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Arbitration, by Any Other Name

I recently went looking for a simple definition of arbitration and ended up going around in circles.

Wiktionary, the online dictionary, defines arbitrate as to either make a judgement in a dispute as an arbitrator, or to submit a dispute to such a judgment. Arbitrator is then defined as a person to whom the authority to settle or judge a dispute is delegated.

The Oxford English Dictionary is even less helpful. It defines arbitrate as to “reach an authoritative judgement or settlement.” Arbitration is “the use of an arbitrator to settle a dispute,” and arbitrator is “an independent person or body officially appointed to settle a dispute.”

Many arbitration statutes have similarly circular definitions.

For example, the Ontario Arbitration Act defines an “arbitration agreement” as “an agreement by which two or more persons agree to submit to arbitration a dispute that has arisen or may arise between them.” But it does not define arbitration. The Alberta Arbitration Act is similar.

Neither Act defines arbitrator, except to say it includes an umpire.

The British Columbia Arbitration Act does provide more detailed (but equally circular) definitions. Arbitration is “a reference before an arbitrator to resolve a dispute under this Act or an arbitration agreement.” An arbitrator is defined as a person who resolves a dispute referred to them under the Act or an arbitration agreement, and expressly includes an umpire. And an arbitration agreement is “a written or oral agreement between 2 or more persons to submit present or future disputes between them to arbitration…”

Several recent cases, in Canada and elsewhere, remind us that arbitration is arbitration, no matter what you call it.

Earlier this year, the United States Second Circuit Court of Appeals provided a reminder that arbitration can be any process that “manifests an intention by the parties to submit certain disputes to a specified third party for binding resolution.” This intention doesn’t need to be expressed in any particular language.

The court decided that a binding appraisal of a loss claimed on an automotive insurance policy was arbitration, even though it was not called that in the insurance contract. The appraisal provision identified a category of disputes that would be submitted to specified third parties for a binding determination of the amount of the loss. That was enough to make it arbitration and, therefore, the relevant law governing arbitration applied. (In this case, giving the court jurisdiction over the dispute.)

It is worth noting, as the court did, that the US Federal Arbitration Act does not define arbitration, leaving it to the courts to decide what is – or is not – arbitration as a matter of common law.

In Belnor Engineering Inc. v. Strobic Air Corporation et al., 2019 ONSC 664 (CanLII), the Ontario Superior Court of Justice was called on to decide whether a clause in a contract was a valid agreement to arbitrate. It read, in part

Any controversy dispute or claim arising out of, or relating to this Agreement, or any breach thereof, shall be settled in accordance with the Commercial Arbitration Rules of the American Arbitration Association, …

The plaintiff had brought an action seeking damages and other relief in a contract dispute. The defendants sought to have the action stayed in favour of arbitration. Plaintiffs argued that there was no agreement to arbitrate because the clause was missing the key words “by arbitration” found in the American Arbitration Association’s recommended arbitration clause.

While noting the clause was poorly written, the court found no real ambiguity or uncertainty. The clause was not sufficiently vague as to render it unenforceable. Reference to the AAA Commercial Arbitration Rules was enough to show a clear intention to refer disputes to arbitration. Any uncertainty over how the arbitrator would be appointed or the arbitration conducted could be answered the the AAA Rules.

However, the decision does serve as a reminder that care must be taken in drafting arbitration agreement, if only to avoid wasting of time and money determining where the dispute should go.

In Zerr v. Thermal Systems KWC Ltd, 2018 ABQB 1008, a Master of the Alberta Court of Queens bench had to decide whether a dispute resolution clause in a lease required arbitration of a dispute over leasehold improvements. The clause provided that:

Where the Landlord is obliged to refer any dispute or question to an auditor, real estate appraiser or other expert experienced in assessment appeals, surveyor, engineer, architect, insurance consultant, or other professional: (i) the Landlord will select a person who is at arm’s length from the Landlord, except that the Landlord may use its external auditor and other arm’s-length persons with whom the landlord has dealings, (ii) that person’s decision or determination will be conclusive and binding on the Landlord and Tenant, and (iii) each of the Landlord and Tenant will pay 50% of that person’s fees and disbursements.

The dispute related to the cost of certain work which was to have been done to the premises and how the rent should be adjusted to reflect those costs. The landlord commissioned independent reports on those issues. The tenant referred to the dispute resolution clause in support of its position that those assessments were “conclusive and binding.” The landlord disagreed.

