Published in Arbitration and ADR, International Bar Assocation, October 2004.
Recent Canadian court decisions concerning the interpretation of the scope of arbitration clauses in commercial contracts – that is, the description of the types of disputes the parties want to resolve by arbitration – demonstrate that Canadian courts are now strongly disposed to favour arbitration. These decisions give a broad interpretation to the words used by the parties to express the scope of arbitrable disputes under their agreement. The decisions also reinforce the principle that if it is unclear whether the dispute falls within the scope of arbitrable disputes under an arbitration clause, courts should let the arbitral tribunal determine the issue.
In this article, we examine the reasoning in these Canadian court decisions and their instructive value regarding the wording that parties should use to articulate the intended scope of their arbitration clauses.
We conclude by considering the scope of arbitration clauses suggested by leading arbitral institutions, and the implications of these Canadian court decisions for the likely construction of those clauses in Canada.
Defining the Scope of Arbitrable Disputes, and Who Decides
Making a decision to resolve disputes through arbitration is only the first decision for parties who are negotiating a commercial contract. They must also decide which types of disputes should be resolved by arbitration. Then they must draft their arbitration clause to reflect clearly their intention to arbitrate those types of disputes. This way, there will be no unintended resort to the courts on the merits of a dispute, or to the courts or arbitral tribunals to determine whether a particular dispute falls within the scope of the arbitration clause.
Recent Canadian court decisions in the provinces of Ontario and British Columbia demonstrate that when drafting arbitration clauses, contracting parties must be aware of the pitfalls of both equivocation and inattention to detail. Drafters of arbitration clauses should take care to both foresee and adequately to define the types of disputes they want resolved by arbitration.
In Mantini v Smith Lyons LLP,1 the defendant law firm appealed a decision that declined to order arbitration of general claims arising out of the plaintiff’s withdrawal from the partnership. The claims were (1) that the law firm’s actions regarding the transfer of client files to the withdrawing partner breached the firm’s legal and professional obligations; (2) that the law firm failed to comply with the partnership agreement, the firm’s practice or assurances made to the plaintiff, and its fiduciary duty regarding repayment of capital and other financial matters; (3) that the non-competition provision of the partnership agreement was void and unenforceable; and (4) that the firm breached its agreement not to require repayment of a loan to the plaintiff.
The arbitration clause in the partnership agreement read as follows:
‘Arbitration: Except for any matters expressly within the sole discretion or power of the Executive Committee or Compensation Committee, any dispute in connection with this Agreement shall be settled by arbitration…’2
In the decision appealed, the court had held that none of the issues raised in the lawsuit were arbitrable because they did not fall within the scope of the arbitration clause. The Court of Appeal for Ontario disagreed, concluding that the phrase ‘in connection with’ has a very broad meaning. The Court of Appeal stated:
‘The arbitration clause ... requires that "any dispute in connection with this agreement" [emphasis added] must be arbitrated. The only exception is matters which are expressly within the sole discretion of the Executive or Compensation Committees.3
In the case of Denison Mines Ltd v Ontario Hydro  OJ No 807 (QL) (Div Ct), the court interpreted the words ‘arising in connection with’ as having ‘a very broad meaning’. The court referred to the House of Lords’ decision in Heyman v Darwins  AC 356, where Lord Porter stated at p 399 that the words ‘arising out of’ have a wider meaning’ than ‘under’. The Divisional Court went on to hold that ‘the words "arising in connection with" are at least as wide as the words "arising out of" and have a very broad meaning’ (para 15).
I agree with these interpretations and in particular with the conclusion that the phrase ‘in connection with’ has a very broad meaning. In my view, it has a broader scope than the phrase ‘out of’, as the dispute need only be connected with the Partnership Agreement, even if it does not arise from or out of a specific provision of the agreement. I conclude that this clause represents a general or universal resort to arbitration, but for the exception for any matters expressly within the sole discretion or power of the Executive and Compensation Committees.’4
The Court of Appeal accepted the appellant’s submission that ‘by agreeing to such a broadly-worded arbitration provision, the parties expressed a clear intention to have the disputes between them arbitrated in a private setting as opposed to being litigated in a public forum’5 and that each of the three types of claims ‘comes within the general resort to arbitration’.6
In Dalimpex Ltd v Janicki,7 the Court of Appeal for Ontario considered whether the particular disputes that arose between the parties fell within the scope of their arbitration clause. In particular, the court had to decide whether a claim arising out of alleged tortious acts (conspiracy, interference with economic relations, inducing breach of contract) were within the scope of the following arbitration provisions:
‘Any disputes which may arise in connection with interpretation or execution of this Agreement will be settled by the College of Arbitrators / Arbitration Court/ at the Polish Chamber of Foreign Trade in Warsaw.’8
The qualification of the term ‘in connection with’ by the words ‘interpretation or execution of the agreement’ would, of course, have the effect of narrowing the scope of the arbitration clause. The judge at first instance held that the tort claims fell outside the scope of the arbitration clause and were not arbitrable.
