CANADA

Matthew Latella and Christina Doria

A. LEGISLATION AND RULES[1]

A.1       Legislation

International arbitration in Canada is, for the most part, a matter of provincial jurisdiction. Each province and territory has enacted legislation adopting the UNCITRAL Model Law, occasionally with slight variations, as the foundational law for international arbitration. Canada’s federal parliament has also adopted a commercial arbitration code based on the UNCITRAL Model Law, which is applicable when the federal government or one of its agencies is a party to an arbitration agreement or where a matter involves an area of exclusive federal jurisdiction under Canada’s constitution. In addition, each of the provinces and the federal government has adopted the New York Convention.

In 2014, the Uniform Law Conference of Canada (ULCC) adopted an amended Uniform International Commercial Arbitration Act (“Uniform Act”), updating Canada’s laws relating to international commercial arbitration in accordance with the 2006 UNCITRAL Model Law amendments. The amended Uniform Act is open for adoption into federal and provincial legislation.

To date, two Canadian provinces have adopted the 2006 amendments to the UNCITRAL Model Law, which offer a more flexible interpretation of some of the more rigid requirements of the New York Convention. In 2017, Ontario adopted the amendments with the International Commercial Arbitration Act[1] (“Ontario ICAA”). British Columbia followed suit in 2018, amending its International Commercial Arbitration Act[2] (“BC ICAA”). Whereas Ontario attached the UNCITRAL Model Law as a schedule to the Ontario ICAA, British Columbia incorporated the 2006 amendments directly into the BC ICAA along with other developments, including a higher threshold to successfully challenge an arbitrator and broad powers for tribunals to grant interim measures and preliminary orders. Ontario and British Columbia are two of 35 jurisdictions worldwide that have incorporated the 2006 amendments to the UNCITRAL Model Law.

The legal framework for investor-state arbitration in Canada is evolving. Canada is a party to 38 BITs, known as Foreign Investment Promotion and Protection Agreements, which contain investor-state arbitration provisions. On 1 July 2020, the United States-Mexico-Canada Agreement (USMCA) came into effect. Ratified by the United States, Canada, and Mexico, the USMCA is the successor to the North American Free Trade Agreement (NAFTA). Chapter 14 of the USMCA phases out the investor-state dispute resolution process between the United States and Canada that was contained in Chapter 11 of NAFTA. The USMCA also restricts access to international arbitration for most foreign investors who are not a party to a “Covered Government Contract.” Most foreign investors must exhaust their remedies in local courts before initiating arbitration. Canada is a party to the Canada-European Union Comprehensive Economic Trade Agreement (CETA) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), both of which contain provisions for investment arbitration.

A.2       Institutions, Rules and Infrastructure

Canada remains a jurisdiction that strongly supports international arbitration, making major Canadian cities like Toronto, Vancouver, Calgary, Ottawa, and Montreal a welcome “seat” of arbitration. Canadian organizations such as the Toronto Commercial Arbitration Society (TCAS), the Western Canada Commercial Arbitration Society (WCCAS) and Young Canadian Arbitration Practitioners (YCAP), and the Chartered Institute of Arbitrators Canada Branch (CIArb) are dedicated to the continued awareness and promotion of arbitration. The Canadian Arbitration community held its inaugural ‘Canada Arbitration Week’ in September 2020.

Canada is distinct in having a dual heritage of common law and civil law (in the province of Québec). Canada offers highly regarded international arbitrators and experienced arbitration counsel. It has excellent hearing facilities, quality interpretation and translation services, modern and efficient transcription services, and highly qualified experts. It also has a stable political system and reasonable visa entry requirements.

 Local arbitration institutions in Canada include ADR Chambers, the ADR Institute of Canada (ADRIC), ICDR Canada, and the Vancouver International Arbitration Centre. Canada has also attracted the presence of renowned international institutions, which have partnered with Arbitration Place, a hearing venue with resident arbitrators in Toronto and Ottawa. These include the CPR, ICDR, the ICC International Court of Arbitration, ICC Canada, and the LCIA.

Canadian practitioners, arbitrators, organizations, and companies serving the arbitration sector have quickly evolved and adapted to offer virtual hearing services during the Covid-19 pandemic. We expect that virtual services and hearings will continue to play a major role in international arbitration in Canada’s future.

