The competence-competence principle is well established in Canadian law. It requires that issues relating to an arbitrator’s jurisdiction are generally first to be determined by the arbitrator instead of the court. In ONE Lodging Holdings LLC v American Hotel Income Properties REIT (GP) Inc., 2024 BCSC 2179, the Chambers Judge identified what amounts to a pre-condition, or exception, to the application of the competence-competence principle beyond those previously recognized by the Supreme Court of Canada in cases such as Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34 (“Dell”) and Uber Technologies Inc. v. Heller, 2020 SCC 16. Those recognized exceptions are: (1) where the jurisdictional issue is a pure question of law or a question of mixed fact and law requiring only a cursory review of the documentary record, or (2) where there is a “real prospect” that the arbitrator may not be able to resolve the jurisdictional challenge due to practical barriers. Here, the Chambers Judge found that the competence-competence principle also does not apply when there is a dispute as to the existence of an arbitration agreement, as opposed to a dispute about the validity or scope of an existing arbitration agreement.
It remains to be seen whether this purported exception, or pre-condition, to competence-competence can survive further judicial scrutiny.
This blog focuses on the competence-competence issues raised in this case. The case addresses other issues such as the test for an arbitration agreement which also may be of interest to arbitration practitioners.
Factual and procedural background – Briefly, the facts were these. The Plaintiffs, ONE Lodging, and the Defendants, AHIP, were parties to a series of agreements including a “Master Agreement” pursuant to which ONE Lodging managed hotel properties owned by AHIP.
AHIP issued a notice of default under the Master Agreement and then an “Appointment Notice” seeking to resolve the issues in the notice of default pursuant to the dispute resolution clause found at Article 11 the Master Agreement. Article 11 is lengthy, and its wording is unusual. The following excerpt is reproduced only because it may provide some insight into the Chamber Judge’s approach to competence-competence in this case:
“In the event that the Master Hotel Manager and AHIP are not able to agree on an Annual Budget for any Fiscal Year or in the event of any other dispute… with respect to any provision of this Agreement or any matter arising hereunder (the “Issue”)… either [party] can give written notice… seeking the appointment of an independent expert qualified to address the Issue (the “Expert”)…The Expert’s decision shall be to select the final proposed resolution of one of the parties and the Expert may not make any determination other than one in accordance with the final proposed resolution of one or the other of the parties, and no issues shall be eligible for determination by such Expert other than in relation to the Issue. The Expert appointed hereunder shall act as an expert and not as an arbitrator and shall govern its own proceedings. Any proceedings convened in person shall be held in Phoenix, Arizona, unless otherwise agreed to by both parties. The decision of the Expert as to the resolution of the Issue shall be conclusive and binding on the parties…”
The Master Agreement also contained a “governing law”clause that provided it was to be:
“governed by and construed and enforced in accordance with the laws of the Province of British Columbia, which shall be deemed to be the proper law hereof, and the courts of British Columbia shall have exclusive jurisdiction in connection with all matters under this Agreement, and the interpretation and enforceability hereof”.
ONE Lodging commenced an action in the British Columbia Supreme Court seeking a declaration that the Court had exclusive jurisdiction to decide the issues raised in the notice of default. ONE Lodging also brought an application to enjoin AHIP from proceeding with the dispute resolution process under Article 11 of the Master Agreement. It argued that the British Columbia Courts had exclusive jurisdiction over all disputes under the Master Agreement and that Article 11 was not an arbitration agreement.
In response, AHIP brought an application seeking a stay of the action in favour of arbitration pursuant to section 8 of the International Commercial Arbitration Act, RSBC 1996, c 233, on the grounds that the subject matter of the action was covered by an arbitration agreement. AHIP argued that (1) article 11 of the Master Agreement provided for dispute resolution by arbitration and (2) there was an arguable case the arbitrator has jurisdiction therefore the principle of competence-competence required that jurisdictional issues be determined first by the arbitrator.
Result – The Chambers Judge dismissed AHIP’s application for a stay in favour of arbitration and granted ONE Lodging’s application to enjoin AHIP from proceeding with the dispute process under the Master Agreement.
The Court’s Competence- Competence Analysis – Section 8 of the B.C. International Commercial Arbitration Act provides that:
“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 submitting the party’s first statement on the substance of the dispute, apply to that court to stay the proceedings.”
The Chambers Judge began her analysis by citing the statement in Peace River Hydro Partners v. Petrowest Corp., 2022 SCC 41 (“Petrowest”), affirming the “legislative and judicial preference for holding parties to arbitration agreements”. She stated that the general rule for stay applications is that if the parties “have agreed to arbitrate an issue and that issue in dispute is covered by that agreement to arbitrate”, the court must stay the proceeding in favour of arbitration and leave any issues about the arbitrator’s jurisdiction to the arbitrator. She stated this general rule is based on the competence-competence principle.
She also noted that there are exceptions to the application of the competence-competence principle recognized by the Supreme Court of Canada. Those exceptions are set out in the first paragraph of this blog, above.
