Ontario – court able to decide jurisdictional challenge on “superficial consideration of documentary evidence” – #040

The Ontario Superior Court in Kanda Franchising Inc. and Kanda Franchising Leaseholds Inc. v. 1795517 Ontario Inc., 2017 ONSC 7064 determined that parties resisting their inclusion in an arbitration were entitled to a decision by the court rather than having their jurisdictional challenge referred to the arbitrator.   Madam Justice Jocelyn Speyer determined that the materials were clear enough and required little if any evidence for a determination of the challenge.

The dispute stemmed from a franchise contract signed between Kanda Franchising Inc. (“Franchisor”) and its franchisee, 1795517 Ontario Inc. (“517” or “Franchisee”) for optician services.  The franchise agreement contained a clause which provided for arbitration:

all disputes, claims, causes of action, or questions regarding the rights and obligations of the Franchisor or the Franchisee incident to or arising from the terms or conditions of this Agreement, Operations Manual, or the conduct of the parties hereto, whether contractual, tort or otherwise in nature, it is mutually agreed that all disputes, claims, causes of action, or questions regarding the rights or obligations of the Franchisor or the Franchisee shall be submitted to binding arbitration in the Province of Ontario…

The Franchisor and its related company, Kanda Franchising Leaseholds Inc. (collectively “Kanda”) delivered an April 20, 2017 Notice of Arbitration to Franchisee but also included two individuals, Mr. Iftikhar Hossain (“Hossain”) and Ms. Parveen Hussain (“Hussain”).  In its arbitration, Kanda claimed damages for alleged breaches of the franchise agreement and related agreements and bad faith under section 3 of the Arthur Wishart Act (Franchise Disclosure), 2000, SO 2000, c 3.  517 agreed to participate in the arbitration but Hossain and Hussain objected.  They pointed to the fact that neither were bound by a contract which they had not signed and that neither consented to participating in an arbitration.

Kanda applied under Ontario’s Arbitration Act, 1991, SO 1991, c 17 to the court for an order requiring Hossain and Hussain to submit to arbitration and for an order appointing an arbitrator.  Kanda’s application presented Speyer J. with three issues to determine:

(1) did the court have jurisdiction to order that Hossain and Hussain submit to arbitration;

(2) if the court had jurisdiction to order that Hossain and Hussain submit to arbitration, does the Arbitration Agreement bind them personally, as well as 517; and,

(3) apart from the issues of jurisdiction, should an order appointing Kanda’s choice of arbitrator be made?

Kanda invoked the competence-competence principle, arguing that whether Hossain and Hussain were parties to the arbitration was a question first left to the arbitrator.  Hossain and Hussain resisted, arguing that a plain reading of the contractual documents clearly showed that they were not personally bound to the undertaking to arbitrate and only Franchisor and 517 were bound to arbitrate.

Speyer J. noted that section 6 of the Arbitration Act strictly limits judicial intervention in the arbitral process.   She referred to Inforica Inc. v. CGI Information Systems and Management Consultants Inc, 2009 ONCA 642 and Haas v. Gunasekaram, 2016 ONCA 744 as statements of the courts’ approach to reading section 6.  Speyer J.’s review of those cases supported her summary of the court’s approach to deferring the jurisdictional challenge to the arbitrator or deciding it.  Echoing Dell, she observed: “Unless the challenge to the arbitrator’s jurisdiction requires for its disposition only a superficial consideration of the documentary evidence in the record, the decision whether that jurisdiction extends to Hossain and Hussain must be made by the arbitrator.” On the file before her, Speyer J. concluded that the jurisdictional challenge required only a superficial consideration of the documentary evidence in the record and that deciding the issue for the parties would further the assistance of the court mentioned in section 6(1) of the Arbitration Act.

