In Bains and 10031670 Manitoba Ltd. v. Tworek et al, 2024 MBKB 111, the Court dismissed a motion to stay two court proceedings in favour of arbitration. In doing so, the Court ran afoul of some settled principles in Canadian (and international) arbitration law. These include interpreting the scope of the arbitration agreements, the test for a stay of proceedings in favour of arbitration, the separability presumption and concerns over inefficiency and multiplicity of proceedings where the dispute concerns both signatories and non-signatories to the arbitration agreement.
Background –This case concerned two related actions involving overlapping parties. The facts of the case are somewhat complex and mostly irrelevant for our purposes.
In short, the plaintiffs in Action #1 (collectively “Bains”) sued a series of defendants, residing in various jurisdictions, in conspiracy, fraud, deceit, fraudulent misrepresentations, and other torts, in relation to failed financial transactions. In Action #2, a plaintiff who was not a party to Action #1 sued Bains for failing to close on an agreement of purchase and sale for a home. Bains commenced a third party claim in Action #2 against the defendants in Action #1. Bains sought contribution and indemnity from those third parties, alleging that Bains could not close because they agreed to the home purchase in reliance upon the funds from the financial transaction at issue in Action #1.
The Defendants in Action #1 brought a motion to stay in both proceedings. They argued that the Manitoba Courts lacked jurisdiction over the subject matter of the actions and, in the alternative, were forum non conveniens. The Defendants also relied on arbitration clauses in certain contracts concluded between themselves and Bains (the “Contracts”).
The Contracts each contained two different arbitration agreements. The first was fairly brief and foresaw arbitration in Paris under the ICC Rules:
“Any disputes arising from and related to this agreement shall be settled by the parties through friendly negotiations. If a dispute cannot be resolved through friendly negotiations within sixty (60) calendar days from the date the dispute arose, the relevant party may submit such dispute for arbitration in accordance with the arbitration rules of the International Chamber of Commerce E (sic) in Paris. The arbitration award shall be final and binding on the respective parties.”
The second clause was considerably more detailed and provided for: “arbitration in accordance with the rules of conciliation and arbitration of the International Chamber of Commerce, Philadelphia, Pennsylvania per ICC document Y432-A and other applicable ICC documents”.
The Decision – The Court ultimately denied the stay motions for several reasons. This case note does not address the jurisdiction/forum non conveniens aspect of the analysis.
With respect to the arbitration agreements, the Court found that Manitoba’s The International Commercial Arbitration Act, C.C.S.M. c. C151 (“ICAA”) governed because the parties were in different states when they concluded the Contracts.
In dismissing the stay under the ICAA, the Court gave several somewhat overlapping reasons for not enforcing the arbitration agreements:
“(i) the causes of action in this matter, being the torts of fraudulent misrepresentation, deceit, conspiracy, breach of fiduciary duty and unjust enrichment do not arise from matters which the parties agreed to submit to arbitration within the [Contracts]. The tort allegations do not arise from “any controversy or claim arising out of or relating to the [Contracts]” as those Agreements are simply one aspect of the transactional relationships that occurred between the parties. It does not embrace pre-Agreements conduct. Accordingly, it is arguable that the Agreements themselves are void, unenforceable, and inoperative;
(ii) the plaintiffs did not receive any monies as a consequence of the Agreements and representations made. Accordingly, there was, arguably, no consideration for the Agreements;
(iii) the Agreements were contended to be void ab initio and, consequently, the arbitration clauses are inapplicable;
(iv) the term of the Agreements had either expired or had been cancelled by [the defendants in Action #1] prior to the plaintiffs’ initiating the First Action;
(v) the other six defendants named in the actions are not signatories to the Agreements containing the arbitration clauses. However, those parties have attorned to the court’s jurisdiction in Manitoba or had (sic) been noted in default. The issues involving all defendants are inextricably intertwined, and to separate them would not serve the interests of justice or fairness;
(vi) the… defendants [in Action #1] have not satisfied the burden of an “arguable case” that the arbitration clauses are operative;
(vii) as previously indicated, if I am wrong and the… defendants [in Action #1] have established that the arbitration clauses are in effect on a prima facie basis, then the plaintiffs, on a balance of probabilities, fall within certain of the exceptions such as:
• the Agreements containing the arbitration clauses were allegedly procured by fraud, misrepresentations, and other torts;
• the allegations of the plaintiffs as to the existence of fraudulent misrepresentations were made prior to the execution of the [Contracts];
• the arbitration clauses are ambiguous, confusing, and contradictory;
• the arbitration clauses are void, inoperative and incapable of being performed.”
In the alternative, the Court rejected the Defendants’ arguments that Manitoba was forum non conveniens.
Contributor’s Notes:
In dismissing the stay in favour of arbitration, the Court mixed concepts of contract formation, validity and interpretation. Overall, in my respectful view, the Court’s analysis is deeply flawed. I limit the discussion to five grounds:
1) The fraudulent misrepresentation, deceit, conspiracy, breach of fiduciary duty and unjust enrichment claims fell outside the arbitration agreement.
