agreement before going to arbitration. The partnership agreement contained a two stage mediation procedure involving the Chief Executive Officer and Executive committee.   The English High Court summarized those procedures as follows:

Section 14.3(a) requires that the dispute or difference should be referred to the Chief  Executive with a view to him attempting amicably to resolve that dispute or difference by amicable conciliation of an informal nature;

Section 14.3(b) prescribes that the Chief Executive shall attempt to resolve the dispute or difference in an amicable fashion within one month after receipt of a request that he should do so;

Section 14.3(c) prescribes that if the dispute or difference is not by then resolved it should be referred to a three-person Panel selected by the Board (none of whom is associated with or in any other way related to the member Firm(s) who are parties to the dispute), it being provided that the Panel is to have up to one further month to resolve the dispute or difference.

The international agreement stated that, until the Panel determined that it could not resolve the dispute or one month passed after the reference of the dispute to that Panel, “no party may commence any arbitration procedures in accordance with this Agreement.”

It is interesting to note that the CEO recused himself from the mediation process on the ground that he had been involved in the decision to remove JBPB. In addition, nobody volunteered to be members of the three member board. These facts did not expressly figure in the decisions of the  arbitral tribunal or court. The Grant Thornton international organization and the other partners of JBPB did not object to the arbitral tribunal proceeding with the arbitration without the mediation procedures in the partnership agreement being utilized.

Arbitral and Court Decisions

The claimants took the position before the arbitral tribunal and the court that participating in the mediation process was a condition precedent to arbitration and that, since there had been no mediation, the arbitration was premature and the arbitral tribunal had no jurisdiction to proceed with it. The arbitral tribunal held that the mediation clause did not preclude the tribunal from proceeding with the arbitration.  That decision was upheld by the court.

The court held that an agreement to negotiate in good faith, without more, is unenforceable, even if that agreement is contained within an agreement that is otherwise enforceable. But this is the beginning, not the end of the debate.  The court will “strain to give effect” to a mediation agreement.

The court outlines two ways in which a mediation agreement may be effective.

First, the subject matter of the mediation may be one that can be objectively determined, and if it is, then the mediation agreement may be enforceable:

“For that purpose it may imply criteria or supply machinery sufficient to enable the Court to determine both what process is to be followed and when and how, without the necessity for further agreement, the process is to be treated as successful, exhausted or properly terminated. The Court will especially readily imply criteria or machinery in the context of a stipulation for agreement of a fair and reasonable price.”

The court found that the decision in Petromec Inc and others v Petroleo Brasileiro SA Petrobras and others, [2005] EWCA Civ 891 could be explained on that basis. There, the English Court of Appeal stated that a provision requiring negotiation in good faith with respect to the cost of equipment was enforceable.  In Grant Thornton, the court said that a mediation agreement dealing with that sort of matter may be enforceable, but that was not the nature of the mediation agreement and dispute in the present case.

The second approach is to determine whether the mediation process is sufficiently clear to give rise to an enforceable agreement. But the court said that the issue is not just the clarity of the procedures, but the clarity of the end of those procedures:

The Court has been in the past, and will be, astute to consider each case on its own terms. The test is not whether a clause is a valid provision for a recognised process of ADR: it is whether the obligations and/or negative injunctions it imposes are sufficiently clear and certain to be given legal effect.

The Court set forth a three step process for making this determination:

“the test is whether the provision prescribes, without the need for further agreement, (a) a sufficiently certain and unequivocal commitment to commence a process (b) from which may be discerned what steps each party is required to take to put the process in place and which is (c) sufficiently clearly defined to enable the Court to determine objectively (i) what under that process is the minimum required of the parties to the dispute in terms of their participation in it and (ii) when or how the process will be exhausted or properly terminable without breach.”

The court concluded that the Grant Thornton partnership agreement did not satisfy these criteria:

“I have reached the clear conclusion that Section 14.3 is too equivocal in terms of the process required and too nebulous in terms of the content of the parties’ respective obligations to be given legal effect as an enforceable condition precedent to arbitration. In particular, I accept that the omission to give any guidance as to the quality or nature of the attempts to be made to resolve a dispute or difference renders the Court unable to determine or direct compliance with the provisions of Section 14.3(a), (b) and (c).”

