Canadian Court Rules Arbitration Clause ‘Inoperative’ Based on the Conduct of the Party Seeking a Stay of Court Proceedings

By Diego Luis Alonso Massa, 5 August 2021

In a judgment handed down on 21 July 2021, the Superior Court of Justice – Ontario (“the Court”) in CSI Toronto Car Systems Installation Ltd. v. Pittasoft Co., Ltd., 2021 ONSC 5117 refused an application to stay proceedings in terms of Article 8(1) of the UNCITRAL Model Law on International Commercial Arbitration (as adopted in Ontario, Canada) on the basis that the parties’ arbitration clause was ‘inoperative’ due to the conduct of the party seeking the stay.

The decision is important because it speaks directly to one of the most vexing issues in international (commercial) arbitration: the proper relationship between courts and the arbitration process. It also highlights how easily domestic laws can be brought to bear on a matter explicitly covered by international arbitration laws.

Background

The arbitration clause in question read as follows:

“9.1     This Agreement shall be construed in accordance with and governed by the laws of the Republic of Korea.

  1. 2       In case of a dispute between the parties as to the interpretation or performance of this Agreement, or any provision hereof, such dispute shall be finally settled by an arbitration held in Seoul, Korea under the Commercial Arbitration Rules of Korean Commercial Arbitration Board by one arbitrator appointed in accordance with such Rules.”

 

The arbitration clause formed part of a Sales Agreement concluded between CSI Toronto – an auto electronic installation company, and Pittasoft – a Korean ‘dash-cam’ manufacturer, in 2018.

The stay application was brought as a cross-motion in an application to consolidate two actions and to amend a statement of claim.

The first of these actions began life as a defamation action brought by CSI Toronto against Pittasoft, whom CSI Toronto alleged had published a defamatory statement on its website in late 2018 / early 2019.

In July 2020, CSI Toronto sought to amend its statement of claim in the first action in order to introduce a breach of contract claim against Pittasoft.

The second action was brought in July 2020 in an effort to avoid CSI Toronto’s breach of contract claim against Pittasoft being time-barred. So, it was identical to CSI Toronto’s claim in the first action but with the amendment to introduce its breach of contract claim already effected.

CSI Toronto’s consolidation application was aimed at regularising the multiplicity of proceedings it has brought on the same cause(s) of action.

Quite separately from these action proceedings, Pittasoft commenced action proceedings of its own against CSI in December 2019, in Korea, alleging that CSI Toronto had breached the Sales Agreement by selling products below the agreed Minimum Advertised Price.

In doing so, it made no mention of the arbitration clause in the Sales Agreement it was ostensibly seeking to enforce. Instead, the action proceedings in Korea were preceded by an email from Pittasoft demanding that CSI Toronto withdraw the first action.

Pittasoft ultimately withdrew the Korean action in March of 2021 – after CSI Toronto’s consolidation and amendment applications had been commenced.

The Court’s Analysis

In its analysis, the Court recognised that both Canadian law and the Model law share a pro-arbitration bent.  In this regard, Article 8(1) of the UNCITRAL Model Law says:

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 not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.

So, the Court held that once parties have agreed to settle disputes by arbitration, they should be held to their bargain. In addition, the court noted that any application to stay court proceedings in favour of arbitration, presupposes an agreement containing a clear arbitration clause applicable to the claims sought to be stayed.

In this regard, and with reference to Article 8(1) of the UNCITRAL Model Law, the court accepted that it is only bound to refer a matter that is subject to an arbitration agreement to arbitration:

  • if a party so requests not later than when submitting his first statement on the substance of the dispute”; and
  • “unless it finds the agreement is null and void, inoperative or incapable of being performed.

In this regard, the Court held that because Pittasoft’s cause of action in the Korean action was based on an alleged breach of contract, the Korean action was Pittasoft’s “first statement on the substance of the dispute” – a statement, however, that conspicuously lacked a request to refer the parties to arbitration.

As to whether the arbitration clause contained in the Sales Agreement was “null and void, inoperative or incapable of being performed,” the Court approvingly cited two international authorities on the subject: (1) Dyna-Jet Pte Ltd v Wilson Taylor Pte Ltd [2016] SGHC 238, a decision of the Singapore High Court which held that an arbitration agreement is inoperative when it ceases to have contractual effect under the general law of contract; and (2) Mitchell v Anor v. Mulvey Developments Ltd., [2012] IEHC 561, a decision of the Irish High Court which held that where a party has chosen to litigate in the courts, it results in an estoppel that prevents that party from relying on an arbitration clause.

