In RH20 North America Inc. v. Bergmann, 2024 ONCA 445, the Court upheld the dismissal of a motion to stay court proceedings. Before a motions judge, several defendants succeeded in striking a number of civil claims on the basis that they disclosed no reasonable cause of action. But seeking such relief in court was treated as waiver of an agreement to arbitrate disputes. As a result, instead of international arbitration in London, breach of contract and conspiracy claims will now be determined by the Ontario courts.
Background – The plaintiff, RH20 North America Inc. (“RH20”), licensed wastewater treatment systems from the defendant Bergmann Group companies (“Bergmann Group”) of Germany for distribution in Canada. The systems were assembled and sold in Ontario by a second plaintiff, Unit Precast. RH20 also licensed system control panels from a Bergmann Group company, Click+Clean GmbH (“Click”).
Notwithstanding an arbitration agreement in its control panel license with Click, RH20 commenced civil proceedings in Ontario alleging that the Bergmann Group had wrongfully terminated the license agreements. RH20 further pleaded that several former employees joined a competitor set up by the Bergmann Group as part of a conspiracy to usurp RH20’s business.
Motion decisions – The Bergmann Group defendants and Click successfully moved to strike several claims, including conspiracy claims relating to Unit Precast, as well as a personal claim against a Bergmann Group executive on the basis that they disclosed no reasonable cause of action.
Click also moved to stay the civil action in its entirety based on the arbitration agreement in the control panel license.
However, the motions judge dismissed the stay on three grounds:
- A choice of forum clause in a separate web portal agreement between Click and RH20 provided that the place of jurisdiction for any disputes was Germany, conflicting with the designation of London as the place of arbitration in the control panel license;
- “Strong cause” existed to reject the forum selection clause in the web portal agreement since multiple agreements between the parties contained conflicting clauses designating different jurisdictions for dispute resolution; and
- Click gave the court consent-based jurisdiction by joining a motion to strike pleadings, rendering the arbitration agreement “inoperative”.
Court of Appeal decision – An appeal and a cross-appeal were unsuccessful. Unit Precast’s appeal of the strike decision was dismissed. Click failed to obtain an order staying the civil proceedings in favour of arbitration on cross-appeal.
Click’s cross-appeal is the focus of this Case Note.
The Court found it was not necessary to examine two grounds of the motion judge’s stay dismissal as it upheld the motion judge on the third ground: Click’s seeking court relief in the motion to strike out claims was equivalent to waiving the agreement to arbitrate, rendering the arbitration agreement “inoperative” within the meaning of art. 8(1) of the UNCITRAL Model Law on International Commercial Arbitration (“Model Law”) as incorporated in International Commercial Arbitration Act, RSO 1990, cI.9 (“ICAA”).
The Court explained:
“[35]… First, in Peace River Hydro Partners v. Petrowest Corp.,2022 SCC 41, 475 D.L.R. (4th) 1, the Supreme Court of Canada described the fourth ‘technical requirement’ for a stay of a court proceeding in favour of arbitration as requesting a stay before taking any ‘step’ in court proceedings. I will explain why I regard that requirement as reflecting a common conceptual element shared by most Canadian domestic and international commercial arbitration regimes: namely, that parties to an arbitration agreement must abide by a negative obligation not to seek the resolution of disputes subject to an arbitration agreement in domestic courts;
Second, art. 8(1) of the Model Law gives effect to that negative obligation of the parties;
Third, the motion judge correctly treated Click’s motion to strike certain of the plaintiffs’ claims as breaching its negative obligation under the arbitration agreement in the Licence Contract. That breach amounted to a waiver of its right to arbitrate; and
Fourth, Click’s waiver of its right to arbitrate rendered the arbitration agreement ‘inoperative’, within the meaning of art. 8(1) of the Model Law, in regard to the dispute between the parties.”
The Court quoted art. 8(1) of the Model Law:
“A court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.”
The Court noted that Peace River was a domestic arbitration case decided under BC’s former Arbitration Act, RSBC, 1996, c 55. The stay of proceedings section of that Act was based on the Model Law but contained an additional express prohibition against “taking any other step in the proceedings”.
However, even in the absence of an express prohibition, parties to arbitration agreements are not to seek the resolution of disputes in domestic courts:
“[45] Arbitration agreements have both positive and negative effects on parties. The positive effects include the obligation to participate and cooperate in good faith in the arbitration of disputes pursuant to the parties’ arbitration agreement; the negative effects include the obligation not to seek the resolution of such disputes in national courts: Gary B. Born, International Commercial Arbitration, 3rd ed., at p. 1349. The negative obligations imposed by an agreement to arbitrate have their source in the parties’ agreement. As Born explains in his treatise, at p. 1368: “The scope of this aspect of the negative obligation not to litigate arbitrable disputes is generally the mirror image of the scope of the positive obligation to arbitration: put simply, disputes which must be arbitrated, may not be litigated.
