In RH20 North America Inc. et al v. Bergmann et al, 2023 ONSC 2378, the moving defendants brought both a motion under Rule 21 striking out certain of the plaintiff’s claims as disclosing no reasonable cause of action, and an application for a stay for want of jurisdiction on the basis of arbitration clauses in their underlying contracts with the plaintiffs. They met with divided success. While granting relief on the Rule 21 motion, Justice Valente dismissed the stay application on a variety of grounds, including that there were competing arbitration and jurisdiction clauses and that there was an attornment to the court’s jurisdiction as a result of bringing the Rule 21 motion.
The plaintiffs RH20 North America Inc. (“RH20”) and Unit Precast (Breslau) Ltd. (“Unit Precast”) (collectively, the plaintiffs) brought an action seeking various relief against the defendants arising from allegations that the defendants had engaged in a “scheme” to prematurely terminate certain agreements between RH20 and certain defendants, and to use confidential information to solicit RH20’s employees and customers (para 14). Plaintiff RH20, an Ontario corporation, was a manufacturer and distributor of onsite wastewater treatment and rainwater harvesting equipment. It used wastewater treatment systems that had been licensed from the corporate defendants, the Bergmann Group, and subcontracted those maintenance and other services for the wastewater systems to its co-plaintiff Unit Precast, which manufactured and sold concrete septic tanks and related products. RH20 also sold wastewater treatments system control panels, which it had licensed from the defendant, Click + Clean GmbH (“Click”).
In a relatively short but comprehensive decision which helpfully summarizes the law on Rule 21 motions, Justice Valente granted virtually all of the relief sought by the moving defendants. He granted leave to amend to RH20, but not to Unit Precast.
Having disposed of the Rule 21 motion, Justice Valente turned to the application for a stay, which required consideration of clauses in two agreements between RH20 and Click.
A Licensing Agreement dated November 23, 2012, governed the licensing relationship between the parties (the “Click Licensing Agreement”). Its arbitration clause addressed both the seat of the arbitration and the governing law. It stated: “All disputes arising in connection with this contract or about its validity shall be finally decided in accordance with the rules of the London Court of International Arbitration (LCIA Arbitration Rules) by exclusion of taking recourse to the courts of law. The place of the arbitration proceedings is London UK….The contract is subject to the law of the Federal Republic of Germany.”
In addition, Click and RH20 had entered into a General Agreement (the “General Agreement”) for Web Portal and use of “GPRS” (wireless and cellular network communication services) dated November 24, 2012. It governed Click’s provision of services to customers using control panels that had been operated through its web portal. The General Agreement also contained a clause which provided for the exclusive place of jurisdiction. It stated: “The exclusive place of jurisdiction for any disputes about the accrual and termination of the contract and all rights and obligations under this contract shall be Kuhlenfeld”, which is in Germany.
In considering the application for a stay, Justice Valente noted that the parties agreed that the arbitration in the Click Licensing Agreement was international. The Model Law, having the force of law in Ontario, directed that the court refer the parties to arbitration “unless it finds that the agreement is null and void, inoperative, or incapable of being performed” (para 64).
Despite arguments by the plaintiffs that the causes of action were not caught by the terms of the arbitration clause, Justice Valente found otherwise, noting that the Court of Appeal had previously directed these types of provisions be given a “wide compass” (para 67). Further, relying on Dalimpex LTD. v. Janicki, (2003) 64 O.R. (3rd) 737 (ONCA), in which Justice Charron noted at para 22 that where it is arguable that the dispute falls within the terms of the arbitration agreement, the stay ought to be granted to permit an arbitral tribunal to determine its own jurisdiction. Justice Valente accepted defence submissions that all the causes of action and tenable causes of action fell within the scope of the arbitration agreement. Justice Valente noted, in particular, that RH20 had specifically requested an arbitration agreement in the party’s contract, indicating a clear intention that all disputes would be determined by way of arbitration.
Nonetheless, Justice Valente dismissed the application for a stay. He did so for three reasons.
