In Friel v HUB International Limited, 2026 ONCA 313, the Appellant signed an employment agreement with a med-arb clause and an option agreement for shares with a forum selection clause that stated that the Courts of Delaware had jurisdiction over any disputes. When a dispute arose, the Appellant sought an order appointing an arbitrator and a declaration that the option agreement was unconscionable and invalid. Ultimately, the motion judge and the Ontario Court of Appeal found that the employment agreement did not apply and that the Courts of Delaware had jurisdiction. This case note considers the unique aspects of a med-arbitration agreement as compared to a standard arbitration in a jurisdiction analysis. A med-arb agreement is best understood as a variety of stepped arbitration agreement.
Background facts – The issue before the Court was whether the parties’ dispute was to be determined in an Ontario mediation-arbitration process, or in the courts of the State of Delaware.
The Appellant Employee signed an Employment Agreement dated September 12, 2012, with HUB International HKMB Limited (“HUB Ontario”), which was not a party to this proceeding. The Employment Agreement provided that it was governed exclusively by the laws of Ontario. It also contained an “ADR clause” that stated that, “any claim, controversy, or dispute contemplated by or arising out of or in connection to this [Employment] Agreement” will be resolved by mediation-arbitration in accordance with the Arbitration Act, 1991, S.O. 1991, c. 17.
On October 2, 2013, the Employee entered into an agreement with Respondent Hockey Parent Holdings LLP (“HPH”), the ultimate parent of HUB Ontario, to purchase Class A units in HPH. It incorporated an Equityholders Agreement of the same date. This agreement is not relevant to the issues addressed in this decision.
On December 22, 2014, the Employee was granted an option to purchase Class B shares in Respondent Hockey Parent Inc. (“HPI”), another subsidiary of HPH, pursuant to a share Option Agreement. It stated that the options would vest and become exercisable on December 22, 2021. It also incorporated an Equityholders Agreement dated July 1, 2014, which contained a forum selection clause that designated the Delaware Courts as the forum for the resolution of any disputes. All the Respondents were related Delaware-based entities.
The Employee resigned from HUB Ontario on December 23, 2021, one day after the Class B options vested, to work for a competitor. In March, 2022, he gave notice of his intention to exercise his vested options in HPI so as to acquire Class B shares in HPI pursuant to the Option Agreement. The Respondents notified him that although the options had vested and he was entitled to exercise them, his employment with a competitor constituted “misconduct” under the Equityholders Agreement. Therefore, they were entitled to buy back the shares at cost because he had forfeited any appreciation in their value.
The Employee commenced this proceeding in Ontario for a declaration that the dispute about the HPI options was governed by the ADR clause in the Employment Agreement requiring med-arb, an order appointing an arbitrator, and a declaration that the forum selection clause in the Equityholders Agreement contained in the Option Agreement was unconscionable.
The parties disagreed about which agreement applied to the dispute and whether it was to be resolved in an Ontario med-arb process or by the Delaware Courts.
The application judge’s decision –The application judge dismissed the proceeding. Although the reasons are not reported, it appears that the Employee’s position was that the dispute was in connection with his employment and that the ADR clause in the Employment Agreement applied. Therefore, an arbitrator should be appointed to deal with this jurisdiction dispute. Determination of the appropriate forum required more than a superficial review of the record and ought to be made by the arbitrator, not the Court. The Respondents seem to have argued that the Court should decide this dispute because the Option Agreement applied and it had a forum selection clause that stated that the dispute was to be decided in the Delaware Courts. Therefore, an arbitrator had no jurisdiction. The application judge rejected the Employee’s position. She found that the Employment Agreement did not apply and that the forum selection clause in the Option Agreement was not unconscionable and was therefore valid, giving the Delaware courts exclusive jurisdiction over the dispute.
The Court of Appeal decision – In a short decision, the Court dismissed the Employee’s appeal and confirmed the application judge’s decision for the following reasons.
