Crosby Molasses Company Limited v. Scot Stuttgart (Ship), 2024 FC 1358 highlights a little-known provision in Canadian maritime law that is being interpreted in a way that ignores arbitration law principles and overrides arbitration clauses in the context of international maritime carriage of goods. The provision, section 46(1) of the Marine Liability Act, SC 2001, c 6 (“Marine Liability Act”) states that, “if a contract for the carriage of goods by water provides for the adjudication or arbitration of claims… in a place other than Canada, a claimant may institute judicial or arbitral proceedings in a court or arbitral tribunal in Canada...”
This case is an appeal from an Associate Judge’s decision denying a stay of court proceedings in favour of arbitration. The Appeal Justice concluded there was an arbitration clause binding the claimant, Crosby Molasses Company Limited (“Crosby”), but ultimately denied the appeal. The decision hinged on the interpretation of section 46(1) of the Marine Liability Act and article 8 of the Commercial Arbitration Code (Commercial Arbitration Act, RSC 1985, c 17 (2nd Supp) (Schedule 1)) (“Commercial Arbitration Code”). Article 8 requires courts to refer parties to arbitration unless the arbitration agreement is “null and void, inoperative or incapable of being performed.” The Appeal Justice found that because the arbitration clause provided for arbitration in New York and Crosby had elected to instead institute court proceedings in Canada, the parties could not be referred to arbitration. Section 46(1) rendered the arbitration clause unenforceable. The full arbitration clause is quoted below.
The Appeal Justice also reviewed and upheld the Associate Judge’s decision not to stay the court proceedings based on the doctrine of forum non conveniens.
This case note highlights some of the problems with the Federal Court’s interpretation of section 46(1) of the Marine Liability Act, and offers an analytical way forward. It does not address other issues raised in the case like the incorporation of charter party terms into bills of lading or the standard of review.
Facts: As the bakers among you know, Crosby is in the business of making and selling molasses products. It contracted with a shipping Charterer for the supply of Black strap molasses and Fancy molasses from the same vendor.
The Defendant Ship “M/T Scot Stuttgart” was the vessel chartered to transport the molasses cargoes. The Charterer and the Owners of the ship entered into a contract known as a charter party (the “Molasses Charter Party”). The molasses cargoes were loaded on board the Ship in Guatemala and delivered to Crosby in St John’s, New Brunswick. Crosby alleged that the molasses cargoes arrived in damaged condition due to contact with epoxy flakes in the Ship’s tanks.
Two Bills of Lading were issued by the Owners, one in respect of the Blackstrap molasses (“Bill of Lading No. 1”) and the other in respect of the Fancy molasses. (“Bill of Lading No. 2”). Crosby was the consignee and endorsee under each of the Bills of Lading, respectively, making Crosby subject to the Bills’ rights and liabilities pursuant to section 2 of theBills of Lading Act R.S.C 1985, c. B-5.
The Bills of Lading purported to incorporate the Molasses Charter Party and specifically the arbitration clause which was as follows.
“ARBITRATION CLAUSE: That should any dispute arise between Owners and the Charterers, the matter in dispute shall be referred to three persons at New York, N.Y., one to be appointed by each of the parties hereto, and the third by the two so chosen; their decision or that of any two of them, shall be final, and for the purpose of enforcing any award, such decision may be made a rule of the Court. The Arbitrators shall be commercial men. Any claim by Charterer or Owner must be presented within sixty (60) days of completion of discharge of the within mentioned cargo, and if there is any occasion for an arbitration under said Charter Party, the Charterer and Owner agree to appoint their respective arbitrators not later than six (6) months following the date of completion of discharge.”
Procedural Background: Crosby commenced four actions in Federal Court, two on its behalf and two on behalf its subrogated insurance underwriters. The four actions were subsequently consolidated into one. No Statements of Defence were filed.
Crosby also delivered an “Arbitration Demand” for arbitration “in New York” relating to Bill of Lading No. 1. The Arbitration Demand provided that the Demand was issued “under reserve” as to the legality of the incorporation of the Molasses Charter Party (and its arbitration clause) into Bill of Lading No. 1.
The Owners responded by moving in Federal Court for an order, under section 50(1)(a) of the Federal Courts Act, RSC 1985, c F-7, to stay the consolidated court proceedings in favor of arbitration in New York. They did so on the grounds there were binding arbitration clauses and forum non conveniens.
The motion was initially dismissed by the Associate Judge, and the Owners appealed.
Decision on appeal
(1) Section 46 of the Marine Liability Act
In the first instance, the Associate Judge found that the arbitration clause was not binding against Crosby. She also found, in any event, that the arbitration clause would be unenforceable as a result of section 46(1) of the Marine Liability Act. In coming to this conclusion the Associate Judge relied on T. Co. Metals LLC v. Federal Ems (Vessel), 2012 FCA 284 ( the “Federal Ems”). The Associate Judge concluded (as quoted by the Appeal Justice at para. 120 of the decision, which is not reported on Canlii):
“… notwithstanding any Arbitration Clause incorporated into the Bills of Lading, Crosby is entitled to institute judicial or arbitral proceedings in a court or tribunal in Canada that is competent to determine the claim pursuant to section 46 of the MLA. As stated in Cougar Ace at para 69, the Arbitration Clause is not enforceable in Canada when section 46 of the MLA applies.”
I pause to note that the reference to Cougar Ace (Mazda Canada Inc. v. Cougar Ace (The), 2008 FCA 219) is obviously erroneous as that case only has 27 paragraphs. The intended reference appears to be Federal Ems which states the following at paragraphs 69:
“[69] Pursuant to article 8(1) of the Commercial Arbitration Code, included as Schedule 1 to the Commercial Arbitration Act, Canadian courts “shall” stay proceedings in the presence of a valid and enforceable arbitration clause. Obviously, when section 46 of the Act applies, the arbitration clause is not enforceable in Canada (see article 1(3) of the Commercial Arbitration Code).”
