When Will the Court Refuse to Enforce an Arbitration Clause?

The recent Ontario Court decision in Hargraft Schofield LP v. Fluke provides some interesting reminders as to problems that can arise when one attempts to enforce an arbitration clause in a contract.

In this case, the plaintiff sued its former employer for an alleged breach of a variety of clauses in the employment agreement that had existed between them.

The parties had entered into an employment agreement in June 2000 with a three-year fixed term. The agreement included an arbitration clause that required that all disputes relating to the agreement would have to be referred to arbitration.

After the first employment agreement expired, the parties entered into a second employment agreement for another fixed term. That document did not include an arbitration clause. It did include a clause providing that it represented the entire agreement between them.

Over the ensuing years, the parties entered into further employment agreements as the terms of each one expired. Eleven years after the first agreement had been entered into, the defendant resigned.

Several months after the defendant’s resignation, the plaintiff sued in Ontario Court. Over the course of the next two years and ten months, the dispute proceeded through the litigation process. The parties exchanged pleadings, negotiated a discovery plan, agreed to a timetable for the balance of the steps in the action, exchanged sworn affidavits of documents, scheduled examinations for discovery, and conducted a mediation (which failed). The defendant then raised the argument that the matter should be proceeding by way of arbitration. The plaintiff refused to change its course of action and the defendant brought a motion for an order staying the action and referring the issues to arbitration.

The first question that the court dealt with had to do with whether or not there even existed an arbitration clause in the agreement between the parties. The initial employment agreement had contained such a clause but the court found that it had been superseded by the second employment agreement which did not include such a clause. Even though one of the subsequent employment agreements specifically indicated that the defendant’s employment would continue on the same terms and conditions as had been contained in all of the previous agreements, so that they were deemed to be incorporated in the most recent agreement, the court determined that as the first agreement had been superseded by the second, and the second included an “entire agreement” clause, there did not exist a valid arbitration clause upon which the defendant could rely.

One of the interesting points in this respect had to do with whether or not the court even had the jurisdiction to make this decision. The Ontario Arbitration Act provides that:

    “An arbitral tribunal may rule on its own jurisdiction to conduct the arbitration and may in that connection rule on objections with respect to the existence or validity of the arbitration agreement.”

It was suggested that based on that provision, where there is an issue as to whether or not there even exists a valid arbitration clause, an arbitrator would have to be appointed to make that determination. Fortunately, in this case, the court took a more common sense approach and considered that this provision in the Act was not mandatory and that the court had the jurisdiction to determine whether or not an arbitration clause was in existence.

Secondly, the court went on to consider whether or not, if there did exist an arbitration clause, there was a valid basis for refusing to refer the matter to arbitration. The court pointed out that while the Arbitration Act requires the court to stay a proceeding that has been commenced in the face of a valid arbitration clause, there are exceptions. One of the exceptions arises where a motion for a stay of the proceeding is brought with undue delay.

The court pointed to the fact that almost three years had elapsed since the law suit had started. During that time, there had been a substantial amount of progress made along the litigation path. The court seemed to suggest that the defendant had either forgotten about the arbitration clause, or deliberately refrained from insisting on arbitration until after the mediation had failed. While not stated in the court’s decision, the idea that the defendant was now raising this argument merely to delay may also have been a concern.

In any event, the court dismissed the motion and the matter was ordered to proceed to trial in the usual course.

Among other things, this is an important reminder to parties to a contract with an arbitration clause that if they do not address the arbitration clause promptly but rather proceed by way of a legal action, they may lose the ability to insist on arbitration at a later date.

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