[co-author: Chelsea Tolppanen - Articling Student]
In the recent Ontario Court of Appeal decision in Husky Food Importers & Distributors Ltd. v. JH Whittaker & Sons Limited, 2023 ONCA 260, the Court addressed the question of what standard of proof a party would need to meet in order to establish that an agreement to arbitrate exists, such that a stay of a court proceeding should be granted and the dispute referred to arbitration under Section 9 of Ontario's International Commercial Arbitration Act. The Court found that the applicable standard of proof is that of "arguable case", which is lower than the ordinary balance of probabilities standard, consistent with the prevailing view in Ontario that deference should be given to agreements to arbitrate and the jurisdiction of arbitral tribunals to determine their own jurisdiction.
The Unsigned Distribution Agreement
Husky Food Importers & Distributors Ltd. (Husky Food), an Ontario company, and JH Whittaker & Sons Limited (JH Whittaker), a New Zealand chocolate manufacturer, entered into an initial distribution arrangement under which Husky Food would import, distribute and market JH Whittaker's products in Canada. Husky Food and JH Whittaker sought to negotiate a formal, long-term, exclusive distribution agreement. The parties exchanged drafts of a distribution agreement toward the end of the negotiations. A final version was never signed. The drafts of the distribution agreement included the following arbitration clause:
Where the Customer is located outside of New Zealand, any dispute, controversy or claim arising out of or in connection with these Terms, or any question regarding its existence, breach, termination or invalidity, will be referred to the New Zealand International Arbitration Centre for arbitration in accordance with the New Zealand Arbitration Act 1996. Such arbitration shall also be as follows:
the number of arbitrators will be: one;
the place of arbitration will be: Wellington, New Zealand; and
the language of the arbitration will be: English.
There was evidence that Husky Food accepted this arbitration clause, including that in its Statement of Claim, Husky Food pled that "[a]fter a lengthy negotiation process, Husky and JHW reached agreement on all the material terms as of May 15, 2020".
Husky Food's Action in the Ontario Superior Court of Justice
A dispute regarding breach of contract arose between the parties and Husky Food commenced an action in the Ontario Superior Court of Justice against JH Whittaker, arguing that the parties had agreed on all the material terms of the distribution agreement, and that JH Whittaker had breached its obligations under that agreement.
JH Whittaker moved to stay Husky Food's action pursuant to Section 9 of Ontario's International Commercial Arbitration Act, which states:
Where, pursuant to article II (3) of the [New York] Convention [on the Recognition and Enforcement of Foreign Arbitral Awards] or article 8 of the [UNCITRAL] Model Law [on International Commercial Arbitration], a court refers the parties to arbitration, the proceedings of the court are stayed with respect to the matters to which the arbitration relates.
Article II(3) of the New York Convention, in turn provides that "when seized of an action in a matter in respect of which the parties have made an agreement [to arbitrate], [the court] shall, at the request of one of the parties, refer the parties to arbitration …". Similarly, Article 8 of the UNCITRAL 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 … refer the parties to arbitration …".
In effect, all of the Ontario International Commercial Arbitration Act, the New York Convention, and the UNCITRAL Model Law require a domestic court seized with a dispute that is subject to an arbitration agreement to (1) stay court proceedings in respect of such a dispute and (2) refer the dispute to arbitration in accordance with the arbitration agreement.
In response to JH Whittaker's motion to stay proceedings, Husky Food took the position that it never agreed to arbitrate disputes that might arise under the distribution agreement.
The motion judge found that the applicable standard of proof to prove the existence of an arbitration agreement is an "arguable case", and that JH Whittaker had met this standard on the facts. Accordingly, the motion judge granted the stay and referred the matter to arbitration.
Husky Food appealed to the Ontario Court of Appeal on the following two grounds:
- the motion judge erred in holding that a court should grant a stay where it is arguable that an arbitration agreement exists; and
- the motion judge made a palpable and overriding error in holding that it was arguable on the record that an agreement to arbitrate existed between Husky Food and JH Whittaker.
The Ontario Court of Appeal Decision
The Applicable Standard of Proof
There are two components common to stay provisions in provincial arbitration legislation: (1) the technical prerequisites for a mandatory stay of court proceedings, and (2) the statutory exceptions to a mandatory stay of court proceedings.
As the Supreme Court of Canada observed in Peace River Hydro Partners v. Petrowest Corp., 2022 SCC 41 [Peace River], provincial arbitration legislation typically contains four relevant technical prerequisites for a stay:
- 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; and
- the party applying for a stay in favour of arbitration does so before taking any “step” in the court proceedings.
The Ontario Court of Appeal held that while the Peace River framework was crafted in the context of domestic arbitration legislation, it applies equally to stays sought under Section 9 of the International Commercial Arbitration Act.
Husky Food contended that a party moving for a stay must demonstrate, on a balance of probabilities, that an arbitration agreement exists. Relying on the SCC's decision in Peace River, the Ontario Court of Appeal found that the motion judge was correct in applying the lower standard of whether it was arguable that an arbitration agreement exists.
The Court of Appeal of Ontario held that if all the technical prerequisites are met, the mandatory stay provision is engaged and the court should then move on to the second component of the analysis, which concerns the statutory exceptions to granting a stay. Issues under the second component did not arise in this case.
The Existence of an Arbitration Agreement was Arguable on the Record
Husky Foods submitted that the motion judge “expressly ignored certain material facts which clearly demonstrate that Husky did not agree to submit disputes to arbitration.” The Ontario Court of Appeal saw no error by the motion judge. The record before the motion judge contained evidence demonstrating that Husky Foods did agree to submit disputes to arbitration, which the Ontario Court of Appeal found fully supported the motion judge’s findings that:
[T]here is evidence here that the Terms did come to Husky’s attention. Whittaker’s sent the Terms containing the Arbitration Clause to Husky. As noted, Husky then engaged with the Terms by selecting the days for payment and removing the track changes in the Terms. It left the Arbitration Clause in place.
The Ontario Court of Appeal dismissed the appeal, confirmed the stay of court of proceedings in favour of arbitration, and awarded JH Whittaker costs in the amount of $30,000.
The standard of proof for whether an arbitration agreement exists in Ontario under both the domestic and international arbitration legislation is the "arguable case" standard, which is lower than the balance of probabilities standard. This means that even where parties do not execute a formal written agreement, they may find themselves before an arbitral tribunal to resolve a dispute.
It is important to appreciate that the discussion and authority above applies to Ontario only, and that the rules governing the standard of proof for whether an arbitration agreement exists may be different in other provinces in Canada.
The above reinforces the importance of obtaining expert advice both when drafting dispute resolution clauses for commercial agreements and when involved in an arbitration proceeding.