Ontario court stays action in favour of US arbitration: Freshii

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By: Ben Hanuka, Law Works PC

In Kore Meals LLC v. Freshii Development LLC, a decision of the Ontario Superior Court of Justice released on April 19, 2021, the court granted a motion for a stay of the Ontario court action in favour of arbitration.

The court noted extensive reasons why traditional factors of forum non conveniens no longer applied in cases heard remotely by video conferences.  Traditional factors about inconvenience to the parties and witnesses, etc. based on the connection of the parties and the case to a certain jurisdiction no longer applied in the age of Zoom hearings.

The underlying dispute and the arbitration

The underlying dispute between the parties related to alleged breaches of a development agreement under which the plaintiff, Kore Meals LLC, was to develop Freshii franchises in Texas.

Kore Meals was based in Houston, Texas.  Freshii Development LLC was based in a Chicago, Illinois.  The development agreement contained an arbitration agreement which required that all disputes be submitted to arbitration with the American Arbitration Association in the city where Freshii Development had its business address, which was identified as Chicago.

Kore Meals brought this action for alleged breaches of the development agreement in the Ontario Superior Court.  The action named as defendants Freshii Development, as well as its parent company, Freshii Inc., which is based in Ontario.  That company was not party to the development agreement.

The Freshii parties brought a motion for a stay of proceedings based on the arbitration agreement.  They took the position the claim against the Freshii parent company was intertwined with the claim under the arbitration agreement and therefore had to be arbitrated together.  They took the alternative position that if the case was to be litigated, the forum selection clause in the arbitration agreement required it to be litigated in the state or federal courts in Chicago, Illinois, rather than Ontario.

Kore Meals challenged the validity of the arbitration agreement on the basis that Freshii Development did not actually operate in Chicago and did not have a real presence there.  It took the position that Freshii Development was not disclosing where its real office was located, and brought investigative evidence showing that Freshii Development just maintained a postal box inside a UPS store there.  It submitted that the arbitration clause requiring that arbitration be held in the city where Freshii Development was located is void for vagueness.  Since the defendant Freshii Inc. was based in Toronto, it argued that the fairest and most logical jurisdiction for the action was Ontario.

The court granted the motion for a stay of the action in favour of arbitration

The court held that, based on existing legal principles, the threshold for a stay of proceeding in the face of a valid arbitration agreement is a low one; in other words, there was a general preference to enforce the arbitration agreement to which the parties had agreed.

Similarly, it was well established in Ontario that the same applies to international arbitrations – if it is merely ‘arguable’ that the dispute falls within the terms of an arbitration agreement, Ontario courts should grant a stay of court proceedings in favour of arbitration under art. 8(1) of the UNCITRAL Model Law on International Commercial Arbitration.

The court confirmed that under section 5(3) of the International Commercial Arbitration Act, 2017 (an Ontario statute), it applied to international agreements dealing with “matters arising from all relationships of a commercial nature” which call for arbitration, and that the development agreement in this case fell within this definition.

The court also confirmed that under section 9 of the International Commercial Arbitration Act, 2017, and articles 7 and 8 of the Model Law, the Ontario court was required to stay such a court proceeding in favour of arbitration.

Court’s observations about forum non conveniens

The court also observed that there may be grounds on which the court could refuse to stay the action if there was a cogent reason for ignoring the express terms of the arbitration agreement.

However, in the case at bar, it noted that since the pandemic moved most proceedings online, the issues of convenience were all but obsolete.  An arbitration hearing would be heard remotely by videoconference, and documents would be filed digitally, and it did not matter where the parties, documents, or witnesses were located.

The court observed that in this context perhaps no forum can be genuinely said to have more non conveniens factors than another and that the extensive legal factors in the analysis of competing forums over the years seemed to now be obsolete: for the court, no specific digital venue could be said to be more or less unfair or impractical from another.

For these reasons, the court granted the motion by the Freshii parties for a stay of the court proceedings in favour of arbitration.