…
[50] A court considering a party’s request for a stay under art. 8 of the Model Law therefore must assess two timing-related matters: (i) whether the party has requested a court to refer the parties to arbitration “not later than when submitting his first statement on the substance of the dispute”; and (ii) whether, before making that request, the party had sought assistance from the court on the substantive claims asserted against it.”
The Court observed that Click had satisfied the first timing requirement and made its request for a stay before filing a pleading responding to the substance of the statement of claim. However, when the plaintiffs filed the Ontario civil claim, Click joined other Bergmann Defendants in requesting that the court strike claims and, in doing so, breached its negative obligation under the arbitration agreement and waived its right to arbitrate:
“[59] I would observe that it was not necessary for Click to ask for the assistance of an Ontario court to reduce the extent of the claims against it in order to seek a reference to arbitration under the Model Law. The London Court of International Arbitration Rules that govern the arbitration under the Licence Contract would have provided Click with an opportunity to argue that some claims were ‘manifestly outside the jurisdiction of the Arbitral Tribunal’ or ‘inadmissible or manifestly without merit’.
…
[61] Applying the Peace River framework to international commercial arbitration agreements requires adhering to the requirements of the ICAA, New York Convention, and Model Law. Born’s commentary on art. 8(1) of the Model Law suggests that Click’s participation in the motion to strike amounted to a breach of the negative obligation not to litigate arbitrable disputes. Born writes that the “obligation not to litigate disputes that are subject to arbitration is expansive and applies to all form of litigation of the merits of the parties’ dispute.” In his view, ‘an arbitration agreement would be ‘inoperative’ where the parties actively pursued litigation, rather than arbitration, resulting in a waiver or abandonment of the right to arbitrate under applicable law.’ He argues that ‘Article 8(1) is directed towards the waiver of the right to arbitrate a particular dispute (and not the termination or invalidity of the underlying arbitration agreement)’.”
The Court agreed and found that this rendered the arbitration agreement “inoperative” within the meaning of art. 8(1) of the Model Law. Accordingly, the motion judge did not err in refusing to grant Click a stay of the court proceeding under ICAA s. 9 and art. 8(1) of the Model Law.
Contributor’s Notes:
First, the Court relied on domestic and international arbitration authorities to understand and explain the Model Law. This is how the Model Law should operate: lessons learned are shared across jurisdictions, improving domestic and international arbitration knowledge and best practices.
Second, there is a best practice lesson from this decision that should be followed before litigating contractual claims: every time a civil pleading raises disputes that arguably fall within an arbitration agreement, caution is needed both from parties preparing claims and parties responding to claims.
Sometimes when a dispute arises, a party preparing a civil claim may forget their arbitration agreement. If so, they will put that agreement in jeopardy by filing a civil claim. Sometimes, however, a claimant recalls the agreement but no longer wishes to arbitrate. One option is to seek express agreement to litigate: a contractual arbitration agreement can always be varied. But sometimes another option is followed: file the civil claim and see if the defendant accedes to litigation.
Similarly, when a defendant receives a civil pleading raising matters that are the subject of an arbitration agreement, the question should be asked, “do we still wish to arbitrate?” After all, service of the civil claim has given the defendant an option—claims can now be litigated. Sometimes a defendant will decide to accept the “offer” and litigate the claims. But often the defendant will want to avoid litigation, more so in a foreign court. Special vigilance is needed to avoid inadvertent waiver of an arbitration agreement.
The waiver inquiry is not whether a “step in the proceeding” has been taken. That potentially ambiguous terminology was unique to the stay provision of BC’s former domestic arbitration legislation and was removed with the enactment of Arbitration Act, SBC 2020 c. 2. This decision identifies and applies the key conceptual question: is the party to an arbitration agreement seeking assistance from the court on substantive claims? If so, arbitration may be waived, as it was when Click joined several defendants requesting that the court strike pleadings.
Third, the decision of the motions judge was considered in a previous Case Note, Ontario – Competing “jurisdiction” clauses result in application for stay being dismissed – #743.
Given the way the Court of Appeal resolved the cross-appeal, it was not necessary to consider the reasoning of the motions judge on “strong cause” and forum selection clauses. The application of these concepts in arbitration contexts is complex, sometimes problematic, and is certain to come up again in future cases.