COMMERCIAL ARBITRATION2012

PAPER 1.2

Interpretation of Arbitration Agreements

These materials were prepared by Ludmila B. Herbst of Farris, Vaughan, Wills & Murphy LLP, Vancouver, BC,
for the Continuing Legal Education Society of British Columbia, March 2012.
Ludmila B. Herbst
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INTERPRETATION OF ARBITRATION AGREEMENTS

I. Introduction ....................................................................................................................................................... 1
II. Who Interprets the Arbitration Agreement: Arbitrators or Courts? ...................................................... 1
III. Principles of Interpretation ............................................................................................................................. 2
A. Principles of Contractual Interpretation ............................................................................................................................. 2
B. Favouring Arbitration .................................................................................................................................................................... 2
C. Particular Wording .......................................................................................................................................................................... 3
IV. Drafting Considerations ................................................................................................................................... 4

I. Introduction
Parties, arbitrators and courts spend considerable time on the interpretation of arbitration agreements. This
brief supplement to the materials is intended to outline some of the issues that arise in relation to
interpretation, though given the volume of case law and commentary on the subjectcoupled with the
somewhat inconsistent fact that each agreement must be interpreted in light of its own language and
contextit is intended simply to provide a general overview.
The volume of case law and commentary relating to the interpretation of arbitration agreements is
attributable in part to the fact that their often insufficiently careful drafting can leave much unclear: often
boilerplate clauses are used in circumstances for which not intended. This can give rise to disputes about what
those agreements say about arbitral process and scope.
The volume of case law and commentary also stems partly from the importance of arbitration agreements,
given that an arbitrators jurisdiction is a matter of contract (Desputeaux v. Editions Chouette (1987) Inc., [2003]
1 S.C.R. 178 at para. 22; Cut & Run Holdings Ltd. v. Booze Bros. Holdings Inc. (2005), 2 B.L.R. (4th) 14 at paras. 24-
26 (B.C.S.C.)): their interpretation is worth fighting over. The proper interpretation of an arbitration
agreement can make the difference between whether or not arbitration is available at all (i.e., is the scope of
the arbitration provision wide enough to encompass a particular dispute between the parties?).
The proper interpretation of the arbitration agreement can also determine whether or not a court proceeding
commenced by one of the parties against the other can be stayed. In the words of s. 15(1) of the Commercial
Arbitration Act, R.S.B.C. 1996, c.55:
If a party to an arbitration agreement commences legal proceedings in a court against
another party to the agreement in respect of a matter agreed to be submitted to arbitration, a
party to the legal proceedings may apply, before filing a response to civil claim or a response
to family claim or taking any other step in the proceedings, to that court to stay the legal
proceedings. [emphasis added]

II. Who Interprets the Arbitration Agreement: Arbitrators or Courts?

The reference to interpretation issues that arise in determining whether or not to stay a court proceeding
pertaining to subject matter which may fall within the scope of an arbitration agreement of course raises the
issue of who should interpret an arbitration agreement: an arbitrator or the courts.
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The courts tend to defer to arbitrators in this regard, although the rule is not absolute. Generally, if it is
arguable that an arbitration agreement applies to a particular dispute, for example, the court will leave its
scope to be determined at first instance by the arbitral tribunal (Gulf Canada Resources Ltd. v. Arochem
International Ltd. (1992), 66 B.C.L.R. (2d) 113 (C.A.); Prince George (City) v. McElhanney Engineering Services Ltd.
(1995), 9 B.C.L.R. (3d) 368 (C.A.), leave to appeal to S.C.C. refused 136 W.A.C. 319n).
If the arbitral tribunal ultimately concludes that some or all of the claims do not in fact fall within the
arbitration agreement, the court may set aside the stay on application (W.Q. Turnbridge, Land Surveying Inc. v.
Cansel Survey Equipment (Canada) Ltd., [2000] B.C.J. No. 333 (QL) at para. 19 (S.C.)).

