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Attornment - Arbitration. RH20 North America Inc. v. Bergmann
In RH20 North America Inc. v. Bergmann (Ont CA, 2024) the Ontario Court of Appeal considered court stay provisions, the International Commercial Arbitration Act (Ontario) [ICAA] and the effect of attornment to the courts on the right to arbitrate:Art. 8 of the Model Law and the negative obligation of a party to an international arbitration agreement
[44] In this case, the availability of a stay of court proceedings in favour of arbitration is controlled by art. II(3) of the New York Convention, art. 8(1) of the Model Law, and s. 9 of the ICAA:. Art. II(3) of the New York Convention reads:
The court of a Contracting State, when seized of an action in a matter in respect of which the parties have made an agreement within the meaning of this article, shall, at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.
. Art. 8(1) of the Model Law was set out in para. 33 above of these reasons; and
. Section 9 of the ICAA states:
Where, pursuant to article II (3) of the Convention or article 8 of the Model Law, a court refers the parties to arbitration, the proceedings of the court are stayed with respect to the matters to which the arbitration relates. [45] Arbitration agreements have both positive and negative effects on parties. The positive effects include the obligation to participate and cooperate in good faith in the arbitration of disputes pursuant to the parties’ arbitration agreement; the negative effects include the obligation not to seek the resolution of such disputes in national courts: Gary B. Born, International Commercial Arbitration, 3rd ed., at p. 1349.[8] The negative obligations imposed by an agreement to arbitrate have their source in the parties’ agreement. As Born explains in his treatise, at p. 1368: “The scope of this aspect of the negative obligation not to litigate arbitrable disputes is generally the mirror image of the scope of the positive obligation to arbitration: put simply, disputes which must be arbitrated, may not be litigated.”
[46] One consequence of a party to an arbitration agreement breaching its negative obligation was described by Smutny, McDougall and Daly in A Practical Guide to International Arbitration:Most people think of the negative obligations first. In particular, parties to a valid arbitration agreement are prohibited from trying to resolve any disputes falling under the agreement in court or by any means other than arbitration. One of the cornerstones of international arbitration is exclusivity. A valid arbitration agreement designates the arbitral tribunal as the one and only forum to resolve any disputes arising out of that agreement. This means that parties bound to arbitrate also thereby agree to waive their rights to litigate disputes in a national court.
...
A party can waive the right to compel arbitration. This usually happens when that party fails to invoke its rights under the arbitration agreement or acquiesces to litigation concerning matters subject to arbitration — for example, by participating in the litigation beyond raising threshold jurisdictional objections.”[9] [Emphasis in original]. [47] Where parties have agreed to submit disputes to arbitration, provisions in the New York Convention and the Model Law recognize and enforce the negative effects of an agreement by requiring either the stay of national court litigation of arbitrable disputes or the dismissal of such litigation. Art. 8(1) of the Model Law reflects such a policy. To repeat, that article states:A court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed. [48] As Born writes, at p. 1369:Article 8(1) of the UNCITRAL Model Law is representative of national arbitration legislation’s treatment of the negative effects of an arbitration agreement ... Article 8(1) imposes an obligation identical to that in Article II of the New York Convention, requiring that courts “refer the parties to arbitration.” This provision impliedly precludes a national court from entertaining a dispute on the merits, if the parties have agreed to arbitrate it, and instead requires that the parties be referred to arbitration. [Emphasis added.] [49] At p. 1371, Born explains the basis underlying the policy given effect by art. 8(1) of the Model Law:[T]he predicate of this approach is that parties to arbitration agreements are themselves mandatorily prohibited from litigating arbitrable disputes. Efforts to do so, by pursuing litigation of arbitrable disputes, are per se violations of a party’s negative obligation not to litigate disputes that are subject to arbitration. Just as the obligations of national courts, under the Convention and Model Law are mandatory, so the obligations of parties under their agreements to arbitrate are mandatory. [Emphasis added].[10] [50] A court considering a party’s request for a stay under art. 8 of the Model Law therefore must assess two timing-related matters: (i) whether the party has requested a court to refer the parties to arbitration “not later than when submitting his first statement on the substance of the dispute”; and (ii) whether, before making that request, the party had sought assistance from the court on the substantive claims asserted against it.
