Ontario – court refuses to accept unilateral revocations of parties’ unwritten agreement to arbitrate – #097

Madam Justice Carole J. Brown in Zenith Aluminum Systems Limited v. 2335945 Ontario Inc., 2018 ONSC 4199  kept the bar firmly high, tripping claims that parties could unilaterally revoke their earlier unwritten agreement to arbitrate.  Despite both parties, at separate moments, asserting that they were no longer bound by their agreement, Brown J. agreed with Claimant who now wanted to continue its arbitration despite having initiated litigation. She held that the parties’ conduct had affirmed their ongoing agreement to arbitrate and dismissed Respondent’s claims that both parties had revoked their agreement. Claimant’s earlier written notice that it withdrew its notice to arbitrate and Respondent’s later change of heart were each insufficient by themselves to serve as revocation. Applying “ordinary rules of contract law“, an arbitration agreement could only be revoked by an agreement of both parties and not unmatched, unilateral revocations.
Zenith Aluminum Systems Limited’s (“Zenith”) provides glazing, including aluminum window wall systems to construction projects. 2335945 Ontario Inc., c.o.b. Momentum Developments’ (“Momentum”) develops and builds condominiums. Zenith and Momentum negotiated Zenith’s supply and installation of window wall systems for one of Momentum’s condominium projects.  Zenith never quoted or referred to pricing or details regarding a balcony guardrail system for the project, as it neither supplies or installs such systems. Another company quoted for balcony railings and dividers.

Zenith submitted a June 9, 2014 quote for $2,997,500.00 plus HST and Momentum issued an August 25, 2014 purchase order. Momentum later claimed in May 2015 that Zenith’s quote included not only glazing services but the supply and installation of the guardrails and privacy screens for the project. A third party submitted a January 21, 2014 quotation for $319,000.00 for the guardrails and privacy screens.

The parties met May 11, 2015 to discuss their disagreement over the issue of the guardrail and the privacy screens (“the railing dispute”). Momentum expressed interest in arbitrating the railing dispute and wrote Zenith setting out its view of the issues and its intention to arbitrate the railing dispute. Zenith never signed the document sent by Momentum but did agree to arbitrate.

The parties appointed an arbitrator, agreed upon arbitration dates and discussed the arbitration process with the arbitrator. Disagreements arose regarding the scope of disclosure and pre-arbitration steps to be taken.

The parties entered into a tolling agreement to address concerns with limitation periods. Momentum signed the tolling agreement and returned it to Zenith. The document never reached Zenith as it was diverted to the “junk” folder in Zenith’s software system. To preserve its rights, Zenith instituted court litigation on May 17, 2017. Momentum defended the litigation, filing a Statement of Defense and a Counterclaim in which it stated that the parties had agreed to arbitrate the railing dispute. Momentum changed its position, stating that it no longer wanted to arbitrate and preferred to have all the disputes resolved by litigation.

Zenith alleged that it and Momentum had agreed to arbitrate the railing dispute, that most of the details for conducting the arbitration had been fixed including selecting an arbitrator, exchanging witness lists and selecting a location for the arbitration hearing. Zenith also addressed the scope of the arbitration.

Zenith states that the parties had agreed that there were only two possible outcomes for the determination of the railing dispute: either railings were not included in Zenith’s contract such that the sum of $319,000 was owing to Zenith from Momentum or, alternatively, Zenith was required to supply and install the railings, which it did not do, and Momentum is therefore entitled to a credit for the amounts spent on the railings. Thus, it is the position of Zenith that the essential terms of the arbitration had been agreed upon.

In contrast, Momentum claimed that Zenith had renounced the agreement to arbitrate given that Zenith had served a November 21, 2016 Withdrawal of Notice of Arbitration and that section 138 of Ontario’s Courts of Justice Act, RSO 1990, c C.43 discouraged multiplicity of proceedings. While Momentum admitted that the original dispute was capable of being resolved by arbitration it no longer wished to arbitrate, asserting that Zenith had now chosen to litigate the same subject matter of the arbitration and add Momentum’s directors.

Two key references from Ontario’s Arbitration Act, 1991, SO 1991, c 17 prefaced Brown J.’s analysis: section 5(3) which provides that an arbitration agreement need not be in writing and section 5(5) which cautions that an agreement to arbitrate may be revoked but “only in accordance with the ordinary rules of contract law”.

Applying section 5(3), Brown J. found that an unwritten arbitration agreement existed. The essential terms, including the subject matter and “fundamental terms”, except the scope of discovery, were agreed and acted upon.

Having determined that an arbitration agreement existed, Brown J. disagreed with Momentum’s claims that the agreement had been revoked. First, the parties had continued to move ahead with the details of the arbitration after the November 21, 2016 Withdrawal of Notice of Arbitration. The scope of discovery remained an outstanding issue but one best left for the arbitrator to resolve. Second, applying section 5(5), Brown J. reiterated a decisive observation regarding the obligational content of an arbitration agreement.

Furthermore, it would not be in keeping with the ordinary rules of contract law to allow one party to unilaterally withdraw from its obligations under an agreement, where such an option was not contracted for.

Brown J. underlined that Momentum’s conduct after receipt of Zenith’s Withdrawal of Notice of Arbitration clearly demonstrated that Momentum had not accepted Zenith’s withdrawal at that time. Momentum’s own conduct demonstrated that there was no matched revocations or meeting of the minds to revoke the arbitration agreement. On the facts, neither party had agreed at the same time to revoke their agreement. Though Momentum later changed its approach, Zenith had returned to its initial position and did not accept Momentum’s new position.

The facts disclose that Zenith’s court litigation was merely conservatory, taken only because of what Brown J. saw as an “unfortunate computer email issue”. Zenith’s decision to litigate differs from other litigants who decisively abandon their arbitration and effectively waive it, either formally or by effect of applicable court procedural rules, as plaintiff by filing an action or as defendant by fully defending it without objection.

Brown J. closed her reasons with comments that the resolution of the railing dispute was best resolved by arbitration despite overlap with the court litigation involving Momentum’s directors.

She remained seized of the litigation and available to resolve any unnecessary duplication between the arbitration and the litigation. She did, however, order that the arbitration be completed by the end of the year provided “a mutually available date” could be found for the parties and the arbitrator. If such a date could not be found, either an alternate date could be determined with the arbitrator or the parties could re-attend before her for a case conference.