The reference to Article 1(3) of the Commercial Arbitration Code is the following: “[t]his Code shall not affect any other law of Parliament by virtue of which certain disputes may not be submitted to arbitration or may be submitted to arbitration only according to provisions other than those of this Code.”
The Court of Appeal in Federal Ems also provided the following caution in the next paragraph which is referenced by the Appeal Justice:
“[70] Nevertheless, the Court should be prudent in construing subsection 46(1), as one should not too readily assume that Parliament has limited the effect of arbitration clauses in respect of disputes that have traditionally been the subject of arbitration, like charter party disputes.”
The Appeal Justice’s analysis was different than the Associate Judge’s, but it ended with the same result. Unlike the Associate Judge, she concluded there was a binding arbitration agreement against Crosby. As a result, she found that Article 8 of the Commercial Arbitration Code applied, which required the parties to be referred to arbitration unless “the agreement is null and void, inoperative or incapable of being performed”. She seemingly accepted that section 46(1) prevented the Court from referring the parties to arbitration “in New York” and simply asked the question whether, pursuant to section 8 of the Code, she was also prevented from staying the action in favour of arbitration in Canada.
The Appeal Justice answered the question as follows:
“[128] At paragraph 70 of the “Federal Ems”, supra, the Federal Court of Appeal opened the door to that possibility. As well, referring the matter to arbitration in Canada will give effect to the intention of the Arbitration Clause.
[129] Such a proceeding would give effect to the terms of the Arbitration Clause which provides for “arbitration”, as a means to resolve disputes between the parties. In order to achieve that result, the present proceedings could be stayed.
[130] Had Scot requested arbitration in Canada, the Court would have been required to weigh the propriety of rewriting the Molasses Charter Party to provide for arbitration in Canada.
[131] However, that is not the situation, and Crosby has chosen to enforce its rights under section 46 of the Marine Liability Act, supra.
[132] The Court is bound to follow the statute. There is no way “around” section 46, and no basis in law for the Court to refer the matter to arbitration in New York. It remains open to the parties to seek arbitration in Canada, should they choose to do so.”
(2) Forum Non Conveniens
The Associate Judge also considered whether a stay could be granted on the basis of forum non conveniens. After considering the various factors set out in Spar Aerospace Ltd. v. American Mobile Satellite, 2002 SCC 78, she concluded that the Owners had failed to meet their burden to show that New York was “clearly” the more convenient jurisdiction for the resolution of the actions. The Appeal Justice found no reviewable error with this conclusion.
Contributor’s Notes:
I will leave it to you, gentle readers, to divine the meaning and import of the words in the arbitration clause: “The Arbitrators shall be commercial men”.
Instead, I will focus on the impact of the following arbitration principles and law on the analysis in this case:
1. Seat theory
The analysis in this case, and Federal Ems, appears to conflate the physical location of an arbitration hearing with the “seat” of the arbitration agreed on in an arbitration clause. In doing so, the analysis treats an arbitration clause with a foreign seat as if it were a forum selection clause.
As arbitration practitioners know, the “place of arbitration” does not determine the physical location of the arbitration. Rather, the parties are selecting the juridical seat, or the law that governs the arbitral proceedings. As Justice Côté noted in Uber Technologies Inc. v. Heller, 2020 SCC 16, at paragraph 273: “The designation of a foreign jurisdiction as the place of arbitration is therefore akin to a choice of law clause for the procedural aspects of the arbitration process.” The physical location of the hearing is typically left to the discretion of the arbitration panel or the further agreement of the parties.
Given this, the conclusion in Federal Ems that section 46(1) of the Marine Liability Act renders an arbitration clause with a foreign seat unenforceable is questionable. At most, section 46(1) would, at the claimant’s election, remove the discretion of the arbitration panel to determine the location of the hearing or override the parties’ choice of a physical hearing location. It should not prevent the court from referring the parties to arbitration pursuant to section 8 of the Commercial Arbitration Code.
For the same reasons, the Appeal Justice’s conclusion in this case that “[t]here is no way ‘around’ section 46, and no basis in law for the Court to refer the matter to arbitration in New York” is arguably incorrect and leads to its unnecessarily extreme result.
2. Article II(3) of the New York Convention
This case interprets section 46(1) of the Marine Liability Act as giving a claimant, otherwise bound by an arbitration clause with a foreign seat, the option to commence court proceedings in Canada. This interpretation is difficult to reconcile with the court’s obligations under Article II(3) of the New York Convention, which provides:
“The court of a Contracting State, when seized of an action in a matter in respect of which the parties have made an agreement within the meaning of this article, shall, at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.”
As hinted at above, an interpretation available on the words of section 46(1) and more consistent with Article II(3) and seat theory would be that, in the presence of a binding arbitration clause with a foreign seat, section 46(1) only requires that the arbitration hearing must be held in Canada if the claimant so wishes, not that it gives the claimant a choice to initiate court proceedings in Canada instead of arbitrating.
3. Forum non conveniens
Arguably, there is no residual jurisdiction to refuse a stay based on forum non conveniens when there is a binding arbitration clause, given (1) the court’s mandatory obligation under Article II(3) of the New York Convention to refer parties to arbitration if they are bound by an arbitration agreement, and (2) the test for referral to arbitration under section 8 of the Commercial Arbitration Code mirrors the language of Article II(3) of the New York Convention. Even if residual jurisdiction existed, how would a forum non conveniens analysis apply to an arbitration clause with a foreign seat if we accept seat theory?