Northwest Territories – Court of Appeal applies ‘pith and substance’ analysis to enforce original undertaking to arbitrate – #015

The Northwest Territories’ Court of Appeal in Miller Sales et al v. Metso Minerals et al, 2017 NWTCA 3 granted an application to stay under section of NWT’s International Commercial Arbitration Act, RSNWT 1988, c I-6 (“ICAA”) .  In doing so, it upheld the reasoning and result in the chambers judge’s decision, reported in Miller Sales & Engineering Inc. et al. v. Metso Minerals Industries Inc. et al., 2016 NWTSC 23,  which looked past the terms of a settlement and assignment agreement and enforced the parties’ initial undertaking to arbitrate.

The litigation involved three parties: Miller Sales and Engineering Inc. (“Miller”); Metso Minerals Industries Inc. and Metso Minerals dba Svedala Industries Inc. (“Metso”); and, Diavek Diamond Mines Incorporated (“Diavek”) (and, later “Diavek 2012”).

In 2003, Miller entered into a Distributor Agreement with Metso.  Miller designs industrial pumping systems for dewatering mines.  Metso manufactures pumps.   In 2006, Miller then contracted with Diavek to design and supply a dewatering system.  To do so, and further to its Distributor Agreement with Metso, Miller bought several specially designed pumps from Metso.   In 2011, Diavek, alleging deficiencies and failures regarding the system design and pump performance, sued Miller.  Miller defended and included Metso in the litigation by way of third-party notice, seeking contribution and indemnity.

Following a procedural amendment changing Diavek to a successor company, (“Diavek 2012”) Diavek 2012 and Miller negotiated and signed a settlement agreement in 2012 which the reasons for judgement define as “Settlement Agreement and Assignment” (“SAA”).  In the SAA, Diavek 2012 assigned to Miller “any and all right, title and interest to any cause of action, suit, proceeding, or any other claim or claims, at law or in equity” that Diavik 2012 had or might have against Metso.  With the court’s approval, Diavek 2012 substituted Metso as a defendant and Miller amended the claim to identify Miller as the assignee of Diavek 2012.  The result of the SAA and the procedural changes was to then have a litigation between Miller as assignee of Diavek 2012 against Metso.

Metso applied under the ICAA to stay or dismiss the litigation.   Miller and Metso as parties to the Distributor Agreement agreed to the following arbitration clause:

16.0 Arbitration – 16.1 Any and all disputes of whatever nature arising between the parties of this Agreement or the underlying business relationship, including termination thereof, and which are not resolved between the parties themselves, shall be submitted for final settlement by arbitration conducted in accordance with the then current JAMS/Endispute Comprehensive Arbitration Rules and Procedures, except as listed within this section, by a sole and independent arbitrator who shall base his or her decision solely on presentations by the parties and not by independent review, in Milwaukee, WI or at such other location as may be mutually acceptable. Any and all disputes shall be submitted to arbitration hereunder within one year from the date they first arose or shall be forever barred. Arbitration hereunder shall be in lieu of all other remedies and procedures available to the parties, provided that either party hereto may seek preliminary injunctive or other interlocutory relief prior to the commencement or during such proceedings. The arbitrator shall be selected by agreement of the parties; provided that if the parties fail to agree upon an arbitrator within thirty (30) days, any party may petition JAMS for appointment of the arbitrator, which appointment shall be made within ten (10) days of the petition therefor. The arbitration procedure and enforcement of the arbitration award shall be governed by the United States Arbitration Act, 9 U.S.C. §§ 1 et seq., regardless of any other choice of law provision in this agreement and judgment upon the award by the arbitrator may be, but is not required to be, entered by any court of competent jurisdiction. Any award of punitive damages shall be limited to twice the amount of compensatory damages.

The chambers judge granted the application, concluding that the litigation against Metso was Diavek 2012’s “in name only.”   The judge determined that the combination of the SAA and procedural changes were “an attempt by Miller to escape the bonds of an agreement it voluntarily entered into with Metso” and that the “machinations discussed above fall under the rubric of “other remedies and procedures” in the distributor agreement arbitration clause.

On appeal, Miller argued that the chambers judge had failed to give legal effect to the SAA and alleged that the standard of review was correctness given that doing so was a legal error.

The Court of Appeal determined that the standard of review on the appeal was the palpable and overriding error standard.  It did so because it determined that the issue before it was the proper characterization of the agreement entered into by Diavek 2012 and Miller.  That characterization was “inextricably linked to the background of the litigation” and obliged the chambers judge to look at the “factual matrix”.

The Court of Appeal began its analysis from the point of view, stated earlier by the Ontario Court of Appeal in Haas v. Gunasekaram, 2016 ONCA 744,  that “(t)he law favours giving effect to arbitration agreements.”  The Court of Appeal referred to the guidance given in Sattva Capital Corp. v. Creston Moly Corp., [2014] 2 SCR 633, 2014 SCC 53 at paras. 50 and 54-55. For the Court of Appeal, the leading case on the UNCITRAL Model Law on International Commercial Arbitration, which is Schedule B to NWT’s ICAA, is B.C.’s Gulf Canada Resources Ltd. v. Arochem International Ltd., 1992 CanLII 4033 and cited from the following paragraphs:

Considering s.8(1) in relation to the provisions of s.16 and the jurisdiction conferred on the arbitral tribunal, in my opinion, it is not for the court on an application for a stay of proceedings to reach any final determination as to the scope of the arbitration agreement or whether a particular party to the legal proceedings is a party to the arbitration agreement because those are matters within the jurisdiction of the arbitral tribunal.  Only where it is clear that the dispute is outside the terms of the arbitration agreement or that a party is not a party to the arbitration agreement or that the application is out of time should the court reach any final determination in respect of such matters on an application for a stay of proceedings.

 Where it is arguable that the dispute falls within the terms of the arbitration agreement or where it is arguable that a party to the legal proceedings is a party to the arbitration agreement then, in my view, the stay should be granted and those matters left to be determined by the arbitral tribunal.

The Court of Appeal’s analysis supported its reliance on the approach that “(t)he law favours giving effect to arbitration agreements” and that the Distributor Agreement contained language broad enough to capture Miller’s claims as assignee against Metso.  The Court of Appeal examined the full context in which Metso had become involved in the facts of the dispute and in the litigation as a third party.

Metso’s original involvement in the litigation was for contribution and indemnity in favour of Miller, there was no direct claim by Diavek against Metso and Diavek 2012 only applied to include Metso after negotiating and signing SAA.  The initial particulars of negligence alleged by Miller against Metso in the third-party notice are identical to the tort particulars in the amended litigation.  The Court analyzed the recitals and terms of the SAA before concluding that the litigation between Miller as assignee of Diavek 2012 and Metso is “in pith and substance a claim by Miller against Metso.”  The substance of the litigation qualified as a dispute under the Distributor Agreement’s arbitration clause.

The Court of Appeal concluded that the chambers judge’s decision to stay was reasonable and dismissed the appeal.