Alberta Court Articulates Important Exceptions to the Kompetenz-Kompetenz Principle and the Scope of Arbitration Clauses

April 09, 2024

Written By Artem Barsukov and Jonas Patron

A recent decision of the Alberta Court of King’s Bench in Orica Canada Inc v ARVOS GmbH, 2024 ABKB 97 [Orica] has attracted considerable attention among members of the arbitration bar. In it, the Court of King’s Bench addressed two established concepts:

• kompetenz-kompetenz: the arbitral tribunal’s power to rule on its own jurisdiction; and
• interpretation of arbitration clauses: determining whether a claim falls within the scope of an agreement to arbitrate to give effect to the parties’ intention to arbitrate.

On the first issue, the Court applied existing jurisprudence to find that the kompetenz-kompetenz principle does not apply to jurisdictional challenges where (1) the challenge involves pure questions of law, (2) the challenge involves questions of mixed fact and law requiring only superficial consideration of the record, or (3) there is a real prospect that referring the challenge to arbitration would mean that it is never resolved.

On the second issue, the Court held that claims arising by operation of law, such as indemnity claims under the Tort-Feasors Act (Alberta), have their genesis outside of contract and therefore do not fall within the scope of an arbitration agreement.

The decision serves as an important reminder to arbitration practitioners that even the most established concepts are not unlimited in scope and are increasingly becoming subject to emerging exceptions.

Background

This case focused on a third-party claim which arose in the context of litigation, but which was subject to an arbitration agreement. To set the stage, the case involved three sets of parties:

• the plaintiffs in the main action, Orica Canada Inc. and Orica International Pte. Ltd. (collectively, Orica);
• the defendant in the main action and plaintiff in a third-party claim, ARVOS GmbH (ARVOS); and
• the defendants in the third-party claim, Arsopi, Industries Metalurgicas Arlindo S. Pinho, S.A. and Arsopi-Industrial Metalurgicas Arlindo S. Pinho, LDS (collectively, Arsopi).

In March 2017, Orica filed a Statement of Claim against ARVOS in connection with fabrication and assembly deficiencies in certain industrial equipment that had been supplied by ARVOS to Orica. The equipment was originally supplied by ARVOS to Orica’s Australian affiliate. It was subsequently sold to Orica Canada Inc. and was ultimately installed in an ammonium nitrate plant located in Alberta.

The defendant, ARVOS, operated primarily in Germany. It acquired the equipment in question from Arsopi, a Portuguese manufacturer, pursuant to a purchase order (the Purchase Order) that was subject to ARVOS’ standard purchase conditions (the Purchase Conditions). The Purchase Conditions provided that “all disputes arising out of or in connection with the Contract” had to be resolved by arbitration in Frankfurt am Main, Germany, under German law.

In March 2020, ARVOS filed a third-party claim against Arsopi, which the Court separated into three components:

1. a claim for contribution of indemnity under the Tort-Feasors Act (Alberta) (the TFA Claim);
2. a tort claim based in negligence and negligent misrepresentation (the Tort Claim); and
3. a contract claim based in breach of implied terms of the Purchase Order and the Purchase Conditions (the Contract Claim).

In response, Arsopi brought an application under the Alberta International Commercial Arbitration Act, RSA 2000, c I-5 [ICAA] to stay ARVOS’ third-party claim on the basis that ARVOS’ claims were subject to arbitration in accordance with the Purchase Conditions.

Arsopi’s application raised the following issues before the Court:

1. Does the kompetenz-kompetenz principle apply, such that ARVOS must commence arbitral proceedings in Germany to have an arbitrator rule on whether they have jurisdiction over the third-party claim?
2. If not, should ARVOS’ third-party claim be stayed or struck under the ICAA?

Decision

Application of the Kompetenz-Kompetenz Principle

The Court first considered whether it had jurisdiction to determine Arsopi’s application, or whether the application ought to be heard in the first instance by an arbitral tribunal seated in Frankfurt, in accordance with the arbitration agreement.

The Court applied the principles previously established by the Supreme Court of Canada in Peace River Hydro Partners v Petrowest Corp, 2022 SCC 41 [Peace River] and Uber Technologies Inc v Heller, 2020 SCC 16 [Uber]. In those cases, the Supreme Court held that while arbitrators should generally be permitted to rule first on their own jurisdiction, departure from the kompetenz-kompetenz principle might be warranted in two scenarios:

1. If the jurisdictional challenge involves:

a. pure questions of law; or

b. questions of mixed fact and law requiring only superficial consideration of the evidentiary record.

2. If there is a bona fide jurisdictional challenge that only a court can realistically resolve. This second exception involves the following two-part test:

a. taking the facts pleaded as true, there must be a genuine challenge to arbitral jurisdiction; and

b. there must be a real prospect that the challenge may never be resolved by the arbitrator.

Applying these principles, the Court declined to apply the kompetenz-kompetenz principle, finding that both of the above scenarios arose on the facts of the case.

