B.C. – court applies ‘arguable case’ test to stay action based on arbitration clause external to contract – #034

The B.C. Supreme Court determined that an applicant for a stay of proceedings under section 8 of B.C.’s International Commercial Arbitration Act, RSBC 1996, c 233 need only meet an arguable case when establishing whether section 8 could support a stay in favour of arbitration.   Mr. Justice Warren B. Milman in Sum Trade Corp. v. Agricom International Inc., 2017 BCSC 2213 determined that both parties had valid arguments to make which went beyond pure questions of law or superficial considerations of documentary evidence and were best determined by an arbitrator with industry expertise. 

Sum Trade Corp. (“STC”) sued Agricom International Inc. (“Agricom”) in B.C. Supreme Court for damages for breach of contract, including implied warranties under B.C.’s Sale of Goods Act, RSBC 1996, c 410. Both parties admitted being bound by three identical two page contracts for the sale and delivery of lentils.  Each contract bore the signature of their respective representative on page two.  The bottom of the first page board the following mention : “Trade Rule Info: GAFTA 88, Incoterms 2010.” 

STC asserted that the lentils did not meet the specifications in the contract and sought to return them in exchange for a refund.  Agricom replied that the contracts were subject to a standard form contract, called the “GAFTA 88”, incorporated by reference into the parties’ contracts and which contained dispute resolution procedures requiring mandatory arbitration.   The Grain and Free Trade Association (“GAFTA”), based in London, England, issued its Arbitration Rules no. 125.  Agricom advised that it would apply to dismiss any court litigation STC might initiate.  STC did initiate its court litigation on September 13, 2017 and Agricom served an application for stay on October 4, 2017 under section 8(1) of ICCA.   

8  (1) If a party to an arbitration agreement commences legal proceedings in a court against another party to the agreement in respect of a matter agreed to be submitted to arbitration, a party to the legal proceedings may, before service of any pleadings or taking any other step in the proceedings, apply to that court to stay the proceedings. 

(2) In an application under subsection (1), the court must make an order staying the legal proceedings unless it determines that the arbitration agreement is null and void, inoperative or incapable of being performed. 

(3) Even if an application has been brought under subsection (1) and even if the issue is pending before the court, an arbitration may be commenced or continued and an arbitral award made. 

STC argued that the arbitration clause did not apply as it was not incorporated into the parties’ contracts.  Agricom countered, arguing that full terms of the GAFTA 88 were incorporated into their contracts by the inclusion of the mention on page 1 of each contract.  

[15]   “GAFTA Contract No. 88” appears to be a template form of contract bearing the title: “CONTRACT FOR FULL OR LIMITED CONTAINER LOADS (FCL OR LCL), BULK OR BAGS, CARTONS, DRUMS OR TINES, CIF/ C&F TERMS.” The essential terms in the first five sections on the first page contain blank spaces that are apparently supposed to be filled in – there is a note at the top of the page stating: “* delete/specify as applicable.” An asterisk precedes several of the spaces to be filled in. From s. 6 at the bottom of the first page to s. 27 on page 6, there are a number of standard terms. At the bottom of page 6 there is a place for each of the parties to execute the contract. 

[16]        At s. 26 is the following term: 

(a) Any and all disputes arising out of or under this contract or any claim regarding the interpretation or execution of this contract shall be determined by arbitration in accordance with the GAFTA Arbitration Rules, No 125, in the edition current at the date of this contract, such Rules are incorporated into and form part of this Contract and both parties hereto shall be deemed to be fully cognisant of and to have expressly agreed to the application of such Rules. 

 (b) Neither party hereto, nor any persons claiming under either of them shall bring any action or other legal proceedings against the other in respect of any such dispute, or claim until such dispute or claim shall first have been heard and determined by the arbitrator(s) or a board of appeal, as the case may be, in accordance with the Arbitration Rules and it is expressly agreed and declared that the obtaining of an award from the arbitrator(s) or board of appeal, as the case may be, shall be a condition precedent to the right of either party hereto or of any persons claiming under either of them to bring any action or other legal proceedings against the other of them in respect of any such dispute or claim. 

 (c) Nothing contained under this Arbitration Clause shall prevent the parties from seeking to obtain security in respect of their claim or counterclaim via legal proceedings in any jurisdiction, provided such legal proceedings shall be limited to applying for and/or obtaining security for a claim or counterclaim, it being understood and agreed that the substantive merits of any dispute or claim shall be determined solely by arbitration in accordance with the GAFTA Arbitration Rules, No 125. 

Relying on Hosting Metro Inc. v. Poornam Info Vision Pvt, Ltd., 2016 BCSC 2371, paras. 26-30, and McMillan v. McMillan, 2016 BCCA 441, paras. 26-29, Agricom submitted that all it had to establish to the court was an “arguable case” that the clause applied.  The arbitrator would decide on the facts if the GAFTA 88 was incorporated into their contracts.  

In contrast, STC pointed to the wording of section 7(5) of ICAA which defines an “arbitration agreement” for the purposes of the ICAA. That se. That definition requires that a reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract. STC argued that the mere mention of GAFTA 88 in the contracts was insufficient to meet the ICAA and, because the mention of GAFTA 88 did not fall within the meaning of section 7(5), Agricom’s application must fail. 

Milman J. held that the applicable standard to apply was that of an arguable case which he held applies to all the prerequisites in section 8 “without distinction“.   He held that the question of whether GAFTA 88 was incorporated into the contracts was primarily a question of fact and was best dealt with by an arbitrator with “specialized industry expertise“.    Following the comments of the majority in Seidel v. TELUS Communications Inc., [2011] 1 SCR 531, 2011 SCC 15, cited by McMillan v. McMillan, Milman J. held that determining whether GAFTA 88 was incorporated was neither a pure question of law nor required only a superficial review of documentary evidence.  

It can be noted that GAFTA’s website allows for parties to query its roster of GAFTA approved arbitrators by country and, in doing so, the search does yield results for Canadian qualified GAFTA arbitrators.  

Having determined that the test to apply is that of the arguable case, Milman J. held that Agricom had met the test. Summarizing some of the key arguments STC would make against the incorporation by reference, he next determined that STC also had an arguable case.  Based on his analysis, Milman J. stayed the action and referred the parties to arbitration.