Julie’s 2024 Hot Topic – Exceptions to Competence-Competence Litigated in Appellate Courts in 2024 – #883

In 2024, for the first time, two appeal courts considered the “brick wall” exception to competence-competence set out in Uber Technologies Inc. v. Heller, 2020 SCC 16 (“Uber”).

By way of background, the Supreme Court of Canada has firmly entrenched the principle of competence-competence in Canadian law through decisions such as Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34 (“Dell”) and Seidel v. TELUS Communications Inc., 2011 SCC 15 . This principle holds that arbitrators have the jurisdiction to determine their own jurisdiction.  As a result, challenges to an arbitrator’s jurisdiction must typically first be decided by the arbitrator rather than by the court (Dell, para. 84).

There are recognized exceptions to competence-competence in the case law.  One is where the issue involves a pure question of law.  Another applies where the issue involves a question of mixed fact and law, but it can be resolved through only a superficial examination of documentary evidence (Rogers Wireless Inc. v. Muroff, 2007 SCC 35, para. 11).  A superficial examination of the facts in determining issues of mixed fact and law has been interpreted as allowing necessary legal conclusions to be drawn based on the facts on the face of the record or on agreed facts (Uber, para. 36).

In Uber the Supreme Court introduced a further exception to competence-competence.  In that case, the claimant challenged the validity of the arbitration clause on the basis of unconscionability. The clause provided for arbitration under the ICC Rules in the Netherlands; however, the ICC’s high initiation fees, coupled with the claimant’s limited financial resources created what the majority found was a “brick wall” between the claimant and the resolution of any of the claims he made against Uber.  This financial barrier meant the assumption on which competence- competence is based, that is “if a court does not decide the issue, the arbitrator will”, did not hold true in that case.

The Court held that before it could consider the issue of the validity of the arbitration clause, it must first determine whether there was a “real prospect” that the arbitrator may not resolve the jurisdictional challenge due to practical barriers. In assessing this threshold issue, the Court assumed the facts pleaded were true and conducted a limited review of the evidence.  Only once the Court had found that this threshold was met, did it conduct an in-depth analysis to rule on the merits of the validity issue.  This requirement to address the threshold issue before a probing examination of the merits was the product of the Court’s concern that the jurisdictional challenge be bona fide, rather than merely intended to impair or delay the arbitral proceeding. 

This year, the ”brick wall” exception to competence-competence set out in Uber was litigated in Courts of Appeal for the first time in Spark Event Rentals Ltd. v. Google LLC, 2024 BCCA 148 (“Spark”) and Lochan v. Binance Holdings Limited, 2024 ONCA 784 (“Lochan”). These 2024 appellate decisions demonstrate that Canadian courts continue to proceed cautiously before deciding jurisdictional challenges in the first instance.  This approach aligns with the principle of competence-competence and Canada’s general arbitration-friendly stance.

In Spark the British Columbia Court of Appeal affirmed that the focus of the inquiry into whether there is a real prospect that the matter will be heard by an arbitrator is on the preliminary jurisdictional challenge and not on the substantive merits of the dispute to be arbitrated. As a result, the relevant question is not, for example, whether it is uneconomic to pursue the entire claim, but rather whether it is uneconomic to pursue the jurisdictional challenge.  In Spark much of the evidence led by the appellant went to the overall cost of resolving the entire arbitration. The Court found this evidence did not assist the court below in deciding the threshold question of whether a “brick wall” prevented an arbitrator deciding whether the arbitration agreement was invalid and so the court below did not err in concluding that there was no brick wall in that case.  At the same time the Court of Appeal pointed out that,” the question whether a brick wall exists does not reduce to the narrow issue of the cost of initial filing fees…Those bricks may include all of the financial costs associated with a determination of the jurisdictional challenge, as well as other practical impediments, such as the necessity of travel.”

The British Columbia Court of Appeal also rejected the appellant’s argument that asserting invalidity based on “public policy” grounds creates an additional exception to the application of competence-competence.  The appellant argued, based on Justice Brown’s concurring reasons in Uber, that the competence‑competence principle should be displaced in circumstances where an arbitration agreement effectively bars access to arbitration so that rather than being an agreement to arbitrate, it becomes in practical terms an agreement not to arbitrate.  Justice Brown found that such arbitration clauses are not enforceable because they undermine the rule of law by denying access to justice and so are contrary to public policy. (See Uber at paras. 101 and 102.) Although the Court of Appeal recognized that Justice Brown’s analysis was helpful when dealing with the merits of a validity challenge, it found that competence-competence was not displaced simply by raising an issue of invalidity whether based on public policy or otherwise.  The Court stated at para. 44:

…the competencecompetence principle addresses which adjudicator gets to decide validity. It raises a threshold issue which is not answered simply by alleging invalidity, whether on grounds of unconscionability, public policy, or other available grounds. It is not the case that only a court can decide whether an agreement is invalid because it is contrary to public policy. If the competencecompetence principle is not displaced, then substantive issues of invalidity fall to be decided by an arbitral tribunal. These issues may include allegations of unconscionability and public policy”.

The appellant cited three cases as previous examples of where the British Columbia Court of Appeal had engaged in a detailed public policy analysis: Pearce v. 4 Pillars Consulting Group Inc., 2021 BCCA 198 (“Pearce”) ; Petty v. Niantic Inc., 2022 BCSC 1077, aff’d 2023 BCCA 315(“Petty”) and Williams v. Amazon.com Inc., 2023 BCCA 314 (“Williams”) (For a discussion of these cases see B.C. – Arbitration clause in contract of adhesion not unconscionable/against public policy – #772).  In Williams and Petty, however, the Court said explicitly that the matter was proceeding on the basis that the parties did not contest the threshold question of whether the issues of invalidity should be decided by an arbitrator rather than a court.  Regarding Pearce, the Court of Appeal pointed out that the case dealt with a class action waiver clause and not an arbitration clause and so competence-competence did not apply.

Leave to appeal to the Supreme Court of Canada was denied.

Recently, the Ontario Court of Appeal in Lochan confirmed the British Columbia Court of Appeal’s reasoning in Spark, noting that it did not alter the principles set out in the Supreme Court’s decisions in Dell and Uber.  Specifically in relation to the public policy argument, the Ontario Court of Appeal confirmed that before a court can consider whether an arbitration clause is invalid for public policy or other reasons, it must first consider the threshold question of whether an exception to the competence-competence principle applies which would justify the court deciding the validity of the arbitration clause, rather than the arbitrator.  

As a final comment, it is arguable that recent cases out of the British Columbia Supreme Court post-Spark like Tahmasebpour v. Freedom Mobile Inc., 2024 BCSC 726 at paras. 19 to 23 and Wiederhold v Aspen Technology, Inc., 2024 BCSC 1731 at para.18 (B.C. – Stay motion test and the “brick wall framework” – #874 ) are conflating the applicant’s  burden on an application for a stay of court proceedings with the threshold considerations related to exceptions to competence-competence.  The burden for the applicant on a stay is to demonstrate an “arguable case” that the technical prerequisites for a stay are met (see Peace River Hydro Partners v. Petrowest Corp., 2022 SCC 41, 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 as these recent cases seem to assume.