So You’ve Lost Your Arbitration: Now What?

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It has been commonplace to include arbitration clauses in commercial agreements. The benefits of arbitrating disputes rather than litigating over them are well known. Arbitrations are usually considered to be a cheaper and faster way to adjudicate disputes than litigation. Typically, arbitrations are seen to be the better approach particularly when the parties expect to continue to do business with each other after the dispute has been resolved. For example, where a dispute arises during a contract where the performance of obligations by each side is expected to continue on a long-term basis and the dispute is not serious enough for either party to actually terminate the agreement, arbitrations are thought to be a somewhat less acrimonious and certainly more efficient way of handling the issue at hand.

Often, one of the key features of arbitration has to do with the limits on appeal rights. It is not uncommon for an arbitration clause to provide that there simply is no appeal of any kind from the arbitrator’s decision.

A limit on appeals may seem like a good idea at the time the contract is signed. Presumably, neither party actually anticipates there is going to be a dispute during the course of the business relationship and it may provide some comfort to know that if there is a dispute, its resolution will not be dragged out by an appeal process.

However, this feature becomes a lot less appealing when one engages in an arbitration to resolve a dispute and loses. What then?

An arbitration provision that provides that the arbitration’s decision is final will be interpreted by the court in exactly that manner – as final. If it turns out that the arbitrator didn’t understand the evidence or simply got it wrong in the opinion of one of the parties (or perhaps both), that’s simply too bad. That is a risk that one takes when entering into such an agreement. Presumably, the risk cuts both ways.

Having said that, in Ontario, the Arbitration Act does provide for some recourse in certain circumstances. Section 46 of the Act allows an unhappy party to ask the court to set aside an arbitration award on the basis that the arbitrator failed to conduct the hearing in a procedurally fair manner. For example, an award can be set aside by a party who is not treated equally and fairly, was not given an opportunity to present its case or respond to the opponent’s case, or was not given proper notice of the arbitration or the appointment of an arbitrator.

There is often a temptation to bring such a motion on the basis of allegedly unequal or unfair treatment when all that has really happened is that one of the parties does not like the award. In the recent case of Aquanta Group Inc. et al. v. Lightbox Enterprises Ltd., 2023 ONSC 971, Aquanta applied to the court for an order to set aside the award because a few days before the commencement of the arbitration, the arbitrator dismissed its motion to amend its pleading. The arbitrator, a retired trial judge, had considered the arguments on both sides and exercised his discretion to dismiss the motion and require the arbitration to proceed as scheduled.

At the motion to set the award aside, Aquanta argued that the arbitrator’s refusal to allow it to amend its pleading amounted to unfair and unequal treatment. The court disagreed and dismissed the motion.

In doing so, the judge relied on a decision of the Ontario Court of Appeal released in December 2022 called Tall Ships Development Inc. v. Brockville (City), 2022 ONCA 861. In that case, the Court of Appeal made it abundantly clear that the basis for setting aside an award for procedural unfairness is extremely narrow. That provision of the Act “is not concerned with the substance of the parties’ dispute and is not to be treated as an alternate appeal route.”

Accordingly, it appears clear that at a motion to set aside an award, the court will not consider the substantive issues in the dispute. It will only concern itself with matters of a procedural nature. In the Lightbox decision, for example, the issue was not whether or not the arbitrator exercised his discretion correctly or even reasonably. The only issue was whether or not the arbitrator had the jurisdiction to make the decision that he made. As the arbitrator acted within the bounds of the authority granted to him by the arbitration agreement, that ended the matter. Arbitration clauses in commercial agreements have become popular because they offer the possibility of a speedy resolution to disputes. However, an arbitration provision with no appeal rights does present some element of risk which should be considered carefully before the agreement is signed.

The Latest on the Duty of Good Faith in Real Estate Transactions

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The case of Sarai et al. v. Singh et al., 2023 ONSC 2102 (CanLII) is an important reminder of the duty of parties to a real estate transaction to act in good faith.

In this Application to the Ontario Superior Court of Justice, three applicants entered into an agreement of purchase and sale with three respondents on May 24, 2021, for the purchase of a 14-acre property in Caledon to be used by the applicants to accommodate their growing trucking business. The transaction had a closing date of November 30, 2021.