The Court also rejected the suggestion that the mediation process could indefinitely postpone arbitration if the two steps in that process never occurred. The court said that it was not “realistic to suppose the parties to have intended that the Board or panel members could indefinitely postpone the right to arbitration.” Accordingly, the court held that, in the alternative, the mediation clause did not prevent a party to the partnership agreement from commencing any arbitration procedures after the time limits set for the in the mediation agreement. The arbitration in question started well after that time frame.

Discussion

The Grant Thornton decision holds that a mediation agreement is enforceable, if properly drafted. This decision is useful because it advances the debate on this issue to a further level. For the clause to be enforceable, Grant Thornton says that the clause must be one of two kinds.

Either the mediation agreement must set out a process that has a reasonably certain commencement, procedural ingredients and ending.  Or the mediation agreement must deal with a dispute over some matter of fairness or reasonableness which allows the court to infer reasonable procedural elements. Furthermore, in order to ensure that the mediation clause does not hold up dispute resolution in court or arbitration, the mediation clause should have a reasonably prompt “drop dead date.”

The court’s remarks about secondalternative, namely a mediation to determine a matter on the basis of fair and reasonableness, raise difficult issues. Must the mediation agreement itself state that it deals with the fairness of something, such as price? Or if the specific mediation is in fact about some matter of fairness or reasonableness, is that sufficient to infer the necessary procedural ingredients to validate the mediation agreement, or its application in the particular case? If it is the latter, then the validity of the mediation agreement will be determined on a case by case basis.  A mediation clause which may or may not be valid, depending on the issue being mediated, may be an unsatisfactory sort of mediation agreement.

In prior articles I have dealt with Ontario decisions dealing with the enforceability of the duty to mediate.  In an article on July 17, 2011, I reviewed the decision in L-3 Communication Spar Aerospace Limited v. CAE Inc., 2010 ONSC 7133 in which the Ontario Court of Appeal held that, in that case, there was a legally enforceable duty to mediate.  In an article on May 5, 2012, I reviewed the same court’s decision in Federation Insurance Co. of Canada v. Markel Insurance Co of Canada,, 2012 ONCA 218 in which it was held that the mediation clause in that case was not enforceable and that in the meantime the limitation period had expired.  Clearly, the law relating to the enforcement of mediation clauses remains a matter of considerable importance.

See Heintzman and Goldsmith on Canadian Building Contracts (4^th ed.), Chapter10, part 6

Wah (Aka Alan Tang) & Anor v Grant Thornton International Ltd & Ors [2012] EWHC 3198

Mediation  -  Validity of Mediation Agreement  –  Uncertainty  -  Duty to Mediate  -Commencement of Arbitration

 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: http://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: http://www.ulcc.ca/en/contact.

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

www.heintzmanadr.com

www.constructionlawcanada.com

In Dunsmuir v. New Brunswick, [2008] 1 S.C.R. 190, the Supreme Court of Canada set out a comprehensive analysis for the judicial review of the decisions of administrative tribunals.  The Court held that there are two tests for determining the legal validity of the decisions of those tribunals: correctness and reasonableness.  Generally speaking, the Court held that an administrative tribunal cannot, by legal error, assume a jurisdiction it does not have.  True questions of statutory jurisdiction must be correctly decided by the tribunal, and therefore may be reviewed on the basis of correctness.  All other decisions will not be set aside unless they are unreasonable, with the degree of deference being shown to the tribunal’s decision depending on the nature of the decision (the “Dunsmuir test”).

Is the unreasonableness test a proper one to apply to an arbitral award when the parties have agreed that there shall be no appeals from the award?  That is the question that was raised in the recent case of Parmalat Canada Inc. v. Ontario Teachers’ Pension Plan Board. While the court did not refer to or address this issue in its decision, this case provides a good opportunity to discuss whether the Dunsmuir test should apply to the review of an award under a commercial arbitration agreement.

Factual Background 

During 2003 to 2005, Parmalat Canada refinanced itself to avoid default on its financial obligations.  Its predicament arose from the financial collapse of its Italian parent. Parmalat Canada entered into a Credit Agreement with Ontario Teachers’ Pension Plan Board (Teachers) whereby Teachers provided $530 million in financing to Parmalat Canada.

