The judicial preference for holding parties to arbitration agreements is well-documented. Where the parties have agreed to arbitrate and the dispute falls within the arbitration agreement, a court will generally stay proceedings in favour of arbitration and leave to the arbitrator any challenge to the arbitrator's jurisdiction. While the appointment of an arbitrator and the existence of an agreement to arbitrate are usually unambiguous, this is not always the case.
One such example of an exception to the general rule is the Supreme Court of British Columbia's recent decision in One Lodging v American Hotel Income Properties ("ONE Lodging"), where the Court considered whether a dispute resolution clause that called for issues to be resolved by an expert constituted an agreement to arbitrate; significantly, the clause expressly stated that the expert would not act as an arbitrator. The decision provides valuable clarity on determining the applicability of (and exceptions to) the competence-competence principle, the existence of an arbitration agreement, and when a decision-maker may be considered an arbitrator. Below, we provide an overview of the case and consider its key takeaways.
Factual Background
The defendants, American Hotel Income Properties ("AHIP"), retained the plaintiffs, ONE Lodging Holdings ("ONE"), pursuant to a series of agreements (collectively, the "Master Agreement"), to manage their hotel properties.
On July 8, 2024, AHIP issued a notice of default under the Master Agreement. Among other things, AHIP claimed that ONE had breached their fiduciary duties and failed to maintain the hotels to contractual standards. AHIP sought damages in excess of USD $17 million to cure the defaults, failing which they threatened to terminate the Master Agreement. In addition, AHIP issued an appointment notice indicating their intention to have the matters resolved by an expert under article 11 of the Master Agreement (i.e. its dispute resolution clause).
In response, on July 18, 2024, ONE commenced an action seeking a declaration that the British Columbia Supreme Court had exclusive jurisdiction to decide the issues raised in the notice of default. ONE also brought an application for interlocutory injunctive relief barring AHIP from proceeding with the article 11 process. In particular, ONE argued: (1) that pursuant to article 13.2 of the Master Agreement, the courts of British Columbia had exclusive jurisdiction over all matters and disputes under the Master Agreement and (2) that article 11 did not contain an agreement to arbitrate, but rather a mechanism for using an expert in support of resolution by a court.
AHIP, in turn, brought an application seeking a stay of the action in favour of arbitration on the grounds that the subject matter of the action was covered by an arbitration agreement. AHIP argued that (1) article 11 of the Master Agreement provided for dispute resolution by arbitration and (2) the competence-competence principle required that any issues regarding jurisdiction be determined by the arbitrator.
The Decision of the British Columbia Supreme Court
The British Columbia Supreme Court dismissed AHIP's application for a stay in favour of arbitration, while granting ONE's application for an interlocutory injunction preventing AHIP from taking any steps under the notice of appointment. This article focuses on AHIP's stay application.
Whether the competence-competence principle permitted the Court to determine the existence of an agreement to arbitrate
The stay application was brought under s. 8(1) of the International Commercial Arbitration Act (the "ICAA"), which grants a party to an arbitration agreement the right "to apply to the court to stay a proceeding in respect of a matter agreed to be submitted to arbitration."1 As a preliminary matter, the Court considered its jurisdiction to determine whether article 11 of the Master Agreement constituted an agreement to arbitrate, or whether the determination of that question needed to be referred to the expert.
The Court began by affirming the general rule, set out in Dell Computer Corp. v. Union des consommateurs, that according to the competence-competence principle, where the subject of a dispute falls within an agreement to arbitrate, a court must stay the proceedings in favour of arbitration and leave issues regarding jurisdiction to the arbitrator.2 However, while it acknowledged an arbitrator's jurisdiction where the parties have agreed to arbitrate, the Court questioned the application of the competence-competence principle to s. 8(1) in situations where the existence of an arbitration agreement was called into question (in other words, the existence of an arbitration agreement was itself a prerequisite to the applicability of s. 8(1)).
Noting the lack of definitive authority as to whether the existence of an arbitration agreement is a precondition to the engagement of the competence-competence principle under s. 8(1), the Court ultimately took the position that on an application for a stay, where the existence of an arbitration agreement is in dispute, the competence-competence principle is not engaged, and the issue must be decided by the Court as a preliminary matter.
In arriving at this decision, the Court considered both (1) the language of s. 8(1) of the ICAA – which (as noted above) provided only that a party to an arbitration agreement may apply for a stay (in other words, if the party applying is not a party to an arbitration agreement, there is no right to apply for a stay) – and (2) the underlying assumption of the competence-competence principle – that "parties should be held to their agreements".3 Ultimately, the Court concluded that only a party to an arbitration agreement has a right to apply for a stay, since to hold otherwise would allow one party to force another to submit to a process it had not agreed to.
Whether there was an agreement to arbitrate
Having confirmed its jurisdiction to consider the matter, the Court turned to the question of whether article 11 contained an agreement to arbitrate.
