Applicability of the arbitration agreement to the action’s subject-matter

Section 28. Before referring an action to arbitration under article 8, a court must not only find that the
arbitration agreement is neither null and void, inoperative or incapable of being performed, but also
that it is applicable to the dispute to which the action relates.

As a general rule most national courts will defer to arbitration proceedings provided the arbitration is in
respect of a defined legal relationship, whether contractual or not, concerning a subject-matter capable
of settlement by arbitration and unless it finds that the agreement is null and void, inoperative or
incapable of being performed. -Julian D M Lew

Under the Model Arbitration Law,

 Under Article 8 of MAL, The court is bound to refer the case to arbitration, ‘‘unless the
agreement is null and void, inoperative or incapable of being performed.
 Under Article 16 of MAL, the tribunal may rule on its own jurisdiction, including any
objections regarding the existence or validity of the agreement.
Thereby, the same objection (of the validity of the arbitration agreement) can
be resolved either as a preliminary issue in court proceedings, upon motion to refer the
dispute to arbitration, or in the arbitral proceedings in a separate decision or in the
award on the merits.

In order to ascertain whether it falls under the Jurisdiction of Arbitrators or under the jurisdiction of the
Court, the case of Patel vs Kanbay International shall be our basis wherein :

• In this action, the plaintiff claims damages under a number of headings for wrongful dismissal
and negligent misrepresentation with respect to his employment as the President of Kanbay
Managed Solutions Canada Inc. (KMS Canada) and Kanbay Canada Inc., subsidiaries of Kanbay
International Inc. (Kanbay International), a company incorporated in Illinois, U.S.A.

• Kanbay International Inc. (defendant) is insisting that such dispute falls under the Arbitration in
Illinois and beyond jurisdiction of this court.

The Main issue in this case Is whether the claim for shares should be dealt through the court or through
the arbitration pursuant to the Shareholders Agreement entered into by the Parties .

These are the three (3) factors of determining if it falls under the ambit of arbitration or under the
auspices of the court:
1.) Nature of the dispute
2.) Whether the case falls within the ambit of the arbitration
3.) Sufficient Reason why the dispute should not be referred to arbitration

Determining the Nature of the Dispute

• The Plaintiff contends that the nature of the dispute is rooted in the plaintiff’s claim for
damages for wrongful dismissal and negligent misrepresentation to accept the position.

• While the Defendant contends that Statement of Claims the first being for damages for
wrongful termination of employment and breaches of the employment agreement; and the
second being damages for alleged negligent misrepresentation and breach of duty, in an
amount to be determined following a forensic valuation of the defendants’ stock shares.

Determining whether the case falls within the ambit of the Arbitration
 • It is the defendants’ position - plaintiff’s right and obligations are governed by Shareholders
Agreement.

• Under their Arbitration Clause, As stated in Par. 8.10(A) of Arbitration Clause states any
“disagreement, dispute, controversy or claim arising out of or relating to the Agreement, or the
making, performance or interpretation” of the Agreement shall be settled by arbitration in
Chicago, Illinois, or such other location agreed to by the parties in accordance with the
Commercial Rules of Arbitration of the American Arbitration Association.”

Sufficient reason why the dispute should not be referred to Arbitration

 The arbitration clause in the Shareholders Agreement generally deals with claims,
disagreements, disputes, or controversies, that may arise from the transactions that relate to
the Shareholders Agreement itself.
 The plaintiff’s claim is not the “making” of the Shareholders Agreement but rather what
representations were made to the plaintiff, if any, to induce him to accept the defendant’s offer
of employment; and how they should be valued.
 The core of the plaintiff’s action or relates to his claims for wrongful dismissal and negligent
misrepresentation and not to any alleged breaches of the Shareholders Agreement o claims
under it.

