B.C. – Court of Appeal reasserts need for only an “arguable case” to justify stay of proceedings – #125

In Sum Trade Corp. v. Agricom International Inc., 2018 BCCA 379, the B.C. Court of Appeal upheld a stay of  court litigation in favour of arbitration, reiterating that, unless a party “clearly” establishes that it is not a party to an arbitration agreement, then the other party seeking a stay need only have an “arguable case” that the prerequisites under section 8(2) of B.C.’s International Commercial Arbitration Act, RSBC 1996, c 233 have been met.  The Court noted that, over the years, the prima facie or “arguable case” analysis had been extended from cases involving the validity of arbitration clauses to cases concerning the applicability of such clauses. The Court also cautioned that earlier judicial comments regarding arbitration must be read in light of the increased deference now applied by the courts.

Sum Trade Corp. (“STC”) appealed a December 12, 2017 order staying its court litigation against Agricom International Inc. (“Agricom”) under section 8(2) of the ICAA. A prior ArbitrationMatters note – “B.C. court applies ‘arguable case’ test to stay action based on arbitration clause external to contract” – covered the decision in first instance, Sum Trade Corp. v. Agricom International Inc., 2017 BCSC 2213,  and summarizes the key facts underlying the dispute and issues raised in the court application for the stay. The Court of Appeal outlines the arguments and findings in first instance at paragraphs 2-17 of its reasons.

A key issue faced by the parties when initiating resolution of their dispute was the role of an arbitration agreement included in terms incorporated by reference into their three (3) main contracts. Each included an annotation, at the foot of the material terms stating simply : “Trade Rule Info: GAFTA 88, Incoterms 2010”.

The mention of “GAFTA 88” referred to a particular standard form contract drafted by the Grain and Free Trade Association and which included an arbitration clause:

26(a) Any and all disputes arising out of or under this contract or any claim regarding the interpretation or execution of this contract shall be determined by arbitration in accordance with the GAFTA Arbitration Rules, No. 125, in the addition current at the date of this contract, such Rules are incorporated into and form part of this contract and both parties hereto shall be deemed to be fully cognizant of and to have expressly agreed to the application of such Rules.
(b) Neither party hereto, nor any persons claiming under either of them shall bring any action or other legal proceedings against the other in respect of any such dispute, or claim until such dispute or claim shall first have been heard and determined by the arbitrator(s) or a board of appeal, as the case may be, in accordance with the Arbitration Rules and it is expressly agreed and declared that the obtaining of an award from the arbitrator(s) or board of appeal as the case may be, shall be a condition precedent to the right of either party hereto or of any persons claiming under either of them to bring any action or other legal proceedings against the other of them in respect of any such dispute or claim.

The Incoterms 2010 provide eleven (11) rules addressing specific trading terms and conditions.  The key issue in first instance and on appeal was whether the mention of the GAFTA 88 lead to an enforceable undertaking to arbitrate on which the court could justify a stay of court proceedings. The Supreme Court stayed STC’s court litigation on the basis there was an arguable case the proceedings were brought in respect of a matter STC had agreed to submit to arbitration.

In its factum, Appellant raised seven (7) alleged errors which the Court of Appeal reduced to four (4), reproduced at paragraph 18 of its reasons, and then addressed in three (3) sections of its own reasons:

#1 incorporation of the arbitration clause is a question of mixed fact and law determined on arguable case standard (paragraphs 22-35)

The Court rejected two (2) of STC’s arguments. First, it disagreed that whether an arbitration clause was incorporated by reference into the parties’ agreement is a question of law. Relying on Sattva Capital Corp. v. Creston Moly Corp., [2014] 2 SCR 633, 2014 SCC 53, the Court likened the task to the one undertaken in Sattva Capital Corp. which was “inherently fact specific” and involves a mixed question of fact and law.

Second, the Court disagreed that a party applying for a stay must prove the existence of an arbitration agreement on a balance of probabilities under section 7 before it can apply for a stay under section 8. It found that argument “inconsistent with the law and the principles recognized in the leading cases” and cited Gulf Canada Resources Ltd. v. Arochem International Ltd., 1992 CanLII 4033 (BC CA) paras 39-40.