[51] As to the timing of the request for a stay, in his commentary on art. 8(1) of the Model Law, Professor Gilles Cuniberti writes that “[b]eyond this time, a request for reference to arbitration would be inadmissible and the court may continue its proceedings.” [11] A late request would be inadmissible as its timing would signal that the requesting party had not adhered to its fundamental negative obligation not to litigate disputes that are subject to litigation.
[52] In the present case, Click satisfied that aspect of the timing requirement of art. 8(1) of the Model Law as it made its request for a stay before it had filed a statement or pleading in response to the statement of claim.[12]
[53] However, a court assessing a request for a stay under art. 8(1) of the Model Law must also consider whether the requesting party had sought the court’s assistance on the substantive claim before requesting a stay in favour of arbitration, thereby ignoring its fundamental obligation not to pursue in court the resolution of disputes that are subject to arbitration. As put by David St. John Sutton, Judith Gill & Matthew Gearing in Russell on Arbitration, 24th ed. (London: Thomson Reuters, 2015), at §7-028, if the requesting party accepts “the court’s jurisdiction to hear the substantive case he is treated as electing to have the matter dealt with by the court rather than insisting on his contractual right to arbitrate.”
[54] Alexander M. Gay, Associate Justice Alexandre Kaufman & James Plotkin, in their Arbitration Legislation of Ontario: A Commentary, 4th ed., (Toronto: Thomson Reuters, 2023) at pp. 974-75, identify some the principles that have emerged from the jurisprudence on this aspect of art. 8(1) of the Model Law:Failure to comply with the requirement of art. 8(1) may result in a loss of a party's right to invoke the arbitration agreement ... The request for arbitration may be made in pleadings provided these pleadings are the first statement on the substance of the dispute ... In determining whether a defendant has lost its right to have the dispute arbitrated, a court may consider whether a defendant has served pleadings which are incompatible with reliance on the arbitration process. The filing of a statement of defence and seeking the court’s intervention to dismiss a plaintiff’s claim will result in a defendant losing his right to have the dispute arbitrated. [Emphasis added]. The characterization of Click’s motion to strike out claims
[55] In the present case, Click did not bring a stand-alone motion to stay the court proceeding against it. Instead, Click joined the other Moving Defendants in bringing one motion that included a request by all Moving Defendants, including Click, to strike out certain of the plaintiffs’ claims against them.
[56] The motion judge concluded that, by joining the request to strike out parts of the statement of claim, Click did “far more than [seek] a procedural foundation for the jurisdictional challenge”. Instead, by joining the motion to strike, Click sought “substantive relief” and “should not be entitled to the benefit of the litigation process while also preserving its ability to reject that same process in favour of arbitration”.
[57] I agree with that characterization by the motion judge. In my view, the motion to strike that Click joined cannot be characterized as a procedural step taken within the confines of the “jurisdictional” motion to stay the court proceeding in favour of arbitration: Fraser v. 4358376 Canada Inc., 2014 ONCA 553, 376 D.L.R. (4th) 295, at para. 9. Instead, Click, together with other Moving Defendants, sought to reduce their exposure to liability by asking the court to dismiss part of the plaintiffs’ substantive claims as disclosing, at law, no reasonable cause of action; or, in the words of the Supreme Court in R. v. Imperial Tobacco Canada Ltd., 2011 SCC 42, [2011] 3 S.C.R. 45, at para. 19, to weed out the plaintiffs’ “hopeless claims.”[13] That was a request for the Ontario court to render a final determination on the merits of part of the proceeding in their favour.
[58] The motion judge properly treated Click’s request that the court dismiss some of the plaintiffs’ substantive claims as disclosing no reasonable cause of action as, in its effect, an election by Click to have some of the substantive claims against it dealt with by the court. By making such a request for substantive judicial relief, Click breached its negative obligation under the arbitration agreement not to litigate arbitrable disputes in the courts. Click thereby waived its right to arbitrate.
