Ontario – raising arbitration in defence helps demonstrate defendant did not waive arbitration – #414

In Elgin Mills v. Farhanian, 2020 ONSC 6435, Master Karen E. Jolley granted an application for a stay, holding that a defendant does not attorn to the court process by filing a defence wherein it specifically raises the arbitration provision.  Master Jolley followed the precedent set by ABN Ambro Bank Canada v. Krupp Mak Maschihnenbau GmbH, 1996 CanLII 12449 (ON SCDC) which held that reference to arbitration in a defence may be treated as a request to arbitrate, “were one needed“.  She further held that defendant’s delayed application for a stay, coupled with light activity in the litigation, did not justify refusing stay and that the work in the litigation could be repurposed for an arbitration.

Plaintiff and Defendant signed a purchase and sale agreement for a new home (“Contract”) which included an agreement to arbitrate in accordance with the Arbitration Act, 1991, SO 1991, c 17. Defendant applied under section 7(1) of the Arbitration Act to stay the litigation and invoked section 17(4) of the Ontario New Home Warranties Plan Act, RSO 1990, c O.31 (“NHWP Act”) and section 106 of the Courts of Justice Act, RSO 1990, c C.43 (“CJA”).

Section 17(4) of the NHWP Act stipulates that “[e]very agreement between a vendor and prospective owner shall be deemed to contain a written agreement to submit present or future differences to arbitration, subject to appeal to the Divisional Court, and the Arbitration Act, 1991 applies”.  Section 106 of the CJA provides that that “[a] court, on its own initiative or on motion by any person, whether or not a party, may stay any proceeding in the court on such terms as are considered just”.

Plaintiff objected to a stay, arguing Defendant’s waiver and undue delay in bringing the application for a stay.

As a guide for her own approach, Master Jolley pointed to Haas v. Gunasekaram, 2016 ONCA 744 para. 17 which set out a five (5) part analytical framework for determining stay applications under section 7(1) of the Arbitration Act:

(1) Is there an arbitration agreement?

(2)  What is the subject matter of the dispute?

(3)  What is the scope of the arbitration agreement?

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

(5)  Are there grounds on which the court should refuse to stay the action?

Plaintiff conceded that Defendant met the first four (4) parts but argued that Master Jolley should use her discretion under section 7(2)4 of the Arbitration Act to refuse to stay the action:

“7(2)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”.

Master Jolley commented that the cases are “clear that a party does not waive its right to exercise its arbitration clause simply by defending a civil action”, referring to Khomovych v. Bomar 2 Inc. o/a Colony Park Homes, 2019 ONSC 3982.  She expanded on that statement.

Something more is required as waiver considers all the circumstances of the case.  Further, the filing of that defence is not treated as an attornment to the court process, particularly where the statement of defence specifically raises the arbitration provision.  In fact, as the appellate court noted in ABN Amro Bank Canada v. Krupp Mak Maschinenbau GmbH (1996 CarswellOnt 1815 (C.A.), that reference to arbitration in a defence may be treated as a request to arbitrate, were one needed”.

(The reference in the reasons is to “C.A.” but perhaps the statement is (or could be) to the Divisional Court’s reasons in ABN Ambro Bank Canada v. Krupp Mak Maschihnenbau GmbH, 1996 CanLII 12449 (ON SCDC)).  Though not excerpted in Master Jolley’s reasons, the 1996 decision contained the following comments on the timeliness of an application for a stay:

[14] I find that Krupp’s statement of defence and counterclaim, in the context of the correspondence between counsel at the time, constituted a request “not later than when submitting [its] first statement on the substance of the dispute”. The effect of Haley J.’s ruling is to require that a request be made before a party’s first statement which is contrary to the express wording of both art. 8 and the commentary. Indeed, it is a return to the requirement of a procedural plea at an earlier stage than any pleading, a concept which the commentary makes clear has been done away with. With the greatest of respect, it is too technical to require that Krupp should also have served a notice of motion before pleading or actually have appeared before a court on or before filing its first pleading. Krupp was pursuing its motion to refer prior to, concurrent with and after filing its statement of defence. In fact, I do not understand that Krupp took any further step in the action in so far as it pertained to the matters Krupp sought to have referred to arbitration. Thus, it is untenable to contend that Krupp did not commit itself until it formally brought its motion or until it was actually before the court. If this was the position of counsel for ABN from the outset, Krupp’s counsel should have been so advised, given the state of the correspondence between counsel at the time”.

Plaintiff argued that Defendant had taken steps in the action and it would be unfair to stay the matter at this stage.  Master Jolley recorded that activity and noted precedents which had denied parties from ‘changing horses’ too late.

[12] Subsequent to filing the defence and counterclaim, defendant’s counsel raised the issue of arbitration in February 2019.  In April, after prompting from plaintiff’s counsel, he asked whether the plaintiff would consent to arbitrate and was advised that it would not.  Thereafter, the defendant took no steps to commence an arbitration or move to stay this action until he received the plaintiff’s motion for summary judgment in May 2020.  The plaintiff argues that the defendant implicitly forewent any right to arbitrate that he might have had and should be held to that bargain.

