Saving Paper Could Cost You– Potential Perils Of Incorporating Terms By Reference: Razar Contracting Services Ltd v. Evoqua Water - Trials & Appeals & Compensation

Why this decision matters

In Razar Contracting Services Ltd. v Evoqua Water, 2021 MBQB 69 ("Razar Contracting"), the Manitoba Court of Queen's Bench refused to give effect to an arbitration clause located on the Defendant's website, which the Defendant referenced in the purchase order it issued. Razar Contracting tells a cautionary tale about attempting to incorporate standard terms and conditions into a transaction merely by referencing where those terms can be found.

Businesses who rely on incorporating terms and conditions to their transactions without specifically including the terms themselves in the exchanges with the counterparty will want to consider what steps they can take to ensure that they can demonstrate their terms and conditions (i) have been brought to the other party's attention; and (ii) were knowingly accepted.

Key Facts

Razar Contracting involved a dispute between a contractor (Evoqua Water Technologies Canada Ltd. ("Evoqua")) and a mechanical subcontractor – Razar Contracting Services Ltd. ("Razar"). The contractual relationship between the parties was formed after Razar responded to a bid package issued by Evoqua which included a form of subcontract with certain conditions. When Razar was awarded the contract, Evoqua simply issued a purchase order that stated that the terms and conditions of purchase that was located on its website applied to the purchase order unless otherwise agreed to in writing. Evoqua also provided a link to the website.¹

Razar's president attested that he attempted, without success, to access the website. He made no further attempts, believing the form of subcontract in the bid documents would be executed. However, that did not come to pass.²

Razar commenced an Action at the Manitoba Court of Queen's Bench regarding unpaid invoices and claims for delay and impact costs. Evoqua brought an application to stay Razar's Action, arguing that the terms and conditions on its website contained an arbitration clause which required all disputes between the parties to be resolved by an arbitral tribunal seated in Pittsburgh, PA, administered by JAMS.

The Court's Analysis

The Application was formally brought pursuant to Article 8 of the Model Law On International Commercial Arbitration ("Model Law"),³ which provides that on an application by a party, the court "shall" refer the parties to arbitration "unless it finds that the agreement is null and void, inoperative or incapable of being performed".

The Court was asked to consider two main issues: (1) whether the Court had jurisdiction to rule on the validity or effectiveness of the arbitration agreement, and (2) if the Court does have jurisdiction, whether there was a valid and binding arbitration agreement.⁴

Issue 1 –Does the Court Have Jurisdiction in the First Instance?

Citing the seminal Supreme Court of Canada decision of Dell Computer Corp. v. Union des consommateurs⁵ ["Dell"], Evoqua argued that the Manitoba Court did not have the jurisdiction to rule on the existence or validity of the arbitration agreement, as that jurisdiction lay with the arbitral tribunal in the first instance. Dell confirmed the applicability of the competence-competence principle in Canada (the arbitrator has the competence to rule on its own competence)⁶ and further established the "general rule" that challenges to an arbitrator's jurisdiction "must be resolved first by the arbitrator", subject to questions of law or questions of mixed fact and law that require only superficial consideration of the evidence.⁷

Razar sought to distinguish Dell, relying on a 2009 British Columbia Supreme Court case, H & H Marine Engine Service Ltd. v. Volvo Penta of the Americas, Inc.⁸ ["H & H Marine"], which suggested that Dell was limited in application to arbitration issues arising under the Civil Codeof Québec, and that the applicant needs to tender an evidentiary or statutory basis for the application of the competence-competence principle.

Relying on H & H Marine, Justice Kroft found that Evoqua had failed to tender evidence pertaining to the JAMS arbitration rules to establish the competence-competence principle would apply to the arbitral tribunal in Pittsburgh, PA. Justice Kroft also noted that in the event Dell applied, this case fell within the exceptions articulated in Dell, as the facts were not in dispute and the question before the Court required a legal conclusion, not material findings of fact. As such, Kroft J. found that the Court had the jurisdiction to consider whether there was an arbitration agreement and that the Court ought to exercise that jurisdiction.

