N.L. – court endorses principle of separability of arbitration agreement despite omission in legislation – #131

In Muskrat Falls Corporation v. Astaldi Canada Inc., 2018 NLSC 210, Mr. Justice James P. Adams reiterated the Newfoundland and Labrador Supreme Court’s endorsement of the principle of separability despite the absence of an express provision in the Arbitration Act, RSNL 1990, c A-14. Adams J. accepted that the parties’ arbitration provisions continued despite claims that their principal contract may be inoperative, unenforceable or terminated. Adams J. held that the party resisting arbitration failed to discharge its onus to satisfy him that he should depart from the general rule that questions of jurisdiction must first be referred to the arbitrator.

Muskrat Falls Corporation (“MFC”) and Astaldi Canada Inc. (“Astaldi”) entered into a November 29, 2013 contract for the construction of a hydro electric project located in Labrador (“CW Contract”) and which, at article 31, provided for dispute resolution:

31.1 If any dispute, controversy, claim, question or difference of opinion arises between the Parties under this agreement including an interpretation, enforceability, performance, breach, termination or validity of this Agreement (“Dispute”), the Party raising the Dispute shall give Notice to the other Party in writing within thirty (30) days of the Dispute arising, and such Notice shall provide all relevant particulars of the Dispute.

Several exhibits attached to the CW Contract and, by agreement of MFC and Astaldi, form part of the CW Contract. One of the exhibits, Exhibit 16, entitled “Rules for Dispute Review Board and Arbitration” set out two phases, Part A and Part B, for resolving disputes. Together, Article 31 and Exhibit 16, form the parties’ arbitration agreement. The full terms of that agreement do not appear in the reasons but Adams J. provides a nine (9) point summary of the key provisions including:

(a) the agreement that the Newfoundland and Labrador Arbitration Act applied; and,

(b) any arbitration shall be conducted in Toronto.

After having signed the CW Contract, MRC and Astaldi negotiated and signed several amendments to the CW Contract, including a recent September 6, 2018 Incentive Funding Contract (“IFC”). Together, the amendments, including the IFC, form the whole of the parties’ CW Contract.

Particular to the 2018 IFC was the agreement by MFC and Astaldi to restrict the application of the arbitration agreement set out in the 2013 CW Contract. The restriction stipulated that the provisions of the CW Contract’s Exhibit 16 “are only available to Contractor [Astaldi] for claims for damages upon termination for Default.

Adams J. stated that it was “common ground” that the CW Contract and subsequent amendments had not been formally terminated though noted that MFC had issued a notice of default to Astaldi. Astaldi claimed that MFC had rendered the contracts invalid and unenforceable.

At paragraphs 12-13, Adams J. sketches the procedural steps taken by the parties in arbitration and in court since September 27, 2018 as well as an outline of the Astaldi’s key allegations against MFC and MFC’s categorical rejection of same.

Astaldi took the first of the procedural steps when it issued a Notice of Arbitration on September 27, 2018 and requesting the appointment of a three-member tribunal. MFC followed the next day by rejecting the Notice of Arbitration and refusing to appoint an arbitrator.

Astaldi applied to the Ontario Superior Court to have the court appoint an arbitrator. MFC applied to the Supreme Court of Newfoundland and Labrador to assert that the latter was the proper forum in which to deal with their dispute, including the appointment of an arbitrator and whether the dispute raised by Astaldi fell within the arbitration agreement. Astaldi then joined MFC before the Supreme Court of Newfoundland and Labrador to seek the relief earlier sought before the Ontario Superior Court and adjourned sine die its Ontario application. Astaldi acknowledged to Adams J. that the Newfoundland and Labrador Arbitration Act and the law of that province applied to the issues before Adams J.

Adams J. therefore had two (2) competing applications before him:

(i) MFC sought a declaration that it was not obliged to appoint an arbitrator and that the arbitration process in the CW Contract was not available to Astaldi; and,

(ii) Astaldi sought an order that MFC is required to appoint an arbitrator pursuant to the arbitration agreement and a stay of MFC’s application.

After analyzing the issues, Adams J. granted Astaldi’s application in part and referred the parties to arbitration so that the arbitration tribunal could first decide on its own jurisdiction, ordered MFC to appoint an arbitrator within 14 days and stayed MFC’s application pursuant to section 4 of the Arbitration Act.

To reach his conclusion, Adams J. dealt with two (2) issues in his analysis: (a) separability of the arbitration agreement; and, (b) competence-competence.

First, at paragraphs 17-20, Adams J. dealt with a gap in Newfoundland and Labrador’s Arbitration Act. He noted that some jurisdictions provide expressly that the parties’ arbitration provisions continue even if their principal contract is found to be inoperative, unenforceable or terminated. No such provision exists in Newfoundland and Labrador’s Arbitration Act. Adams J. was alert to the mischief in allowing parties to claim that validity of the principal contract led to a mirror result on the arbitration agreement.

[18] This is known as the separability principle. In some jurisdictions (e.g. Ontario) their arbitration acts provide for this. That is not the case in the Arbitration Act. There is no such provision. Nevertheless, our Court has recognized the necessity of maintaining arbitration provisions in order to avoid abuse by parties to contracts by them simply terminating a contract and thereby eliminating the arbitration provisions to which the parties have agreed.

Both MFC and Astaldi agreed that the arbitration provisions continued to have full force and effect independent of what might happen to the CW Contract. In addition to the parties’ own support of that approach, Adams J. referred back to Wheeler v. Hwang, 2007 NLTD 145 which held that the principle of separability applied in Newfoundland and Labrador. That 2007 decision referred further back to Marine Atlantic Inc. v. Seabase Ltd., 1995 CanLII 10463 (NL SC) in which a party, resisting arbitration, argued that since the main contract had terminated, the arbitration clause was no longer in effect and the party was not obliged to proceed with arbitration to settle the dispute.

