A recent British Columbia Supreme Court decision confirms that the courts are not empowered to determine the validity of an alleged arbitration agreement before the commencement of an arbitration proceeding. In El Nino Ventures Inc v GCP Group Ltd the court concluded that the proper procedure for such a determination, as prescribed by Section 16(6) of the International Commercial Arbitration Act, contemplates that decision being made by an arbitral tribunal, with the arbitral tribunal's decision to accept jurisdiction ultimately being reviewable by the court.
The petitioner, El Nino Ventures Inc, and the respondent, GCP Group Ltd, entered into two commercial agreements - a mineral property option agreement and a joint venture agreement. A third agreement, a services agreement, was also entered into between the petitioner and the principal of the respondent.
The underlying commercial arrangement of all three agreements was that the petitioner was to acquire from the respondent, under the terms of the mineral property option agreement, an interest in certain mineral research permits in the Democratic Republic of the Congo owned by the respondent; thereafter, the parties were to engage in exploration and development of mineral properties in the Democratic Republic of the Congo through a joint venture. In accordance with the terms of the joint venture agreement, the joint venture was to be financed and operated by the petitioner, with the respondent providing logistical, administrative and technical support.
Under the terms of the mineral property option agreement and the joint venture agreement, the petitioner was required to issue to the respondent 700,000 shares in the petitioner's common stock in four blocks with four corresponding payments totalling C$550,000.
A dispute arose between the parties regarding the fourth and final share transfer and payment. The respondent sought a change to the payment structure, to which the petitioner acquiesced, provided that the respondent delivered a release in advance of the payment. No release was provided by the respondent before the date on which payment was due and, as a result, the petitioner failed to make the final payment. The petitioner asserted its readiness to pay funds and transfer the shares, and through its lawyer confirmed that it had put the funds and shares in escrow pending delivery of the release. The respondent took the position that the petitioner was in default under the joint venture agreement and the mineral property option agreement.
Neither party took any steps to commence arbitration proceedings or an action for damages or other relief before the court. Rather, the petitioner brought an application to the court seeking a declaration that the joint venture agreement and the mineral property option agreement contained arbitration agreements and a direction that the parties proceed to arbitrate their dispute. The respondent resisted the application on the basis that the agreements did not contain an arbitration agreement, and that in any event, a decision as to whether the agreements contained an arbitration agreement was a decision for an arbitrator in the first instance.
Section 16 of the International Commercial Arbitration Act provides that decisions regarding jurisdiction are within the competence of the arbitral tribunal and a tribunal's decision accepting jurisdiction is reviewable on the request of a party. Specifically:
"(1) The arbitral tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement, and for that purpose,
(a) an arbitration clause which forms part of a contract must be treated as an agreement independent of the other terms of the contract, and
(b) a decision by the arbitral tribunal that the contract is null and void must not entail ipso jure the invalidity of the arbitration clause...
(6) If the arbitral tribunal rules as a preliminary question that it has jurisdiction, any party may request the Supreme Court, within 30 days after having received notice of that ruling, to decide the matter".
The court noted that in general, the courts have a limited role in intervening in matters governed by the International Commercial Arbitration Act. In keeping with this limitation, the court referenced the Supreme Court of Canada's decision in Dell Computer Corp v Union des consommateurs, which confirmed that in any case involving an arbitration clause, the general rule is that a challenge to the arbitrator's jurisdiction must be resolved first by the arbitrator. A court should depart from this general rule only where a challenge to an arbitrator's jurisdiction is based solely on a question of law.
Given the rule enunciated by the Supreme Court of Canada, it was unsurprising that the respondent attempted to frame the issue as a question of law - namely, whether it was crystal clear, as a matter of law alone, that the clauses in the two agreements, as properly interpreted, could not constitute an arbitration agreement or, if they did, whether they were so fundamentally flawed as to be inoperable.
The court held that the respondent's argument flew in the face of the legislative intent behind the International Commercial Arbitration Act and the specific wording of Section 16(1) thereof. The court concluded that it did not have jurisdiction at that stage to rule on the existence of an applicable arbitration agreement. This was a matter within the exclusive competence of the arbitral tribunal, once appointed.
With respect to the petitioner's request for a direction that the parties proceed to arbitrate their dispute, the court held that a direction or referral to arbitration would become necessary only if one of the parties sought to resolve the merits of the dispute in court, while the other party sought to rely on the arbitration agreement. As no court or arbitration proceeding had been initiated on the merits, the court found that a direction could not be issued in the circumstances.
This case is notable as it reaffirms the global trend of constraining judicial intervention in international arbitration proceedings. The language of Section 16 of British Columbia's International Commercial Arbitration Act is reflective of the trend across all Canadian jurisdictions when dealing with this issue. Parties seeking preliminary determinations regarding the existence of an arbitration agreement must proceed down the path of arbitration to have the issue determined before resort may be had to the courts, save in circumstances where the preliminary determination involves a pure question of law alone. The decision in El Nino is in keeping with the narrow reading that the Canadian courts appear to be applying to the exception articulated by the Supreme Court of Canada in Dell.