Federal Court Clarifies Law on Arbitration Clauses
In General Entertainment and Music Inc. v. Gold Line Telemanagement Inc., 2022 FC 418, the Federal Court clarified the legal test applicable when a party seeks to avoid an arbitration clause.
Background
The parties entered an agreement in 2013 concerning the licensing and broadcasting of intellectual property. An arbitration clause confirmed that “any disputes under this Agreement shall be settled by Arbitration in Bermuda, and each of the parties herby irrevocably submits to the exclusive jurisdiction of Bermuda.” The agreement also permitted either party to terminate the agreement “without cause, at any time, with six (6) months’ notice.” The Plaintiff, GEM Inc., terminated the agreement in 2015 and a dispute arose over amounts owing and certain copyright issues.
In 2021, the Plaintiff commenced an action in the Federal Court of Canada and the Defendant, Gold Line, commenced arbitration in Bermuda. Gold Line brought a motion in the Federal Court to stay the court proceeding in favour of the arbitration. On the motion, the parties agreed that the Court’s discretion on arbitration clauses was governed by Z.I. Pompey Industrie v ECU-Line N.V., 2003 SCC 27. Applying this law, the case management judge dismissed the motion.
The Decision
Justice Fothergill overturned the decision on appeal and stayed the Canadian court proceedings. He held that the case management judge was invited by the parties to apply the wrong legal test, which caused a decision that was incorrect in law.
Pompey concerned only a forum selection clause and provided no guidance with respect to arbitration clauses. The parties tended to use the terms “choice of law clause”, “forum selection clause” and “arbitration clause” indiscriminately, but the terms are not interchangeable and each involves distinct legal considerations. A choice of law clause specifies the law of the contract; an arbitration clause binds the parties to a dispute resolution mechanism crafted through consensual agreement; a forum selection does not determine the mechanism of dispute resolution, but only the forum.
The Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which has been incorporated into Canadian law, provides that courts “shall, at the request of a party, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.” The legal considerations applicable when a party seeks to avoid an arbitration clause by challenging the validity of the agreement and/or the jurisdiction of the arbitrator were established by the Supreme Court in Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34 and further summarized in Uber Technologies Inc v Heller, 2020 SCC 16. Any challenges to the jurisdiction of an arbitrator must first be referred to the arbitrator. Courts should only derogate from this rule when the challenge concerns a question of law alone or where “answering questions of fact entails a superficial examination of the documentary proof in the record and where the court is convinced the challenge is not a delaying tactic.” A “superficial” examination is one where the legal conclusions can be drawn from facts that are either evident on the face of the record or undisputed by the parties.
In this case, Justice Fothergill found the relevant facts were neither evident nor undisputed, but the issues involved complex questions of mixed fact and law (e.g., whether certain companies were distinct legal entities).
The Plaintiff also sought to avoid arbitration by relying on its termination of the agreement in 2015. However, a party cannot escape arbitration by alleging termination of the contract containing the arbitration clause. The doctrine of separability considers an arbitration clause “autonomous and juridically independent from the main contract in which it is contained.” Even if the agreement had been validly terminated, this would not detract from the Court’s duty to “systematically” refer the parties to arbitration.
The Court, citing Uber, explained that an arbitration clause is only null and void where it is “manifestly tainted,” which requires the invalidity of the arbitration agreement to be “incontestable” such that no serious debate can arise about its validity. This must not require anything more than a superficial review of the record.
The decision can be read here.
