ONTARIO – International Arbitration – Where a party to an arbitration agreement seeks substantive relief in court proceedings, that party breaches the negative obligation not to litigate the arbitration agreement. Such a breach is a waiver of the right to arbitrate, which renders the arbitration clause inoperable. – Article 8(1) of the Model Law – International Commercial Arbitration Act, 2017.

RH20 North America Inc. v Bergman
2024 ONCA 445 (June 5, 2023)
Ontario Court of Appeal (Gillese, Brown and Paciocco JJ.A.)

ONCA heard appeals and cross-appeal from the decision of Valente J. 2023 ONSC 2378, which dismissed an application to stay in favor of arbitration and struck out some paragraphs of the Plaintiff’s claims. (para. 2)

This summary will focus on the stay application under the International Commercial Arbitration Act, 2017, c.2, Sch. 5 (“ICAA”) and Article 8 of the Model Law on International Commercial Arbitration (“Model Law”). (para. 27)

Background

Click and RH20 entered into two agreements: a Licence Contract and a General Contract for Web Portal (“General Contract”). (para. 29) The Licence Contract contained an agreement to arbitrate which stated:

“All disputes arising in connection with this contract, shall be finally decided in accordance with the rules of the London Court of International Arbitration (“LCIA Arbitration Rules”) by exclusion of taking recourse to the courts of law. The place of arbitration proceedings is London, U.K. The number of arbitrators is one. This contract is subject to the laws of the Federal Republic of Germany.”

The last clause of the General Contract stated: “The exclusive place of jurisdiction for any disputes about the accrual and termination of this Contract shall be Kuhlenfeld (Germany).”

The motion judge dismissed Click’s motion for a stay in favour of arbitration for three reasons:

1. The arbitration agreement in the Licence Contract conflicted with the choice of forum clause in the General Contract and therefore, the arbitration agreement was “incapable of being performed”.
2. Strong cause existed to reject the forum selection clause in the General Contract because the other agreements between the parties designated different jurisdictions for dispute resolution.
3. Click invoked the jurisdiction of the court by joining the other defendants in the motion to strike certain of the plaintiffs’ claims. (paras. 31– 32)

Analysis

The ONCA dismissed the appeal. Brown J.A. agreed with the motion judge that Click’s participation in the motion to strike was tantamount to waiving the agreement to arbitrate, thereby rendering the arbitration agreement inoperative. (para. 34)

Referring to Peace River Partners v. Petrowest Corp., 2022 SCC 41 in which the SCC described the fourth technical requirement for a stay of proceedings in favor of arbitration as “requesting a stay of a court proceeding in favor of arbitration before any ‘step’ in the court proceedings”. (paras.35 – 36), Brown J.A. held that:

ONCA further held that:

• Article 8(1) of the Model Law gives effect to the party’s negative obligation not to litigate in the courts.
• The motion judge correctly treated Click’s motion to strike certain of the Plaintiffs’ claims as breaching its negative obligations. The breach amounted to a waiver of the right to arbitrate.
• Click’s waiver of its right to arbitrate rendered the arbitration agreement inoperative within the meaning of Article 8(1) of the Model Law. (para. 35 )

Brown JA pointed out “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 favor of arbitration did not turn on such statutory “step” language and that the Supreme 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. (para. 40)

The negative obligation is a concept that is shared by most provincial arbitration legislation adopting The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention). (para. 42) The ONCA noted that a negative obligation imposed by an agreement to arbitrate arises as a result of the parties’ agreement. (para. 45)

In this case, the availability of the stay was governed by Art. 11(3) of the New York Convention, Art. 8(1) of the Model Law, which is identical to Art. 11 of the New York Convention, and s. 9 of the ICAA. (para. 44)

Parties can waive their rights to compel arbitration when they fail to invoke the arbitration agreement or acquiesce to the litigation in court by participating in the litigation. (paras. 45 & 46) A court considering a stay request pursuant to article 8 (1) of the Model Law must consider:

• Whether the party requesting the court refer the matter to arbitration did so “not later than when submitting their first statement on the substance of the dispute;” and
• Whether the requesting party sought assistance from the court on the substantive claims against it before making the request. (para. 50)

Click made its stay request before it filed a statement or pleading. Click joined the other moving defendants in bringing one motion to strike some of the plaintiffs’ claims against it. (para. 55)

The motion judge held that Click sought substantive relief (not procedural relief) from the court and that therefore, Click should not be entitled to take some benefit from the court and then reject the court process in favor of arbitration. Along with the other moving defendants, Click sought to limit its exposure to liability by asking the court to dismiss some claims against it as having no reasonable cause of action. This motion sought substantive relief from the court. (para. 57)

Brown J.A. The ONCA held that by electing to make this request for substantive relief, Click breached its negative obligation under the arbitration agreement not to litigate disputes and therefore waived its rights to arbitrate. (para. 58)

As a result, the agreement to arbitrate became inoperative within the meaning of Art. 8(1) of the Model Law. (paras. 61-62)