Canada: Alberta Court Grants Encana's Application For A Stay Of Action And Referral To Arbitration

On April 12, 2016, the Alberta Court of Queen’s Bench stayed an action started by Toyota Tsusho Wheatland Inc. (TTWI) against Encana Corporation (Encana) and referred the vast majority of the claims to arbitration.  The Court’s decision, reported in Toyota Tsusho Wheatland Inc. v. Encana Corporation, 2016 ABQB 209, upholds the contractual autonomy of parties to have their disputes determined by mandatory arbitration, even where the arbitration touches on the interests of third parties not privy to the arbitration agreement.

Background

A dispute arose between TTWI and Encana regarding a clause in their Royalty Agreement that prohibits either party from disposing of any of its interest in the Royalty Agreement without “the prior consent in writing of the other Party, which shall not be unreasonably withheld” and “unless the proposed assignee shall deliver an agreement agreeing to be bound by and to assume and comply with the provisions of this Agreement with respect to the assigned interest.”  TTWI alleges that Encana breached this provision as the result of a corporate restructuring in which Encana transferred title in the lands subject to the Royalty Agreement to a wholly-owned subsidiary: PrairieSky Royalty Ltd. (PrairieSky). PrairieSky, now a publicly-traded company, is not a party to the Royalty Agreement between Encana and TTWI. 

The Royalty Agreement contains an arbitration clause that requires Encana and TTWI to refer any “Dispute” to arbitration. Dispute is broadly defined in the Royalty Agreement; it means:

any dispute, controversy or Claim (of any and every kind or type, whether based on contract, tort, statute, regulation, or otherwise) arising out of, relating to, or connected with this Agreement, including any dispute as to the construction, validity, interpretation, enforceability or breach of this Agreement […]

However, Section 6.04 of the Royalty Agreement also provides that:

[Encana] agrees and irrevocably consents to the granting of an order by the Court of Queen’s Bench of Alberta requiring [Encana] to specifically perform its obligations set forth in this Agreement, and to a mandatory injunction compelling [Encana] to perform such obligations.

TTWI commenced an action in the Alberta Court of Queen’s Bench against Encana and PrairieSky alleging, inter alia, that the disposition to PrairieSky was a breach of the Royalty Agreement and seeking specific performance, declaratory relief and damages. TTWI also commenced an arbitration against Encana seeking a declaration that it was entitled to terminate the Royalty Agreement as a result of the disposition to PrairieSky and seeking damages or restitution.  Encana applied to the Court to stay the action and to refer the matters raised in the action to arbitration.

Which arbitration act: domestic or international?

First, the Court had to determine whether the arbitration commenced by TTWI was governed by the Arbitration Act, R.S.A. 2000 c. A-43 (the Domestic Act) or the International Commercial Arbitration Act, R.S.A. 2000 c. I-5 (the International Act). Although TTWI and Encana agreed that the International Act governed the arbitration, PrairieSky took the position that the arbitration was governed by the Domestic Act.   

Pursuant to Article 1(3) of the United Nations Model Law on International Commercial Arbitration, the International Act governs arbitrations if the parties to an arbitration agreement have their places of business in different States at the time the agreement is made.

Encana and TTWI argued that Encana and TTWI had their places of businesses in different States at the time the Royalty Agreement was made. Encana had its place of business in Canada. TTWI was incorporated in New Brunswick and extra-provincially registered in Alberta; however, Encana and TTWI argued that at the time the Royalty Agreement was executed, all of TTWI’s business was in fact conducted from either Tokyo or Houston, such that its place of business was located either in Japan or the United States.

On the other hand, PrairieSky argued that TTWI had its place of business in Canada when the Royalty Agreement was made. In particular, PrairieSky noted that presentations and meetings were held in Calgary on TTWI’s behalf during the negotiation of the Royalty Agreement; that TTWI used a Calgary-based reserves firm to evaluate the transaction and had lawyers conduct due diligence at Encana’s offices in Calgary; that TTWI was extra-provincially registered in Alberta and had by implication commenced carrying on business in Alberta; that TTWI had represented in the Royalty Agreement that it was “authorized to carry on business in Alberta”; and that TTWI attended the closing of the transaction in Calgary and executed the Royalty Agreement, which relates to the development of oil and gas interests in Alberta and is governed by Alberta law.

