Ontario – Participation in litigation beyond pleadings waives arbitration agreement – #693

In Azam v Multani Custom Homes Ltd., 2022 ONSC 6536, Justice Chang denied the defendant’s application to stay litigation under section 7 of the Arbitration Act, 1991, SO 1991, c 17 (“Arbitration Act”) upon finding the defendant unduly delayed bringing the application for a stay, after having actively participated in many steps to advance the litigation over a 16-month period, with the effect that the defendant had abandoned its rights to rely upon the arbitration clause and it was therefore invalid. 

In this case, the material background facts were not in dispute. The plaintiff and the defendant entered into an agreement for the purchase and sale of a pre-construction residential condominium in Brantford, Ontario (the “APS”). The defendant was registered with Tarion Warranty Corporation (“Tarion”) under the Ontario New Home Warranties Plan Act, R.S.O. 1990, c. O.31 (“ONHWP Act”). The APS included an addendum prepared by Tarion that included: (i) at section 6, a clause on early termination of the APS; (ii) at section 11, a clause on the parties’ rights to terminate the APS under section 6; and at section 16(a), of an Arbitration Clause as follows:

The Vendor and Purchaser agree that disputes arising between them relating to termination of the Purchase Agreement under section 11 shall be submitted to arbitration in accordance with the Arbitration Act, 1991 (Ontario) and subsection 17(4) of the ONHWP Act.”

The defendant terminated the APS on May 14, 2019. On July 31, 2020, the plaintiff filed a statement of claim against the defendant claiming the defendant had improperly terminated the APS. The defendant filed its statement of defence on October 14, 2020. After this, the parties agreed to a discovery plan, exchanged affidavits of documents, exchanged productions, and scheduled examinations for discovery which were subsequently cancelled by the plaintiff. 

On October 15, 2021, the defendant raised the Arbitration Clause for the first time, alleging the Superior Court of Justice did not have jurisdiction to hear the matter and indicated its intention to bring a motion to stay or dismiss the litigation for lack of jurisdiction. 

The motion was ultimately heard on November 14, 2022. Justice Chang began his analysis by recounting sections 7(1) and (2) of the Arbitration Act, which state:

7(1) If a party to an arbitration agreement commences a proceeding in respect of a matter to be submitted to arbitration under the agreement, the court in which the proceeding is commenced shall, on the motion of another party to the arbitration agreement, stay the proceeding.

(2) However, the court may refuse to stay the proceeding in any of the following cases:

1. A party entered into the arbitration agreement while under a legal incapacity.

2. The arbitration agreement is invalid.

3. The subject-matter of the dispute is not capable of being the subject of arbitration under Ontario law.

4. The motion was brought with undue delay.

5. The matter is a proper one for default or summary judgment.”

Before moving to the analytical framework for assessing a motion to stay litigation, Justice Chang noted at paragraph 7 that, “[a]s a general rule, where there is an arbitration clause, challenges to the arbitrator’s jurisdiction are to be referred to the arbitrator”, and at paragraph 8 that, “the court may hear such a challenge where it concerns a question of law or ‘where the necessary legal conclusions can be drawn from facts that are either evident on the face of the record or undisputed by the parties’”. 

The analytical framework, following Haas v Gunasekaram, 2016 ONCA 744 at para 17, involves addressing the following issues:

“a) Is there an arbitration agreement?

b) What is the subject matter of the dispute?

c) What is the scope of the arbitration agreement?

d) Does the dispute arguably fall within the scope of the arbitration agreement?

e) Are there grounds on which the court should refuse to stay the proceeding?”

Perhaps signaling the key point on which the decision ultimately turned, Justice Chang then noted at paragraphs 10 and 11, following Elgin Mills v Farhanian, 2020 ONSC 6435 (at paragraphs 9 and 13), that while simply pleading a matter in court does not waive a party’s right to rely upon an arbitration clause, a party, “should not be permitted to change horses late in the race by moving to enforce an arbitration clause”.

Upon applying the framework, Justice Chang found he was able to draw the conclusions needed from the uncontroverted facts that were evident on the record without referring the issue to the arbitrator. The plaintiff conceded in oral argument that the dispute fell within the Arbitration Clause, and even without this concession Justice Chang was able to draw this conclusion. It was also clear that there was an Arbitration Clause in the APS and an agreement to arbitrate, that the nature of the dispute involved the APS, and that the scope of the arbitration agreement applied to disputes relating to termination of the APS. 

When examining the final part of the framework, and whether there were, “grounds on which the court should refuse to stay the proceeding”, Justice Chang cited three such grounds: 

a) the defendant unduly delayed bring its motion to enforce the Arbitration Clause;

b) the Arbitration Clause is invalid as a result of the defendant having waived its rights under it; and

c) the action herein is an appropriate one for summary judgment.

On the defendant’s delay, Justice Chang found that not only was the delay in bringing the stay motion lengthy in time, spanning some 16 months, but the defendant had actively participated in the litigation and for those months attorned to the court’s jurisdiction. As a result of that active participation (where as stated at paragraph 32, “the defendant defended this action, negotiated and renegotiated a discovery plan, fully availed itself of its documentary discovery rights under the discovery plan and participated in scheduling examinations for discovery” which would have proceeded but for the plaintiff’s cancellation) Justice Chang held that invocation of the Arbitration Clause now “is the definition of forum shopping” (paragraph 36). As a result of the undisputed steps in the litigation that had occurred Justice Chang found the defendant’s delay and waiver of the Arbitration Clause to be plainly evident. 

This finding led to Justice Chang’s conclusion that the Arbitration Claus was invalid: “the defendant was aware of the Arbitration Clause, unequivocally and consciously abandoned its rights thereunder and communicated that abandonment” (paragraph 46). Moreover, based on the pleadings and evidence to date, Justice Chang found the ultimate issue of allegedly unlawful termination of the APS was appropriate for summary judgment. The defendant’s motion to stay the litigation was dismissed.

Contributor’s Notes:

First, when providing his reasons, Justice Chang was clear in his acknowledgment that the law supports “giving effect to arbitration agreements” but noted that on the facts of this case, “the defendant’s delay in bringing this motion, the invalidity of the Arbitration Clause and the fact that this matter is a proper one for summary judgment” there were grounds to refuse a stay of proceedings were compelling (paragraph 57). In doing so he rejected arguments by the defendant that the strength of the first four parts of the framework from Haas v Gunasekaram, 2016 ONCA 744 at para 17 ought to outweigh any findings under the fifth part of the test (grounds to refuse a stay). Justice Chang found that the 5-part framework does not “represent a legal test of interconnected synergistic factors where the strength of one factor may compensate for the weakness of another” (paragraph 61). For a list of Case Notes that discuss the analytical framework in Haas v Gunasekaram, 2016 ONCA 744, see Ontario: Stay ordered as promissory note captured by separate arbitration agreement – #643.

Second, this case underscores the fact-specific analysis that will be brought to applications to stay litigation in favour of arbitration. The circumstances leading to the court’s decision in this case, and the active participation of the parties to the litigation for almost a year and a half before the stay application, along with the nature of the dispute, and the parties’ agreement on these salient facts, were determinative of the Court’s finding with respect to delay. As Justice Chang notes, while there should be defence to parties’ contractual agreements to arbitrate, in his view this defence is not unlimited particularly where, as stated at para 37, “[a]fter having attorned to this court’s jurisdiction and spent almost one and a half years in the court’s process, the defendant decided that it was no longer satisfied with this particular horse and that it wanted to – late in the race – change to a different one.