Ontario Court of Appeal confirms threshold for obtaining a stay in favour of arbitration.

Facts

The parties entered into an initial distribution arrangement under which Husky Food would import, distribute, and market JH Whittaker's products in Canada. The parties sought to negotiate a formal, long-term, exclusive distribution agreement. JH Whittaker sent a draft containing an arbitration clause providing for arbitration seated in Wellington, New Zealand. 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 main body of the distribution agreement also contained a non-exclusive jurisdiction clause in favour of the courts of Wellington.

A dispute arose 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 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, relying on the inconsistent non-exclusive jurisdiction clause in favour of the courts of Wellington.

The motion judge granted the stay, and Husky Food appealed.

Decision

The Court of Appeal noted that the Supreme Court of Canada's decision in Peace River Hydro Partners v Petrowest Corp, 2022 SCC 41, reaffirmed the competence-competence principle, which gives precedence to the arbitration process. Broadly speaking, this principle means that an arbitral tribunal is competent, in the first instance, to determine whether it has jurisdiction. Pursuant to competence-competence, a court should normally allow an arbitrator to exercise this competence before any court review.

However, the Court noted that the competence-competence principle is not absolute. The Supreme Court 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 factual consideration. However, where questions of fact alone are in dispute, or where 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.

The Court of Appeal confirmed that the framework for assessing whether there was an arbitration agreement for the purposes of seeking a stay was that 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. The moving party bears the burden at this first step. 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:

  1. An arbitration agreement exists.
  2. Court proceedings have been commenced by a "party" to the arbitration agreement.
  3. The court proceedings are in respect of a matter that the parties agreed to submit to arbitration.
  4. The party applying for a stay in favour of arbitration has done 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."

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. 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.

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.

Analysis

This decision strikes a reasonable balance between respecting the competence-competence principle and establishing a certain minimum burden on the party seeking a stay: 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 increased costs by referring such spurious jurisdictional or validity questions to an 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 a dispute resolution mechanism and risk opening up the arbitration process to abuse.

The Ontario Court of Appeal's approach is largely consistent with the practice other arbitration-friendly jurisdictions have adopted, such as Hong Kong and England. 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, in a summary fashion, whether an arbitration agreement exists on a balance of probabilities.

Husky Food Importers & Distributors Ltd v JH Whittaker & Sons Limited, 2023 ONCA 260