In Bains v Loader, 2026 MBCA 66, the Court found no palpable and overriding error in the lower court’s judgment that ICC arbitration agreements in two international commercial contracts were incapable of being performed because of poor drafting. However, the Court reversed the findings that two technical prerequisites of the Peace River Hydro v Petrowest Corp. stay test were not satisfied, and declined to endorse the findings that the agreements were null and void or inoperative, “or any suggestion … that exceptions, other than those set out in the ICAA, are relevant to the exception analysis in this case.”
The arbitration agreements in question had drafting flaws. And, no doubt, the Manitoba Plaintiffs’ claims placed them, if proven, in a sympathetic position. But I do not agree that those flaws established the kind of legal or physical impediments to setting an arbitration in motion that the Supreme Court of Canada has said may render an agreement incapable of being performed. Neither the judgment below nor the Court appeared to grapple with the incorporation of mechanisms in the ICC Rules that address the drafting problems the appealed judgment identified. It would be unfortunate if a branch of cases finding inartful – but not fatally flawed – arbitration clauses “incapable of being performed” were to propagate.
Background – Bains entered into international financing transactions designed to monetize Standby Letters of Credit to capitalize an investment fund for private health care projects. The entities and individuals involved were based in Manitoba, Alberta, New York City, South Africa, and the Republic of Seychelles. To fund the transactions Bains deposited $1 million USD in two payments (to be repaid as part of the financing, or if the SBLCs did not issue). The proceeds were to be transferred to Bains’s numbered company. The proceeds never arrived, the deposits were not refunded, and Bains sued the financiers in Manitoba, alleging tort claims arising from the failed transactions.
The Actions Below – Apart from the action against the financiers, a third party sued Bains and his wife in Manitoba for failing to close on a home purchase. Bains brought a third-party claim against the financiers, claiming the home had been purchased in reliance on funds expected from the SBLC monetization.
The financiers sought a stay in both actions, pointing to arbitration agreements in two financing documents executed between Bains, his numbered company, and some of the financiers. The financiers also argued that the Manitoba courts lacked jurisdiction and were forum non conveniens.
The Judgment Below – The Manitoba Court of Kings Bench found jurisdiction simpliciter and ruled that no other jurisdiction proposed by the defendants had stronger connecting factors.
It then considered the Petrowest stay test, in which the respondent must show an arguable case that: (1) an arbitration agreement exists, (2) court proceedings were commenced by a party to it, (3) regarding a covered matter, and (4) the stay application is made before taking any “step” in court.
Turning to the arbitration agreements, referring at para 44 to the stay provision at s. 7.1 of Manitoba’s domestic Arbitration Act, C.C.S.M c. A120, the court refused a stay, finding:
- Two of the four Petrowest stay test technical prerequisites were not established on an arguable basis because: (1) “the arbitration clauses may not have come into existence” (given the Claimant’s arguments that the financing agreements were void ab initio); and (2) “the tort allegations do not constitute matters that the parties agreed to arbitrate” (paras 51, 54); and
- The arbitration agreements were inoperable because there were two internally contradictory and unclear arbitration clauses in each relevant agreement, plus an unclear reference to a “further procedure” in the London courts (paras 52-53).
The Court of Appeal – The Court began its analysis of the arbitration issues by reciting several foundational concepts, including:
- The International Commercial Arbitration Act, CCSM c C151 (ICAA) governs the application for a stay in this case;
- An arbitral tribunal should generally determine its own jurisdiction first (competence-competence) (para 45(i));
- That principle should be displaced only in “clear” cases (paras 45(iii), 49);
- A court should only decline to refer the jurisdictional determination if it involves a question of law, or a question of mixed fact and law determinable on a superficial review of the record (para 45(iv)); and
- The enforceability or validity of a commercial contract is distinct from an arbitration agreement contained in it (separability) (paras 50, 51).
Applying those principles, the Court found that the judge below erred in concluding, at step 1 of the Petrowest analysis, that there was no arguable case that: (1) an arbitration agreement existed; and (2) the court proceedings were in respect of a matter covered by it. Nevertheless, the Court of Appeal affirmed the finding, at step 2 of the Petrowest analysis, that on a balance of probabilities the arbitration agreements were incapable of being performed.
The Court of Appeal set out the full text of the ICC arbitration agreements at para 55, and recited “a number of inconsistencies, contradictions and flaws” observed by the Court and in the judgment below:
- Inconsistencies about the place of arbitration (which the judgment below referred to as the “applicable rules”, at para 52) – Paris, or Philadelphia (or potentially Hong Kong, Singapore, or England);
- Contradictions between “binding” arbitration and a “further procedure … in the London courts under the jurisdiction of the laws of England & Wales” if the parties “refuse the decision of the arbitration process” (para 63);
- A reference to the non-existent “International Chamber of Commerce Document Y432-A” (para 63);
- A tribunal appointment process lacking a mechanism for appointing a third arbitrator if the other two cannot agree (para 63); and
- Contradictions between language providing that a party “may submit” a dispute to arbitration, which contrasted with a later provision that disputes “shall be subject to arbitration.” (para 64).
The Court then considered whether these circumstances established that the arbitration agreements were “null and void, inoperative or incapable of being performed” under Article 8 of the Model Law, as incorporated into Manitoba legislation.