One of the agreements which Parmalat Canda and Teacher entered into was a Liquidity Payment Agreement (“LPA”). Under the LPA, Parmalat Canada agreed to pay Teachers a Liquidity Payment equal to 10 per cent of the value of Parmalat Canada if a Liquidity Event occurred within seven years of the closing of the Credit Agreement.  That closing occurred on June 29, 2004.  The definition of Liquidity Event included an “Indirect Change of Control” which included “any Person or Persons, acting jointly and in concert, acquiring, directly or indirectly, ….securities or the right to vote securities of Parmalat Italy carrying any number of votes where thereafter a majority of the board of directors of Parmalat Italy are nominees of such Person or Persons.”

On June 28, 2011, or one day before the seventh anniversary of the closing of the Credit Agreement, a slate of director nominated by Group Lactalis S.A. was elected to the board of directors of Parmalat Italy. In March 2011, Lactalis had acquired 28.97 % of the shares of Parmalat Italy.  That purchase enabled Lactalis to elect its slate of directors, who were elected on June 28, 2011.

The Arbitration

Teachers then commenced an arbitration asserting that a Liquidity Event had occurred and that Parmalat Canada was required to pay the Liquidity Payment to Teachers.  Teachers relied upon the plain language of the agreement and asserted that, under that language, a Liquidity event had occurred and the Liquidity Payment was due to it.

Parmalat Canada took the position that a significant liquidity or realization of value must result from any transaction for it to qualify as a Liquidity Event. It argued that there must be a value realization and/or liquidity, which in turn would fund the Liquidity Payment, for a Liquidity Event to have occurred.

The Arbitrator found that the acquiring shareholder Lactalis, being able to elect its slate of directors on June 28, 2011, thereby gained control of Parmalat Italy. The Arbitrator applied the plain reading of the agreement and concluded that a Liquidity Event had occurred. Under the LPA, the decision of the Arbitrator was final and binding with no appeal.

Does Dunsmuir Apply?

Parmalat Canada applied to the Superior Court to set aside the arbitrator’s award under section 46 of the Ontario Arbitration Act, 1991.  Among other arguments, it submitted that the arbitrator’s decision was unreasonable. It relied on the Dunsmuir decision of the Supreme Court of Canada, and other decisions of the Supreme Court in which that court had applied the Dunsmuir test in its review of two arbitration decisions.  Parmalat Canada referred to my article of January 22, 2012 in which I reviewed those two decisions and discussed the potential application of Dunsmuir outside the administrative law context.

 Parmalat Canada also relied upon the decision of the Ontario Court of Appeal in Smyth v. Perth and Smith Falls District Hospital (2008) 92 OR 3d 656 in which the Court of Appeal applied Dunsmuir in its review of an arbitration decision.

 Smyth concerned an arbitration relating to the appointment of a doctor to the staff of a hospital. The arbitration agreement provided that there was to be no appeal to the court from the arbitrator’s decision.  The arbitrator decided that the doctor should be given the opportunity to resign or his appointment to the hospital should be terminated.  The doctor sought to have the award reviewed under section 46 of the Ontario Arbitration Act, 1991.  The superior court judge applied the test of correctness, held that the arbitrator had incorrectly exercised his jurisdiction and overturned the arbitrator’s decision.  The Court of Appeal applied Dunsmuir, held that the reasonableness test should apply, found that the arbitrator’s decision was reasonable and set aside the superior court judge’s decision.

In my article of January 22, 2012, I commented on the decisions of the Supreme Court of Canada in  Nor-Man Regional Health Authority v. Manitoba Association of Health Care Professionals, 2011 SCC 59 and Newfoundland and Labrador Nurses Union v. Newfoundland and Labrador (Treasury Board) 2011 SCC 62. In both those cases, the Supreme Court upheld a labour arbitration award applying the reasonableness standard in Dunsmuir.  I said in my article that those cases are powerful supports for person seeking to uphold arbitration awards. 

None of these cases involved commercial arbitrations.  In none of these decisions did the court determine whether the reasonableness test is a proper test for the review of the decisions of arbitral tribunals under commercial arbitration agreements, particularly when the parties have agreed that there is no appeal from an arbitral decision. That issue remains to be decided by Canadian courts.

 What are the arguments for and against the application of a reasonableness test to commercial arbitrations?

