Ontario – Arbitrator to decide whether non-signatories are bound to arbitrate – #776

In We Care Community Operating Ltd. v Bhardwaj, 2023 ONSC 4747, the Court granted the Plaintiff’s motion to compel arbitration under a Co-Ownership Agreement that related to a development property in Toronto. The Court deferred to the arbitrator the question of whether certain corporate entities – which were not signatories to the Co-Ownership Agreement – were nonetheless bound by the arbitration agreement contained in it.

Background – The Plaintiff and the individual Defendants in the action (the “Co-Owners”) entered into a Co-Ownership Agreement in 2011 and a related Addendum in 2015. The Co-Owners owned Concept Lofts Ltd. (“Concept”), which held title to the development property itself. The Plaintiff alleged that the other Co-Owners breached obligations to contribute funds to the development project, which it alleged were urgently needed to stave-off the loss of the family home of the Plaintiff’s principal.

The corporate Defendants other than Concept (the “Mortgagees”) named in the action were solely owned by one or another of the individual Defendants, and each had also taken out a mortgage to contribute funds to the development. While the judgment made clear that the individual Defendants had also issued personal guarantees to secure the mortgage loans, the Mortgagees were not signatories to the Co-Ownership Agreement.

The Plaintiff alleged that the Mortgagees were the alter egos of the individual Defendants, and that the Mortgagee’s financial contributions were “not really mortgage loans … but are in fact personal contributions by the individual Defendants.” On that basis, counsel for the Plaintiff argued that the Mortgagees should be included in the arbitration “with respect to the monies owing and funding of the project’s debts.” In turn, the Mortgagees took the position that, as non-signatories to the Co-Ownership Agreement, they could not be compelled to arbitrate disputes arising out of it. The Mortgagees further argued that there was no evidence that the corporations had been used for an improper purpose or as their principals’ alter egos.

The Court decided, at para. 7, to refer to the arbitrator the question of which parties were subject to arbitral jurisdiction under the Co-Ownership Agreement. That question is a jurisdictional challenge to arbitration, which – subject to limited exceptions – must be resolved first by the arbitrator.

The limited exceptions identified by the Supreme Court of Canada in Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34, in the Court’s view, did not apply in this circumstance. 

First, the Court determined that the challenge to the arbitrator’s jurisdiction raised by the Mortgagees was not a pure question of law. Citing Kanda Franchising Inc. and Kanda Franchising Leaseholds Inc. v. 1795517 Ontario Inc., 2017 ONSC 7064, the Court reasoned, at para. 9, that a jurisdictional challenge raises a pure question of law “only if a superficial glance at the contract provide[s] a complete answer to the question of the arbitration’s ambit.”

The second limited exception applies when a challenge to arbitral jurisdiction raises a question of mixed law and fact capable of being determined on a “superficial consideration of the documentary evidence in the record.” The Court determined, at para. 11, that a “quick glance at the governing agreements reveals that the issue is not so straightforward.” It acknowledged, also at para. 11, that factual context could be relevant to the jurisdictional reach of the arbitration agreement and offered a hypothetical example: the Co-Owners may have “registered a corporation as the chosen vehicle to go on title as Mortgagee, [while] the funds were actually advanced by the individual co-owner personally.” At para. 12, the Court summarized its conclusions: (1) the record was insufficient for it to make a ruling, and (2) it would be improper for it to do so at this stage in the proceedings. Accordingly, the Court granted the Plaintiff’s motion to compel arbitration.

Contributor’s Notes: 

First, some lawyers’ blogs on a decision like this might laud its support for “pro-arbitration” policy and the primacy of the competence-competence principle and leave it at that. But the practical lessons of seemingly routine procedural decisions like this can be broader. Who is – and who is not – subject to arbitration is fundamental, not only for a parties’ ultimate recourse when things go wrong, but also to the success of commercial projects.

Creating a harmonized, thoughtful dispute resolution process at the outset, and modifying it to reflect changes in parties, funding, and commercial alignment, ensures that the parties turn their minds to how they will proceed if relationships or circumstances go sideways. As this case shows, structuring a commercial project so that the funding sources are not explicitly subject to an arbitration agreement between the development’s co-owners is fraught with risks. This is a commonly overlooked issue when interlinking construction contracts are drafted; it is also plainly an important detail. If the parties find out after a dispute has arisen that the resolution provisions are discordant or unworkable, they may end up fighting long and costly procedural battles just to determine where their dispute will be heard on the merits. And, as the alleged stakes of this case also demonstrate, time may be the most precious commodity to one or another of the litigants.

Second is the Court’s unusual (and possibly ultra vires) direction, at para. 15, that “[t]he arbitrator shall decide, as a preliminary issue, the question of who is subject to the arbitration and who is not” (emphasis added). The Court may have simply wanted to jump-start the arbitral process, noting the time pressure on the Plaintiff’s principal. But, as it noted in para. 12, “[i]t is for the arbitrator to structure the arbitral proceedings as he or she sees fit.” Typically, under the Ontario Arbitration Act, 1991, SO 1991, c 17, s. 17, an objection to arbitral jurisdiction must be directed first to the arbitrator. The arbitrator has discretion to determine whether to deal with the objection in a preliminary phase or not. The Arbitration Act then provides, at s. 17(8): “If the arbitral tribunal rules on an objection as a preliminary question, a party may, within thirty days after receiving notice of the ruling, make an application to the court to decide the matter.” While an arbitration may continue in parallel with such an application, requiring the jurisdictional issue to be dealt with in a preliminary phase may expose the parties, their counsel, and the courts to avoidable delay and costs.

Third, arbitration law on non-signatory issues is developing across Canada. Arbitration Matters contributor Marie-Claude Martel highlighted recent trends in Quebec in her Hot Topics post for 2022. She explained the trend in Quebec toward binding non-signatories where the non-signatory has an intertwined or intimate relationship with the dispute and the signatories, and to support Quebec’s policies – including the 2016 revisions to the Code of Civil Procedure – in favor of arbitration and against contradictory decisions or multiplication of proceedings.