A. LEGISLATION AND RULES
A.1 Legislation
International arbitration in Canada is, for the most part, a matter of provincial jurisdiction. Each province and territory has enacted legislation adopting the UNCITRAL Model Law, occasionally with slight variations, as the foundational law for international arbitration. Canada’s federal parliament has also adopted a commercial arbitration code based on the UNCITRAL Model Law, which is applicable when the federal government or one of its agencies is a party to an arbitration agreement or where a matter involves an area of exclusive federal jurisdiction under Canada’s constitution. In addition, each of the provinces and the federal government has adopted the New York Convention.
In 2014, the Uniform Law Conference of Canada adopted an amended Uniform International Commercial Arbitration Act (“Uniform Act”), updating Canada’s laws relating to international commercial arbitration in accordance with the 2006 UNCITRAL Model Law amendments. The amended Uniform Act is open for adoption into federal and provincial legislation.
To date, two Canadian provinces have adopted the 2006 amendments to the UNCITRAL Model Law, which offer a more flexible interpretation of some of the more rigid requirements of the New York Convention. In 2017, Ontario adopted the amendments with the International Commercial Arbitration Act (“Ontario ICAA”). British Columbia followed suit in 2018, amending its International Commercial Arbitration Act (BC ICAA). Whereas Ontario attached the UNCITRAL Model Law as a schedule to the Ontario ICAA, British Columbia incorporated the 2006 amendments directly into the BC ICAA along with other developments, including a higher threshold to successfully challenge an arbitrator and broad powers for tribunals to grant interim measures and preliminary orders.
In 2019, the Alberta Law Reform Institute recommended that Alberta adopt the 2006 amendments, but Alberta has yet to amend its Act. Prince Edward Island has also introduced a bill to bring its International Commercial Arbitration Act in line with the 2006 amendments. The bill was first read by the Legislative Assembly in February 2022, however it has not yet received royal assent.
The legal framework for investor-state arbitration in Canada is evolving. Canada is a party to 39 bilateral investment treaties, known as Foreign Investment Promotion and Protection Agreements, which contain investor-state arbitration provisions. In May 2021, the Government of Canada revised its model Bilateral Investment Treaty, the Foreign Investment Promotion and Protection Agreement Model.
On 1 July 2020, USMCA, the successor to NAFTA, came into effect. Canada did not sign on to the investor-state dispute settlement mechanism under USMCA, so investment arbitration is not available for both Canadian investors with investments in Mexico and the US, and US and Mexican investors with investments in Canada. However, investors who invested under NAFTA may make use of USMCA’s provisions which allow for legacy arbitration claims under NAFTA’s protections. This “Sunset Period” ends on 30 June 2023. For expropriation claims, investors must have served the host state with a notice of intent at least six months before 30 June 2023. For non-expropriation claims, investors must serve the notice of intent at least 90 days before 30 June 2023.
Canada is a party to the Canada-European Union Comprehensive Economic Trade Agreement and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), both of which contain provisions for investment arbitration. Although Canada did not sign on to the investor state dispute settlement mechanism under USMCA, investor state disputes between investors in Mexico and Canada may be brought under the CPTPP.
A.2 Institutions, rules and infrastructure
Canada remains a jurisdiction that strongly supports international arbitration, making major Canadian cities like Toronto, Vancouver, Calgary, Ottawa and Montreal a welcome “seat” of arbitration. Canadian organizations such as the Chartered Institute of Arbitrators Canada Branch, the Toronto Commercial Arbitration Society, the Western Canada Commercial Arbitration Society and Young Canadian Arbitration Practitioners are dedicated to the continued awareness and promotion of arbitration.
Canada is distinct in having a dual heritage of common law and civil law (in the province of Québec). Canada offers highly regarded international arbitrators and experienced arbitration counsel. It has excellent hearing facilities, quality interpretation and translation services, modern and efficient transcription services and highly qualified experts. It also has a stable political system and reasonable visa entry requirements.
Local arbitration institutions in Canada include ADR Chambers, the ADR Institute of Canada, ICDR Canada and the Vancouver International Arbitration Centre. Canada has also attracted the presence of renowned international institutions that have partnered with Arbitration Place, a hearing venue with resident arbitrators in Toronto and Ottawa. These include the International Institute for Conflict Prevention and Resolution, ICDR, the ICC International Court of Arbitration, ICC Canada and the LCIA.
