Canada: New Test: Ontario Court Stayed Action In The Face Of Broad Arbitration Agreement

In Haas v. Gunasekaram (Haas), the Court of Appeal for Ontario clarified the test for staying court proceedings under section 7(1) of the Ontario Arbitration Act and emphasized that courts should enforce arbitration agreements where possible. In so doing, it reversed a lower court's decision and stayed the plaintiff's action.

FACTS

The plaintiff entered into a shareholders' agreement relating to a Toronto restaurant and invested C$200,000. The restaurant failed and the plaintiff launched an action against the defendants. The plaintiff alleged that he was induced to enter into the shareholders' agreement by fraudulent misrepresentations about the restaurant's business prospects and how it would be managed.

The shareholders' agreement contained a broadly-worded arbitration clause, which stated:

If at any time during the currency of this Agreement, or after the termination hereof, any dispute, difference or question shall arise, or any failure to agree as specifically hereinabove referred to, shall occur among the parties hereto or certain of them, respecting this Agreement or anything herein contained then every such dispute, difference or question or failure to agree shall be referred to a single arbitrator to be appointed by the parties to the dispute within ten (10) days of such referral...

In the court at first instance, the defendants unsuccessfully moved under section 7(1) of the Arbitration Act to stay the action in favour of arbitration. That provision provides:

If a party to an arbitration agreement commences a proceeding in respect of a matter to be submitted to arbitration under the agreement, the court in which the proceeding is commenced shall, on the motion of another party to the arbitration agreement, stay the proceeding.

DECISION

Consistent with most recent case law in this area, the Court of Appeal noted that the law "strongly favours giving effect to an arbitration agreement" and that previous cases revealed a "pro-arbitration orientation". The Court noted the mandatory language of section 7(1).

The Court then set out and applied the following five-part analytical framework for determining if an action should be stayed under the Arbitration Act:

  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?

In Haas, it was common ground that an arbitration agreement was embedded in the shareholders' agreement. On the scope issue, the Court concluded that the language of the arbitration agreement was "broad".

The main disagreement centered on whether the subject matter of the dispute fell within the scope of the agreement. The plaintiff argued that his court action was focused on tort and fraud claims that were not captured by the arbitration clause. The motion judge applied a "pith and substance approach" in characterizing the subject matter of the dispute, and agreed that most of the plaintiff's claims fell outside the scope of the agreement, meaning that the arbitration agreement did not extend beyond contractual claims.

While the Court of Appeal agreed that "pith and substance" was the correct approach, it disagreed in the result. It concluded that the alleged misrepresentations related to the defendants' failures to perform their obligations under the shareholders' agreement, and thus fell within the scope of the arbitration agreement. In arriving at this conclusion, the Court underscored that tort claims do not automatically fall outside of arbitration agreements and that fraud allegations do not automatically vitiate such agreements. In passing, the Court remarked that there was no specific exclusion for tort claims, misrepresentation, or fraud in the arbitration agreement.

Finally, the Court rejected the plaintiff's arguments that it should exercise its discretion to refuse to stay the action on the basis that the arbitration agreement was invalid and because there might be a multiplicity of proceedings. It again emphasized that "the court should not lightly depart from the strong policy support for enforcing arbitration agreements."

IMPLICATIONS

Haas sits squarely in the long line of pro-arbitration decisions issued by Ontario's highest court. It illustrates the strong tendency of Ontario courts to give effect to broadly-worded arbitration clauses, and reveals a preference that arbitrators decide issues of jurisdiction at first instance (including under the so-called competence-competence principle). But the Haas decision also extends the jurisprudence by providing a useful five-part test for motions to stay court actions in favour of arbitration. Here, the framing of the fourth factor is key: does the dispute "arguably fall" within the scope of the clause?

The decision may help settle some uncertainty that arose from the 2014 decision of the Ontario Superior Court of Justice in 2156775 Ontario Inc. v. Just Energy (Just Energy). In Just Energy, the court refused to stay court proceedings in the face of an arbitration clause on the grounds that the clause applied only to disputes "under" the agreement and not to a challenge to the existence of the agreement itself. In our June 2014 Blakes Bulletin: Handle With Care: Ontario Court Finds Boilerplate Arbitration Clause Doesn't Apply, we wrote that the outcome in Just Energy was curious as it ran counter to the growing body of law in Ontario more deferential to arbitration. Haas now suggests that Just Energy was an outlier decision.

Haas also reinforces the importance of careful drafting. Parties wishing to exclude certain matters from arbitration (such as tort, fraud, or misrepresentation claims) should consider explicit language to that effect for their arbitration agreements. Absent such language, motions to stay such claims litigated in court are likely to succeed in the face of a broadly-worded arbitration clause.

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.

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