[11] It is a moot point whether the contract ceased to exist on March 13, 1994. Even if such is the case, it does not necessarily follow that the dispute resolution by way of arbitration as contained in the contract no longer applies. The law pertaining to the effect of repudiation or termination of a contract upon an arbitration clause was reviewed by the House of Lords in Heyman v. Darwins, [1942] 1 All E.R. 337. In that case the contract between the parties had been repudiated and one of the parties issued a writ claiming damages from the other party to the contract. An application to have the dispute submitted to arbitration was successful.

The 1995 Marine Atlantic Inc. v. Seabase Ltd. at paragraphs 12-14 then further excerpted different speeches of the House of Lords in Heyman v. Darwins, [1942] 1 All E.R. 337 which argued for and supported that result, including the preference that the arbitrator decide on the termination of the contract. Marine Atlantic Inc. v. Seabase Ltd. also endorsed the doctrinal writing, Mustill and Boyd, Commercial Arbitration, 2nd ed. (1989), which stated the following and which Adams J. reproduced in large measure in his 2018 reasons:

An agreed reference to arbitration involves two groups of obligations. The first concerns the mutual obligations of the parties to submit future disputes, or an existing dispute to arbitration, and to abide by the award of a tribunal constituted in accordance with the agreement. It is now firmly established that the arbitration agreement which creates these obligations is a separate contract, distinct from the substantive agreement in which it is usually embedded, capable of surviving the termination of the substantive agreement and susceptible of premature termination by express or implied consent, or by repudiation or frustration, in much the same manner as in more ordinary forms of contract. Since this agreement has a distinct life of its own, it may in principle be governed by a proper law of its own, which need not be the same as the law governing the substantive contract.

Despite the absence of an express provision to that effect in Newfoundland and Labrador’s Arbitration Act, Adams J. held that the arbitration agreement in the CW Contract and section 31 of the IFC survive any finding that the CW Contract may be inoperative, invalid or terminated.

Second, at paragraphs 21-35, Adams J. addressed the competence-competence principle. He referred to Dell Computer Corp. v. Union des consommateurs, [2007] 2 SCR 801, 2007 SCC 34, paras 84-85, Sattva Capital Corp. v. Creston Moly Corp., [2014] 2 SCR 633, 2014 SCC 53, paras 50 and 55 and Seidel v. TELUS Communications Inc., [2011] 1 SCR 531, 2011 SCC 15 as touch points for (a) treating contractual interpretation as involving issues of mixed fact and law and (b) deferring jurisdictional challenges first to arbitrators for determination, absent those ‘rare’ cases in which the determination requires only a superficial consideration of documentary evidence.

Adams J. distinguished Jean Estate v. Wires Jolley LLP, 2009 ONCA 339 from the circumstances before him. Though the Ontario Court of Appeal upheld the decision in first instance that the court was the more appropriate forum to determine a contingency fee dispute subject to an arbitration agreement, Adams J. considered that (a) other issues present in that case had lead to that result and were not present before him and (b) the case before him presented extensive and disputed facts.

The Court held that there were broad implications for lawyers and judges in the case and the issues in question would require only a brief consideration of the undisputed facts. That is not the case before me as the issues are restricted to the parties to the agreement and do not have broader implications. As well, the arbitration raises extensive disputed facts between the parties which form part of the factual matrix to be considered in determining the question of jurisdiction.

The considerations accepted in that case were similar to those in Alberta Medical Association v. Alberta, 2012 ABQB 113 but which Adams J. also distinguished on grounds of the type of contract, the particular provisions of section 47(1)(b) of Alberta’s Arbitration Act, RSA 2000, c A-43 and the fact that the 2012 decision issued before Sattva Capital Corp. v. Creston Moly Corp.

[30] However, there are a number of differences between that case and the case at bar. The contract in that case was found to not be an “ordinary contract” as it dealt “directly with the delivery of health care services” in the province. That is not the case here as the contract is, apart from the huge amounts of money involved, an ordinary commercial contract not involving any public policy issues such as in the Alberta Medical Assn. case. As well, section 47 of the Arbitration Act in Alberta contains a provision specifically permitting the Court to determine, among other things, that the arbitration agreement does not apply to the matter in dispute. The Arbitration Act has no such provision. As well, the Alberta Medical Assn. case was decided in 2012. So Wittmann, C.J.Q.B. did not have the benefit of the Supreme Court of Canada decision in the Sattva case for consideration in his deliberations.

He contrasted that result with the Ontario Court of Appeal decision issued the same year in Dancap Productions Inc., v. Key Brand Entertainment, Inc., 2009 ONCA 135 in which the Court held that where it is arguable that the issue of jurisdiction should be left to the arbitrator, the Court should decline to make that decision on jurisdiction. That Court of Appeal opted to default in favour of the arbitrator, concluding that, before a court should assume jurisdiction, it must be “clear and obvious that the dispute is not governed by the arbitration clause”.

The arbitration provisions in issue were broad and the “factual matrix involving their contractual relationship is complex”. Adams J. held that it was not clear and obvious that the parties’ complex relationship would not form part of the consideration of whether the dispute submitted by Astaldi is subject to arbitration. “In my view, it is at least arguable that the dispute falls within the arbitration agreement”.

Identifying that MFC had failed to discharge the onus on it to satisfy the court that it should depart from the “general rule that the question of jurisdiction of the Board [of arbitration] must first be referred to the Board of Arbitration”, Adams J. stayed MFC’s application and referred the jurisdiction challenge to arbitration.