B. CASES
B.1 The Supreme Court of Canada clarifies enforceability of arbitration clauses in insolvency proceedings
In Peace River Hydro Partners v. Petrowest Corp.,[1] the Supreme Court of Canada refused to stay a receiver’s civil lawsuit in favor of multiple arbitration proceedings, finding the arbitration agreements were made inoperative by court order to facilitate an orderly and single insolvency process.
B.1.1 Background
Peace River Hydro Partners (“Peace River”) subcontracted various Petrowest entities to work on a construction project. The Petrowest entities subsequently fell into receivership and bankruptcy. Their court-appointed receiver (“Receiver”) commenced a civil action against Peace River to collect money allegedly owed under various subcontracts containing arbitration clauses. Notably, each of the arbitration agreements differed, requiring a variety of arbitration procedures. Peace River applied to the court for a stay of the court proceedings pursuant to section 15 of British Columbia’s domestic Arbitration Act.[2] The Receiver opposed the stay application on the basis that section 183 of the Bankruptcy and Insolvency Act (BIA)[3] authorized the court to assert centralized judicial control over the matter.
B.1.2 British Columbia Supreme Court decision
The chambers judge held that section 15 of the Arbitration Act, which requires a court to stay a legal action in favor of arbitration unless the arbitration agreement is void, inoperative, or incapable of being performed, was engaged. The chambers judge found that the Receiver was a “party” to an arbitration agreement within the meaning of section 15(1) of the Arbitration Act.
The chambers judge then considered the interaction of arbitration agreements governed by section 15 of the Arbitration Act and the “inherent jurisdiction” of courts. She found that section 183 of the BIA empowered courts to disrupt private contractual rights where doing so was necessary to achieve fairness in the bankruptcy or insolvency process and to promote the underlying objectives of the BIA, such as the proper administration of a bankrupt’s estate. The chambers judge exercised her “inherent jurisdiction” to dismiss the stay application.
B.1.3 British Columbia Court of Appeal decision
Peace River appealed the chamber judge’s decision on the basis that courts do not have inherent jurisdiction under the BIA to decline a stay mandated by section 15 of the Arbitration Act. The Court of Appeal dismissed the appeal but did not endorse the chamber judge’s reasoning. Rather, the appellate court relied on the doctrine of separability which permits an arbitration clause to be treated as a self-contained contract collateral to the containing contract. The Court of Appeal held that separability allowed the Receiver to disclaim an otherwise valid arbitration agreement by bringing the civil claim on behalf of the Petrowest entities. Accordingly, the court reasoned that the Receiver was not a party to the arbitration agreements and section 15 of the Arbitration Act did not apply.
B.1.4 Supreme Court of Canada decision
Justice Côté, writing for the majority, held that the arbitration agreement was inoperative. Côté J considered and made conclusions about relevant arbitration doctrines, the aims of arbitration law in comparison to insolvency law, and the general framework applicable to stay applications brought under domestic arbitration legislation. Côté J interpreted section 15 of the Arbitration Act, finding that the arbitration agreements—on the particular facts of this case—were inoperative.
B.1.4.1 Kompetenz-kompetenz
As a threshold issue, Côté J concluded that the court could resolve this issue without offending the principle of kompetenz-kompetenz, which establishes that a “challenge to an arbitrator’s jurisdiction should generally be decided at first instance by the arbitrator.” This case represented an exception to the principle because the court could decide the issue by interpreting the arbitration and insolvency legislation with superficial consideration of the evidentiary record.
B.1.4.2 Commonality between arbitration law and insolvency law
Côté J then considered the tension between arbitration law and insolvency law. Fundamental to arbitration is the concept of party autonomy, which is closely related to freedom of contract. Together, party autonomy and freedom of contract go hand in hand with the principle of limited court intervention in arbitral proceedings. On the other hand, insolvency engages broad public interests. Canadian insolvency legislation offers stakeholders a wide range of judicial procedures to resolve problems presented by an insolvency.
