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All is not Well, Man by Anthony Daimsis

All is not Well, Man: Ontario Courts should pay closer attention to arbitration law when deciding arbitration cases

by: Anthony Daimsis[1]

 

Disclosure: I’m an unapologetic pro arbitration advocate so you probably don’t need to read my entry to know my views on this topic. But this is not a pro arbitration posting – it’s about why judges, who do not account for arbitration’s legal intricacies in their decisions, end up with questionable judicial reasoning.

 

Courts are very good at resolving criminal and family law disputes, and other types of disputes where the public has a vested interest in the outcome. Likewise, arbitral tribunals are very good at resolving commercial cases. Arbitral tribunals are often populated with arbitrators who possess specialized commercial knowledge making their decisions pretty good.

 

However, this division of labour is rarely so neat. Increasingly, courts tackle cases that implicate arbitration law and, sometimes, courts seem disinterested in examining how the intricacies of arbitration law may affect the decision’s outcome. This blog asks whether courts should examine these intricacies, and whether it even matters.

 

I examine two decisions from the Ontario Court of Appeal: The recent Wellman v Telus[2] decision and last fall’s Novatrax[3] decision.

 

Novatrax

The relevant facts in Novatrax are rather pedestrian. The two parties (Novatrax and Hägele Landtechnik GmbH (Hägele)) signed an Exclusive Sales Agreement (ESA) providing Novatrax the exclusive right to market and sell Hägele’s products in North America.

After Hägele terminated the ESA, Novatrax sued in Ontario court and added Hägele’s principals as defendants to the action. Since the ESA contained an arbitration agreement, Hägele brought motion to stay the action in favour of arbitration.

This common motion should have led the court to look to Ontario’s arbitration acts (in this case its international act) and apply the stay provisions found in both acts to finally decide whether to hear the court action or refer the parties to arbitration.

Unfortunately, Ontario’s highest court did not do this. Instead, by failing to distinguish between a forum selection clause and an arbitration agreement it walked down a different path and applied a forum selection analysis that permits courts to apply discretion, which an arbitration clause analysis does not. Fortunately, the outcome was correct: the court stayed the court proceedings. But the specter of discretion might well have led to a different outcome. And this is concerning.

 

So how did the ONCA confuse the two? Paragraph three of ONCA’s Novatrax decision simply reads:

 

“[3] Section 18 of the ESA contains a forum selection clause which states:

 

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.”

 

Did you catch that? The court referred to an arbitration clause as a forum selection clause. It used the word “forum” in a sentence to describe the very next sentence, which uses the word “arbitration”. Should this muddling only preoccupy a pedant like me? Or does it change the analysis, the outcome, or both?

 

Forum clause or Arbitration clause: What’s the difference?

 

A forum selection clause, sometimes known as a “jurisdictional clause” or “forum clause” designates a jurisdiction to the exclusion of any other jurisdiction. Where only one jurisdiction is named, these clauses are properly termed exclusive forum selection clauses, in contrast to non-exclusive forum selection clauses,[4] which may designate more than one jurisdiction but still exclude all other jurisdictions not named in the clause.

 

The effect is simple. The courts in the jurisdiction the parties name (like Ontario, or California) enjoy exclusive jurisdiction to hear disputes arising from the agreement containing the clause. In a very real sense, forum selection clauses “oust” all other jurisdictions, which absent the ouster, would otherwise remain competent to hear the dispute.

 

Arbitration Agreements, on the other hand, do not oust court jurisdiction. Parties choose arbitration, instead of the court process, to resolve their disputes. A properly drafted arbitration agreement names a physical location (like the city of Ottawa) in which to hold the arbitration. In arbitration jargon this location is known as the juridical seat.

 

Perhaps the differing functions played by forum clauses and arbitration agreements are subtle, but they are important. Whereas a forum clause naming Germany ousts Ontario as a forum, an arbitration clause naming Berlin, or Ottawa, does not oust the Ontario courts. Courts are not removed from the arbitral process; their powers are merely circumscribed. In both cases, courts restrict themselves by “staying” actions brought before them. But for those that are subject to valid arbitration agreements a court’s jurisdiction remains intact, despite this “pausing” by way of the stay. Arbitration statutes sanction arbitration as a process to resolve private disputes, they do not expulse court jurisdiction or avow a separate arbitration process detached from a national framework of laws. In arbitration, courts play a supportive role. In forum selection scenario, once ousted, the courts have no role left to play.

