Stay denied where dispute fell under oral agreement and outside arbitration clause

Introduction

Although Canadian commercial arbitration legislation is clear that disputes involving subject matter governed by an arbitration clause should be referred to arbitration rather than resolved through court proceedings, courts continue to develop and refine the test for determining whether a particular dispute falls under the scope of an arbitration agreement.

The Commercial Arbitration Act of British Columbia, based on the United Nations Commission on International Trade Law Model Law, requires that a stay be granted only in proceedings governed by an arbitration clause "in respect of a matter agreed to be submitted to arbitration". The recent Supreme Court of British Columbia case of Padmawar v Altig(1) provides a useful summary of the test for determining whether a stay should be granted. The court refused a stay, finding that the dispute fell under a separate oral agreement and not under the written agreement which contained the arbitration clause.

In this case Justice Masuhara cited the recent Supreme Court of Canada decisions in Seidel v TELUS Communications Inc(2) and Dell Computer Corp v Union des consommateurs(3), emphasising that arbitrators are competent to determine their own jurisdiction excluding pure questions of law and certain questions of mixed law and fact, which the court can decide. However, this principle was limited in earlier British Columbia case law, which stated that a final determination of the scope of an arbitration agreement and the parties to the agreement could be determined in a stay proceeding where it is clear that the dispute is outside the terms of the arbitration agreement.(4)

Decision

Padmawar, an insurance agent, brought a claim against his principal for unpaid commissions. He brought the claim under an oral agreement that did not include an arbitration clause, although there was also a written agreement between the parties that contained an arbitration clause. The defendant applied to stay the court proceedings and have the matter referred to arbitration under the written agreement.

The court denied the application for a stay of proceedings pursuant to Section 15 of the Commercial Arbitration Act,(5) despite a written contract between the parties that included an arbitration clause covering "any dispute or disagreement arising out of or relating to this contract". The judge found that the dispute clearly fell outside of the scope of the written contract, allowing him to deny the application for a stay.

In determining that the matter at dispute did not fall under the arbitration agreement, the judge considered:

• the nature of the agreement;
• the words of the arbitration clause;
• the terms of the contract; and
• the factual context.

The judge emphasised that the parties to an agreement containing an arbitration clause cannot be presumed to have agreed to submit all matters which may arise between them to arbitration. This is particularly the case where the parties have entered into more than one agreement governing their relationship and only one of those agreements contains an arbitration clause.

Comment

In British Columbia, a court may determine both the scope of an arbitration agreement and whether it applies to the parties where it is a clear case of inapplicability of the arbitration clause. Padmawar provides further clarification as to what may constitute such a clear case. Disputes arising from relationships that are governed by more than one agreement may be more readily characterised as a clear case if all relevant agreements do not contain an arbitration clause.

The test under Canadian law for when courts can determine jurisdiction extends to cases of mixed fact and law, where only a superficial review of the documentary evidence is required. This is such a case. Of course, the determination of what constitutes a relevant agreement, and whether a particular dispute falls under one contract or another, necessarily involves contemplation of the facts of the case, which may not always be superficial. Where the line will be drawn between determining the scope of the agreement and consideration of facts in clear cases and other cases remains to be seen.

The limited application of the kompetenz-kompetenz principle (ie, that the tribunal is competent to decide its own jurisdiction) in this case may signal a willingness on the part of Canadian courts, or at least British Columbia courts, to be more involved in deciding jurisdiction rather than leaving it to the realm of the arbitration tribunal. Time will tell whether this is a general trend or a limited example – but either way, it flags the issue for clients and lawyers alike to be aware of the scope of the arbitration agreements in place. Where oral agreements are entered into separately from written contracts, the arbitration agreement in the written contract may not cover a dispute arising from a separate oral agreement.

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Endnotes

(1) 2011 BCSC 682.

(2) 2011 SCC 15. For further information please see "Supreme Court of Canada splits on upholding commercial arbitration clause".

(3) 2007 SCC 34.

(4) (1992), 66 BCLR (2d) 113 (CA).

(5) RSBC 1996, c 55.