[13] The plaintiff argues that the defendant’s agreement to litigate is further demonstrated by the steps he took in the action.  Cases have held that where an action has advanced, one party should not be permitted to change horses late in the process by moving to enforce an arbitration clause”.

Master Jolley acknowledged that Defendant’s motion could have been brought earlier but scant activity had been taken aside from the pleadings.  The parties had exchanged unsworn affidavits of documents, discussed a discovery plan and proceeding with examinations but they did not follow the plan or proceed with the examinations.  Master Jolley also stated that the work in the litigation could be repurposed for the arbitration.

[15] The work done in the civil action to date will be of use in the arbitration.  The pleadings can to frame the issues between the parties and the affidavits of documents are equally relevant (Amec E&C Services Limited v. Nova Chemicals (Canada) Ltd. 2003 CanLII 40438 (ONSC) at paragraph 30).  There is no prejudice to the plaintiff as a result of having taken these steps in the litigation”.

Master Jolley’s reference to Amec E & C Services Ltd. v. Nova Chemicals (Canada) Ltd., 2003 CanLII 40438 (ON SC) para. 30 directs the reader to a more expansive comment on the court’s support for repurposing work produced in the litigation for use in an arbitration.

[30] The question then remains whether to refer the matter to arbitration at this stage would cause undue prejudice to either of the parties. The parties have invested nine months in this application and spent funds on procedural motions relating to its determination. In my view, the bulk of the work that has been done with reference to this application will be of use to the parties in the arbitration proceedings. The issues have been defined and the evidentiary and legal bases for the positions taken on these issues have been flushed out. Proceeding to arbitration will necessitate some more delay but, taken as a whole, this delay is not a sufficient reason to depart from what I see to be an important principle – that parties who contractually agree to submit their disputes to arbitration should be held to that agreement, rather than being encouraged to separate out certain aspects of their dispute for determination by the courts in a separate proceeding”.

urbitral notes – First, Master Jolley cited Khomovych v. Bomar 2 Inc. o/a Colony Park Homes, 2019 ONSC 3982 para. 15 which provides the following:

[15] The plaintiffs state that the defendant’s participation in litigation means that it waived its entitlement and is now estopped from proceeding to arbitration.  It relies on Williams v. Paul Revere Life Insurance Co., 1997 CanLII 1418 (ON CA), 1997 CarswellOnt 2450.  In Williams, the court set out the three essential elements of estoppel namely (1) a representation or conduct amounting to a representation intended to induce a course of action or conduct on the part of the person to whom the representation is made; (2) an act or omission resulting from the representation, whether actual or by conduct, by the person to whom the representation is made; and (3) detriment to such person as a consequence of the act or omission. The plaintiffs state that the defendant’s participation in litigation is a representation.  The plaintiffs had to defend the counterclaim.  The defendant never said that it would provide a waiver for a defence to the counterclaim”.

Second, Master Jolley’s reference to ABN Ambro Bank Canada v. Krupp Mak Maschihnenbau GmbH, 1996 CanLII 12449 (ON SCDC) allows readers to resurface an authoritative statement of an assignor’s restricted options when claiming the benefits of an agreement.  In that case, the Ontario Divisional Court mentioned the following ‘all or nothing’ impact for the assignor.

[15] ABN is, in law, a party to the arbitration agreement. It is a fundamental and, I think, universal commercial legal principle that an assignor is not entitled to divide that which is assigned amongst assignees so as to convey the benefits and nullify the burdens: First City Capital Ltd. v. Petrosar Ltd. (1987), 1987 CanLII 4434 (ON SC), 42 D.L.R. (4th) 738, 61 O.R. (2d) 193, 7 A.C.W.S. (3d) 112 (H.C.J.). Thus, a party seeking to enforce assigned rights under an agreement can only do so subject to the terms and conditions embodied therein: Best v. Beatty (1920), 1920 CanLII 439 (ON CA), 53 D.L.R. 44, 47 O.L.R. 265, 18 O.W.N. 67 (C.A.); affirmed 1921 CanLII 578 (SCC), 58 D.L.R. 552, 61 S.C.R. 576. This principle has been applied, by this and other courts, to include arbitration clauses: Boart Sweden AB v. NYA Stromnes AB (1988), 41 B.L.R. 295, 14 A.C.W.S. (3d) 348 (Ont. H.C.J.); Kaverit Steel and Crane Ltd. v. Kone Corp. (1992), 1992 ABCA 7 (CanLII), 87 D.L.R. (4th) 129, 40 C.P.R. (3d) 161, 4 C.P.C. (3d) 99 (Alta. C.A.); Fisser v. International Bank, 282 F.2d 231 (2d Cir.); Rumput (Panama) SA and Belzetta Shipping Co. SA v. Islamic Republic of Iran Shipping Lines (The “Leage”), [1984] 2 Lloyd’s Rep. 259. Accordingly, the appeal is allowed. The claims set out in Part B of the statement of claim (paras. 22-31) are referred to arbitration and the action, in those respects, is stayed”.