Ontario – Court overturns decision, “deciding the matter” of jurisdiction de novo – #586

In Electek Power Services Inc. v. Greenfield Energy Centre Limited Partnership, 2022 ONSC 894, Justice Perell set aside a preliminary jurisdiction decision rendered by a three-person arbitral tribunal. The tribunal found that the parties had agreed to arbitrate their dispute. The matter came before the court as an application under section 17(8) of the Arbitration Act, 1991, S.O. 1991, c. 17, which provides that the court may “decide the matter” of a jurisdictional objection where the arbitral tribunal rules on the objection as a preliminary question. Following the approach set out by the Divisional Court in The Russian Federation v. Luxtona Limited, 2021 ONSC 4604 (Lisa’s 2021 Top Pick: Ontario – Russian Federation v. Luxtona Limited (Part 1) – #564), Justice Perell held that he was required to “decide the matter” of whether the parties agreed to arbitrate on a de novo basis. He explicitly rejected the submission that administrative law or appellate standards of review have any relevance in an application to the court to “decide the matter” of whether parties agreed to arbitrate their dispute.

The dispute was about $10 million in damage to Greenfield’s power plant, allegedly caused by emergency repairs that Electek carried out there. There was no specific tender or purchase order for the work.  Several years before the repairs were carried out, the parties had signed certain terms and conditions that contained an arbitration clause, but they disagreed as to whether those terms and conditions applied to the transaction in question. According to Justice Perell, the parties’ subjective contractual intention “was that of ships passing in a foggy night”. Electek had “forgotten” about the terms and conditions and the arbitration clause they contained, while Greenfield “remembered” them and thought they governed the parties’ relationship.

Greenfield started an arbitration. Electek objected and brought a court application to stop the arbitration, on the basis that it had not consented to arbitrate the dispute. In an endorsement, Justice Myers ruled that the arbitration should continue, applying the competence-competence principle. With prescient breviloquence, he said: “There is no short, crisp ruling of law that would save significant trial expense either here or there. Start there. We’ll be here when you get back.

So the parties “start[ed] there”. The preliminary question of whether they had consented to arbitrate was the subject of a four-day hearing, including extensive witness and documentary evidence. The arbitral tribunal decided as a preliminary question that the parties had agreed to arbitrate the dispute that was before the tribunal.

As Justice Myers had foretold, the matter then went back to court. This time, Electek brought an application under section 17(8) of the Arbitration Act, 1991, for the court to “decide the matter” of whether the parties had consented to arbitrate their dispute. The application was decided by Justice Perell, who held that he was required to decide the issue of whether the parties consented to arbitrate on a de novo basis.

Section 17(8), which applies to arbitrations in the domestic context, largely tracks the language of Article 16(3) of the UNCITRAL Model Law on International Commercial Arbitration, adopted in Ontario as Schedule 2 to the International Commercial Arbitration Act, 2017, and section 11(3) of that Act, which applies to international commercial arbitrations. Citing the Divisional Court’s interpretation of those provisions in The Russian Federation v. Luxtona Limited, 2021 ONSC 4604, Justice Perell held that “[t]he case law establishes that s. 17(8) of the Arbitration Act, 1991 applications and the matching provision under the International Commercial Arbitration Act, 2017 are hearings de novo.” The de novo nature of the court’s role meant that “strictly speaking”, the court could “ignore” the arbitral tribunal’s decision and come to its own decision.

Justice Perell dismissed Greenfield’s argument that the application was “in the nature of a judicial review application governed by the principles of judicial review set out by the Supreme Court of Canada in Canada (Minister of Citizenship and Immigration) v. Vavilov”. He stated clearly that neither administrative law nor appellate standards of review are relevant to an application under section 17(8).

In a section of his reasons entitled “Procedural jurisdiction to determine the arbitrator’s jurisdiction”, Justice Perell identified “seven procedural ways of determining whether an arbitrator has jurisdiction”, as follows: (a) stay motions; (b) applications for declarations and injunctions pursuant to section 48 of the Arbitration Act, 1991; (c) applications for interpretations of the arbitration agreement pursuant to rule 14.05 of the Rules of Civil Procedure; (d) applications for the appointment of arbitrators; (e) applications pursuant to section 17(8) of the Arbitration Act, 1991; (f) applications pursuant to section 46 of the Arbitration Act, 1991 (set-aside applications); and (g) appeals of arbitration awards.

