Ontario – Court refers part of dispute to arbitration despite concluding dividing the issues was “unreasonable” in the circumstances – #520

In Star Woodworking Ltd. v. Improve Inc., 2021 ONSC 4940, Justice F.L. Myers of the Ontario Superior Court of Justice concluded he was required to refer to arbitration parts of a multi-action litigation even though dividing the issues and parties was, in the Court’s view, unreasonable in the circumstances. In granting the stay, Justice Myers followed the Supreme Court of Canada’s holding in TELUS Communications Inc. v. Wellman, 2019 SCC 19 (Wellman) to the effect that unless a party establishes one of the bases for refusing a stay under subsection 7(2) of the Arbitration Act, 1991, the Court lacks discretion to refuse the partial stay motion under subsection 7(5). He stayed portions of two of the joined actions on certain issues as against one of the Defendants but allowed them to continue on the remaining issues as against the other Defendants.

The Plaintiffs agreed to purchase non-residential condominiums in a project designed as a specialized showroom and marketing centre for home improvement businesses. They claimed the Defendant developer and its principal (also a Defendant) conspired with others to falsely represent that 90% of the units were sold. The Plaintiffs claimed two purchasers of several units failed to close their transactions with the Defendant developer, who returned their deposits. These important purchasers were allegedly the principal’s friends and acted as his co-conspirators by entering into sham transactions, all with the goal of inducing the Plaintiffs to buy. The Plaintiffs further alleged the Defendant developer violated the Condominium Act, 1998 by making “very material” and self-serving changes to the draft condominium declaration and by-laws. The Plaintiffs also sued the condominium corporation that took the project over from the developer.

The key question before the Court in the four joined actions turned on whether the Plaintiffs were entitled to rescind their agreements of purchase and sale. The Plaintiffs raised several other issues that would only become relevant if they failed to obtain the rescission remedy. Justice Myers noted that, given the chronology, the Defendant condominium corporation’s liability was contingent on the Court finding against the Defendant developer. This is because the allegations supporting the Plaintiffs’ claims all arose before the Defendant developer turned the project over to the Defendant condominium corporation.

On the motion, the Defendant condominium corporation sought to partially stay the Plaintiffs’ actions as against it under section 7 of the Arbitration Act, 1991.It based this request on subsection 132(4) of the Condominium Act, 1998, which requires that disputes about a condominium corporation’s declaration and by-laws be resolved by mediation and arbitration. It further relied on provisions in its by-laws requiring mediation and arbitration.

From the outset, Justice Myers remarked that granting the partial stay, though legally required, was unreasonable in the circumstances and detrimental to the overall adjudication process:

[11] This is a motion to allow the tail to wag the dog. In my view, it is unreasonable to separate the arbitrable from the unarbitrable because the arbitral matters seem to depend on the outcome of the court matters.

[12] Nevertheless, given a recent pronouncement by the Supreme Court of Canada, as discussed by the Court of Appeal, unless a basis to refuse the stay exists under s. 7 (2) of the statute, the unreasonableness of bifurcating the proceedings under s. 7 (5) on its own does not authorize the court to refuse the mandatory stay of the proceeding.

Justice Myers went on to describe the purpose of the Condominium Act, 1998’s mediation and arbitration provisions: quickly and inexpensively resolving disputes between condominium corporations and unit owners related to the corporation’s declaration, by-laws and rules. He found that, in this case, the Defendant condominium corporation used them to achieve the opposite effect:

[45] I agree with Pattillo J. in Metropolitan Condominium Corporation No. 1143 v. Peng, [2008] O.J. No. 244 (S.C.J.), at para 14: [t]he purpose of the mandatory mediation and arbitration provisions in s. 132 of the Act is to permit, among other things, the expeditious resolution of disagreements between a condominium corporation and its unit owners with respect to the corporation’s declaration, by-laws and rules in a simple and inexpensive manner”.

[46] Here however, they are being used as a form of bifurcation and partial resolution that increases risks of multiplicity of proceedings. Instead of being simple and inexpensive, the condominium corporation seeks to create a second front for the full case to be heard but with no authority in the arbitrator to resolve all the issues.