 The Rationale For Applying Dunsmuir

 The arguments for the application of a reasonableness test have been stated in Dunsmuir and the other Supreme Court of Canada decisions applying Dunsmuir.  A quote from Dunsmuir was cited in Smyth and sets out its rationale:

 Reasonableness is a deferential standard animated by the principle that underlies the development of the two previous standards of reasonableness: certain questions that come before administrative tribunals do not lend themselves to one specific, particular result. Instead, they may give rise to a number of possible, reasonable conclusions. Tribunals have a margin of appreciation within the range of acceptable and rational solutions. A court conducting a review for reasonableness inquires into the qualities that make a decision reasonable, referring both to the process of articulating the reasons and to outcomes. In judicial review, reasonableness is concerned mostly with the existence of justification, transparency and intelligibility within the decision-making process. But it is also concerned with whether the decision falls within a range of possible, acceptable outcomes which are defensible in respect of the facts and law.

 In Nor-Man, the Supreme Court of Canada explained the reason for applying the reasonable test from Dunsmuir as follows:

 The standard of reasonableness, on the other hand, normally prevails where the tribunal’s decision raises issues of fact, discretion or policy; involves inextricably intertwined legal and factual issues; or relates to the interpretation of the tribunal’s enabling (or “home”) statute or “statutes closely connected to its function, with which it will have particular familiarity” (Dunsmuir, at paras. 51 and 53-54; Smith, at para. 26).

 Similarly, in Newfoundland and Labrador Nurses Union, the Supreme Court of Canada said the following in support of its application of the Dunsmuir reasonableness standard to a labour arbitrator’s decision, referring to Professor Dyzenhaus’ explanation of Dunsmuir:

 This, I think, is the context for understanding what the Court meant in Dunsmuir when it called for “justification, transparency and intelligibility”. To me, it represents a respectful appreciation that a wide range of specialized decision-makers routinely render decisions in their respective spheres of expertise, using concepts and language often unique to their areas and rendering decisions that are often counter-intuitive to a generalist. That was the basis for this Court’s new direction in Canadian Union of Public Employees, Local 963 v. New Brunswick Liquor Corp., 1979 CanLII 23 (SCC), [1979] 2 S.C.R. 227, where Dickson J. urged restraint in assessing the decisions of specialized administrative tribunals. This decision oriented the Court towards granting greater deference to tribunals, shown in Dunsmuir’s conclusion that tribunals should “have a margin of appreciation within the range of acceptable and rational solutions” (para. 47).

 These expressions of the rationale behind the reasonableness test are largely based upon the statutory jurisdiction of administrative tribunals.  Even labour arbitrators are usually exercising their authority in the context of arbitration mandated by statute. The statutory source of jurisdiction justifies the court imposing a standard of reasonableness on the arbitrator’s reasons for decision.

 Does this rationale apply when the parties have quite voluntarily chosen arbitration as their dispute resolution mechanism and have agreed that there shall be no appeal to the courts? 

 The Rationale For Not Applying Dunsmuir

The argument that it does not can conveniently be started by examining the Ontario International Commercial Arbitration Act (ICAA) and the Model Law attached to it.  That Model Law has been adopted by many countries around the world. Pursuant to that Model Law, international commercial arbitration decisions are rendered and enforced around the world. Under Article 34(1) of the Model Law, recourse to a court against an arbitral award may be made only by an application for setting aside in accordance with that article. No right of appeal is provided in the Model Law. Article 34(2) of the Model Law says that an award may be set aside by the court only on the following grounds:

 (i) a party to the arbitration agreement was under some incapacity; or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of this State, or

(ii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case, or

(iii) the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the award which contains decisions on matters not submitted to arbitration may be set aside, or

(iv) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Law from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Law; or

(b) the court finds that:

(i) the subject-matter of the dispute is not capable of settlement by arbitration under the law of this State, or

(ii) the award is in conflict with the public policy of this State.

This is a pretty comprehensive list of grounds to set aside an award.  Yet, nothing in Article 34(2) says that the substance of the award must be correct or reasonable, or that the arbitral tribunal must be correct or reasonable except with respect to jurisdiction or one of the other matters expressly stated in Article 34(2).  Indeed, under Article 31(2) with the consent of the parties the arbitral tribunal need give no reasons. It must be assumed that the drafters of the Model Law envisaged that, sometime and somewhere, an international commercial arbitration panel might issue an award which was legally or factually incorrect or unreasonable.  But no relief on those grounds was afforded in the Model Law.