III. Principles of Interpretation1

A. Principles of Contractual Interpretation

Arbitration agreements are, of course, a form of contract. By extension, they are to be interpreted and
construed according to the same rules as applicable to contracts in general (J.J. Brearton et al., Rules of
Construction, 4 Am Jur. (2d) Alternative Dispute Resolution 73; St. Pierre v. Chriscan Enterprises Ltd. (2011),
80 B.L.R. (4th) 163 (B.C.C.A.)).
In this regard, an arbitration clause must be construed according to its language, in the context of the
agreement as a whole, and in the light of the circumstances in which it is made (Heyman v. Darwins, Ltd.,
[1942] A.C. 356 (H.L.), per Viscount Simon; Huras v. Primerica Financial Services Ltd. (2001), 55 O.R. (3d) 449
(C.A.), at paras. 10-12; Mantini v. Smith Lyons LLP (2003), 64 O.R. (3d) 505 at para. 21 (C.A.), leave to appeal to
S.C.C. refused 235 D.L.R. (4th) vi).

B. Favouring Arbitration
As a general principle, arbitration agreements are interpreted broadly, in favour of arbitration. Where the
arbitration clause is capable of two interpretations, and one provides for arbitration, the Court should favour
that interpretation (Greenfield Ethanol Inc. v. Suncor Energy Products Inc., 2007 CanLII 33118 at para. 8 (Ont.
S.C.J.), affd 2007 ONCA 823; Onex Corp. v. Ball Corp. (1994), 12 B.L.R. (2d) 151 (Ont. S.C.)).
A concomitant presumption is that the intention of the parties is that all disputes which relate to a specific
transaction will be subject to resolution by the same tribunal (M.J. Mustill and S.C. Boyd, The Law and Practice
of Commercial Arbitration in England, 2nd ed. (London: Butterworths, 1989), at 118).
This said, the parties to an arbitration agreement have a broad measure of autonomy in identifying disputes that
may be the subject of the arbitration proceeding, and may introduce a range of limitations on arbitral
jurisdiction. For example, some forms of arbitration clauses may authorize the arbitrator to determine liability
but not the amount of a claim, or only the amount of a claim rather than liability (Mustill and Boyd, supra, at
121). In some cases, an arbitration clause may also provide that only claims by one of the parties can be subject
to arbitration (ibid., at 121; Woolf v. Collis Removal Service, [1948] 1 K.B. 11 (C.A.) at 17). Limitations on arbitral
jurisdiction should be respected.