First, he found that the agreements were incapable of being performed. Justice Valente noted that the two clauses haddifferent grants of jurisdiction: in the Licensing Agreement, the arbitration was to take place inLondon UK, whereas in the General Agreement, disputes were to be determined exclusively in Kuhlenfeld, Germany. Justice Valente concluded that, “it is impossible for the parties to comply with the relevant provisions of both agreements; they clearly conflict. Because the provisions are in conflict, I agree with the plaintiffs that at a minimum they are incapable of being performed.” In finding that the clauses in both agreements were incapable of being performed, Justice Valente accepted that the dispute fell within the scope of the arbitration clause.
Second, enforcement would not be commercially reasonable. Justice Valente noted at para 71 that, for these types of cases, the traditional forum non conveniens analysis does not apply; rather, he relied on Novatrax International Inc. v. Hagele Landtechnik GmbH, 2016 ONCA 771 in which the Court of Appeal stated that the plaintiff must show a “strong cause” that the forum clause should not be enforced and the commercial parties not held to their bargain. The plaintiff met that burden here. Relying on the Court of Appeal’s decision in Quickie Convenience Stores Corp v. Parkland Fuel Corporation, 2020 ONCA 453, Justice Valente found that this was a case in which there was “strong cause” to reject a forum selection clause.
Although the Bergmann defendants included a number of companies of which Click was only one, and despite that any individual dispute may only engage one of the agreements and therefore only one clause, the court agreed with the plaintiffs’ submissions that the litigation resulted from the alleged tortious conduct of all of the defendants collectively. Justice Valente concluded that, “it would be commercially unreasonable to interpret the agreements as requiring the parties to litigate the same issue in multiple jurisdictions. This interpretation falls outside of what the parties would have reasonably contemplated when they agreed to the forum selection clause and favours dismissal of the defendants’ stay motion.” (para 74)
Third, by bringing the Rule 21 motion, the defendants had attorned to the jurisdiction of the court. Here, the defendants were both seeking the benefit of the court’s jurisdiction through the Rule 21 motion, and simultaneously trying to reject its jurisdiction through the application for a stay. Having brought the Rule 21 motion and been willing to receive the benefit of that disposition, Click had “given the court consent – based jurisdiction.” (para 81).
Of note, while Article 8 of the Model Law (which the parties agreed applied) provides that a stay can be granted no later than when a party submits its first statement on the substance of the dispute, the focus here is on the fact that the defendants did more than provide a statement on the dispute; they sought and obtained relief (i.e., a benefit) from the court. Having wanted the assistance of the court, the defendants could not now reject the court’s jurisdiction.
Justice Valente dismissed the application for a stay.
First, in giving his reasons for rejecting the stay application, Justice Valente relied on the decision in Novatrax and its comments on “forum clauses”. In doing so, Justice Valente did not engage in the distinction between arbitral jurisdiction, that is whether an arbitral tribunal or the court has jurisdiction over the dispute, and a forum selection clause.. The decision turns on the unreasonableness of the parties having specified two different physical jurisdictions for a determination of their disputes. The fact that the parties clearly intended to grant jurisdiction to an arbitrator (in lieu of a court) is lost in a discussion that conflates arbitration clauses with forum selection clauses. Of note, there is criticism that Novatrax also does not recognize the distinction.
Second, this case also provides lessons for both corporate and litigation counsel.
While the Ontario courts are pro-arbitration and arbitration clauses are given wide latitude and interpretation, Novatrax and the cases that follow it expressly provide the court with the power to reject a stay, albeit only after meeting a high threshold. Here, the Court was concerned that the two agreements between the same parties and executed just one day apart had included, in one, a seat of arbitration as London and, in the other, Kuhlenfeld. There is nothing in the decision that explains the commercial basis for doing so. For corporate counsel, this serves as a good reminder of the importance of drafting these clauses in a manner that is not susceptible to an argument that, due to inconsistency with other agreements, they are not capable of performance.
In addition, the case provides a lesson on strategy for litigation counsel.
If a party seeks to reject the court’s jurisdiction for any reason, it must do so first before seeking the assistance of the court. No doubt the defendants were considering the delay that would be incurred if they brought multiple motions in succession, particularly as only the action against Click was affected by the arbitration clause. However, doing so will be necessary to avoid the result here.