Applying these, amongst other authorities, the Court eventually held that:

  • by threatening to commence proceedings in the Korean courts;
  • by acting on that threat;
  • by failing to seek relief before an arbitrator;
  • by waiting until after CSI Toronto’s consolidation and amendment applications had been commenced to raise the arbitration clause,

the arbitration clause contained in the Sales Agreement had ceased to have contractual effect under the general law of contract, and that Pittasoft was estopped from reverting back to the arbitration clause as if its prior conduct had not occurred. The court was also unpersuaded by the fact that Pittasoft later withdrew the Korean action.

Finally, the court concluded that “strong cause” had been established to not enforce the arbitration clause because the arbitration clause in the Sales Agreement is no longer operative as Pittasoft could not, as a result of estoppel, revert to it.

Commentary

It is accepted – both generally and in the UNCITRAL Model Law – that even parties who have bound themselves to resolve disputes via arbitration may nonetheless take a chance on court proceedings and leave the other party to decide whether or not to enforce the arbitration clause.

And of course, when it comes to the letter of law, the Court’s overall methodology is hard to fault. For example, through its reliance on the international authorities highlighted above, the Court arguably observed good faith in its regard for the Model Law’s “international origin and ... the need to promote uniformity in its application” in its interpretation of the Model Law, in accordance with Article 2A of the Model Law.

However, as the venues for litigious proceedings in a typical commercial scenario are likely to be the courts in both the defendant's or plaintiff’s country, and possibly the place of performance of the contract, there is a risk of an alarming degree of disparity in how each of these courts approach stay applications – even within pro-arbitration jurisdictions.

This is where it is perhaps possible to fault the Court, which appears to have overlooked both the true spirit of Article 8 of the Model Law and the spectre of parallel arbitration proceedings.

Article 8 of the Model Law typically applies to early stage litigation, making it quite different from other articles directed at the annulment and enforcement of arbitral awards. In this regard, it is directed at encouraging courts to recognise and defer to arbitration proceedings. This is clear from the fact that, according to its drafting history, Article 8 was inspired by Article II (3) of the New York Convention – both of which share similar wording. In other words, it is overwhelmingly concerned with finding any good reason to refer the parties to arbitration.

However, if as this case found, a party can lose its right to enforce an arbitration clause because their conduct rendered the arbitration clause ‘inoperative’ under the general laws of contract, there is a real risk that any international commercial contract with a clear arbitration clause could be rendered susceptible to domestic laws in any of the jurisdictions where court proceedings could feasibly be initiated.

For example, as this decision highlights, the topic of estoppel was considered from both the domestic law perspective (as part of Canada’s general law of contract), as well as the international law perspective (with reference to the Irish High Court decision in Mitchell v Anor v. Mulvey Developments Ltd., [2012] IEHC 561). But what is to stop a less circumspect court from disregarding the international authorities that may apply to any of the other general laws of contract, or from favouring an esoteric principle of domestic law, to the detriment of promoting uniformity in the application of international arbitration law?

And if a multiplicity of legal proceedings is indeed something to be avoided, the fact that Article 8 of the Model law contains an additional paragraph is another factor to consider. Article 8 (2) reads:

Where an action referred to in paragraph (1) of this article has been brought, arbitral proceedings may nevertheless be commenced or continued, and an award may be made, while the issue is pending before the court.”

When read together with Article 16(1) of the Model Law, which expressly grants competence to a tribunal to consider any jurisdictional challenge, it is clear that the Court’s decision will not bar either party from initiating and persisting with parallel arbitration proceedings regarding the claims raised in their various actions.

Perhaps, given these additional factors, it would have been better had the Court given greater consideration to applying (rather than just referring to) the “strong cause” test espoused in Canada in Z.I. Pompey Industrie v. ECU-Line N.V., 2003 SCC 27 or restricting itself – for the sake of promoting international uniformity in the Model Law’s application, as well as good order and fairness in international commerce – to only finding that the arbitration clause contained in the Sales Agreement was ‘inoperative’ in circumstances where no other forum would reasonably interpret Pittasoft’s conduct differently.

URL: https://taobserver.com/news/29/canadian-court-rules-arbitration-clause-inoperative-based-on-the-conduct-of-the-party-seeking-a-stay-of-court-proceedings