Ontario –  A pathological med-arb clause – #781

Stothers v Kazeks, 2023 ONSC 5021 is a perfect example of the confusion about the med-arb process that I covered in my last case note: Med-arb process was “fundamentally flawed” – #775. If you want to skip to the language of the pathological so-called med-arb clause without the factual background in this case, just scroll down to just above the Editor’s Notes section.

Background facts –The parties had two disputes, which arose 18 years after their romantic relationship ended. They were brought to the Court on an urgent basis because the 67-year-old Applicant submitted that she had recently received a terminal cancer diagnosis and had perhaps only months to live. The Court found that she wanted to put her financial affairs in order. 

(1) Application for partition and sale – The parties lived together for 7 years, from 1998 to 2005, in a house. In 2003, the Respondent transferred his sole interest in the house to the Applicant and himself for $2.00. The parties proffered conflicting evidence about who made what contributions to the house while they both lived in it. Just over a year later, the relationship ended and the Respondent continued to live in the house for 18 years and paid all expenses associated with it. The Applicant sought an order for the sale of the house and granting her 50% of the proceeds of sale. The 78-year-old Respondent asked the Court not to exercise its discretion to order a sale of the house because it would cause him unbearable physical and emotional hardship and impair his ability to earn a living out of the house. 

Because of the “accelerated pace of this litigation” the record was incomplete and the Court said it could not fairly determine the parties’ contributions to and interests in the house.

The Court found for the Respondent and dismissed the application for partition and sale.

This is background for the second dispute.

(2) Application for a declaration of interest – the Applicant also sought a declaration that her interest in a property formerly owned by the parties’ church was severed from the Respondent’s. The parties were two of 11 persons who, via a corporation, purchased land of which their church was divesting. The corporation was the owner on title and the parties had beneficial interests in two lots. The Applicant expressed concern that when the lots were sold, the Respondent would not ensure that her estate would receive 50% of the proceeds.

The Court declined to grant the declaration as hypothetical and speculative – there was no pending sale transaction. 

The Court noted that the agreement between the corporation and the 11 beneficial owners contained a dispute resolution clause, which the Court said, at paragraph 75, “provides that the dispute shall be settled through a mediation-arbitration process”:

“16. DISPUTES – If a dispute arises as to any matter between the Corporation and a beneficial lot owner, the same shall be referred to binding mediation by a mediator chosen by the parties. For greater certainty, a mediator shall be deemed to be chosen by the parties if at least 60% of the directors of the Corporation, and 60% of the beneficial lot owners agree to the mediator. If the parties are unable to agree on a mediator, the parties’ dispute shall be referred to three mediators, one chosen by the directors of the Corporation, one chosen by the beneficial lot owners, and a third to be chosen by the two mediators. For greater certainty, binding mediation shall mean that the parties shall first attempt to mediate any disputes. In the event that such mediation fails, and the parties are unable to reach an agreement, the decision of the mediator(s) shall be binding upon.”

The Court offered no comment on the sufficiency of this dispute resolution clause to achieve its objective.

Editor’s Notes:

First, the fundamental problem with this clause is the confusion between the roles of arbitrator and mediator. By definition, the latter runs a consensual rather than binding process. And if the parties cannot agree upon a single mediator, how is a mediation to be conducted by three mediators? This sounds like a creative, but expensive, exercise. But substituting the word “mediator” with “arbitrator” does not solve this clause’s many problems. If this clause is to be considered a med-arb clause, when does the mediation process end and the arbitration process begin? As I stated in my last case note, an elegant solution is to use the ADR Institute of Canada standard clause, which refers to its Med-Arb Rules

Second, arbitration counsel so often see dispute resolution clauses like this – that do not resolve the disputes on substantive issues but instead fuel them and entrench the parties by adding disputes about the process for dispute resolution. I hope this case note inspires you to speak to your transaction lawyer colleagues, with this clause in hand, to explain why they should be getting advice from experienced arbitration counsel whenever they are working on a deal. (Please run, don’t walk.) The agreement in this matter appears to have been executed in 2018. Let’s hope that with arbitrations becoming ever more common to resolve commercial disputes, a clause like this would not make its way into a business agreement in 2023.