Ontario – Court of Appeal offers clarity for contracts containing competing wording on dispute resolution – #044

Ontario’s Court of Appeal provided clarity for parties bound to contracts containing competing mentions of arbitration and litigation.  In Trade Finance Solutions Inc. v. Equinox Global Limited, 2018 ONCA 12, the Court overturned a motion judge’s interpretation of the International Commercial Arbitration Act, RSO 1990, c I.9 (“ICAA”) and the Model Law on International Commercial Arbitration adopted by the United Nations Commission on International Trade Law on June 21, 1985, as set out in the Schedule to ICCA (“Model Law”).  The Court qualified the interpretation as an error in law, and asserted that arbitration can still be binding even if it subjects only “certain” disputes to arbitration.

Trade Finance Solutions Inc. (“TFS”) and Equinox Global Limited (“Equinox”) were bound by an insurance contract which contained two clauses touching on disputes: an arbitration clause and an “Action Against Insurer” which respectively read as follows:

This policy shall be governed by the laws of England and Wales. Any dispute arising in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration under the LCIA Rules, which Rules are deemed to be incorporated by reference into this clause. The number of arbitrators shall be three. The seat, or legal place of, the arbitration, shall be London. The language used in the arbitral proceedings shall be English.

In any action to enforce the obligations of the Underwriters they can be designated or named as “Lloyd’s Underwriters” and such designation shall be binding on the Underwriters as if they had each been individually named as defendant. Service of such proceedings may validly be made upon the Attorney In Fact in Canada for Lloyd’s Underwriters, whose address for such service is 1155 rue Metcalfe, Suite 2220, Montreal, Quebec H3B 2V6.

Unsatisfied with how a disagreement over payments was progressing, TFS sued Equinox in the courts of Ontario.  Equinox applied for a stay.  The motions judge interpreted the two clauses as being alternative and viable, refusing to stay the court litigation or to refer the parties to arbitration.  The Court of Appeal disagreed, giving priority and effect to the arbitration clause, and stayed the court litigation.

The Court considered two alleged errors made by the motions judge.  Whether the judge applied the correct (a) principles of contractual interpretation and, (b) legal test for a stay under the ICAA and the Model Law?

For both alleged errors, the Court decided to apply the standard of correctness.  For both, it concluded that the motions judge incorrectly applied the principle and the legal test for a stay.

In regard to the first error, the Court concluded that, while having articulated the correct principle of law for contract interpretation, the motion judge failed to apply it.  Doing so was an error of law.  The Court also flagged its concern for precedent and uniformity of results as a cause to intervene and exert its role as an appellate court:

[30] Also, the motion judge’s interpretation of the Action Against Insurer Clause conflicts with other decisions in Canada and elsewhere, creating uncertainty in the law about how similarly worded insurance policies ought to be interpreted. The provisions at issue in this case seem to appear frequently in cases involving U.K.-based insurers  In my view, this case raises an issue that will have an impact beyond the parties to the dispute. This court, therefore, should review the decision on a standard of correctness to address the uncertainty it has created in the law: Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37 (CanLII), [2016] 2 S.C.R. 23, at para. 46, and Biancaniello v. DMCT LLP, 2017 ONCA 386 (CanLII), 411 D.L.R. (4th) 367, at paras. 20-22.

In regard to the second error, the Court noted that an error in the interpretation of ICAA was an issue of law and drew a correctness standard.

In its reasons, the Court provided analysis which ought to assist in clarifying wording in other disputed contracts.  Stay applications can involve contracts which include wording about “actions” and “defendants”.  Such wording serves either to conflate the contracting parties’ choice of dispute resolution or distract in determining the parties’ intention to submit to arbitration or not.   The Court looked directly at the impact such wording could have on an arbitration clause.

[40] The word “action” and the word “defendant”, when they appear in a clause about the identification and service of underwriters in the context of claims for breaches of the obligations under the insurance agreement, do not necessarily refer to a civil action, or to a defendant in a civil action. They can easily be read as referring to any proceeding in which a claim is made against the underwriters. An arbitration is a proceeding in which a claim is advanced against the underwriters. The reference to the underwriters as “defendant” is a description of their role in the proceeding.

 [41] Indeed, even if “action” and “defendant” do refer to a civil action, the Action Against Insurer endorsement does not conflict with the mandatory arbitration clause. Notwithstanding the latter’s operation, there are still civil actions available to TFS: actions to determine jurisdiction or compel arbitration, actions to enforce arbitral awards, and appeals of arbitral awards are all examples of such actions.

The Court disagreed with the motion judge’s approach which served to “widen” the Action Against Insurer clause.  As well, the Court dismissed TFS’ argument, only made on appeal, that it ‘intended and believed’ that the Action Against Insurer clause gave it access to the courts.  The Court noted bluntly that “contractual interpretation does not turn on these types of subjective expectations”.

The Court resolved the tension between the arbitration clause and the Action Against Insurer clause by choosing the interpretation which gave effect to the arbitration clause.

[47] In our case — just as it was in Ace Capital and Midnight Marine — after interpreting the insurance contract as a whole, it is possible to give meaningful effect to both the mandatory arbitration clause and the Action Against Insurer clause. Interpreting it this way gives meaning to all of its terms, and avoids an interpretation that would render the mandatory arbitration clause merely optional and thus ineffective. In contrast, the motion judge’s interpretation required the modification of the wording of the arbitration clause, which was accomplished by changing the word “shall” to “may”.

The Court’s interpretation led it to conclude that the parties’ insurance policy contained a mandatory provision for arbitration as the sole method of resolving the parties’ dispute.  The Court’s choice of interpretation was sufficient to resolve the stay application.  Having said that, the Court expressly noted the importance of clarifying the law for the benefit of international commercial agreements.  The Court sought to provide that clarity by commenting on how and when article 8 of the Model Law can require the courts to stay litigation.  The Court noted that article 8 of the Model Law can apply even if only “certain” disputes have been subjected to arbitration.

[54] In my view, to the extent that the motion judge held that arbitration must be the sole method of dispute resolution agreed to between the parties in order to attract the operation of the Model Law, doing so was wrong in law. Simply stated, the Model Law is not restricted in its application to international commercial agreements that provide for arbitration as the sole method of dispute resolution. While I agree that a purely optional arbitration provision does not necessarily attract the application of art. 8 of the Model Law, an agreement by the parties to submit certain, but not all disputes in a contract to arbitration does attract its application. This conclusion is supported by the jurisprudence and consistent with a plain reading of the ICAA and the Model Law.

The Court also held that the Model Law can still apply when the arbitration agreement makes access to arbitration optional.  Once that option has been exercised by one of the parties, the Model Law could apply to prevent “duplicative court actions” and the courts could use article 8 to require the parties to respect the choice now made.

The Court granted the appeal, stayed the litigation and referred the parties to arbitration before the LCIA in London.