However, despite these apparent differences, Côté J reasoned that the two bodies of law have much in common. Specifically, both arbitration law and insolvency law prioritize efficiency and expediency, procedural flexibility and rely on specialized decision-makers to achieve their respective objectives. Côté J concluded that, in many cases, these shared interests will converge through arbitration. Where this is the case, the parties should be held to their agreement to arbitrate notwithstanding ongoing insolvency proceedings. However, there are exceptions in certain insolvency matters where arbitration would compromise the orderly and efficient conduct of a court-ordered receivership. This will necessarily be a highly factual determination.
B 1.4.3 The two-stage framework to determine whether a stay will be granted
Côté J set out the two-stage framework to determine whether to grant a stay in favor of arbitration. At the first stage of the analysis the technical prerequisites must be met. The party seeking the stay has the burden to establish, on a low “arguable case” standard that: (i) an arbitration agreement exists; (ii) court proceedings have been commenced by a “party” to the arbitration agreement; (iii) the court proceedings are in respect of a matter that the parties agreed to submit to arbitration; and (iv) the party applying for a stay in favor of arbitration does so before taking any “step” in the court proceedings.
At the second stage the party resisting the stay has the burden to establish, on a balance of probabilities, that the arbitration agreement is “void, inoperative, or impossible of being performed.” If one or more of these statutory exceptions are not met, then the court must grant a stay.
Côté J held that the BIA provides a statutory basis on which a court may, in certain circumstances, find an arbitration agreement inoperative within the meaning of section 15(2) of the Arbitration Act. Factors to assess whether an arbitration agreement is inoperative due to insolvency proceedings include the following:
- The effect of arbitration on the integrity of the insolvency proceedings
- The relative prejudice to the parties from the referral of the dispute to arbitration
- The urgency of resolving the dispute
- The applicability of a stay of proceedings under bankruptcy or insolvency law
- Any other factor the court considers material in the circumstances
On the facts of the case, Côté J concluded that the arbitration agreements were inoperative.
The technical prerequisites in the first stage were met. There was no dispute that the arbitration agreements existed and the impugned civil proceedings were in respect of the contractual dispute covered by them. Côté J concluded that a court-appointed receiver can be a party to an arbitration agreement as the Receiver stepped into the shoes of the Petrowest entities when it initiated the civil claim on their behalf. Côté J further held that no step in the proceeding was taken because an undertaking to file a defense was not a step in the proceeding.
In the second stage of the analysis, the determinative factor was the inexpediency that would result from multiple overlapping arbitral proceedings stemming from the arbitration agreements. A single insolvency process was more expedient than a chaotic multiplicity of arbitral proceedings.
B.1.4.4 Unilateral disclaimer and separability
Significantly, Côté J found that a receiver’s disclaimer cannot unilaterally render an arbitration agreement void, inoperative or incapable of being performed. Only a court can make this determination. Côté J held that allowing a receiver to avoid arbitration by unilaterally disclaiming a debtor’s pre-existing arbitration agreement conflicts with the language and intent of section 15 of the Arbitration Actand would diminish the presumptive enforceability and overall predictability of arbitration agreements, which was the purpose for Canada ratifying the New York Convention and for British Columbia adopting the Model Law.
Côté J also held that, contrary to the Court of Appeal’s conclusion, the doctrine of separability was not applicable. Separability does not apply absent a challenge to the validity of the main contract or of the arbitration agreement itself. On the facts of the case, there was no issue taken with validity of the main agreement or the arbitration agreements. Further, Côté J held that the Court of Appeal’s approach to separability would permit receivers to revoke agreements unilaterally, without judicial inquiry into their validity or enforceability, undermining the central purpose of the Arbitration Act.
B.1.4.5 Concurring opinion
Justice Jamal, writing a short concurring opinion on behalf of four justices, agreed that the arbitration agreements were inoperative. However, Jamal J found that the Receiver was at liberty to disclaim and render inoperative the arbitration agreement, while suing to collect debts under the underlying contracts, because the Receiver was so authorized by the receivership order. Jamal J agreed that a receiver cannot unilaterally “revoke” a valid arbitration agreement. Rather, a receiver can implicitly disclaim an arbitration agreement by starting a court action pursuant to a receivership order.
