In our last post, we gave an overview of the pros and cons of having arbitration clauses in employment agreements. In this post, we will consider the enforceability of such clauses. 

How does an arbitration clause work?

Generally, when parties have included an arbitration clause in their contracts, any court proceedings covered by the clause must be stayed. Once the court proceeding is stayed, the parties can proceed to arbitration to resolve the dispute.

However, the provincial statutes also give courts residual discretion to refuse to stay the proceedings in certain circumstances. For example, British Columbia’s Arbitration Act allows a court to refuse to stay proceedings if the application for a stay is not brought in time or if the arbitration clause is “void, inoperative or incapable of being performed.” Similarly, Ontario’s Arbitration Act, 1991 allows a court to refuse to stay proceedings if one of the parties did not have legal capacity to enter into the contract in the first place, the arbitration clause is invalid, the subject-matter of the dispute cannot be the subject of arbitration under Ontario law, the party seeking the stay engaged in undue delay, or the matter can be dealt with through default or summary judgment. 

What issues might arise in invoking arbitration clauses?

There are two key issues surrounding enforceability of an arbitration clause: (1) whether the arbitration clause is applicable to the dispute; and (2) whether the arbitration clause is void or unenforceable because it is abusive, unconscionable, or illegal.

Applicability

Employees may argue that the arbitration clause is not applicable, or that the dispute does not fall within the scope of the arbitration clause in their employment agreement. In Hargraft Schofield LP v. Fluke, the employee’s contract had been renewed multiple times. The first employment agreement contained a mandatory arbitration clause. The second employment agreement did not contain an arbitration clause, although it did contain a clause purporting that the contract was the “entire agreement” between the parties. The third and fourth employment agreements merely extended the terms of the preceding agreement. The fifth employment agreement contained a clause that incorporated the terms of all four preceding agreements. The Court determined that the arbitration clause in the first agreement was not applicable because the second agreement superseded the first and because no allegations were made with respect to the first agreement.

In Patel v. Kanbay International Inc., the arbitration clause was contained in a shareholders’ agreement, which the employer claimed had been incorporated into the employment agreement. Both the original court and the Court of Appeal refused to stay the proceedings. The Court of Appeal noted that the issues in dispute related to wrongful dismissal and negligent misrepresentation, which were not contemplated by the shareholders’ agreement.

Enforceability

Employees may also argue that an arbitration clause, even if it exists, is unenforceable. For instance, in Houston v. Exigen (Canada) Inc., the employment agreement included an arbitration clause that required disputes to be resolved by binding arbitration in California. However, the clause did not apply to disputes or claims relating to the misuse or misappropriation of the employer’s trade secrets or proprietary information. The Court of Queen’s Bench of New Brunswick held that the arbitration clause was rendered unenforceable because the existence of an at-will termination of employment clause tainted the entire employment agreement. The Court further concluded that the arbitration clause was invalid, noting that it was “particularly offensive” that employees were barred from bringing lawsuits in the province while the employer was still able to pursue its current and former employees.

By contrast, in Ross v. Christian & Timbers Inc., the Ontario Superior Court agreed to stay the court proceedings in favour of binding arbitration in Ohio. The Court noted that the case before it was not a situation in which a vulnerable employee was being treated unfairly; rather, the employee was sophisticated, had independent legal advice before entering into the agreement, and had bargained over its terms. However, the Court emphasized that, if the minimum standards under Ontario’s Employment Standards Act, 2000 were not respected, the employee could have further remedies in Ontario.

What does this mean for employers?

Employers should ensure that any arbitration clauses in their employment agreements are properly drafted and presented. Potential gaps or serious fairness issues in arbitration clauses may prevent employers from relying on them and allow employees to seek recourse through the courts in spite of the clause.

Having outlined some of the major enforceability issues, stay tuned for our next post, in which we will discuss some important considerations when drafting arbitration clauses.