By: Matthew J. Latella1Matthew Latella is a partner in Baker & McKenzie’s Toronto office and the head of the office’s International Arbitration Practice Group. and Christina I. Doria2Christina Doria is an associate in Baker & McKenzie’s Toronto office and an active member of the Firm’s International Arbitration Practice Group. She is a Global Advisory Board member of the ICDR Y&I and frequently writes and speaks on the subject of international arbitration.
A. Legislation, Trends and Tendencies
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 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, either directly or indirectly, adopted the New York Convention.
In March 2014, the Uniform Law Conference of Canada (the “Conference”) released a final report and commentary with recommendations and implementation of a new Uniform International Commercial Arbitration Act (the “Uniform Act”), updating Canada’s laws relating to international commercial arbitration in accordance with the 2006 Model Law amendments. The Conference has since adopted the amended Uniform Act, which is open for adoption into federal and provincial legislation.
A.2 Trends and Tendencies
Canada remains a jurisdiction that strongly supports international arbitration. There continues to be an awareness of international arbitration, the promotion and utilization of arbitration for international commercial matters, and the promotion of Canada as an ideal place to arbitrate international commercial disputes. In particular, organizations such as the Toronto Commercial Arbitration Society (TCAS) and Young Canadian Arbitration Practitioners (YCAP) are dedicated to the continued awareness and promotion of arbitration.
In general, Canadian courts increasingly apply the Model Law and the general principles of arbitration to hold parties to the bargains they have made through enforceable arbitration agreements. Where an arbitration agreement exists between parties, and it is arguable that the arbitration agreement is valid and covers the subject matter of the dispute, Canadian courts have shown a willingness to stay judicial proceedings in favor of arbitration.
Courts are now also being called upon to address issues of interim relief. Although arbitrators are given broad powers to grant interim relief, courts have demonstrated an inclination to make interim orders for injunctions, and for the detention, preservation and inspection of property, which are consistent with the Model Law.
Unlike domestic arbitration awards in Canada (which generally may be appealed, with leave, on a question of law), international arbitral awards are final and cannot be appealed. Consistent with the New York Convention, the powers of Canadian courts are limited to a judicial review of whether the tribunal lacked or exceeded its jurisdiction in making an award, or where there was a lack of proper conduct and procedure during the proceeding.
B. Cases
B.1 Ontario Court of Appeal Reaffirms Competence-Competence
In Ciano Trading & Services C.T. & S.R.L. v. Skylink Aviation Inc.,32015 ONCA 89. the Ontario Court of Appeal confirmed its commitment to the competence-competence principle by deferring to an arbitrator in a matter concerning the arbitrator’s jurisdiction to decide an issue.
The plaintiff, Ciano, sought a court order declaring that the arbitration clause in an agreement between it and the defendant, Skylink, did not survive the agreement’s termination. The agreement contained a “survival provision,” which specified certain clauses that would continue after the termination of the agreement, but the arbitration clause was not included among the clauses listed. Ciano argued that the omission of the arbitration clause reflected the specific intention of the parties to ensure that the arbitration clause would be inoperable post-termination.
The Ontario Court of Appeal affirmed the decision of the lower court to decline to make a determination as the operability of the arbitration clause. It considered the language of the agreement and decided that the divergent conclusions suggested by the parties – that the arbitration clause survived the termination, and that the termination clause did not survive the termination – were both “arguable” in the circumstances. It concluded that “where it is unclear if the arbitrator has jurisdiction, it is preferable to leave the issue to the arbitrator pursuant to the competence-competence principle.”
B.2 BC Supreme Court Declines to Pre-Empt Tribunal
In African Mixing Technologies (PTY) Limited v. Canamix Processing Systems Ltd.,42014 BCSC 2130. the British Columbia (BC) Supreme Court declined an application for interim relief and referred the issue of whether to grant interim relief to the arbitrator to decide.
The plaintiff, PTY, requested interim injunctive relief against the defendants. The plaintiff and defendants were parties to an agreement that included a mandatory arbitration clause. The plaintiff argued that the BC Supreme Court had jurisdiction to grant the relief requested pending the final resolution of the matter by arbitration and that irreparable harm would result if the BC Supreme Court did not grant such relief. The defendants argued that the matter was governed by the mandatory arbitration provision and that granting interim injunctive relief would have the effect of pre-empting a final decision by an arbitrator.