The intermediate appellate court (the Divisional Court) had held, and the Court of Appeal for Ontario largely agreed, that the judge at first instance erred in two respects, the first of which was deciding the scope of the question at all. The Court of Appeal held that the proper approach if it is unclear that a dispute is outside the terms of the arbitration agreement – that is, where it is arguable that the dispute falls within the scope of the arbitration agreement – is for the matter to be determined by the arbitral tribunal. The Court of Appeal stated:
‘It is my view that the proper approach to be taken by the court on a motion pursuant to article 8 [9 ] is that set out by Hinkson JA of the British Columbia Court of Appeal in Gulf Canada Resources v Arochem International (1992) 43 CPR (3d) 390 … [Gulf Canada Resources]. That case was decided under the British Columbia International Commercial Arbitration Act, SBC 1986, c 14 of which ss 8 and 16 [10 ] are substantially identical to articles 8 and 16 of the Schedule to the Ontario statute [both UNCITRAL Model Law statutes]. Hinkson JA wrote at p 397 CPR:
"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".’11
The Court of Appeal then discussed the second error made by the judge at first instance, and the decision of the intermediate appellate court [Divisional Court] in that regard, stating as follows:
‘Second, the court held that the motion judge erred in focusing entirely on the claims made by the plaintiff without considering the defences raised by Agros in determining whether the subject matter of the action was within the arbitration clause. The court stated the following at paras. 31-32:
"In determining whether the dispute is one that relates to the interpretation or execution of the agency agreement, it is relevant to consider whether the existence of the contractual obligation is a necessary element to create the claim or to defeat it: Kaverit Steel & Crane Ltd v Kone Corp (1992) 87 DLR (4th) 129 at 135 (Alta CA) leave to appeal denied, 93 DLR (4th) vii (SCC).
In its defence Agros pleads that under the agreement, Dalimpex was to be the agent of Agros, that all of the customers and confidential information were the property of Agros (not Dalimpex), that the individual defendant Janicki was at all times the agent of Agros to protect its interests under the agreement and that Agros was entitled under the agreement to terminate its relationship with Dalimpex at any time. Therefore, Agros argues that because of the contract terms between Agros and Dalimpex, the claims asserted by Dalimpex are without foundation. The defences raised by Agros call into question the interpretation of the agreement as well as the manner in which the contract was performed. As such, they can reasonably be construed as a ‘dispute in connection with [the] interpretation or execution’ of the agreement. Therefore, the dispute between Dalimpex and Agros in the action in this court is covered by the arbitration clause and should be stayed pending determination of those issues by the Court of Arbitration of the National Chamber of Commerce in Warsaw."12
I agree with the analysis and the conclusion of the Divisional Court, except where the court appears to make a definitive finding that "the dispute between Dalimpex and Agros in the action in this court is covered by the arbitration clause". In my view, it is preferable to leave the matter for final determination to the Court of Arbitration and to stay the action against Agros until final determination of the disputes by arbitration, including any jurisdictional issue, or until further order of the Superior Court of Justice.’13
The decisions of the Court of Appeal for Ontario in both Mantini and Dalimpex were then discussed by a judge of the Ontario Superior Court of Justice in AMEC E & C Services Ltd v Nova Chemicals (Canada) Ltd.14 In this case, the contract contained the following arbitration clause:
‘Any dispute between the Parties that cannot be resolved by negotiation within 60 days shall be finally settled by arbitration pursuant to the International Chamber of Commerce Rules and Procedures for Arbitration.’15
The judge hearing an application (for a declaration that any liability under the contract had expired and that any claim was time-barred) raised the question whether the issues raised in the application fell within the scope of the arbitration agreement, and whether the appropriate approach was to let the arbitral tribunal determine those issues.