In the case of Sumitomo Canada vs. Saga Forest Carriers et. Al

Their arbitration clause only states that “Arbitration in Vancouver, British Columbia (BC), with
English law to be applied”

• According to Judge Ross Tweedale, “one phrase in an incomplete sentence consisting of nine
words has caused thousands of words to be written and countless additional words to be
spoken. Many law cases and legal principles have been referred to. This is Confusing, Unclear
and Uncertain

• But whether few or many words are used, and whatever words are chosen, the purpose of the
words must be to convey meaning.

The case of LeCleir Bros. Contracting Ltd v Canoe Cove Marina laid down rules to follow
that an arbitration agreement is valid :

(1) it must be reasonable and equitable;

(2) it must be necessary to give business efficacy to the contract so that no term will be implied if the
contract is effective without it;

(3) it must be so obvious that "it goes without saying";

(4) it must be capable of clear expression;

(5) it must not contradict any express term of the contract.

An example of a valid arbitration agreement as held in ABOP vs QTRADE Canada states that “If any
dispute or difference between the parties arises concerning this Agreement, the parties will first attempt in
good faith to resolve the matter. Any dispute or difference between the parties concerning this Agreement
which cannot be settled by the parties will be referred to and finally resolved by arbitration under
the Commercial Arbitration Act (BC)
Justice Grove states that the case of ABOP vs QTRADE Canada is a good example in order to ascertain the
true meaning and intention of the parties in their agreement.

“It is abundantly clear to me that the dispute between the parties relates to the different interpretations
of the Agreement. They have clearly agreed that any dispute over their interpretation of the
Agreement is to be dealt with by arbitration. Simply put, in oppression relief, claims should not
automatically oust the jurisdiction of the arbitration clause the parties agreed to.

Applicable standards of review: Whether it is a Full Review or Prima Facie

FULL REVIEW :

In the case of UNCITRAL Model Law, the court will permit full (rather than prima facie) judicial
consideration of jurisdiction.

According to Gary Born, whose expertise on the topic is formidable, these include Germany,
New Zealand, Australia, England, Austria, Spain, Croatia, Mexico, Kenya and Uganda.

These courts approached the issues on validity, operability and incapability of performance by
fully analyzing the evidence and making a finding.

ex. Hong Kong but Prima Facie. The Hong Kong approach in reviewing the given case is by fully
analyzing the evidence and making a finding.

PRIMA FACIE However other jurisdictions preferred prima facie. The core principle of "kompetenz-
kompetenz" empowers the arbitrators to rule on their own jurisdiction, which means that challenging the
existence or the validity of the arbitration agreement will not prevent the arbitral tribunal from proceeding
with the arbitration.

Because of such inherent power of the domestic courts they should not, in parallel and with the same degree
of scrutiny, rule on the same issue, at least at the outset of the arbitral process.

In other words, the courts should limit, at that stage, their review to a prima facie determination that the
agreement is not "null and void, inoperative or incapable of being performed

Example:

Canada –

Where the objection of the referral of the case to arbitration only raises questions of law – must be
resolved immediately by Court.

Where the objection raises disputed question of facts, the arbitration must decide.

Where if it is mixed questions of law and a mixed question of facts the arbitration must decide unless, it
requires superficial consideration of documents.

PROCEDURAL CONDITION: THE TIMELINESS OF REFERRAL APPLICATION

• That a referral to arbitration requested no latter than when party seeking a referral order its
statement on the dispute
• In other words, a referral application had to be made prior to the filling of any pleadings on the
substance of the dispute.
STRICT OR PERMISSIVE APPLICATION OF THE REQUIREMENT?

• The court held that the timeliness requirement set out therein had to be applied strictly
• But in other cases, court granted permissive approach where the court expressly state that the
timeliness ought not to be applied strictly and treated as admissible a referral application filed
months after the party seeking referral order had filed its statement of defense, - where it is
sufficient that a party expressly stated in his defense an intention to invoke arbitration.

REFERRAL REQUESTED BY CLAIMANT

Typically referral to arbitration is requested by defendant in the court action. The question arises whether
commencing court action; claimant bars it from subsequently invoking the arbitration agreement.

