Exemptions to a tribunal’s authority to determine its own jurisdiction and the scope of arbitration clauses

In the recent case of Orica Canada Inc. v ARVOS GmbH [Orica], the Alberta Court of King’s Bench considered two issues which frequently arise in arbitration disputes:

1. a tribunal’s authority to determine its own jurisdiction, often referred to as the “competence-competence principle”; and
2. the interpretation of arbitration clauses to determine whether a particular claim, in this case an indemnity claim, fell within the scope of the parties’ agreement to arbitrate.

In doing so, the Court affirmed the recognized exceptions to the competence-competence principle as set out by the Supreme Court of Canada in the 2022 case Peace River Hydro Partners v PetroWest Corp. [Peace River] and the 2020 case Uber Technologies Inc. v Heller [Uber]. The Court further found that statutory based claims, such as claims brought under the Tort-Feasors Act [TFA], may not fall under an arbitration clause as they are routed in statute rather than contract.

Background

In Orica, Arsopi, Industries Metalurgicas arlindo S. Pinho, S.A. and Arsopi-Industrial Metalurgicas (collectively “Arsopi”) applied to stay or dismiss the Third Party Claim issued against them by the Defendant, ARVOS GmbH (“Arvos”), on the basis that the claims at issue in the Third Party Claim were subject to a dispute resolution clause under the agreement between Arsopi and Arvos (the “Agreement”), which required the claims to be resolved by an arbitration in Germany, and subject to German law.

The claims advanced by Arvos in the Third Party Claim were classified by the Court as (a) an indemnity claim under the TFA based on a duty of care allegedly owed by Arsopi to Orica Canada and Orica International Pte Ltd. (collectively “Orica Int.”), the Plaintiff in the underlying action (the “Indemnity Claim”); (b) a tort claim between Arvos and Arsopi (the “Tort Claim”); and (c) a breach of contract claim between Arvos and Arsopi (the “Contract Claim”).

Orica Int. was not a party to the Agreement, and the dispute in the underlying action between Orica Int. and Arvos was not otherwise subject to the arbitration clause.

Tribunal’s Authority to Determine its Own Jurisdiction (Competence-Competence Principle)

The competence-competence principle is a general proposition that arbitration tribunals should be allowed to exercise their power to rule first on their own jurisdiction. In practice, this means that a challenge to a tribunal’s jurisdiction should generally be decided at first instance by the tribunal, rather than the courts. The competence-competence principle, however, is not absolute.

Adopting the Supreme Court of Canada’s findings in Peace River and Uber, the Court in Orica found that the court may elect to hear a challenge to the arbitrator’s jurisdiction where:

1. the challenge involves pure questions of law, or questions of mixed fact and law requiring only “superficial consideration of the evidentiary record;”
2. there is genuine challenge to the arbitration tribunal’s jurisdiction and there is a risk that issues of jurisdiction may never be resolved by the arbitration tribunal.

The Court went on to find that both exceptions applied in Orica, such that the competence-competence principle could not be exercised, and the Court was authorized to determine the issues on the merits.

With respect to the first exception, the Court found that although it was necessary to make a factual finding with respect to the German law submitted into evidence, that evidence was not in dispute, therefore only superficial consideration of the evidentiary record was required. With respect to the second exception, the Court found that there was a genuine challenge to the arbitration tribunal’s jurisdiction and that there was a real risk that the jurisdictional challenge would not be heard by the arbitration tribunal if the matter were stayed, as the limitation periods applicable to the commencement of an arbitration in Germany had likely passed.

Causes of Action Outside Scope of Arbitration Agreement

In considering the challenge on its merits, the Court applied Section 10 of the International Commercial Arbitration Act [ICAA], which, like most domestic arbitration statutes, requires the court to stay court proceedings when the matters before the court are properly subject of an arbitration.

The Court applied Section 10 of the ICAA to the three categories of claims advanced by Arvos in the Third Party Claim and stayed the court proceedings with respect to the Tort Claim and the Contract Claim, finding that both disputes arose from the Agreement and were therefore subject to German law and the arbitration clause, as specified therein. In contrast, the Court declined to stay the court proceedings with respect to the Indemnity Claim, finding that the Indemnity Claim could not fall within the scope of the arbitration clause under the Agreement as the Indemnity Claim was based on the allegation that Arsopi owed a duty of care to Orica Int., and Orica Int. was not a party to the Agreement. The Court concluded that the authority for the Indemnity Claim was the TFA, and the claim was therefore based in Alberta law and should be determined by a Canadian court.

Practical Takeaways

Orica provides a helpful summary of the court’s approach to competence-competence challenges and confirms that, despite overlapping issues or facts, only those claims that fall squarely within the scope of an arbitration clause will be stayed pending arbitration.  However, Orica also opens the door for a potential increase in bifurcated claims by carving out an exception for claims advanced under the TFA, which likely will be argued should be extended to other statutory based claims.

Should you have any questions, please do not hesitate to reach out to a member of Miller Thomson’s Construction Litigation Group.