A recent decision of the Ontario Superior Court of Justice reaffirms Canadian courts' commitment to enforcing arbitration agreements and narrowly interpreting statutory exceptions to enforcement.
In 1146845 Ontario Inc v Pillar to Post Inc(1) the Superior Court of Ontario stayed class proceedings commenced by Pillar to Post Inc franchisees who alleged that Pillar to Post had violated its disclosure obligations pursuant to Ontario's Arthur Wishart Act.(2) The franchisees resisted Pillar to Post's application for a stay, arguing that the arbitration clause in the franchise agreement was unenforceable because:
- the Arthur Wishart Act is analogous to consumer protection legislation, a purpose inconsistent with mandatory arbitration; and
- the "right to associate" found in Section 4 of the act expressly protects franchisees' right to bring class proceedings.
Relying on guidance from the Supreme Court of Canada in Seidel v TELUS Communications Inc,(3) the Ontario court held that in the absence of a clear statement of legislative intent to protect a party's right to litigate or the application of one of the exceptions found in Section 7 of the Ontario Arbitration Act 1991,(4) the court is obliged to stay court proceedings in favour of arbitration. The court also rejected the franchisees' assertion that the Arthur Wishart Act conferred exclusive jurisdiction on the court to resolve the parties' dispute, noting that the regulations that accompany the act specifically contemplate alternative dispute resolution.
Pillar to Post operates a home inspection business across Canada and the United States through a number of franchises. The plaintiffs, three Pillar to Post franchisees, alleged that Pillar to Post had treated them unfairly and had unilaterally made fundamental changes to the franchise system – including the conversion of exclusive sales territories to non-exclusive sales territories – which caused substantial and continuing losses to franchisees. Among other things, the plaintiffs asserted that Pillar to Post's omissions constituted material misrepresentation under the Arthur Wishart Act for which Pillar to Post was liable for over C$25 million in damages.
The standard form franchise agreement signed by all Pillar to Post franchisees contained an arbitration clause through which the parties agreed that "all controversies, claims or dispute between Franchisor and Franchisee…[would] be resolved by arbitration before a sole arbitrator". The franchise agreement also contained a waiver of franchisees' right to initiate or participate in class action proceedings; however, Pillar to Post did not rely on this provision in seeking the stay of proceedings.
Although one of the plaintiffs initially commenced arbitration in respect of its claim, proceedings were halted soon after an arbitrator was appointed. Instead, and notwithstanding the arbitration clause in the franchise agreement, the plaintiffs commenced class proceedings on behalf of all Canadian Pillar to Post franchisees "whose franchise was terminated, transferred, assigned, converted to a non-exclusive territory or altered in any other manner as a result of the alleged failure to comply with the [Pillar to Post] franchise agreement".
The franchisees argued that their right to "associate with other franchisees" under Section 4 of the Arthur Wishart Act extended to the right to commence and participate in class proceedings, and expressed the "clear statement of legislative intent" that the Supreme Court of Canada deems necessary to oust an arbitration agreement. The franchisees also asserted that the objective of the act – to protect franchisees from unfair treatment – is comparable to that of the consumer protection legislation and is incompatible with mandatory arbitration of franchise disputes.
Pillar to Post denied that the "right to associate" extends to class actions and referred the court to Seidel and other cases that reinforce the Canadian courts' willingness to enforce arbitration agreements in all circumstances, including where a power balance exists between contracting parties.
Following the principles set out in Seidel, the court considered whether the Arthur Wishart Act and the arbitration clause could co-exist. It found that they could, holding that the franchisees' interpretation was "strained" and that, unlike the Business Practices and Consumer Protection Act(5) at issue in Seidel, the Arthur Wishart Act did not contain "clear intervention by the legislature to override an agreement to arbitrate disputes". On the contrary, the Arthur Wishart Act Regulations(6) expressly contemplate the use of arbitration and mediation in franchise disputes.
In considering the scope of the "right to associate", the court distinguished cases relied on by the franchisees on the basis that they did not require the court to resolve tension between two legislative imperatives – in this case, the mandatory language in the Arbitration Act 1991 and the right to associate in the Arthur Wishart Act – and held that the arbitration agreement in Pillar to Post did not "deny the franchisee any forum for access to justice".
The court also rejected the franchisees' argument regarding the suitability of class proceedings, commenting that class proceedings are not always preferable to arbitration for group claims. For example, "where the class members can be easily identified, then joinder of claimants without the rigmarole of the certification procedure would be more advantageous than a class proceeding". In addition, the court cautioned that class proceedings cannot function as a means of circumventing an arbitration agreement, because class actions are procedural in nature and do not create substantive rights, modify existing rights or augment the courts' jurisdiction.
Finally, the court determined that stay was not to be denied for public policy reasons, holding that the question of enforceability "is not a matter of weighing whether arbitration is a preferable procedure to resolve the issues raised in a proposed class action", but rather whether the right to arbitrate must be enforced. Without an exception in the Arbitration Act 1991 or a clear statement of legislative intent in the Arthur Wishart Act that would render the arbitration agreement unenforceable, the court was bound to enforce the arbitration agreement and grant Pillar to Post's application for a stay of proceedings.
Pillar to Post clarifies that the exception to enforcing an arbitration agreement expressed in Seidel is limited and confined to clear statements of legislative intent to preserve the jurisdiction of the courts. This is consistent with the Canadian courts' respect for arbitration and their narrow view of the exceptions to enforcing arbitration clauses, regardless of the type of contract or parties involved.
While the interplay between arbitration agreements and statutory rights will continue to be decided on a case-by-case and statute-by-statute basis, Pillar to Post confirms Canadian courts' willingness to enforce arbitration agreements and ensures that well-drafted arbitration agreements will continue to be an effective means of limiting franchisors' exposure to class action claims.
Craig R Chiasson
Kalie N McCrystal (articled student) assisted in the preparation of this update.
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