Ontario – Stay granted: tort claims were in “pith and substance” contractual – #768

In Spasiw et al v. Quality Green Inc. et al, 2023 ONSC 4422, the Court granted the defendants’ motion to stay the action in favour of arbitration in the context of a shareholders dispute. The plaintiffs’ claims of fraudulent misrepresentation and oppression were “closely connected with and related to” the parties’ share purchase agreement and shareholders agreement and in “pith and substance” contractual.. Accordingly, the claims fell within the broad scope of the arbitration clauses contained in the parties’ two agreements. 

None of the exceptions set out in s. 7(2) of the Ontario Arbitration Act, 1991, S.O, 1991 c. 17  applied.

Background to disputeOn August 10, 2018, the parties entered into a Share Purchase Agreement (“SPA”) and a Shareholders Agreement, through which the plaintiffs acquired shares in one of the defendant companies. Both agreements contained a similar arbitration clauses, which provided as follows: “Any dispute, difference or question arising between the Parties concerning the construction, meaning, effect or implementation of this Agreement (including any allegations or disputes regarding alleged breaches) shall be submitted to binding arbitration in accordance with the provisions of this Section…”  They further provided that notwithstanding “the foregoing, a Party seeking injunctive relief, specific performance or any other equitable remedy shall be entitled to seek such remedy in a court of competent jurisdiction.”

The actionShortly after the agreements were entered into, the plaintiffs began to complain about the defendants’ performance. On May 6, 2020, the plaintiffs commenced an action by Statement of Claim seeking, among other things: rescission of the SPA; damages for fraudulent misrepresentation, negligent misrepresentation, conversion and breach of contract; a declaration that the defendants had acted oppressively and unfairly disregarded the plaintiffs’ interests; and injunctive relief.

On November 9, 2020, the defendants served a Statement of Defence, which pleaded that “the Court is not the proper venue to determine this dispute” as a result of the arbitration clauses.” From December, 2020, through the fall of 2021, the parties exchanged communications about the potential appointment of an arbitrator and about the process for adjudicating the claims in issue.

In October, 2021, the defendants advised that they intended to bring a motion to stay the action in favour of arbitration. After various other procedural spats, related attendances and adjournments of the stay motion, the stay motion was heard in April 2023. 

The legal framework – At issue was whether the action should be stayed in whole or in part in favour of arbitration under sections 7(1),(2) and (5) of the Ontario Arbitration Act, 1991. The Court relied on the five-part framework laid out by the Court of Appeal in Haas v. Gunasekaram, 2016 ONCA 744 (“Haas”), to determine whether to order a stay under s.7. (After this case was heard, the Court of Appeal for Ontario released its decision in Husky Food Importers & Distributors Ltd. v. JH Whittaker & Sons Limited, 2023 ONCA 260 holding that the Haas framework has been superseded by the framework articulated in Peace River Hydro Partners v Petrowest Corp, 2022 SCC 41, although it is unlikely that this development in the law would have impacted the ultimate outcome given the facts of this case). 

The Haas framework applied in this case required consideration of the following:

  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?

Analysis – The Court held that there was an arbitration agreement in both agreements (issue 1 above). 

The Court then went on to consider the “pith and substance” of the subject matter of the dispute (issue 2 above). The Court agreed with the defendants that the underlying claims related directly to the meaning, effect, implementation and alleged breaches of the agreements. The plaintiffs had argued that the pith and substance of their claim concerned allegations of fraudulent misrepresentation and oppression. The Court held at paragraph 28

“It is apparent from the pleadings and the nature of the claims that the plaintiffs will be relying on the contractual documents to establish their claims for fraudulent misrepresentation and oppression. Therefore, the claims with respect to misrepresentation largely relate to the alleged failures of the defendants to perform their obligations under the Agreements. This is also the case for the alleged oppression. The claims for disgorgement, unjust enrichment and rescission also relate to or are closely connected with the Agreements. In the result, I find that the plaintiffs’ claims are in pith and substance contractual.”

With respect to the scope of the arbitration clauses (issue 3 above), the Court held that they were broad in scope. And while certain provisions were permissive in allowing a party “to seek such remedy in a court of competent jurisdiction” (relating to injunctive relief), this did not limit the otherwise broad mandatory language of the arbitration clause, or the jurisdiction of the arbitrator to deal with such remedies (and, as set out below, the Court held that the pleading of a claim for injunctive relief, without any further action to seek such relief, was not sufficient for the purpose of defeating a stay motion). 

