In Eurofins Experchem Laboratories, Inc. v BevCanna Operating Corp., 2023 ONSC 4015, the Court dismissed an application by Defendant BevCanna Operating Corp (“BevCanna”) for a permanent stay of the action or alternatively, a permanent stay of any claims caught by the arbitration clause in the agreement between BevCanna and the Plaintiff, Eurofins Experchem Laboratories, Inc. (“Eurofins”). The Court found that Eurofins’s claim sought recovery of unpaid fees under the parties’ contract, even though it also included claims for breach of fiduciary duty and unjust enrichment. Claims for unpaid fees fell within an exception to the mandatory arbitration clause. It permitted (but did not require) claims for unpaid fees to be brought in the courts. In reaching this conclusion, the Court considered whether the essential character, or pith and substance of the dispute, was covered by the arbitration clause. This focus ensures that parties are held to their agreement and avoids attempts by clever counsel to plead their way around an arbitration clause.
Eurofins and BevCanna were parties to a contract dated December 2021 (the “GMP Agreement”) relating to the supply, analytics and testing of products to ensure compliance with Canadian Good Manufacturing Practices.
The GMT Agreement included an arbitration clause, which provided:
“Unless specifically agreed otherwise, all disputes arising out of or in connection with Contractual Relationship(s) hereunder shall be governed by the substantive laws of the Province of Ontario exclusive of any rules with respect to conflicts of laws and be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with said rules, each party to bear its own costs. The arbitration shall take place in Toronto, Ontario.”
The GMP Agreement, however, also provided that:
“Company may elect to bring action for the collection of unpaid fees in any court having competent jurisdiction.
Client shall pay all of the Company’s collection costs, including attorney’s fees and related costs.”
For context, in the GMP Agreement, Eurofins was the “Company” and BevCanna was the “Client.”
Eurofins delivered the services under the GMP Agreement but was not paid for invoices totalling $95,751. In March, 2022, the parties agreed that BevCanna would make weekly payments on the outstanding sum. BevCanna defaulted after making one payment and Eurofins commenced the action to recover the total amount owing.
BevCanna applied to permanently stay the action pursuant to Section 7(1) of the Arbitration Act, 1991, SO 1991, c 17 (the “Arbitration Act”), which provides for a mandatory stay of proceedings that are the subject of an arbitration agreement as follows:
“7(1) If a party to an arbitration agreement commences a proceeding in respect of a matter to be submitted to arbitration under the agreement, the court in which the proceeding is commenced shall, on the motion of another party to the arbitration agreement, stay the proceeding.”
The issue before the Court was whether the claim for unpaid invoices was subject to the arbitration agreement in the circumstances.
The Court began its analysis by summarizing legal principles bearing on stay applications, including that: (a) to give effect to the agreement of the parties, arbitration clauses are given a large and liberal interpretation; and (b) stays will only be declined where the dispute is clearly outside the terms of the arbitration agreement.
To determine whether a claim falls within an arbitration clause, “the court must determine the pith and substance of the claim(s) at issue.” Courts look past disguised claims designed to avoid application of an arbitration clause. The Court of Appeal in Piko v. Hudson’s Bay Co., 1998 CanLII 6874 (ON CA) noted:
“No matter how the claim is framed, if “the dispute, in its essential character, arises from the interpretation, application, administration or violation of the [agreement requiring arbitration]” it must be arbitrated. Parties cannot avoid arbitration simply by pleading a common law tort.”
While Eurofins sought recovery of unpaid invoices from BevCanna, its claim also included pleas sounding in, among other things, breach of fiduciary duty and unjust enrichment. In support of its stay application; therefore, BevCanna argued that the claim was not simply for unpaid fees. BevCanna intended to pursue an arbitration claim for damages to recover lost profits resulting from Eurofins’s breaches of the GMP Agreement, which fell within the scope of the arbitration agreement. Staying the action so that all claims were dealt with in arbitration would result in fewer proceedings, save costs and minimize delay. Against this, Eurofins maintained that the action fell within the exception to mandatory arbitration, as the gravamen of the claim concerned recovery of unpaid invoices, which allowed it to sue in the courts.
The Court rejected BevCanna’s arguments for several reasons and refused to order the stay of the court proceedings. Firstly, the GMP Agreement specifically authorized Eurofins to commence an action to recover the debt. While Eurofins’s claim included broader pleas, the substance of its claim was to recover amounts owing for unpaid invoices. Secondly, arbitration agreements are broadly construed, not because arbitration is “good”, but because parties should be held their agreements. In this case, forcing Eurofins to arbitrate the full unpaid invoice claim would thwart the GMP Agreement, which authorized court proceedings relating to unpaid invoices. Policy arguments, such limiting the number of proceedings, cannot override language of the parties’. Finally, there were seven other defendants not party to the GMP Agreement, against whom there was no proper basis to stay the action. The claims concerning those parties would continue in the courts.
Contributor’s Notes:
There are two issues worth highlighting in this case.
Firstly, in Canada, it is settled policy that courts will enforce arbitration clauses. Sometimes, as in Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34, at para. 1, courts advert to the economic efficiency these clauses promote. This case, however, is a reminder that the key governing principle is that these agreements are enforced not because of an overriding policy in favour of arbitration, but because courts will generally give effect to the terms of a commercial contract freely entered into: Seidel v. TELUS Communications Inc., 2011 SCC 15, at para. 2. In practice, this may mean that in some cases part of a claim will be litigated and part arbitrated because that is what the parties agreed to, even if it results in inefficiency.
Secondly, although the Court found that the claim was in substance a claim for the unpaid invoices, it is important to note that there exists residual discretion to allow the claim to proceed even if some matters do fall within the arbitration clause. While Section 7(5) of the Arbitration Act authorizes a court to grant a partial stay if it is reasonable to separate out the matters which fall within the arbitration clause, courts will otherwise refuse a stay application, particularly where the result would be a multiplicity of proceedings, increased costs and delay: Shaw Satellite G.P. v. Pieckenhagen, 2012 ONCA 192, leave to appeal to the S.C.C. refused 2012 CanLII 6623 (SCC) at para. 10. The parties did not appear to argue this point.