To answer this question, the Court relied on the Supreme Court of Canada's decision in Sport Maska Inc. v. Zittrer4 and the four factors identified therein for determining there exists an agreement to arbitrate (as opposed to a different form of dispute resolution):5
- there is a dispute or a difference between the parties which has been formulated in some way or another;
- the dispute or difference has been remitted by the parties to the person to resolve in such a manner that he is called on to exercise a judicial function;
- where appropriate, the parties must have been provided with an opportunity to present evidence and/or submissions in support of their respective claims in the dispute; and
- the parties have agreed to accept his decision.
Regarding the first factor (the presence of a dispute), the Court observed that the parties, in each of AHIP's notice of default, ONE's response, and ONE's notice of civil claim, had conceded the existence of a dispute. The Court noted, however, that the presence of a dispute alone did little to resolve whether the parties had agreed to arbitrate that dispute.
As to the second factor (the exercise of judicial function), the Court emphasized that a principal feature of an arbitration agreement is "the similarity that must exist between arbitration and the judicial process".6 That is to say, the more judicial-like the expert's function, the greater the likelihood that the process will be characterized as arbitration.
ONE argued that the wording of article 11 – that the expert "shall act as an expert and not as an arbitrator" – should be interpreted according to its plain meaning.7 This, according to ONE, meant that the parties intended for the expert to address, but not judicially resolve, issues that arose under the Master Agreement. In contrast, AHIP argued that the words of article 11 should be given less weight than the actual function assigned to the expert. Since the expert was to be mutually appointed by the parties, since the parties had the opportunity to make submissions, and since the expert was to govern the proceedings, AHIP asserted that article 11 possessed the hallmarks of a judicial process and should be interpreted as an agreement to arbitrate.
In determining whether the expert was called upon to exercise a judicial function, the Court considered both the words of article 11 and the existence of article 13.2 (which conferred jurisdiction on the British Columbia courts). To begin, the Court considered the fact that article 11 expressly restricted the expert to selecting from among the two positions proposed by the parties. While the Court conceded that such an approach can be agreed to in an arbitration (e.g. like baseball arbitration), it found that this limitation detracted from the expert's judicial decision-making role.
Next, the Court considered the provision in article 11 that the expert "shall act as an expert and not as an arbitrator."8 In considering past cases where a decision-maker had been expressly described as an expert and not an arbitrator, the Court noted that British Columbia courts had been willing to find an agreement to arbitrate where the parties had agreed to the presentation of evidence and submissions. Such an agreement, the Court stated, assigned the decision-maker a judicial role.
Significantly, however, the Court noted that the relevant jurisprudence preceded the Supreme Court's decision in Sattva Capital Corp. v. Creston Moly Corp. In light of Sattva, the Court held that the Sport Maska criteria could not be applied in a manner which allowed context to overwhelm the words of the agreement. As such, the wording of article 11 had to be interpreted in light of article 13.2.
Notably, article 13.2 broadly granted the courts of British Columbia "exclusive jurisdiction in connection with all matters" under the Master Agreement, including its interpretation and enforcement.9 Consequently, the Court held that in the absence of an express agreement to arbitrate, the existence of article 13.2 indicated that the parties had not assigned judicial powers to the expert but rather had reserved the judicial-decision making function exclusively to the courts of British Columbia. For these reasons, the Court concluded that the second factor weighed against article 11 being considered an agreement to arbitrate.
On the third factor (the opportunity to present evidence and submissions), the Court found that the absence of any requirement that the expert either consider evidence, allow for cross examination, or conduct an oral hearing, together with the fact that the parties were not required to be represented by lawyers and that the expert was to be paid by AHIP alone, detracted from article 11's similarity to a judicial-like process. As such, the Court held that the third factor weighed against article 11 being considered an agreement to arbitrate.
Finally, with respect to the fourth factor (the acceptance of the decision), the Court found article 11's silence on review to be inconclusive. The Court noted that while the parties' agreement that the expert's decision be final could indicate arbitration, it could also point to another form of dispute resolution. Consequently, the Court stated that to be meaningful, the fourth factor had to be considered in light of other indicia of arbitration. Given the lack of other indicia and article 11's silence on review, the Court concluded that article 11 must be the servant of article 13.2, which, the Court found, weighed against article 11 being viewed as an agreement to arbitrate.
Ultimately, having reviewed each of the Sport Maska factors in light of Sattva, the Court concluded that it was not arguable that the Master Agreement contained an agreement to arbitrate and so dismissed AHIP's application for a stay.
Commentary
ONE Lodging is instructive for two reasons: it clarifies (1) the engagement of the competence-competence principle under s. 8(1) of the ICAA, and (2) the determination of whether a contract contains an agreement to arbitrate. The latter point may be particularly instructive for readers in the construction industry, where forms of alternative dispute resolution outside of arbitration are common.
