Canada: Rethinking Arbitration Clauses – Are They More Of A Headache Than They Are Worth? – A Case Comment On Novatrax International Inc. v. Hägele Landtechnik GmbH

Last Updated: November 17 2016
Article by Varoujan Arman

Most of our business clients will be familiar with the concept of arbitration clauses found in their commercial agreements. An arbitration clause is an agreement between the parties to forgo taking any dispute that may arise to court. Rather, the parties are to refer the dispute to an arbitrator, who is hired by the parties to act like a judge (some of them are retired judges) and will preside over an out-of-court private trial and decide the dispute. Such clauses are intended to help parties resolve disputes that may arise during the course of their relationship in a speedy, cost-effective, private and final way (rights of appeal are usually limited).

While such clauses appear to be a good idea in theory, in practice they can often lead to more headaches and expense than if there were no arbitration clause at all and the parties had to resort to the ordinary courts.

The recent decision of the Court of Appeal for Ontario in Novatrax International Inc. v. Hägele Landtechnik GmbH, 2016 ONCA 771 provides a prime example of how arbitrations can complicate, rather than simplify matters. The result in that case is that there may now be more than one proceeding to resolve the dispute – an arbitration, plus a court case.

The appellant in that case, Novatrax, had an Exclusive Sales Agreement ("ESA") with Hägele Landtechnik GmbH ("Hägele") whereby Novatrax was granted the exclusive right to market and sell Hägele's industrial reversible fans in North America. Hägele purported to terminate the ESA for cause, cut out Novatrax and began selling its products in North America directly through a new company it incorporated, Cleanfix North America Ltd. ("Cleanfix"). Novatrax sued Hägele in the Ontario Superior Court of Justice for damages for breach of the ESA. It also named Hägele's principals, Karl Hägele and Benjamin Hägele as defendants, as well as Cleanfix. The Hägeles and Cleanfix were not signatories to the ESA.

The ESA contained an arbitration clause that read as follows:

The contractual parties agree that German law is binding and to settle any disputes by a binding arbitration through the "Industrie und Handelskammer" (Chamber of Commerce) in Frankfurt.

The defendants brought a motion to the court to stay (stop) the action on the basis that the arbitration clause required Novatrax to sue by way of private arbitration in Frankfurt. Novatrax opposed the motion on the basis that it was not required to proceed by way of arbitration because the individual Hägeles and Cleanfix were not parties to the ESA and therefore they could not be forced to arbitrate. The judge hearing the motion stayed the entire claim against all defendants in favour of arbitration in Frankfurt. Novatrax appealed.

In a 2-1 split decision, the Court of Appeal dismissed the appeal and upheld the motion judge's decision. Justice Brown, writing for the majority, held that enforcement of the arbitration clause required that all of the claims brought in the Ontario action be stayed, even as against those defendants who could not be compelled to participate in the arbitration because they were not signatories to the ESA containing the arbitration clause. He found that the language of the clause was broad enough to include, within the term "any disputes", claims relating to any stage of the ESA's life-cycle, including the wrongful termination and breach of duty of good faith claims pleaded by Novatrax. A key underpinning of the majority's decision appears to have been the finding that Novatrax's claims against the individuals and Cleanfix were intertwined with the claims against Hägele. That is, Cleanfix was sued because it was a corporation created to further the common purpose of the defendants, and the individuals were sued because of their relationship to Hägele. Since the claims raised by Novatrax arose out of the same transactions and occurrences and raised common questions of fact and law linked to the claims against Hägele, all of the claims must be dealt with together.

In her dissenting opinion, Justice Feldman would have set aside the stay of the claims against the non-parties to the arbitration clause and allowed those claims to proceed. She was of the view that the stay unjustifiably deprived Novatrax of its right to litigate those claims in Ontario under Ontario law.

From Novatrax's perspective, the effect of the majority's decision appears to force it to arbitrate claims with parties with whom it never agreed to do so. The majority of the Court of Appeal rejected that argument, citing that the practical effect of the stay of the entire action was that if the other defendants refused to participate in the arbitration, the question of whether Hägele wrongfully terminated the ESA would be decided first in an arbitration. Depending on the outcome of that issue, Novatrax could then decide whether to continue its claim against the defendants (the claim was stayed, not dismissed, so Novatrax would be free to ask for an order lifting the stay and allowing the claim to proceed). The result is the possibility of a multiplicity of proceedings in different jurisdictions relating to the same issues involving related parties. Add to that the significant expense and delay involved in arguing the motion and the appeal about whether the claim should be stayed or not, and from a practical point of view, this was not a good outcome for Novatrax.

The result highlights the pitfalls of arbitration clauses and should give pause to parties and their counsel before deciding to include them in their commercial agreements. An arbitration clause that seems desirable when the deal is done and everyone is getting along may become a serious nuisance and impediment years later once the relationship has broken down. While such clauses are intended to provide for a more efficient, timely, cost-effective, private and final dispute resolution process, instead, they can only serve to make things more complicated, costly and just as public as court proceedings. Worse still, a dispute over whether to arbitrate or go to court diverts precious time and resources away from resolving the real underlying dispute.   

Another common example of arbitration clauses becoming impediments to dispute resolution are those that provide for a three-member arbitral panel rather than a single arbitrator. The clause may sound like a good idea because it is intended to minimize the chance of error, since three arbitrators will be considering and deciding the matter together. However, suppose the contract under-performed and, ten years later, was not worth anywhere near what had been anticipated at the outset. It may no longer be cost-effective to hire three arbitrators to resolve the dispute. Unless both parties agree to use one arbitrator instead, the parties will be stuck with having to pay for three.

An alternative approach to arbitration would be to leave arbitration clauses out of commercial agreements altogether. Instead, when a dispute arises, the parties and their litigation counsel can consider whether a voluntary, after-the-fact arbitration may be appropriate. By that time, the parties will know what the issues are and what parties need to be at the table, and can custom tailor their arbitration to the circumstances. Of course, this requires the co-operation of counsel and their clients. While a collaborative approach is preferable in principle, it can sometimes be hard to achieve in practice. Litigation is, by its nature, adversarial, and getting parties and their counsel to agree on anything, let alone to arbitrate and give up the right to go to court, can be a challenge. However, good counsel and reasonable clients should be able to overcome this obstacle in most cases.

When including arbitration clauses in commercial agreements, parties and their lawyers would be well advised to treat such clauses as more than afterthoughts found in the boilerplate language at the end of agreements, and to take some time to consider the desirability and scope of such clauses. If they do so, they can save themselves significant time and expense down the road.

Original Newsletter(s) this article was published in: Commercial Litigation Update: November 2016

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Varoujan Arman
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.