The Court then held that the dispute fell within the scope of the arbitration agreements (issue 4 above). The Court relied on Haas for the proposition that “tort claims do not automatically fall outside of the scope of an arbitration agreement and nullify its applicability” (at para. 33) and highlighted the caution in Haas against parties undermining arbitration agreements by pleading common law torts. Here, the claims for fraudulent misrepresentation or oppression, disgorgement, unjust enrichment and rescission were “clearly referable” and related to, or were connected with the agreements and their alleged breaches. 

The Court also commented on the plaintiff’s pleading for interim relief. The mere pleading of a request for injunctive relief without taking any steps to obtain the relief was insufficient basis to hold that the dispute fell outside the scope of the arbitration clauses. Further, s.8(1) of the Ontario Arbitration Act, 1991 enabled the parties to seek injunctive relief from the Arbitrator if the action was stayed. 

The Court then examined and rejected the arguments raised by the plaintiffs to the effect that the Court should refuse to stay the action on the basis of one of the exceptions (issue 5 above). 

  1. The plaintiffs had not entered into the agreements while under a legal incapacity. Although the plaintiffs may have been inexperienced in business transactions, this was not a basis on which to refuse the stay.
  2. The arbitration clauses were not invalid or inoperable. There was no basis for this submission.  
  3. The subject matter was capable of being the subject of arbitration under Ontario law. The plaintiffs did not cite to any authority for the proposition that claims of fraud or oppression could not be arbitrated.
  4. The stay motion had not been brought with undue delay. There was a reasonable explanation for the timing of the motion. The defendants had consistently asserted that the claims must be arbitrated and the plaintiffs had initially agreed. There were also ordinary scheduling delays and other procedural disagreements that led to delay, including the plaintiffs’ proposed motion to amend the statement of claim, which was never brought.
  5. The matter was not a proper one for summary judgment. The plaintiffs made no written arguments on this issue and did not explain at the hearing why the action was proper for summary judgment. 
  6. It was premature to determine whether to order a partial stay the proceedings – only with respect to matters dealt with in the arbitration agreement and to allow it to continue with respect to other matters before the arbitrator decided on any jurisdictional challenges, citing Haas for the proposition that until an arbitrator decides his or her jurisdiction, a motion under s. 7(5) of the Arbitration Act, 1991 is premature. 

The defendants’ motion was granted and the action was stayed in favour of arbitration.

Contributor’s Notes:

First, a party seeking a stay faces the burden of establishing through evidence and argument that a stay should be granted in the face of a broadly worded arbitration clause and claims grounded in the underlying contract(s), even where allegations of fraud and misrepresentation are asserted. The Court focused on the “pith and substance” of the claims (borrowing this turn of phrase from Haas) – which were contractual in this case. This might not be considered “news” to a practitioner with experience in arbitration matters (no pun intended), but for the self-represented plaintiffs in this case, this may not have been clear. This situation might have been avoided with proper counsel on the arbitration regime in Ontario. 

Parties wishing to exclude tort claims from an arbitration clause must carefully do so at the time the arbitration clause is drafted. The plaintiff may have had better chances of  obtaining a stay  if the arbitration clauses were more carefully worded and if the tortious claims did not derive substantially from the contract. See for example Harris v Isagenix International, 2022 BCSC 268 (discussed in a previous Arbitration Matters Case Note here), where the motion for a stay was dismissed because the plaintiff did not seek to enforce any rights under the contract as an associate of the defendant companies, but relied upon a separate right to sue in negligence as a consumer. In the present case, more could likely have been done to provide that claims for injunctive relief could only be determined by a court if that is what the parties had wanted, in place the existing permissive language, which also allowed for such relief to be granted by an arbitrator. 

Secondly, this case may have broader importance in its assessment of whether ordinary procedural delays (which can now unfortunately be expected in Ontario) can result in the court declining to grant a stay. The answer in this case was “no”. These do not constitute the kind of “undue delay” which disqualifies the party seeking the stay from obtaining it.

The contributor thanks Eniola Akinoso, a student at Dentons Canada LLP, for her assistance with this case note.