First, it observed that while the Model Law does not define these terms, the Supreme Court of Canada did so in Petrowest, at paras 144-145:
“an arbitration agreement is considered ‘incapable of being performed’ where ‘the arbitral process cannot effectively be set in motion’ because of a physical or legal impediment beyond the parties’ control. Physical impediments rendering an arbitration agreement incapable of being performed may include the following: (a) inconsistencies, inherent contradictions, or vagueness in the arbitration agreement that cannot be remedied by interpretation or other contractual techniques; (b) the non‑availability of the arbitrator specified in the agreement; (c) the dissolution or non‑existence of the chosen arbitration institution; or (d) political or other circumstances at the seat of arbitration rendering arbitration impossible. In all these circumstances, the arbitration agreement is incapable of being performed because it is impossible for the parties to obtain the specific arbitral procedures for which they bargained.” (cleaned up; emphasis added)
This is a high bar, especially paired with the modern toolbox of contract interpretation. Here, the Court devoted one paragraph (para 71) to its application of this guidance, noting that contract interpretation is reviewed for palpable and overriding error:
“Applying these meanings to the inconsistencies, contradictions and flaws in the arbitration agreements as found by the judge, I disagree with the appellants’ submission that the respondents failed to establish an exception on a balance of probabilities. The judge’s finding that the arbitration agreements were inconsistent, contradictory and flawed, and thereby incapable of being performed, was a reasonable one. To overturn the judge’s conclusion on this point, I would have to be satisfied a palpable and overriding error had occurred in her fact finding or in her application of the law to the facts. No such error has been established in respect of the “incapable of being performed” exception.”
Having failed to identify a palpable and overriding error, the Court affirmed the result on that narrow point, rejecting a stay in favour of arbitration. However, the judgment expressly refused to endorse the findings that the arbitration agreements were null and void or inoperative, or that any non-ICAA exception was relevant to the case.
Commentary:
Before all else, it bears repeating: arbitral institutions provide model clauses. These are carefully researched, drafted, and battle tested. This case is a paradigmatic example of the costs of departing from model clauses without careful consideration or experience.
Putting aside all but the arbitration aspects of this case, the Court of Appeal corrected many of the flaws in the lower court judgment which my colleague, James Plotkin, identified in Arbitration Matters Case Note #868. Those corrections included:
- how the low “arguable case” standard applies to the technical prerequisites identified in Petrowest (para 58(2)-(3));
- theinterpretation of broadly worded arbitration agreements to include related tort and equitable claims (paras 59-60); and
- the separability concept, such that the alleged invalidity of a contract does not necessarily vitiate an arbitration agreement within it (para 59).
Obviously, it’s impossible to see behind the lower court’s reasoning, but this may be a case of hard facts leading to bad law. In my respectful view, upholding the ruling that the arbitration agreements are incapable of being performed risks propagating a branch of arbitration jurisprudence out of step with the Supreme Court of Canada and Model Law jurisprudence. I agree with James’s observation that the arbitration agreements were not “truly pathological,” and that the Singapore Court of Appeal articulated a better approach in Insigma Technology Co Ltd v Alstom Technology Ltd [2009] SGCA 24, para. 40, giving effect to the “clear intention to settle any disputes by arbitration.” That approach is in harmony with Canadian principles of contract interpretation, which, as Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, teaches us, requires a practical, common-sense approach to giving effect to the intent of the parties (Sattva, at para. 47). This includes attention to relevant context, which here would include the international character of financing transactions involving parties from all over the world – Manitoba, Alberta, New York, South Africa, and Seychelles.
On appeal the Court corrected many errors made by the court below. The difficulty is that because contract interpretation is insulated from de novo appellate review, outlier decisions on whether an arbitration agreement is incapable of being performed may escape correction.
The lower court’s judgment on this point was, in my respectful view, wrong. First, inconsistencies, contradictions, or flaws in an arbitration agreement may establish that it is incapable of being performed, but only if those flaws mean that the arbitral process cannot effectively be set in motion. What matters is not the existence of a flaw but its impact on the process the parties contracted for. The lower court appeared to identify flaws but then failed to grapple with whether those flaws really made the arbitration the parties bargained for impossible.
Second, the incorporation of the ICC Rules into the contracts at issue brings to bear a host of mechanisms (i.e., “other contractual techniques,” Petrowest para 145) to help overcome the very challenges to getting an arbitration “set in motion” that the lower court saw as fatal here. The 2021 and 2026 ICC Rules of Arbitration on these points are not materially different:
- The ICC Court of Arbitration will fix the seat of arbitration if the parties do not agree (Article 18(1) of the 2021 ICC Rules; Article 19(1) of the 2026 ICC Rules);
- The ICC Court will assist to constitute the Tribunal, even if a contractual mechanism for nominating arbitrators fails (Article 12 of the 2021 ICC Rules; Article 13 of the 2026 ICC Rules);
- The Tribunal will determine the venue of any hearings, after consulting the parties (Article 18(2) of the 2021 ICC Rules; Article 19(2) of the 2026 ICC Rules); and
- A resulting Award will be “final and binding on the parties,” who shall be deemed to have waived any right to recourse to the maximum extent possible (Article 35(6) of the 2021 ICC Rules; Article 38(3) of the 2026 ICC Rules).
It is thought-provoking to consider what might have happened if the financiers had done so and presented evidence to the lower court that an ICC arbitration was, in fact, “in motion.” If an arbitral tribunal had been constituted, it might have declined jurisdiction on the basis that the provisions are fatally irreconcilable. However, that question belonged first to the tribunal. In my view the lower court here improperly short-circuited the competence-competence principle that an arbitral tribunal should determine its jurisdiction over the dispute in the first instance.
Perhaps the best way to understand this case is as an outlier without much persuasive value for the narrow holding it affirmed.