What happens where some, but not all, parties to a lawsuit have agreed to arbitrate the dispute between them? In complex, multi-party disputes, this is not uncommon. In two recent decisions in such cases, the British Columbia Supreme Court has ordered a stay of lawsuits against all defendants in favour of arbitration.

Canadian courts encourage the use of arbitration as a method of resolving disputes. If a party sues another party over something they have agreed to arbitrate, then any party to the lawsuit may apply to the court for a “stay” of the lawsuit, suspending it in favour of arbitration. So long as certain requirements are met – including that the party applying for the stay does so before taking any step in the lawsuit - then the court must stay the lawsuit.

This is straightforward where all the parties to the lawsuit are also parties to the arbitration agreement. But what happens where that is not so, for example where one defendant in the lawsuit is party to an arbitration agreement with the plaintiff, but another is not? In 2003, the BC Court of Appeal confirmed that in those circumstances the defendant who is not a party to the arbitration agreement can apply for a stay of the lawsuit. However, the crucial question remained whether the court nevertheless retained a discretion to refuse to grant the stay in those circumstances. Could a defendant actually obtain a stay of a lawsuit in favour of arbitration, despite not being a party to the arbitration agreement?

This precise issue has come before the Supreme Court of British Columbia twice in recent months. In both cases, the Court did stay the lawsuit against all defendants, despite the fact that not all were parties to an arbitration agreement with the plaintiff.

In both cases, the plaintiff sued several defendants, both corporations and individuals. The individuals were shareholders or directors of the corporations. In both cases, the plaintiff had an arbitration agreement with the corporations, but not the individuals. All defendants applied for stays, because they were parties to lawsuits by parties to arbitration agreements against other parties to those agreements. In both cases, the Court granted the stays.

To overcome the hurdle of not being parties to the arbitration agreements, the individual defendants emphasized that if the lawsuits were stayed only against the corporations, there would be arbitrations with the corporations and lawsuits with the individuals. This would be a waste of the Court’s and the parties’ resources, and could result in inconsistent findings of fact and legal conclusions. (The individuals also said they would agree to resolve the plaintiffs’ claims against them in the arbitrations with the corporations.)  

If some, but not all, defendants in a lawsuit have an arbitration agreement with the plaintiff, the option of a stay may still be available to all the defendants, depending on the applicable arbitration legislation. All defendants should consider the effect of any arbitration agreement to which any of them are parties.