Ontario – Appeal allowed where arbitration agreement “invalid”; Arbitration Act not engaged – #746

In Goberdhan v Knights of Columbus, 2023 ONCA 327, the Ontario Court of Appeal dismissed an appeal of an order dismissing the Defendant’s/Appellant’s motion for a stay of proceedings in favour of arbitration. The motion judge found that the contracts containing the arbitration agreements were invalid for lack of consideration. He therefore refused the stay pursuant to s. 7(2)2 of the Ontario Arbitration Act, 1991 SO 1991, c 17. The Plaintiff/Respondent argued that no appeal was permitted under s. 7(6), which prohibits an appeal of a stay decision. The Court of Appeal disagreed and found that because the contracts and the arbitration clauses were invalid, the Arbitration Act,1991, was not engaged and there was no prohibition on appeal. The appeal was dismissed on its merits.

The Defendant/Appellant was a fraternal benefit society that offered insurance products to its members. The Plaintiff/Respondent was a field agent for the Appellant, who sold insurance products. The parties entered into three field agent contracts, the first when the Respondent started working for the Appellant and the second and third agreements while he continued to work. His contract was terminated and he sued for wrongful dismissal. Only the second and third contracts contained mandatory arbitration clauses. The Appellant moved for a stay.

The motion judge found that the second and third contracts failed for lack of consideration because there was no benefit flowing to the Respondent. Those contracts were found to be “invalid”. He refused the motion for the stay of proceedings. The motion judge’s decision is summarized (with my commentary) in an earlier Arbitration Matters Case Note: Ontario – Arbitration clause not consideration; provides only detriment to contracting party – #641.

The Appellant filed a notice of intent to defend the action and then moved under r. 21.01(3) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 and s. 106 of the Courts of Justice Act, R.S.O. 1990, c. C. 43 for an order to stay the wrongful dismissal action pursuant to s. 7(1) of the Arbitration Act, 1991. The Appellant relied on the mandatory arbitration clauses in the second and third contracts signed by the parties.

The appeal raised two issues of relevance to arbitration practitioners:

1. Whether there was no right to appeal because of s. 7(6) of the Arbitration Act, 1991; and

2. Whether the motion judge erred in concluding that there was no valid arbitration clause.

This case note covers only the first issue, the jurisdiction issue.

Section 7(1) of the Ontario Arbitration Act, 1991, states that, “if a party to an arbitration commences a proceeding in respect of a matter to be submitted to arbitration under the arbitration agreement, the court in which the proceeding is commenced shall… stay the proceeding.” Section 7(6) provides that, “there is no appeal from the court’s decision” on a motion to stay brought under s. 7(1).

The Respondent argued that the Appellant’s stay motion had been brought under s. 7(1) and that the motion judge concluded that the arbitration clauses in agreements two and three were invalid for lack of consideration and dismissed the motion under s. 7(2). It provides that a court “may refuse to stay the proceeding in any of the following cases”, including that “the arbitration agreement is invalid”. The Respondent relied upon a a statement from the Supreme Court of Canad’s decision in TELUS Communications Inc. v. Wellman, 2019 SCC 19 at para. 91:

“Given the absence of any qualifying language, s. 7(6) must be taken as referring to a “decision” made under any subsection contained in s. 7 [and] would include, for example, a decision to stay the proceeding under s. 7(1), a decision to refuse a stay under s. 7(2), or a decision to order a partial stay under s. 7(5).”

The Court of Appeal disagreed with the Respondent. The fact that the motion judge found that the arbitration agreements were “invalid” under s. 7(2) was not “determinative”.

It relied upon paragraphs 9 and 10 of its earlier decision of Huras v. Primerica (2000), 2000 CanLII 16892 (ON CA), 137 O.A.C. 79 (C.A.), in which the Court found that “where a court finds that there is no arbitration clause (in that case because the clause was unconscionable), the Arbitration Act, 1991, has no application and the dispute lies beyond the scope of s. 7.” It follows, therefore, that “the prohibition against an appeal in s. 7(6) is equally not applicable”. The Court explained:

[9] The authority of Huras, and the jurisprudence that followed it, was recently confirmed by a five-judge panel of this court in Toronto Standard Condominium Corporation No. 1628 v. Toronto Standard Condominium Corporation No. 1636, 2020 ONCA 612, at paras. 3-8. In that case, Jamal J.A. (as he then was) addressed and rejected the argument made here, that Wellman changed the law in respect of the scope and application of s. 7(6). He concluded that Wellman “did not disturb the Huras line of cases on the interpretation of s. 7(6)”, and that “the Huras line of cases was correctly decided”: at para. 6.”

Therefore, because the motion judge concluded that there was no consideration for the two contracts which contained the arbitration clauses, there was no contract and no arbitration clause. The Arbitration Act, 1991, did not apply and s. 7(6) did not apply to prohibit the appeal.

Ultimately, however the Court of Appeal dismissed the appeal on the merits.

Editor’s Notes:

First, the Huras case relied upon by the Court of Appeal can easily be distinguished and arguably has no application to this case. There, the Plaintiff sued for damages in respect of a period of time in which there was no contract at all. This meant that there was no arbitration clause and the Arbitration Act, 1991, had no application. The Plaintiff became a member of a sales force of independent contractors that provided financial and insurance services and products to its customers. To qualify for membership, she was required to complete a training program, following which she signed three agreements which contained arbitration clauses. She sued to recover remuneration from the training period. The Defendant moved to stay the action on the basis of the arbitration clauses. The motion judge dismissed the stay motion on the ground that the contracts following the training period could not apply retroactively. In other words, there was no contract at all during the training period and there was no arbitration agreement. Therefore, the Arbitration Act, 1991, did not apply. The motion judge also, in obiter, found that the arbitration clauses in the contracts – for the period of time after the training period – were invalid because they were not enforceable.

Those are not the facts of this case. Here, the motion judge found that there was an arbitration clause, but that it was “invalid” under. s 7(2)2 for lack of consideration. The motion judge did not conclude that the parties had entered into no contract at all. Therefore, the motion judge applied the Arbitration Act, 1991, to refuse to grant the stay sought by the Appellant. Section 7(6) provides that the motion judge’s decision was not subject to appeal.Second, see my earlier commentary on the principle of separability, which is relevant to this case: Ontario – Arbitration clause not consideration; provides only detriment to contracting party – #641 – Arbitration Matters.