ONTARIO – On a motion to stay an action under ICAA, 2017, a party to an arbitration clause may be estopped by its prior conduct from relying on it. The party’s commencement of an action in another court may be a strong cause to justify a departure from the forum selected by the parties.

CSI Toronto Car Systems Installation Ltd. v. Pittasoft Co., Ltd.
2021 ONSC 5117, Sharma, J. July 21,2021

CSI and the Pittasoft entered into an agreement (‘Agreement”) where CSI would sell cameras manufactured by Pittasoft. There was an arbitration clause in the Agreement.

CSI sued Pittasoft for defamation in Ontario (“1^st Action”), which Pittasoft defended. Subsequently, CSI sought to amend the defamation action to add a breach of contract claim and to add another party.

In 2020, CSI started a second action (“2^nd Action”) with the same pleadings it sought to amend in the 1st Action because it was concerned that a limitation period could expire before the motion was heard. para. 11

In 2019, Pittasoft threatened to commence an action against CSI in South Korea. In December 2019 Pittasoft actually commenced an action in South Kores alleging breach of the agreement and other tort claims (“the South Korea Action”). There were issues with service and the claim was not served on CSI until October 2020 at which time CSI found out about the South Korea Action. CSI defended the South Korea Action.

Pittasoft then brought a motion to stay the 2^nd Action on the basis that disputes about the Agreement were subject to an arbitration clause requiring arbitration in South Korea ( “South Korea”).

Forum Selection

The Court at para.21  reviewed the relevant factors when seeking to displace a forum selection clause in a commercial contract as set out in Novatrax International Inc. v. Hägele Landtechnik GmbH 2016 ONCA 771, para. 5 which Sharma J, summarized as follows:

1. Parties should be held to their agreements on forum selection.
2. A stay of proceedings should be granted unless the plaintiff shows a “strong cause’ that the case is exceptional, and the forum selection clause should not be enforced.
3. The requirement that the plaintiff show a “strong cause” presumes that there is an agreement with a clear forum selection clause, and it applies to the claims the plaintiff seeks to bring in Ontario.
4. The forum selection clause pervaded the forum non conveniens analysis and must be given full weight in consideration of other factors.

Sharma J. referred to Z.I. Pompey Industrie v ECU-Line N.V., 2003 SCC 27 at para.20., where the SCC discussed the “strong cause” test for the Court to give effect to the forum selection clause agreed to by the parties:

“In the context of international commerce, order and fairness have been achieved at least in part by application of the “strong cause” test. This test rightly imposes the burden on the plaintiff to satisfy the court that there is good reason it should not be bound by the forum selection clause. It is essential that courts give full weight to the desirability of holding contracting parties to their agreements. There is no reason to consider forum selection clauses to be non-responsibility clauses in disguise. In any event, the “strong cause” test provides sufficient leeway for judges to take improper motives into consideration in relevant cases and prevent defendants from relying on forum selection clauses to gain an unfair procedural advantage.”

Should the 2^nd Action be stayed?

The International Commercial Arbitration Act, 2017 (Ontario) (“ICAA”) applied to the arbitration agreement. Article 8(1) of UNCITRAL Model Law on International Arbitration. (“Model Law”) provides for a stay if an arbitration agreement applies:

Article 8 (1) of the Model Law requires the court to refer a matter that is subject to an agreement to arbitration except in certain exceptions. Article 8(1) provides:

“8“(1) 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.”

Sharma, J. addressed whether the agreement to arbitrate was null and void or inoperative. The Court found that Pittasoft’s “first statement on the substance of the dispute” was in the South Korea Action where it alleged breach of contract. Therefore, the Court found that pursuant to Article 8(1) the time had passed for Pittasoft to seek enforcement of the arbitration clause. Para 25.

In addition, the Court held that the arbitration clause was rendered inoperative by Pittasoft’s conduct in threatening to commence an action in South Korea and then commencing the South Korea Action which amounted to estoppel by conduct.

Sharma J. referred to Tiny v Battaglia 2013 ONCA 272 para.155 for the proposition that conduct of threatening to commence a proceeding in a South Korea Court, acting on that threat and commencing proceedings there, and CSI engaging a lawyer in South Korea to respond to that proceeding constitute estoppel by conduct. Since that proceeding alleged breach of contract, which would otherwise have been subject to arbitration under the Agreement, Pittasoft cannot revert back to the arbitration clause as if its prior conduct had not occurred. para.31 .The judge was not swayed by the fact the Pittasoft withdrew the South Korea Action. para. 32.

Sharma J. held that because the arbitration clause in the Agreement was rendered inoperative by Pittasoft’s conduct, the Plaintiff, CSI had established a “ strong cause” as to why the arbitration clause should not be enforce .para 34 and dismissed the motion to stay the action. The two actions were consolidated.

Motion to stay was dismissed.