[59] I would observe that it was not necessary for Click to ask for the assistance of an Ontario court to reduce the extent of the claims against it in order to seek a reference to arbitration under the Model Law. The London Court of International Arbitration Rules[14] that govern the arbitration under the Licence Contract would have provided Click with an opportunity to argue that some claims were “manifestly outside the jurisdiction of the Arbitral Tribunal” or “inadmissible or manifestly without merit”.[15]
Technical prerequisite or statutory exception?
[60] How should one categorize a finding that a party to an international arbitration agreement breached its negative obligation not to seek the resolution of disputes arising under an arbitration agreement in national courts thereby waiving its right to arbitration? Does it amount to a breach of what the Peace River decision described as the fourth “technical prerequisite” that a party applying for a stay in favour of arbitration not take any “step” in the court proceeding before requesting a stay? Or, does it fall within the statutory exceptions to a mandatory stay of courts proceedings under art. 8(1) of the Model Law because the arbitration agreement “is null and void, inoperative or incapable of being performed”?
[61] Applying the Peace River framework to international commercial arbitration agreements requires adhering to the requirements of the ICAA, New York Convention, and Model Law. Born’s commentary on art. 8(1) of the Model Law suggests that Click’s participation in the motion to strike amounted to a breach of the negative obligation not to litigate arbitrable disputes. Born writes that the “obligation not to litigate disputes that are subject to arbitration is expansive and applies to all form of litigation of the merits of the parties’ dispute.”[16] In his view, “an arbitration agreement would be ‘inoperative’ where the parties actively pursued litigation, rather than arbitration, resulting in a waiver or abandonment of the right to arbitrate under applicable law.”[17] He argues that “Article 8(1) is directed towards the waiver of the right to arbitrate a particular dispute (and not the termination or invalidity of the underlying arbitration agreement)”.[18]
[62] I am persuaded by such reasoning. By seeking the judicial determination of a substantive, non-jurisdictional aspect of its dispute with RH20, Click waived its right to arbitrate the dispute thereby rendering the arbitration agreement in the Licence Contract “inoperative” within the meaning of art. 8(1) of the Model Law.[19] Accordingly, the motion judge did not err in refusing to grant Click a stay of the court proceeding under ICAA s. 9 and art. 8(1) of the Model Law. . RH20 North America Inc. v. Bergmann
In RH20 North America Inc. v. Bergmann (Ont CA, 2024) the Ontario Court of Appeal reviews a recent SCC case [Peace River] that considers several provincial statutes regarding arbitration stays:The Peace River decision
[36] By the time the motion judge heard the motion for a stay, the Supreme Court of Canada had released its decision in Peace River [SS: Peace River Hydro Partners v. Petrowest Corp. (SCC, 2022)]. In that case, the Supreme Court described two general components to the stay provisions in provincial arbitration legislation, which this court summarized in Husky Food Importers & Distributors Ltd. v. JH Whittaker & Sons Limited, 2023 ONCA 260, at paras. 23-25:[In Peace River] the Supreme Court identified two general components common to stay provisions in provincial arbitration legislation: (i) the technical prerequisites for a mandatory stay of court proceedings; and (ii) the statutory exceptions to a mandatory stay of court proceedings. The applicant for a stay must establish the technical prerequisites “on the applicable standard of proof”; if the applicant does so, the party seeking to avoid arbitration then must show that one of the statutory exceptions applies, such that a stay should be refused: at paras. 76-79.
The technical prerequisites concern whether the stay applicant has established the arbitration agreement engages the mandatory stay provisions. As the Supreme Court observed in Peace River, at para. 83, provincial arbitration legislation typically contains four relevant technical prerequisites:(a) an arbitration agreement exists;
(b) court proceedings have been commenced by a “party” to the arbitration agreement;
(c) the court proceedings are in respect of a matter that the parties agreed to submit to arbitration; and
(d) the party applying for a stay in favour of arbitration does so before taking any “step” in the court proceedings. If all the technical prerequisites are met, the mandatory stay provision is engaged. The court should then move on to the second component of the analysis, which concerns the statutory exceptions to granting a stay, such as whether an arbitration agreement is “void, inoperative or incapable of being performed”. [37] As the Supreme Court noted in Peace River, at para. 77, the two general components are “interrelated” but ought to remain analytically distinct.
