The importance of a clearly stated arbitration provision in a cross-border agreement has benefitted a Canadian company this past week as shown by a decision from the U.S. District Court for the Eastern District of Michigan.
In Powertrain Production Systems, L.L.C. v. Nemak of Canada Corp., the defendant filed a motion to dismiss the complaint filed against it and compel arbitration pursuant to an arbitration provision in its agreement with Powertrain. Powertrain is a manufacturer and supplier of automotive parts in Michigan, while Nemak is an Ontario corporation that produces automobile components for sale to motor vehicle manufacturers. After finding a Powertrain proposal acceptable, Nemak submitted a purchase order (PO) to Powertrain that stated the contract was subject to Nemak’s Global Terms and Conditions. The Global Terms and Conditions provided that all disputed matters under the agreement must be submitted to arbitration, and that the contract terms were to be governed by Ontario law. Binding arbitration was to be conducted before a single arbitrator under the Ontario Arbitrations Act.
Powertrain filed its lawsuit in federal court alleging that Nemak breached its agreement by failing to install anticipated casting capacity which caused a shortfall in the production levels projected in Nemak’s request for proposal. Nemak moved to dismiss the case and compel arbitration and Powertrain did not oppose the motion. Nonetheless, the district court had to determine whether the issue of arbitrability was governed by the U.S. Federal Arbitration Act (the “FAA”) or Ontario law, the stated choice of law contained in the Global Terms and Conditions.
The court concluded that the arbitrability issue was governed by the Federal Arbitration Act, 9 U.S.C. § 1, et seq. It found support for its conclusion in one of its earlier decisions where it concluded that “even in international agreements, the [Federal Arbitration Act] governs the arbitrability of claims and choice-of-law clauses will be applied to the substantive aspects of the arbitration proceedings.” The court went on to note that the U.S. Supreme Court had found that “the choice-of-law provision covers the rights and duties of the parties, while the arbitration clause covers arbitration; neither sentence intrudes upon the other.” The court noted that Powertrain did not dispute the validity of the arbitration agreement. Therefore, applying the principles of its past decision involving similar facts, the court determined that while the FAA governed the arbitrability question and that the dispute was subject to arbitration, the substantive law to be applied in that arbitration was Ontario law. The court ordered the case dismissed and the parties to “submit their issues of disagreement to arbitration forthwith.”
While distance to the forum in Michigan would not be significant, and the Eastern District could quite easily have decided the dispute under Ontario substantive law, Nemak quite likely will benefit from avoiding the expense and invasiveness of U.S. pretrial discovery by having the arbitration conducted in Ontario. It can also be expected that the dispute will be resolved faster than if it were heard in a U.S. court and, of course, the details of the dispute will now become more private. So this case presents me with yet another opportunity to extol the virtues of international arbitration and how its inclusion in almost any type of cross-border agreement can serve the parties well, particularly non-U.S. parties.
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