Ultimately, the Court agreed with Encana and TTWI and held that the International Act governs the arbitration. The Court concluded that the arbitration is an international arbitration within the meaning of Article 1(3)(a) of the Model Law because the parties had their places of business in different States when the Royalty Agreement was made. In particular, the Court held that TTWI’s “place of business” for the purposes of Article 1(3)(a) of the Model Law was the place where its business decisions were being made, which in this case was either Tokyo, Japan or Houston, USA.  The Court expressly rejected PrairieSky’s arguments that the place of business could be determined by TTWI’s place of incorporation; the fact that it was extra-provincially registered in Alberta; or that it had represented in the Royalty Agreement that it was authorized to carry on business in Alberta.

The stay of the action and referral to arbitration

Next, the Court considered whether the action ought to be stayed and the claims referred to arbitration. The Court emphasized the limited role for judicial intervention in disputes that are subject to an arbitration agreement. The Court further noted that the legislative direction for limited judicial intervention was perhaps even stronger under the International Act than under the Domestic Act. Disputes that are subject to an arbitration agreement governed by the International Act must be referred to arbitration, unless the arbitration agreement is null and void, inoperative or incapable of being performed. This remains the case even where the interests of third parties not privy to the arbitration agreement are involved. 

The Court then considered whether all of the issues advanced by TTWI in the action were subject to arbitration, or whether there were aspects of the dispute that fell within the jurisdiction of the Court pursuant to Section 6.04 of the Royalty Agreement. To determine this issue, the Court had to interpret in a cohesive fashion the various provisions of the Royalty Agreement, which stated that all “Disputes” would be dealt with by arbitration, subject to applications for specific performance against Encana, which could be brought in the Court of Queen’s Bench.

TTWI argued that Section 6.04 of the Royalty Agreement carved out specific performance claims from the arbitration agreement and that if specific performance was the relief sought, then the Court would be entitled to consider all of the issues necessary to determine if that remedy was appropriate. In other words, as long as specific performance was the remedy sought in an action commenced by TTWI, the Court would be entitled to consider questions of law as to how the Royalty Agreement should be interpreted, questions of disputed fact as to what occurred and questions of mixed fact and law as to whether that conduct constituted a breach of the Royalty Agreement. 

On the other hand, Encana argued that Section 6.04 was limited to giving the Court the ability to order specific performance as a remedy, in lieu of damages, after an arbitrator had determined that there had been a breach of the Royalty Agreement. Further, Encana questioned whether specific performance was in fact the primary remedy sought by TTWI in its action against Encana. 

Ultimately, the Court preferred Encana’s interpretation of the Royalty Agreement and held that the issues raised in the action were to be referred, at least in the first instance, to arbitration. The Court was satisfied that it was the intention of the parties that any disputes regarding the appropriate interpretation of the Royalty Agreement and whether or not it had been breached ought to be determined by arbitration. The Court also noted that it appeared that at least some of the issues advanced in the action fell within the scope of the arbitration clause in the Royalty Agreement. As a result, it was appropriate for an arbitrator to determine the scope of Encana’s obligations under the Royalty Agreement, and whether it was in breach of those obligations, before TTWI could seek specific performance of those obligations in the Court of Queen’s Bench. 

The Court therefore stayed the action but held that the limited aspect related to the remedy of specific performance could proceed in Court after the determination of the dispute through arbitration. Although the Court stayed the action against Encana pending the determination of the arbitration, it allowed the action to continue as is against PrairieSky, being a non-party to the Royalty Agreement.

Conclusion

This case illustrates the deference showed by the Court to arbitration agreements. It also highlights the importance of ensuring that all clauses in the agreement that relate to dispute resolution work together harmoniously. Finally it illustrates a substantive rather than formal approach to determining whether the parties “have their places of business in different states”, which determines whether the International or Domestic Act – and their different protections and rights – applies to an arbitration agreement.

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.

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