In CSI Toronto Car Systems Installations Ltd. v Pittasoft Co., Ltd., 2021 ONSC 5117, Justice Mohan D. Sharma dismissed a motion by Pittasoft for a stay of CSI’s Ontario action in favour of arbitration on the grounds that: (1) under Article 8(1) of the Model Law, the arbitration agreement was “null and void, inoperative or incapable of being performed” because Pittasoft was estopped by its own conduct from relying upon it and also that Pittasoft had brought its stay motion too late; and (2) these findings constituted “strong cause” why the arbitration clause should not be enforced in accordance with the principles articulated by the Ontario Court of Appeal in Novatrax International Inc. v Hagele Landtechnik GmbH, 2016 ONCA 771 , that apply “when a litigant seeks to displace a forum selection clause agreed upon in a commercial contract”.
The Plaintiff (CSI) brought a motion, inter alia, to consolidate two actions in which overlapping relief was claimed. The Defendant (Pittasoft) brought a cross-motion to stay the second action on the basis of an arbitration clause contained in the parties’ business agreement. CSI was an auto electronic installation company. Pittasoft, a Korean corporation, manufactured dashboard cameras. The parties entered into a Sales Agreement dated March, 2018, pursuant to which CSI agreed to sell dashboard cameras manufactured by Pittasoft.
In September, 2019, CSI sued Pittasoft in Ontario for defamation, based upon allegedly libellous statements on the Pittasoft website (the First Action). In July, 2020, CSI sought to amend its Statement of Claim in the First Action to include breach of contract as against Pittasoft and a claim for inducing breach of contract and intentional interference with economic relations as against a third party to the contract, Automobility Distributions Inc., which distributed motor vehicle supplies throughout Canada. However, because of the concern about an expiring limitation period, CSI served and filed its Amended Statement of Claim as a new action (the Second Action).
Pittasoft argued that CSI’s breach of contract claim should be stayed because the Sales Agreement contained an arbitration clause. Justice Mohan quoted the relevant sections as follows:
9.1 This Agreement shall be construed in accordance with and governed by the laws of the Republic of Korea.
9.2 In case of a dispute between the parties as to the interpretation or performance of this Agreement, or any provision hereof, such dispute shall be finally settled by an arbitration held in Seoul, Korea under the Commercial Arbitration Rules of (sic) Korean Commercial Arbitration Board by one arbitrator appointed in accordance with such Rules.
In December, 2019, Pittasoft commenced an action against CSI in the Republic of Korea, alleging that CSI was in breach of the Sales Agreement for selling Pittasoft’s products at less than the agreed-upon price. CSI learned of the Korean action in October, 2020, when service of the complaint was effected pursuant to the requirements of the Hague Convention. CSI responded to the Korean action, but Pittasoft withdrew it in March, 2021, after this motion was commenced.
CSI’s position on the motion was set out by Justice Sharma as follows:
a. Pittasoft, by its own conduct, is estopped from relying on the arbitration clause. CSI relies heavily upon the fact that Pittasoft commenced its own action in Korea, in addition to other conduct.
b. Automobility is not a party to the contract with CSI and Pittasoft, and therefore, is not a party to any arbitration that would be held in Korea.
c. Arbitration would lead to a multiplicity of proceedings and potentially inconsistent results, both with respect to the claim against Automobility and with respect to the defamation claim. It would be more expeditious and less costly to avoid a multiplicity of proceedings.
d. If the Second Action is not stayed, leave should be granted to amend the pleadings in the two Ontario actions so that they proceed as a single action.
Pittasoft’s position was that CSI had not established a “strong cause” as to why the arbitration clause should not be enforced, as required under case law. It said it was not estopped by its conduct from enforcing the arbitration clause. It argued that the Second Action should be stayed in its entirety, and the Court should order the matter proceed to arbitration in Korea.
Automobility argued that the Second Action should be stayed until the arbitration in Korea was complete to allow a determination to be made as to whether Pittasoft had breached the contract. If not, the claims against Automobility for inducing breach of contract would fail.
