Ontario – court revives litigation dismissed on consent when parties do not proceed with arbitration – #231

In Mishukov v. Fatoullaeva, 2019 ONSC 5550, Mr. Justice Grant R. Dow revived litigation which had been dismissed on consent by a court order in favour of arbitration.  Despite having agreed to submit to arbitration, the parties never completed the arbitration in the agreed upon time frame and Defendants claimed that the arbitration could no longer proceed, Applying equitable estoppel, Dow J. determinined that a party which chooses to treat its agreement as subsisting cannot later claim non-performance.  Dow J. held that a consent order dismissing an action was not a judicial determination of the dispute but only elevated the parties’ consent.

Plaintiff and Defendants had been engaged in litigation involving disputes over a partnership investment.  After litigation had commenced, the parties had entered into Minutes of Settlement dated December 22, 2012 which included the following terms:

– a consent order on consent dismissing the litigation;

– resolution of the dispute by arbitration, including terms for the selection of the arbitrator, holding of funds in trust, a set length for the arbitration and costs; and,

– conclusion of the arbitration by March 31, 2012.

(Note: the reasons at paras 1 and 18 date the Minutes of Settlement at December 2012 but provide also that the arbitration, set out in the Minutes of Settlement, conclude by March 2012.)

The court issued an order on consent dismissing the litigation.

The parties confirmed an arbitrator, determined a schedule of issues, circulated an agreement to arbitrate and a retainer and discussed dates for the arbitration.  

Despite dismissal of the litigation and steps taken to schedule the arbitration hearing, the parties never proceeded to the hearing. Each party eventually appointed new counsel.

Having appointed new counsel in July 2016, Defendants’ counsel took the position “for the first time” that the arbitrator had not been properly appointed and that Plaintiff had “no authority to proceed”. Plaintiff relied on “ongoing and repeated contact” between counsel as confirmation that the arbitration was still viable.  Such contact included transfer of the funds in trust in October 2015 from Plaintiff’s counsel to the arbitrator and discussion in January 2016 for dates in April 2016 for the hearing.

Dow J. observed that “[6] At no time did either party raise an issue with respect to the proceeding being beyond the time set out in the Minutes of Settlement or that a two year limitation period began to run as of March 31, 2012.

Plaintiff applied to the court for an order setting aside the dismissal of the action.

Plaintiff referred to equitable estoppel discussed and applied in Conwest Exploration Co. v. Letain, [1964] SCR 20, 1963 CanLII 35 (SCC) pp. 28-29 which provides that a party which chooses to treats its contract as subsisting cannot later claim non-performance.

The inference to be drawn from Letain’s conduct until October 9, 1958, when he revoked his consent to the use of his name, was that he was participating in the incorporation of this company with full knowledge of what was being done, and was accepting Conwest’s steps towards incorporation of this company as performance of Conwest’s obligations under the two agreements. He knew what the position was. He chose to treat his contracts with Conwest as subsisting. He continued these contracts although he now says they were not fully performed at the due date. He cannot now assert his construction of the contract that the letters patent should have been sealed and issued on or before October 1.

Dow J. noted that equitable estoppel was applied in Re Tudale Explorations Ltd. and Bruce et al., 1978 CanLII 1471 (ON SC) which cited  Hughes v. Metropolitan R. Co. (1877), 2 App. Cas. 439:

… it is the first principle upon which all Courts of Equity proceed, that if parties who have entered into definite and distinct terms involving certain legal results–certain penalties or legal forfeiture–afterwards by their own act or with their own consent enter upon a course of negotiation which has the effect of leading one of the parties to suppose that the strict rights arising under the contract will not be enforced, or will be kept in suspense, or held in abeyance, the person who otherwise might have enforced those rights will not be allowed to enforce them where it would be inequitable having regard to the dealings which have thus taken place between the parties.

Re Tudale Explorations Ltd. and Bruce further stated the then current state of the doctrine as follows:

The essential features are an unambiguous representation which was intended to be acted upon and indeed was acted upon. The present rule is now expressed by Snell in his work Snell’s Principles of Equity, 27th ed. (1973), p. 563, as follows:

Where by his words or conduct one party to a transaction makes to the other an unambiguous promise or assurance which is intended to affect the legal relations between them (whether contractual or otherwise), and the other party acts upon it, altering his position to his detriment, the party making the promise or assurance will not be permitted to act inconsistently with it.

Dow J. also mentioned two (2) further authorities to which the parties referred him which supported the statement made in Re Tudale Explorations Ltd. and Bruce: Snell’s Equity, 33rd Ed., 2015 (at paragraph 12-005 and 12-006) and The Law of Contract, 14th Edition by Edwin Peel, 2015 (at paragraph 3-007).

