ONTARIO – Arbitration – Jurisdiction – International Commercial Arbitration Act, 2017, SO 2017, c 2, Sch 5 (“the ICAA” – Model Law on International Commercial Arbitration, (“the Model Law”) Article 34 – Where parties agreed that an international arbitration relating to a particular dispute under their agreement would take place in Ontario under Ontario law, an application to set aside that arbitration award must be made to the Ontario Superior Court, despite a forum selection clause in the parties’ agreement that selected the Courts of the State of New York for the resolution of all other disputes.

Tehama Group Inc v. Pythian Services Inc.
2024 ONSC 1819 (April 8, 2024)
Superior Court of Justice (Penny J.)

This was a motion by Pythian to stay Tehama’s application under Article 34 of the Model Law to set aside a September 19, 2023 arbitration award on the basis of lack of procedural fairness and on the basis that the arbitration was not conducted in accordance with the agreement between the parties. Pythian’s principal argument was that the parties agreed that the Courts of the State of New York, USA had exclusive jurisdiction to determine their dispute. (paras. 2, 3 and 13)

Penny J. dismissed the motion for a stay of the application for the reasons set out below. (paras. 6, 48)

Background and Facts

Pythian, a BC corporation, acquired a cross-border business through its US subsidiary from Tehama, an Ontario-based corporation, in 2019 under an Asset Purchase Agreement (“the APA”). Following the closing of the sale, the parties disagreed about the interpretation of a provision requiring a $10 million earnout payment if certain earnings thresholds were met and referred the matter to be dealt with under the arbitration clause. The arbitration clause specified that the arbitrator was “the Toronto office of PricewatrhouseCoopersLLP” (“PwC”). (paras. 1, 4)

The PwC arbitration award denied Tehama the $10 million earnout payment, whereupon Tehama applied to the SCJ to set aside the award. (para. 4)

The APA provided that if Tehama disagreed with Pythian’s calculations of the earnout, it would file a notice of disagreement. The agreement established a procedure for the manner of disposition of the dispute within 30 days in writing without hearing or depositions. The PwC arbitrator’s decision would be final and binding absent fraud, bad faith or manifest error. (para. 9, 10)

Forum Selection Clause and Governing Law

The APA also included a broad forum selection clause, which required that “any suit, action or other proceeding arising out of this Agreement” or any other documents relating to the transaction be brought exclusively in the state or federal courts of New York and a governing law clause stating that the agreement is governed by the laws of the State of New York. However, the forum selection clause also provided that it “shall not apply to any dispute under Section 1.07 (or 1.08) that is required to be decided by [PwC].” (paras. 11-12, 23 and 27)

Following Tehama’s application to SCJ, Pythian commenced an anti-suit injunction proceeding in New York based on the forum selection clause in the APA for a stay of the Ontario SCJ proceeding. In turn, Tehama made a motion in New York for a stay of the anti-suit injunction proceeding pending disposition of its proceeding in the SCJ. The New York proceedings had not yet been argued at the time of Penny J.’s decision in the present case. Another SCJ judge directed that Pythian’s stay motion should be argued first. (para. 16-18)

Issue and Analysis

The issue before Penny J. was whether the forum selection clause selecting New York as the forum for disposition of disputes required Tehama to bring its application to set aside the PwC arbitration award before the New York Court or whether, by virtue of the terms of the APA and the selection of the Toronto office of PwC as the arbitrator, the ICAA and the Model Law required the application to be brought in the Ontario SCJ. (para. 19)

Sections 1.07 and 1.08 of the APA provided for the accounting issue to be resolved by the Toronto office of PwC. The parties accepted that provision and submitted the accounting dispute to arbitration without complaint or objection and engaged PwC in a jointly signed letter. (paras. 23-25)

The parties agreed that the accounting arbitration was an international arbitration. Penny J. held that the ICAA and the Model Law applied. Section 6(1) of the ICAA provides that, regarding Article 34 of the Model Law (which confers jurisdiction to “set aside” an international commercial arbitration award on certain grounds), the law of Ontario applies. Section 6(2) of the ICAA states that “court” in the context of the Model Law means the Ontario Superior Court of Justice.  Article 1(2) of the Model Law provides that, with certain exceptions not relevant here, the provisions of the Model Law apply only if the “place of arbitration is in the territory of” Ontario. (paras. 29, 30)

Penny J. noted that Article 31(3) of the Model Law provides that the award shall state its date and the place of arbitration as determined in accordance with Article 20(1). Article 31(3) goes on to state: “The award shall be deemed to have been made at that place.” Relying on Article 34 of the Model Law and on Popack v. Lipszyc, 2015 ONSC 3460, aff’d 2016 ONCA 135, Penny J. held that “the parties cannot contract out of the right of a party to apply to the Superior Court of Justice to set aside the award under article 34.” (para. 33-34)

Penny J. held that the choice of New York law provision in s. 7.09 of the APA was not dispositive of the issue before the court because the question of the substantive law that governs the international commercial contract is clearly different from the question of the law of the arbitration itself. As the parties agreed that the place of the PwC arbitration was Toronto, the ICAA and the Model Law, not the choice of law clause in the APA, determined the forum which had jurisdiction to review the PwC award. (paras. 38-40)

Disposition

For these reasons, Penny J. dismissed Pythian’s motion to stay Tehama’s application to set aside PwC arbitration award. (para. 48)