Ontario – clause omitting express referral to arbitration still valid enough to stay litigation – #172

Despite less-than clear drafting, the parties’ agreement to have their disputes “settled in accordance with” identified institutional rules was sufficient to remove the court’s jurisdiction in Belnor Engineering Inc. v. Strobic Air Corporation et al., 2019 ONSC 664.  Mr. Justice Lorne Sossin also dismissed arguments that the arbitration agreement was invalid because it was unconscionable, noting that (i) no argument was made that applying the institutional rules was unconscionable and (ii) no inequality of bargaining power or practical inaccessibility of arbitration existed to create an unfairness if the action was stayed in favour of arbitration.

Belnor Engineering Inc. (“Belnor”) initiated litigation against Strobic Air Corporation (“Strobic”) claiming breach of their January 23, 2008 Representative Sales Agreement (the “Belnor RSA”).  The latter also included Addendum D which set out a schedule for splitting sales commissions and provided that Strobic would “reward the appropriate effort throughout the sales process”. Both the Belnor RSA and Addendum D mentioned arbitration.

Paragraph 14 of the Belnor RSA read as follows:

Controversy, disputes or claims. Any controversy dispute or claim arising out of, or relating to this Agreement, or any breach thereof, shall be settled in accordance with the Commercial Arbitration Rules of the American Arbitration Association, and judgment upon the award may be entered in any court having jurisdiction thereof. The prevailing party shall be entitled to its or her/her attorneys’ fees and costs.

Addendum D to the Belnor RSA provided the following:

Strobic Air reserves the right to arbitrate all commission rates and disputes and it’s [sic] decision shall be binding on all parties.” 

In its litigation, Belnor also included other defendants including Preston Phipps Inc. (“Preston”) which had also signed its own, separate Representative Sales Agreement with Strobic (“Preston RSA”).  The Preston RSA also contained the same paragraph 14 undertaking to arbitrate and the same Addendum D.

Strobic, Preston and the other three (3) individuals named as defendants (“Defendants”) applied to stay Belnor’s litigation.  No mention is made of the individuals being parties to either the Belnor RSA or the Prestion RSA.  No mention is made of the parties agreeing to consolidation with other arbitrations.

In support of their stay application, Defendants argued both of Ontario’s arbitration legislation and its court rules:

[2] The defendants bring this motion under Rule 21.01(3) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, to stay the action based on an arbitration clause contained in the sales agreement between Belnor and Strobic and the arbitration clause in the sales agreement between Strobic and Preston (“the Arbitration Clauses”). The defendants assert that this claim is subject to the Arbitration Clauses, and therefore lies outside the jurisdiction of this Court. The defendants rely on section 106 of the Courts of Justice Act, R.S.O. 1990, c. C.43, sections 6 and 7 of the Arbitration Act, 1991, S.O. 1991, c. 17, and article 8 of Schedule 2 to the International Commercial Arbitration Act, 2017, S.O. 2017, c.2, Sched. 5 (the “ICAA”).

In his reasons, Sossin J. followed Defendants’ approach and grouped the arbitration clauses in the Belnor RSA and the Preston RSA together, referring to them as the “Arbitration Clauses”.  (It is unclear if that definition, first introduced in para. 2 by reference to Defendants’ motion, includes or excludes the Addendum D wording.  Based on Sossin J.’s reasons at para. 29, the term “Arbitration Clauses” likely excludes the Addendum D wording.)

Belnor submitted four (4) reasons why the Arbitration Clauses were not binding:

– the Arbitration Clauses omit an express referral to arbitration required by the “Standard Arbitration Clause” set out in the American Arbitration Association’s (“AAA”) own Commercial Arbitration Rules (“AAA Rules”).  The latter, reproduced at para. 12, require that parties agree that their dispute “be settled by arbitration”. Belnor argued that the Arbitration Clauses only refer to the dispute being “settled in accordance with” the AAA’s Rules;

– the contra proferentum doctrine urges that the Arbitration Clauses, being vague, should be interpreted against the interest of Strobic as the drafting party;

– the reference to the AAA Rules is similar to a choice of law provision and only provides that the AAA Rules will be used in court.   Because the parties cannot “oust the Court’s own rules and procedural law”, the Arbitration Clauses are a nullity and “should be ignored”; and,

– the wording of Addendum D refers disputes which Strobic can arbitrate and, if Strobic had wanted to arbitrate, it would have done so but did not.

