Alberta Court of Queen’s Bench Determines Arbitration Must Proceed Under Alberta’s International Commercial Arbitration Act

In Toyota Tsusho Wheatland Inc v Encana Corporation[1], the Alberta Court of Queen’s Bench dealt with the tension between the contractual autonomy of international parties to deal with disputes, the interests of and potential prejudice to unrelated third parties, and the Court’s desire to avoid a multiplicity of proceedings and the potential for inconsistent results.

In dismissing two different stay applications and coming to the conclusion that both a superior court action and international arbitration could proceed simultaneously, the Court made a number of findings which could be of interest to parties seeking relief through international arbitration while also involved or contemplating related domestic court proceedings.

Background

In April 2012, Toyota Tsusho Wheatland Inc. (“TTWI”) and Encana Corporation (“Encana”) entered into binding contracts which included (i) a New Royalty Conveyance Agreement (the “NRCA”), (ii) a Royalty Agreement (the “Royalty Agreement”), and (iii) a Royalty Extension Agreement (“REA”).

The Royalty Agreement expressly provided that no party would dispose of all or any portion of the subject royalty, the royalty lands, or any interest in the Royalty Agreement without "the prior consent in writing of the other Party, which shall not be unreasonably withheld".[2]

Both the Royalty Agreement and the REA contained an arbitration clause directing the parties to binding arbitration in the event of a “Dispute”.

Section 6.04 of the Royalty Agreement, however, also expressly provided that:

[Encana] agrees and irrevocably consents to the granting of an order by the Court of Queen’s Bench of Alberta requiring [Encana] to specifically perform its obligations set forth in this Agreement, and to a mandatory injunction compelling [Encana] to perform such obligations.[3]

In November 2013, Encana began laying the framework for a corporate restructuring that would see its title in the royalty lands transferred to a newly formed and (and at that time) wholly owned subsidiary, PrairieSky Royalty Ltd. (“PrairieSky”).  No signed agreement, permission, or consent from TTWI regarding the proposed transfer was ever obtained.

In May 2014, Encana transferred its title in the royalty lands to PrairieSky and, from May to September 2014, divested its entire interest in PrairieSky through a series of public offerings.

As a result of Encana's alleged failure to remedy breaches of the REA and the Royalty Agreement, TTWI terminated the REA in August of 2015.

In September 2015, TTWI filed a Statement of Claim in the Alberta Court of Queen’s Bench (the “Action”) against Encana and PrairieSky for, among other things, specific performance of the Royalty Agreement.  In October 2015, TTWI also commenced arbitration proceedings against Encana seeking, among other things, a declaration that its termination of the REA as a result of Encana’s transfer of its title in the royalty lands to PrairieSky was valid and effective (the “Arbitration”).

In November 2015, Encana applied, pursuant to the International Commercial Arbitration Act, RSA 2000, c I-5, as amended (the “International Act”) to stay the entire Action, including TTWI’s claims against PrairieSky pending the determination of the Arbitration, and to refer TTWI’s claims against Encana in the Action to the Arbitration.  Encana also alleged that the International Act applied to the Arbitration.

PrairieSky subsequently filed a cross-application, opposing Encana’s application to stay all or any portions of the Action and seeking to have the Action proceed.  PrairieSky also asked the Court to stay the Arbitration with respect to issues that were common to those in the Action. In contrast to Encana, PrairieSky alleged that the Alberta Arbitration Act, RSA 2000 c A-43, as amended (“Domestic Act”) was the applicable governing legislation.

TTWI agreed with Encana that the International Act governed but opposed both stay applications and submitted that both the Arbitration and the Action should proceed as it was seeking different relief in each proceeding that was not available to it in the other proceeding, namely specific performance in the Action (including against PrairieSky who was not party to any of the aforementioned agreements or the resulting Arbitration) and a claim for contractual breach against Encana which was subject to Arbitration.

Decision

In dealing with Encana and PrairieSky’s stay applications, the Alberta Court of Queen’s Bench determined that:

  • The claims advanced against Encana in the Action should be referred to arbitration, except for the remedial relief sought pursuant to clause 6.04(e) for specific performance of Encana’s obligations under the Royalty Agreement.
  • The Action should be stayed against Encana only, pending the determination of the Arbitration. The Action against PrairieSky may proceed, including any third party proceedings that may be commenced by PrairieSky against Encana.
  • PrairieSky’s application to stay the Arbitration should be dismissed.[4]

The International Act Applied

In coming to its decision, the Court first determined that the International Act governed the Arbitration as it was an “international arbitration” as expressed in Article 1(3)(a) of the Model Law because Encana and TTWI had their places of business in different States when the Royalty Agreement was entered into.  The Court determined that TTWI’s “place of business” for the purposes of Article 1(3)(a) of the Model Law was the place where relevant business decisions were made, which was Tokyo, Japan or Houston, USA.  The Court rejected PrairieSky’s arguments that a place of business could be determined by (i) a place of incorporation, (ii) an extra-provincial registration, (iii) or a contractual representation that a party is entitled or authorized to carry on business in a particular jurisdiction.

Neither the Arbitration or the Action Should be Stayed

In determining that the Arbitration should not be stayed, the Court noted that the potential for judicial discretion and intervention - such as ordering a stay of the Arbitration - was severely limited under the International Act (even more so than the Domestic Act) and that disputes subject to arbitration under the International Act must always be referred to arbitration, unless the arbitration agreement was null and void, inoperative, or incapable of being performed. The Court confirmed that this was the case even where the interests of third parties not involved in the arbitration agreement were a consideration.

The Court also determined that under a proper interpretation of s. 6.04(e) and the arbitration clause of the Royalty Agreement, while the Action should continue as against PrairieSky, claims against Encana, with the exception of the claim for specific performance which was expressly contemplated by s. 6.04(e) of the Royalty Agreement, should be referred to the Arbitration.

With respect to the claim in the Action for specific performance against Encana, the Court held that it was necessary for an arbitrator to first determine the scope of Encana’s obligations under the Royalty Agreement and whether it was in breach of the Royalty Agreement before TTWI could seek specific performance of that agreement against Encana before the Court.

Comment

This decision suggests a clear deference by courts, at least in Alberta, to the dispute resolution choices made in a party’s contractual agreements and the continuing requirement for the clear and careful drafting of such clauses.  The Court highlighted both the necessity of continuing any existing arbitration under the International Act once it was determined that the International Act applied, as well as allowing related court proceedings against third parties to go ahead, at least as against those third parties.  The practical effect of this decision is arguably that while no party will be required to address a litany of identical claims against it in two different proceedings at the same time, each party will be entitled to have its disputes addressed as quickly and efficiently as possible in whatever legitimate forum is most appropriate.

For more information on this decision or on any issue related to applications to stay international or domestic arbitration proceedings, please contact Neil Finkelstein of McCarthy Tetrault’s Toronto office or Doug Yoshida of McCarthy Tetrault’s Calgary office, both of whom represented TTWI in Toyota Tsusho Wheatland Inc v Encana Corporation.

[1] Toyota Tsusho Wheatland Inc v Encana Corporation, 2016 ABQB 209

[2] Ibid, at para 10.

[3] Ibid, at para 55.

[4] Ibid, at para. 90.

Alberta deference Encana parallel claims

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