 

The illusion that arbitration agreements serve the same function as forum selection clauses is a beguiling one. After all, both elect particular places to resolve disputes, to the exclusion of other places. But conflating the two risks bedeviling parties’ rights as the Novatrax decision reveals.

 

Does the difference matter?

 

Arbitration legislation governs the process to enforce arbitration agreements, like the one in Novatrax. In Ontario, either the domestic act or the international act applies, depending on whether the arbitration is domestic or international. Both acts follow the basic model that arbitration agreements are presumptively enforceable and courts have no discretion but to stay their process when confronted with a valid arbitration agreement.

 

The process can work like this. Party A starts an action in court alleging a breach of contract. Party B’s objection relies on the parties’ previous agreement whereby the parties chose arbitration to resolve their disputes under the very contract that Party A alleges Party B has breached. If Party B presents an ostensibly valid arbitration agreement, the burden shifts to Party A to show that this agreement to arbitrate is not valid or is somehow deficient. At this point, the court’s only role is to determine whether a valid arbitration agreement exists. If the court finds that an agreement exists, it stays the court proceedings. But this did not happen in Novatrax.

 

Instead, because the courts (both lower and appeal) treated the arbitration agreement as a forum selection clause, the courts applied the “strong cause” test intertwined with the forum non conveniens analysis,[5] tests neither designed nor applicable to arbitration clauses.[6] As explained in the previous paragraph, arbitration agreements are enforced (or not) using an analysis that intentionally purges court discretion. As the Supreme Court has made clear,[7] the strong cause test is an exercise in court discretion to determine whether a party has established a “strong cause” (i.e. that its case is exceptional enough) to ignore the forum selection clause that would oust the hearing court’s jurisdiction. Although the test is strict, it nevertheless engages appreciable court discretion.

In the end, the ONCA upheld the lower court’s decision to stay the court action, leaving the parties to arbitrate their dispute. The outcome was correct for the parties to the arbitration agreement, but perhaps not for the non-signatories who are now forced to proceed (or not) via arbitration.[8] More importantly, by using the strong cause test, the courts engaged with the parties’ facts and arguments in their pleadings. For example, the Ontario courts assessed whether the evidence sufficiently demonstrated that the respondent would suffer an injustice if the Ontario action were to continue, or whether the many witnesses in Ontario would be inconvenienced in terms of travelling to another jurisdiction, or whether the appellant’s business had been ruined, to name only a few. The courts even considered whether applying another law to the claims, if they were arbitrated in Germany, was prima facie prejudicial to the appellant!

This level of court engagement is plainly beyond the stay process applicable to enforcing arbitration agreements, which simply has courts asking whether or not the parties entered into a valid arbitration agreement.

In this case, although the ONCA read the arbitration agreement as a forum selection clause and therefore applied a different legal analysis, fortunately, the decision’s outcome was not affected. But it very well might have if the courts had appreciated the available facts differently.

***

 

 

Wellman v Telus

Contracts between big businesses and consumers that contain arbitration clauses have kept Canadian courts busy for many years. These cases have gone through provincial courts, including Ontario, British Columbia, Quebec and all the way up to the Supreme Court.[9] And still, Canadian courts struggle with them and the Wellman v Telus case is yet another example of a court, the ONCA, confused about the legal issues that arise once an arbitration agreement is present.

 

The ONCA decision is plagued by several mistakes, both conceptual and interpretive. I will focus on one conceptual and one interpretive error made by the ONCA, to show how a court’s misunderstandings on arbitration law can lead to poor decisions. But first, a quick refresher on the relevant facts may be helpful. Basically, Telus offers the same cellular contract to consumer customers and business customers. This contract contains a dispute resolution clause requiring “mediation and, failing resolution, arbitration of any disputes other than in respect of the collection of accounts by Telus Mobility.”

 

The effect of this clause, if enforced, means all unresolved disputes (aside from collection of accounts) must finally use arbitration and the courts to resolve disputes arising under the Telus cellular contract.

 

A dispute arose regarding Telus’ charging policy and its customers commenced action to certify a class, which would include all customers affected by the charging policy, both consumer and business customers.

 

One effect of certifying a class of customers is that it allows them to by-pass the arbitration agreement in the Telus contract. In response, Telus brought motion to stay the proceeding with respect to the business customer claims, but Telus lost this motion and its appeal.