Despite these comments, Justice Myers concluded he was bound by Wellman to order the partial stay. In Wellman, the Supreme Court of Canada overturned a previous line of jurisprudence in Ontario governing the application of subsection 7(5) of the Arbitration Act, 1991. That provision reads as follows:

(5) The court may stay the proceeding with respect to the matters dealt with in the arbitration agreement and allow it to continue with respect to other matters if it finds that,

(a) the agreement deals with only some of the matters in respect of which the proceeding was commenced; and

(b) it is reasonable to separate the matters dealt with in the agreement from the other matters.

Before Wellman, the Court of Appeal for Ontario’s decision in Griffin v. Dell Canada Inc., 2010 ONCA 29 (Griffin)held that on a motion under section 7, the court could refuse a stay where it considers it unreasonable to separate matters falling within an arbitration agreement from other matters that would remain before the court. In such a case, the court should hear all the matters, including those within a valid arbitration agreement’s scope. In other words, the court may use subsection 7(5) to render an arbitration agreement inoperative absent a finding that the agreement was invalid on one of the grounds listed in subsection 7(2).

The Supreme Court in Wellman overruled Griffin. It held that a court cannot use subsection 7(5) to refuse to stay the part of a court proceeding falling within an arbitration agreement’s remit. Rather, where subsection 7(5) is engaged, the Court has two options: (1) stay the entire court proceeding; or (2) stay only the portion falling under the arbitration agreement (para. 69).

Justice Meyers cited the Court of Appeal’s recent post-Wellman decision in Toronto Standard Condominium Corporation No. 1628 v. Toronto Standard Condominium Corporation No. 1636, 2020 ONCA 612. In that case, the Court referenced Justice Moldaver’s point in Wellman that section 138 of the Courts of Justice Act, R.S.O. 1990, c. C.43, which requires Ontario courts to avoid a multiplicity of proceedings wherever possible, does not override subsection 7(5) of the Act. Summarizing Justice Moldaver’s comments, the Court of Appeal wrote:

[41] Moldaver J. added that s. 138 of the Courts of Justice Act, which provides that “[a]s far as possible, multiplicity of legal proceedings shall be avoided”, does not provide a basis to override s. 7(5). He noted that the stipulation in s. 138 that the court “shall” avoid a multiplicity of proceedings is tempered by language that the court must do so only “as far as possible”. He observed that s. 7(5) “expressly contemplates bifurcation of proceedings”, with a potentially concurrent arbitration and court adjudication, and therefore the court must give effect to the will of the legislature in s. 7(5): at para. 90.

Justice Myers also cited the Court of Appeal’s subsequent decision arising from the same proceeding in Toronto Standard Condominium Corporation No. 1628 v. Toronto Standard Condominium Corporation No. 1636, 2021 ONCA 360 (TSCC). The TSCC decision re-emphasized that unless one of the grounds in subsection 7(2) arises, the court lacks discretion to refuse a stay under subsection 7(1) (or a partial stay where subsection 7(5) is engaged).

Justice Myers summarily dealt with the Plaintiffs’ arguments under subsection 7(2) that: (1) the claims submitted to arbitration were non-arbitrable; and (2) the Defendant condominium corporation’s motion was unduly delayed.

With respect to arbitrability, Justice Myers acknowledged that under section 135 of the Condominium Act, 1998, a complainant may bring an oppression proceeding in court without having to mediate or arbitrate. He noted parties sometimes tactically plead oppression to circumvent ADR under that Act. He found that, in this case, the oppression claims “piggyback” on the claims captured by the arbitration provision. Justice Myers relied on the Court of Appeal’s comments in TSCC that courts should take care in assessing oppression claims under section 135:

[25] In our view, courts should generally be cautious in their approach to oppression claims of the type asserted here. In particular, courts should be wary of allowing such claims to overtake, and potentially distort, the dispute resolution process that lies at the heart of the Condominium Act, 1998, a central aspect of which is a preference for arbitration over court proceedings. In other words, courts should be alert to the possibility that persons, who are party to an arbitration agreement, are attempting to avoid that process by “piggybacking” onto claims made against others: see e.g. MTCC No. 965 v. MTCC No. 1031 and No. 1056, 2014 ONSC 5362, at para. 18; see also TELUS, at paras. 76, 98.