B.1.5 Significance
By drawing on the commonality in both arbitration law and insolvency law, Côté J resolved the apparent tension between the expedience of a single insolvency process and the presumptive enforceability of arbitration agreements. Generally, parties will be held to their agreements to arbitrate despite insolvency proceedings. In rare circumstances, a court may refuse to order a stay if a single insolvency process would be more expedient than a multiplicity of arbitral proceedings.
Whether the commonality rationale would lead to the same result in the cross-section of Canadian international commercial arbitration legislation and insolvency law remains to be seen. Certainly, the prioritization of expediency, procedural flexibility and reliance on a specialized decision makers are present in the international arbitration context as well.
This case is also significant because it brings clarity to separability. Notably, Côté J held that separability is intended to safeguard arbitration agreements, not imperil them.
B.2 The Ontario Court of Appeal reaffirms that judges exercising their appellate power should be cautious in extricating questions of law
In Tall Ships Development Inc v. Brockville (City),[4] the Ontario Court of Appeal reversed an application judge’s order to set aside three arbitral awards, finding that the application judge erred in characterizing the issues under appeal as extricable questions of law.
B.2.1 Background
The City of Brockville (“Brockville”) and Tall Ships Landing Development Ltd. (“Tall Ships”) entered into a series of agreements in which Tall Ships undertook to remediate and develop a waterfront project, which would include building a mixed residential/commercial condominium tower and an attraction known as the Maritime Discovery Centre (MDC). The price set out in the purchase agreement for the design and construction of a 27,000 square foot MDC was CAD 7,400,000. Disputes arose when Tall Ships supplied the MDC roughly 6,000 square feet larger than designed and claimed approximately CAD 1,800,000 in additional construction costs. A second issue related to Brockville’s refusal to pay invoices for remediation costs pursuant to the agreement. The third dispute involved Tall Ships’ claim for interest paid on a related settlement. The parties submitted to arbitration. Notably, the parties agreed that only questions of law would be subject to appeal.
B.2.2 The arbitral awards
After a four week hearing, the arbitrator dismissed all of Tall Ships’ claims via three written awards.
In the first award, the arbitrator reviewed the agreement for the repayment of remediation costs and found that Brockville was not liable for repayment. The agreement provided that Tall Ships had 15 days to dispute Brockville’s rejection of the remediation claim and Tall Ships had not done so within that time period. The arbitrator noted that “time was of the essence.”
In the second award, the arbitrator concluded that Tall Ships was responsible for the cost of the construction overruns. The arbitrator found that under the purchase agreement, Tall Ships was obliged to manage Brockville’s expectations so that Brockville would make fully informed decisions with a realistic appreciation of the cost consequences. Particularly, Brockville was not in a position to give Tall Ships a financial carte blanche. Tall Ships knew that the project would be much larger and cost substantially more than anticipated but never disclosed this, thus breaching its duty of good faith.
In the third award, the arbitrator considered Tall Ships’ claim for interest on an amount paid in settlement of a related claim. The arbitrator found that Tall Ships was estopped from claiming interest because it never responded to the letter from Brookville setting out the settlement agreement.
B.2.3 Ontario Superior Court decision
Tall Ships then successfully brought an application to set aside the three arbitral awards.
With respect to the first award, the application judge held that arbitrator erred in implying a “time of the essence” clause into the contract, which was neither argued or advanced by either party. Relying on such a theory was held to be fundamentally unfair to the parties and was a reviewable error under section 46(1) of the Arbitration Act.[5] The application judge found that the arbitrator violated procedural fairness in offering meager reasons for his conclusion on the limitations period.
Regarding the second award for the construction cost overruns, the application judge similarly held the arbitrator erred in finding that Tall Ships had breached obligations that were neither pleaded or argued by Brockville. The arbitrator was found to have further failed to apply the appropriate legal analysis for implying contractual terms and misconstrued the duty of good faith.
With respect to the third award, the application judge concluded that the arbitrator erred because he based his finding on interest on his finding that Tall Ships was required to advise Brockville of its intention to claim interest. The arbitrator erred in finding that Brockville pleaded sufficient material facts to put Tall Ships on notice of its estoppel argument.
