Muskrat Falls Corporation Applicant And: Astaldi Canada Inc. Respondent - v. -, 2018 NLSC 210

court crest IN THE SUPREME COURT OF NEWFOUNDLAND AND LABRADOR GENERAL DIVISION Citation : Muskrat Falls Corporation v. Astaldi Canada Inc. , 2018 NLSC 210 Date : October 23, 2018 Docket : 201801G6917 Between: Muskrat Falls Corporation Applicant And: Astaldi Canada Inc. Respondent - AND - Docket: 201801G7001 Between: Astaldi Canada Inc. Applicant And: Muskrat Falls Corporation Respondent Before: Justice James P. Adams Place of Hearing: St. John’s, Newfoundland and Labrador Date of Hearing: October 17, 2018

Summary: Muskrat Falls Corporation (“MFC”) and Astaldi Canada Inc. (“Astaldi”) entered into a contract for the construction of alarge hydro electrical project in Labrador which contained an arbitration agreement requiring disputes to be determined by arbitration. Inan amending agreement the parties agreed that the arbitration provisions would only be available to Astaldi if it was claiming damagesfor termination of the contract. The contract had not been formally terminated. Astaldi claimed the contract was unenforceable becauseof the actions of MFC, except for the arbitration provisions.

Astaldi filed a Notice of Arbitration alleging numerous breaches of contract and fiduciary duty, among other things, by MFCand appointed an arbitrator to a proposed Board of Arbitration. MFC rejected the right to arbitration and refused to appoint an arbitrator. MFC applied to the Court to decide if the dispute was arbitrable submitting that it is the Court that has the authority to decide thisjurisdictional question in the circumstances. Astaldi took the position that the question of the jurisdiction of the arbitrator must first bereferred to the arbitrator.

It requested that the Court order MFC to appoint an arbitrator or to appoint one for it so the matter ofjurisdiction could be determined. Held: The arbitration raises issues of mixed fact and law requiring a detailed consideration of the contract and the factualmatrix surrounding it. Therefore, the issue of jurisdiction should be referred to the Board of Arbitration for determination once it isestablished. MFC was ordered to appoint an arbitrator to the Board. Appearances: Thomas R. Kendell, Q.C. Appearing on behalf of the Douglas Skinner Applicant/Respondent Paul R.

Burgess Appearing on behalf of the Peter-Paul Du Vernet Respondent/Applicant Authorities Cited: CASES CONSIDERED: Wheeler v. Hwang, 2007 NLTD 145; Marine Atlantic Inc. v. Seabase Ltd. (1995), (NLSC), 132 Nfld. & P.E.I.R. 121, 410 A.P.R. 121 (Nfld. S.C. (T.D)); Union des Consommateurs v. Dell Computer, 2007 SCC 34; CrestonMoly v. Sattva Capital, 2014 SCC 53; Seidel v. Telus Communications Inc., 2011 SCC 15; Alberta Medical Assn. v. Alberta (Minister ofHealth and Wellness), 2012 ABQB 113; Jean Estate v. Wires Jolly LLP, 2009 ONCA 339; Dancap Productions Inc. v.

Key BrandEntertainment Inc., 2009 ONCA 135 STATUTES CONSIDERED: Arbitration Act, R.S.N.L. 1990, c. A-14 TEXTS CONSIDERED: Mustill and Boyd, Commercial Arbitration, 2nd edition (Butterworths, 1989) REASONS FOR JUDGMENT ADAMS, J.: INTRODUCTION [1] The parties to the two applications before me entered into a contract on 29 November 2013 for the completion of certain civil

construction work on the Muskrat Falls Project in Labrador (the “CW Contract”). The CW Contract contained a provision for the resolution of disputes between the parties by arbitration. On 27 September 2018 Astaldi Canada Inc. (“Astaldi”) filed a Notice of Arbitration alleging numerous breaches of contract by Muskrat Falls Corporation (“MFC”) and in which it appointed its arbitrator to a prospective Board of Arbitration.

MFC refused to appoint an arbitrator and took the position that the arbitration agreement was not available to Astaldi in the circumstances by virtue of a subsequent contract amending the arbitration agreement in the CW Contract. [ 2 ] MFC filed an application in 201801G6917 in which it sought, among other things, a declaration that it was not obliged to appoint an arbitrator and that the arbitration process in the CW Contract was not available to Astaldi. [ 3 ] Astaldi filed an application in 201801G7001 seeking, among other things, an order that MFC is required to appoint an arbitrator pursuant to the arbitration agreement and a stay of the MFC application. [ 4 ] These two applications were heard together.

