Saskatchewan – Tribunal to decide whether arbitration clause is unconscionable – #711

In Singer Enterprises Inc. v. Parrish & Heinbecker, Ltd., 2022 SKKB 268, Justice Currie found, based on the principles of competence-competence, that an arbitral tribunal has the jurisdiction to determine whether an arbitration clause is unconscionable and improvident, because such a determination is not a question of law alone and requires a review of the facts. He stayed the plaintiff’s action pending that determination by the tribunal in an arbitration already commenced by the defendant.

Singer and Parrish & Heinbecker (“P&H”) had entered into a contract, whereby Singer would sell grain for a fixed amount to P&H.  In July 2021, Singer advised that it could not meet its obligations because of drought and severe weather. P&H cancelled Singer’s obligations to deliver on the shortfall, which it stated, triggered an obligation on Singer to pay approximately $765,000 as a buyout of the contract.  Singer refused to pay, claiming that the buyout provisions were unconscionable and improvident.  

P&H initiated arbitration proceedings pursuant to the contract. Singer commenced an action, in which it stated that the contract was improvident and unconscionable, and sought a declaration that the arbitration provisions were not enforceable.  In conflicting applications before the court, P&H sought to have the action stayed, whereas Singer sought an interim injunction and argued that the court, as opposed to the arbitral tribunal, should determine that issue.

The arbitration clause contained a provision that stated, in part: “Any claim relating to this Contract shall be settled by arbitration under the National Grain and Feed Association Grain Trade Rules as are in effect at the date of this agreement.  The parties agree to submit to arbitration”.  While the evidence did not include the rules in effect at the time of the contract, ultimately, Justice Currie found that it did not matter.  

Justice Currie also found that he did not need to decide whether the dispute was international or domestic in nature, as both Saskatchewan’s International Commercial Arbitration Act, SS 1998-89, c I-10.2 (“ICAA”), through its adoption of Article 16 (1) of the Model Law, and s. 18 of the Arbitration Act, 1992, SS 1992, c. A-24.1 (the “domestic Act”) adopted the competence-competence principle. Both Acts stated explicitly that the arbitral tribunal could determine its own jurisdiction.  Justice Currie also rejected an argument by Singer that there was ambiguity in the arbitration clause such that it should be interpreted against P&H as the drafter of the contract. He found that “(o)ne may conclude only that each Act states expressly that an arbitral tribunal has the jurisdiction to rule on the existence and validity of contracts, full stop” (para 23). 

Justice Currie also rejected the argument that the ICAA, if it were to apply, does not allow for the application of equity. (The domestic Act specifically did, in s. 32).  Justice Currie disagreed, relying on a comparison of two different sections of the ICAA.  In the section under the heading “Jurisdiction of Arbitral Tribunal”, he noted that there was a broad power to rule on jurisdiction.  In comparison, where the intention was to exclude the application of equity, such as in Article 28 (3) in the section under the heading “Making of Award and Termination of Proceedings”, the legislature had said so. That Article stated that “The arbitral tribunal shall decide ex aequo et bono or as amiable compositeur only if the parties have expressly authorized it to do so”, making it clear that the tribunal did not have the jurisdiction to rule on those equitable provisions in the absence of the parties’ agreement. Based on this statutory analysis, Justice Currie found the ICCA allowed an arbitral tribunal to rule on issues of equity in respect of jurisdiction in the absence of a provision saying otherwise.

Justice Currie next examined whether there was an exception to the competence-competence principle.  He noted that the Supreme Court of Canada in Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34 had found that a challenge to the jurisdiction is to be determined by the arbitrator, a principle that can be departed from only if the question of jurisdiction is based solely on a question of law. Accordingly, he examined whether the question of jurisdiction based on an assertion of unconscionability is a question of law. 

In Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 the Supreme Court of Canada found that contract interpretation generally is a question of mixed fact and law. This was modified in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, in which the Supreme Court of Canada made an exception for standard form contracts for which no meaningful factual matrix is needed in order to interpret the contract.  Therefore the question is whether a finding of unconscionability requires an examination of a meaningful factual matrix. If it does, then it is not a question of law alone, the exception in Dell does not apply, and the arbitral tribunal has the jurisdiction to make the decision.

Relying on Uber Technologies Inc. v. Heller, 2020 SCC 16 and the cases that follow, Justice Currie found that in order to make a finding of unconscionability, the court or tribunal would need to consider whether there was inequality of bargaining power and an improvident transaction.   Here, Singer relied on evidence of a specific factual matrix in the materials filed on its application to argue that the contract both reflected an unequal bargaining power and was improvident.  In its claim, Singer asked the court to look at the facts to demonstrate inequality of bargaining power, such as differences in sophistication and an inability to negotiate.  Based on Singer’s position alone, Justice Currie determined that a court or tribunal would need meaningful consideration of the factual matrix to determine if an inequality of bargaining power existed.  

Moreover, Singer argued that there was factual evidence of the excessive expenses necessary to conduct the arbitration in Virginia, the seat of the arbitration. Drawing a comparison to Uber, this evidence served as a basis to argue that there was an improvident bargain.  However, the Justice Currie noted that one would need to know the financial resources of the plaintiff in order to determine whether in fact the contract was improvident. Given the need for evidence, the question of unconscionability is not a question of law alone. 

In accordance with the competence-competence principle, the question of whether the arbitration clause was unconscionable and, therefore, whether the tribunal had jurisdiction had to be determined by the arbitral tribunal.  The action was stayed, pending that ruling. 

Contributor’s Notes:

First, this is an arbitration-friendly decision. The argument over whether an arbitral tribunal lacks jurisdiction will be scrutinized very closely.  Notwithstanding the sympathy that may arise for Singer, whose inability to fulfill the contract was arguably caused by forces outside its control, Singer did not get to unilaterally determine the forum for the legal proceeding. Rather, it was bound by the contractual provisions to which it originally agreed.

Second, it is curious that Justice Currie elected not to weigh into the issue of whether this was a domestic or international arbitration.  Though he side-stepped the issue by stating that the competence-competence principle is identical in both applicable statues, he was required to conduct some analysis on whether equity could apply to an international arbitration. That analysis could have been avoided he found that this was a domestic arbitration.  It is not clear why Justice Currie elected not to grapple with this issue. In Ontario, there is a move to eliminate the distinction between international and domestic arbitrations, at least as it relates to commercial arbitrations.  The efforts of the Toronto Commercial Arbitration Society (“TCAS”) towards reforming the Arbitration Act in Ontario have resulted in proposed legislation, drafted by TCAS, in favour of one act for all commercial arbitrations. That proposed legislation is being circulated in hopes of being taken up by the provincial government.  While it may not have mattered to the outcome in this case, as long as provinces have separate statues for international and domestic arbitration, it will be important for courts to be able to distinguish between the two.