B.2.4 Ontario Court of Appeal decision
The Ontario Court of Appeal reversed the decisions of the application judge. Critically, the appellate court emphasized throughout the decision that the parties specifically chose to agree that only questions of law would be subject to appeal — not matters of mixed fact and law. None of the alleged errors by the arbitrator could properly be considered extricable errors of law. Nor were there any breaches of procedural fairness, as the appellate court found those conclusions had effectively bootstrapped the substantive arguments and, accordingly, did not properly attract review under section 46 of the Arbitration Act.
Regarding the first award, the Ontario Court of Appeal held that, read in context, the arbitrator’s award made clear that he was not implying a “time of the essence” clause, as “a term of art” or “as though it were a term of the contract.” Rather, read in the context of his detailed reasons, he was simply saying that the contract explicitly required that Tall Ships adhere to an agreed upon 15-day time limit. The court noted that the arbitrator found that the contract was clear that Tall Ships had a legal obligation to respond within 15 days to dispute Brockville’s rejection of the remediation claims. This was a question of mixed fact and law which squarely fell within the purview of the arbitrator and was not subject to appeal, as chosen by the parties.
Moreover, the court held that since the application judge’s conclusion that Tall Ships had been deprived of procedural fairness rested on the erroneous finding that the arbitrator had implied a term into the parties’ contract and that such an argument was not argued by Brockville, the procedural fairness argument must also fail. In other words, the procedural fairness error by the application judge was rendered a byproduct of her substantive contract law error.
On the second award, the Ontario Court of Appeal similarly held that the application judge erred in concluding that the construction cost overruns were questions of law and that the procedural fairness arguments had been bootstrapped by the same erroneous finding of the application judge. The appellate court found that the arbitrator interpreted the contract and was detailed in his reasons. The appellate court concluded that the arbitrator found that the parties’ intent, as set out in “a complex network of agreements and relationships which developed over a decade” required Tall Ships to keep Brockville informed of financial risks. These obligations did not arise out of “implied terms” that were neither pleaded nor argued, as the application judge had held. Rather, they arose from the interpretation of the contract as a whole and were a matter of mixed fact and law. Characterizing Tall Ships’ obligations to keep Brookville informed as an implied term such that it would attract a right to appeal would undermine the intent of the parties to submit the dispute to arbitration. Importantly, in oral argument during the appeal, Tall Ships’ counsel conceded that it could not dispute the arbitrator’s finding that it breached the duty of good faith. The arbitrator found that Tall Ships’ principal “had actively misled [Brockville] and deliberately withheld information about the size and financial implications of the ongoing project.”
With respect to the third award, the Court of Appeal again held that the application judge erred in setting aside the arbitrator’s award as this too was a question of mixed fact and law and therefore agreed to be immune from appeal. The court also repeated that section 46 of the Arbitration Act cannot be used as a broad appeal route to bootstrap substantive arguments to attack an arbitrator’s legal findings that would otherwise be immune from appeal. Further, the fact that the arbitrator’s conclusion was based on estoppel, despite the word “estoppel” not appearing in the pleadings, was not a reversible error because it was, in substance, Brockville’s argument.
B.2.5 Significance
This case is significant because it reaffirms the aims of the arbitration process in Ontario, applicable to both domestic and international arbitration. Central to the Court of Appeal’s reasoning in this highly fact-specific case was the importance of correctly identifying truly extricable questions of law, as distinguished from mixed questions of fact and law. If that initial analysis is erroneous, other errors can then follow, including “bootstrapped” arguments based on procedural fairness. Clearly, there remains scope for overturning arbitral awards for breaches of procedural fairness, including findings based on matters not pleaded or argued by the parties. However, the particular facts of this case demonstrated that the alleged fairness errors were, in fact, inextricable from the application judge’s errors regarding whether an extricable error of law existed. This decision gives primacy to party autonomy. The Court of Appeal advised judges exercising their appellate powers under the Arbitration Act to be cautious in extricating questions of law in the interpretation of contracts. A failure to exercise such caution results in the inefficiencies, delays and added expense that the arbitral process seeks to avoid.
The authors thank articling students Anton Rizor and Bryan Hsu for their valuable contributions to this chapter.
