Summary

Ontario courts may not stay an action in favour of arbitration if the substance of the claim falls within an exception to an arbitration clause.

In Eurofins Experchem Laboratories, Inc. v BevCanna Operating Corp., 2023 ONSC 4015, Justice De Sa of Ontario's Superior Court of Justice examined the scope of an arbitration clause in a contractual dispute between Eurofins and BevCanna. Eurofins commenced a claim against BevCanna for $95,751.30 in unpaid fees for the supply, analytics, and testing of products. BevCanna brought a motion to permanently stay the action, as the parties' agreement contained an arbitration clause.

The court dismissed BevCanna's motion. It determined that the arbitration clause contained an explicit exception that allowed Eurofins to pursue an action for unpaid fees. The key takeaway from the decision is this — when parties have an arbitration clause but wish to pursue litigation by relying on any carve-outs, they should ensure that the substance of their claim aligns with those carve-outs.

Background

Eurofins Experchem Laboratories, Inc. ("Eurofins") and BevCanna Operating Corp. ("BevCanna") entered into a Good Manufacturing Practices ("GMP") Agreement for the supply, analytics, and testing of products to ensure compliance with Health Canada Regulations. However, BevCanna was alleged to have failed to pay Eurofins approximately $95,751.30 in unpaid invoices. As a result, Eurofins commenced a claim against BevCanna for, among other things, breach of contract, breach of trust, unjust enrichment, and quantum meruit.

The GMP Agreement contained the following arbitration clause:

"Unless specifically agreed otherwise, all disputes arising out or in connection with Contractual Relationship(s) hereunder shall be governed by the substantive laws of the Province of Ontario exclusive of any rules with respect to conflicts of laws and be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with said rules, each party to bear its own costs. The arbitration shall take place in Toronto, Ontario. [Emphasis added.]"1

However, another section of the GMP Agreement contained the following carve-out:

"[Eurofins] may elect to bring action for the collection of unpaid fees in any court having competent jurisdiction. [BevCanna] shall pay all of the [Eurofins'] collection costs, including attorney's fees and related costs".2

BevCanna's Motion

BevCanna brought a motion to permanently stay Eurofins' claim or any of the claims caught by the arbitration clause. It had two main arguments:

  • Eurofins' claim against BevCanna fell within the arbitration clause. The claim arose "out or in connection to" the GMP Agreement. The courts should interpret the language of the arbitration clause "generously".3
  • Eurofins' claim went beyond the carve-out. In addition to the unpaid fees, which BevCanna acknowledged to fall within the carve-out, Eurofins' other claims fell squarely under the arbitration clause. These claims included breach of trust, unjust enrichment and breach of fiduciary duty. In these circumstances, all of Eurofins' claims should proceed via arbitration instead of litigation.4

The Court's Dismissal of BevCanna's Motion

Justice De Sa rejected BevCanna's arguments and dismissed its motion. In reaching its decision, the court held that:

  • Forcing Eurofins to arbitrate on the issue of the unpaid fees would "thwart the very purpose" of the carve-out. The rationale for staying actions in favour of arbitration is to give effect to the parties' agreement to arbitrate. It is not a general preference for arbitration.
  • The parties drafted the GMP Agreement specifically to allow Eurofins to commence an action regarding the unpaid fees. The Agreement further contemplated that BevCanna be responsible for legal expenses associated with an action for the collection of unpaid fees.
  • There was no basis to stay any portion of Eurofins' claim. The substance of Eurofins' claim "relate[d] in its entirety to unpaid fees". All of Eurofins' ancillary claims (e.g., breach of trust) related to the recovery of unpaid fees.5

Implications

While courts will construe arbitration clauses generously, they will give effect to any exceptions or carve-outs to the extent that they reflect the parties' intentions and expectations. This decision has practical implications for those seeking to commence a claim in court, despite an existing arbitration clause. To navigate this, follow three key steps:

  1. Examine the arbitration clause to see if it permits exceptions or carve-outs. In particular, watch for language such as "unless specifically agreed otherwise";
  2. Identify and understand the scope of any carve-outs and the specific circumstances in which they apply; and
  3. Ensure that the substance of the claim aligns with the applicable carve-outs, including when drafting the pleadings (e.g., Statement of Claim). Doing so increases the likelihood that the courts will allow the claim to proceed through the courts instead of staying the claim in favour of arbitration.

Footnotes

1. Eurofins Experchem Laboratories, Inc. v BevCanna Operating Corp., 2023 ONSC 4015 at para. 15.

2. Ibid. at para. 17.

3. Ibid. at para. 27.

4. Ibid. at paras. 29-31.

5. Ibid. at paras. 32-37.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.