Ontario – Refusal to respond not a waiver to arbitrate – #686

In Justmark Industries Inc. v. Infinitus (China) Ltd., 2022 ONSC 5495, Justice Williams granted the Defendant/Moving Party’s motion to stay the court action in favour of arbitration. The Plaintiff/Responding Party Justmark Industries Inc. (“Justmark”) commenced the court action for breach of contract against the Defendant/Moving Party Infinitus (China) Ltd. (“Infinitus”). The contract, however, contained an arbitration clause requiring disputes to be arbitrated in Hong Kong by the Arbitration Committee of the International Trade Council (the “ITC”) pursuant to the law of the United Kingdom. As such, Infinitus brought a motion under s 9 of Ontario’s International Commercial Arbitration Act, 2017 (the “ICAA”), which incorporates Article 8(1) of the UNCITRAL Model Law on International Commercial Arbitration (the “Model Law”), to stay the proceedings. In response, Justmark alleged that Infinitus had waived its right to arbitration and thus rendered the arbitration agreement “inoperative” under Model Law Article 8(1). Justmark claimed that Infinitus’s failure to respond to its requests to commence arbitration amounted to waiver. Justice Williams, however, dismissed Justmark’s  argument on the grounds that there was no evidence that “[16] …  Infinitus had the requisite ‘unequivocal and conscious intention,’ or any intention, to abandon its right to arbitrate.

Justice Williams reached her decision in noting that “[10] The threshold to avoid arbitration is high” and that “[12] A waiver involves a knowing relinquishment of rights.” With respect to waiver, Justice Williams relied on the Court of Appeal for Ontario’s decision in Campbell v 1493951 Ontario Inc., 2021 ONCA 169, at para 12 citing the Supreme Court of Canada decision in Saskatchewan River Bungalows Ltd. v. Maritime Life Assurance Co., [1994] 2 SCR 490 at para 20: “Waiver will be found only where the evidence demonstrates that the party waiving had (1) a knowledge of rights; and (2) an unequivocal and conscious intention to abandon them.

The fact that Infinitus did not respond to Justmark’s communications seeking to invoke the arbitration clause in their contract was not sufficient to demonstrate that Infinitus had the requisite intention to abandon its right to arbitration.

In addition, Justice Williams found that even if the test for the waiver of a right to arbitrate was the lower threshold, as argued by Justmark – of knowledge of the right to arbitrate, acting inconsistently with the right, and prejudicing the opposing party – there was no prejudice. Any issues of delay and additional costs could be addressed by the arbitrator. Any risk of a limitation period expiring as a result of Infinitus’s refusal to arbitrate could be overcome by Justmark seeking the appointment of an arbitrator in court under Article 11 of the Model Law

Lastly, Justmark argued that it iswas not a member of ITC, the institution identified in the arbitration clause. Justice Williams, however, remarked that there was no evidence that not having an ITC membership would make the arbitration clause inoperative. Rather, the evidence showed that ITC membership coould be easily obtained and inexpensively purchased online if necessary. 

As a result, Justice Williams found that Justmark failed to demonstrate that the arbitration agreement was inoperative on the basis that Infinitus had waived its right to arbitration and thus stayed the action pursuant to s 9 of the ICAA.

Contributor’s Notes 

Section 9 of Ontario’s ICCA provides:

Stay of proceedings

9    Where, pursuant to article II (3) of the Convention or article 8 of the Model Law, a court refers the parties to arbitration, the proceedings of the court are stayed with respect to the matters to which the arbitration relates.”

Article 8 of the Model Law, adopted in Ontario’s ICCA, provides:

“Article 8. Arbitration agreement and substantive claim before court

(1) 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.

(2) Where an action referred to in paragraph (1) of this article has been brought, arbitral proceedings may nevertheless be commenced or continued, and an award may be made, while the issue is pending before the court.”

Interpreting the Model Law

In setting out its proposed test for waiver noted above, Justmark advocated for Justice Williams to consider case law from other jurisdictions that considered waiver in the context of the Model Law. Justmark relied on two case summaries from the Yearbook Commercial Arbitration 2003 – Volume XXVIII (Albert Jan Van den Berg (ed), Kluwer Law International; ICCA & Kluwer Law International 2003) (the “Yearbook”). Justice Williams, however, found that there was inconsistent case law in the Yearbook on the issue of waiver and was thus not persuaded “[15] … that a waiver of a right to arbitrate does not require the two elements required for a ‘knowing relinquishment of rights’, set out by the Supreme Court of Canada in Saskatchewan River Bungalows Ltd and relied upon by the Court of Appeal for Ontario in Campbell: A party must have both a full knowledge of [sic] it rights and an unequivocal and conscious intention to abandon them.”

It should be noted that there is support in the Model Law of consulting the law in other jurisdictions when applying the Model Law. Along with the 2006 amendments to the Model Law, a new article 2A was adopted, which provides:

“Article 2 A. International origin and general principles

(1) In the interpretation of this Law, regard is to be had to its international origin and to the need to promote uniformity in its application and the observance of good faith.

(2) Questions concerning matters governed by this Law which are not expressly settled in it are to be settled in conformity with the general principles on which this Law is based.”

Definition of “Inoperative”

The Supreme Court of Canada recently considered the “proper interpretation” of the term “inoperative” in the context of a stay application in bankruptcy or insolvency proceedings in Peace River Hydro Partners v. Petrowest Corp., 2022 SCC 41 (“Petrowest”). Justice Côté, writing for the majority, noted that an arbitration agreement could be rendered inoperative by waiver, and stated, in relevant part:

[138] The term “inoperative” has no universal common law definition (Prince George (City) v. McElhanney Engineering Services Ltd. (1995), 1995 CanLII 2487 (BC CA), 9 B.C.L.R. (3d) 368 (C.A.), at para. 33, citing M. J. Mustill and S. C. Boyd, The Law and Practice of Commercial Arbitration in England (2nd ed. 1989), at pp. 46465). In arbitration law, however, the term has been used to describe arbitration agreements which, although not void ab initio, “have ceased for some reason to have future effect” or “have become inapplicable to the parties and their dispute” (McEwan and Herbst, at § 3:57; Lamm and Sharpe, at p. 301; see also Casey, at ch. 3.7.2).[139] Possible reasons for finding an arbitration agreement inoperative include frustration, discharge by breach, waiver, or a subsequent agreement between the parties. The cases interpreting s. 15(2) of the Arbitration Act make it clear that matters such as inconvenience, multiple parties, intertwining of issues with nonarbitrable disputes, possible increased cost, and potential delay generally will not, standing alone, be grounds to find an arbitration agreement inoperative (Prince George, at para. 37; MacKinnon v. National Money Mart Co., 2004 BCCA 473, 50 B.L.R. (3d) 291, at para. 34). Indeed, like all the statutory exceptions, the exception for an inoperative arbitration agreement is to be narrowly interpreted, with the party seeking to avoid arbitration bearing the heavy onus of showing that it applies. This serves “the interests of freedom of contract, international comity and expected efficiency and costsavings” from enforcing otherwise valid arbitration agreements (McEwan and Herbst, at § 3:57; MacKinnon, at para. 36).