Justice Mohan considered the legal principles set out by the Ontario Court of Appeal in Novatrax Inc. v Hagele Landtechnik GmbH, 2016 ONCA 771, which he found applied “when a litigant seeks to displace a forum selection clause agreed upon in a commercial contract”.
Justice Mohan summarized the relevant principles: Novatrax provides that the law favours the enforcement of forum selection clauses in commercial contracts so that parties are held to their bargain; a stay of an action should be granted unless the plaintiff shows “strong cause” that the case is exceptional and the forum selection clause should not be enforced; and the “show cause” requirement presumes that there is an agreement containing a clear forum selection clause which applies to the claims being advanced in Ontario.
Justice Mohan also applied Article 8(1) of the Model Law, adopted in the Ontario International Commercial Arbitration Act, S.O. 2017, c. 2 (“ICAA”), which “like the case law referenced above, it requires a court to respect arbitration agreements in certain circumstances”. Article 8(1) reads:
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.
Justice Mohan found that Pittasoft “submitted [its] first statement on the substance of the dispute in the Korean proceedings in which it first alleged breach of contract as against CSI. Therefore, he concluded, Pittasoft was out of time to “seek enforcement of the arbitration clause in the Sales Agreement” and that “the arbitration clause in the Sales Agreement has been rendered inoperative by virtue of Pittasoft initiating a claim in Korea”. In addition, Pittasoft was estopped from relying upon the arbitration clause by its conduct in commencing proceedings in Korea, even though it later withdrew the Korean action after CSI brought this consolidation motion. Further, Pittasoft never sought relief under the arbitration clause.
Justice Mohan concluded that because the arbitration clause in the Sales Agreement was no longer operative, CSI had established “strong cause” under the Novatrax principles as to why the arbitration clause should not be enforced. Therefore, he dismissed Pittasoft’s motion for a stay and ordered that the Amended Statement of Claim in the Second Action constitute the pleading in the First Action.
First, Novatrax has been subsequently cited for its analysis of a motion to stay a court proceeding in favour of arbitration on two main issues:
(1) when third parties to the arbitration agreement are affected. See for example: Tall Ships Landing Developments v. Leeds Standard Condominium Corporation No. 41, 2018 ONSC 2600 (“Where it is doubtful whether claims against individuals who are not parties to an arbitration agreement would be sustainable once claims that are arbitrable have been resolved by arbitration, the arbitration should be allowed to proceed”): Novatrax International Inc. v. Hägele Landtechnik GmbH, 2016 ONCA 771, at para. 25; Kanda Franchising Inc. and Kanda Franchising Leaseholds Inc. v 1795517 Ontario Inc., 2017 ONSC 7064 (“Just as non-parties to an arbitration agreement cannot invoke it (see: Rampton v. Eyre, 2007 ONCA 331, at para. 20), those who are not parties to an arbitration agreement cannot be compelled to submit to arbitration”) (see: Novatrax International Inc. v. Hägele Landtechnik GmbH, 2016 ONCA 771, at para. 24); and
(2) that parties who agree to an arbitration clause in their contract should be held to their bargain. See for example: Worldwide Warranty Life Services Inc v. LiquidNano Inc, 2019 BCSC 2475; TFS RT Inc v Kenneth Dyck, 2017 ONSC 2780; Bull Run Productions Inc. v Wild TV, 2016 NSSC 315; Toronto Standard Condominium Corporation No. 1628 v Toronto Standard Condominium Corporation No. 1636, 2019 ONSC 1827; and Select Comfort Corporation v Maher Sign Products Inc., 2019 ONSC 2478.
Second, Novatrax has been the subject of academic commentary. See for example: Canadian Arbitration and Mediation Journal, John S. Kelly, “The Novatrax Decision: Court of Appeal Confuses an International Arbitration Clause With a Forum Selection Clause and Incorrectly Stays a Court Action”, 2017 CanLII Docs); and “Expanding the Reach of Forum Selection Clauses”, Practical Law, Thomson Reuters.