BC – Court determines arbitrator jurisdiction, exercising exception to competence-competence – #726

In Isagenix International LLC v. Harris, 2023 BCCA 96, Justice Griffin, for the British Columbia Court of Appeal, upheld an order dismissing the Appellant’s application made pursuant to section 8 of the International Commercial Arbitration Act, RSBC 1996, c 233 (the “ICCA”) for a stay of proceedings in favour of arbitration. In particular, she rejected the Appellant’s argument that the chambers justice had misapplied the principle of competence-competence by deciding the question about whether the underlying negligence claim fell within the scope of the arbitration clause, rather than referring the jurisdictional matter to the arbitrator. Justice Griffin found that the chambers justice did not err in law because he came within one of the well-established exceptions to the competence-competence rule.

The Appellant was Isagenix International LLC (“Isagenix”), a company that sells various edible products, marketed as health products containing certain fortified vitamins and minerals. It markets its products in two ways. First, it sells directly to consumers (i.e. its “Preferred Customers”) through a “Consumer Contract”. Second, it sells to persons described as “Associates” through an “Associate Contract”, who then resells the products for a commission. Both types of contracts contain an arbitration clause that required arbitration of any controversy or claim arising out of, or relating to, the respective contract. 

In this case, the Plaintiff (and Rspondent on appeal), Ms Harris, was both a Preferred Customer and an Associate at various periods and had entered into both agreements. Under the Consumer Contract, she placed two orders for product. She subsequently commenced a legal action against Isagenix alleging negligence in Isagenix’s design, manufacture, distribution, marketing and supply of products, which Health Canada and the Canadian Food Inspection Agency recalled due to the unsafe over-fortification of vitamins and minerals. Ms Harris alleged that she suffered various personal injuries due to her consumption of these products.

Rather than defending the claim, Isagenix applied, under section 8 of the ICCA, to stay the action because Ms Harris’ claims were subject to the parties’ arbitration agreement. Section 8 states in part:

“(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.” (Emphasis added)

The question on the application was whether the litigation was “in respect of a matter agreed to be submitted to arbitration.” The chambers justice found that Ms Harris’s negligence claim was not captured by the arbitration agreements, whose scope was constrained to contractual matters, and therefore dismissed Isagenix’s stay application. 

Isagenix appealed, alleging that the chambers justice misapplied the competence-competence principle by making the decision himself rather than referring the matter to the arbitrator.

The British Columbia Court of Appeal disagreed, noting the Supreme Court of Canada’s recent confirmation of relevant legal principals in respect of stay applications in Peace River Hydro Partners v Petrowest Corp, 2022 SCC 41. In general, the competence-competence rule requires courts to allow the arbitrator the first opportunity to determine his or her own jurisdiction. This rule has been expressed through the “arguable case” test, which provides that if a party seeking a stay can establish an arguable case that the legal proceedings are in respect of a matter subject to an arbitration agreement, then the Court should grant a stay and allow the arbitrator to decide his or her own jurisdiction. 

However, if the relevant question is a pure question of law or a question of mixed fact and law requiring only a superficial examination of the evidentiary record, then the Court can resolve the question of the arbitrator’s jurisdiction and does not need to refer it to the arbitrator. The Supreme Court recently confirmed these exceptions in Peace River at para. 42. In relation to the meaning of what requires a superficial review of the record, Justice Griffin referred to Uber Technologies Inc. v. Heller, 2020 SCC 16 at para. 36, which states that the essential question is “whether the necessary legal conclusions can be drawn from facts that are either evident on the face of the record or undisputed by the parties“.

In this case, the Court of Appeal accepted the chambers justice’s conclusion that Ms. Harris’s case raised a question of law or, in the alternative, one of mixed fact and law that required only superficial consideration of the evidentiary record. It agreed that there was “no arguable case” that the words in the arbitration clause could cover the negligence claims advanced by Ms. Harris. 

The Court of Appeal also rejected Isagenix’s argument that the arbitration agreement in the Associate Contract was broad enough to capture any disputes arising from the parties’ relationship, more generally, and not arising solely from the contract. The Court held that this argument went too far when viewed against the words in that clause. Justice Griffins found the “arguable case” does not mean “any possible argument, no matter how absurd and lacking in merit” (para. 41). 

Further, when faced with a stay application, Justice Griffin held that the Court ought to look at the pleading to determine the nature of the claim to determine if it is the type of dispute the parties subjected to arbitration. In this case, Ms Harris’s product liability claim was pled based on longstanding tort principles in negligence— not breach of contract. Although the parties had a contractual relationship, Ms Harris’s claim did not arise from it. There was no factual matrix evidence that an arbitrator needed to determine to reach this conclusion. 

As such, the Court of Appeal upheld the chamber justice’s dismissal of the stay application and dismissed the appeal.

Contributor’s Note: 

First and notably, to support its decision, the Court of Appeal also pointed out that the arbitration clauses required at least one arbitrator to be “an attorney at law experienced in business law transactions and network marketing“. The Court found that this requirement indicated that the intention was for commercial disputes to be arbitrated, not tort or personal injury-based disputes. These observations confirm not only that courts will take a contextual view of contractual interpretation to try to give weight to the parties’ objective intentions but also that drafters should draft carefully. Second, for a summary of the chamber’s judge’s decision, see Case Note: B.C. – Arbitration clause covered contract not tort claims – #600.