With respect to the first exception, the Court held that Arsopi's application involved pure questions of law or questions of mixed fact and law requiring only superficial consideration of the evidentiary record. While the Court acknowledged that the contract between ARVOS and Arsopi was governed by German law, and that the effect of German law was a question of fact, the Court found that there was no conflicting evidence in that regard. As such, the Court found that the determination of Arsopi’s application required only superficial consideration of the evidentiary record.

With respect to the second exception, the Court held that the question of whether ARVOS’ third-party claim is subject to arbitration was a genuine challenge to arbitral jurisdiction. The Court was further satisfied that the time to commence arbitration in Germany has “most likely passed” by operation of German limitations law. On this basis, the Court found that there was a real prospect that the issue would not be resolved by an arbitrator.

Scope of Arbitration Agreement

The second issue raised by Arsopi’s application was whether the third-party claim should be stayed, in whole or in part, under ICAA. The parties relied on section 10 of ICAA, which states:

Where, pursuant to article II(3) of the [1958 New York Convention] or article 8 of the [UNCITRAL Model Law], a court refers the parties to arbitration, the proceedings of the court are stayed with respect to the matters to which the arbitration relates.

Article II of the 1958 New York Convention provides as follows, in relevant part:

1. Each Contracting State shall recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration.

[…]

3. The court of a Contracting State, when seized of an action in a matter in respect of which the parties have made an agreement within the meaning of this article, shall, at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed. [emphasis added.]

Article 8(1) of the UNCITRAL Model Law similarly provides as follows:

A court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed. [emphasis added.]

The key question was whether ARVOS’ third-party claims against Arsopi concerned a matter in respect of which there was an arbitration agreement between ARVOS and Arsopi.

Relying on expert testimony regarding German law, the Court found that both the Tort Claim and the Contract Claim were “differences arising out of a commercial legal relationship”—namely the Purchase Order between ARVOS and Arsopi—and therefore fell within the scope of the arbitration clause in the Purchase Conditions. Significantly, the Court found that the Tort Claim and the Contract Claim by ARVOS against Arsopi had to be resolved by arbitration, even though they related to the claims made by Orica against ARVOS in the litigation proceedings.

However, the Court came to the opposite conclusion regarding the TFA Claim. The Court held that the TFA Claim arose by operation of law under the Tort-Feasors Act and the common law. As such, the TFA Claim had its genesis in Canadian law, as opposed to the Purchase Order between ARVOS and Arsopi and was therefore not subject to the arbitration agreement. On this basis, the Court declined to stay the TFA Claim.

Finally, the Court considered whether the fact that an arbitration was likely time-barred by operation of German limitations law rendered the arbitration agreement “null and void, inoperative or incapable of being performed.” The Court concluded that it did not, holding that the mere fact that an arbitrator could potentially apply limitations law to dismiss claims does not make an arbitration agreement inoperative or incapable of being performed.

Discussion and Implications

The decision in Orica offers an important reminder that even the most established concepts in arbitration are increasingly becoming subject to new and expanding exceptions.

With respect to the kompetenz-kompetenz principle, the decision in Orica does not actually tread much new ground. What it does is apply and highlight two existing exceptions to this long-standing principle that were recently articulated by the Supreme Court of Canada in Uber and Peace River, released in 2020 and 2022, respectively.

Indeed, it can be argued that the decision in Orica potentially expands the exception found in Uber. In Uber, the Supreme Court found that there was a real prospect that the jurisdictional challenge might never be resolved by an arbitrator because arbitration was prohibitively expensive. In Orica, the Court found that this prospect also exists where arbitration is likely time-barred, signaling that there may be other, additional scenarios where the exception in Uber may apply. In this sense, the decision in Orica continues the trend toward expanding carve-outs established by the Supreme Court of Canada in Uber and Peace River.

By contrast, Orica breaks potentially significant new ground in holding that claims arising by operation of law, such as claims for indemnity under the Tort-Feasors Act (Alberta), do not fall within the scope of arbitration agreements. In doing so, the decision in Orica introduces some uncertainty and potential for bifurcation of arbitration proceedings in Alberta, with attendant risks and increased costs.

To begin, parties seeking to resist or frustrate arbitration proceedings now have a new ground to mount jurisdictional challenges in cases where part of the claim arises by operation of law, and such challenges may well be successful in arbitrations seated in Alberta. A successful jurisdictional challenge will lead to unnecessary bifurcation of proceedings, with claims arising by operation of law being thrown into court, resulting in duplication of effort, delays, and additional costs. Throwing the parties’ claims into open court—even in part—will also make the nature and existence of the dispute public knowledge, effectively doing away with any confidentiality protections incorporated into the arbitration agreement. And finally, bifurcation of proceedings gives rise to the risk of inconsistent results, particularly where claims arising under contract and by operation of law are closely related and/or grounded in the same facts, as was the case in Orica.

At this point, the ruling in Orica on the scope of arbitration clauses is only law in Alberta. However, the decision may have persuasive effect on courts of other jurisdictions. In light of this, parties will be well-advised to review their arbitration agreements and consider amending them to expressly encompass claims arising by operation of law, including in the context of third-party claims. To discuss your specific needs and to receive tailor-made advice, please contact the Bennett Jones International Arbitration practice group.

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