Ontario – courts must not pre-empt arbitrator decision on jurisdiction by limiting scope of issues in stay order – #086

In 10313033 Canada Inc. v. 2418973 Ontario Inc. et al., 2018 ONSC 2406, Madam Justice Sally Gomery declined to limit the scope of the issues referred to the arbitrator.  She determined that, absent exceptional circumstances, courts must not pre-empt an arbitrator’s ruling on jurisdiction.  Following the stay granted, the parties could make their own submissions directly to the arbitrator regarding the issues which could or could not be within the undertaking to arbitrate or which were no longer in dispute following prior court rulings.

In August 2017, the Québec Superior Court in Arrangement relatif à Gestion Éric Savard inc., 2017 QCCS 4257 authorized 10313033 Canada Inc. (“103”) to buy the assets of Laurier Optical, a franchisor, under the provisions of the Companies’ Creditors Arrangement Act, RSC 1985, c C-36 (“CCAA”).  In addition to its acquisition of assets, 103 also obtained authorization to acquire all the rights and obligations under various contracts, including leases for 21 store locations and franchise agreements for 12 locations.  None of respondents opposed the acquisition, despite having received notice of 103’s application for the CCAA vesting order.

Counsel for eight (8) of the respondent franchisees (“Franchisees”) sent a September 28, 2017 letter to 103.  The letter raised questions about the enforceability of the assigned leases and franchise agreements, alleged breach of the 103’s obligations under those agreements, gave notice of payment of marketing and franchise fees on a without prejudice basis and invoked the franchisees’ right to arbitration under the arbitration clauses in their agreements.  The arbitration clauses read as follows, or some variation of it:

All irreconcilable differences or disputes which arise between Laurier Optical and the [Franchisee] and the Guarantor during the term of this Agreement in relation to any matter whatsoever relating to the terms of this Agreement may, at the option of Laurier Optical or the [Franchisee] or the Guarantor by written notice to that effect … be referred to a single arbitrator agreed upon by the parties to the dispute and in the absence of agreement as to the Arbitrator … to any arbitrator appointed by the Court under the provisions of the Arbitrations Act, 1990 R.S.O. c. A-24. (   )  Any award or determination which shall be made by such arbitrator shall be final and binding upon the parties hereto and there shall be no appeal from such award or determination… .

(Note: the legislation mentioned in the clause had been overtaken by a later iteration, namely the Arbitration Act, 1991, SO 1991, c 17 as provided for by section 2(2). )

Over the next four (4) months, relations between 103 and the Franchisees deteriorated on a number of key fronts including refusal by 103 to engage in arbitration and most of the Franchisees withholding fees.

Franchisees applied on January 22, 2018 for the appointment of an arbitrator.  103 applied on February 8, 2018 to enforce the franchise agreements and for an interlocutory injunction.  103’s action included officers and directors who signed as guarantors to certain franchise agreements.

Gomery J.’s reasons dealt first with the interlocutor injunction and then the appointment of an arbitrator.  This note looks at those reasons in reverse order.

Gomery J. noted that a party can require arbitration by providing a written notice but the notice need not follow any particular format.  After receipt of the notice and absent a response by the recipient, the court may appoint an arbitrator.  The Franchisees’ September 28, 2017 notice set out the issues they wanted to arbitrate, identified the parties to the arbitration and proposed timelines for the conduct of initial steps once they appointed an arbitrator.

Franchisees sought a stay of the court litigation under section 7 of the Arbitration Act.  103 resisted, submitting that some of the issues had been solved by the August 31, 2017 Québec Superior Court order.  103 argued that the issues it identified as having been resolved by the Québec Superior Court could not be submitted to arbitration and that any stay should be limited.

Gomery J. disagreed with 103’s attempt to limit what was referred to arbitration.

She applied section 2(2) of the current Arbitration Act which held that the current legislation applies to an arbitration conducted under an arbitration agreement made before the day this Act comes into force, if the arbitration is commenced after that day.  The new legislation limited the court’s authority to decline a stay.

She referred to the Ontario Court of Appeal reasoning in Haas v. Gunasekaram, 2016 ONCA 744.  The Court, at paras 10-11, noted that section 7 contains mandatory language and identified a distinction between the current Arbitration Act and the prior iteration.  The earlier iteration gave the court discretion to stay the action.  That discretion was not carried into the current legislation.   The former version read as follows:

7 [I]f satisfied that there is no sufficient reason why the matter should not be referred in accordance with the submission and that the applicant was at the time when the proceeding was commenced and still remains ready and willing to do all things necessary to the proper conduct of the arbitration, [the court] may make an order staying the proceeding.

