In Katerinaville Developments Ltd., v. Garthwood Homes Ltd.et al., 2023 ONSC 6267, the Court held that the Arbitration Act, 1991, S.O. 1991, c. 17 (the “Act”), does not allow a plaintiff to quash a notice of arbitration in favour of a court proceeding, deferring to the arbitral tribunal for any determination of the unconscionability of an arbitration clause. Additionally, the Court emphasized that duplication of proceedings in Court and arbitration does not necessarily render the arbitration unfair.
The Underlying Dispute – The plaintiff was one of 15 family-owned companies incorporated to participate as syndicate members in various real estate joint ventures. The defendant Garthwood Homes Ltd. (“Garthwood”) was incorporated as a management company for housing developments developed by the Lazaridis family. Garthwood held title to the lands as bare trustee for the syndicate members. The plaintiff participated in a joint venture with Garthwood regarding a property development joint venture, in which Garthwood held a 20% interest. The joint venture agreement (the “Agreement”) involved sixteen entities. The first fifteen were syndicate members, and the final party was Garthwood. Garthwood was also a signatory to the Agreement.
The Agreement contained a mandatory arbitration clause, pursuant to which “any dispute, difference or question … among the Parties … or any of their representatives touching [the] Agreement or any part thereof or the business of the syndicate or the construction” … [should] be settled by arbitration.”
In April 2020, the plaintiff commenced an oppression action against Garthwood and two other defendants who were not parties to the Agreement (the “Action”).
In 2023, Garthwood requested additional funds from syndicate members, including the plaintiff, for the property development due to the depletion of its remaining funds. The plaintiff did not comply with the cash call. Other syndicate members informed Garthwood of their intention to buy the plaintiff’s interest in the joint venture under the terms of the Agreement. The Agreement envisaged a role for Garthwood, naming it as the irrevocable attorney to perform all acts required for the sale or transfer of a defaulting member’s interest.
Garthwood then issued a notice of arbitration against the plaintiff based on the mandatory arbitration clause in the Agreement, notwithstanding the ongoing Action, seeking declaratory relief to allow Garthwood to effect the sale or transfer of the plaintiff’s interest. In response, the plaintiff moved to quash the arbitration notice.
The plaintiff’s application to quash was based on the following arguments: (1) that Garthwood lacked standing to issue the notice of arbitration as it was not identified as a “party” to the Agreement, even though it was a signatoryt; (2) the unconscionability of the arbitration clause in the Agreement; and (3) that the arbitration was impractical and unfair because Garthwood had knowledge of the arbitration clause when it submitted its statement of defence in the Action and should have taken steps to stay the oppression Action if it sought to commence arbitration (which it had not).
The Court’s Decision – The Court dismissed the plaintiff’s motion to quash the notice of arbitration. As part of its analysis, the Court considered whether it had jurisdiction to quash the notice of arbitration under the Act in the first place and while not ultimately ruling on that, it found that section 7 of the Act allows a defendant to seek a stay of proceedings in favour of arbitration but a plaintiff does not have the converse right to move to quash the notice of arbitration in favour of court proceedings.
The Court determined that Garthwood did have standing to initiate the arbitration because it was a signatory to the Agreement . It provided that it was “between” sixteen entities, the first fifteen of which were syndicate members, and the final party was Garthwood. The syndicate members were referred to as “Parties” and Garthwood was referred to as the “Company”, although in one paragraph the use of the word “parties” clearly was meant to include Garthwood. Garthwood was also a signatory to the agreement. Further, the dispute fell within the ambit of the arbitration clause.
Regarding the claim of unconscionability, the Court held that the determination of that issue should be made by the arbitrator based on the well-established competence-competence principle. Citing the Supreme Court of Canada’s decision in Uber Technologies Inc. v. Heller, 2020 SCC 16, at paras. 32, 37 [Uber], the Court held that challenges to an arbitrator’s jurisdiction should generally be referred to the arbitrator unless they raise questions of law or questions of mixed fact and law that require “only superficial consideration of the documentary evidence in the record”, and that the Court may depart from this general rule only where there are issues of accessibility. The Court specifically rejected the notion that the costs of arbitration alone would create an accessibility barrier for the plaintiff that would justify departing from the established principles.
The Court also rejected the plaintiff’s argument that the arbitration was unfair or impractical, noting that the parties in the Action and the arbitration did not overlap fully. There were some parties to the Action that were not privy to the Agreement and some parties to the arbitration (and the Agreement) that were not named in the oppression Action. The issues raised in the Action could not have been determined in the arbitration, so having two separate proceedings was not unfair or impractical.
Relying on another SCC decision, TELUS Communications Inc. v. Wellman, 2019 SCC 19, at para. 90, the Court held that some degree of duplication between an arbitration and a court action does not automatically render the arbitration unfair.
Contributor’s Notes:
This decision is of interest for a number of reasons.
First, it recognizes the limitations on the Court’s jurisdiction to interfere in arbitration proceedings. The Court questioned the assumption upon which the “motion to quash” was made, which is that it had the jurisdiction to “quash” an arbitration proceeding. While not ultimately ruling on the issue, the Court succinctly stated that the Act itself, “does not entitle a plaintiff to quash a notice of arbitration in favour of a court proceeding”.
Second, this case further affirms the long-standing competence-competence principle (which is embraced by courts across Canada) and provides some limited commentary on what financial constraints would comprise an “accessibility issue” sufficient to justify a departure from this principle. The Court provides brief commentary indicating that for the cost of arbitration to be considered an accessibility issue warranting a departure from the competence-competence principle, there must be evidence that the cost of the arbitration would preclude the plaintiff from continuing the litigation. Since there was no such evidence here, the Court held that there were no issues of accessibility that would justify a departure from the principle.
This is in line with the recent decision of the Court in British Columbia in Spark Event Rentals Ltd. v Google LLC, 2023 BCSC 1115, which was discussed in a recent case note for Arbitration Matters British Columbia – Google wins stay of conspiracy claims; plaintiff refuses to arbitrate – #761. There, the Court rejected the plaintiff’s argument that arbitration was inaccessible due to its uneconomic nature compared to litigation. Instead, the Court held that the financial “brick wall” (mentioned in Uber at para. 47) pertains to the financial ability of the plaintiff to initiate the arbitration. In the absence of evidence of financial inability of the plaintiff, the Court rejected the accessibility argument and ordered that the action against Google be stayed.
Third, the Court’s comments on the multiplicity of proceedings and whether it renders the arbitration unfair should be read in the context of the applicable laws in Ontario. The same reasoning may not be applicable in other jurisdictions such as British Columbia, where section 7(5) of the Act has no equivalent. It provides that the Court may grant a partial stay of proceedings where the arbitration agreement only deals with some of the matters and they can reasonably be separated. There are cases in British Columbia in which the Court has denied a partial stay of proceeding as it would endorse multiple proceedings and pose the risk of inconsistent decisions, a scenario to be avoided under BC’s Law and Equity Act RSBC 1996 c. 253, s. 10 (Kwon v Vanwest College Ltd, 2021 BCSC 545 at para 50; see also Ts’kw’aylaxw First Nation v Graymont Western Canada Inc., 2018 BCSC 2101 at para 33; James v Thow, 2005 BCSC 809 at para 105).
The author wishes to thank Hessam Mehrabi for his assistance.