If a Canadian court is asked to apply the Dunsmuir test to an award of an international commercial arbitration, on what basis could it do so?  Would it say that simply because the award is unreasonable, then under Article 34(2)(iii) it does not fall within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration, or deals with matters not remitted to the tribunal?  Can that be said when the Model Law does not require that the award be reasonable or correct?

Of course, if there is a true jurisdictional challenge to the award, then Article 34(2) (iii) will apply and the court will have to decide that issue using an appropriate jurisdictional test.  But apart from that situation, the application of the reasonableness standard to the merits of the arbitral award does not appear to fit comfortably within Article 34.  

If Canada applies a reasonableness standard to international arbitration awards outside of true jurisdictional issues, then it may apply a test that no other country applies to the Model Law, even though that Law was adopted by many countries for the purpose of uniformity. 

Turning to the domestic Ontario Arbitration Act, 1991, section 46(1) states that an arbitral award may be set aside on the following grounds:

1.   A party entered into the arbitration agreement while under a legal incapacity.

2.   The arbitration agreement is invalid or has ceased to exist.

3.   The award deals with a dispute that the arbitration agreement does not cover or contains a decision on a matter that is beyond the scope of the agreement.

4.   The composition of the tribunal was not in accordance with the arbitration agreement or, if the agreement did not deal with that matter, was not in accordance with this Act.

5.   The subject-matter of the dispute is not capable of being the subject of arbitration under Ontario law.

6.   The applicant was not treated equally and fairly, was not given an opportunity to present a case or to respond to another party’s case, or was not given proper notice of the arbitration or of the appointment of an arbitrator.

7.   The procedures followed in the arbitration did not comply with this Act.

8.   An arbitrator has committed a corrupt or fraudulent act or there is a reasonable apprehension of bias.

9.   The award was obtained by fraud.

10.  The award is a family arbitration award that is not enforceable under the Family Law Act.

Once again, this section provides a very comprehensive basis for setting aside arbitral awards, but does not state that correctness and reasonableness are separate tests for doing so.  Except as a test to determine whether the arbitral tribunal had jurisdiction to determine the dispute or whether the tribunal has applied one of the other factors mentioned in section 46(1), the reasonableness test does not seem to fit well within that subsection.

Section 46 is found within a particular statutory setting as a separate test.  Section 6 says that courts shall not intervene except for express statutory purposes.  Section 45(1) provides a right to seek leave to appeal from an arbitral award unless the parties have agreed otherwise.  Section 45(2) and (3) allow the parties to agree on an appeal on questions of law and fact.  So the parties are afforded by statute the broadest right to agree on recourse to the courts to review the award.  When the parties agree that there will be no appeal, they know that the award could possibly be in error or unreasonable, but they chose expedition and finality over legal perfection.  In that context, a review of the decision based on reasonableness –outside the pure jurisdictional context under section 45(1).3 – seems difficult to justify.

The Parmalat Decision

Returning to the Parmalat Canada decision, Parmalat Canada argued that the interpretation of the LPA was unreasonable as it allegedly did not take into account the meaning of the word “liquidity” and common sense need for a transaction or other liquidity event to fund the Liquidity Event.  Fitting that argument within the specific grounds for review found in section 46 of the Arbitration Act, 1991 was the challenge.  Justice Cumming found that the arbitrator’s decision was reasonable so he did not have to decide whether the award could be set aside if it was unreasonable.

Conclusion

The challenge for those who support the application of the Dunsmuir test to commercial arbitrations is to show that the administrative law rational for Dunsmuir applies to commercial arbitrations, and that the test can be useful or justified notwithstanding the limited right of courts to review awards of domestic and international arbitrations.  

The challenge for those who oppose the application of Dunsmuir to commercial arbitration awards is to show that the administrative law rational for Dunsmuir does not apply in the commercial arbitration setting, and that the grounds for reviewing a commercial arbitration are sufficiently and definitively stated in the arbitration statutes and leave no need or room for Dunsmuir except in relation to true jurisdictional issues.