Factual background The Agreements [ 5 ] The CW Contract between the parties was entered into on or about 29 November 2013. There followed several other agreements amending the CW Contract which together form the whole contract between the parties. Of particular interest to these applications is the Incentive Funding Contract (“IFC”) entered into on or about 6 September 2018 by which, among other things, the parties agreed to restrict the application of the arbitration provisions in the CW Contract. [ 6 ] The CW Contract provides a dispute resolution system in

Article 31. It states at

Article 31.1: 31.1 If any dispute, controversy, claim, question or difference of opinion arises between the Parties under this agreement including an

interpretation, enforceability, performance, breach, termination or validity of this Agreement (“Dispute”), the Party raising the Dispute shall give Notice to the other Party in writing within thirty (30) days of the Dispute arising, and such Notice shall provide all relevant particulars of the Dispute. [ 7 ] The CW Contract also has a number of exhibits attached to it which by definition form part of the agreement. Of relevance to these applications is Exhibit 16, Rules for Dispute Review Board and Arbitration. Part A of Exhibit 16 sets out a process for resolving disputes short of arbitration.

Part B of Exhibit 16 establishes the rules by which an arbitration will be held if there is no resolution to a dispute pursuant to Part A. Together,

Article 31 and Exhibit 16 form the arbitration agreement in the CW Contract before the parties entered into the IFC. [ 8 ] The arbitration agreement provides, among other things, that:

a) Either party may submit a dispute to arbitration by giving a Notice of Arbitration to the other party (CW Contract,

Article 31.4);

b) The Arbitration Act , R.S.N.L. 1990, c. A-14 (“the Arbitration Act ”) applies for the

interpretation of terms and phrases in the exhibits (Exhibit 16, Part B,

section 1.1 (a) (i);

c) Any mandatory provisions in the Arbitration Act shall govern if there is any inconsistency between them and any of the Rules in Exhibit 16 (Exhibit 16, Part B,

section 1.4);

d) A reference to “the Court” in the exhibits shall mean the Supreme Court of Newfoundland and Labrador (Exhibit 16, Part B,

section 1.1(d);

e) Any arbitration shall be conducted in Toronto, Ontario (Exhibit 16, Part B,

section 5.1);

f) The arbitration shall be conducted before a three-person arbitral tribunal if the amount involved in the dispute exceeds $5,000,000 (Exhibit 16, Part B,

section 8.2);

g) In the case of a three-person arbitral tribunal, each party shall appoint an arbitrator and the two appointed arbitrators shall select a third arbitrator who shall be the chairperson (Exhibit 16, Part B,

section 8.4);

h) The Supreme Court of Newfoundland and Labrador shall determine procedural issues such as the appointment of an arbitrator if there is disagreement or failure to appoint one (Exhibit 16, Part B,

section 8.7); the replacement of an arbitrator (section 8.10); an “appeal” against an award of an arbitrator (section 17.6); a dispute respecting the consolidation of a number of arbitrations (section 20.2) and; any dispute respecting procedural issues arising out of the consolidation of arbitrations (section 20.4);

i) The arbitrator (which includes a Board of Arbitration) may rule on the arbitrator’s jurisdiction (Exhibit 16, part B,

section 10.2). [ 9 ] The IFC provided, among other things, that it incorporated by reference the CW Contract and subsequent agreements referred to therein, including

Article 31 and Exhibit 16. Of particular relevance to these applications, it also provided in

section 31 in relevant part: Exhibit 16 to the Agreement [CW Contract] including, but not limited to, the Dispute Review Board, provisions: …

c. are only available to Contractor [Astaldi] for claims for damages upon termination for Default. [10] The CW Contract sets out in

Article 24 a detailed provision respecting default and the rights of termination of the contract. [11] It is common ground that the CW Contract and subsequent contracts have not been formally terminated, although MFC issueda Notice of Default to Astaldi. Astaldi claims that by its actions MFC has rendered the contracts invalid and unenforceable. In fact,work was progressing on the project by Astaldi on the day of this hearing.

Nevertheless, there was evidence before me of numerousdisputes, both formal and informal, initiated by Astaldi claiming breach of contract, among other things, by MFC. [12] As already stated, on 27 September 2018 Astaldi served a Notice of Arbitration on MFC requesting a three-person arbitraltribunal and appointing its arbitrator. On 28 September 2018 MFC “rejected” the Notice of Arbitration and refused to appoint anarbitrator.