The Superior Court judge stayed the court proceedings and referred the issues for arbitration in accordance with the contract. She concluded as follows:
‘Thus, in this case, if I find that the dispute between the parties in the Application is one that is arguably covered by the arbitration clause, I should make no definitive determination on that issue and should refer that matter to the arbitral tribunal for a decision in the first instance. The arbitration clause in the Contract is clearly broad enough to potentially encompass a dispute between the parties as to whether or not the Contract contains a two-year limitation period. Therefore, on the face of it, the matter should be referred to arbitration …’16
The British Columbia Court of Appeal in Cooper v Deggan17 considered the arbitrability of a dispute between owners of an island regarding a potential partition of the property. Their arbitration clause was as follows:
‘8. If at any time during the continuance of this agreement any dispute, difference or question shall arise between the owners or any of their representatives touching this agreement, then the same shall be determined or settled by arbitration under the provisions of the "Arbitration Act" of British Columbia.18
The trial judge stayed the court proceedings, relying largely on the Gulf Canada Resources decision.19
The British Columbia Court of Appeal upheld the trial judge’s decision, holding that there existed ‘a question that may engage the jurisdiction of the arbitrator and in addition, the arbitration clause itself and the general tenor of the agreement lend support to the proposition that arbitration, not a court of law, was intended to be resorted to in the circumstances that have arisen.’20 The Court held that a stay of the court proceedings was required ‘so that the arbitrator may determine the scope of his or her jurisdiction …’21
Arbitration Clauses Suggested by Leading Arbitral Institutions
What are the implications of these Canadian court decisions on the likely construction in Canada of the scope of the arbitration clauses suggested by leading arbitral institutions? Set out below are the standard arbitration clauses suggested by the following four arbitral institutions (with emphases added):
- American Arbitration Association (AAA)
- ADR Institute of Canada
- London Court of International Arbitration (LCIA)
- International Court of Arbitration (ICC)
Not surprisingly, all these arbitration clauses are broadly worded. They all use the phrase ‘arising out of’ and all of them except the AAA clause use the phrase ‘in connection with’ (which was given a broad construction by the Court of Appeal of Ontario, as outlined above). The AAA clause uses ‘relating to’ rather than ‘in connection with’. Canadian courts can be expected to find that these institutional clauses have a broad scope, even apart from the additional words in some of these clauses.
The ICC clause’s scope is the most succinctly stated, yet it appears to encompass any disputes (or, as the AAA clause terms them, ‘any controversy or claim’), even without the additional phrase ‘or the breach thereof’ (in AAA’s clause) or ‘including any question regarding its existence, validity or termination’ (in LCIA’s clause). It is perhaps arguable that if the contract does not exist, there cannot be a dispute ‘arising out of or in connection with’ it. Yet certainly the tenor of the Ontario decisions discussed here would not appear to sympathise with that argument. It seems that Canadian courts would at least consider that the issue, if not clear, should be resolved by an arbitral tribunal. It will be interesting to see if a Canadian court, or an arbitral tribunal, would conclude that disputes that are not sufficiently contractual to be encompassed by ‘arising out of or relating to’ or ‘arising out of or in connection with’ the contract are encompassed by the additional words in the ADR Institute of Canada’s clause ‘or in respect of any legal relationship associated with or derived from this agreement’.
Parties to commercial transactions wishing to avoid recourse to the courts are reminded by these Canadian court decisions that they should take care to draft their arbitration provisions to ensure that types of disputes they want determined by arbitration are within the scope of arbitrable disputes in their arbitration clause.
1 (2003), 64 OR (3d) 505 (CA) (Mantini).
2 Ibid. at para. 8 [emphasis added in court’s decision].
3 Ibid. at para 18.
4 Ibid. at para. 19.
5 Ibid. at para. 26.
6 Ibid. at para. 35.
7 (2003), 64 O.R. (3d) 737 (C.A.) [Dalimpex].
8 Ibid. at paras. 6 and 24 [emphasis added].
9 The Schedule to the International Commercial Arbitration Act, RSO 1990, c I.9, Art 8, provides as follows:
‘(1) A court before which an action is brought in a manner which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.
(2) Where an action referred to in paragraph (1) of this article has been brought, arbitral proceedings may nevertheless be commenced or continued, and an award may be made, while the issue is pending before the court.’
10 Article 16 provides as follows:
‘(1) The arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence of validity of the arbitration agreement. For that purpose, an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. A decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.
(2) A plea that the arbitral tribunal does not have jurisdiction shall be raised not later than the submission of the statement of defence. A party is not precluded from raising such a plea by the fact that he has appointed, or participated in the appointment of, an arbitrator. A plea that the arbitral tribunal is exceeding the scope of its authority shall be raised as soon as the matter alleged to be beyond the scope of its authority is raised during the arbitral proceedings. The arbitral tribunal may, in either case, admit a later plea if it considers the delay justified.
(3) The arbitral tribunal may rule on a plea referred to in paragraph
(2) of this article either as a preliminary question or in an award on the merits. If the arbitral tribunal rules as a preliminary question that it has jurisdiction, any party may request, within 30 days after having received notice of the ruling, the [Superior Court of Justice] to decide the matter, which decision shall be subject to no appeal; while such a request is pending, the arbitral tribunal may continue the arbitral proceedings and make an award.’
11 Ibid at para 21.
12 Ibid at para. 41.
13 Ibid at para. 43.
14 (2003) 35 BLR (3d) 100, 25 CLR (3d) 47 (Ont. SCJ) [cited to BLR].
15 Ibid at para. 7.
16 Ibid at para. 27.
17 (2003) 16 BCLR. (4th) 248, 184 BCAC 231, 34 BLR (3d) 278, 302 WAC 302 (CA) (cited to BCLR).
18 Ibid. at para 3.
19 Ibid at para7. Also see Gulf Canada Resources, discussed in the quotation referenced at note 11.
20 Ibid at para.10.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.