2) Several other defendants, who were not signatories to the arbitration agreements, attorned to the Court’s jurisdiction. As a result, it would be unreasonable to separate out the issues that might have fallen within the arbitration clause (had the Court found it broad enough to cover those issues) from the actions proceeding in court.
3) Bains’s allegation that the agreements were void ab initio due to fraud rendered the arbitration agreements inapplicable.
4) There was “arguably” no consideration, and thus no agreement.
5) The two arbitration agreements were “ambiguous, confusing and contradictory”.
Scope of the arbitration agreement – The Court interpreted the arbitration agreements narrowly. This is out of step with modern case law. In the oft-cited Fiona Trust & Holding Corp v Privalov [2007] 2 Lloyd’s Rep 267, the U.K. House of Lords laid down a general rule that “rational businessmen” are presumed to want a single forum to resolve all disputes arising between them. Under this principle, courts should generally read arbitration agreements broadly. Indeed, the question before the Court in Fiona Trust was whether a claim that a charterparty containing an arbitration clause was procured by bribery, and was thus void, fell within the agreement to arbitrate.
Canadian case law mostly follows the same course and extends broadly worded arbitration agreements to claims that the underlying contract is void for fraudulent or negligent misrepresentation. For example, in Mercer Gold Corporation (Nevada) v. Mercer Gold Corp. (B.C.), 2011 BCSC 1664, the words “all questions or matters in dispute with respect to this Agreement” was held to cover claims sounding in misrepresentation. In New World Expedition Yachts, LLC v. F.C. Yachts Ltd., 2011 BCSC 78, the Court found that a claim for fraud fell within a clause requiring the parties to arbitrate “any dispute arising out from [sic] this Agreement”. See also Mantini v. Smith Lyons LLP, 2003 CanLII 20875 (ON CA), and Woolcock v. Bushert, 2004 CanLII 35081 (ON CA), which both hold that the language “in connection with” an agreement should be read broadly.
All of this case law aside, we must recall that contract interpretation is a question of mixed fact and law. The Court must consider the words of the contract in light of the circumstance surrounding its formation [Earthco Soil Mixtures Inc. v. Pine Valley Enterprises Inc., 2024 SCC 2, para 63-65; and Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, para. 47]. This means that the same language appearing in two arbitration clauses may carry different scopes in two different contracts. That said, the language in the two clauses at issue here (“any disputes arising from and related to this agreement” and “any controversy or claim arising out of or relating to this contract”) contains the sort of broad language that courts ordinarily interpret to cover claims in tort or misrepresentation.
Unreasonable to separate issues involving non-signatories from those involving signatories – This one is just plain wrong. It is trite that a court should not refuse to enforce an arbitration agreement simply because it covers only part of a dispute or binds only some of the parties to that dispute.
The ICAA enacts the Model Law in Manitoba. Article 8(1) is the Model Law’s stay provision:
“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.”
Article 8(1)’s language is mandatory [Kaverit Steel and Crane Ltd. v. Kone Corporation, 1992 ABCA, para. 8]. The court “shall” grant a stay when article 8(1)’s conditions are met. It does not make the stay contingent on the arbitration agreement covering all aspects of or all parties to a dispute. The case law is crystal clear that inconvenience, multiplicity of proceedings, inefficiency or the fact that non-parties are involved in a court proceeding is no basis for refusing a stay [Saskatchewan Power Corporation v Alberici Western Constructors, Ltd., 2016 SKCA 46, para. 53; Kaverit Steel, para. 47]. Indeed, when a dispute involves some matters or parties that are not subject to an arbitration agreement, the question is whether the remainder of the court proceeding should be stayed, or whether it should proceed in parallel with the arbitration [See for example: Mussche v. Voortman Cookies Ltd., 2012 BCSC 953; UCANU Manufacturing Corp v Calgary (City), 2015 ABCA 22, para. 7]. Here, the Court had it backward.
Void for fraud – The Court essentially found that the allegations of fraud necessarily extended to the arbitration agreement itself, rendering it void. This is out of step with article 16(1) of the Model Law, which enshrines a version of the separability presumption. There are different articulations of separability. However, they all hold that, at least for certain purposes, an arbitration agreement should be presumptively treated as a separate contract from the one in which it resides.
Article 16 begins by stating that “[t]he arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement”. As readers will know, this is the competence-competence principle—that an arbitral tribunal should have the first say on whether it has jurisdiction, or whether the arbitration agreement is valid. Article 16(1) goes on to state that “[f]or that purpose [preserving competence-competence], an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract.”
In this case, the Court’s reasons do not suggest that the alleged fraud or deceit extended to the arbitration agreement specifically, but to the Contacts in general. Canadian case law largely considers this insufficient to find an arbitration agreement void so as to justify denying a stay [see for example: James v. Thow et al, 2005 BCSC 809, para. 92; The Owners, Strata Plan BCS 3165 v. 1100 Georgia Partnership, 2013 BCSC 1708, para. 120].
