November 22, 2016
Some time back, I wrote about Taking Arbitration Clauses Seriously, noting that “Canadian courts are increasingly willing to enforce the terms of arbitration clauses in commercial agreements.”
This has been reinforced by a recent Ontario Court of Appeal decision, Haas v. Gunasekaram, which involved a dispute between investors in a restaurant. The shareholders’ agreement contained a broadly-worded mandatory arbitration clause. It did not only refer disputes arising out of the agreement itself to arbitration, but it included “any dispute, difference or question … respecting this Agreement.”
The Court of Appeal considered this wording to fit within the same category as an earlier case which used the phrase “relating to” the contract. The earlier case had favoured arbitration over a court lawsuit, and in Haas, the Court of Appeal reached the same result.
In doing so, the Court noted that the Arbitration Act had been rewritten in 1991, and one change was that section 7 of the Act now states that if the agreement contains a submission to arbitration, the court shall stay any action brought in respect of the subject matter covered by the arbitration clause. “Shall” is legislative code for making something mandatory, and is read generally to mean “must”.
The old section 7 said that the court “may” stay an action. “May” is code for not mandatory, but simply permissive.
A “stay” is a court order which suspends a proceeding, either permanently, or temporarily.
The Court of Appeal further noted that section 17 of the Act, new in 1991, grants arbitrators the power to rule on their own jurisdiction. A 2007 Supreme Court of Canada decision states that the general rule is now that any dispute as to the arbitrator’s jurisdiction should be first decided by the arbitrator. Since that time, Ontario courts have deferred to arbitrators, except where there is a clear error in interpretation by the arbitrator.
The Court then provides a handy analytical framework for considering a stay, breaking the issues into five questions:
(1) Is there an arbitration agreement?
(2) What is the subject matter of the dispute?
(3) What is the scope of the arbitration agreement?
(4) Does the dispute arguably fall within the scope of the arbitration agreement?
(5) Are there grounds on which the court should refuse to stay the action?
Question 1 will usually be clear, though in some complex situations, it might be less so.
Question 2 was hotly contested in Haas, because the Statement of Claim, as they often do, contained claims not directly arising from a breach of contract, or at least, legally characterized as a statutory oppression remedy, or a common law tort rather than a breach of contract. The Court looked at the true nature of the dispute and how it arose out of the shareholders’ agreement, rather than the legal characterization of the complaints.
That determination feeds into Question 3, where the broad nature of the arbitration clause was considered, and applied.
Considering Question 4, the Court states that torts do not automatically fall outside arbitration agreements, nor do allegations of fraud. Somewhat surprisingly, the oppression remedy claim was found to at least arguably arise out of the contract. The court should favour the interpretation that does not undermine the arbitration agreement- the law favours the enforcement of arbitration agreements.
Question 5 in Haas led to a consideration of whether the agreement was appropriate with multiple parties (it was); The possibility that one of the defendants was not party to the agreement so there might still require a lawsuit against him as well as arbitration did not fall within the principle that multiple proceedings is undesirable.
This decision reinforces the view I took in my earlier article that before signing an agreement containing an arbitration clause,
- you should pause to consider whether arbitration is the better path for any disputes that might arise in the future.
- you need to make sure that you understand the clause – as noted in my earlier article, not all arbitration clauses are created equally.
- you might wish to try to have that clause removed or modified.
- if that is impossible, the submission to arbitration is one of many factors you must consider in deciding whether or not to sign the agreement – because the courts are likely to enforce the arbitration clause.
The choice between arbitration and litigation may seem unimportant in the excitement of negotiating a fresh deal, but good risk management requires that you consider what happens if something goes wrong.