Four arbitration trends to watch in 2023

As 2022 comes to a close, we’re highlighting the year’s top trends in Canadian arbitration law, which will shape arbitration practice in 2023. The takeaways arise from cases addressing: limitation periods in arbitral enforcement, arbitration clauses and the competence-competence principle in insolvency proceedings, the use of summary judgment in arbitration, and arbitration costs.

1. Provincial limitation periods apply to enforcing international arbitral awards

Enforcing arbitral awards requires consideration of conditions for recognition. While Canada is party to the New York Convention, which requires domestic courts to give effect to international arbitral awards, the extent to which an international arbitral award can be recognized and enforced in Canada is still subject to local conditions, including provincial limitation periods.  

The Quebec Court of Appeal, in Itani v. Societe Generale de Banque au Liban SAL, held that an international commercial arbitral award was subject to the 10-year prescription period in the Civil Code of Québec (the equivalent of a limitation period in common law jurisdictions) applicable in Québec to enforcing rights resulting from judgments. Itani follows the Supreme Court of Canada’s 2010 decision in Yugraneft Corporation v Rexx Management Corporation, in which the Court held that the two-year limitation period in the Alberta Limitations Act applied to proceedings to enforce international arbitral awards in that province.

The takeaway

Avoid delay in enforcement. Parties seeking to enforce arbitral awards in Canada should not delay bringing an enforcement proceeding to avoid the application of any limitation provisions, ensuring that their rights are preserved.

2. Arbitrators are entitled to decide by summary judgement

Courts are likely to defer to procedural decisions by arbitrators where there is a broad arbitration agreement that does not set out any specific procedure that must be followed. In Optiva Inc. v. Tbaytel, the Court of Appeal for Ontario upheld the decision of an arbitrator who opted to decide an arbitration by way of summary judgment over the objection of one of the parties. The Court of Appeal determined that a provision in the parties’ arbitration agreement entitling the arbitrator to “consider and rule upon all motions during the Arbitration” was broad enough to entitle the arbitrator to direct the hearing of the case by way of summary judgment.

The takeaway

Specify desired procedure. A broad arbitration clause grants broad procedural discretion to an arbitrator. If a particular procedure is desired, particularize it in an arbitration clause or in a further agreement at the outset of arbitration.

3. Arbitration clauses may not be enforced in insolvency proceedings

In the insolvency context, courts have declined to enforce an arbitration clause when doing so would conflict with the “single proceeding” model that applies to insolvency proceedings. The Supreme Court, in Peace River Hydro Partners v. Petrowest, dismissed an appeal where a court-appointed receiver brought an action on a debtor’s (Petrowest's) behalf for contractual claims against Petrowest’s counterparties, and those counterparties sought to have the receiver’s claims stayed in favour of four contractually-agreed arbitrations and an additional civil action.

Insolvency proceedings, including receivership proceedings, operate by consolidating all claims against a debtor into a single judicial proceeding so the rights of all creditors can be determined efficiently and fairly under the auspices of insolvency law. The Supreme Court held that in the receivership context, a court has the power to declare an arbitration clause “inoperative” if the arbitration would compromise the integrity of the parallel receivership proceedings, with the result being that the suit is required to be heard in court (i.e., in the receivership proceedings) instead of before an arbitrator. The court renders this decision without the arbitrator first determining jurisdiction as is usually the case under the competence-competence principle.

The Supreme Court was clear that there is no automatic rule that arbitration clauses in a receivership or insolvency are inoperative. However, to declare an arbitration agreement inoperative in this context, the party seeking to avoid arbitration must show that an arbitration would compromise the integrity of the parallel insolvency proceedings. A Court must consider (i) the effect of the arbitration on the integrity of the insolvency proceedings; (ii) the relative prejudice to the parties; (iii) any urgency; (iv) the effect of any existing insolvency stay. While this test is relevant to suits or proceedings brought by a debtor, it does not modify bankruptcy or insolvency stays of proceedings prohibiting bringing claims against a debtor (through arbitration or otherwise).

In Petrowest’s case, the complexity of the four arbitrations and additional civil action that would have been required—which the Court repeatedly described as “chaotic”—animated the decision. The Court ultimately determined that the proposed arbitrations would have compromised the orderly and efficient resolution of Petrowest’s receivership proceedings. The arbitration clause was therefore inoperative in this case. This case further clarifies Canadian law on the limitations to the application of the competence-competence principle in Canada. In most circumstances where an arbitrator’s jurisdiction is challenged, arbitrators should be allowed to rule first on their own jurisdiction. However, courts may resolve jurisdictional questions without recourse to the arbitrator if the challenge involves pure questions of law, or questions of mixed fact and law “requiring only superficial consideration of the evidentiary record”¹.

The takeaway

Choice to arbitrate may not apply in insolvency. To avoid having an arbitration agreement rendered inoperative, contracting parties may want to ensure that their agreed arbitration procedures are as simple, efficient and cost-effective as possible and establish that they will be prejudiced if the arbitration agreement is not honoured (for example, by a loss of confidentiality in court proceedings).

4. Approaches to arbitration costs diverge

The courts of British Columbia and Ontario have adopted different presumptions regarding the nature of costs awards in arbitrations, with little to reconcile the two approaches.

The Ontario Superior Court, in Electek Power v. Greenfield Energy Centre, held that an arbitrator’s discretion to award costs is no different from a judge’s. It must be “exercised judicially and not irrationally or whimsically”. While an arbitrator has the jurisdiction to order substantial or full indemnity costs where justified by the conduct of a party in litigation, partial indemnity costs are typically awarded to the victor in both litigation and arbitration.

In contrast, in Allard v. UBC, the BC Supreme Court held that the “normal rule” in arbitration is that the successful party is entitled to its “actual reasonable costs”. The successful party’s actual undiscounted costs are therefore the starting point for a costs award under this framework, with the analysis focusing on whether those costs are reasonable, without discount.

While some provinces, such as Alberta, have arbitration legislation specifying that the default rule for arbitration costs will be partial indemnity, that is not the case in BC or Ontario. Parties to arbitrations will want to account for these differing costs rules by jurisdiction in the conduct of arbitration, and consider specifying the nature of an arbitrator’s discretion on costs in an arbitration agreement.

The takeaway

Costs approaches vary by jurisdiction. Some jurisdictions presume that actual costs will be awarded to the victor, while others presume partial costs. Pay attention to the costs rules of the arbitral seat, and consider specifying the nature of an arbitrator’s costs discretion in an arbitration agreement.