B. CASES

B.1       Supreme Court of Canada finds Uber arbitration clause is unconscionable

In Uber Technologies Inc. v. Heller, 2020 SCC 16 (“Uber v. Heller”), the Supreme Court of Canada upheld the Ontario Court of Appeal’s decision that Uber’s arbitration agreement is invalid and unenforceable, leaving disputes under the clause to be litigated in the courts. The Court re-affirmed the competence-competence principle and the deference generally afforded to arbitrators by the courts while creating an exception to the general rule of arbitral referral.

B.1.1    Background

The case arises from an UberEATS driver, David Heller, and his efforts to bring a class action on behalf of Uber drivers in Ontario against Uber for allegedly violating the Employment Standards Act (ESA). To become a driver for UberEATS, Mr. Heller was required to accept the terms of Uber’s standard form services agreement, which obligated him to resolve any dispute with Uber through mediation and arbitration under the International Chamber of Commerce Rules of Arbitration (ICC Rules). The contract was governed by Dutch law, and the Hague was the seat of arbitration. However, the mediation and arbitration process under the ICC Rules required up-front administrative and filing fees of USD 14,500, plus legal fees and other costs of participation. Mr. Heller makes CAD 400-600 (approximately USD 315-475) per week, and these costs represent most of his income.

B.1.2    Ontario Superior Court Decision

Uber brought a motion to stay Mr. Heller’s proposed class action in favor of arbitration in the Netherlands under the service agreement. The motion judge held that the Court did not have the authority to decide whether the arbitration agreement was valid and stayed the proceeding in favor of arbitration in the Netherlands.

B.1.3    Ontario Court of Appeal Decision

The Ontario Court of Appeal set aside the order of the motion judge, determining that the arbitration agreement was unconscionable because of the inequality of bargaining power between the parties and the improvident cost of arbitration. Uber appealed the decision. The Supreme Court agreed with the Court of Appeal that the arbitration agreement was a classic case of unconscionability and dismissed Uber’s appeal.

B.1.4    Applicable statutory framework: domestic vs. international

The Court first considered which statute governed the dispute. The Ontario ICAA applies to international commercial arbitrations, and the Arbitration Act applies to all other Ontario arbitrations to which the Ontario ICAA does not apply. To determine whether the Ontario ICAA applies, the Court was required to examine the nature of the parties’ dispute rather than the nature of their relationship. The Court held that characterizing the dispute requires the decision-maker to examine only the pleadings, but characterizing the relationship requires consideration of a variety of factors in order to make a finding of fact.

The Court deferred to the commentary on the UNCITRAL Model Law, which revealed that labour and employment disputes are not considered “commercial” and will not be covered by the Ontario ICAA. The Court found that the agreement was not commercial and the domestic Arbitration Act applied.

B.1.5    Determining jurisdiction over the agreement and the competence-competence principle

Section 7 of the Arbitration Act directs courts to stay judicial proceedings when there is an applicable arbitration agreement. However, under section 7(2), a court has discretion to retain jurisdiction and decline to stay the proceedings in five circumstances:

  • A party entered into the arbitration agreement while under a legal incapacity;
  • The arbitration agreement is invalid (emphasis added);
  • The subject-matter of the dispute is not capable of being the subject of arbitration under Ontario law;
  • The motion was brought with undue delay;
  • The matter is a proper one for default or summary judgment.

In this case, the second exception applied. However, the Arbitration Act is silent on what principles the courts should consider in exercising their discretion to determine the validity of an arbitration agreement under section 7(2). Under the Dell Computer Corp. v. Union, des consommateurs 2007 SCC 34 (“Dell”) framework, the degree to which courts are permitted to analyze the evidentiary record depends on the nature of the jurisdictional challenge. The Dell test requires a court to refer all challenges of an arbitrator’s jurisdiction to the arbitrator unless they raise:

  • Pure questions of law, or
  • Questions of mixed fact and law that require “only a superficial consideration of the documentary evidence in the record.”

The Dell framework respects the competence-competence principle, which considers arbitrators competent and having jurisdiction to determine their own jurisdiction.