In the same section, he also discussed the competence-competence principle, which he summarized as directing that “subject to certain exceptional circumstances, the court respects that arbitrators have the competence to determine whether they have the competence (i.e. the jurisdiction) to decide whether they can decide a dispute.

Next in Justice Perell’s reasons is a section entitled “Substantive law about the jurisdiction of arbitrators to decide disputes”, in which he identified four principles relating to arbitral jurisdiction:

“140. From the trite proposition that arbitration is a consensual matter of verbal contracting, four complex legal principles about the jurisdiction of arbitrators emerge. First, for there to be an arbitration, an arbitration agreement must exist between the parties. Second, for there to be an arbitration, the arbitration agreement must be legal; i.e. not illegal and void ab initio. Third, the existence and validity of an arbitration agreement is independent of any contract in which the arbitration agreement is imbedded. Fourth, if a legal arbitration agreement exists, it is a matter of contract interpretation whether the arbitrator has jurisdiction over the particular dispute; if as a matter of interpretation, the court determines that the particular arbitration agreement does not apply to the dispute, then the arbitrator has no jurisdiction to decide the arbitration and the arbitration is invalid.

141. The aggregation of the four principles is that if: (a) there is no contract agreeing to submit disputes to arbitration; (b) the arbitration agreement is void ab initio because it was illegal; or (c) the particular dispute is not covered by the arbitration, then there is no obligation to submit the dispute to arbitration and the arbitrator has no jurisdiction.”

According to Justice Perell, this was not a typical case in which the existence of the arbitration agreement was clear, and a dispute arose as to its scope. Rather, this case was “a rare inversion of the typical problem”. It was clear that the dispute would fall within the scope of the arbitration clause if the arbitration clause was binding on the parties. The dispute was about whether the parties had agreed that the arbitration clause would bind them.

Applying these principles – and considering the evidence afresh on a de novo basis – Justice Perell disagreed with the arbitral tribunal’s findings. He found that there was no arbitration agreement between the parties.  As a result, he set aside the arbitral tribunal’s decision finding that it had jurisdiction.

Ordinarily, this would mean that the question of whether the parties consented to arbitrate would have been finally settled, such that Greenfield could choose to pursue its claim in court or not at all. However, it is possible that a further slate of judges will be asked to weigh in about whether these parties agreed to arbitrate.

Section 17(9) of the Act provides in no uncertain terms that “[t]here is no appeal from the court’s decision” under section 17(8). Justice Perell pre-emptively addressed the question of whether his decision could be appealed. Reasoning that section 17(9) would apply only if he had decided that there was a binding arbitration agreement, he concluded: “having regard to my decision that there is no arbitration agreement in the immediate case, my decision de novo can be appealed.”

Contributor’s Notes

There is a lot going on in this decision, so let me offer only a few focused thoughts.

First, clear jurisprudence is emerging that there is no place for administrative law or appellate standards of review on questions involving consent to arbitrate. Muddy jurisprudence helps no one, so this is a welcome development.

Second, it might come as a shock to many in the arbitration community that the decision of the tribunal would be set aside in this manner, given that the community is so accustomed to arbitral awards being immune from substantive court review, at least when it comes to international arbitration. I share the sentiment. But it’s important to recognize that near-total immunity from substantive review is only possible if there is a corresponding near-total absence of immunity from jurisdictional review. In other words, if arbitral tribunals are to have the last word on matters of substance, it is important that they only be given that power if the parties truly agreed to give it to them. And the last word as to whether the parties agreed to do that has to lie with the courts of inherent jurisdiction. As a matter of access to justice, that decision can’t lie with the arbitral tribunal in circumstances in which one party says it did not agree to arbitrate.

Third, the competence-competence principle creates unavoidable, yet important, systemic inefficiencies. Jurisdictional questions later re-decided by the court on a de novo basis lead to substantial time and costs having been expended that might appear to have been wasted. This is unfortunate and probably unavoidable. But it doesn’t make competence-competence a bad principle. The alternative is likely to cause even more inefficiencies since it would mean that more disputes potentially subject to arbitration would start off in court from the get-go. Inefficiencies in cases such as this one and The Russian Federation v. Luxtona are a possibly unavoidable side effect of applying an otherwise effective tool for increasing efficiency in a world in which a multiplicity of dispute resolution forum options will continue to lead to fights about where to fight.

Fourth, Justice Perell’s pre-emptive ruling that his decision can be appealed, despite the language of section 17(9) of the Act, is intriguing. That ruling is obviously not binding on the appellate courts that lie above his court in the hierarchy. It will be interesting to see whether they take him up on his offer.