Canada: Supreme Court Of Canada Sends Dispute To Arbitration Despite Defence On Merits

The Supreme Court of Canada ("SCC") recently considered whether a party had waived its right to rely on contractual arbitration and forum selection clauses by defending an Ontario action on the merits. In Momentous.ca Corp. v. Canadian American Association of Professional Baseball Ltd., 2012 SCC 9, the SCC unanimously affirmed an Ontario Court of Appeal ruling that a defence on the merits did not amount to a waiver of contractual arbitration and forum selection clauses. However, the Court left considerable uncertainty about what would amount to such a waiver.

Background

The dispute involved the Ottawa Rapidz, a professional baseball team, owned by subsidiary companies of Momentous.ca, who played in the Can‐Am League at a stadium owned by the City of Ottawa. Prior to entering the League, the team signed agreements that included arbitration and choice of forum clauses indicating that all disputes would be resolved by arbitration and enforced in North Carolina. Due to financial losses, the baseball team applied under the League's by‐laws to withdraw voluntarily. The League rejected their application, terminated the team's membership and drew down a letter of credit the team had been required to post to secure its financial obligations. The team sued the League, its principals, and the City of Ottawa.

The team filed a Statement of Claim in January 2009 and all of the defendants delivered pleadings in April 2009 which defended the action on the merits. The Can‐Am defendants also pleaded and relied upon the contractual arbitration and choice of forum provisions. In August 2009, the Can‐Am defendants brought a motion pursuant to Rule 21.01(3)(a) of the Ontario Rules of Civil Procedure seeking to have the action dismissed or stayed for lack of jurisdiction based on the arbitration and choice of forum clauses. This rule does not limit when a defendant must bring such a motion. At common law and in some other jurisdictions, such motions are restricted to the period before a defence on the merits.

The Courts Below

The motions judge found that although the Can‐ Am defendants had defended the action on its merits, they had simultaneously raised a jurisdictional argument and, therefore, had not waived the arbitration and choice of forum clauses in their agreements, and had not attorned to the jurisdiction of Ontario. The action was dismissed.

The Ontario Court of Appeal disagreed with the motions judge and held that the Can‐Am defendants had attorned to the jurisdiction of Ontario by defending the action on its merits. Nevertheless, the Court of Appeal ruled that the Court possessed residual discretion and refused, despite the attornment, to exercise jurisdiction over the dispute on the basis that the parties' agreement to arbitration and choice of forum clauses should take precedence. A "strong cause" is needed to displace these clauses and the attornment and delay in bringing the stay motion were not sufficient to meet the "strong cause" standard. Attornment was said to establish jurisdiction simpliciter, but to have little or no relevance to whether a court should exercise its discretion to accept this jurisdiction.

The SCC Decision

The SCC did not address attornment, merely stating that the parties did not contest the finding of the Court of Appeal on the issue. Nor did the SCC deal with when "strong cause" to ignore choice of forum and arbitration clauses might exist in favour of a jurisdiction based on attornment. Instead, the SCC's short decision focused on the narrow issue of whether the Ontario Rules of Civil Procedure permitted dismissal of the action based on the arbitration and forum selection clauses, notwithstanding the delivery of a statement of defence. The SCC held that the relevant rules did not limit the time during which the motion could be brought. In effect, the lack of such restriction was held to displace any inferred waiver of the arbitration and choice of forum clauses that might exist at common law. In this context, the SCC found that a statement of defence that specifically pleads a foreign forum selection clause does not amount to consent that the courts of Ontario assume jurisdiction so as to preclude consideration on the merits of whether to enforce the clause. Accordingly, the appeal was dismissed, ending the Ontario action.

Resulting Uncertainties

The Momentous decision begs a number of important questions. First, it does not account for the provisions in Ontario's International Commercial Arbitration Act ("ICAA") (which incorporates the UNCITRAL Model Law) which deal specifically with when a party must elect jurisdiction. Except for Quebec, all provinces and territories in Canada have adopted similar legislation. Where signatories to a commercial arbitration agreement have their places of business in different countries, the ICAA governs the question of whether a court can stay proceedings in favour of the dispute resolution method specified in the agreement. Article 8 of the UNCITRAL Model Law provides that a defendant is entitled to a stay of proceedings no later than filing its first statement on the substance of the dispute. This provision might have defeated the jurisdictional challenge but was not referred to by any level of court in Momentous. It's impact or significance is therefore unclear.

Further, the SCC did not comment on the recent and potentially contradictory decision of the British Columbia Court of Appeal in Larc Developments Ltd. v Levelton Engineering Ltd, 2010 BCCA 18, which held that the common law principles of attornment apply in the arbitration context. The Court of Appeal noted that, at common law, any step taken which invokes the jurisdiction of the court results in attornment even if the party has reserved or is pursuing a challenge to jurisdiction. In Larc, a demand for particulars was held to be a step in the proceedings and therefore a stay under the provincial arbitration act was no longer available. While Larc may be distinguishable from Momentous on its facts, there remains at least an appearance of inconsistency.

Momentous also leaves uncertainty as to whether and when defendants served with a claim must attempt to enforce an arbitration or choice of forum clause. Must they bring a motion disputing jurisdiction immediately, or can they merely raise the jurisdiction issue in their statement of defence and bring a motion disputing jurisdiction some time later? If a defendant can "wait in the weeds", how long can it wait? What amount of delay will amount to "strong cause" to justify a court refusing to enforce arbitration and choice of forum clauses?

Conclusion

The Momentous case clearly reinforces that Canada is an arbitration‐friendly jurisdiction that will give strong deference to arbitration and choice of forum clauses in commercial agreements. However, the questions left open in the wake of Momentous remain difficult and could pose hazards for unwary parties who seek to enforce arbitration and choice of forum clauses in commercial agreements in Canada.

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