In a recent decision of the Court of Appeal for Ontario, RH20 North America Inc. v. Bergmann,[1] the Court provided useful guidance cautioning when and how an arbitration agreement can become “inoperative” under the Model Law[2] and result in a refusal of a stay of court proceedings.
The Court agreed with the motion judge that, after a party to an arbitration agreement has sought substantive relief from a court with respect to the merits of the dispute, that step amounts to a waiver of the arbitration agreement, rendering it “inoperative” and precluding a stay. The Court’s conclusions serve as a reminder to parties wishing to arbitrate their disputes that they should be mindful of the timing and nature of assistance they seek from a court before enforcing an arbitration agreement to avoid waiving such a clause.
Relevant facts
Two plaintiffs, RH20 North America Inc. (RH20) and Unit Precast (Breslau) Ltd., commenced an action in the Ontario Superior Court against Click+Clean GmbH (Click) and other defendants. A key allegation in the claim was that Click had wrongfully terminated its agreements with RH20 — fatefully, including one (the Licence Contract) that had an arbitration agreement mandating arbitration under the LCIA rules in London, England.
The other defendants (who were not party to the Licence Contract) then brought a motion to strike the claims. Click joined that motion, but also simultaneously brought a motion to stay the action against it by the plaintiff RH20, in light of the arbitration clause in the Licence Contract between RH20 and Click.
The Superior Court’s decision
On April 19, 2023, Justice Valente released his decision on the two motions. The motion to strike was successful; however, Click’s stay motion was dismissed pursuant to Article 8(1) of the Model Law, which provides:
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.[3]
Justice Valente held that although RH20 and Click intended the arbitration clause in the Licence Contract to apply to all disputes between them, conflict with a dispute resolution clause in a separate Web Portal Agreement between them[4] rendered the arbitration clause in the Licence Contract “incapable of being performed” within the meaning of Article 8(1).
Additionally, Justice Valente found that because Click had taken steps to invoke the jurisdiction of the Court — by participating in the motion to strike along with the other defendants — the arbitration agreement in the Licence Contract had been waived and was therefore “inoperative” under Article 8(1). Justice Valente found that Click’s joining in the motion to strike with other defendants was more than just a means of seeking a procedural foundation for its stay motion, and that Click had attorned to the Ontario courts: “a party should not be entitled to the benefit of the litigation process while also preserving its ability to reject that same process in favour of arbitration”.[5]
The Court of Appeal’s decision
Click appealed Justice Valente’s dismissal of its stay motion, and on June 5, 2024, the Court of Appeal released its appeal decision — refusing to overturn Justice Valente’s order in that regard.
The Court of Appeal found it unnecessary to examine whether Justice Valente erred in holding that the arbitration agreement was “incapable of being performed”. Instead, the Court focused on whether Click had rendered the agreement “inoperative” by participating in the motion to strike.
The ‘negative obligation’ not to seek resolution in courts
The Court began its analysis by summarizing the Supreme Court of Canada’s decision in Peace River Hydro Partners v. Petrowest Corp.[6] In that case, the Supreme Court set out a two-part framework for assessing stay provisions in provincial legislation: that an applicant for a stay must establish certain technical prerequisites (for example, the fourth prerequisite not to take “any other step” in the proceedings), and must then show that one of the statutory exceptions to granting a stay has been triggered. Notably, the Supreme Court of Canada in Peace River was considering the pre-2020 version of the British Columbia domestic arbitration legislation, which contained reference to taking a “step” in the proceedings (the domestic statute in that province no longer contains such language). However, in applying Peace River to the case at bar, the Court of Appeal found that the two-part framework does not turn on such statutory “step” language and instead reflects a broader principle: that there is a “negative obligation” on parties to an arbitration agreement not to use courts to resolve a dispute that is subject to an arbitration agreement.
In light of this, the Court of Appeal found that two matters must be assessed when a stay motion is brought under Article 8(1) of the Model Law: first, whether the party has requested a court to refer the parties to arbitration “not later than when submitting his first statement on the substance of the dispute”; and second, whether, before making that request, the party had sought assistance from the court on the substantive claims asserted against it. The reasoning of the Court was that if a party does seek such assistance, it will have breached its negative obligation.
Click’s breach of its negative obligation and its waiver of the arbitration agreement
Although the Court of Appeal found that Click had satisfied the first of the two factors (it requested a stay before filing any statement or pleading in response to the statement of claim), it agreed with Justice Valente that Click had sought substantive relief from the court by joining in the other defendants’ motion to strike the lawsuit. The Court of Appeal also agreed with Justice Valente that by joining the motion to strike, Click waived its right to arbitrate. In the Court of Appeal’s view, the basis for this waiver was Click’s breach of its negative obligation not to litigate disputes which are the subject of an arbitration agreement.
The arbitration agreement was rendered ‘inoperative’ under the Model Law
Finally, the Court of Appeal considered whether such a waiver of an arbitration agreement amounted to a breach of any technical prerequisite for a stay as set out in Peace River, or whether it amounted to a statutory exception to the mandatory stay of court proceedings under Article 8(1). In short, relying on academic commentary surrounding the Model Law, the Court of Appeal held that a waiver in these circumstances triggered the statutory exception to a stay under the Model Law because the arbitration agreement, once waived, became “inoperative”.[7]
Key takeaways
The Court of Appeal’s decision signals that parties should not lightly seek the court’s assistance on the merits of an arbitrable dispute if they intend to enforce an arbitration agreement to enjoin a court proceeding.
Additionally, parties to an arbitration agreement who want to proceed with arbitration should generally avoid filing a statement of defence or other document (e.g., a motion) that seeks a court’s intervention to dismiss a plaintiff’s claim. Doing so may result in a court finding that an arbitration agreement has been waived and thus rendered “inoperative”.
That said, the decision should not be read as preventing parties from resorting to the courts for relief that does not finally determine the merits of the dispute. For example, parties may seek the court’s assistance in consolidating multiple arbitrations pursuant to section 8 of the Act, parties may appeal rulings of an arbitral tribunal pertaining to its jurisdiction under section 11 of the Act, and parties may request that a court grant interim measures under Articles 9 and 17J of the Model Law, among other forms of procedural or temporary relief. The merits of an arbitrable dispute, however, are appropriately left only to the arbitral tribunal itself.
[1] 2024 ONCA 445.
[2] UNCITRAL Model Law on International Commercial Arbitration, in force in Ontario by virtue of section 5 of the International Commercial Arbitration Act, 2017, S.O. 2017, c. 2, Sched. 5 (the Act).
[3] See also section 9 of the Act, which states, “Where, pursuant to article II (3) of the Convention or article 8 of the Model Law, a court refers the parties to arbitration, the proceedings of the court are stayed with respect to the matters to which the arbitration relates.”
[4] Mandating the resolution of disputes in Kuhlenfeld, Germany (without reference to arbitration).
[5] 2023 ONSC 2378 at para. 81.
[6] 2022 SCC 41.
[7] Because the Act incorporates the “inoperative” language of the Model Law, whereas the Ontario domestic statute does not, the same circumstances in a domestic context may give rise to different findings.
