Ontario – Court can hear set aside despite NY forum selection clause – #837

In Tehama Group Inc v Pythian Services Inc, 2024 ONSC 1819, the Court declined to stay an application to set aside an arbitration award. The stay application was based on a forum selection clause in favour of the courts of New York. In denying the stay, the Ontario court applied an exception in that forum selection clause regarding certain types of disputes under the parties’ agreement that were to be referred to arbitration. The key issue in the case concerned establishing the “place” of the arbitration, which had not been expressly set out by the parties or determined by the arbitrator. Applying the International Commercial Arbitration Act, RSO 1990, c I.9 (“ICAA”) and  UNCITRAL Model Law on International Commercial Arbitration (“Model Law“) the Court determined that Toronto, Ontario, was the place of arbitration and that the Ontario Superior Court of Justice was therefore the only competent forum to decide the set-aside application. 

Background Tehama Group Inc (“Tehama”) entered into an asset purchase agreement (“APA”) with Pythian Services Inc and Pythian Services USA Inc (“Pythian”) pursuant to which Tehama was the seller and Pythian was the purchaser of a business. Two provisions of the APA contemplated possible adjustments to the purchase price. Section 1.07 of the APA contemplated certain price adjustments at closing.  Section 1.08 of the APA contemplated the possibility of an additional $10 million “earn out” payment to Tehama if the adjusted earnings of the business for the 2021 calendar year achieved a certain threshold. 

These same sections of the APA set out that Pythian would prepare a statement for the purposes of determining the purchase price adjustments on closing and Tehama’s entitlement to the “earn out” payment. In case of disagreement between the parties regarding the statement prepared by Pythian, s. 1.07 of the APA set out a dispute resolution process which ultimately called for final and binding arbitration by “the Toronto office of PricewaterhouseCoopers LLP or such other internationally recognized independent public accounting firm mutually acceptable to” the parties. Section 1.08 of the APA incorporated that same dispute resolution mechanism “mutatis mutandis”.

Section 7.08 of the APA set out a forum selection clause in favour of the courts of the State of New York. The clause included an exception regarding disputes under Section 1.07 concerning the statement to be prepared by Pythian : 

”Each Party irrevocably submits to the exclusive jurisdiction of the courts of the State of New York, located in New York County or in the United States District Court for the Southern District of New York, for the purposes of any suit, action or other proceeding arising out of this Agreement (…). This Section 7.08 shall not apply to any dispute under Section 1.07 that is required to be decided by the Accounting Firm.”[Emphasis added]

The dispute – Pythian submitted a statement to Tehama in accordance with ss. 1.07 and 1.08 of the APA. The statement showed that the threshold for the “earn out” payment contemplated int s. 1.08 of the APA had not been reached. Tehama disagreed with the statement and initiated arbitration before the Toronto office of PricewaterhouseCoopers LLP. The arbitration proceeded by a paper record only. In its award, the arbitrator agreed with the calculations in the statement submitted by Pythian. 

Tehama filed an application to set aside the arbitral award based on art. 34 of the Model Law before the Ontario Superior Court of Justice. Pythian responded with an anti-suit injunction brought before the courts of New York seeking an order that Tehama be restrained from seeking a set-aside of the award before the Ontario courts, and also filed an application to stay the set-aside proceedings initiated by Tehama before the Ontario Court on the basis of the forum selection clause at s. 7.08 of the APA. In turn, Tehama brought an application before the New York courts to stay Pythian’s application and any enforcement proceedings before the courts of New York pending the outcome of the set-aside application that it had first filed in Ontario.

Issues – The Court’s task was to determine whether Tehama was required to bring any set-aside application before the courts of New York, or whether the Ontario court was the appropriate forum. The decision turned on “the interpretation of section 1.07, 1.08 and 7.08 of the APA and the relevant provisions of the ICCA (sic) and Model Law.” The Court’s analysis addressed three sub-issues:

  • Whether a dispute regarding an issue decided under s. 1.08 of the APA (the earnout provision)  was subject to the exception in the forum selection regarding disputes based on s. 1.07 APA (the closing adjustments provision) for disputes to be decided by the accounting firm  
  • Whether the ICAA and Model Law applied to the arbitration.
  • Whether the doctrine of forum non conveniens was of any assistance.

Analysis – The Court denied Pythian’s application for stay, with costs against Pythian.