Defendants referred to the statement in Haas v. Gunasekaram, 2016 ONCA 744 that the law favours giving effect to arbitration agreements. They submitted that refusing to stay the litigation would be “contrary to the bargain made”.  Defendants resisted the claim that the Arbitration Clauses were ambiguous.  The dispute “involves sophisticated commercial parties whose intent can be inferred from the Arbitration Clauses in the context of the agreements”.

Sossin J. conceded that the wording “could have been drafting more clearly by including language that disputes will be referred to an arbitrator” but found no ambiguity in the wording.

The mention that “judgment upon the award may be entered in any court having jurisdiction thereof” undermined Belnor’s suggestion that the parties intended a court to use the AAA Rules.

Sossin J. concluded that interpreting the Arbitration Clauses in the way Belnor suggested would render them “ineffective”.

He also refused to consider applying the contra proferentum doctrine because the wording was not ambiguous.

Having determined that the Arbitration Clauses were “otherwise enforceable”, he next turned to Section 7(2) of the Arbitration Act.  He limited his consideration of the exceptions listed in Section 7(2) to those triggered by Belnor’s arguments, namely invalidity based on vagueness and unconscionability.

Sossin J. held that Belnor failed to demonstrate that the Arbitration Clauses were vague. He observed that the Arbitration Clauses may not detail how the arbitral process would unfold, including nomination of the arbitrator, location, timelines and procedure but were saved by the reference to the fulsome AAA Rules.  “The AAA’s Commercial Arbitration Rules, however, include detailed provisions governing each of these questions, and mechanisms for resolving differences between the parties on these questions.

The different process set out in Addendum D did not establish vagueness as Sossin J. held that the process applied to disputes under Addendum D and had “little bearing on the interpretation of the Arbitration Clauses generally”.

Sossin J. then evaluated and dismissed Belnor’s claim that the Arbitration Clauses were unconscionable.  He referred to Titus v. William F. Cooke Enterprises Inc., 2007 ONCA 573 and the more recent Heller v. Uber Technologies Inc., 2019 ONCA 1 (leave to appeal applied for March 4, 2019 docket 38534) but held that Belnor had failed to demonstrate unconscionability.

[33] In the case at bar, the plaintiff alleges that the Arbitration Clause is unconscionable because it could result in Strobic arbitrating the dispute between itself and Belnor. This view arises under the language of the Addendum “D” referred to earlier. That aspect of the Belnor Agreement relates only to the potential for apportioning sales commissions to reward additional effort or skill on the part of the sales representative. The dispute resolution clause in Addendum “D” does not govern the dispute before this Court, which relates to whether Belnor is entitled to the sales commissions at issue generally.

[34] The plaintiff has not alleged any unconscionability flowing specifically from the application of the Commercial Arbitration Rules of the AAA, nor is this a situation analogous to the Heller case where inequality of bargaining power or practical inaccessibility of arbitration would create an unfairness if this action is stayed in favour of arbitration.

(Note: Heller v. Uber Technologies Inc., 2019 ONCA 1 is also considered in WCL Capital Group Inc. v. Google LLC, 2019 ONSC 947, paras 38-39 and 58-68.)

Sossin J. concluded that the Arbitration Clauses covered the disputes at issue in the litigation, that they “have binding effect” under both the Arbitration Act and the ICAA and that the exceptions in Section 7(2) do not apply.

He stayed the action in favour of arbitration.  In fixing the costs, Sossin J. observed that the “question of how to interpret the Arbitration Clauses at issue in this case raises somewhat novel issues”. Note: The reasons omit: (i) analysis on why the action was stayed regarding the other four (4) defendants – Preston and the individuals – not bound to arbitrate under the Belnor RSA; (ii) mention of whether the stay “in favour of arbitration” was only pending the result of the arbitration between Belnor and Strobic; and, (iii) explanation regarding how the Preston RSA arbitration provision was triggered by an action by Belnor as non-party to that Preston RSA. See P-2 Checklist item (a)(vi)(c) regarding consolidation.