In RS Marine Ltd. v. M/V Terre Neuvas (Ship), 2024 FC 1825, the Court was tasked with considering whether to stay a proceeding in favour of arbitration in a dispute arising from a joint venture agreement between the plaintiffs—RS Marine Ltd. (“RSM”) and Murphy Marine Ltd. (“MML”)—and the French-based defendant SPM Ocean SAS (“SPM”). The key issue before the Court was whether a dispute resolution clause in the subject agreement required the parties to arbitrate their disputes. Relatedly, the Court had to consider if it had the authority to rule on this point or if it ought to be left to an arbitrator to rule on their own jurisdiction.
Background Facts
In September 2022, Rex Simmonds, president of RSM, was approached by shareholders of the French company SPM to discuss a joint venture for expanding the fishery of the island of St. Pierre under French licenses. As a result, Simmonds’ daughter and her husband incorporated MML, which purchased a 49% share in SPM. A letter of intent (the “LOI”) was signed, outlining a loan from RSM to SPM for purchasing a vessel, with the loan secured by a marine mortgage and other guarantees.
A detailed joint venture agreement was signed in November 2022, which was consistent with the LOI in that it provided for the crewing of the vessel, harvesting and distribution of fishery proceeds, and terms of repaying loans. It also contained a dispute resolution clause calling for “mediation” in the event of disagreements (the “JVA”).
That clause provided:
“[14] In the event of a dispute, including a shareholders dispute, between any of the Parties… concerning SPM and/or this Agreement that they cannot resolve between them after using reasonable efforts, the Parties agree to use a third party meditator for the dispute settlement process. If the Parties cannot agree on a single mediator either Party may apply to Court and have the Court name a mediator. The mediator shall be familiar with the business and operations of SPM, including the country(ies) and territory(ies) of its operations. The decision of the mediator shall be binding on the Parties. [Emphasis in judgment]
A dispute among the parties arose regarding their financial arrangements.
By spring 2023, trust between the parties deteriorated, leading to threats of dissolving SPM and selling the vessel, leaving plaintiffs as unsecured creditors.
Proceedings before the Court
The plaintiffs filed two actions, which were consolidated, in August 2023, arresting the in rem defendant vessel while it was in Canada.
On September 20, 2023, SPM filed its statement of defence and counterclaim, alleging damages for the wrongful arrest of the vessel, plus costs.
In February 2024, SPM filed a motion to stay the proceedings, arguing, among other things, that the Dispute Clause in the JVA mandated arbitration, either in Newfoundland and Labrador or France. In response, on April 17, 2024, the plaintiffs filed a motion for summary judgment on the amounts SPM admitted to owing, seeking to resolve only the admitted debts, with the remainder of the claims to proceed to trial.
This blog focuses on the former application below.
Issue: Enforcement of the Dispute Resolution Clause
SPM, sought a stay of proceedings, asserting that the Dispute Clause was arbitration clause, relying on Section 50 of the Federal Courts Act (“FCA”), which provides:
“50 (1) The Federal Court of Appeal or the Federal Court may, in its discretion, stay proceedings in any cause or matter
(a) on the ground that the claim is being proceeded with in another court or jurisdiction; or
(b) where for any other reason it is in the interest of justice that the proceedings be stayed.”
However, SPM did not reference any arbitral statute in support of its motion, nor did it point to any applicable arbitration law of Newfoundland and Labrador.
During the hearing, the Court suggested that the parties consider the Commercial Arbitration Act, RSC 1985, c 17, which incorporates the Commercial Arbitration Code (the “Code”) and applies to maritime or admiralty matters.
Article 8(1) of the Code provides for a stay of proceedings in favour of arbitration:
“ARTICLE 8
Arbitration Agreement and Substantive Claim before Court
(1) A court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.”
SPM argued that the dispute clause constituted an arbitration agreement because it provided that the decision of the mediator would be “binding.” The plaintiffs disagreed, maintaining that the clause merely contemplated mediation, as it did not reference arbitration rules or specify a site for arbitration.
The Court found the clause ambiguous, noting that it referred to mediation, and did not establish a process involving judicial decision-making, a key element of arbitration. It concluded at para 36:
“I am not convinced that the parties have agreed to submit any dispute under the [JVA] or the LOI to arbitration. The dispute resolution clause is not an arbitration agreement, and I am certainly not about to imply the existence of a willingness on the part of the parties that it be so interpreted.”
In reaching this conclusion, the Court accepted that under normal circumstances, the competence-competence principle dictates that arbitrators have the authority to rule on their own jurisdiction. As a result, any challenge to an arbitrator’s jurisdiction must first be resolved by the arbitrator.
However, the Court noted that in its statement of defence, SPM itself had linked the enforceability of the Dispute Clause to the enforceability of the entire JVA. Since SPM was arguing that the JVA was merely a preliminary agreement that was not binding, the competence-competence principle was not engaged in the usual way. As the Court explains at para. 42:
[42] I note as well that in its statements of defence and counterclaim, SPM makes a distinction between mediation and arbitration, terms it is now attempting to conflate. All of this of course only adds to the confusion. Ordinarily, arbitration clauses are taken to be stand-alone contracts, separate from the agreements in which they may be found; in fact, the separability doctrine holds that arbitration clauses embedded in contracts should be treated as independent agreements that are ancillary or collateral to the underlying contract (Uber Technologies Inc v Heller, 2020 SCC 16 [Uber] at para 221). However, this is not a situation where there is an allegation, say by the plaintiffs, that the Agreement is void or has been terminated because of a breach, thus rendering the arbitration clause inoperative; such a situation is precisely what the principles of separability and competence-competence (which I discuss below) are meant to address. Here, it is SPM, the party invoking the dispute resolution clause, which is suggesting that the validity of the purported arbitration clause is tied to the validity of the Agreement, and that the Agreement and the LOI attached to it were only preliminary agreements that were not meant to create contractual terms binding on the parties. In other words, the validity of the Agreement and that of the dispute resolution clause must stand together, according to SPM’s own argument.
The Court found no authority supporting the proposition that a stay should be granted where the party invoking arbitration makes the validity of the arbitration clause conditional on the enforceability of the underlying contract.
Commentary
This case represents a rare and interesting exception to the application of the competence-competence principle, a legal doctrine that grants arbitrators the authority to determine their own jurisdiction, including the validity and scope of the arbitration agreement.
This exception arose because SPM filed a substantive statement of defense, denying the enforceability of the entire Agreement, including the dispute resolution clause itself. While the Court did not have to consider the issue, the defendants may have waived their right to arbitration, as it is unclear if the defendants demanded that the dispute be referred to arbitration in their statement of defence, a requirement of the Code.
Moreover, unlike the defendants in the present case, parties will more often seek a stay pursuant to a federal or provincial arbitration act, where stays are generally mandatory, meaning the court has limited discretion to continue the action if the requirements for a stay are met. In contrast, seeking a stay pursuant to s. 50 of the FCA is discretionary, stipulating only that a court “may” stay a proceeding.
Finally, the case highlights the importance of carefully drafting arbitration clauses. In this case, the Court found the dispute resolution clause ambiguous, as it referred to mediation without specifying arbitration rules or a seat of arbitration. To avoid such confusion and ensure enforceability, drafters of arbitration clauses should strive for clarity and precision, defining the scope of disputes to be resolved through arbitration, choosing the rules and procedures governing the arbitration, selecting the seat of arbitration, as well as practical aspects such as the number of arbitrators and the method of their appointment. And they must understand the difference between mediation and arbitration!