Asserting a contract is void for fraud is not always enough to escape an agreement to arbitrate. In Haas v. Gunasekaram, the Court of Appeal for Ontario recently confirmed a clear preference for upholding arbitration agreements. In its decision, the Court describes the test to be applied when deciding to stay a court action in favour of arbitration and highlights the importance of drafting an appropriate arbitration clause.
Andreas Haas, the plaintiff, invested in a restaurant in Toronto and entered into a shareholders' agreement with business partners. When the restaurant failed, Haas started a court action against his partners to recover his investment. He alleged that they had acted oppressively and that he had been induced to sign the shareholders’ agreement (the "Contract") based on fraudulent representations.
The Contract contained an agreement to arbitrate "any dispute, difference or question" arising out of the Contract (the "Arbitration Clause"). In light of the Arbitration Clause, the defendants moved to stay the action under Ontario's Arbitration Act, 1991. Haas opposed the motion and argued, among other things, that the scope of the Contract could not include arbitrating the issue of whether it was void for fraud.
The motion judge declined to stay the action. He held that the subject of the dispute was not the parties' contractual obligations but rather the misrepresentations that led Haas to enter into the Contract in the first place. Since the misrepresentation claims did not arise out of the Contract, they were not captured by the Arbitration Clause.
The Court of Appeal overturned the lower court and stayed the action.
As the starting point for its analysis, the Court of Appeal noted that the law in Ontario strongly supports arbitration. For instance, the Act, unlike predecessor legislation, requires the court to stay an action if an arbitration agreement applies to the dispute. Similarly, Canadian case law generally favours enforcing arbitration agreements and, even when the scope of an arbitration agreement is unclear, the court prefers the arbitrator to determine her own jurisdiction.
In considering whether to stay an action in favour of arbitration, a judge must answer the following questions:
- Is there an arbitration agreement?
- What is the subject matter of the dispute?
- What is the scope of the arbitration agreement?
- Does the dispute arguably fall within the scope of the arbitration agreement?
- Are there grounds on which the court should refuse to stay the action?
In Haas, there was no dispute that the Contract included an arbitration agreement.
With respect to the subject matter of the dispute, the Court of Appeal concluded that the alleged misrepresentations largely related to the defendants' failures to perform their contractual obligations. For example, Haas alleged that the defendants failed to achieve a promised rate of return on his investment and operated the restaurant without the agreed upon management team. The Court of Appeal noted that to establish the misrepresentations that led him to enter the contract, Haas would be relying on the terms of the Contract and related documents.
With respect to the scope, the Court of Appeal noted that the Arbitration Clause was broad and captured not only disputes arising out of the Contract but also disputes related to it. Having addressed the first three questions, the Court then turned to whether the dispute fell within the scope of the Arbitration Clause. On this point, the Court found that the motion judge had erred in three ways:
1. Tort claims are not automatically excluded
First, the motion judge erred by assuming tort claims automatically fall outside the scope of an arbitration clause. Instead, the Court confirmed that if the clause includes disputes arising out of or in connection with the agreement, a dispute will be caught if either the claimant or defendant relies on the existence of a contractual obligation as a necessary element of a claim or defence. In the circumstances, the Court found that the bulk of the misrepresentation claims being advanced by Haas were captured.
2. Fraud does not necessarily vitiate an arbitration agreement
Second, the motion judge erred by assuming fraud would vitiate the Arbitration Clause. Simply alleging that a contract is void for fraud does not make it so and the dispute still must be determined. Further, the Court of Appeal noted that a strategy of alleging fraud as a means to avoid arbitration should not be encouraged.
The Court held that where an arbitration agreement contains broad language that would otherwise capture the dispute, claims for misrepresentation or fraud are not excluded simply because they challenge the validity of the contract.
3. The law favours the enforcement of arbitration agreements
Third, the motion judge erred by failing to acknowledge the statutory and judicial preference for enforcing arbitration agreements. Where the scope of the arbitration agreement is broad, the legislation and jurisprudence dictate that an arbitrator, and not the court, should determine whether they have jurisdiction to hear the dispute.
Addressing the final question, the Court of Appeal determined that there were no grounds to otherwise stay the action.
Take away points
The Haas ruling builds on a long line of Ontario cases expressing support for arbitration. In fact, the Court of Appeal explicitly states that, when considering a challenge to an arbitration agreement, "the court should lean against a result that undermines arbitration agreements". Given the clear preference of the judiciary, parties should appreciate when negotiating a contract including an arbitration agreement that it will be an uphill battle to avoid arbitration if a dispute arises.
The decision also highlights the importance of carefully drafting arbitration agreements. In Haas, the parties chose to include broad language in the arbitration agreement that covered not only disputes directly arising out of the interpretation of the contract, but also disputes related, more generally, to the performance of the agreement. While this type of broad agreement is common (and may be default or boilerplate language), it is certainly not mandatory. The scope of an arbitration agreement, like any other contractual term, is open to negotiation. If a party would prefer that only certain types of claims be arbitrated and others excluded (for instance, whether an agreement is void for fraud), the arbitration agreement should be worded accordingly.
Finally, the Court of Appeal has made it clear that once the parties have agreed on a broad arbitration agreement, attacking the validity of the underlying contract will not necessarily avoid arbitration. Even where it is alleged that the contract is void for fraud, the court will be inclined to leave it to the arbitrator to decide whether the dispute is captured by the arbitration agreement and, if so, hear the claim.