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Author: Anthony Pugh, Law Works P.C.
Editor: Ben Hanuka, Law Works P.C.
In Graves v. Correactology Health Care Group Inc., a July 9, 2018 decision of the Ontario Superior Court of Justice, the court refused to stay proceedings in favour of purported arbitration agreements in the contracts between the parties.
In September 2013, the three plaintiff students enrolled in the Correactology Practitioner Program at the Canadian Institute of Correactology (the “Institute”) and paid substantial amounts in tuition fees. Each student signed an Enrollment Agreement with the Institute, a Licence Agreement on behalf of a company to be incorporated with Correactology Health Care Inc. (“CHC”), and a Confidentiality Agreement with CHC.
At the end of the program, students were required to complete examinations to receive a purported accreditation as a licenced correactology practitioner from the Canadian Association of Correactology Practitioners (the “Association”). The program was not licenced under the Private Career Colleges Act, 2005 (“PCCA”).
The Institute, the Association, and the CHC were controlled by the same or closely-related individuals.
While the students were preparing their business plans for the program, they consulted a lawyer about the Enrollment Agreements and Licence Agreements. When the director of CHC and the Association (and an individual defendant) found out about this, he suspended the program and expelled the three students, alleging that they were in breach of the Confidentiality Agreement.
The students served a statement of claim, alleging fraudulent misrepresentation, conspiracy, restraint of trade and breach of contract; that the entire system was a sham; and that the defendants were operating an unregistered private career college. They also alleged that the licence agreement was a franchise agreement that did not comply with the requirements of the Arthur Wishart Act (Franchise Disclosure), 2000.
The defendants brought a motion to stay proceedings in favour of arbitration clauses in the Enrollment Agreement and Licence Agreement.
The arbitration clauses did not show a clear intent to refer all disputes to arbitration
The Enrollment Agreements and Licence Agreements contained arbitration clauses. However, they also contained contradictory jurisdiction clauses. The Enrollment Agreements stated that the parties must submit to the exclusive jurisdiction of the courts of Ontario. The Licence Agreements stated that parties must bring actions in the Superior Court of Justice in Sudbury.
The Confidentiality Agreements did not contain an arbitration clause and stated that the parties agreed to the non-exclusive jurisdiction of the Ontario courts.
The conflict between the arbitration clauses and the jurisdiction clauses created an ambiguity in the agreement. In interpreting the Enrollment Agreements, the court applied the legal principle of contra proferentum against the Defendants (meaning that contractual ambiguities will be interpreted against the interests of the party that drafted the contract). It found that the students had recourse to the courts.
In interpreting the Licence Agreements, the court held that the jurisdictional provision referring actions to the Superior Court of Justice in Sudbury was more specific than the arbitration agreement. If the court enforced the arbitration agreement, then the jurisdictional provision would be superfluous. A court should avoid such an interpretation based on the principles of contractual interpretation.
Therefore, the Licence Agreements also did not clearly refer all disputes to arbitration.
The Association and individual defendants were not parties to the arbitration agreements
Neither the individual defendants, nor the Association, were parties to any arbitration agreements. In the Enrollment Agreements with each student, only the Institute and the students were the parties to the arbitration agreement. In the Licence Agreements, CHC and non-existent corporations were parties.
The students alleged that the individual defendants made material misrepresentations and engaged in coercive conduct.
They also made allegations under the Arthur Wishart Act (Franchise Disclosure), 2000, which may hold the directing minds of the franchisor liable.
The court held that the individual defendants were not named just to defeat the arbitration clause. Rather, they were non-parties and could not rely on the arbitration clauses.
The students’ allegations were outside the scope of the arbitration clauses
The scope of the arbitration clauses was restricted to disputes between students and the Institute (in the case of the Enrollment Agreements) or disputes about the Licence Agreements. The students, however, raised issues that were much broader, including fraud, conspiracy, breach of contract, breach of the Arthur Wishart Act (Franchise Disclosure), 2000, and that the entire system was a fraudulent and illegal scheme.
Also, the statement of claim, if proven, would mean that the contracts were void rather than subject to rescission. The arbitration clause could therefore not be enforced because it was never validly agreed to.
The court held that disputes about disclosure of confidential information were not subject to arbitration because the Confidentiality Agreements did not have an arbitration clause.
Partial stay not reasonable because the validity of the arbitration agreements was a serious issue
Finally, the court held that it would use its discretion under section 7(2) of the Arbitration Act, 1991, to refuse a stay.
There were serious public policy concerns about whether the Institute should be registered under the PCCA. The defendants produced no evidence to challenge this allegation. They alleged that they were exempt from the PCCA regulations, but exempt professions are mostly self-governing health professions under the Regulated Health Professions Act, 1991 (RHPA). The students questioned whether the Association was permitted to grant certificates to graduates to purportedly enable graduates to provide health care related services and whether correactology practitioners should fall within the scope of the RHPA.
There were two significant issues involving the defendants. Either they were involved in a fraudulent scheme – which would go beyond the scope of the arbitration clauses – or there was a serious question about whether the program was operating outside the relevant regulatory scheme. Both avenues led to significant concerns about the legality of the business. The invalidity of the arbitration clause was therefore a serious issue.
In addition, section 7(5) of the Arbitration Act, 1991, provides that – when an action contains some claims that are subject to an arbitration clause and some claims that are not – the court may grant a partial stay where it is reasonable to separate the matters.
When a partial stay is not reasonable, the proceedings will not be separated. In this case, the court held that it was not reasonable to separate matters within the scope of the agreements with matters that were not, because the allegations of fraud were deeply connected to the other issues.
Finally, the court held that it was not reasonable to give a partial stay because the claims against the Association and the individual defendants could not easily be separated from the claims against the Institute and the CHC.
For more information about Law Works’ expertise and how we may be able to help you, please contact Ben Hanuka at firstname.lastname@example.org or by phone in Ontario at (855) 978-5293 and in British Columbia at (604) 262-1711.Tags : Arbitration, What is a Franchise
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