Issue 2 – Is There a Valid and Binding Arbitration Agreement?

Having taken jurisdiction of the matter, Kroft J. applied a balance of probabilities standard and found that no arbitration agreement was formed in the circumstances either for the purposes of the Model Law (which requires arbitration agreements to be in writing)⁹ or at common law.

In assessing whether an arbitration agreement was formed for the purposes of the Model Law, Kroft J. noted that under Article 7(2) of the Model Law, an agreement in writing could be found, among other ways, in acknowledgements in pleadings, or in "an exchange" of telecommunications that provide a record of the agreement.¹⁰

Kroft J. dismissed the argument that defining the purchase orders as the "Agreement" in the Statement of Claim signified Razar's agreement to the terms and conditions on Evoqua's website.

Examining the evidence concerning the formation of the agreement between the parties, Kroft J. noted that there was no "exchange" of communication between the parties where they both acknowledged and agreed to the arbitration clause, and held that such an exchange was required by the plain language of Article 7(2) of the Model Law to form an arbitration agreement.

Lastly, Justice Kroft applied common law contractual formation principles and held that there was no meeting of the minds regarding the agreement to arbitrate. In so doing, Justice Kroft found that not only did the bid documents depict one set of terms (those set out in the draft form of subcontract) while the purchase order contained others, but the evidence did not establish that Razar was aware of the terms and conditions on the website when it accepted the purchase order.¹¹

Having found no binding arbitration agreement, Evoqua's application for a stay of the action in favour of arbitration was denied.

Commentary

The Court's conclusion that the general rule of systemic referral to arbitration articulated in Dell need not apply in the circumstances is surprising, both legally and on the facts of the case. Dell has been followed by courts across common law Canada numerous times, including in Manitoba.¹²

Also surprising is the Court's decision not to address Article 16 of the Model law in the decision, as this provides for the application of the competence-competence principle for a tribunal subject to the Model Law.¹³ Instead, the Court opted to recognize its discretionary jurisdiction afforded by Dell.

The Court's consideration of whether the terms incorporated by reference actually formed part of the agreement stands as an interesting 21^st century twist on the so-called "battle of the forms".¹⁴ What is consistent with this long line of authority is the underlying question of whether the terms and conditions have been specifically drawn to the attention of the seller. Razar Contracting stands as an example of the difficulty a party may have establishing this when the terms and conditions are located outside of the main agreement.

Footnotes

1. Razar Contracting Services Ltd. v Evoqua Water, 2021 MBQB 69, at para. 6.

2. Ibid at para 7.

3. The Model Law is in force in Manitoba pursuant to the International Commercial Arbitration Act, C.C.S.M. c. C151 ("ICAA"). Interestingly, the Court noted that both parties' written submissions were premised on the domestic Arbitration Act, CCSM c A120, applying. The application of the ICAA was only addressed in oral argument where both parties acknowledged that the ICAA applied.

4. Ibid, at para. 13.

5. Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34.

6. Stated differently, the jurisdiction to determine the scope of its own jurisdiction.

7. Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34 at paras 84-86.

8. 2009 BCSC 1389.

9. Model Law Article 7(2).

10. Model Law Article 7(2).

11. Razar Contracting, at para. 33.

12. See for instance, Uber Technologies Inc. v Heller, 2020 SCC 16 where the Supreme Court of Canada confirmed that the framework from Dell Computer Corp. applies in Ontario based on the "similarities between the arbitration regimes in Ontario, British Columbia and Quebec." (at para 35). See also Wardrop v Ericsson Canada Inc., 2021 MBQB 183, and Buffalo Point Development Corp. Ltd. v. Alexander et al, 2012 MBQB 341.

13. On account of conflicts of laws principles, foreign law is to be assumed to be the same as the law of the forum unless specifically pled and proven otherwise: Old North State Brewing Co v Newlands Services Inc. (1998) 58 BCLR (3d) 144 at 154.

14. See Butler Machine Tool Co Ltd. v Ex-Cell-O Corp (England) Ltd. [1977] EWCA Civ 9.

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