B.1.6    Access to Justice: a novel exception to the rule of arbitral referral

The Court acknowledged that Uber v. Heller raised an accessibility issue not contemplated in Dell, which justified a departure from the general rule of referral to arbitration. Dell presumes that if the court does not decide a jurisdictional issue, the arbitrator will do so.

This case presented a novel scenario as there was a real possibility that the validity of the arbitration clause would not be resolved, and the arbitration would not proceed if the Court did not decide the case. This would raise access to justice problems that the Ontario legislature could not have intended when giving the courts the power to refuse a stay.

In light of this, the Court created an exception to the general rule of arbitral referral. The exception applies where arbitration is fundamentally too costly or otherwise inaccessible, such that staying the action in favor of arbitration would be tantamount to denying substantive relief. The exception applies where:

  • Assuming the pleaded facts to be true, there is a genuine challenge to arbitral jurisdiction; and
  • Based on supporting evidence, there is a real prospect that if the stay is granted, the challenge may never be resolved by the arbitrator.

The parties’ agreement, in this case, was a contract of adhesion, and the terms could not be negotiated by Mr. Heller. The Court found that Mr. Heller made a genuine challenge to the validity of the arbitration agreement and that the prohibitive fees meant resolution of the claims may never occur. The Court determined it would resolve the arguments against the validity of Uber’s arbitration agreement rather than refer them to arbitration in the Netherlands.

B.1.7    Validity of the agreement: unconscionability and access to justice

This decision expands the scope of the doctrine of unconscionability in Canada. As the Court held, the doctrine’s purpose is to protect those who are vulnerable in the contracting process from loss resulting from an unfair bargain. Uber argued for a more stringent threshold for unconscionability, which the Court rejected on the grounds that it would be formalistic and less equity-focused. The Court reiterated the test for unconscionability as:

  • An inequality of bargaining power, stemming from some weakness or vulnerability affecting the claimant; and
  • A resulting improvident bargain.

Further, the Court noted that a party knowingly or deliberately taking advantage of another’s vulnerability may provide strong evidence of inequality of bargaining power. Still, it is not essential for a finding of unconscionability.

The Court found clear inequality of bargaining power and improvidence of the arbitration clause between Uber and Mr. Heller. The reasoning was based on the fact that the agreement effectively bars Mr. Heller from advancing any legal claim against Uber and that the clause operated “to defeat the very claims it purports to resolve.” The Court found this to amount to undue hardship and undermining the rule of law. The arbitration agreement was found to be unenforceable. The Court dismissed the appeal and affirmed the Court of Appeal’s decision.

B.1.8    Impact of decision

This decision is an important application of the doctrine of unconscionability in the modern context, where standard form contracts dominate the gig economy. The Court likened Uber drivers with consumers as “individuals at the mercy of the terms, conditions, and rates of service set by Uber,” whose only option is to click “I agree” to the terms of the contractual relationship that are presented to them.

In Forest Hill Homes (Cornell Rouge) Limited v. Wei 2020 ONSC 5060, the court emphasized that Uber had brought the doctrine of unconscionability “from the backburners to the forefront of contract law,” reflecting that, in this day and age, often the freedom of parties to negotiate their own terms is impaired because one party simply has the market power to demand whatever it wants. Uber v Heller has determined that where a party has such power, the law will ensure that it has not been used unfairly to force an improvident bargain on a weaker party.

It is debatable that this decision will have a significant direct impact in true commercial arbitration cases under the Ontario ICAA, which is based on the 2006 Model Law. However, companies should seek advice when reviewing their arbitration clauses, in particular for online contracts of adhesion.

B.2       British Columbia Court of Appeal finds that receivers in bankruptcy can enforce contracts without being bound by arbitration agreements

In Petrowest Corp. v. Peace River Hydro Partners,[2] the British Columbia Court of Appeal held that arbitration clauses are separate agreements from the contracts that include them. The doctrine of separability allows for arbitration agreements to be considered as distinct agreements. This doctrine has, for example, meant that contracts remained intact when they contained an arbitration clause that was found to be inoperative. In Petrowest, the separability of arbitration agreements meant that the receiver appointed as part of the bankruptcy was entitled to seek enforcement of several contracts through a single judicial process, even though those contracts each contained separate arbitration agreements.