Plaintiff further cited Clatney v. Quinn Thiele Mineault Grodzki LLP, 2016 ONCA 377 para. 92, which held that a consent order was not “a judicial termination of a case but only an agreement elevated to an order on consent”.  (Note: the reasons mention “termination” rather than “determination”, the latter being a term mentioned in the authorities relied upon which the court relied).

The 2016 Ontario Court of Appeal decision in Clatney v. Quinn Thiele Mineault Grodzki LLP referred expressly to Rick v. Brandsema, [2009] 1 SCR 295, 2009 SCC 10 para. 64, which itself turned back to a 1995 decision of the Ontario Court of Appeal and provided a list of cases which ostensibly stated or followed the same reasoning.

[64] This makes it unnecessary to deal with the effect of the consent order since, as Osborne J.A. observed in McCowan v. McCowan (1995), 1995 CanLII 1085 (ON CA), 14 R.F.L. (4th) 325 (Ont. C.A.), at para. 19, “it is well established that a consent judgment may be set aside on the same grounds as the agreement giving rise to the judgment”.  This approach was explained by James G. McLeod as follows:

This rule reflects the reality that a consent judgment is not a judicial determination on the merits of a case but only an agreement elevated to an order on consent.  The basis for the order is the parties’ agreement, not a judge’s determination of what is fair and reasonable in the circumstances.

(Annotation to Thomsett v. Thomsett, 2001 BCSC 546 (CanLII), 16 R.F.L. (5th) 427, at pp. 428-29)

 (See also Shackleton v. Shackleton, 1999 BCCA 704 (CanLII), 1 R.F.L. (5th) 459, at para. 12; Schlenker v. Schlenker (1999), 1999 CanLII 3658 (BC SC), 1 R.F.L. (5th) 436 (B.C.S.C.), at para. 21; McGregor v. Van Tilborg, 2003 BCSC 918 (CanLII), [2003] B.C.J. No. 1427 (QL), at para. 16; T. (T.L.A.) v. T. (W.W.), at para. 18; Huddersfield Banking Co. v. Henry Lister & Son, Ltd., [1895] 2 Ch. 273 (C.A.), at p. 280; Monarch Construction Ltd. v. Buildevco Ltd. (1988), 26 C.P.C. (2d) 164  (Ont. C.A.), at pp. 165-66; Donald J. Lange, The Doctrine of Res Judicata in Canada (2nd ed. 2004), at p. 329; R.L.S. v. D.C.M., 2002 BCSC 1794 (CanLII), [2002] B.C.J. No. 2890 (QL), at para. 43; and G. Peter Fraser, John W. Horn and Susan A. Griffin, The Conduct of Civil Litigation in British Columbia (loose-leaf), vol. 2, at p. 32-11.)

Defendants relied on the “authority of the calendar” and the “the need for the court to protect its integrity”.  They argued that “[t]he fact neither party addressed the consequences of their actions did not undermine the defendants’ right to now rely on its strict legal rights.

Referring to Defendants’ own authority Maracle v. Travellers Indemnity Co. of Canada, [1991] 2 SCR 50, 1991 CanLII 58 (SCC), Dow J. accepted that the evidence before him demonstrated that, contrary to the Defendants’ authority, one of the parties had entered into a course of negotiations which had the effect of leading the other to suppose that the strict rights of the agreement would not be enforced.

Dow J. held that an order would issue setting aside the consent of the parties to the dismissal of the litigation pursuant to the December 22, 2012 Minutes of Settlement.

urbitral note – Dow J. in his reasons, at para. 18, mentions that the eventual order would set aside “the consent of the parties” and not specifically the “Consent order”. The manner in which he expressed his approach tracks the reasoning in the authorities and reduces a ‘consent order’ to a confirmation of a contract between parties and not a judicial determination of a situation based on contested facts and argument.  This reasoning may have some application to consent awards by which parties agree to dismiss the arbitration.

The post-dispute agreement to arbitrate set out in the Minutes of Settlement qualifies as a submission agreement. The reasons illustrate how breach of a submission to arbitrate can lead to a revival of litigation if party A, by its conduct, allows the other party B to rely upon that conduct to alter its position.  Having presented its conduct as being unambiguous, party A cannot later act inconsistently or expect the court to endorse that inconsistency to the detriment of the party B. 

The reasons confirm that litigants can agree to abandon litigation provided that, as arbitral parties, they respect their submission agreement to arbitrate, failing which the litigation might be subject to revival.

The reasons hold that, on the facts, Defendants had not denied the agreement to arbitrate but then grant Plaintiff’s application to proceed with litigation. Setting aside the dismissal of the litigation based on Defendants’ recognition of their agreement to arbitrate appears to be a resiliation of that agreement and not enforcement of that agreement.