Courts in other jurisdictions take a consistent approach. For example, to defeat the separability presumption, the case law in the U.S. and U.K. requires the alleged fraud to go to the arbitration agreement itself and not only the container contract [Fiona Trust; Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440; Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U. S. 395]. In the words of the U.S. Court of Appeals for the 6th Circuit, there must be “misrepresentations particular to the arbitration agreement separate from the contract as a whole” [Moran v. Svete, 366 F.App’x 624, 631 (6th Cir. 2010)].
Although reasonable minds may disagree, there is some logic to this position. Just because a person is induced into the substantive contact, it does not necessarily follow that his or her consent to arbitrate that point is vitiated. This makes sense in a world where arbitration is considered every bit as viable a dispute resolution method as litigation. In other words, a party wishing to argue that it would not have concluded a contract but for a fraudulent misrepresentation may achieve the same redress before an arbitral tribunal as it could before a court.
Lack of consideration/no contract formation – The reasoning above supporting separability’s application to substantive validity issues does not necessarily extend to formation issues. The Court of Appeal for Ontario implicitly took this position in Ismail v First York Holdings Inc, 2023 ONCA 332. In that case, the Court of Appeal held that an arbitration agreement contained in a share purchase contract was never validly formed since: 1) one of the purported parties never existed; 2) the subject shares never existed; and 3) there was no consideration. The first and third of these points would apply to the arbitration agreement and the container contract in equal measure. The Court of Appeal’s holding in Ismail is consistent with other authorities [see for example: Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63].
This, too, makes sense. Where an arbitration agreement figures within a larger contract, parties generally agree (or not) to all the terms with a single act of assent (e.g., signature). So, for example, where a party argues that it never accepted an offer to be bound by a contract containing an arbitration agreement, separability has little application. Unfortunately, the Court’s reasoning in this case is still flawed.
Under the Peace River Hydro Partners v. Petrowest Corp., 2022 SCC 41 framework, a party seeking a stay in favour of arbitration need only show an “arguable case” that the arbitration agreement exists [paras. 83 and 84]. If so, competence-competence dictates that the arbitral tribunal should be first to decide the formation question, unless a statutory exception applies such that the court should not enforce the arbitration agreement.
Here, the Court found only that “there was, arguably, no consideration for the Agreements”. This turns the Peace River framework on its head. The question is not whether it is arguable that the arbitration agreement does not exist; if the arbitration agreement arguably does exist, the technical prerequisite is met.
Contradictory agreements – It is admittedly strange to see two arbitration agreements in a single contract, especially where the contract does not clearly assign different categories of potential disputes to each clause. However, the arbitration clauses in this case were largely consistent. Apart from the incorrect reference to a non-existent document (“ICC document Y432-A”) in one of the clauses, and the reference to “International Chamber of Commerce, Philadelphia, Pennsylvania”, nothing else in the clauses was amiss.
Where parties manifest a clear intention to arbitrate, Court’s will generally read their arbitration agreement(s) as operative, even if they are not perfect. For example, German courts have many times upheld arbitration agreements that refer to a non-existent arbitral institution [Kammergericht (Highest State Court) Berlin, Germany, 28 Sch 17/99, 15 October 1999; Oberlandesgericht (Higher Regional Court) Celle, Germany, 8 Sch 03/01, 2 October 2001].
In the words of the Singapore Court of Appeal in Insigma Technology Co Ltd v Alstom Technology Ltd [2009] SGCA 24, para. 40:
“…[W]here the parties have evinced a clear intention to settle any dispute by arbitration, the court should give effect to such intention, even if certain aspects of the agreement may be ambiguous, inconsistent, incomplete or lacking in certain particulars… so long as the arbitration can be carried out without prejudice to the rights of either party and so long as giving effect to such intention does not result in an arbitration that is not within the contemplation of either party”.
That case dealt with a clause that foresaw an arbitration administered by the Singapore International Arbitration Centre, but under the ICC Rules. SIAC agreed to administer the arbitration and apply the ICC Rules by creating “appropriate functional bodies that correspond to the bodies required under the ICC Rules”.
In the present case, at most, the clauses misnamed an institution that does exist and remains in operation. On my reading of the two arbitration clauses, there was no contradiction. Even if there were, the ICAA’s posture, which clearly favours resort to arbitration, should have caused the Court to either read the two agreements harmoniously (e.g., by finding the parties wanted an arbitration seated in Paris with Philadelphia as the venue for hearing, or vice versa), or pick one as the operative agreement. Sometimes an arbitration agreement is truly pathological, such as when it names a specific arbitrator who has passed away or is otherwise unable or unwilling to act. But the clauses at issue here were not so flawed as to justify the Court throwing up its hands and determining they simply cancel each other out.
Although more could be said, these points should suffice to show that the Court’s analysis departed from what one might expect on a stay motion under article 8 of the Model Law.