So far, there has been no real debate on these issues. In Smyth, the Dunsmuir test was applied to an arbitration in a hospital setting, as a convenient and apparently governing authority but without considering whether the rationale and the statutory setting justified that application outside a pure jurisdictional dispute. Let the debate begin.

See Heintzman and Goldsmith on Canadian Building Contracts (4^th ed.), chapter 10

Parmalat Canada Inc. v. Ontario Teachers’ Pension Plan Board, 2012 ONSC 5981

 Arbitration  -  Review of Award  -  Jurisdiction of Arbitral Tribunal  -  Reasonableness

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                         November 24, 2012

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• Will the UNCITRAL Arbitration rules in FIPA provide real and enforceable protection for  Canadian investments in China? 
• Will the UNCITRAL Arbitration Rules be sufficient to overcome Canadian concerns about the lack of responsiveness of the Chinese government to domestic public opinion and the lack of independence of the Chinese judiciary?

Parliament and the Canadian public have not had a large role in the discussions about the wisdom of entering into the FIPA with China and the wisdom of the specific terms of that Agreement.  The Agreement was signed in Vladivostok, Russia on September 9, 2012 and may come into force after it has been tabled with Parliament for 21 sitting days.  The Agreement may be seen at http://www.international.gc.ca/trade-agreements-accords-commerciaux/agr-acc/fipa-apie/china…

Protections in the Agreement

Part B of the FIPA with China contains broad expressions of protection to investors from one country when they are investing in the other country.

Part B contains:

Article 4:                     guarantees for fair and equal treatment of investments  

Article 5:                     most-favoured-nation treatment  

Articles 6 and 11:        treatment no less favourable than that accorded to nationals 

Article 7:                     protections for senior management and boards of directors 

Article 10:                   protection against expropriation except for a public purpose and only with compensation

Article 12:                   protections for the free transfer of capital, profits, dividends and similar payments without delay

Article 15:                   the dispute resolution mechanism between Canada and China as the Contracting Parties.

The protections for Canadian investors contained in Part B may be ineffective without a Chinese government encouraged by public opinion to adhere to these protections.  After all, remedial protections are of little use if governments actually do renounce their contractual obligations.  Canadian investors may not view the Chinese government as under any compulsion of domestic public opinion to continually and fully implement these protections in the future.  Indeed, the real impetus for China (or indeed any country) to adhere to its obligations under bilateral treaties may be international opinion.

 Remedial protections in any agreement are ineffective if no system for enforcing a judgment is available.  The need for effective enforcement may be greater to the extent that a government is not compelled by domestic public opinion to adhere to its agreements. Canadian investors might not view an action in the Chinese courts as leading to an impartial access to justice if the protections are withdrawn. 

In this setting, the remedial aspects of FIPA are critically important from a perceptual standpoint, but not a complete answer from an enforcement standpoint.

Dispute Resolution System in the Agreement

Part C of the Agreement contains the dispute resolution system for an investor of a contracting party which wishes to assert a claim against the other Contracting State. 

Before submitting a claim, the disputing investor must give notice of intent to submit a claim to arbitration, and consultations between the disputing parties must be held within 30 days of that notice unless the disputing parties agree otherwise.

Before submitting its claim, the disputing party must agree to arbitration under this Part of the Agreement, and at least six months must have elapsed from the date of the events giving rise to the claim and at least four months from the notice of intent to submit the claim to arbitration.  A three year limitation period is established, and the claim must be made within three years of the date when the investor first acquired or should have first acquired knowledge of the alleged breach and knowledge of the alleged loss or damage. (Article 21)

Annex C.21 requires that a Canadian investor wishing to make a claim under the Agreement shall first participate in the “administrative reconsideration procedure” that is apparently available in China, and withdraw any claim in a Chinese court.

