Canada: Think That Arbitration Clause Applies? Think Again (And Think Fast!)

Last Updated: August 14 2017
Article by Scott McGrath

Many business contracts include broad arbitration clauses meant to apply to any issue related to the interpretation, application and operation of the contract. However, the decision in Allied Accounting v Pacey, 2017 ONSC 4388, released on July 18, 2017, shows that such clauses may be found not to apply in particular cases, depending on other clauses of the contract or the conduct of the parties.

In Allied Accounting the Defendant, Karen Pacey, was a former shareholder and employee of the Plaintiff, Allied Accounting & Tax Services Limited. Ms. Pacey terminated her relationship with Allied and sold her shares pursuant to a Share Purchase Agreement dated December 2, 2013.

Shortly after Ms. Pacey left, Allied alleged that she had misused its confidential information, solicited its employees and clients and competed with it contrary to the provisions of Allied's Shareholders' Agreement. Those allegations led to a war of correspondence between counsel and, on September 2, 2015, nearly two years after Ms. Pacey left Allied, Allied commenced an action against her. In its Statement of Claim, Allied sought a number of remedies, including an accounting, damages and injunctions.

In response to the claim, Ms. Pacey sought a stay of the proceedings based on an arbitration provision contained in Allied's Shareholders' Agreement. Her motion relied on s. 7(1) of the Arbitration Act, 1991, which states:

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.

The arbitration clause in the Shareholders' Agreement was drafted in a very broad manner:

Any question, dispute or disagreement ... arising under or pertaining to this Agreement including the interpretation, application or construction of this Agreement or any part thereof shall be determined by arbitration in accordance with the following terms and provisions...

On the face of this provision, Ms. Pacey appeared to have a strong case. However, the motion judge, Grace J., was not persuaded. The motion was dismissed for either of two alternative grounds.

First, Grace J. found that other provisions of the Shareholders' Agreement refined the broad language of the arbitration provision. The confidentiality and non-competition provisions contained references to a "court" and a "court of competent jurisdiction". For example, one article of the Shareholders' Agreement stated:

Availability of Equitable Relief:

Each Shareholder agrees that the restriction contained in section 8.1 [the agreement not to disclose confidential information] is reasonable and that in the event of any breach by the Shareholder thereof, the Corporation shall be entitled to equitable relief, including an injunction and specific performance, in any competent court having jurisdiction over the Shareholder, in addition to all other remedies available at law or in equity.

Allied argued that the references to "court" and "court of competent jurisdiction" conferred jurisdiction on the Superior Court of Justice for disputes concerning misuse of confidential information and the application for injunctive remedies, among other things.

In response, Ms. Pacey took the position that "court" was broad enough to include an arbitrator. This interpretation was rejected by Grace J., who noted that "court" and "arbitrator" are separately defined in the Arbitration Act, 1991.

Justice Grace went on to find that it made "good sense" for certain provisions to be carved out of the ambit of the arbitration clause. A party alleging a breach of confidentiality or a non-competition clause may need swift access to justice, which an arbitration clause will often not provide. In the case before him, Grace J. noted that the arbitration clause contained a detailed and potentially time-consuming process for the selection of the arbitrator.

In the event that he was wrong that the arbitration clause was not applicable to the dispute between the parties, Grace J. found that there was a second reason why the motion failed. He found that Ms. Pacey had "unduly delayed" in bringing the motion, which prevented her from obtaining the relief she sought.

The allegations against Ms. Pacey had first been raised in correspondence in early 2014. The Statement of Claim was not served on her until the fall of 2015. However, she did not bring her motion for a stay until late February, 2017. In the circumstances, this delay was properly classified as "undue", and the motion was alternatively dismissed on that basis.

The Court's decision serves to underscore two important considerations for counsel and parties considering whether to bring a motion to stay an action pursuant to an arbitration clause. First, a broad arbitration clause will not be determinative. Every section of the agreement at issue must be considered; especially those provisions that it is alleged were breached. An agreement may carve out certain causes of action (or actions based on violations of specific sections) from an arbitration clause, no matter how broadly that clause is drafted.

Second, a party should not delay in bringing its motion. Ms. Pacey's explanation for the delay in bringing her motion was that she was not sure that Allied was serious in pursuing its action. Each step and flurry of correspondence was followed by long periods of delay, and Ms. Pacey professed to believe that Allied may not have been serious in pursuing the litigation through. Justice Grace was sceptical about the genuineness of this evidence, but in any event he found that the delay had simply been too long.

A party who raises an arbitration clause as a potential defence should know that the longer the delay in raising this defence, the higher the risk that it will lose the opportunity to rely on the arbitration clause to stay the action. A party seeking to rely on an arbitration clause would be best served to bring a motion to stay as soon as possible to avoid jeopardizing its position.

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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Scott McGrath
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