In Toyota Tsusho Wheatland Inc v Encana Corporation and PriarieSky Royalty Ltd,(1) an Alberta court recently considered the complexities that can arise in multi-party disputes where arbitration clauses may not be included in all of the relevant agreements. The court balanced the issues of judicial efficiency with the need to respect parties' agreements (or absence thereof) to refer a dispute to arbitration under Alberta's International Commercial Arbitration Act.
Toyota Tsusho Wheatland Inc is a wholly owned subsidiary of Toyota Tsusho Corporation. On April 19 2012 Toyota Tsusho entered into three agreements with Encana Corporation:
- a new royalty conveyance agreement, which granted Toyota Tsusho a royalty on gas and substances produced from the wells on the royalty lands;
- a royalty agreement contained in Schedule B of the royalty conveyance agreement; and
- a royalty extension agreement.
The royalty agreement provided that neither party would dispose of all or any portion of the royalty, the royalty lands or any interest in the royalty agreement without, among other things, "the prior consent in writing of the other Party, which shall not be unreasonably withheld". The royalty agreement and the royalty extension agreement contained arbitration clauses.
In November 2013 Encana advised Toyota Tsusho that it was proposing a corporate restructuring, whereby it would transfer its title in the royalty lands to a newly formed subsidiary, PrairieSky Royalty Ltd. The announcement triggered a series of negotiations to address the relationship among the parties with respect to the Toyota Tsusho agreements, but no agreement was ever reached.
On May 22 2014 Encana went ahead with its restructuring and transferred its title in the royalty lands to PrairieSky pursuant to the royalty business purchase and sale agreement. From May to September 2014, Encana sold its interest in PrairieSky through two successive public offerings. On August 14 2015 Toyota Tsusho purported to terminate the royalty extension agreement, based on Encana's alleged failure to remedy breaches of the royalty extension agreement and the royalty agreement; Encana responded by purporting to terminate the royalty extension agreement on the grounds that Toyota Tsusho's termination was invalid and that it unreasonably withheld its consent to the royalty business purchase and sale agreement.
In response to the purported terminations, on September 9 2015 Toyota Tsusho commenced a court action against Encana and PrairieSky before the Alberta Court of Queen's Bench, including a request for specific performance. On October 9 2015 Toyota Tsusho commenced arbitration proceedings against Encana and sought, among other things, a declaration that its termination of the royalty extension agreement as a result of the transaction with PrairieSky was valid and effective. On November 18 2015 Encana applied to stay the action and refer all disputes between the parties to arbitration, pursuant to the royalty agreement and the royalty extension agreement. On December 18 2015 PrairieSky brought an application to stay the arbitration.
The court considered a number of issues, including the following:
- Was the arbitration governed by Alberta's Domestic Arbitration Act or the International Commercial Arbitration Act?
- Should issues in the action relating to Encana be referred to arbitration?
- Should the action be stayed in its entirety or against Encana?
- Should the arbitration be stayed?
Which act governed the arbitration?
The court determined that Section 1(3)(a) of the International Commercial Arbitration Act was determinative; it provides that "[a]n arbitration is international if: the parties to an arbitration agreement have, at the time of the conclusion of that agreement, their places of business in different States". The court referred to case commentary on the United Nations Commission on International Trade Law Model Law to determine that a 'place of business' constitutes "any location from which a party participates in economic activities in an independent manner", and concluded that Toyota Tsusho had a place of business outside Canada while Encana had its place of business within Canada. Accordingly, the International Commercial Arbitration Act was found to apply.
Should Encana-related claims be stayed?
Encana sought to have the issues in the action against it referred to arbitration on the basis that these issues fell within the scope of the arbitration agreement in the royalty agreement. Toyota Tsusho and PrairieSky opposed the application, arguing that the issues in the action should be dealt with in court. The court referred to judicial consideration of the International Commercial Arbitration Act, which the court determined "direct[s] that disputes which are subject to an arbitration agreement that is covered by the ICAA must be referred to arbitration, even where third parties may be involved".
The court examined whether the issues advanced by Toyota Tsusho against Encana in the action were subject to arbitration, or whether these aspects of the dispute were within a carve-out in the royalty agreement preserving a limited right for the court to consider ordering specific performance. The court considered whether, in carving out jurisdiction for the court to grant the remedy of specific performance, the parties also empowered the court to consider the myriad of issues underlying a decision of whether to order specific performance, or whether such issues fell within the tribunal's jurisdiction. The court adopted the latter interpretation of the royalty agreement and referred the issues advanced by Toyota Tsusho in the action to arbitration.
Should action be stayed in its entirety or against Encana?
Encana sought a stay of the action pending completion of the arbitration. Given the multiplicity of parties and agreements, the key question for the court was whether the whole action should be stayed, or whether the action should be stayed only against Encana. Referring to judicial consideration of the domestic act, the court considered factors relevant to the issue of whether to stay part or all of the action. The court concluded the potential prejudice suffered by Toyota Tsusho and PrairieSky in the event of a full stay was greater than the potential prejudice to Encana in the event of only a partial stay and ordered that the action against PrairieSky could proceed, with the action being stayed only as against Encana.
Should the arbitration be stayed?
PrairieSky argued it was not party to the Toyota Tsusho agreements and that a stay of the arbitration would avoid a multiplicity of proceedings and the associated risks. The court dismissed this application on the basis that it was not permitted to intervene, except as provided under the International Commercial Arbitration Act, which does not grant the court the power to stay an arbitration where the parties to the arbitration agree that the arbitration should proceed. Accordingly, the court was unwilling to exercise discretion based on another act or rule governing court procedure.
Toyota Tsusho provides an example of a Canadian court's comprehensive and sophisticated balancing of complex arbitration-related issues that can arise in multi-party and multi-contract situations.
The court's decision demonstrates its effort to identify and apply the International Commercial Arbitration Act as distinct from considerations that arise under the domestic act. The court focused its analysis on judicial consideration of the International Commercial Arbitration Act, acknowledging that any referral to judicial consideration of the domestic act was relevant in the circumstances to the extent that there was an absence of case law under the International Commercial Arbitration Act.
The court was explicit in its deference to the tribunal's power to decide on its own jurisdiction. However, the court's application of the 'competence-competence' principle could have gone further by referring the issue of the scope of the arbitration – namely, the interpretation of the carve-out in the arbitration agreement regarding specific performance – to the tribunal. However, the court's consideration of jurisdictional issues, rather than referring all matters of jurisdiction and contractual interpretation to the tribunal from the outset, was consistent with its powers under the relevant legislation.
For further information on this topic please contact Hugh A Meighen or Craig R Chiasson at Borden Ladner Gervais LLP by telephone (+1 604 687 5744) or email (firstname.lastname@example.org or CChiasson@blg.com). The Borden Ladner Gervais LLP website can be accessed at www.blg.com.
(1) 2016 ABQB 209.
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