In Husky Food Importers & Distributors Ltd. v. JH Whittaker & Sons Limited, 2023 ONCA 260, the Ontario Court of Appeal clarified the threshold to obtain a stay of court proceedings in favour of arbitration where there is a disagreement as to whether there is a valid arbitration agreement that encompasses the dispute in question.
The court confirmed that a party seeking a stay of court proceedings only has to establish an "arguable case" that an arbitration agreement exists that would apply to the dispute. The court rejected the argument that a party seeking to invoke an arbitration agreement had to establish its existence on the balance of probabilities.
The case clarifies the law in Ontario on this issue, following the seminal Supreme Court decision in Peace River Hydro Partners v. Petrowest Corp., 2022 SCC 41, which we summarised in our list of top arbitration cases of 2022.
In late 2014, the parties entered into an initial distribution arrangement under which Husky Food would import, distribute and market JH Whittaker's products in Canada. The terms of the arrangement were part oral and part written. Between 2016 and 2020, the parties sought to negotiate a formal, long-term, exclusive distribution agreement. JH Whittaker sent a draft in April 2020, which contained an arbitration clause providing for arbitration seated in Wellington, New Zealand using the New Zealand International Arbitration Centre. The arbitration clause was located in Schedule G of the draft agreement.
In May 2020, Husky Food responded with a "slightly" revised version of the agreement, and stated that this version had been "signed off." No changes were made to the arbitration clause, but the revised version added a clause stating that in the event of any inconsistency between the main body of the agreement and a schedule, the main body shall have paramountcy to the extent of any inconsistency. The main body of the distribution agreement contained an non-exclusive jurisdiction clause in favour of the courts of Wellington.
A dispute arose in the summer of 2020, prior to the parties actually signing the distribution agreement. Husky Food commenced a claim in Ontario in which it specifically pleaded that the parties had "reached an agreement on all material terms" of the unsigned agreement.
Relying on the arbitration clause, JH Whittaker sought to stay the court proceedings under section 9 of the International Commercial Arbitration Act ("ICAA") and article 8 of Schedule II (the UNCITRAL Model Law on International Commercial Arbitration), on the basis that the dispute was the subject of an arbitration agreement. Husky Food opposed the stay motion, submitting that the parties never agreed to arbitrate disputes. It relied on what it contended was the inconsistent non-exclusive court jurisdiction clause in the body of the agreement, and the paramountcy clause referenced above that would give it precedence over the arbitration agreement contained in the schedule.
The motion judge granted the stay. Husky Food appealed on the basis that the motion judge erred in holding that a court should grant a stay in favour of arbitration where it is merely "arguable" that an arbitration agreement exists. Husky Food contended that a party seeking a stay was required to prove the arbitration agreement exists on a balance of probabilities. In the alternative, Husky Food argued that the motion judge made a palpable and overriding error in holding that there was arguably an agreement to arbitrate between Husky Food and JH Whittaker.
Court of Appeal decision
The court noted that Peace River reaffirmed the competence-competence principle, which gives precedence to the arbitration process. Broadly speaking, this principle means that an arbitrator is competent, in the first instance, to determine whether they have jurisdiction. The court should normally allow the arbitrator to exercise this competence before any court review. However, the court noted that the competence-competence principle is not absolute. Relying on its previous jurisprudence, the Supreme Court of Canada in Peace River affirmed that a court may resolve a challenge to an arbitrator's jurisdiction (including the arbitration agreement's existence or validity) if the challenge involves pure questions of law or questions of mixed fact and law that require only superficial consideration. However, where questions of fact alone are in dispute, or the court would have to look deeper into the factual record to decide the matter, the court should normally stay the proceeding in favour of arbitration.
This approach is reflected in Ontario legislation, which gives arbitrators broad scope to determine issues of their jurisdiction. Both article 16(1) of the Model Law (as enacted in the ICAA) and subsection 17(1) of the Arbitration Act, 1991 provide that an arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the "existence or validity" of the arbitration agreement.
Section 9 of the ICAA and article 8 of the Model Law provide the mechanism by which a party can seek to stay a court proceeding in favour of referring the dispute to arbitration. Section 9 of the ICAA provides that where a court refers the parties to arbitration, the proceedings of the court are stayed with respect to the matters to which the arbitration relates. While article 8(1) of the Model Law provides that: "A court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed."
