Royalty Agreements – Arbitrate or Litigate?

November 13, 2021

By Brian Babcock

Despite the complexity of mining royalty agreements, if they contain an arbitration clause, Ontario courts are likely to stay any court proceedings and defer to arbitration. This is consistent with the recent trend to defer commercial disputes to arbitration generally, if that is what the parties agreed to in their contract.

In 743584 Ontario Inc. v. LAC Otelnuk Mining Ltd.,  the judge reviewed four separate alleged exceptions to the principle of deferral, and found that each was lacking.

The agreement provided for advance royalty payments, which became unattractive after the claims were abandoned. The LAC company argued that it could terminate payment upon notice. The numbered company disagreed.

The agreement contained a submission to an arbitration process which followed the framework of the Arbitration Act. Courts have established a firm position of deferring to similar clauses, with narrow exceptions. Unlike older times, judges today recognize that arbitrators are well equipped to resolve factual disputes, and may bring a special expertise.

Initially, the applicant gave notice of its intent to arbitrate under the agreement, but then never proceeded to give notice of arbitration. Instead, it commenced a court application. The LAC company moved for a stay of the application.

The numbered company first argued that the arbitration clause was inconsistent with the general jurisdiction clause of the agreement, which provided that all disputes were in the “exclusive jurisdiction of the Courts of Ontario”. However, LAC argued that section 17(2) of the Arbitration Act provides that the arbitration clause is treated as a separate agreement for the purposes of resolving this alleged conflict. There does not appear to be precedent for this ruling, which stretches the fabric of section 17(2) somewhat, but it is consistent with the principle of deferral. The judge ruled that the answer to this question requires examining the factual background surrounding the contract, which more appropriately should be done by the arbitrator.

The judge reached a similar conclusion with regard to arguments about a limitation period, LAC’s compliance with the dispute resolution terms of the agreement, and the application of the British Columbia Business Corporation Act provisions on liquidation. Each of these would require a factual inquiry more appropriately suited to arbitration.

The applicant may have triggered this result by first giving notice under the arbitration provisions of the agreement, but regardless, the case is a useful reminder that Ontario courts will defer even complex disputes to arbitrators. If anything, judges will favour deferring to arbitrators in areas like mining royalties, where an arbitrator may bring greater subject matter expertise to the dispute.

In light of this, care must be taken in drafting the dispute resolution provisions of your agreements. If a dispute does arise, care must be taken to follow the terms of the agreement.

Because of the complexity of mining agreements, arbitrators with industry specific experience are often a better choice than judges, who seldom have mining law experience. The usual benefits of privacy in arbitration also apply. Opinions vary on the desirability of arbitrators to decide cases based upon straight points of law. However, in most contract disputes, the issues mix questions of facts and law, which may be suited to arbitration.