Haas v. Gunasekaram read the language of the current legislation as being “directory, not equivocal”.

Gomery J. determined that the arbitration agreements’ arbitration clause “has a wide ambit”.  She found that no exceptions listed in section 7(2) arose and it was not appropriate to sever the issues even if section 7(5) authorized her to do so.  “Absent exceptional circumstances, courts will not pre-emptively limit the scope of an arbitration”.  Following the principles set out in Dell Computer Corp. v. Union des consommateurs, [2007] 2 SCR 801, 2007 SCC 34, Gomery J. endorsed referring the jurisdictional matter to the arbitrator because challenges to jurisdiction can and should be resolved first by the arbitrator.  She also acknowledged that 103 could raise the same arguments on scope when appearing before the arbitrator.

[46] In its preliminary submissions to the arbitrator, 103 Canada may argue that the scope of the arbitration should be limited so as to avoid any ruling at odds with the vesting order.  It would however be inappropriate for this court to pre-empt the arbitrator’s ruling on the limits of its own jurisdiction as a result of the order.

For those reasons, 103’s action was stayed in favour of arbitration. Further to the parties’ agreement on the individual, Gomery J. appointed an arbitrator.

Gomery J.’s reasons also dealt with 103’s application for urgent relief.  Her analysis can guide arbitration practitioners whose disputes demand urgent intervention before an arbitral panel is appointed.   Adopting the well-known three-part test stated in RJR-MacDonald Inc. v. Canada (Attorney General), [1994] 1 SCR 311, 1994 CanLII 117, she examined 103’s application against the following:  is there a serious issue to be tried; would 103 suffer irreparable harm if the injunction were refused; and, balance of convenience favours which party.

She distinguished between mandatory orders requiring the Franchisees to respect their contractual obligations and prohibitions which restrain them from continuing to violate franchise agreements.   Part of 103’s demands was an order for the payment of monies.

She concluded that 103 met the criteria of ‘a serious issue to be tried’.

[20] In RJR-MacDonald, the Supreme Court held that the more stringent test traditionally used in interlocutory injunction applications, which required the applicant to show a strong prima facie case, does not apply in most cases.  In most cases, the applicant must only show that there was a serious issue to be tried.  The more stringent standard applies only where the potential harm flowing from an interlocutory order was “of a kind for which money cannot constitute any worthwhile recompense”.

 [21] Issuing a mandatory order that only requires a party to pay money does not give rise to the same concerns as a broader mandatory injunction.  If a person is ordered to pay money on an interim basis, and the applicant’s case is eventually dismissed on its merits, the person subject to the order can get their money back. If, on the other hand, an interlocutory order requires a person to conduct themselves in a certain way, there is nothing that can compensate them for the loss of their freedom while the order was in force, even if it turns out they were in the right.

 [22] In this case, 103 Canada is asking only that the respondent franchisees be required to pay monthly fees that they had been paying until recently.  Although it claims that the franchisees are breaching the franchise agreements in other ways, they are not seeking a broader order. As a result, I need only be satisfied that it has shown there is a serious case to be tried.  On the record before me, I conclude that 103 Canada has met this test.  As mentioned earlier, the franchise agreements clearly require the franchise to pay monthly advertising and royalty fees, and they are not doing so.

Her analysis was also influenced by the Franchisees having adopted inconsistent arguments regarding 103’s actions.  They alleged 103 had fundamentally breached the agreements but they continued to operate their franchises, used the leased premises and trademark. Gomery J. noted the contradiction: “A party cannot argue that a contract has been repudiated but continue to draw its benefits”.

103 failed to meet the test for irreparable harm and failed to make an undertaking for damages as required by Rule 40.03 of the Rules of Civil Procedure, RRO 1990, Reg 194:

40.03 On a motion for an interlocutory injunction or mandatory order, the moving party shall, unless the court orders otherwise, undertake to abide by any order concerning damages that the court may make if it ultimately appears that the granting of the order has caused damage to the responding party for which the moving party ought to compensate the responding party.

Gomery J. dismissed 103’s application for interlocutory relief.