-Some claimants seeking to refer their own action to arbitration and have generally not
been successful.

-Where courts granted referral to claimants who had commenced proceedings for interim
measures of protections.

WHAT CONSTITUTES STATEMENT ON THE SUBSTANCE OF THE DISPUTE?

Statement on the Substance of the Dispute is commonly known as “a step in the proceedings “

Lord Denning held in Eagle Star Insurance vs Yuval Insurance that , to constitute step in
proceedings depriving a party of its recourse to arbitration, the action of this party must be one
which impliedly affirms the correctness of the proceedings and willingness of going to Court.

“A party will not necessarily be barred from seeking a referral of the action to arbitration if it
takes a step in the judicial proceedings without invoking the arbitration agreement. “

EFFECT OF FAILURE TO INVOKE ARTICLE 8 IN A TIMELY MANNER ON SEPARATE BUT RELATED ACTION

• Two related actions raising similar issues and same parties, failure to invoke Article 8 in a Timely
Manner on separate but related action prevents it from seeking the referral of the other action
to arbitration, as the arbitration agreement becomes inoperative as to the disputed issues.

MAY REFERAL TO ARBITRATION BE DENIED ON THE GROUND THAT THERE IS NO DISPUTE BETWEEN
THE PARTIES?

Yes, in several cases decided by the Court the cases were denied on the ground that there is no
dispute between the parties.

Courts tend to require proof that the party seeking a referral order has unequivocally admitted
claim.

If a claim is made against him in a matter which is the subject of an arbitration

agreement and he does not admit the claim, then there is a dispute within the meaning of the article.

“No substantial or Arguable defense will suffice”

MULTIPARTY CONTEXT

Court proceedings frequently involve multiple claimants, multiple defendants, or both multiple
claimants and defendants and several issues relating to Article 8 in such context.

The problem in the Multiparty is that the party involve has the right to chose its own
arbitrator. It could lead on tribunals of an impractical size frustrating the whole purpose of the
arbitration. It is unfair to the fewer parties, which would less influence the tribunals.
The Article 18 of World Intellectual Property Organization (WIPO) laid down rules in order to avoid
impractical size frustrating whole purpose of arbitration:

There are only three Arbitrators:

One selected by the Claimants

One Selected by the Respondents

The Third Arbitrator shall be selected by the Two (2) Arbitrators chosen by the Claimants and
Respondents within 30 days after the appointment of the second arbitrator.

MAY A COURT IMPOSE A CONDITIONS TO ORDERS REFERRING TO ARBITRATION?

Article 8 is silent about the possibility of imposing conditions on referrals under that provisions, courts
have done it in several cases.

-Court order to complete the arbitration swiftly

-Courts referred occasionally referred to arbitration on the condition that the defendant
undertook not to raise defense of prescription in the arbitration proceedings.

-The court referred the case to a religious tribunal selected by the parties in their arbitration
agreement but on a condition that it either proceed with the arbitration on a fixed timetable or clearly
indicate its refusal to resolve dispute.

Possibility of relying on local procedural rules to stay the action or refer the parties to arbitration
where requirements of Article 8 are not met

Several Cases confirm that the requirements of Article 8 are not met, and then courts may
nevertheless stay an action on the basis of local procedural action.

Courts have thus reorganized the possibility of relying on the local rules to stay part of an action
not falling within the arbitration agreement while the rest of the claim was being arbitrated.

• In other cases, courts were more sensitive to the fact that the parties had agreed on multiple
dispute resolution mechanisms, so that a court had refused to refer parties to arbitration
because it found that a particular dispute was not covered by the arbitration agreement, since
the clause allowed ‘‘court proceedings for specifically listed default events’’ (such as the one
submitted to the court), ‘‘while retaining arbitration for all other disputes

• In which arbitration was agreed for all disputes, except of differences ‘‘involving a question of
law’’. In all such cases courts found that arbitration agreement was in the particular case either
inoperative or—for the particular dispute—non-existent.