[29] The question here is whether the contracts incorporate by reference an arbitration clause. In my opinion, a distinction in principle cannot be drawn between a case where a litigant says it is not a party to an arbitration agreement and a case where a litigant says the contract to which it is a party does not incorporate an arbitration agreement. Neither dispute involves the scope of the arbitration agreement. Rather, each raises the fundamental question of applicability: whether the agreement is effective to bind the party at all. In Gulf Canada, this Court held that both scope and applicability are appropriate questions for the arbitral tribunal.

Appellant relied on the dissent of one of the appeal judges in Gulf Canada Resources Ltd. who expressed a “tentative opinion” in the 1992 decision that a party could not invoke section 8 until the B.C. Supreme Court had decided whether there was, in law, an arbitration agreement within the meaning of section 7. Aside from distinguishing the facts in that case from those before it in 2018, the Court followed the suggestion of Agricom to the effect that “the opinion was expressed at a time when deference to arbitral decisions had a different aspect than it has now taken on.

By relying on and distinguishing the same 1992 case, the Court of Appeal effectively showed that older case law would still be relevant provided its application/interpretation stayed current with the increased deference now granted by the courts to the arbitral process.

The Court could draw no distinction in principle between (a) cases in which litigants claim they are not party to an arbitration agreement and (b) cases in which litigants claim the contract to which they are a party does not incorporate an arbitration agreement. Neither raises the scope of the arbitration agreement. Both raise the question of applicability. Referring back to Gulf Canada Resources Ltd., the Court noted that it had already determined that scope and applicability are appropriately left to the arbitrator to decide.

The Court then devoted the balance of its section on the incorporation of the arbitration clause to reiterating the standard applicable to such initial enquiries undertaken by the courts on stay application. At paragraphs 30-35, the Court demonstrated that the standard applied by the courts – since 1995 in Prince George (City of) v. A.L. Sims & Sons Ltd., 1995 CanLII 2487 (BC CA), in 2007 in Dell Computer Corp. v. Union des consommateurs, [2007] 2 SCR 801, 2007 SCC 34 and more recently in H & H Marine Engine Service Ltd. v. Volvo Penta of the Americas, Inc., 2009 BCSC 1389 – is a prima facie or “arguable case”.

The Court accepted that, unless a party “clearly” establishes that is not a party to an arbitration agreement, then it is sufficient for the other party seeking a stay to have an “arguable case” that the prerequisites under the ICAA have been met. It noted that, over the years, and as confirmed in Dell Computer Corp., the prima facie or “arguable case” analysis has been extended from cases involving the validity of arbitration clauses to cases concerning the applicability of such clauses. The Court followed the guidance in Seidel v. TELUS Communications Inc., [2011] 1 SCR 531, 2011 SCC 15, stating that challenges to an arbitrator’s jurisdiction should first be determined by the arbitrator unless the challenge involves a pure question of law, or one of mixed fact and law requiring “only superficial consideration of the documentary evidence in the record”.

[35] In my opinion, the authorities leave no doubt the judge hearing a stay application has jurisdiction to rule on the existence of an arbitration agreement but should do so only in clear cases. Where, as here, it is arguable a party to the legal proceedings has agreed in writing to refer disputes to arbitration by a tribunal competent to rule on its own jurisdiction, the stay should be granted and the question whether the party is bound to arbitrate the dispute should be left to be determined by the arbitral tribunal.

#2 validity of the arbitration clause (paragraphs 36-37) to be left to arbitrator

Relying on the Ontario Court of Appeal’s reasons in Dalimpex Ltd. v. Janicki, 2003 CanLII 34234 (ON CA) para. 22 which examined legislation the B.C. Court of Appeal considered “similarly drafted”, the Court of Appeal refused to decide the validity of an arbitration clause unless “the case for doing so is clear”.

#3 deference to judge’s finding of mixed fact and law in incorporation by reference

The Court closed its reasons by examining whether the actual Supreme Court’s finding of an incorporation by reference of GAFTA 88 into the contracts allowed for the Court to intervene. The Court held that the Supreme Court’s determination regarding incorporation was a finding of mixed fact and law and entitled to deference. As that finding was not undermined by a palpable and overriding error and STC had not demonstrated that there was no evidence to support the Supreme Court’s conclusion, the Court gave that finding deference.