My Choice of Forum? Not So Fast, When Arbitration Is An Option

What happens when there are two distinct, mandatory, and contradictory provisions in an agreement for dispute resolution?

The Ontario Superior Court of Justice recently provided clarity in Bakaris v. Southern Sky, 2020 ONSC 7306, as to how parties ought to proceed when their agreements require that disputes both be arbitrated and be brought before the courts.

Facts

In 2018, Nick Bakaris, an entrepreneur working and residing in Zimbabwe, entered into a memorandum of agreement (the “MOA”) with Southern Sun Pharma Inc. (“Southern Sun”), a British Columbia holding company whose subsidiaries produce, market and sell cannabis in the African market.[1] Under the terms of the MOA, Mr. Bakaris agreed to obtain a licence on behalf of a Zimbabwean corporation to cultivate and sell medical cannabis in Zimbabwe. In exchange for obtaining this licence, Mr. Bakaris would receive a 10% shareholding of Southern Sun.[2]

A dispute arose between Mr. Bakaris and Southern Sun, which resulted in Southern Sun terminating the MOA. Mr. Bakaris subsequently commenced an application in the Ontario Superior Court of Justice to enforce his rights under the MOA.[3]

Southern Sun brought a motion for a stay of proceedings under the International Commercial Arbitration Act,2017, S.O. 2017, c-2, Sched. 5 (the “ICAA”). The basis for Southern Sun’s motion stems from two provisions in the MOA, s. 24 (Dispute Resolution) and s. 26 (Jurisdiction):

DISPUTE RESOLUTION

24.1. Should any dispute, disagreement or claim arise between the parties (hereinafter referred to as the "Dispute") concerning this Agreement, the Parties shall try to resolve the Dispute by negotiation. This entails that the one party invites the other in writing to meet and to attempt to resolve the Dispute within 7 (seven) days from date of the written invitation.

24.2. Failing a resolution under clause 24.1 above, the Dispute shall be referred to and finally resolved by arbitration under the London Court of International Arbitration, Arbitration Rules, which Rules are deemed to be incorporated by reference into this clause. […]

JURISDICTION

26. Each party irrevocably agrees that the courts of Canada shall have nonexclusive jurisdiction to settle any dispute or claim arising out of or in connection with this Agreement or its subject matter or formation (including non-contractual disputes or claims).[4][emphasis added]

Issue

The issue to be determined by the Ontario Superior Court of Justice was whether the application should be stayed in favour of arbitration, or whether the conflicting provisions in the MOA gave Mr. Bakaris the right to choose his preferred forum.

The Decision

Justice Dietrich began by reviewing the relevant provisions of the ICAA and the Model Law on International Commercial Arbitration (“Model Law”).

Under Article 8 of the Model Law, where court proceedings are brought with respect to a matter that is the subject of arbitration, the court shall refer the parties to arbitration unless certain exceptions apply.[5] The test to demonstrate whether a dispute falls under arbitration provisions is “not onerous”,[6] as held in Dalimpex Ltd. v. Janicki (2003), 64 O.R. (3d) 73 (C.A.):

[I]t is not for the court on an application for a stay of proceedings to reach any final determination as to the scope of the arbitration agreement or whether a particular party to the legal proceedings is a party to the arbitration agreement, because those are matters within the jurisdiction of the arbitral tribunal. Only where it is clear that the dispute is outside the terms of the arbitration agreement, or that a party is not a party to the arbitration agreement, or that the application is out of time should the court reach any final determination in respect of such matters on an application for a stay of proceedings.

Where it is arguable that the dispute falls within the terms of the arbitration agreement or where it is arguable that a party to the legal proceedings is a party to the arbitration agreement then, in my view, the stay should be granted and those matters left to be determined by the arbitral tribunal.[7]

Here, the parties agreed that there was a mandatory arbitration provision which was valid. The question was instead which of the two mandatory provisions – s. 24 referring the dispute to arbitration, or s. 26 referring the dispute to the Canadian courts – applied.

Mr. Bakaris argued the dispute should be litigated in the Ontario court system. In his submission, the commercially sensible result was to proceed in an Ontario court because there is a real and substantial connection among Ontario, the parties and the dispute, and Ontario is the most convenient forum.[8] Southern Sun argued that the dispute should be arbitrated before the London Court of International Arbitration given the mandatory language of s. 24.[9]

Justice Dietrich noted that when determining how a dispute should be dealt with under the MOA, the parties had specifically turned their minds to arbitration, and included in the MOA a number of specific conditions relating to same. Her Honour wrote:

[29] They agreed to a framework, including the number of arbitrators (one), the arbitral seat (England) and the language of the arbitration (English), and specifically chose the London Court of International Arbitration for this purpose. They also addressed issues of confidentiality, interlocutory court orders and finality. I find that it is certainly arguable that the parties intended the Dispute Resolution provisions to apply in the event of a dispute, as opposed to the more general Jurisdiction provision dealing with the non-exclusive jurisdiction of Canadian courts to settle any dispute or claim arising out of or in connection with the MOA.[10]

In light of the relatively low bar set out in Dalimpex, Justice Dietrich “[declined] to reach any final determination as to the scope of the arbitration agreement”,[11] preferring to have the question of jurisdiction decided by the arbitrator itself.

The Court therefore granted Mr. Bakaris’ motion to stay the judicial proceeding in favour of arbitration.

Conclusion

The Bakaris case demonstrates that, even when an arbitration clause may not be exclusive, the competence-competence principle should apply and it is up to the arbitrator(s) to decide on its own jurisdiction. It is only in the clearest of cases – i.e. where (i) the dispute is outside the terms of the arbitration agreement; (ii) the moving party is not a party to the arbitration agreement; or (iii) the application is out of time – that a motion to stay will be dismissed by courts.

This case also follows and confirms the jurisprudence that compels courts to show deference to arbitrators on questions of jurisdiction.

When drafting agreements, it is important for the parties to remember the consequences of including a mandatory arbitration agreement as a means of dispute resolution. Where there are provisions that refer disputes to both the courts and arbitration, it is likely that the matter will be referred to arbitration.

[1]Bakaris v. Southern Sky, 2020 ONSC 7306, at para 1.

[2]Bakaris v. Southern Sky, 2020 ONSC 7306, at para 2.

[3]Bakaris v. Southern Sky, 2020 ONSC 7306, at para 3.

[4]Bakaris v. Southern Sky, 2020 ONSC 7306, at para 16.

[5]Bakaris v. Southern Sky, 2020 ONSC 7306, at para 19.

[6]Bakaris v. Southern Sky, 2020 ONSC 7306, at para 24.

[7]Dalimpex Ltd. v. Janicki (2003), 64 O.R. (3d) 73 (C.A.), at para 21.

[8]Bakaris v. Southern Sky, 2020 ONSC 7306, at para 8.

[9]Bakaris v. Southern Sky, 2020 ONSC 7306, at para 8.

[10]Bakaris v. Southern Sky, 2020 ONSC 7306, at para 29.

[11]Bakaris v. Southern Sky, 2020 ONSC 7306, at para 30.

alternative dispute resolution arbitration commercial arbitration international arbitration

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