The Master considered the dispute resolution clause and found it “somewhat oblique.” He said “it does not provide for the appointment of an arbitrator and a hearing, as one might expect.” Finding no binding obligation to arbitrate the specific issues in dispute under the lease, the court refused to grant either party the summary judgments each of them had sought.

In Quebec, a court refused to refer a construction claim to arbitration, where the contract said (in part): “…either party may refer the dispute to be finally resolved by arbitration under the Rules of Arbitration of Construction Disputes…” The judge in Prométal inc. v. Maxim Construction inc., 2019 QCCS 1207 found that the wording did not require all contract claims to be arbitrated. It was permissive, rather than mandatory, and the defendant had failed to deliver the required arbitration notice within the time set out in the contract (or before the plaintiff started the court action).

In Lambsmead Limited v. Pharmawest Pharmacy Ltd., 2014 BCSC 218 (CanLII), the question for the BC court was whether the following term in a contract was an arbitration agreement:

It is understood that in the unfortunate event of a dispute that the matter will be resolved by arbitration or mediation as opposed to litigation and U.K. law will prevail.

The plaintiff, which had insisted on including the clause in a contract to supply pharmaceutical products, claimed that it was not and opposed an application to stay a claim for non-payment brought in the BC court. The defendants argued both (1) they were not parties to the contract, and therefore, the claim should be dismissed; and (2) if they were parties, as the plaintiff claimed, the clause required arbitration, so the claim should be stayed.

The court referred to the definition of “arbitration agreement” in the BC Arbitration Act and the International Commercial Arbitration Act. It also referred to equivalent definitions in the English and Scottish Arbitration Acts, since the clause referred to UK law. All of these statutes include provisions for legal proceedings to be stayed or suspended if there is an arbitration agreement.

In the circumstances, the court had no difficulty finding that there was a valid agreement to arbitrate and that it should stay the legal proceedings, regardless of which law – BC or UK – it applied. The lack of any procedural detail in the clause was not fatal, because the arbitration statutes provided enough procedural certainty.

It is interesting to note that the Arbitration Acts in BC, Alberta and Ontario all specifically provide that an arbitrator includes an umpire. Does this mean that other species of decision-makers – such as appraisers, assessors, or valuators – are not arbitrators?

In Concord Pacific Developments Ltd. v. British Columbia Pavilion Corporation, 1991 CanLII 5733 (BC CA), the court had to decide whether an appraiser appointed to determine fair market rent under a lease was in law acting as an arbitrator. The appraiser made an error and failed to follow the process set out in the lease. He offered to remove himself as a result. One party supported removal; the other did not (presumably because they liked the appraisal). So the dispute went to court over whether the appraiser should be removed for “arbitrator error” under the BC Commercial Arbitration Act. That led to the question of whether the appraiser was an arbitrator under the Act. The court concluded that he was.

In my opinion, what is important in this determination is the function of the person appointed, not his title. [20]

The court referred to Sport Maska Inc. v. Zittrer, 1988 CanLII 68 (SCC), in which the Supreme Court had to decide whether auditors, whose opinion of the valuation of the inventory of a bankrupt company was agreed to be final and binding, were acting as arbitrators. To make that determination, the court said, one must look at whether

  • there is a “formulated dispute” between the parties, not just some unresolved disagreement
  • there is a legal obligation to submit that dispute to arbitration, whether by statute or agreement (agreement may be express or implied, based on the intention of the parties)
  • the dispute has been remitted to the person to make a decision and the parties have agreed to accept the decision
  • the parties have been given an appropriate opportunity to present evidence and make submissions in support of their claims

In that case, it was determined that the auditor was not acting as an arbitrator, because these conditions had not been met. In particular, there was no crystalized dispute at the time the parties agreed to have the auditor make the valuation.

The take-away from these and other similar cases?

For lawyers drafting arbitration agreements, clear explicit language referring specific kinds of disputes to arbitration (and stating what is not subject to arbitration, if applicable) will avoid all kinds of potential issues if a dispute arises.

For litigators reviewing dispute resolution clauses, the absence of the word “arbitration” does not necessarily resolve matters. If there is a clear intention to refer disputes to a binding determination by a third party, that may be arbitration by any other name.

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