First, the application judge did not err in law or in fact when she found that she could decide the jurisdiction issue because an exception to the competence-competence principle was engaged. While a court normally refers challenges to an arbitrator’s jurisdiction to the arbitrator, here the determination of the arbitrator’s jurisdiction involved a question of mixed fact and law that required only a superficial examination of the evidence because all that was required was an interpretation of the relevant contracts. Therefore, the Court could resolve the issue of jurisdiction, relying on Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34, [2007] 2 S.C.R. 801, at paras. 84-85 and Uber Technologies Inc. v. Heller, 2020 SCC 16, [2020] 2 S.C.R. 118, at para. 32.
Second, the application judge did not err in her interpretation of the contracts. She applied the correct principles of contract interpretation and found that the Option Agreement unambiguously stated that the grant of the options was not tied to the Employee’s employment. She was also correct in her finding that, despite the inequality of bargaining power, the forum selection clause was not unconscionable.
The Court of Appeal agreed with the application judge that the Employment Agreement, with its ADR clause, did not apply.
Commentary:
First, in my view, this case is less interesting for what the Court of Appeal ultimately decided (which is not surprising), but for how these proceedings would have been very different if the Employment Agreement, with its med-arb clause, had applied, because it does not appear that either Court considered the med-arb clause to be any different from a standard arbitration clause.
In essence, the Court was asked to determine whether the parties had agreed to arbitrate their dispute at all. The answer depended on what agreement applied. This was a question of jurisdiction, which the court decided rather than referring it to an arbitrator, because it fell within an exception to the competence-competence principle. After interpreting both contracts, the Option Agreement applied, with its forum selection clause, and the dispute was to be determined in the Delaware Courts.
However, had the court determined that the Employment Agreement applied, another jurisdiction question arose.
The med-arb agreement was not quoted or described; however, the typical med-arb agreement requires that the parties try to mediate a resolution of their dispute and, if that fails, they agree to enter into an arbitration process. In other words, mediation is a condition precedent to mandatory arbitration. Unless that condition precedent has been fulfilled, the arbitrator has no jurisdiction. (Using often vexing arbitration terms, this is a matter of jurisdiction rather than admissibility.) In this respect, a med-arb clause is a variation of stepped or multi-tier arbitration clause in which some sort of negotiation or mediation is a pre-condition to arbitration. The facts in this case suggest that no mediation took place. By the Court’s analysis, it would have determined that the arbitrator had no jurisdiction, and the matter would have to be determined in court proceedings. However, because in this scenario the Option Agreement did not apply, the Ontario Courts would have had jurisdiction.
Second, I make some observations about med-arb in general. In the most common form of med-arb, if the parties are unable to settle their dispute by mutual agreement and must go to arbitration, the same neutral serves as both mediator and arbitrator. This has both risks and benefits.
Having recently completed ADRIC’s course on Med-Arb run by mediator-arbitrator Colm Brannigan, I focus on what makes a med-arb process unique and why it must be structured and disciplined to protect the parties. It is critical that the med-arb agreement contain a clear transition between the mediation and arbitration stages so that the parties understand (among other things) that the mediator takes on a different role when they put on their arbitrator hat and what use may be made in the arbitration (if any) of information (confidential or otherwise) or documents disclosed during the mediation stage. ADRIC has published Med-Arb Rules, which provide guidance on some of the transition issues.
Finally, I raise one other issue about which the decision is silent. Had the Court determined that the Employment Agreement applied, that the parties were bound to a med-arb process, and that an arbitrator should be appointed, there was a hurdle. The Employee did not name as a Respondent to the proceedings the other party to the Employment Agreement – Hub Ontario. Unless the parties had an agreement on this issue, Hub Ontario was a necessary party and would have had good reason to complain if an arbitrator was appointed without its knowledge or participation in the proceeding – even if its parent was a named Respondent and a full participant. This is a reminder of a fundamental principle in arbitration: under both domestic and international arbitration law, the parties shall be treated fairly, and each party shall be given an opportunity to present a case and respond to the other side’s case.