In its Notice of Arbitration, Astaldi alleged that shortly after entering into the CW Contract, MFC realized that it had under-budgeted the cost of the Muskrat Falls Project originally projected to be $6.2 billion. Astaldi alleges that thereafter MFC introduced“pain share” measures to ensure that additional costs would be borne by Astaldi.

Astaldi claims that because of these measures, amongother things, the CW Contract, including the subsequent agreements referred to earlier, in these reasons, no longer represent the bargainbetween the parties and that the agreements therein are no longer operative or enforceable, except for the arbitration agreement. Astaldialleges that by its conduct, MFC has converted the CW Contract into a fully cost reimbursable agreement. Astaldi seeks variousremedies, including damages in the amount of $500,000,000 for MFC’s negligence, breach of contract, breach of fiduciary duty andbreach of fair dealing.

MFC totally rejects Astaldi’s right to have its claim referred to arbitration and submits that this court is theappropriate forum in which to litigate the dispute raised by Astaldi.

Background Leading up to these Applications [13] Following the issuance of its Notice of Arbitration and appointment of an arbitrator and MFC’s rejection of the applicability ofthe arbitration provisions, Astaldi applied to the Superior Court of Ontario (the location agreed to by the parties where any arbitrationwould be held) to have that court appoint an arbitrator for MFC who could then with Astaldi’s arbitrator, appoint a Chair and therebyestablish the Board of Arbitration to hear Astaldi’s claims.

In response to the action by Astaldi in the Ontario Superior Court, MFC filedthe Originating Application in this Court seeking, among other things, that this Court is the proper forum in which to hear the matters indispute, including the appointment of an arbitrator and, more importantly, whether the matter raised in the Notice of Arbitration byAstaldi are subject to arbitration at all, that is, the jurisdiction of the Board of Arbitration.

MFC took the same position in the Ontarioaction. [14] Astaldi then filed its Originating Application in this Court seeking the declaratory relief earlier described, including that MFCbe required to appoint an arbitrator in response to Astaldi’s Notice of Arbitration and that both applications be heard together. [15] In reply to MFC’s application, Astaldi stated that it had adjourned its Ontario Superior Court application sine die and isproceeding in this Court.

Astaldi acknowledged that the Arbitration Act and the law of this province applies to the issues before me. issue [16] While there are two applications before me, the principle issue to be decided in both of them is whether this Court shoulddecide if the Board of Arbitration has the jurisdiction to determine the matters raised in Astaldi’s Notice of Arbitration or whether thatquestion should be referred to the Board of Arbitration in the first instance once it is established.

Depending on the answer to thatquestion, it may be necessary to make certain ancillary orders. considerations [17] The parties are in agreement that even if the CW Contract is found to be inoperative, unenforceable or is terminated, thearbitration provisions continue to be in full force and effect. I agree. [18] This is known as the separability principle. In some jurisdictions (e.g. Ontario) their arbitration acts provide for this. That isnot the case in the Arbitration Act. There is no such provision.

Nevertheless, our Court has recognized the necessity of maintainingarbitration provisions in order to avoid abuse by parties to contracts by them simply terminating a contract and thereby eliminating thearbitration provisions to which the parties have agreed. [19] In Wheeler v. Hwang, 2007 NLTD 145 the same issue arose as it was alleged that the contract which provided for arbitration ofa dispute was invalid and thus the arbitration provisions were unenforceable. Butler, J. held that the principle of separability applies inthis province.

She referred at paragraph 11 with approval to another decision of this Court: Marine Atlantic Inc. v. Seabase Ltd. (1995), (NL SC), 132 Nfld. & P.E.I.R. 121, 410 A.P.R. 121 (Nfld. S.C. (T.D)).

In that case, Hickman, C.J. referred to astatement of the law (which Butler, J. accepted) from Mustill and Boyd, Commercial Arbitration, 2nd edition (Butterworths, 1989). 11. … It is now firmly established that the arbitration agreement which creates these obligations is a separate contract, distinct fromthe substantive agreement in which it is usually embedded, capable of surviving the termination of the substantive agreement andsusceptible of premature termination by express or implied consent, or by repudiation or frustration, in much the same manner as in moreordinary forms of contract. … [20] Therefore, I find that the arbitration agreement survives any finding that the CW Contract is inoperative, invalid or has beenterminated.