The agreement provided that the applicants would provide their $100,000 deposit to the respondents’ lawyer in trust within 48 hours of the respondents’ acceptance of their offer.

However, the respondents did not bother to tell the applicants who their lawyer was until May 28, 2021.

Within 24 hours thereafter, the applicants provided that lawyer with a bank draft to satisfy the deposit. The bank draft was accepted by the respondents’ lawyer.

Over five months later, on the day before closing, one of the respondents, a Mr. Singh, notified the applicants that he did not intend to close. Singh’s position was that the delivery of the deposit was too late because it was not within 48 hours of acceptance. The applicants had therefore breached the agreement and thus Singh did not have to close.

The applicants asked the court to declare that the agreement was binding and to require the respondents to close the transaction. They argued that the respondents had conducted themselves as if the agreement was binding until just before closing. Specific performance was the appropriate remedy because the property was so unique that damages would not be an adequate remedy. Finally, they argued that Singh was acting in bad faith by relying on the deposit clause when the respondents had failed to identify their lawyer, to whom the deposit was to be delivered, until after the deadline.

Singh pointed out that the applicants could have delivered the deposit directly to the respondents within the 48 hours and that, having failed to do so, the applicants had breached a fundamental term of the agreement of purchase and sale.

The court had no hesitation in granting the application. The respondents had made strict performance of the deposit condition impossible by delaying in identifying their lawyer. Furthermore, they waived strict compliance with that deadline by accepting the deposit when it was delivered.

The court also considered Singh’s failure to notify the applicants in writing about his position until the very last moment to be completely unreasonable. Singh did not act in good faith and, given the uniqueness of the property and this unreasonable behaviour, the applicants were entitled to specific performance.

There are a number of important lessons to learn from this decision.

Firstly, the court will have no sympathy for behaviour that is patently unreasonable. If a party to a transaction intends to take the position that the agreement has been breached by the other party, it is incumbent upon that party to give timely written notice of that position. A failure to do so may be considered unreasonable and bad faith behaviour.

Secondly, if one wishes to take such a position, it is critical that one not act in a manner that is inconsistent with that position. In this case, acceptance of the deposit after the 48-hour deadline period contemplated by the agreement amounted to a waiver of that deadline so that it could not be relied upon at a later date as a breach of the agreement of purchase and sale. Thirdly, where a party has an obligation to do something, the other party cannot make satisfaction of that obligation impossible and then claim that the agreement has been breached.

How to Ensure that your Case does not Settle at Mediation

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On several occasions over the course of my years participating in mediations both as counsel and as mediator, I have come across a number of lawyers who clearly have no interest in settlement. This post is not directed to those lawyers. It is directed to those lawyers who do have an interest in settlement but, perhaps unwittingly, make mistakes that decrease the chances that their case will settle. 

Here is a list of what I consider to be the most significant of these mistakes:

Raising New Issues

In Ontario, most mediations take place after the discovery process is complete. At that point, both sides should have a good idea of the cases they have to meet. However, it is not always so, and it is certainly not likely if the mediation takes place early in the process. This gives rise to the possibility that one side would be able to raise a completely new issue, for the very first time, at the mediation. Inevitably, it results in a good deal of wasted time and perhaps even the need to adjourn the mediation so that the issue can be fleshed out with the mediation resuming at a later date. 

Similarly, a mediation is not a good time to bring forward any type of smoking gun for the first time, for the same reason.

Failing to have a Frank Discussion with the Client Prior to the Mediation

It is a serious mistake not to discuss with the client, in advance, the obstacles that he or she faces in achieving a successful result. It is also a mistake not to temper a client’s expectations by painting a realistic picture of how the case is likely to play out, and by not encouraging the client to recognize both the factual and legal challenges that he or she faces. 

The client will certainly hear about all of this at the mediation. If the client is hearing this for the first time, this may lead to a rather embarrassing loss of confidence in his or her counsel, and with it, a severe reduction in the odds of reaching a settlement. 

Failing to Explain the Process to the Client

The typical client will have only a vague idea of what a mediation is about. The client may even be under the impression that the mediator has some kind of authority to impose a result. Obviously, the client has to be disabused of that notion before the mediation. The client has to understand that there will be a great deal of downtime in the course of the exercise, and that when he or she is actively involved, there may be some unpleasant remarks made for which the client has to be prepared. Above all, the client has to understand that the case is almost certainly not going to settle unless some compromise is made.