 

I will begin with the conceptual error as it feeds into why the ONCA may have made its interpretive error

 

For the avoidance of doubt, the interpretive error I’m referring to is misreading the scope and purposes of section 7(5) of Ontario’s Arbitration Act. A proper interpretation would have left the Court with no choice but to stay the court action for the business customer.

 

The conceptual error relates to basic contract law. The Court failed to realize that the consumer customer never entered into an arbitration agreement. The Court was actually faced with two different contracts between different parties and subject to different laws. Missing this point saw the Court walk a Pyritic path that leaves arbitration law in Ontario more muddled than before.

 

The contract between Telus and the consumer customer contains NO arbitration agreement

 

Ontario’s Consumer Protection Act renders an arbitration clause in a consumer contract invalid if it has the effect of denying a consumer the right to access courts for, inter alia, class proceedings.[10] But this invalidity is of no effect if, after a dispute arises, the consumer agrees (accepts) to use arbitration. As explained below, a consumer who signs a contract that includes an arbitration clause does not, at that moment, agree to arbitrate.

 

From a contract perspective the arbitration clause is an offer that a consumer may accept only after an actual dispute arises. This tracks the idea underpinning unilateral offers in that the offeree may only accept the offer by an action (as opposed to a promise to act). In this case, the action is accepting to arbitrate after knowing of the dispute.

 

Therefore, an arbitration clause in a consumer contract is an “offer” to use arbitration to resolve matters. And like all offers, until accepted, the offer is not transformed into a contract.

 

This reasoning is set down (perhaps not clearly) in the relevant provisions of the Consumer Protection Act. I’ve underlined the relevant portions of the provisions as I realize “reading” legislation isn’t always fun.

 

No waiver of substantive and procedural rights

7 (1) The substantive and procedural rights given under this Act apply despite any agreement or waiver to the contrary.

Limitation on effect of term requiring arbitration

(2) Without limiting the generality of subsection (1), any term or acknowledgment in a consumer agreement or a related agreement that requires or has the effect of requiring that disputes arising out of the consumer agreement be submitted to arbitration is invalid insofar as it prevents a consumer from exercising a right to commence an action in the Superior Court of Justice given under this Act.

Procedure to resolve dispute

(3) Despite subsections (1) and (2), after a dispute over which a consumer may commence an action in the Superior Court of Justice arises, the consumer, the supplier and any other person involved in the dispute may agree to resolve the dispute using any procedure that is available in law.

Non-application of Arbitration Act, 1991

(5) Subsection 7 (1) of the Arbitration Act, 1991 does not apply in respect of any proceeding to which subsection (2) applies unless, after the dispute arises, the consumer agrees to submit the dispute to arbitration.

 

What these provisions reveal is that a consumer, although signing a contract containing an arbitration clause, may only agree to arbitration (and thereby form an arbitration agreement) after an actual dispute arises. This is a critical point to understand as it feeds directly into the error made by the Ontario courts in Wellman v Telus.

 

Unlike the contract between Telus and the consumer, the business customer did agree to arbitrate upon signing the Telus contract

 

Telus’ contract with its business customers, includes the same arbitration clause used in its contract with consumer customers, but is not subject to the Consumer Protection Act. Consequently, the provisions of the Consumer Protection Act that limit the validity of arbitration agreements found in contracts with consumers is not in play with respect to business customers. Therefore, the Telus contract with its business customer is subject to a valid arbitration agreement.

 

When we place the Telus and business customer contract (A-B) next to the Telus and consumer customer contract (A-C) the difference is obvious:

  • Business customers bind themselves to both the Telus cellular terms and the arbitration clause on the day they sign the A-B contract
  • But consumers, who sign ostensibly the same contract (A-C) at the same moment as the business customer, bind themselves only to the cellular terms on that day. The Consumer Protection Act allows consumers to later bind themselves to the arbitration clause found in the very contract they previously signed

Consequently, upon signing the Telus contract, a business customer has formed both a cellular contract and an arbitration contract at the same moment (A-B). A consumer customer, on the other hand, although signing the same contract on the same day, has only formed the cellular contract. Formation of the arbitration contract may occur if the consumer later accepts to arbitrate but only after an actual dispute arises (A-C).

