Court Boosts Arbitral Agreements

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This article, written by Ben Hanuka, originally appears in the March 31, 2017, issue of The Lawyers Weekly. Click here to view the full article.

In Haas v Gunasekaram, a decision released by the Ontario Court of Appeal in October 2016, the court decided that a shareholder’s dispute – even where many of the allegations involved precontractual misrepresentation and fraud – fell within the scope of the arbitration agreement that was contained in the shareholder’s agreement.

The decision strengthens Canadian appellate courts’ approach to favouring the enforcement of arbitration agreements – as a strong pro-arbitration policy.  The court noted that section 7(1) of the Act contains mandatory language, using the word “shall”, rather than an earlier version of the Act that used the word “may”.  In addition, the court cited section 17 of the Act as further support of this policy.  Section 17 of the Act allows arbitrators to rule on their own jurisdiction (the “competence-competence” doctrine) and if necessary to sever the arbitration agreement from the overall agreement in which it is found.

The Key Facts

The claimant, Haas, was a passive investor in an Italian restaurant.  He and the defendant shareholders entered into a shareholder’s agreement.  The restaurant failed and Haas sought to recover his investment.  He claimed that he was induced into entering the relationship by way of misrepresentations and fraud, including that the defendants made the following misrepresentations:

• The defendants had a proven track record of operating successful restaurants.
• Haas would get his return on investment within two years.
• The restaurant management team that would be fully committed to the restaurant.
• Other investors would invest in the project.
• No material change in the business would be made without Haas’ consent.

The shareholders agreement contained a broad arbitration clause including the following words:

 …[I]f at any time during the currency of this Agreement… any dispute, difference or question shall arise… respecting this Agreement or anything herein contained then every such dispute, difference or question or failure to agree shall be referred to a single arbitrator.

Haas sued the defendants in court on the basis that the bulk of his claims were based in tort.  The defendants brought a motion to stay the proceedings based on section 7(1) of Ontario’s Arbitration Act, 1991 (a similar provision is contained in provincial arbitration statutes across Canada).  The motion judge dismissed the motion – he refused to stay the court proceeding because in his opinion the bulk of the claims fell outside the arbitration agreement.  The Ontario Court of Appeal reversed the decision.

The court provided a step-by-step analytical framework that is focused on the subject matter of the dispute, the scope of the arbitration agreement and whether it is arguable that the dispute falls within the scope of the arbitration agreement.

Focus Should be on the Scope of Arbitration Agreements

This was not the first appellate decision involving the enforcement of an arbitration agreement in cases involving tort and contract.  Yet, the fact that the motion judge in this case refused to stay the action in favour of arbitration based on allegations of pre-contractual misrepresentations shows that the issue of tort trumping arbitration continues to be a live issue for practitioners and motion courts.

On the court’s analysis, it held that the motion judge made three errors:

• He mistakenly assumed that tort claims automatically fall outside arbitration agreements.
• He mistakenly assumed allegations of fraud nullify arbitration agreements.
• He did not factor policy strongly favouring the enforcement of arbitration agreements.

Also, allegations of fraud are insufficient to void an arbitration agreement.  Citing past findings, the court held that arbitration agreements are not void until a finding is made to that effect.  In this case, the language of the arbitration agreement – which is typically found in many standard arbitration agreements – was broad enough to capture allegations of fraud.

Practice Points

Standard of Review: The court stated that the motion judge’s errors were extricable errors of law.  Based on the factors set out by the Supreme Court of Canada in Sattva Capital Corp. v Creston Moly Corp., those were questions of law.  Therefore, no defence was owed to the motion judge.

Amending pleadings: The parties raised an issue about the use of amendments to the pleadings to avoid the application of the arbitration agreement.  The court held that generally a party is allowed to amend the pleadings to avoid the application of an arbitration agreement (whether that would be successful is another issue).  Having said that, the court noted that it and other courts should be cautious about the use of tort claims as a strategic device to avoid arbitration agreements.

Section 7(5) of the Act: The court addressed the use of section 7(5) of the Act.  This section permits a court to refuse a stay of proceedings (in other words, keep the case in court rather than arbitration) if the arbitration agreement deals with only some of the claims and if it would be reasonable to separate the case based on the claims that fall within the arbitration agreement and those that do not.  The court held that the application of this section can only come into play after the arbitrator has determined his jurisdiction – not at the initial stage.

For more information about Law Works’ expertise and how we may be able to help you, please contact Ben Hanuka at https://www.lawworks.ca/book-a-consultation or by phone at (855) 978-5293.

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