The court confirmed that the previous framework for assessing whether there was an arbitration agreement for the purposes of article 8 of the Model Law, as set out in Haas v. Gunasekaram, 2016 ONCA 744, had been superseded by the framework adopted by the Supreme Court in Peace River. This involves a two-step analysis. First, the moving party must meet the technical prerequisites for a stay in favour of arbitration. Second, if the technical requirements are met, the burden shifts onto the party opposing the stay to establish whether any statutory exceptions apply to the mandatory stay of court proceedings.
There are typically four technical prerequisites at the first step that the stay applicant has to establish. These are:
- An arbitration agreement exists.
- Court proceedings have been commenced by a "party" to the arbitration agreement.
- The court proceedings are in respect of a matter that the parties agreed to submit to arbitration.
- The party applying for a stay in favour of arbitration does so before taking any "step" in the court proceedings.
If all the technical prerequisites are met, the mandatory stay provision is engaged. The court should then move on to the second component of the analysis, which concerns whether the statutory exceptions to granting a stay apply on the basis that the arbitration agreement is "void, inoperative or incapable of being performed" (for a discussion on what these terms mean, see Peace River at paragraphs 136-145).
The court clarified that to satisfy the first step, the party seeking a stay must only establish an "arguable case" that the technical prerequisites are met. If it does, the burden passes to the other party resisting the stay to establish a statutory exception to the presumed stay. However, at the second step, the party seeking to avoid the stay must show that a statutory exception applies on the higher balance of probabilities standard.
In this case, the Court of Appeal was satisfied that JH Whittaker had established an arguable case that the dispute was subject to an arbitration agreement, and Husky Food had not suggested that any of the statutory exceptions applied. As such, the appeal was dismissed and the stay of the Ontario proceedings was continued in favour of arbitration.
This is a sensible decision that strikes a reasonable balance between respecting the competence-competence principle and establishing a certain minimal burden on the party seeking a stay of showing an "arguable case" that there is an applicable and binding arbitration agreement. Without that burden, spurious allegations of disputes being subject to arbitration would trigger a mandatory stay of court proceedings. This would lead to wasted time and costs of deferring spurious jurisdiction or validity questions to the arbitral tribunal (perhaps to have a court subsequently overturn the arbitral tribunal's decision should it accept jurisdiction). Allowing a spurious allegation of a binding arbitration agreement to proceed, and staying court proceedings in order to enable this, would be damaging to the reputation of arbitration as dispute resolution mechanism and risk opening up the arbitration process to abuse.
The underlying obligation to stay court proceedings in favour of arbitration is found in Article II(3) of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (also given force of law in Ontario through the ICAA). This provides that courts, when seized of an action in a matter in respect of which the parties have made an arbitration agreement, shall, at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.
The Ontario Court of Appeal's approach is largely consistent with the practice other arbitration friendly countries have adopted. For example, Hong Kong courts require a party to establish a prima facie case of a binding arbitration agreement in order to trigger a stay of competing court proceedings. In England, if the existence (or not) of a binding arbitration agreement can be determined on the balance of probabilities in a summary fashion on the written evidence, the court will proceed to make that determination. The party seeking a stay has the burden of proving the existence of the arbitration agreement and, like in Husky Food, the party resisting the stay has the burden of proving on the balance of probabilities that any arbitration agreement is null and void, inoperative or incapable of being performed. However, if the issue cannot be determined in a summary fashion on the written evidence, then it is sufficient for the applicant for a stay to satisfy the court that there is an "arguable case" that there is a valid and binding arbitration agreement (see the English Court of Appeal case of JSC Aeroflot Russian Airlines v Berezovsky).
It will be interesting to see if the Ontario courts maintain the "arguable case" test in circumstances where the court is actually able to determine the question of the existence of an arbitration agreement on the balance of probabilities in a summary fashion. In light of the Ontario Court of Appeal's express comments in this case (following earlier Supreme Court authority) that a court may resolve a challenge to an arbitrator's jurisdiction at the stay stage if it involves pure questions of law or questions of mixed fact and law requiring only superficial consideration, it appears likely the court will follow the English court's approach and determine finally a jurisdiction challenge on a stay application if it is able to properly do so on a summary basis.