I also find that the arbitration agreement includes the provisions in

section 31 of the IFC, that is, that arbitration is onlyavailable to Astaldi for claims for damages upon termination for default. This forms an integral part of the arbitration agreementbetween the parties and would survive under the separability rule.

[ 21 ] The issue here requires a review of the so called “competence – competence” principle in arbitral authority. This principle states that a challenge to the jurisidiction of an arbitrator must at first instance be referred to the arbitrator to resolve. The most authoritative statement of this principle is found in Union des Consommateurs v. Dell Computer , 2007 SCC 34 and subsequent cases considering it. [ 22 ] In Dell , a customer attempted to obtain a computer at an erroneously low price contained on the company’s website.

Dell refused to honour the purchase at that price and referred the dispute to arbitration pursuant to a term in the contract. The customer refused arbitration and sought to file a class action lawsuit. The Supreme Court (reversing the Quebec Court of Appeal) held that the matter first had to be referred to arbitration to have the issue of jurisdiction resolved. [ 23 ] Deschamps, J. stated for the majority at paragraphs 84 and 85: 84. First of all, I would lay down a general rule that in any case involving an arbitration clause, a challenge to the arbitrator's jurisdiction must be resolved first by the arbitrator.

A court should depart from the rule of systematic referral to arbitration only if the challenge to the arbitrator's jurisdiction is based solely on a question of law . This exception is justified by the courts'expertise in resolving such questions, by the fact that the court is the forum to which the parties apply first when requesting referral and by the rule that an arbitrator's decision regarding his or her jurisdiction can be reviewed by a court.

It allows a legal argument relating to the arbitrator's jurisdiction to be resolved once and for all, and also allows the parties to avoid duplication of a strictly legal debate. In addition, the danger that a party will obstruct the process by manipulating procedural rules will be reduced, since the court must not, in ruling on the arbitrator's jurisdiction, consider the facts leading to the application of the arbitration clause. 85.

If the challenge requires the production and review of factual evidence, the court should normally refer the case to arbitration, as arbitrators have, for this purpose, the same resources and expertise as courts. Where questions of mixed law and fact are concerned, the court hearing the referral application must refer the case to arbitration unless the questions of fact require only superficial consideration of the documentary evidence in the record . [emphasis added] [ 24 ] The issues before me raise questions of mixed law and fact.

MFC submitted that the case at bar falls into the exception created by Deschamps, J. in that “the questions of fact require only superficial consideration of the documentary evidence in the record”. MFC says the IFC restricts the availability of arbitration to a claim by Astaldi for damages on termination of the contract.

MFC says that it has not terminated the contract and therefore on a superficial consideration of the documentary evidence, this Court can conclude that there is no basis on which Astaldi’s claim should go to arbitration as it would essentially be a pointless and costly exercise to establish a Board of Arbitration which would have to come to the same conclusion. In other words, the exercise is really a question of law which the Court is uniquely suited to decide. This was the traditional approach applied to contractual

interpretation. [ 25 ] With respect, this approach invites an

interpretation of a commercial contract which is at odds with current contractual

interpretation established by the Supreme Court of Canada. In Creston Moly v. Sattva Capital , 2014 SCC 53 , the Court rejected this historical approach to contractual

interpretation. At paragraph 50, the Court stated: 50. With respect for the contrary view, I am of the opinion that the historical approach should be abandoned. Contractual

interpretation involves issues of mixed fact and law as it is 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. [ 26 ] The Court did not rule out the possibility that there may be cases where an extricable question of law might be discerned from a question of mixed fact and law but held at paragraph 55 that these will be rare. [ 27 ] So, is this one of those rare cases where an extricable question of law can be identified out of a mixed fact and law context? I find it is not. [ 28 ] I was referred to several cases which considered this question following the Dell case. Astaldi referred me to Seidel v.

Telus Communications Inc ., 2011 SCC 15 where the Supreme Court determined that the court was in a position to decide on the jurisdiction of an arbitrator based on the fact that there was a statutory prohibition governing the situation and the issue raised public policy considerations concerning consumer protection. [ 29 ] MFC referred me to Alberta Medical Assn. v.

Alberta (Minister of Health and Wellness) , 2012 ABQB 113 in which Wittmann, C.J.Q.B. found that in the circumstances of that case the Court held at paragraph 30 that it was as capable as an arbitrator to interpret the terms of the agreement on arbitration and the nature of the arbitration sought by the Medical Association. Consequently, Wittmann, C.J.Q.B. went on to conclude in paragraph 38 that the Applicant was not entitled to arbitration. [ 30 ] However, there are a number of differences between that case and the case at bar.

