ONTARIO – Arbitration – Application for Stay – The analytical framework and standard of proof for a stay application has changed. Once the party seeking the stay has shown that the technical requirements establish that there is an arguable case that an arbitration agreement exists, the party seeking to avoid the stay must establish on a balance of probabilities that one of the statutory exceptions to a mandatory stay of proceedings exists.
Husky Food Importers & Distributors v. JH Whittaker & Sons Limited
2023 ONCA 260 (April 17, 2023)
Ontario Court of Appeal (Fairburn ACJO, Brown and Sossin JJ.A)
The Appellant (Husky) commenced an action in Ontario in June 2021 for breach of a commercial distribution agreement with the Respondent (Whittaker), a chocolate manufacturer located in New Zealand. Whittaker moved for a stay pursuant to s. 9 of the International Commercial Arbitration Act, (“ICCA”) on the basis that there was an agreement to arbitrate. The action was stayed.
Background
The parties entered into a distribution agreement in 2016 that had both written and oral terms. Thereafter, there were negotiations to formalize the agreement into a written agreement. In spring 2020, draft agreements were exchanged. The draft agreements included a blank Schedule titled “Standard Form Order Agreement for Purchases”.
On April 19, 2020, Whittaker provided text to the Schedule that included an arbitration clause which read:,
19 OVERSEAS DISPUTES
19.1 Where the Customer is located outside of New Zealand, any dispute, controversy or claim arising out of or in connection with these Terms, or any question regarding its existence, breach, termination or invalidity, will be referred to the New Zealand International Arbitration Centre for arbitration in accordance with the New Zealand Arbitration Act 1996. Such arbitration shall also be as follows:
(a) the number of arbitrators will be: one;
(b) the place of arbitration will be Wellington, New Zealand; and
(c) the language of the arbitration will be English. (para.6)
By email dated May 15, 2020, Husky wrote Whittaker and advised: “Attached please find a slightly revised version of the last contract you sent over. This has been signed off by JH.”
Thereafter, Husky made a few more changes such as removing underlining on the Schedule, amending a term on the Schedule, and adding the following paragraph to the main Agreement being section 8.4”
“If there is any inconsistency between any provision or term in the main body of this Distribution Agreement and in any schedule annexed hereto, the terms in the main body of this Distribution Agreement shall have paramountcy to the extent of such inconsistency only.”
The April 19 and May 15 drafts contained the following term in the main contract,
8.7 “This Distribution Agreement and the individual delivery contracts between the parties shall be governed by the laws of New Zealand. The parties submit to the non-exclusive jurisdiction of the courts of Wellington, New Zealand to hear and determine all disputes arising from or related to this Distribution Agreement or transactions contemplated herein.”
The new agreement was never signed. Subsequently, a dispute arose about rerouting of two shipments from Whittaker to Husky. Husky disputed that an agreement to arbitrate existed. The lower court granted a stay pursuant to s. 9 of the ICCA.
Analysis
On appeal, Husky argued the stay decision was interlocutory and therefore an appeal did not lie to the ONCA. The ONCA held that a stay order pursuant to s. 9 of the ICCA is final in nature for the purposes of determining the appeal route. The ONCA also confirmed that challenges to the jurisdiction of an arbitrator must first be referred to the arbitrator unless they involve pure questions of law or questions of mixed fact and law that can be determined by a superficial review of the record. The ONCA referred to Dell Computer Corp. v. Union des consommateurs 2007 SCC 34 and Rogers Wireless Inc. v. Muroff, 2007 SCC 35. (para. 17)
If a stay is granted, the action effectively ends and the arbitrator will proceed to decide the issues. (Uber Technologies Inc. v. Heller, 2020 SCC 16 at para. 38.(para. 17) It is well established in Canada that a court normally refers challenges to the arbitrator’s jurisdiction to the arbitrator pursuant to the competence-competence principle. (para.19)
Husky argued that the lower court erred by applying the wrong standard, an arguable case, that the arbitration existed.
The ONCA reviewed both the domestic and international arbitration legislation in Ontario, which gives arbitrators broad scope to determine issues of jurisdiction, including whether the arbitration agreement exists and/or is valid. (para. 21) ICCA s. 9 and Article 8 set out the mechanism for a stay application.
Schedule 2, Article 8 of the ICCA sets out the exceptions to the stay order as follows:
“Article 8. Arbitration agreement and substantive claim before court
(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.”
The ONCA held that the analytical stay framework set out in Haas v. Gunasekaram 2016 ONCA 744 has been superseded by the framework established by the Supreme Court of Canada in Peace River Hydro Partners v. Petrowest Corp., 2022 SCC 41 (para. 23). In Peace River, the SCC identified two components to the analysis: (i) the technical requirements for a mandatory stay of court proceedings, and (ii) the statutory exceptions to a mandatory stay of proceedings.
An applicant for a stay must establish the technical requirements and the party seeking to avoid the arbitration must then establish one of the statutory exceptions applies. The standards for the two components differ.
The SCC in Peace River set out the technical requirements as follows (para. 24):
- 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 the stay does so before taking any steps in the court proceedings.
Once the above technical requirements are met, the Court proceeds to the second part of the analysis, which concerns the statutory exceptions to granting a stay, such as whether the arbitration agreement is “void, inoperative or incapable of being performed”. (paras. 24 and 25)
The ONCA held that the while the Peace River framework was developed in respect of domestic arbitration legislation, it is also applied to the ICCA, s. 9 stay provisions. (para. 26)
The ONCA also held that both the Haas and Peace River analytical frameworks require that an agreement to arbitration exists. The standard of proof for the technical requirements of whether an arbitration agreement exists is an “arguable case”. For the second component, whether a statutory exception applies, the SCC in Peace River changed the standard of proof to “on a balance of probabilities”. (paras. 28 and 29)
Finally, the ONCA held that it would require a thorough review of the parties’ intentions and evidence to determine the existence of an arbitration agreement by the arbitrator and that therefore, the appeal was dismissed.