Speyer J. summed up what she described as the “classical approach to contract interpretation” includes the following principles:

(1)   where there is no ambiguity in a written contract it must be given its literal meaning;

(2)   words must be given their plain, ordinary meaning, at least unless to do so would result in absurdity;

(3)    the contract should be construed as a whole, giving effect to everything in it if at all possible;

(4)    the contra proferentem rule: that language should be construed against the “authorial party” to a contract if the “non-authorial party” had no meaningful opportunity to participate in negotiation of the contract, and where a stipulation is capable of two meanings equally.

Speyer J. noted that “words of the contract are clear” and that neither the franchise agreement or the arbitration agreement included Hossain or Hussain.  In her reasons for judgment, Speyer J. noted those facts which corroborated her conclusion that neither individual was bound by contract to Kanda.  The preamble to the Franchise Agreement explicitly confirms that the party to the agreement as franchisee is 517.  Hossain, the sole shareholder, director and officer of 517, signed the franchise agreement but only in his capacity as director of 1795517 Ontario Inc., above the notation “I have authority to bind the corporation”. Hussain, Hossain’s wife, operated the franchise store on a day-to-day basis. Her name and signature appear nowhere in the contractual documents.

“Just as non-parties to an arbitration agreement cannot invoke it (see: Rampton v. Eyre, 2007 ONCA 331 (CanLII), at para. 20),  those who are not parties to an arbitration agreement cannot be compelled to submit to arbitration (see: Novatrax International Inc. v. Hägele Landtechnik GmbH, 2016 ONCA 771 (CanLII), 132 O.R. (3d) 481, at para. 24). ”

Speyer J. analyzed the franchise agreement and concluded that Hossain and Hussain were not bound by it.  Had the parties intended to include either or both individuals in their contractual relationship, the could have done so but did not.  Referring to the contra proferentem rule, Speyer J. concluded her analysis by observing that “Kanda, as the authorial party, had the opportunity to expand the scope of the Arbitration Agreement to include shareholders, directors, and employees of the franchise and either chose not to do so or was aware that the Franchisee, the non-authorial party, would not have accepted such a term.

Speyer J. then moved to the final issue, the appointment of an arbitrator.  As their arbitration agreement was silent on the process to do so, Speyer J. exercised her authority under section 10(1) of the Arbitration Act to appoint an arbitrator for the parties.  The analysis is summary, reflecting the necessity of the court to evaluate the suggestions made by the parties and the limited information provided to her.

[29] The applicants propose the Mr. Gary Caplan be appointed as the arbitrator. The evidence indicates that Mr. Caplan is a lawyer, certified mediator, and chartered arbitrator. I have reviewed his curriculum vitae, which forms part of the record, and have no doubt that he is a highly qualified arbitrator. He has litigated, mediated and arbitrated “scores” of franchise disputes.

[30] The respondents take the position that “if an arbitration is to be imposed on Iftikhar [Hossain] and Parveen [Hussain], they should be entitled to choose the arbitrator”. They propose the appointment of Mr. Steven Goldman on the basis that he is more experienced than Mr. Caplan in arbitrating franchising disputes, and because his fees would be lower than those charged by Mr. Caplan. I have been provided with a printout of Mr. Goldman’s webpage. I have not been provided with a curriculum vitae for Mr. Goldman. The webpage indicates that Mr. Goldman acts as a mediator and arbitrator in franchise and other commercial disputes, but does not support the conclusion that he is more experienced than Mr. Caplan in arbitrating franchising disputes. The difference in their fees is not sufficiently significant to influence the choice of arbitrator. My conclusion that arbitration will not be imposed on Hossain and Hussain substantially attenuates their expressed concerns about who the arbitrator will be.

[31] I appoint Mr. Gary Caplan to arbitrate the dispute between Kanda and 1795517 Ontario Inc. ”

The parties had agreed that costs would be in the amount of $12,000.00, awarded to the successful party.  Speyer J. observed that success was mixed.  She awarded $10,000.00 to 517, Hossain and Hussain because the jurisdictional issue was “significantly more complex that the application to appoint the arbitrator, and this was reflected in the time and effort devoted to it in the written materials and the oral argument.