The contract in that case was found to not be an “ordinary contract” as it dealt “directly with the delivery of health care services” in the province. That is not the case here as the contract is, apart from the huge amounts of money involved, an ordinary commercial contract not involving any public policy issues such as in the Alberta Medical Assn. case. As well,

section 47 of the Arbitration Act in Alberta contains a provision specifically permitting the Court to determine, among other things, that the arbitration agreement does not apply to the matter in dispute. The Arbitration Act has no such provision. As well, the Alberta Medical Assn. case was decided in 2012.

So Wittmann, C.J.Q.B. did not have the benefit of the Supreme Court of Canada decision in the Sattva case for consideration in his deliberations. [ 31 ] For these reasons and other distinctions in the specific contract under consideration in that case, I find that the Alberta Medical Assn. case is distinguishable from the case at bar. [ 32 ] I was also referred by MFC to Jean Estate v. Wires Jolly LLP , 2009 ONCA 339 where the Ontario Court of Appeal upheld the

trial judge’s decision holding that the Court was the more appropriate forum in which to determine the applicability of a contingency fee agreement between the parties which also contained an arbitration clause for the resolution of disputes. The Court held that there were broad implications for lawyers and judges in the case and the issues in question would require only a brief consideration of the undisputed facts. That is not the case before me as the issues are restricted to the parties to the agreement and do not have broader implications.

As well, the arbitration raises extensive disputed facts between the parties which form part of the factual matrix to be considered in determining the question of jurisdiction. [ 33 ] In Dancap Productions Inc. v. Key Brand Entertainment Inc. , 2009 ONCA 135 , the Ontario Court of Appeal held that where it is arguable that the issue of jurisdiction should be left to the arbitrator, the Court should decline to make that decision.

Sharpe, J.A. for the Court, while acknowledging that the issue was not without doubt in declining to assume jurisdiction, referred to the breadth of the arbitration clause and the complex relationship between the parties as factors to consider in whether the question of jurisdiction should be referred to the arbitrator in the first instance. He concluded that before a court should assume jurisdiction it must be “clear and obvious that the dispute is not governed by the arbitration clause.” [ 34 ] This is consistent with the approach taken by Butler, J. in the Wheeler case referenced earlier.

During the reserve period of her judgment, the Supreme Court of Canada decided the Dell case. Butler, J. referred to Dell in her decision at paragraph 23 citing the same paragraphs that I have referred to at paragraph [23]. Having determined that the question to be determined was one of mixed fact and law, she concluded that the matter of jurisdiction to hear the arbitration must first be referred to the arbitrator for determination.

She concluded further, and I agree, that the onus is on the party seeking to deny the right to arbitration to show that the issue of jurisdiction should not in the first instance be referred to the arbitrator. [ 35 ] In this case, the arbitration provision is broad and empowers the arbitrator to determine “any dispute, controversy, claim, question or difference of opinion” that might arise between the parties, “including an

interpretation, enforceability, performance, breach, termination or validity” of the Agreement. Astaldi has alleged numerous breaches of contract by MFC including an allegation that the agreement (including the IFC) is no longer valid or enforceable due to the actions of MFC. The relationship between MFC and Astaldi has been fraught from the beginning and the factual matrix involving their contractual relationship is complex. It is not clear and obvious that that complex relationship will not form a part of the consideration as to whether the issues raised by Astaldi are subject to arbitration.

In my view, it is at least arguable that the dispute falls within the arbitration agreement. As in Wheeler , MFC has failed to discharge its onus of satisfying the Court that there should be a departure from the general rule that the question of the jurisdiction of the Board must first be referred to the Board of Arbitration. conclusion [ 36 ] In the result, I conclude: (

i) that the issue of the jurisdiction of the Board of Arbitration must first be submitted to the Board for determination; (ii) the Originating Application of MFC in 201801G6917 is stayed pursuant to

section 4 of the Arbitration Act ; (iii) the Originating Application of Astaldi in 201801G7001 is allowed in part as follows; (iv) MFC shall appoint an arbitrator to the Board of Arbitration within 14 days; (

v) The parties may apply for any further direction; (vi) Astaldi shall have its costs of both applications under column 3 of the costs Rule. _____________________________ James P. Adams Justice