In Clost v Rennie, 2023 ONSC 6998, the Court ruled that an arbitration agreement was invalid after a de novo hearing to “decide the matter” of the arbitrator’s jurisdiction under section 17(8) of the Ontario Arbitration Act, 1991, SO 1991, c. 17 (the “Act”). The Applicant (also referred to in the decision and herein as “Norm”) contended that the arbitration agreement was invalid because it was contained in a lease agreement which he alleged was fraudulent because his signature was forged. The parties first submitted the jurisdictional issue to a sole arbitrator, who found the arbitration agreement to be valid. The Court accepted that a de novo hearing under s. 17(8) of the Act was required, finding that the Arbitrator had rendered a “ruling” on a preliminary question of jurisdiction rather than an “award”, even though the sole question he was asked to determine was jurisdiction. There was an extensive evidentiary record before the arbitrator relative to the jurisdictional issue. This raised for debate the difference between an “award” and a “ruling” on a preliminary question which can be decided by the Court on a hearing de novo. The Court completed its own review of the extensive evidentiary record and ultimately concluded that the lease (and therefore the arbitration agreement) was fraudulent and invalid and the arbitrator had no jurisdiction
Background to the dispute – The case arises in the context of the sale of a family cottage. Applicant, Norm, had acquired a majority interest in the cottage in 2005 pursuant to a series of transactions with his siblings or their estates. At the time of the 2005 transactions, one of Norm’s brothers had passed away and the deceased’s three daughters approved the transactions on behalf of his estate. In 2020, Norm sought to sell his interest in the cottage to a consortium of prospective buyers including three of Norm’s great nephews and nieces, who included the children of the deceased brother’s daughters who had approved the transactions in 2005.
A purchase and sale agreement had been reached, but it was terminated by Norm when the prospective buyers failed to deliver a deposit within the time set out in the agreement. Norm eventually sold his interest in the cottage to two different individuals, including his son. The first prospective buyers invoked a right of first refusal of sale contained in a lease agreement they say had been signed in 2005 at the time of the transactions which led to Norm obtaining a majority interest in the cottage. Norm disputed having signed the lease; he claimed his signature on the lease was forged.
The arbitral proceedings regarding jurisdiction – The lease, which Applicant alleged was a fraud, contained an arbitration agreement. The first prospective buyers provided notice of an intention to commence an arbitration to enforce their alleged right of first refusal under the lease. In response, Norm provided notice of an intention to raise a preliminary objection to arbitral jurisdiction pursuant to s. 17 of the Act, contending the lease (and any arbitration agreement within it) was invalid because of the fraud. Rather than proceed under the arbitration agreement in the lease, it appears the parties agreed to first submit the issue of the validity of the arbitration agreement and arbitral jurisdiction to a sole arbitrator by way of a separate Agreement and Submission to Arbitration.
The Agreement and Submission to Arbitration stated in part that the parties, “agree that the issue of the existence and validity of the alleged arbitration agreement [in the lease] and the jurisdiction of the Arbitrator shall be decided by the Arbitrator by way of motion pursuant to s. 17 of the Act”. The parties also jointly appointed an “Arbitrator of the Jurisdiction Motion”.
The Arbitrator confirmed, in writing, that he had “accepted said appointment, thereby taking up jurisdiction over those disputes exclusively”. The record before the Arbitrator was voluminous, including affidavits of several lay witnesses, the reports of 4 expert witnesses, and several cross-examinations. In his decision, the Arbitrator found that the arbitration agreement in the alleged lease “is valid and that there is jurisdiction to conduct an arbitration in this matter”.
The Applicant’s challenge of the Arbitrator’s jurisdictional ruling – Norm challenged the Arbitrator’s jurisdictional ruling to the Court on several grounds. He contended that he was entitled to a de novo hearing under s. 17(8) of the Act. This provides that if the tribunal rules on an objection to jurisdiction as a preliminary question, a party may make an application to the court to “decide the matter”. If a de novo hearing did not apply, Norm argued that the Arbitrator had erred in law. Alternatively, he requested that the ruling be set aside pursuant to s. 46 of the Act.
Since the Court found that s. 17(8) of the Act applied, it did not decide the other grounds of challenge.
Application of s. 17(8) of the Act – Relying upon such authorities as Electek Power Services Inc v Greenfiled Energy Centre Limited partnership, 2022 ONSC 894 (see “Ontario- Court overturns decision, “deciding the matter” of jurisdiction de novo” – case note # 586) and The Russian Federation v Luxtona Limited, 2021 ONSC 4604, upheld on appeal 2023 ONCA 393 (see “Ontario – Courts must decide arbitral jurisdiction de novo” – case note #748), the Court held that the power to “decide the matter” under s. 17(8) of the Act, confers on it the power to perform a de novo review of the jurisdictional issue. Thus, if s. 17(8) of the Act applied, the Court’s task would not be to review the Arbitrator’s ruling, but rather to decide the matter of jurisdiction anew based on the full record that was available to the Arbitrator.
Key to the Court’s determination of whether s. 17(8) of the Act applied was the distinction between a “ruling” and an “award” as set out at s. 17(7) of the Act.
Section 17(7) of the Act states that an “arbitral tribunal may rule on an objection [to jurisdiction] as a preliminary question or may deal with it in an award”. Thus, if the Arbitrator was found to have dealt with jurisdiction “in an award”, the Applicant would not be entitled to a de novo hearing under s. 17(8) of the Act.
