The case involves an issue of who among the parties are subject to arbitration
The Ontario Superior Court of Justice has upheld the competence-competence principle in a commercial dispute involving an issue of who among the parties should be subject to arbitration.
The court said that the thrust of contemporary arbitration law is to respect the competence-competence principle. It is for the arbitrator to structure the arbitral proceedings as they see fit and to determine the scope of the parties included within their jurisdiction.
In We Care Community Operating Ltd. v. Bhardwaj, 2023 ONSC 4727, the parties have entered a co-ownership agreement where they own Concept Lofts Ltd., which holds title to a development property located at Dufferin Ave., Toronto.
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The co-owners had arranged the funding of the development project. The funding was secured by mortgages registered in favour of most of the corporate defendants. Each of the mortgagees was solely owned by some of the individual defendants, who have also personally guaranteed the loans on behalf of the borrower.
A dispute arose among the co-owners concerning financial contributions to the project. The plaintiff alleged that the other co-owners had not contributed to the project despite their obligation.
The parties agreed to arbitrate the dispute but disagreed on which of them was covered by the arbitration clause. Since the commercial arbitration arose from a contract, only those bound by the agreement must participate and adhere to its ruling.
The plaintiff asserted that the financial contributions to the real estate development and property were not mortgage loans by the respective mortgagees but personal contributions by the individual defendants. In making this point, he advanced an alter ego theory of corporate control of those companies. The plaintiff argued that they should all be included in the arbitration concerning the monies owed and funding of the project's debts.
The defendants argued that they made no loans. They said the guarantors were not lenders and that there was a distinction between the liabilities of the mortgagees and those of their directors, officers, or shareholders. In their view, there was no evidence of the individual defendants misusing their corporations or of the corporations being their principals' alter egos. Instead, they argued that the arrangement whereby the corporate defendants are mortgagees and the individual defendants are guarantors of the loans was nothing more than ordinary corporate practice when dealing with closely held companies.
The matter reached the Ontario Superior Court of Justice, which ruled that the arbitrator, not the court, should decide who is subject to arbitration. The court explained that the Arbitration Act gives an arbitrator the authority to determine. The court, citing case law, said that arbitration is an autonomous, self-contained, self-sufficient process, according to which the parties agree to resolve their disputes by an arbitrator, not the courts.
The court noted that there is one exception to the rule that an arbitrator should determine their jurisdiction, and that is where the answer is entirely straightforward and self-evidence on the face of the arbitration agreement.
The court said that the question is whether the challenge to the arbitrator's jurisdiction in this case is one of mixed fact and law or is based on a question of law alone. If the contract needs some context and interpretation to answer the "who-is-in-and-who-is-out" question, it raises an issue of mixed fact and law. That, in turn, makes the analysis into "an exercise in which the principles of contractual interpretation are applied to the words of the written contract, considered in light of the factual matrix."
The court found that the governing agreements in this case reveal that the issue is not so straightforward. The individual defendants are co-owners and guarantors, while the corporate defendants are mortgagees and, presumably, lenders. The court said it does not have sufficient records to determine the dispute, and it would not be proper to do so.
The court emphasized that the competence-competence principle in contemporary arbitration law empowers the arbitrator to decide who are the parties included within their jurisdiction. Accordingly, the court ordered the dispute to proceed to arbitration and that the arbitrator decide who are subject to arbitration.