First, the Court found that the exception provided for in the forum selection clause (excerpted above) applied to the arbitration in question. On the Court’s interpretation of the APA:

  • Section 1.08 of the APA directly incorporated the dispute resolution procedure in s. 1.07 of the APA. Refusing to extend the exception set out in the forum selection clause to disputes under s. 1.08 APA would lead to commercial absurdity, which should be avoided. 
  • Pythian’s argument ignored the fact that s. 1.08 of the APA incorporated s. 1.07 of the APA dispute resolution procedure “mutatis mutandis”. The Court interpreted this to mean that the dispute resolution procedure in s. 1.07 of the APA was incorporated by reference, with “all necessary changes having been made” into s. 1.08. The Court appeared to interpret this to mean that necessary changes to the forum selection clause at s. 7.08 of the APA (excerpted above) should also be made, such that it should be read to include disputes under s. 1.08 of the APA referred to arbitration according to the dispute resolution procedure set out in s. 1.07. 
  • In any event, the Court found that the parties had submitted a dispute to arbitration under both ss. 1.07 and 1.08 APA. Since the dispute referred to arbitration included s. 1.07 APA as well as s. 1.08, this appeared sufficient for the Court to hold that the exception to the forum selection clause applied to the whole arbitration. 

In the circumstances, the Court dismissed Pythian’s argument that the exception set out in the forum selection clause only applied to a s. 1.07 APA dispute, and not to disputes under s. 1.08 APA, as being “formalistic in the extreme”.

Second, the Court found that Ontario was the place of arbitration based on ICAA and Model Law. As such the Ontario Superior Court of Justice was the only competent forum to hear any set aside application. 

Pythian’s principal submissions on this point were that (i) the parties’ choice of the “Toronto office” of PricewaterhouseCoopers LLP was only a choice of arbitrator, not a choice of the place of the arbitration, (ii) the location of the arbitration is not dispositive of the “place”, and (iii) in any event no hearing occurred, as the arbitration proceeded on a written record. Therefore, in the absence of a clear place of arbitration, Pythian argued that the choice of forum and choice of law provisions at s. 7.08 of the APA should prevail.  

In dismissing these arguments, the Court provided the following review of legal principles:

Thus, the issue of whether the Ontario Superior Court of Justice was the competent forum turned on whether the place of arbitration was in the territory of Ontario. Applying section 20(1) of the Model Law, the Court determined that Ontario was the place of arbitration. Section 20(1) reads as follows:

The parties are free to agree on the place of arbitration. Failing such agreement, the place of arbitration shall be determined by the arbitral tribunal having regard to the circumstances of the case, including the convenience of the parties.

Here, the parties had not expressly chosen a place of arbitration and the arbitrator had not determined a place. The Court, however, found that since the parties had designated “the Toronto office” of PricewaterhouseCoopers LLP as the arbitrator in the APA, they had in effect agreed to Toronto, Ontario as the place of arbitration. The Court also noted an absence of any evidence that the arbitration occurred elsewhere, as well as the uncontested fact that the award was made in Ontario. On the latter point, it drew a parallel with article 31(3) of the Model Law, which stipulates that the award shall state its date and place as determined by s. 20(1) of the Model Law and that the award “shall be deemed to have been made at that same place”. The Court found further support for its conclusion in the fact that the engagement agreement between the parties and the arbitrator was to be interpreted by the law of Ontario. While the Court accepted that the law applicable to the engagement agreement is distinct from the law of the arbitration, it found that this choice of law provided further indication of the parties’ intention that Ontario would be the place of arbitration. 

Third, on the issue of forum non conveniens the Court simply stated that the issue between the parties appeared to be one of jurisdiction, rather than convenient forums, such that the factors relevant to forum non conveniens were not applicable. 

Contributor’s Notes:

First, this case is a reminder that setting out relevant parameters of the arbitration in an arbitration agreement or at least at the outset of arbitration may help avoid procedural skirmishes down the road.  As the Court acknowledged in this case, the place of arbitration has important legal consequences as it can determine the law of the arbitration; moreover, the “place” of arbitration does not necessarily correspond with the physical location where a hearing or other proceedings relative to the arbitration occurred. It is common (and good) practice for parties to expressly agree to parameters for the arbitration, including its “place”, in terms of reference concluded together with the arbitral tribunal. Here, the parties did not stipulate the place of the arbitration in their arbitration agreement and did not ask the arbitrator to determine it. This would have avoided a dispute about this issue later on.

Second, the Court made short work of the forum non conveniens argument. Indeed, it would seem strange to hold that Toronto was an inconvenient forum for a set aside application considering that the parties expressly chose the arbitrator with reference to a “Toronto office”.

Finally, the Court refused to hold in favour of a “formalistic” interpretation of the exception in the forum selection clause in the APA between the parties. This is consistent with a longstanding trend to move away from a formalistic approach to interpreting such clauses, and toward an interpretation that favours the parties’ intention and commercial reasonableness. A similar trend of intention over formalism can be observed regarding the interpretation of arbitration agreements. As this case suggests, the search for intention can also be relevant to determining parameters of the submission to arbitration, such as the “place” of arbitration.