lululemon v. ICP: The Standard of Reasonableness will Generally Best Serve to Preserve the Autonomy of the Forum Selected by the Parties and to Minimize Judicial Intervention – #48

The yoga practitioners must have heard of lululemon. Indeed, headquartered in Vancouver, British Columbia, lululemon is the high-end yoga-focused chain featuring stylish athletic wear and accessories. It sells its products in retail stores and directly to consumers through their online platforms. Industrial Color Productions Inc. (“ICP”) is a professional media production company located across the USA. ICP provided professional media production services and photography for lululemon’s e-commerce platforms since October 2017. However, in May 2019, lululemon notified ICP that it intended to terminate the Agreement. Their contractual disputes were brought to the arbitral tribunal seated in Vancouver, Canada. In April 2020, the arbitrator rendered his award, requiring lululemon to pay to ICP, inter alia, an amount of US$1,081,967 and applicable interest as the damages for breach of contract. lululemon seeks to set aside this portion of the award before the Supreme Court of British Columbia as it claims that the arbitrator went beyond the scope of the submission to arbitration in making an award that ICP did not plead during the arbitral hearing (lululemon athletica canada inc. v Industrial Color Productions Inc., 2021 BCSC 15).

This court decision reminds us that the standard of reasonableness and not correctness will generally best serve to preserve the autonomy of the forum consensually selected by the parties and to minimize judicial intervention. It points out that although the Ontario courts applied standard of correctness on reviewing question of jurisdiction in The United Mexican States v. Burr, 2020 ONSC 2376 and Mexico v. Cargill, Incorporated, 2011 ONCA 622, a commercial dispute involving two private companies is “foundationally different than” an investment dispute between a state and foreign investors. In addition, Mr. Justice Funt noted that the parties’ expectations as to the completeness of the arbitrator’s reasons should be less than those of the parties engaged in the commercial litigation before the judicial tribunal.

Factual Background

On October 31, 2017, the parties entered into a Services Agreement (dated August 13, 2017). Sections 53 and 54 of the Services Agreement provided that the parties would submit any dispute arising under the Service Agreement to arbitration administered by International Centre for Dispute Resolution in accordance with its International Arbitration Rules (the “IA Rules”).

ICP agreed to provide its services under the applicable “Statement of Work” (“SOW”). Sections 12 and 13 of the SOW provided that a 75 days’ written notice of termination is required if either party intends to terminate the agreement before the end of the initial term or the end of any extension.

On May 13, 2019, lululemon notified ICP that it intended to terminate the Agreement as of August 1, 2019. However, lululemon’s employees and executives told ICP verbally that notwithstanding the written notice, lululemon intended to cease shooting with ICP as early as June 14, 2019. This verbal notice made the written notice improper and in contravention of the agreement.

On October 8, 2019, ICP filed its Notice of Arbitration which included its Statement of Claim (“SOC”). It claimed that the Notice of Termination was of no force and effect.

The arbitrator characterized the issue of the parties as the “commercial consequences of the termination” and “further damages for breach of the Agreement”.

In relation to ICP’s claim, the arbitrator found that lululemon’s notice of termination was not effective and that ICP was entitled to compensation for 75 days of additional losses resulting from the Respondent’s premature termination of the Agreement. Furthermore, the arbitrator awarded ICP US$1,081,967 as damages for lululemon’s “premature termination of the Agreement”.

Main Issues to Analyse

1. What is the standard of review?

2. Did the arbitrator go beyond the scope of the submission to arbitration in making this award?

Photo by Becky.C

Court’s Analysis

1. The key statutory provisions are ss. 5, 16 and 34 (2)(a)(iv) of the International Commercial Arbitration Act. Section 5 of the ICA Act stipulates that judicial intervention is limited. Section 16 of the ICA Act stipulates that the arbitral tribunal may rule on its own jurisdiction. Section 34(2)(a)(iv) stipulates that the party may apply for setting aside an arbitral award if the arbitral award “deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration”.

2. In paragraph 19 of the decision, Mr. Justice Funt emphasized that it is important to adopt a standard which seeks to preserve the autonomy of the forum selected by the parties and to minimize judicial intervention when reviewing international commercial arbitral awards in British Columbia (See also Quintette Coal Ltd. v. Nippon Steel Corporation (1991), 50 B.C.L.R. (2d) 207 (C.A.) and Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 at paras. 104–106).

Although lululemon submitted that the standard of review should be correctness where there is a true question of jurisdiction based on the decision of the Ontario Court of Appeal in Mexico v. Cargill, Incorporated, 2011 ONCA 622, Mr. Justice Funt noted that the judicial review of an arbitral award on the disputes between two private commercial parties is “foundationally different than” the judicial review on the award from the investor-state arbitration engaging international multinational trade agreement or treaty interpretation principles.

Therefore, the standard of reasonableness and not correctness should be applied in this judicial review.

3. The pleadings of the parties in arbitration frame the submission to arbitration, which would determine the arbitral tribunal’s scope of authority. Mr. Justice Funt noted that ICP’s pleadings should not be read with the technical precision lululemon submits. Instead, ICP’s claim should be read in light of the SOC as a whole, the Services Agreement, and the subject SOW. Secondly, Mr. Justice Funt noted that ICP sought the arbitrator to find that lululemon breached the Services Agreement in its pleading. Thirdly, ICP’s pleadings refer to “an amount not less than the Contractual Minimum due to it up to and including October 14, 2019”. Although the term “contractual minimum” was not a defined term, a similar phrase i.e. “contractual minimum shortage” was referred to elsewhere in the SOC and the supporting materials. Fourthly, despite the fact that the arbitral award did not specifically address lululemon’s concerns on the scope of the arbitrator’s scope of authority, which as raised in its closing submissions, Mr. Justice considered that it is not required for the arbitrator to do so, especially having regard to the Kompetenz-Kompetenz principle.

Based on the above-mentioned reasons, Mr. Justice Funt found it reasonable for the arbitrator to rule on the damages for lululemon’s “premature termination of the Agreement”

Conclusion: Main Takeaways

1. It is worth to note that a common international approach has not yet established with respect to the standard of judicial review of jurisdictional rulings by arbitral tribunals in the context of international commercial arbitration (Gary B. Born, International Commercial Arbitration, 3rd ed. Alphen aan den Rijn, The Netherlands: Kluwer Law International B.V., 2020, at page 1198). This may cause additional judicial challenges when the parties apply to recognize and enforce an arbitral award in a foreign jurisdiction (See my notes on Emphor v. Yuexin).

2. In terms of the guide for arbitrators in writing reasons, it is worth to read the Supreme Court of British Columbia’s decision on Gormac Developments Ltd. v. Teal Cedar Products Ltd., 2020 BCSC 712.

3. In this court decision, Mr. Justice Funt annexed the entirety of the commercial arbitral award on the dispute between lululemon and ICP. In my opinion, in order to better protect the confidentiality of commercial arbitration proceedings and arbitral awards, it would be sufficient to cite the extracts of the award in the court decisions on judicial review, homologation or recognition and enforcement of the arbitral awards (See my notes on 79411 USA Inc. c. Mondofix Inc. 2020 QCCS1104).

(Reminder: The purpose of this article is to provide general legal information. It does not contain a full analysis of the law nor does it constitute a legal advice on the points of law discussed. To minimize the legal risk for your business, you must take specific legal advice from a lawyer on any particular matter which concerns you. Thanks for your attention.)