Article 22 of the FIPA provides that the investor can submit the claim under any one of three regimes:

1. The ICSID Convention, provided that both Canada and China are parties to that Convention.  That Convention is the Convention on the Settlement of Investment Disputes between States and Nationals of other States, made at Washington, D.C. in 1885. While China has ratified this Convention, Canada has signed but not ratified the Convention because several of the provinces have not approved it. The English version of the ICSID Convention can be viewed at the ICSID’s website: https://icsid.worldbank.org/icsid
2. The Additional Facility Rules of ICSID, if one of Canada or China is not a party to the ICSID Convention.  China is a signatory to the ICSID Convention, so investors could use the Facility Rules if they wish to do so.  The Additional Facilities Rules can also be viewed at ICSID’s website. Those rules provide an ad hoc form of arbitration similar to the UNCITRAL Arbitration Rules.
3. The UNCITRAL Arbitration Rules, being the Arbitration Rules adopted by the United Nations Commission on International Trade Law, as amended from time to time.  The UNCITRAL Arbitration Rules can be viewed at UNCITRAL’s website:  http.www.uncitral.org

 Article 24 of the FIPA provides that the arbitration shall be heard by three persons, that the arbitrators are to be experienced in international law, trade, investment or dispute resolution and that they are to be independent of the contracting governments and disputing parties. If the dispute relates to financial institutions, then the parties may agree that, in addition, all the arbitrators shall have expertise or experience in financial institutions. At a minimum, however, the chair person is required to have that expertise or experience.

Under Article 26, claims with questions of fact or law in common can be consolidated.

Articles 27 to 32 of the Agreement provides for such matters as the production of documents of, and the participation and submissions by third parties, the public access to the hearings and documents, governing law, interim measures and the enforcement of an Award.

Article 32(4) requires Canada and China to provide for enforcement of the award in its respective territory. This is the sole provision in the FIPA that deals with enforcement of awards.  This provision cannot be enforced by the investor, and can only be enforced by the other Contracting State.  So it will be imperative for Canada to ensure that a system is implemented in China for the enforcement of awards under this FIPA, and to monitor the effectiveness of that system. 

 The UNCITRAL Arbitration Rules

The availability of the UNCITRAL Arbitration Rules should provide a good measure of administrative law fairness to the arbitration proceedings under the FIPA.  Those Rules were adopted by the United Nations Commission on International Trade Law (UNCITRAL) which is the same body that developed the UNCITRAL Model Law. Among the countries that have adopted it, the Model Law provides a common basis for the conduct and enforcement of international commercial arbitrations, no matter where the arbitrations are conducted.  The origins of the UNCITRAL Model Law are found in the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention).  The Model Law can also be viewed on UNCITRAL’s website.

The UNCITRAL Arbitration Rules were developed for use in international commercial arbitrations.  First adopted in 1976, these rules have been successfully used for many years to ensure fairness in the conduct of international commercial arbitrations.  It is the statutory adoption of the Model Law in the countries which have adopted that Law, not these Rules themselves, that requires courts in those countries to enforce the arbitral award.

The UNCITRAL Arbitration Rules go a long way to guaranteeing procedural fairness in the process leading to an award in the arbitration process provided to investors under FIPA. However, one aspect of the dispute resolution system in FIPA cannot be addressed by those Rules, and that is the enforcement of the arbitral award.  As noted, Article 32 (4) of the FIPA requires Canada and China to provide for the enforcement of an award in each of their territories.  Only Canada, and not a Canadian investor, can require China to implement such a system in that country. Only Canada, and not a Canadian investor, can commence proceedings under FIPA if such enforcement does not occur.

Until a tried and true enforcement mechanism is established by China, Canadian investors may be reluctant to conclude that the UNCITRAL Arbitration Rules, tried and true as they are, will ensure that the Chinese government complies with FIPA, or if it does not, that an arbitral award will actually result in compensation. 

Conclusion

The UNCITRAL Arbitration Rules have been used in international commercial arbitration for many years, and also in other bilateral trade and investment agreements.  However, their use in the agreement with China is significant since Canadian investors may be concerned about the responsiveness of the Chinese government to domestic public opinion and about the independence of Chinese courts compared to those in other countries with which Canada has bilateral treaties. 

The use of the UNCITRAL Arbitration Rules in the FIPA with China will go a long way to giving confidence to Canadian investors that they will obtain procedural fairness in the arbitration of a dispute arising under the FIPA with China.  However, procedural fairness is no substitute for actual adherence of governments to their agreements.  The real issues will be whether both the Chinese and Canadian governments fully implement FIPA and whether awards made by the arbitral process are enforced.

Thomas G. Heintzman O.C.,Q.C., FCIArb                                                                                           October 7, 2012

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