 

This conceptual difference is important. The Telus-Business contract does not engage the Consumer Protection Act and the Telus-Consumer contract does not engage the Arbitration Act. And yet, the ONCA looked to both acts when discussing and finally determining rights and obligations under the Telus contracts. This “cross-pollination” as Justice Blair described it, is an error of law.

 

The relevant provisions in Ontario’s Arbitration Act are ss.7(1) and 7(5), which read:

Stay

7 (1) 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.

 

Agreement covering part of dispute

7(5) The court may stay the proceeding with respect to the matters dealt with in the arbitration agreement and allow it to continue with respect to other matters if it finds that,

(a) the agreement deals with only some of the matters in respect of which the proceeding was commenced; and

(b) it is reasonable to separate the matters dealt with in the agreement from the other matters.

 

To better understand this subsection, let’s examine the underlined terms and the context these provisions intended to address.

 

Context

Section 7(1) is the “stay” provision found in all modern arbitration legislation. It is included to make one point very clear to courts: If a party attempts to commence a court proceeding but has agreed previously to use arbitration to resolve the very matter the party has brought before the court, the court must not hear the case and instead stay (stop) the court proceeding. This effectively leaves the party with only one option: use arbitration.

Section 7(5) is an exception to s.7(1). Section 7(5) focuses on a discrete procedural matter tied to “judicial efficiency”, a principle aimed at avoiding expenses caused through bifurcating litigation and arbitration. It’s a fancy way of telling parties “If it’s more efficient to hear all your problems in one venue rather than splitting them between two venues (court and arbitration), then we will send you to one venue”. This exception arises only when a party alleges that some matters in dispute fall under the arbitration agreement and some matters do not.

 

Proceeding

When s.7(5) speaks of a proceeding the assumption is that Party A commenced a court action despite agreeing with Party B to use arbitration to resolve disputes between A-B.

 

Arbitration Agreement and Matters

Section 7(5) is only ever triggered when A-B have agreed to an arbitration agreement. If no arbitration agreement exists, s.7(5) cannot apply. Ever.

 

What’s more, s.7(5) only applies if the arbitration agreement is restrictive on matters that it intends to cover. For example, A-B may simply wish to use arbitration to resolve contractual warranty matters, leaving it to the courts to resolve all other contractual and non-contractual matters.

 

This means that s.7(5) is relevant only where two conditions exist: 1) a valid arbitration agreement between parties A-B (the parties to the arbitration agreement); and 2) a matter (dispute) between A-B covered by the arbitration agreement and a matter between A-B not covered by the arbitration agreement.

 

Therefore, in a case between A-B, where A starts a court action and B asks the court to stay the court proceeding in favour of arbitration, if the court finds that the matters in dispute between A-B include both matters covered by the arbitration agreement and matters not covered by the arbitration agreement, using the principle of judicial efficiency enshrined in s.7(5), a court might invoke its power to take jurisdiction over all the disputed matters to court, instead of sending some matters to arbitration and retaining others.

 

 

ONCA’s Errors

With s.7(5) context in mind, the Ontario Court of Appeal’s error is easier to see, but still unfortunate.

 

The Court assessed whether the motions judge erred by allowing business customers to join a class of consumer customers. The ONCA found that the motions judge did not err and confirmed the right for business customers to join the consumer class action by conflating matters within the A-B contracts with matters within the A-C contract, despite s.7(5) applying only to matters resulting from the A-B contract.

 

The Court misread what the word matters refers to in s.7(5) and misunderstood the very purpose and context for when s.7(5) applies.

 

ONCA’s misreading of s.7(5)

 

Recalling that s.7(5) contemplates an arbitration agreement between A-B and matters between A-B both covered and not covered by their arbitration agreement, the ONCA instead looked to a proceeding between A-C and matters between A-C when exercising its power under s.7(5). This misreads s.7(5), ignores privity and introduces a wildcard that risks undermining arbitration as Justice Blair intimated in his cogent separate opinion.

 

What this all means is that when the ONCA applied s.7(5) it looked to the “matters” between the parties to the A-C contract (Telus and consumer customers) to determine whether “matters” between the parties in the A-B contract (Telus and business customers) included arbitration and non-arbitration matters and hence was more efficient to hear in one venue. But that’s not how s.7(5) is constructed.

