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Federal court endorses competence-competence principle: General Entertainment and Music Inc. v. Gold Line Telemanagement Inc.,2022 FC 418
In General Entertainment and Music Inc. v. Gold Line Telemanagement Inc., 2022 FC 418, the Federal Court provided guidance on the legal test that applies when a party seeks to enforce an arbitration clause. This decision is notable because arbitration related matters are much less common in the Federal Court than the provincial courts, and it provides guidance to parties on the applicable framework where a party is seeking a stay.
What you need to know
- Gold Line Telemanagement Inc. (Gold Line) appealed a decision of an Associate Judge dismissing its motion to stay in favor of arbitration General Entertainment and Music Inc’s (GEM) action for copyright infringement.
- The primary issue before the court was whether the proceedings could be stayed in favour of arbitration in Bermuda.
- The Federal Court allowed the appeal. The case management judge’s refusal to stay the proceedings in favour of arbitration was based on an incorrect error of law.
GEM, incorporated in Canada in 2015, broadcasted television programs in the Farsi language to customers through subscription satellite services. GEM owned the copyright of the programs. Until 2017, the GEM group of companies were operated primarily through an entity called GEMCO, which was the predecessor-in-title to certain assets now owned by GEM. GEM asserted that it was not the corporate successor of GEMCO and it that had not assumed GEMCO’s contractual obligations.
Under the Content Acquisition and Licensing Agreement (Agreement), the Licensor, GEM, gave Ava, a contracting entity based in Bermuda that sourced content for Gold Line, its parent company, the right to offer its content. Gold Line provided some of their over-the-top media services through GLWiZ, which was a global IP platform owned and run by GLWiZ Inc, a subsidiary of Gold Line. The Agreement contained an arbitration clause that describes “General Entertainment Media”, but did not specify whether it was referring GEMCO, the GEM group of companies generally, or another entity.
The applicable test to stay proceedings in favour of arbitration
The primary issue before the court was whether the Federal Court proceeding could be stayed in favour of arbitration in Bermuda.
While there is a federal Commercial Arbitration Act (the CAA), its scope is narrower than the Federal Court’s subject matter jurisdiction. The CAA applies only to actions involving the federal Crown, and maritime and admiralty law matters. It does not apply to other claims that can be brought in the Federal Court, such as claims under intellectual property statutes.
Without directly acknowledging the scope of the CCA, the Court referred to the United Nations Foreign Arbitral Awards Convention Act, RSC 1985, c 16 (UNFAACA) which incorporates into Canadian law the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). The Court confirmed that Article II.3 of the New York Convention requires the Court to refer the matter to arbitration unless they found that the arbitration agreement was “null and void, inoperative or incapable of being performed.”
The Court held so long as the “the dispute potentially falls within the arbitration clause; it must be referred to arbitration.” This is consistent with the competence-competence principle and leading Supreme Court of Canada jurisprudence, including Dell Computer Corp v Union des consommateurs, 2007 SCC 34, which has consistently confirmed that arbitrators are competent to their own jurisdiction.
When an arbitration clause exists, the Federal Court held that any challenges to the jurisdiction of the arbitrator must first be referred to the arbitrator, subject to two exceptions:
- when the challenge to the arbitrator’s jurisdiction concerns a question of law alone, or
- when there is a question of mixed law and fact, the question of fact only entails a superficial examination of the documentary proof in record and the challenge is not a delaying tactic or prejudice to the recourse of arbitration.
The Federal Court also clarified that the case management judge erred in relying on the Supreme Court of Canada’s decision in Z.I. Pompey Industrie v ECU-Line N.V., 2003 SCC 27 when deciding whether to enforce the arbitration clause. That case holds that where a forum selection clause binds the parties, a court must enforce it unless the plaintiff can show sufficiently “strong cause” to support the conclusion that it would not be reasonable or just in the circumstances to require the plaintiff to adhere to the terms of the clause. Unlike a forum selection clause case, where there is a valid arbitration agreement, the court has no discretion not to stay the proceedings.
A party cannot escape arbitration by alleging termination of the contract
The Federal Court also confirmed that a party cannot escape arbitration by alleging termination of the contract containing the arbitration clause. The doctrine of separability considers an arbitration clause to be “autonomous and juridically independent from the main contract in which it is contained”. The Court held that even if the Agreement had been validly terminated, it would not detract from the Court’s duty to systematically refer the parties to arbitration.
This decision makes clear that a stay of proceedings in favour of arbitration is mandatory in Federal Court even if the CAA does not apply. Further, a party cannot escape arbitration by alleging termination of the contract containing the arbitration clause. This decision is under appeal although a hearing of the appeal has not been scheduled at the time of this writing.