[38] The appeal in the Peace River case considered the application of provincial domestic arbitration legislation, specifically the pre-2020 version of the British Columbia arbitration legislation, the Arbitration Act, R.S.B.C. 1996, c. 55.[4] That legislation contained a stay provision containing language similar to that found in art. 8(1) of the Model Law but that also expressly referred to the effect of a party to an arbitration agreement taking a “step” in a court proceeding. Sections 15(1) and (2) of the old British Columbia act stated:15(1) If a party to an arbitration agreement commences legal proceedings in a court against another party to the agreement in respect of a matter agreed to be submitted to arbitration, a party to the legal proceedings may apply, before filing a response to civil claim or a response to family claim or taking any other step in the proceedings, to that court to stay the legal proceedings.
(2) In an application under subsection (1), the court must make an order staying the legal proceedings unless it determines that the arbitration agreement is void, inoperative or incapable of being performed. [Emphasis added]. [39] By the time the Supreme Court heard submissions in the Peace River case, new provincial arbitration legislation had been enacted in British Columbia: the Arbitration Act, S.B.C. 2020, c. 2. The stay provision in the new legislation tracked much of the language found in the former statute but dropped the express reference to a “step” in the court proceeding. Sections 7(1) and (2) of the new Act provide:7(1) If a party commences legal proceedings in a court in respect of a matter agreed to be submitted to arbitration, a party to the legal proceedings may, before submitting the party's first response on the substance of the dispute, apply to that court to stay the legal proceedings.
(2) In an application under subsection (1), the court must make an order staying the legal proceedings unless it determines that the arbitration agreement is void, inoperative or incapable of being performed. [40] At the time of the hearing of the Peace River case, Ontario’s domestic arbitration legislation also did not contain any language about the effect on the availability of a stay by a party to an arbitration agreement taking a further “step” in the court proceeding.[5] Nor did Alberta’s domestic arbitration act, the language of which is very similar to that of the Ontario act.[6]
[41] I refer to this legislative history of the British Columbia Arbitration Act and the content of stay provisions in other major provincial domestic arbitration legislation to make a simple point. Although the appeal in Peace River involved arbitration legislation whose stay provision included the language of “taking any other step in the proceedings”, the Supreme Court’s identification of a two-part framework for stays of court proceedings in favour of arbitration did not turn on such statutory “step” language. As I read Peace River, the court’s general description of “the technical prerequisites for a mandatory stay of court proceedings” in “stay provisions in provincial arbitration legislation across the country” reflected conceptual elements common to most Canadian arbitration legislation. As I shall explain shortly, those conceptual elements include the negative obligation of parties to an arbitration agreement not to seek the resolution of disputes subject to an arbitration agreement in domestic courts.
[42] That negative obligation is also a common conceptual element shared by most provincial domestic arbitration legislation and provincial legislation that has adopted the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Can. T.S. 1986 No. 43, (the “New York Convention”)[7] and Model Law for international commercial arbitration agreement disputes. That conceptual commonality underpinned this court’s decision in Husky Foods to apply the Peace River framework to stays sought under s. 9 of the ICAA and art. 8(1) of the Model Law in respect of international commercial arbitration agreements.
[43] The appeal in Husky Foods did not raise the issue that is central to this appeal: whether the party requesting a stay had waived its right to arbitration by taking a step in the court proceeding other than challenging the court’s jurisdiction to hear the dispute. Instead, Husky Foods involved the issue of whether an arbitration agreement existed and, more specifically, the standard of proof applicable to establishing the technical prerequisites for a mandatory stay: at paras. 28-35. Accordingly, the present case requires a further consideration of how to apply Peace River’s two-step framework to international arbitration agreements under the ICAA in circumstances where it is argued that a stay should be denied because the requesting party took a “step” in the court proceeding.
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