 

The purpose behind s. 7(5) begins by allowing a court to ask one simple question: Do matters (disputes) within the A-B contract include “arbitration” disputes and “non-arbitration” disputes? If the answer is yes, then the court determines whether it is more efficient to send both arbitration and non-arbitration matters, arising only from the A-B contract, to one venue. Most significantly, s.7(5) does not empower or permit a court to look to matters in other contracts, like the A-C contract. The rule of privity remains.

 

A generous interpretation of the decision may lead one to conclude that the ONCA is prioritizing the Class Proceedings Act, whose purpose includes modifying corporate behaviour. It is no secret that businesses prefer not to expose themselves to class proceedings and that arbitration agreements are often a powerful shield to this effect. This explains why the legislator chose to amend section 7 of the Consumer Protection Act as it did. Significantly, the legislator has not amended the Class Proceedings Act or the Arbitration Act in a way that would mollify these concerns. But it could have. Perhaps the legislator is not so alarmist as to believe that the only reason businesses include arbitration agreements in their business contracts is to avoid a class proceeding. Inferring such malevolence onto businesses is often the low hanging fruit of the ill-informed and self-important.

 

On an interesting side note, the Consumer Protection Act makes one point very clear: a discussion about arbitration stays never applies if a consumer invokes its right to go by way of class action. This is explained in s.7(5) of the Consumer Protection Act (yes, also 7(5), not to be confused with s.7(5) of the Arbitration Act)

 

Non-application of Arbitration Act, 1991

(5) Subsection 7 (1) of the Arbitration Act, 1991 does not apply in respect of any proceeding to which subsection (2) applies unless, after the dispute arises, the consumer agrees to submit the dispute to arbitration. [subsection 2 renders invalid arbitration agreements with consumers in the face of an available class action recourse]

 

The effect of this subsection seems to confirm that the legislator only wanted courts to engage in a stay analysis under the Arbitration Act if a consumer chose to arbitrate. Now, I see the irony in raising a provision of the Consumer Protection Act to a case about a non-consumer after I chastised the court for mixing the two up. But as Justice Blair pointed out, this cross pollinating of acts and rights, both procedural and substantive, is a step away from clarity and cohesion. Our courts can do better.

 

Moving forward

Whether the reader agrees with me on the errors I’ve highlighted is second to agreeing that our courts must do a better job of respecting how arbitration law affects judicial decisions. Our courts must do more than simply pay lip service to arbitration law when correctly understanding (or misunderstanding) how arbitration law applies to a given case can impact party rights rather significantly.

[1] With special thanks to James Plotkin who served as a great sounding board and helped me to refine the points in this posting.

[2] Wellman v. TELUS Communications Company, 2017 ONCA 433.

[3] Novatrax International Inc. v. Hägele Landtechnik GmbH, 2016 ONCA 771.

[4] See International Arbitration and Forum Selection Agreements. Drafting and Enforcing, Fifth Edition. Kluwer Law International.

[5] For absolute precision (and I must thank my expert colleague Prof. Marina Pavlović for instructing me on this point) an exclusive forum clause removes otherwise competent courts and is subject to the strong cause test. A non-exclusive clause does not eliminate otherwise competent courts but merely signals parties’ preference and is therefore subject to forum non conveniens analysis and not the strong cause.

[6] It is also hazardous to mix both strong cause and forum non conveniens tests as Justice Bastarache pointed out in Z. I. Pompey Industry v ECU-Line N.V.,[2003] 1 S. C. R. 450.

[7] Z. I. Pompey Industry v ECU-Line N.V.,[2003] 1 S. C. R. 450.

[8] It is beyond the scope of this blog entry to get into this issue but the courts error in not distinguishing between arbitration agreements and forum clauses also lead to a peculiar outcome for the non-signatories who were named as defendants in the action. Under traditional arbitration theory, binding non-signatories of the arbitration agreement is difficult and a very good argument exists to send the parties to the arbitration to arbitrate and leave the non-signatories to await a court action.

[9] By no means exhaustive, a few cases that come to mind include Seidel v. TELUS Communications Inc., 2011 SCC 15, [2011] 1 S.C.R. 531; Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34, [2007] 2 S.C.R. 801; Rogers Wireless Inc. v. Muroff, 2007 SCC 35, [2007] 2 S.C.R. 921.

[10] Section 7(2).

J Brian CaseyAll is not Well, Man by Anthony Daimsis

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