Sunday, February 15, 2009

Ontario Court of Appeal Reaffirms Judiciary's "Deferential Approach" to Arbitration

Canada_2 We’re pleased to bring you a special blog post from Antonin I. Pribetic, Litigation Counsel at Steinberg Morton Hope & Israel LLP in Toronto, Canada. 

Last week’s decision by the Court of Appeal for Ontario in Dancap Productions Inc., v. Key Brand Entertainment, Inc., 2009 ONCA 135 (Ont. C.A.) per Sharpe, Armstrong and Watt JJ.A., available online, reaffirms the Canadian judiciary’s “deferential approach” to the principle of competence/competence for arbitral jurisdiction.

The issue on appeal was whether the motion judge erred in refusing to grant a stay on account of arbitration and forum selection clauses in one of the contracts entered into by the respondents “Dancap” and the appellants “Key Brand”.  Dancap and Key Brand executed a preliminary Term Sheet outlining the general terms of a participation agreement related to Key Brand’s acquisition of theatrical assets, including two Toronto theatres. Dancap was to gain an equity position in Key Brand and membership on its board, which included the right to manage the theatres pursuant to separate management agreements yet to be concluded. The parties also entered into an Additional Rights Agreement (“ARA”) which, inter alia, set out the parties’ agreement to negotiate in good faith towards the conclusion of the management agreements.  Following Key Brand’s acquisition of the assets, but prior to the finalization of the management agreements, Key Brand sold the Toronto theatres to the respondent Mirvish Enterprises Limited (“Mirvish”). Dancap immediately threatened proceedings. However, Key Brand won the “race to the courthouse”; a month before Dancap sued in Ontario, Key Branch had already commenced an action in the United States District Court in California for an order compelling Dancap to submit their dispute to arbitration. 

The ARA contained an “entire agreement” clause providing that it “supersedes all prior agreements, negotiations and understandings concerning the subject matter hereof” and that it “shall supplement each of the Management Agreements and the Shareholders Agreement of even date”.  The entire agreement clause further provided that “if there is a conflict between this Agreement and… the Management Agreements, this Agreement shall control and provide [Dancap] with the additional rights granted… under this Agreement.” [at ¶ 13]. The ARA and Shareholders Agreement both contained an arbitration clause requiring that “[a]ny dispute, controversy or claim arising out of or relating to” the agreement (except for equitable claims) be submitted to arbitration “in accordance with the JAMS International Arbitration Rules.  The tribunal will consist of a sole arbitrator.”  The ARA and Shareholders Agreement also contained a forum selection clause providing for the exclusive jurisdiction of the state or United States District courts in California.  However, the Term Sheet was silent on both arbitration and forum selection.

Key Branch then moved for a stay of the Ontario action based upon art. 8(1) of the UNCITRAL Model Law on International Commercial Arbitration, adopted in Ontario by the International Commercial Arbitration Act, R.S.O. 1990, c. I-9. The motion judge dismissed Key Brand’s motion. Morawetz, J. ruled that Dancap’s claims arose solely under the Term Sheet and not under the ARA and that the arbitration and forum selection clauses did not apply. 

he Court of Appeal allowed the appeal and stayed the Ontario action, pending the resolution of the arbitration on the “core issue of whether Key Brand has the right to terminate any management rights to the theatres that Dancap may have obtained under either the Term Sheet or the ARA upon the sale of the theatres.” [at ¶43] Writing for the unanimous Court, Sharpe, J.A., held that:

“[32]  It is now well-established in Ontario that the court should refuse to grant a stay under art. 8(1) of the Model Law where it is “arguable” that the dispute falls within the terms of an arbitration agreement. [Dalimpex Ltd. v. Janicki (2003), 64 O.R. (3d) 737 ( C.A. ), at para. 21, Charron J.A. and Hinkson J.A. in Gulf Canada Resources Ltd. v. Arochem International Ltd. (1992), 66 B.C.L.R. (2d) 113 (B.C.C.A.) internal quotation omitted] . . .

[33]  As Charron J.A. explained in Dalimpex, at para. 22, “a deferential approach” allowing the arbitrator to decide whether the dispute is arbitrable, absent a clear case to the contrary, ‘is consistent both with the wording of the legislation and the intention of the parties to review their disputes to arbitration.’”

Justice Sharpe also relied upon the recent Supreme Court of Canada decision in  Dell Computer Corp. v. Union des consommateurs, which endorsed the “competence-competence” principle, calling for deference to arbitrators to resolve challenges to their jurisdiction [at ¶34, citing Deschamps, J., [2007] 2 S.C.R. 801 (S.C.C.) at ¶84).  The parties consented to the admission of fresh evidence relating to a recent order issued by the District Court in California, which required the parties to submit to arbitration. The Court of Appeal’s deferential approach was not limited to arbitrability. Sharpe, J.A. had no difficulty in extending judicial comity to the U.S. court, without any form of reciprocity requirement, stating:

[36]  It may well be that in the United States , courts do not follow the deferential approach to arbitrability set out in Dalimpex and Dell.  (I note, however, that in the statement of defence Dancap has filed in the arbitration, Dancap maintains that Key Brand’s claims are not arbitrable and reserves the right to argue the point before the arbitrator as well as before the Ninth Circuit Court of Appeals.)

[37]  Whatever the law may be in the United States , I am persuaded that the motion judge erred in ruling on the scope of the arbitration clause rather than leaving the issue to the arbitrator.  While the issue of whether the dispute between the parties is covered by the ARA is by no means free from doubt, for the reasons that follow, I conclude that it is at least arguable that the ARA arbitration clause governs the core issue raised in the action.  That issue was properly identified by the District Court judge as being whether Key Brand has the right to terminate any management rights to the theatres that Dancap may have obtained under either the Term Sheet or the ARA upon the sale of the theatres to Mirvish.

Thanks again to Antonin I. Pribetic, Litigation Counsel, Steinberg Morton Hope & Israel LLP, Toronto, Ontario, Canada

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