The BC Supreme Court concluded that it had residual authority to grant interim relief pursuant to Section 9 of the BC International Commercial Arbitration Act, but that such authority was limited to instances where the interim relief is unavailable under a contractual or statutory scheme. As interim relief was contemplated by the arbitration clause in this instance, this was not a circumstance where the court ought to exercise its residual authority.
The court also drew on an earlier decision of the Supreme Court of Canada (BMWE v. Canadian Pacific Ltd.5[1996] 2 SCR 495 (SCC).) in support of the principle that interim relief, even in instances where the court has the proper authority to order it, should be applied sparingly. In this instance, the court agreed with the defendant that granting the interim relief would have significantly prejudiced the defendants by pre-empting a future decision of an arbitrator on the matter. This case suggests that Canadian courts may increasingly decline to rule on interim relief where the parties have given the arbitrator(s) the power to grant such an award.
B.3 Stay in Favor of Arbitration Must Be Requested at the Outset
In T. Films S.A. v. Cinemavault International Inc.,62015 ONSC 937 (Div. Ct.) the Ontario Divisional Court declined to stay an application for arbitration because the party requesting arbitration failed to make that request in its first statement on the substance of the dispute, as required pursuant to Article 8(1) of the Model Law.
The appellant, Cinemavault, brought a motion to stay an application against it in favor of arbitration, pursuant to an arbitration clause in the agreement between the parties. However, Cinemavault had earlier filed a comprehensive reply to the action made against it that, while listing several grounds of relief, made no reference to arbitration or the arbitration provision. T. Films, the respondent, argued that the subsequent request for arbitration was in contravention of Article 8(1) of the Model Law, which requires that a party requesting arbitration do so “not later than when submitting his first statement on the substance of the dispute.”
The Ontario Divisional Court agreed with the respondent. It was satisfied that the appellant, by filing a substantive submission with the court, had demonstrated that it had turned its mind to the issue and submitted to the court’s jurisdiction. It could not subsequently change course and request that the matter then proceed to arbitration. This case is a reminder that if a party wishes to enforce an arbitration clause, it must do so at the outset of the dispute resolution process.
B.4 Adjournment and Security Pending Annulment Proceeding
In Empresa Minera Los Quenuales S.A. v. Vena Resources Inc.,72015 ONSC 4408. the Ontario Superior Court adjourned a recognition and enforcement application pending the outcome of an annulment proceeding targeted at the arbitral award in question. The Court ordered the respondent to post security until such time as the annulment proceeding was completed.8The Award was for US$2.3 million, and the respondent was required to post C$250,000 in trust.
The applicant, Empresa, sought an enforcement application in Ontario for an arbitral award rendered in Peru. Concurrently, the respondent, Vena, had commenced an application to annul the arbitral award in Peru. Peruvian law does not bar a party from seeking enforcement where the adverse party has proceeded with an annulment proceeding against the underlying arbitral award. Nevertheless, Vena requested that the Ontario application be adjourned until such time as the outcome of its annulment application in Peru was determined.
The Ontario Superior Court considered the balance of convenience between the parties, giving significant weight to the financial strength of the applicant and the financial insecurity of the respondent. It determined that proceeding with the Ontario application would prejudice the respondent more than an adjournment would prejudice the applicant. Consequently, it decided to adjourn the enforcement proceeding and ordered that security be posted in the amount of C$250,000, an amount the court described as follows: “…not so substantial that it will cripple Vena, nor should it pose an insurmountable obstacle. This amount will also show good faith on Vena’s behalf that it does everything it can do to ensure that the annulment decision is rendered as soon as possible.”
The court arrived at that figure, despite the applicant seeking security in the full amount of the award (US$2.3 million) by “[c]onsidering the state of the annulment proceeding in Peru, the likelihood of success of this proceeding, Vena’s financial situation, and LQ’s financial situation.” This case demonstrates the court’s willingness to carefully fashion an “appropriate” outcome aimed at balancing a variety of countervailing factors.
C. Costs In International Arbitration
C.1 Allocation of Costs
In international arbitration, since the Model Law makes no provision for costs, regard must be had to the contract, the arbitration agreement, any rules agreed to by the parties, or, if necessary, the lex arbitri as to the allocation of costs.
Costs generally follow the event in this jurisdiction, with the unsuccessful party being ordered to pay the costs of the successful party. While tribunals have unfettered discretion in awarding costs in Canada, general principles lend some predictability to the allocation of costs awards. For instance, it is uncommon for a tribunal to order a cost award in the full amount of the costs incurred by the party awarded costs.