Coming in to the Mediation with a Bottom Line Drawn in the Sand

In terms of compromise, a realistic assessment of the case should give the client a good idea of what a likely result would look like. Having said that, it is usually unhelpful to formulate, in advance, a bottom line position. It is more helpful to consider the range of possible results. At the top end, the range would consist of clearly acceptable results and obviously better than risking an adverse result at trial. At the other end, the range would consist of results that are likely unacceptable at the outset, but may have to be considered once the process unfolds. This is especially true if it becomes clear that the client’s assessment of the case was overly optimistic. The middle range, which is where most settlements are achieved, involves balancing an immediate and ascertainable result, as opposed to the uncertainty and expense of a trial.

Other Mistakes

Other mistakes I see all too often include:

Any of these mistakes can easily scuttle a mediation and deprive both sides of what is likely the best opportunity to resolve the dispute that they will ever have. 

The Latest on Non-Competition Covenants

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On December 2, 2021, the Working for Workers Act, 2021, came into force. The Act prohibits non-competition clauses in employment or other agreements except in the context of a sale of the business, or if the employee operates at an executive level. The effective date of the Act is October 25, 2021. The Court has held that it does not apply to agreements entered into prior to that date.

Non-competition clauses have always been fertile ground for litigation simply because many employers consider them vital to their business. But, they are also very difficult to enforce. At the end of the day, at common law, the enforceability of such clauses depends on whether or not a court considers them reasonable. For that reason, it is important for both employers and employees to give careful thought to how a Court will make that determination when negotiating the terms of a non-competition clause.

In the recent case of M & P Drug Mart Inc. v. Norton and Whitehead Pharmacy Ltd., the Ontario Court of Appeal took the opportunity to review this process.

Norton, a pharmacist, had been the pharmacy manager of a pharmacy owned by M & P in Huntsville, Ontario. His employment agreement contained a non-competition covenant. The clause in issue provided that for one year after the termination of Norton’s employment for any reason, he would not “carry on, or be engaged in, concerned with, or interested in, directly or indirectly, any undertaking involving any business the same as, similar to, or competitive with the business within the 15 km radius of the business located at 10 Main Street East, Huntsville, Ontario”.

The agreement also provided an acknowledgement on Norton’s part that the clause was necessary to protect M & P’s legitimate business interests and was reasonable in the circumstances.

Norton resigned and became an employee at a pharmacy less than 3 km away.

M & P sued Norton and the matter was determined by Application. The Application judge found the covenant to be unreasonable and therefore unenforceable. The Application was dismissed. The decision was appealed to the Court of Appeal, which dismissed the appeal.

The Court of Appeal began its analysis by observing that, as a general rule and on public policy grounds, a non-competition clause is unenforceable unless it is reasonable considering the interests of the parties and the public based on the circumstances at the time that the covenant is made. In order to determine whether the clause is reasonable, the Court will consider the extent of the activity to be prohibited, the geographic coverage of the restriction, and its duration. The covenant must be clear as to activity, time and geography. If it is ambiguous on any of these factors, it is likely to be considered unenforceable simply because the ambiguity will make it impossible to show that it is reasonable.

If the covenant is clear and unambiguous, it will then be assessed for reasonableness. The Court will not rewrite the covenant in accordance with what it thinks is reasonable. If it is unreasonable, the Court will simply decline to enforce it.

In this case, M & P argued that the clause merely restricted Norton from working as a pharmacist for a pharmacy or a store that includes a pharmacy. However, the words contained in the clause went well beyond this restriction. In the view of the Court, the covenant would have prohibited Norton from working in a job at a supermarket, for example, that included a pharmacy department, even if his job was in a completely different department and he was not employed as a pharmacist. Furthermore, Norton would have been prevented by the clause from being a passive investor in any such business.

As it happens, Norton did become re-employed as a pharmacist. Nevertheless, as the clause included activities beyond working as a pharmacist, it was considered overly broad and, therefore, unenforceable.

The jurisprudence is filled with cases in which a non-competition clause was found to be unenforceable. This is because historically, employers have insisted on protections well beyond what is truly necessary, thinking that inclusion of an acknowledgment by the employee that the employer’s concerns are reasonable will preserve the clause.

