Ontario – Court application stayed; jurisdictional issues required analysis of contract’s factual matrix, should be decided by arbitrator – #522

In 743584 Ontario Inc. v. LAC Otelnuk Mining Ltd., 2021 ONSC 5255, Master Jolley stayed a court application in favour of arbitration. Applying the competence-competence principle and the general rule adopted by the Supreme Court of Canada in Dell Computer Corporation v. Union des consommateurs 2007 SCC 34, she held that the question of the arbitrator’s jurisdiction should be decided by the arbitrator, except if the challenge to jurisdiction is based solely on a pure question of law or a question of mixed fact and law that requires only a superficial consideration of the documentary evidence in the record. She stayed the application in favour of arbitration, because the jurisdictional issues raised were questions of mixed fact and law that could not be determined on superficial consideration of the evidence.

A dispute arose between the parties as to whether certain royalties were due under a royalty agreement in respect of an iron ore mine. Lac Otelnuk Mining Ltd. (LOM) brought an arbitration pursuant to the royalty agreement for a declaration that it had no further obligations to pay royalties and for associated relief. 743584 Ontario Inc. (584) brought a parallel, competing court application for an order that LOM be required to pay outstanding royalties and for associated relief. Relying on an arbitration clause in the royalty agreement, LOM moved to stay 584’s application in favour of arbitration.

In response to LOM’s motion to stay its application, 584 raised certain objections to the application of the arbitration clause to LOM’s arbitration claim. First, it argued that LOM failed to deliver its arbitration notice within a one-year contractual limitation period. Second, 584 argued that an exclusive forum selection clause in favour of Ontario courts should be applied rather than arbitration clause, by operation of the doctrine of contra proferentem. Third, 584 argued that LOM had not made commercially reasonable efforts to resolve the dispute, which was a condition precedent to arbitration.

The parties agreed that where a proceeding is brought in respect of a matter that is subject to arbitration, it must be stayed, subject to certain exceptions set out in section 7(1) of the Arbitration Act, 1991. The parties also agreed that the competence-competence principle applied, which meant that jurisdictional issues should be left to the arbitrator to determine, subject to limited exceptions. In accordance with the Supreme Court of Canada’s decision in Dell, challenges to arbitral jurisdiction should be determined first by the arbitrator, unless the challenge is based solely on a pure question of law or where the question is one of mixed fact and law that requires only a superficial consideration of the documentary evidence in the record.

Master Jolley found that it was not possible for her to decide any of the three issues that 584 raised based only a superficial consideration of the record. To decide whether the contractual limitation period and the contra proferentem doctrine applied, it would be necessary to conduct a detailed review of the factual matrix of the royalty agreement and other relevant documents. To determine whether LOM had fulfilled the condition precedent to arbitration, the decision maker would need to “wade into the evidence to determine what efforts were made” and might also require industry evidence to determine whether those efforts were commercially reasonable.

Since none of those issues could be determined on a superficial consideration of the evidence, Master Jolley stayed 584’s application in favour of arbitration.

Contributor’s Note:

This case illustrates that Canadian courts are very reluctant to decide issues that go to arbitral jurisdiction on a stay motion. Jurisdictional objections rooted in the arbitration agreement will often require more than superficial consideration of the evidence, and should therefore first be decided by the arbitrator, rather than by a court. For another recent case in which the court applied the “superficial consideration” test from Dell, see Arbitration Matters Case Note Québec – case referred to arbitration despite some parties and some claims possibly not covered by the arbitration agreement regarding Césario v. Régnoux, 2021 QCCS 3009. One notable exception to this reluctance is Uber Technologies Inc. v. Heller, 2020 SCC 16., which may be the exception that proves the rule. See Arbitration Matters Case Note Supreme Court – courts should not refer jurisdiction challenge to arbitrator if real prospect that challenge might never be resolved – #344.

This case involved parallel, “competing” court and arbitral proceedings for what was, in substance, diametrically opposed relief: 584 sued in court for payment of royalties; LOM brought an arbitral claim for a declaration that it did not owe royalties. Interestingly, the thrust of the jurisdictional objections that 584 raised in response to LOM’s stay motion were directed at LOM’s arbitration claim, not at whether an arbitrator would have jurisdiction over 584’s claims if they were referred to arbitration. Despite this approach, the question on a stay motion is whether the proceeding before the court should be referred to arbitration, not whether an existing, competing arbitral proceeding can continue. Viewed through that lens, it may be that 584’s objections based on LOM’s alleged failure to comply with the limitation period and LOM’s alleged failure to fulfill a condition precedent could have been dismissed on the basis that they were not relevant to whether 584’s claim should be referred to arbitration.