C.2 Security for Costs
Tribunals may, in an award, ruling, order or decision, make a provision for interim measures of protection, which can include, among other things: the payment of security for costs; the posting of security for the amount claimed; and the preservation of property that is the subject matter of the dispute.
Either party may move before the tribunal to request security for costs where there is a reasonable concern that the other party may not subsequently pay the costs ordered against it. One scenario includes such instances where the other party is a foreign entity and has insufficient assets in the country to cover costs awards.
C.3 Recovery of Costs
There is no strict rule as to the type of costs that may recovered in this jurisdiction. The principal consideration, as espoused in many rules of arbitration and more broadly in the legal system of this jurisdiction, is the “reasonableness” of the costs. Assessing reasonableness requires a contextual approach. Nevertheless, the following comprise some of the more common cost categories: outside counsel time charges; expert and professional fees related to reports and opinions produced by such persons; travel costs; and office expenses.
Tribunals will consider some or all of the following factors in determining the reasonableness of costs:
• the complexity of the matter, both legal and factual;
• the actual time and disbursements incurred by counsel
• the importance of the issues to one party or the other;
• the conduct of any party that tended to shorten or to lengthen unnecessarily the duration of the arbitration;
• any offers to settle;
• the concept of proportionality, which includes at least two factors:
• the amount claimed and the amount recovered in the arbitration; and
• the amount of costs that an unsuccessful party could reasonably expect to pay in relation to the step in the proceeding for which costs are being fixed.
Proof of disbursements (e.g., invoices, receipts) are required for all costs a party seeks to have reimbursed. Proving reasonableness may require further documentation. For instance, letters of engagement with experts may be produced to show that the scope of their investigation was appropriately determined.
Costs are generally awarded on one of three bases: on a partial indemnity basis; on a substantial indemnity basis; and on a full indemnity basis. Partial indemnity cost awards, as the name suggests, are costs awards that are less than the actual costs incurred. Substantial indemnity cost awards are for a greater portion of the actual costs incurred, and are often calculated as being one-and-a-half times the partial indemnity costs in the circumstances. Full indemnity costs awards are for the entirety of the costs incurred. Full indemnity costs awards are awarded much less frequently than the other two.
The three bases are often applied in a dynamic manner, with general principles having developed as to the sort of situations that may trigger awarding costs pursuant to one scale rather than another.
For instance, the Ontario Rules of Civil Procedure provide that if a moving party offers to settle and the other party declines to settle, and the moving party obtains a judgment that is favorable or more favorable than the settlement offer, then the plaintiff is entitled to partial indemnity costs until the date the settlement offer was made and substantial indemnity costs from that date onwards. Tribunals may apply a similar analysis.
While the existence of a contingent fee arrangement is acceptable, such an arrangement is a private contract between the claimant and its counsel and is unlikely to sway a tribunal from its routine analysis, which is how much of the cost is reasonably chargeable to the respondent in the circumstances.
The state of the law regarding third party funding is less settled. There is no prohibition on third party funding for class actions in this jurisdiction, but the law is in flux regarding third- party funding in other types of court cases. While there are no reported cases dealing with third party funding and arbitration, there is also no prohibition on third party funding of arbitration cases.
The more relevant question for the recovery of costs provided by a third party funder is whether the tribunal has jurisdiction to permit recovery of the additional costs incurred by the claimant over and above the actual cost for its legal representation. Third party financing should be treated no differently than any other financing cost, whether from an established banking line of credit or other form of funding. Third party funders do not supply the legal services, and the tribunal normally only considers the costs for legal representation, absent any additional costs incurred by financing the arbitration.
Sometimes, parties to a contract may agree, in advance of the dispute or in the arbitration agreement, how costs should be divided, thus taking away the power of the tribunal to award costs. It is unlikely that parties will ever agree on how costs should be divided after a dispute has arisen, but if they did, the tribunal would be bound by that agreement.
It is not possible for the arbitrator to impose a cap on the amount a party may spend in an arbitration, but it is possible to limit the recoverable costs with a costs cap. There is no specific arbitration legislation in this jurisdiction similar to Section 65 of the English Arbitration Act, which specifically gives such a power to the arbitrator. However, the general view is that an arbitrator has such power under the tribunal’s general case management power and the obligation to see to it that the parties are treated fairly and equally.
If an arbitrator were to impose a cap, he or she would, presumably, in exercising his or her discretion, follow the Chartered Institute of Arbitrators Guideline 9, including the necessity to fully understand the issues and to make the order well in advance of either party incurring the costs to be capped.