Justice Myers determined that the arbitrator was well-placed to assess whether “there is independent content to the oppression claims or whether the gravamen of the allegations against the condominium corporation fall into the arbitration in any event”.

With respect to undue delay, Justice Myers found that the Defendant condominium corporation’s nearly one-year delay in bringing a motion was justified in the circumstances. Although the motion was filed some 11 months after the Plaintiffs commenced the first of the four actions, several intervening events—the other claims being issued as well as yet other pieces of litigation related to the same factual landscape—were a reasonable excuse for the delay.

In the result, Justice Myers granted the partial stay. He nevertheless gave directions requiring the parties to advance the remaining court proceedings with all due haste.

Contributor’s Notes:

First, the Court’s reasons are suffused with recognition for the policy that arbitration agreements should generally be upheld. This policy underpins most Canadian arbitration legislation, including the Arbitration Act, 1991. In that regard, Justice Myers put aside his conception of how the litigation ought to unfold and recognized the higher principle in play:

[59] I considered whether the arbitration might be premature in light of my view that the court’s findings are conditions precedent to the real relief sought by the plaintiffs. However, that is my characterization in this proceeding. The parties have plainly joined issue. A dispute exists as to the validity of the declaration, the bylaws and compliance issues. Trying to defer the arbitration until the litigation ends, while possibly the efficient outcome, is the opposite of the primacy of arbitration intended by the statute according to the Supreme Court of Canada.

Interestingly, this decision, as well as the Court of Appeal’s decision in TSCC, demonstrate that the general policy of requiring adherence to arbitration agreements expressed in Wellman is consonant with the Condominium Act, 1998’s specific emphasis on resolving condominium-related disputes in arbitration.

Second, the Court of Appeal’s decision in TSCC provides helpful guidance for cases in which oppression claims might be asserted under section 135 to avoid ADR. Beyond the above quote advising courts to approach with caution a party invoking section 135 of the Condominium Act, 1998 to avoid arbitration, the Court further observed that section 135’s language is permissive, not mandatory. This means parties may agree to arbitrate oppression claims under section 135 despite that provision’s express reference to the Ontario Superior Court.

Although not cited, the Court of Appeal’s reading of section 135 is in line with the Supreme Court of Canada’s decision in Desputeaux v. Éditions Chouette (1987) inc., 2003 SCC 17 (Desputeaux). Consistent with the policy that courts should normally give effect to arbitration agreements, the Supreme Court found that a provision in the Copyright Act conferring concurrent jurisdiction on the Federal Court and the provincial Superior Courts did not oust an arbitrator’s jurisdiction to hear a dispute involving copyright ownership. As in TSCC, the Court in Desputeaux found the jurisdiction-conferring provision in the Copyright Act was not intended to exclude arbitration.

Third, the Supreme Court in Wellman observed that the Arbitration Act, 1991’s scheme reflected a move away from the historical “overt hostility” toward arbitration exhibited by the Courts (paras. 48 and 49). Justice Moldaver identified the Act’s stay provision as a prime example of this. The Arbitration Act, 1991 is based on the ULCC Uniform Arbitration Act 1990. Alberta, Saskatchewan, Manitoba, New Brunswick and Nova Scotia (for commercial arbitration only) have also adopted domestic arbitration statutes based on the ULCC’s model legislation. Wellman’s holding is thus applicable to subsection 7(5)’s sister provisions in those statutes as well. This legislative approach may be contrasted with the stay provision in Newfoundland and Labrador’s Arbitration Act, which is based on old U.K. legislation and lacks the mandatory language in subsection 7(1) of the Arbitration Act, 1991 and its counterparts.

Fourth, Justice Myers’ comments in rejecting the Plaintiffs’ undue delay argument are a reminder that this subsection 7(2) ground (and the corresponding ground in the other ULCC-based statutes) is contextual. This case was one in which a fairly substantial delay of nearly a year was not “undue” given the discrete facts before the Court on the motion.