While the number of such cases will start to decrease given the new legislation, the vast majority of contracts existing today that include such clauses will not be subject to the legislation. They will continue to be litigated, and Courts will continue to be vigilant in protecting the ability of employees to make a living elsewhere unless the clause restricting the new employment is eminently reasonable.

Even with the new legislation, the common law will apply to “executive” employees. In addition, this issue will arise in the context of the sale of businesses. In the latter cases, while the attitude of the Court has always been more generous to parties seeking to enforce non-competition covenants, the issue of reasonability will continue to be one to which attention must be paid.

Virtual Mediations and Arbitrations: The New Opportunities Presented to Disputants

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The new world of virtual court attendances, arbitrations, and mediations has now been our reality for well over one year. There is no reason to believe that this will not continue, regardless of our progress in reducing the impact of the coronavirus on the population. In fact, users of Ontario’s justice system have already been told that virtual court hearings will be the new normal.

This news is far from all bad. Actually, there are some very positive aspects to virtual litigation. This may be particularly true for parties to disputes seeking to either arbitrate or mediate their disputes.

Common to both arbitration and mediation is the fact that the parties select their own neutral. In the past, as a general rule, parties and their counsel were usually restricted to neutrals residing near locations where the parties lived or did business. This did not ordinarily represent a serious obstacle for parties located in highly populated areas. However, this posed a serious problem for those in smaller centres where there are fewer trained and qualified mediators and arbitrators. The only solution was to pay the additional expense involved in bringing in or going out of town to see the selected neutral.

Furthermore, in disputes involving highly technical fact patterns or complex legal principles, the search for a local qualified neutral is more complicated and far less likely to be fulfilled adequately.

In the virtual world, these restrictions do not exist. Parties are now able to locate and engage neutrals literally anywhere in the world. The restrictions of living or working in small markets no longer apply, as neutrals anywhere can be engaged at no additional cost. Where specific expertise, whether legal, factual, or scientific, is required, the availability of neutrals with such expertise opens up dramatically. For an arbitration matter involving a complex area of knowledge, it is now possible to engage a panel consisting of a trained arbitrator and industry experts, from wherever they happen to be located, and all without the burden of travel costs to bring such individuals together in a room for days, weeks, or more.
In the world of virtual mediation and arbitration, there are almost no limits to the extent that imaginative counsel can accommodate the needs of their clients at far less expense than before.

The experience of the pandemic has been brutally difficult for almost everyone, but here is one example of a silver lining that should be exploited where possible.

Wrongful Dismissal and Mitigation: What is the Extent of the Employee’s Obligation?

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In the recent case of Lake v. La Presse (2018) Inc., the Ontario Superior Court provided some useful guidance concerning an employee’s obligation to mitigate damages when there has been a wrongful dismissal.

In this case, the Plaintiff had been employed by the Defendant for 5.5 years. The employment was terminated without cause and there was no issue as to the fact that the Plaintiff was entitled to reasonable notice at common law.

The matter came before the Court as a summary judgment motion to determine the reasonable notice period, compensation for loss of a bonus over the reasonable notice period, and whether or not the Plaintiff took reasonable steps to mitigate her damages.

The particularly interesting aspect of this case has to do with the mitigation question.

In my experience, it is typical in these cases for former employees to produce evidence of unsuccessful job applications and leave it to the former employer to lead evidence at trial that, had more diligent efforts been made, the former employee would have become re-employed much sooner than actually was the case. Most employers find this to be an extremely difficult task.

In this case, the Plaintiff was the most senior employee in the Toronto division of a company that carried on business as a daily online French-language newspaper based in Montreal. The Plaintiff had ample experience working in sales and sales operations for media companies. She reported to the Vice-President of Sales and Operations of the Defendant, who was based in Montreal. Her duties included client development, training and management of sales teams, and developing and implementing the Defendant’s sales strategies. However, she did not attend weekly executive meetings or participate in setting strategic direction within the organization.

Her employment ended on May 30, 2019. At that time, she was 52 years of age. At the time of the motion, about two years later, she remained unemployed.

The Court noted that the onus is on the Defendant to demonstrate that the Plaintiff did not mitigate damages and that the onus is not a light one. However, where the Defendant overcomes that onus, the notice period can be reduced or eliminated altogether.