Respondents argued that s. 17(8) of the Act did not apply because the Agreement and Submission to Arbitration was separate from the arbitration agreement in the contested lease. They argued that proceedings under this separate agreement constituted “stand-alone” arbitral proceedings, and the Arbitrator’s ruling pursuant to these proceedings was therefore an award on jurisdiction. Such an award, argued Respondents, could only be appealed or reviewed (ss. 45 and 46 of the Act, respectively).
Relying on 1107051 Ontario Ltd v GG Kingspa Enterprises limited Partnership, 2022 ONSC 1847 (see “Ontario- Arbitrators can decide non-legal business disputes, but not in this case” case note # 608), the Court interpreted the term “award” at s. 17(7) of the Act as an arbitrator’s “ultimate decision on the merits of a dispute.”
On the facts of the case, the Court found that s. 17(8) of the Act applied so as to entitle the Applicant to a de novo hearing on jurisdiction, because the Arbitrator’s decision was a “ruling” on a “preliminary question”, not an “award” even though it was the only question to be determined. In coming to this conclusion, the Court relied heavily on its interpretation of the parties’ Agreement and Submission to Arbitration (see para 33). The Court noted that the Agreement set out the parties’ intention to submit the issue of jurisdiction to the Arbitrator “by way of a motion pursuant to s. 17 of the Arbitration Act, 1991”, which the Court found necessarily meant a preliminary motion (see para 32) to the Arbitrator. The Court also relied on the Arbitrator’s description of the “motion” before him as a “preliminary jurisdictional motion pursuant to s. 17(1)” (see para 29). Finally, the Court also referred to the fact that the Arbitrator declined to rule on other matters, noting his jurisdiction was limited to ruling on the validity of the arbitration clause.
The Court reviewed the full record that was available to the Arbitrator and concluded that the lease, and the arbitration agreement contained in it, was invalid. On this basis, the Court set aside the Arbitrator’s jurisdictional ruling. Earlier this year, the Court provided a separate ruling on costs (2024 ONSC 1012), which underlines the Court’s disapproval of the Respondent’s conduct in the proceedings (see para 11 and 12).
Contributor’s Notes:
First, the principle of separability is not discussed in this case. At first blush, given the Court’s ultimate finding that the lease was invalid (not the arbitration agreement), this may seem inconsistent with the separability principle (s. 17(1) and (2) of the Act, see also esp. art. 16(1) Model Law). In this case, the absence of any separability argument appears to flow from Applicant’s argument, which was effectively that no part of the contract was valid. The jurisdictional argument (and indeed the case) turned on whether Norm had in fact signed the lease or if his signature had been forged. If the signature was forged, then no part of the contract (including the arbitration agreement) could be said to exist. In its reasons, the Court, relying on Secure Solutions Inc v Smiths Detection Toronto Ltd, 2011 ONCA 337 stated, “if there is no arbitration provision contracted for at the relevant time, that ends the matter”.
Second, it seems fair to ask whether there was a missed opportunity in this case to define the term “preliminary question” as it appears in s. 17 the Act.
The Court relied in large part on the words used in the parties’ Agreement and Submission to Arbitration (which words were echoed by the Arbitrator). But some may find it difficult to square the Court’s conclusion on this point with the particular circumstances of the case. First, as the Respondents argued, the parties’ Agreement and Submission to Arbitration seemed to submit only the jurisdictional question to the Arbitrator, to the exclusion of other issues. No further award (on the merits or otherwise) appears to have been contemplated in this separate Agreement. Second, the Arbitrator’s jurisdictional decision was based on a voluminous factual and evidentiary record, much of which was relevant to the merits. Third, and perhaps most strikingly, the jurisdictional issue was so intricately entwined with the merits, that in rendering its decision on the de novo hearing on jurisdiction, the Court effectively (though implicitly) dismissed Respondent’s entire claim based on the right of first refusal contained in the lease. What was framed as a de novo hearing on jurisdiction effectively yielded a ruling on the merits. One may question whether a de novo hearing is warranted in such circumstances. The Court’s reasons do not directly address how circumstances such as those listed above should factor, if at all, in the determination of whether an arbitrator rules on jurisdiction as a preliminary question, rather than in an award under s. 17(7) of the Act. The Court appears to reason that if a decision on jurisdiction is rendered separately and at any point before an award on the merits, then the former is a ruling on a “preliminary question” open to de novo review under the scheme of the Act.
Finally, this case serves as yet another reminder that the drafting of arbitration agreements and related instruments (e.g. submission agreements, arbitral mandates, etc) is a critically important step and one that must be done strategically. Often, costly procedural and jurisdictional skirmishes can be avoided by careful drafting of the arbitration agreement that directly addresses predictable outcomes based on applicable rules. In this case, the Applicant got a second kick at the can to have a so-called jurisdictional issue reviewed by the Court de novo. There was effectively a retrial of a voluminous evidentiary record. Ultimately, the Court not only came to a different conclusion than the Arbitrator but also made a large, punitive costs order against Respondent. Given the Court’s reasons, which relied on the words used by the parties in their Agreement and Submission to Arbitration, parties to an arbitration might avoid a de novo review of a jurisdictional question, if they so intended, through careful planning and wording of their arbitration agreements that take into account applicable rules. Similarly, it is useful to note the possibility of contracting out of some provisions of the Act, including de novo review, as set out under s. 3 of the Act.