First, the Court in ONE Lodging was emphatic that without an agreement to arbitrate, "the competence-competence principle is without foundation".10 In other words, since the purpose of the competence-competence principle is to enable the arbitrator to rule on their jurisdiction, the existence of an arbitration agreement is a precondition to the principle's engagement. In this instance, the application of the principle proved challenging insofar as it would have required assuming that the expert was in fact an arbitrator – the very point under dispute. This would also be difficult in circumstances where the expert was limited to selecting between the parties' respective positions, thus circumscribing the expert's presumptive jurisdiction (if any) to rule on their jurisdiction.
On the other hand, however, it is worth querying the extent to which the Court's conclusion could be subject to abuse by future litigants seeking to avoid modes of dispute resolution that do not obviously fall within the Sport Maska criteria for arbitration. To the extent there is any dispute as to whether there is an arbitration agreement, parties could presumably attempt a similar approach of denying the existence of an arbitration agreement in order to avoid having the issue referred to the presumptive arbitrator and instead have it decided by the court.
The result is also difficult to reconcile with the proposition that an arbitrator has the jurisdiction to rule on whether a dispute falls within the scope of the parties' arbitration agreement since, in principle, the same logic used by the court in ONE Lodging would apply to other scenarios. Specifically, if an arbitrator were to rule that the dispute does not fall within the scope of the arbitration agreement, then that same logic would dictate that there was no arbitration agreement between the parties in respect of that dispute, and that the arbitrator therefore never had the jurisdiction to rule on that issue (because there was no arbitration agreement in respect of the dispute). Evidently, this is difficult to reconcile with the competence-competence principle, particularly in circumstances where most arbitration legislation is clear that arbitrators have the authority to rule on the existence or validity of an arbitration agreement.
Second, ONE Lodging clarifies the balancing of the factors involved in inquiring whether there exists an agreement to arbitrate. In ONE Lodging, the Court found in respect of the Sport Maska factors that there was a dispute (factor 1) and that the expert's decision was to be final and binding (factor 4). Nevertheless, the Court held (somewhat surprisingly) that none of the factors supported article 11 being an arbitration agreement; in that regard, the Court suggested that the first and fourth factors only weigh in favour of an arbitration agreement in the presence of the other two indicia of arbitration. Therefore, it would appear that the determinative factors are whether the decision-maker's function (factor 2) and the dispute resolution process itself (factor 3) are sufficiently similar to a judicial process.
These latter two factors are more difficult to assess with precision, given the somewhat imprecise boundaries of what constitutes a "judicial process". The Court concluded that the dispute resolution clause in this case was "a clause for resolving matters to facilitate the performance of the contract and/or to facilitate dispute resolution of other matters", and observed that the expert's conclusion was final and binding on the parties, but this was not enough to render the process sufficiently judicial in circumstances where article 13.2 conferred jurisdiction on the courts. It is therefore unclear what status or weight, if any, the expert's determination would have in court.
Perhaps the Court's most important finding, though, is that in keeping with Sattva, the Sport Maska factors may not be applied in a manner that overwhelms the words of the contract. That is, where the parties have expressly agreed that a decision-maker is not an arbitrator (as was the case here), the contract can only be interpreted as containing an arbitration agreement in the presence of "strong indicators" that the parties have agreed to assign the decision-maker a judicial-like function despite language identifying them as something other than an expert. The Court failed to find such indicia in ONE Lodging, particularly in circumstances where the clause in question explicitly stated that "the expert appointed hereunder shall act as an expert and not as an arbitrator".
Ultimately, ONE Lodging serves as a caution regarding the risk of challenges to the existence of an arbitration agreement and the nature of a decision-maker's role. Accordingly, parties would be well advised to carefully draft their dispute resolution clauses in order to avoid any ambiguity as to the nature of the dispute resolution to which they are submitting.
Footnotes
1 ONE Lodging Holdings LLC v American Hotel Income Properties REIT (GP) Inc., 2024 BCSC 2179 at para 18.
2 Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34 at para 84.
3 ONE Lodging Holdings LLC v American Hotel Income Properties REIT (GP) Inc., 2024 BCSC 2179 at para 24.
4 Sport Maska Inc. v. Zittrer, [1988] 1 SCR 564, 1988 CanLII 68.
5 ONE Lodging Holdings LLC v American Hotel Income Properties REIT (GP) Inc., 2024 BCSC 2179 at para 43; Sport Maska Inc. v. Zittrer, 1988 CanLII 68 (SCC) at para 62.
6 ONE Lodging Holdings LLC v American Hotel Income Properties REIT (GP) Inc., 2024 BCSC 2179 at para 57; Sport Maska Inc. v. Zittrer, 1988 CanLII 68 (SCC) at para 99.
7 ONE Lodging Holdings LLC v American Hotel Income Properties REIT (GP) Inc., 2024 BCSC 2179 at para 15.
8 ONE Lodging Holdings LLC v American Hotel Income Properties REIT (GP) Inc., 2024 BCSC 2179 at para 15.
9 ONE Lodging Holdings LLC v American Hotel Income Properties REIT (GP) Inc., 2024 BCSC 2179 at para 16.
10 ONE Lodging Holdings LLC v American Hotel Income Properties REIT (GP) Inc., 2024 BCSC 2179 at para 24.
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