Written by Ranjan Agarwal, Lincoln Caylor and Mehak Kawatra
In a “rare inversion of a typical problem,” the case of Electek Power Services Inc. v Greenfield Energy Centre Limited Partnership contains an overview of the relevant principles applicable to the determination of an arbitral tribunal’s jurisdiction under Ontario law, beginning first with the determination of whether a valid arbitration agreement exists between the parties.
The dispute here involved $10 million in damages claimed by Greenfield and allegedly caused by Electek in February 2018. In line with its ongoing business relationship, Greenfield, an operator of an electricity power plant, hired Electek, an operator of a high voltage equipment business, to complete emergency services on Greenfield’s transformer. Upon completion of the assignment, Greenfield issued its purchase order, signed Electek’s Timesheet containing its general terms and conditions, and then received an invoice for the work provided. Electek’s work having allegedly caused damage, Greenfield claimed compensation and submitted the dispute to arbitration. In so doing, it relied on an arbitration agreement in Greenfield’s standard purchase order general terms and conditions, signed by Electek’s chief operating officer years before the parties’ active business relationship. Electek disagreed with the application of the arbitration agreement, arguing that Greenfield had never included it in any of the contracts or their purchase orders for work. Rather, Electek submitted that its own terms and conditions, as provided in its timesheet and rate sheets, governed the relationship between the parties. These terms and conditions did not include an arbitration agreement.
Electek first brought an application under section 48 of the Ontario Arbitration Act, 1991, for a declaration that the arbitration was invalid. In light of the COVID-19 pandemic and the emergency protocols restricting court hearings to urgent matters, Justice Myers of the Ontario Superior Court of Justice directed the parties to defer the issue of jurisdiction to the arbitral tribunal: “The competence-competence principle suggests the panel should rule on its jurisdiction without prejudice to Electek’s right to raise the issue thereafter. This is especially the case where significant facts are in dispute. There is no short crisp ruling of law that could save significant trial expense either here or there. Start there. We’ll be here when you get back.”
The arbitral tribunal determined that they had jurisdiction over the dispute. Although the tribunal acknowledged that the validity and applicability of Greenfield’s standard document was contested, it found that the arbitration agreement embedded within the document formed an independent agreement that applied to all disputes between the parties. This independent agreement applied even in the face of Electek’s own terms and conditions.
Electek applied under section 17(8) of the Arbitration Act, 1991, for “the court to decide the matter” of jurisdiction. In coming to his decision, Justice Perell of the Ontario court examined the evidence before the tribunal.
Justice Perell preliminarily dealt with the standard of review under section 17(8) of the Arbitration Act, 1991, relying on case law under the matching provisions of Ontario’s International Commercial Arbitration Act, 2017, and the UNICTRAL Model Law on International Commercial Arbitration it adopts. Citing the Divisional Court’s decision in The Russian Federation v Luxtona Limited [Luxtona] (which is under appeal), Justice Perell held that the court’s role under section 17(8) of the Arbitration Act, 1991, is a hearing de novo and not a court review of the tribunal’s decision.
On the central issue of whether the agreement to arbitrate applied in this case, Justice Perell set out the three types of laws which govern whether arbitrators have jurisdiction over disputes: (a) the general law of contract formation; (b) procedural and statutory law; and (c) the substantive law arising from these principles.
After reviewing the basic principles of contract formation—including the need for essential terms to be settled—Justice Perell homed in on the procedural and statutory law, as well as the substantive law applicable to the jurisdiction issue. He identified seven procedural routes to bring the determination of an arbitrator’s jurisdiction to the court, among which is an application under section 17(8) of the Arbitration Act, 1991. Justice Perell clarified that some of the available procedural routes will invoke the competence-competence principle, which provides that where there is an arguable case that the arbitrator has jurisdiction, the court will defer the issue of jurisdiction to the arbitrator itself. This is the case, for example, under section 17(1) of the Arbitration Act, 1991, the language of which mirrors the Model Law codifying the competence-competence principle. This is also the case when the question of the arbitrator’s jurisdiction is a matter of contractual interpretation.
Under the substantive law, Justice Perell clarified that the issue of an arbitrator’s jurisdiction is typically one of contract. In these cases, four principles apply: (a) an arbitration agreement must exist between the parties; (b) the arbitration agreement must be legal, in that it must not be illegal or void ab initio; (c) the validity of the arbitration agreement must be independently determined from the rest of the contract into which the agreement is embedded; and (d) jurisdiction is a matter of contractual interpretation.
Justice Perell ultimately held that the tribunal did not have jurisdiction over the dispute here because there was no settled or valid arbitration agreement between the parties. Although he did not have to engage with the arbitrators’ reasoning under the correctness standard, Justice Perell nevertheless critiqued their decision. In what he described as a “tautological leap,” the tribunal concluded that because the standard purchase order’s general terms and conditions were in contention, the present dispute necessarily fell within their confines. The tribunal overlooked whether there was even a settled arbitration agreement to begin with. It also failed to determine whether Greenfield’s standard terms formed an independent part of the contracting that took place for the immediate incident giving rise to their claim for damages.
On the facts here, Greenfield’s standard purchase order’s general terms and conditions were not in themselves a free-standing agreement. They only came into effect once annexed or incorporated by reference into a purchase order. The Ontario court held that this standard document was more like an agreement to agree, with parties deferring their legal obligations until a formal contract had been approved and executed—in this case, the specific purchase orders for Electek’s business. Since Greenfield failed to incorporate these terms in its purchase orders for work, the arbitration agreement therefore did not apply to the contracts which the parties entered into for Electek’s supply of goods and services, including for Electek’s work in February 2018.
Because of his finding that the matter was not subject to arbitration, Justice Perell confirmed that his decision could be appealed despite section 17(9) of the Arbitration Act, 1991 (which otherwise bars appeals under this section of the legislation).
There are a few notable takeaways worth highlighting:
- The question of arbitral tribunal’s jurisdiction is typically a question of contract law, as aided by procedural, statutory and substantive law. The threshold question that must be decided, therefore, is whether a validly formed agreement to arbitrate can be said to exist between the parties.
- The court’s hearing on the tribunal’s jurisdiction over a dispute in a section 17(8) application under the Arbitration Act, 1991, is a hearing de novo and is not an exercise of court review (though this issue is subject to appellate review in the Luxtona matter). In such a hearing, the court will look at underlying evidentiary record that was before the tribunal when deciding the matter.
- Under section 17(8) of the Arbitration Act, 1991, a court retains the power to set aside the tribunal’s decision on jurisdiction despite the competence-competence principle codified under section 17(1) of the legislation.
- Despite the language of section 17(9) barring appeals, the Ontario court’s decision under s. 17(8) of the Arbitration Act, 1991, can be appealed when the court holds that there is no arbitration agreement in effect.
If you have any questions about the effect of this decision or on our arbitration or enforcement practices, please contact the authors or other members of our Arbitration practice group.