This was all beside the point, however, as the Chambers Judge observed that the competence-competence principle has previously only been considered in the context of cases concerning the validity or scope of an existing arbitration agreement and not in cases like this one where there is a dispute as to whether any agreement to arbitrate existed at all. She then reasoned as follows at paragraph 24:
“…That is an important distinction, because the foundational principle to the competence-competence principle is that parties ought to be held to their agreements. If they did not agree to arbitrate at all, the competence-competence principle is without foundation. In the absence of an agreement to arbitrate, permitting an arbitrator to decide the issue is abhorrent to the foundation principle that parties should be held to their agreements, because it permits a party to force the other to submit to a decision-maker and a process that the parties have not agreed upon.”
The Chambers Judge also considered section 16(1) of the International Commercial Arbitration Act which provides that “[t]he arbitral tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement…” but she found it did not address whether the existence of an arbitration agreement is subject to the competence-competence principle.
She then considered Dell and Spark Event Rentals Ltd. v. Google LLC, 2024 BCCA 148 and found there was nothing definitive in either case as to whether the existence of an arbitration agreement was a pre-condition to the application of competence-competence or merely part of the test for a stay. One of the requirements for a stay is that it is arguable that an arbitration agreement exists.
Given this the lack of clarity in the case law, based on the wording of section 8(1), she decided that the court must first determine an arbitration agreement’s existence before competence-competence is engaged. She reasoned that section 8(1) of the International Commercial Arbitration Act states:
“… that a party to an arbitration agreement may apply to the court for a stay of a matter that is subject to an agreement to arbitrate. If the party applying is not a party to an arbitration agreement, there is no right to apply for a stay. Accordingly, my view is that where there is a dispute about the existence of an arbitration agreement on an application for a stay (as opposed to before the alternate decision-maker under s. 16), the competence-competence principle is not engaged in the resolution of that dispute, and it must be decided by the court as a preliminary matter.”
She then stated the law as follows:
“[38] If the competence-competence principle is engaged on the question of whether there is an arbitration agreement, then the stay applicant must establish on the arguable case threshold that there is an arbitration article.
[39] In addition, if the competence-competence principle applies, the question of whether there is an arbitration agreement can be decided by this court if it is a pure question of law or a question of mixed law and fact where the facts need only superficial consideration: Dell at paras. 84–85.”
On this basis the Chambers Judge concluded that competence-competence did not prevent her from considering whether Article 11 of the Master Agreement constituted an arbitration agreement, first because it did not apply as it had not yet been determined that there was an arbitration agreement and second, even if it did, the issue was one of mixed fact and law “in which the legal analysis will heavily dominate and only a cursory reference to the nature of the dispute is necessary”.
Contributor’s Notes:
In a recent blog post, I summarized the current law in Canada with respect to the competence-competence principle: Exceptions to Competence-Competence Litigated in Appellate Courts in 2024 – #883.
When a jurisdictional issue is raised before a court, the application of the competence-competence principle results in a triaging step before the jurisdictional issue is determined. As a preliminary matter, the court must decide whether the issue should first be determined by the arbitrator. The law is clear that an arbitrator should decide the issue unless it is a pure question of law, a question of mixed fact and law only requiring a cursory review of record or there is some practical barrier to an arbitrator ever considering the jurisdictional issue.
However, In ONE Lodging, the Chambers Judge found that the competence-competence principle does not apply when the jurisdiction issue is a dispute as to the existence of the arbitration agreement, as opposed to its scope or validity. The reason given was that, If the parties “did not agree to arbitrate at all, the competence-competence principle is without foundation” because there is no agreement to which to hold the parties.
But isn’t this a distinction without a difference? Isn’t the result of any successful jurisdictional challenge the same – that no applicable arbitration agreement exists? Couldn’t the same argument be made if a dispute is beyond the scope of an arbitration clause or a clause is void ab initio?
The effect of drawing this distinction is to take one of the requirements for granting a stay—the existence of an arbitration agreement—and turn it into an issue of standing that must be considered even before the initial triaging step. The Chambers Judge expressly states this at paragraph 37: “If the party applying is not a party to an arbitration agreement, there is no right to apply for a stay.”
Is the better interpretation of section 8(1) that the existence of an arbitration agreement is not a precondition for applying for a stay but rather a precondition for whether a stay should be granted?
This case illustrates a confusion between the applicant’s burden on an application for a stay of court proceedings and the threshold considerations related to exceptions to competence-competence. The applicant’s burden on a stay application is to demonstrate an “arguable case” that the technical prerequisites for granting a stay are met (see Petrowest, para. 84). In my view, an “arguable case” is not part of the established threshold considerations related to exceptions to competence-competence set out in Dell and Uber. Although the arguable case standard may reflect, or be consistent with, the competence-competence principle, it is not the same as the initial triaging step. The competence-competence principle arises not only in stay applications in favour of arbitration but whenever a jurisdictional issue is raised before the court (see Dow Chemical Canada ULC v. NOVA Chemicals Corporation, 2023 ABCA 217).