1 This portion of the paper is an abbreviated version of the discussion on this topic in Commercial Arbitration in
Canada: A Guide to Domestic and International Arbitrations (Toronto, Ont.: Canada Law Book, looseleaf), of which Ms.
Herbst is one of the co-authors. Ms. Herbsts co-author, J. Kenneth McEwan, QC, is also a panelist in this
conference.
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C. Particular Wording
Over time certain words have come to be used repeatedly in arbitration agreements, and jurisprudence has
developed surrounding that wording. For example, it is traditional to view the words arising out of the
contract, when used in an arbitration clause, as:
(a) broad and expansive (Campney & Murphy v. Bernard & Partners (2002), 224 F.T.R. 265; Prima
Paint Corp. v. Flood & Conklin Manufacturing Co., 388 US 395 (1967), at 398); and
(b) broader, in particular, than the concept of arising under a contract (Denison Mines Ltd. v.
Ontario Hydro, [1981] O.J. No. 807 (QL) (Div. Ct.), at para. 15; D.G. Jewelry Inc. v. Cyberdiam
Canada Ltd. (2002), 21 C.P.C. (5th) 174 (Ont. S.C.J.), at para. 25; Gomori v. Greenvilla
Development Group Inc. (2007), 64 C.L.R. (3d) 254 (Ont. S.C.J.), at para. 49; Heyman v. Darwins,
Ltd., [1942] A.C. 356 (H.L.), per Lord Porter; Gunter Henck v. Andre & Cie SA, [1970] 1 Lloyds
Rep. 235, at 240); Kinoshita & Co. (Re), 287 F.2d 951 (2d Cir. 1961), at 953).
However, two important cautions must be given about the application of traditional jurisprudence.
The first is that, of course, the facts of each particular case must be considered in determining how the wording
should properly be interpreted. Noting that the same or similar words may be differently interpreted in different
cases, the British Columbia Court of Appeal has observed that the question of whether a disagreement falls
within the scope of an arbitration agreement must be determined by an analysis of the nature of the
disagreement, the words of the arbitration clause, and the terms of the contract as a whole in their factual
context (St. Pierre v. Chriscan Enterprises Ltd. (2011), 80 B.L.R. (4th) 163 (B.C.C.A.), at paras. 16-17; see also Ashville
Investments Ltd. v. Elmer Contractors Ltd., [1989] Q.B. 488 (C.A.), at 495; Onex Corp. v. Ball Corp. (1994), 12 B.L.R.
(2d) 151 (Ont. Ct. (Gen. Div.), at 159-60).
The second point of note is that much of the case law, when assessed with a critical eye, tends to be quite
strained. It is difficult to justify some of the distinctions made between given wording, it is difficult to rank
clauses in terms of their efficacy, and analysis of both the case law and the wording itself may consume
unnecessary energy. In face of the case law, the temptation when drafting an arbitration clause can be to
invoke multiple catch phrases in the hope that one or other will accomplish the desired objective, however
inelegant this renders the arbitration agreement.
The state of the case law and the niceties that it contains were commented upon by Lord Hoffman in Fiona
Trust & Holding Corp. v. Privalov, [2008] 1 Lloyds Rep. 254 (H.L.), in terms that are useful to bear in mind:
11 With that background, I turn to the question of construction. Your Lordships were
referred to a number of cases in which various forms of words in arbitration clauses have
been considered. Some of them draw a distinction between disputes arising under and
arising out of the agreement. In Heyman v. Darwins Ltd [1942] AC 356 , 399 Lord Porter
said that the former had a narrower meaning than the latter but in Union of India v. E B
Aabys Rederi A/S [1975] AC 797 Viscount Dihorne, at p 814, and Lord Salmon, at p 817, said
that they could not see the difference between them. Nevertheless, in Overseas Union
Insurance Ltd v. AA Mutual International Insurance Co Ltd [1988] 2 Lloyd's Rep 63, 67, Evans
J said that there was a broad distinction between clauses which referred only those
disputes which may arise regarding the rights and obligations which are created by the
contract itself and those which show an intention to refer some wider class or classes of
disputes. The former may be said to arise under the contract while the latter would arise
in relation to or in connection with the contract. In Fillite (Runcorn) Ltd v. Aqua-Lift
(1989) 26 Con LR 66, 76 Slade LJ said that the phrase
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under a contract was not wide enough to include disputes which did not concern
obligations created by or incorporated in the contract. Nourse LJ gave a judgment to the
same effect. The court does not seem to have been referred to Mackender v. Feldia AG
[1967] 2 QB 590, in which a court which included Lord Denning MR and Diplock LJ decided
that a clause in an insurance policy submitting disputes arising thereunder to a foreign
jurisdiction was wide enough to cover the question of whether the contract could be
avoided for non-disclosure.
12 I do not propose to analyse these and other such cases any further because in my
opinion the distinctions which they make reflect no credit upon English commercial law. It
may be a great disappointment to the judges who explained so carefully the effects of the
various linguistic nuances if they could learn that the draftsman of so widely used a
standard form as Shelltime 4 obviously regarded the expressions arising under this charter
in clause 41(b) and arisen out of this charter in clause 41(c)(1)(a)(i) as mutually
interchangeable. So I applaud the opinion expressed by Longmore LJ in the Court of Appeal
[2007] Bus LR 687 , para 17, that the time has come to draw a line under the authorities to
date and make a fresh start. I think that a fresh start is justified by the developments which
have occurred in this branch of the law in recent years and in particular by the adoption of
the principle of separability by Parliament in section 7 of the 1996 Act. That section was
obviously intended to enable the courts to give effect to the reasonable commercial
expectations of the parties about the questions which they intended to be decided by
arbitration. But section 7 will not achieve its purpose if the courts adopt an approach to
construction which is likely in many cases to defeat those expectations. The approach to
construction therefore needs to be re-examined. [emphasis added]
Lord Hoffman turned by way of assistance to the sort of presumptions noted under Favouring Arbitration,
above:
13 In my opinion the construction of an arbitration clause should start from the
assumption that the parties, as rational businessmen, are likely to have intended any
dispute arising out of the relationship into which they have entered or purported to enter
to be decided by the same tribunal. The clause should be construed in accordance with this
presumption unless the language makes it clear that certain questions were intended to be
excluded from the arbitrator's jurisdiction. As Longmore LJ remarked, at para 17: if any
businessman did want to exclude disputes about the validity of a contract, it would be
comparatively easy to say so.

IV. Drafting Considerations

To state the obvious, given both the difficulties traditionally encountered in interpreting arbitration
agreements, and the significance of their content, it is important to be clear in drafting them. It is also
important, in doing so, to consider the situation to which they will be applied, rather than simply importing a
clause prepared for another purpose.