In Novatrax International Inc v Hagele Landtechnik GmbH,(1) the Ontario Court of Appeal confirmed a decision of the Ontario Superior Court of Justice staying an action commenced by Novatrax International Inc against Hagele Landtechnick GmbH, a German company with which Novatrax had contracted, and non-parties to the agreement, on the basis of a commitment to arbitrate in the contract.
The result is consistent with prevailing Canadian jurisprudence and the United Nations Commission on International Trade (UNCITRAL) Model Law, which governs international commercial arbitration in Canada, although neither the lower court nor the Ontario Court of Appeal referred to Ontario's International Commercial Arbitration Act or the UNCITRAL Model Law incorporated in this act. Instead, the court characterised the arbitration agreement as a 'forum selection clause', applied a conflicts of law analysis based on forum non conveniens and concluded that, because Novatrax's claims related to the contract and were somewhat intertwined, the forum selection clause should be applied to all of the parties.
Although the issue before the court concerned an international arbitration, the lower court was directed to Section 7 of the Ontario Arbitration Act, which governs domestic arbitrations. On that basis, the court concluded, in part, that a stay should be granted. The Ontario Court of Appeal did not refer to Ontario's arbitration legislation.
Although the dissenting judge accepted the majority conclusion on the forum selection issue, the dissent proceeded on the basis that the majority obliged Novatrax to arbitrate its claims against the non-signatories in Germany. Neither the decision of the majority nor that of the lower court ordered the parties to the action to arbitrate; rather, they simply stayed the Ontario action.
Novatrax and Hagele were parties to an exclusive sales agreement through which Novatrax was entitled to distribute Hagele's industrial fans in Canada.
The contract required all disputes to be resolved by binding arbitration in Frankfurt, Germany and permitted either party to terminate the contract without notice if certain circumstances arose. In November 2009 Hagele invoked this right and notified Novatrax that it was terminating the contract effective immediately.
Novatrax commenced an action for wrongful termination of the contract and tortious misconduct, naming Hagele, Karl and Benjamin Hagele (Hagele's principals) and Cleanfix North America Ltd (a company set up by Hagele to sell its products in Canada and the United States). The defendants applied to stay the action under the Ontario Arbitration Act (not the International Commercial Arbitration Act), the Rules of Civil Procedure and the Courts of Justice Act.
The lower court's judgment began by setting out the basis on which the stay application was brought, including Section 7 of the Ontario Arbitration Act, and then undertook a forum non conveniens analysis. The court concluded that Novatrax's claims fell within the forum selection clause in the contract (which was an arbitration clause) and that there was no "strong cause" why the clause should not apply.(2)
In considering the distinction between Hagele (a party to the contract) and the non-party defendants, the lower court held that it was bound by the Ontario Court of Appeal's decision in Momentous.ca Corp v Canadian American Association of Professional Baseball.(3) In Momentous.ca the plaintiff commenced an action in Ontario against the association, its principals and the city of Ottawa, despite a clause in the contract between Momentous and the association that required the parties to attorn to the jurisdiction of the North Carolina courts and purported to provide for arbitration in accordance with the provisions of other instruments. Relying on the attornment clause, the defendants moved to dismiss the action for lack of jurisdiction based on forum non conveniens. The plaintiff argued that the attornment and arbitration provision did not apply to the non-parties to the contract, thereby giving the Ontario courts jurisdiction over the plaintiffs' action. The court granted the defendants' application, largely on the basis of the plaintiff's pleadings, which asserted that the claims were inextricably intertwined and the action could not be disposed of without participation of all of the parties. The court held that in the circumstances, the plaintiff could not avoid the attornment and arbitration provision and dismissed the action.
The lower court interpreted the fundamental point in Momentous.ca to be that when a plaintiff takes a position in its claim that allegations against parties and non-parties to a contract containing a forum selection-type clause are intertwined, and those allegations arise out of the contract, then the forum selection clause should govern all of the defendants (including non-parties to the contract). The lower court does not appear to have considered whether Momentous.ca, which did not squarely address the applicability of arbitration principles and legislation, could be applied in the face of specific provisions in the International Commercial Arbitration Act governing stays of proceedings. In any event, the lower court's decision to stay the proceedings demonstrates the willingness of Canadian courts to stay litigation against non-parties in order to enforce parties' agreements to arbitrate.
The majority of the Ontario Court of Appeal upheld the lower court's decision.(4) Recognising that "a court lacks the jurisdiction to compel those who are not parties to an arbitration agreement to submit their claims to arbitration", the court concluded that, since the claims were factually intertwined, they should all be stayed to allow the issue of termination "to be decided first in an arbitration". The court also noted that the lower court had correctly followed and applied Momentous.ca in staying the action against the non-party defendants (ie, the allegations against parties and non-parties to the relevant contract were intertwined).
The dissenting judge held that it was an error of law to stay the claims against the non-party defendants because, as non-parties to the arbitration agreement, Novatrax could not be forced to arbitrate its dispute with them (although, the majority did not compel arbitration with the non-parties). The dissenting judge then considered whether the court should have stayed the claims against the non-party defendants pending the outcome of the arbitration pursuant to the court's inherent jurisdiction, and adopted the three factors set out in UCANU Manufacturing Corp v Calgary:
- whether the issues in the arbitration are substantially the same as the issues in the action;
- whether the defendant has satisfied the court that continuing the action would work an injustice on it; and
- whether the defendant has satisfied the court that staying the action would not cause an injustice to the plaintiff.(5)
Applying these factors, the dissenting judge held that the action should have proceeded against the non-party defendants.
Novatrax illustrates the deference that Canadian courts show to arbitration. The majority concluded that the seminal contractual issue – whether the contract had been terminated wrongfully – should be determined first as between the contracting parties, while resolution of the claims against the non-contracting parties should await that determination.
This result – reached through a forum non conveniens analysis – is consistent with the result that should have ensued from applying the International Commercial Arbitration Act (and the UNCITRAL Model Law incorporated into it) along with the court's inherent jurisdiction to stay proceedings against non-parties to an arbitration commitment. The Alberta Court of Appeal in Kaverit Steel and Crane Ltd v Kone Corp held that a forum non conveniens analysis is inapplicable on an application to stay proceedings in favour of international commercial arbitration.(6) Similarly, the Supreme Court of Canada in Momentous.ca confirmed that "in the absence of specific legislation, the proper test in determining whether to enforce a forum selection clause is discretionary in nature" (emphasis added) (ie, when a statute such as the International Commercial Arbitration Act sets out a specific test for a stay, the analysis is not discretionary).(7) Accordingly, there was no need for the Ontario courts to use a forum selection clause or forum non conveniens analysis in this case. By doing so, the court in Novatrax may have left open the possibility that, in addition to the narrow exceptions found in Section 8(2) of the UNCITRAL Model Law to granting a stay of court proceedings in favour of arbitration, a plaintiff could try to seek a stay on the basis that there was strong cause to reject an arbitration agreement.
It is hoped that in future cases, Ontario courts will confirm that the jurisdiction of courts to stay actions in favour of international commercial arbitration is governed by the UNCITRAL Model Law and provincial international commercial arbitration legislation, not a forum non conveniens or forum selection clause analysis.
Kelsey McIntyre, articled student, also assisted in the preparation of this update.