B.2.1    Background

Petrowest was bankrupt, and an accounting firm was appointed as receiver under Canada’s federal Bankruptcy and Insolvency Act (BIA).[3] The receiver commenced an action to recover payments owed to Petrowest by several of Petrowest’s affiliates. The amounts owing to Petrowest were governed by several different contracts, each of which contained an arbitration agreement. The receiver brought an action to allow recovery of the payments via a single judicial process rather than through the various arbitration processes stipulated in the contracts.

Petrowest’s affiliates applied for a stay of proceedings based on British Columbia’s Arbitration Act.[4] The Arbitration Act allowed a party to apply to a court to stay legal proceedings when the dispute was governed by an arbitration agreement. The receiver opposed the stay, arguing that Canada’s BIA allowed the court to exercise its jurisdiction and use discretion about whether to stay the proceedings.

B.2.2    The BC Supreme Court Decision

The court of first instance sided with the receiver, saying that a multiplicity of proceedings was inappropriate. A significant amount of money was at stake, multiple arbitral proceedings would be costly, and it was not possible to distribute the bankrupt’s estates until the disputes were resolved. Given the circumstances and the powers afforded by the BIA, the lower court held that a single proceeding was most appropriate, regardless of the arbitration agreements in the various contracts.

B.2.3    The BC Court of Appeal Decision

The British Columbia Court of Appeal reached the same result, though for different reasons. Instead of exercising jurisdiction granted by the BIA, the court held that a receiver who opts to disclaim an arbitration agreement does not meet the requirements for a stay in favor of arbitration as outlined in the Arbitration Act.

A receiver is an officer of the court, and it is, therefore, a different legal entity than a solvent corporation. Unlike a solvent corporation that sues on the basis of a contract, a receiver owes a fiduciary to all stakeholders. A receiver is not bound by the bankrupt entity’s contracts and may instead choose to disclaim those contracts. In this case, the receiver sued based on the contracts but wanted to disclaim the arbitration clauses.

The court held that a receiver can sue to enforce a bankrupt entity’s contracts while also disclaiming the arbitration agreements within those contracts. In Canadian law, the doctrine of separability treats arbitration agreements as separate from the contracts that contain them. The court points to case law to support this point, including the Supreme Court of Canada’s decision in Uber Technologies Inc. v Heller. Canada’s top court said that arbitration clauses are “judicially independent” from the main contract.[5]

The separability doctrine does not mean that receivers are free to pick and choose which elements of a contract to enforce. Arbitration agreements are unique because they can be separated from the main agreement, and receivers can disclaim them even if they choose to enforce the rest of the contract: “it is open to the receiver to disclaim the arbitration agreements notwithstanding that it has adopted the containing contracts for the purpose of suing on them. This flows from the receiver’s particular powers and position, and the separability of the arbitration agreements”.[6]

Because the receiver was free to disclaim the arbitration agreements, the requirements were not met for a stay of proceedings in favor of arbitration. Under the Arbitration Act, the first requirement to stay a proceeding is that the party bringing that proceeding must be a party to the arbitration agreement. The receiver disclaimed the arbitration agreement and therefore was not a party to it. The receiver’s action was allowed to proceed, regardless of the arbitration clauses that were included in the contracts it sought to enforce.

This case is significant because it shows that receivers appointed under the federal BIA may be able to enforce contracts without being subject to the arbitration clauses within them. This outcome depended heavily on the facts of the case. Still, the special judicially-mandated role of a receiver appointed under the BIA will be important to consider when seeking to enforce arbitration clauses in cases of bankruptcy in Canada.

 

[1] Matthew and Christina thank articling students Adam Casey, Tina Yuan, and Brittany Shales for their valuable assistance drafting this chapter.

[2] 2020 BCCA 339 [Petrowest].

[3] RSC 1985, c B-3.

[4] RSBC 1996, c 55. This legislation has since been replaced by Arbitration Act, SBC 2020, c 2, which contains a similar provision at s 7.

[5] Petrowest at para 51, citing Uber Technologies Inc. v Heller, 2020 SCC 16 at para 221.

[6] Petrowest at para 55.

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