The Court pointed out that the Plaintiff was entitled, firstly, to some reasonable period of time before starting the job search in order to adjust to the situation and plan for the future, and secondly, to seek out reasonably comparable work for which she was qualified. However, after a reasonable period of attempting to find similar work, a Plaintiff must, at some point, lower her sights and take a lesser paying job, or use her skills in a perhaps unrelated industry.

Considering the Plaintiff’s position, the Court concluded that the Plaintiff should have been ready to begin her job search after a one-month adjustment period. In the year following the termination, she applied for 11 jobs, nine of which were for a vice president role, which was a more senior title than one that she had ever had. Accordingly, she focused her job search on a role that represented a promotion over her prior role.

The Court found that the appropriate notice period was nine months. In that time frame, the Plaintiff only applied for seven positions, six of which were a vice president role. Her first job application was submitted four and a half months after she stopped working for the Defendant.

Taking these facts into account, and apparently without any direct evidence from the Defendant as to available jobs, the Court concluded that the Plaintiff had failed to properly mitigate her damages. She should have started her search earlier, expanded the parameters of her job search, and applied for more positions in more junior roles. Accordingly, the period of reasonable notice to which she was entitled was reduced by two months. This case provides the useful reminder as to the seriousness with which the search for alternate employment must be pursued. It also demonstrates that while the onus to prove a failure to mitigate is always on the Defendant, that onus can be met if the Plaintiff can be shown to have acted unreasonably and without proper diligence.

Can Electronic Signatures Be Declared Invalid?

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Our new reality over the last year and a half has meant that in large measure, documents of all kinds have been signed electronically rather than in person – including sworn documents to be filed in Court. But what if someone denies having “signed” an electronic document?

In Ontario, the Electronic Commerce Act, 2000, provides for the legal recognition of electronic information in documents. While there are exceptions, such as wills and codicils as well as powers of attorney relating to an individual’s financial affairs or personal care, for the most part, the Act provides that an electronic document will be as effective as an originally-signed paper document provided that the electronic signature is reliable for the purpose of identifying the person, and the association of the electronic signature with the relevant electronic document is reliable. The Act does not specify how reliability is established. If some doubt can be raised as to the reliability of the application of an electronic signature, the document may be rendered invalid.

The question of how one can best assure reliability was recently addressed in the Texas Supreme Court case of Aerotek, Inc. v. Boyd. In Texas, legislation similar to that of Ontario is provided by the Texas Uniform Electronic Transactions Act, which provides that an electronic signature is attributable to a person by showing the effectiveness of the security procedures in place when the document was electronically signed.

In Aerotek, Inc., a number of contractors were hired by the plaintiff through an online hiring application process. Upon request, the plaintiff sent the applicants an email that provided a link to a registration page. On that page, each applicant created a user ID and a password and set up security questions. Each time an applicant accessed the system, this information was required to be inputted.

As the process of making the applications developed, each applicant had to sign an Electronic Disclosure Agreement agreeing to be bound by electronic contracts as if they had been signed in writing.

The process could not be completed without all of the contracts involved in the process being signed electronically. As documents were signed, those actions were recorded electronically with a time stamp. The system was designed so that the plaintiff could not alter any of this information.

Ultimately, four applicants completed the process and were hired. They were terminated and proceeded to sue the plaintiff. The plaintiff responded by insisting that the disputes be referred to arbitration pursuant to an arbitration clause in one of the documents that had been electronically signed. Each contractor then denied ever having seen, signed, or been presented with the document containing the arbitration clause.

Accordingly, the Court had to determine whether or not the electronic signatures were valid.

The Court concluded that there would be several different ways in which a party relying on an electronic document could prove the connection between an individual and an electronic signature. This would include requiring personal identifying information to register for an account, assigning a unique identifier to a user, taking steps to prevent unauthorized access to electronic records, requiring users to complete all steps in a process before moving forward, and using time stamps to show when actions were completed.

In this case, the Court concluded that the security procedures used by the plaintiff were sufficient to demonstrate that the electronic signatures could be attributed to the four contractors notwithstanding their sworn denials about ever having seen, signed, or been presented with the relevant contract. Accordingly, where documents are to be exchanged electronically, it is important to establish security procedures along the foregoing lines in order to be able to demonstrate reliability as required by the Ontario statute. If there are any gaps in the process that might give rise to a question as to its reliability, the document may well be invalidated.