In RH20 North America Inc. v. Bergmann, 2024 ONCA 445, the Ontario Court of Appeal dismissed a cross-appeal of a motion to stay court proceedings in favour of arbitration. The Court emphasized that a party seeking to enforce an arbitration agreement has a negative obligation to not take any steps to seek the resolution of the disputes subject to the arbitration agreement in court. In this case, the Court held that a breach of that negative obligation was a waiver of the arbitration agreement such that the Court was not required to stay the court proceedings in favour of arbitration. Below, we review the case and consider the implications of this decision.
Factual Background
In late 2012, RH20 North America Inc. ("RH20") entered into two agreements with Click+Clean GmbH ("Click"), for the use of control panels in "WSB" brand wastewater systems: a Licence Agreement, and a "General Agreement for Web Portal and GPRS Use" (the "Web Portal Agreement").
The Licence Agreement included an arbitration agreement, which stipulated that all disputes were to be decided in accordance with the LCIA's Arbitration Rules, and would be seated in London, England, while the governing law would be that of Germany. In contrast, the Web Portal Agreement contained a choice of forum clause, which provided that the jurisdiction for all disputes was Germany.
A number of disputes arose between the parties following the execution of the Licence Agreement and the Web Portal Agreement, as a result of which RH20 and its co-plaintiff commenced litigation against Click and a number of other defendants in Ontario.
In response to RH20's claims, Click sought two orders through one motion: (1) an order staying the action against it and referring the dispute to arbitration; and (2) along with the other moving defendants, an order seeking to strike out parts of the statement of claim. Below, we consider only the second issue in detail.
The Superior Court Decision
In striking out various portions of the statement of claim and dismissing the stay motion, the motion judge made a number of findings. Fundamentally, the motion judge found that the arbitration referenced in the Licence Agreement was an international arbitration, meaning that it was governed by the International Commercial Arbitration Act, 2017, S.O. 2017, c. 2, Sch. 5 (the "ICAA") and therefore that the Model Law applied (given its incorporation into the ICAA).
Ultimately, the motion judge dismissed Click's request for a stay of the court proceedings for three main reasons:
- The arbitration agreement in the Licence Agreement conflicted with the choice of forum clause in the Web Portal Agreement such that the arbitration agreement was "incapable of being performed" within the meaning of Article 8(1) of the Model Law;
- There was "strong cause" to reject the forum selection clause in the Web Portal Agreement, as there were multiple agreements as to dispute resolution with conflicting clauses; and
- Since Click had joined with the other moving defendants to seek an order striking out certain parts of the plaintiff's claim, Click took a step to invoke the jurisdiction of the court and effectively waived the agreement to arbitrate (thereby consensually submitting – or attorning – to the court's jurisdiction).
Click appealed the dismissal of the motion, and argued (in relation to the stay motion) that the motion judge erred in failing to give effect to the arbitration agreement between it and RH20.
The Court of Appeal's Decision
In dismissing the appeal, the Court of Appeal held that the motion judge did not err in refusing to grant Click's stay request. The Court only reviewed the third reason for refusing a stay, finding that the assessment of this question alone was a sufficient basis to refuse a stay. On this issue, the Court agreed that Click's participation in the motion to strike certain parts of the statement of claim was equivalent to waiving the agreement to arbitration, which consequently had the effect of rendering the arbitration agreement inoperative.
The Court came to this conclusion by considering four points.
First, the Court considered the Supreme Court of Canada's judgement in Peace River Hydro Partners v. Petrowest Corp., 2022 SCC 41. In Peace River, the Court found that provincial arbitration legislation typically contains four "technical prerequisites" that must be satisfied in order for a court to grant a stay of proceedings in favour of arbitration:
- An arbitration agreement exists;
- Court proceedings have been commenced by a party to that arbitration agreement;
- The court proceedings are in respect of a matter that is subject to the arbitration agreement; and
- The party applying for the stay in favour of arbitration must do so prior to taking any step in the court proceedings.
The Court emphasized that the fourth requirement reflects a common concept shared by most Canadian and international commercial arbitration regimes that have adopted the New York Convention and the Model Law: namely, that parties to an arbitration must abide by a negative obligation to not seek the resolution of disputes subject to an arbitration agreement in court. This negative obligation finds its source in the parties' agreement (meaning that participating in litigation is a rejection of that agreement).
Second, the Court reviewed the Model Law and found that it similarly gave effect to that negative obligation. In particular, the Model Law requires a court to consider whether the requesting party had sought the court's assistance on the substantive claim before requesting a stay in favour of arbitration, as doing so would ignore the fundamental obligation of not pursuing the resolution of disputes in court. As a result, a party can waive the right to compel arbitration if they acquiesce to litigation concerning matters subject to arbitration (such as by participating in the litigation beyond raising threshold jurisdictional objections).
Third, the Court found that the motion judge correctly treated Click's motion to strike certain parts of the statement of claim as a breach of its negative obligation under the arbitration agreement. By joining onto the motion to strike, Click went beyond a procedural step taken within the confines of the jurisdictional motion to stay, and instead sought substantive relief. Requesting an order to strike certain parts of a claim is a request for the court to render a final determination on the merits of part of a proceeding. This breach of the negative obligation amounted to a waiver of Click's right to arbitrate.
Fourth, the Court considered whether Click's breach of this negative obligation constituted a failure of the fourth "technical prerequisite" set out in Peace River, or whether it constituted a statutory exception to compelling arbitration on the basis of being "null and void, inoperative or incapable of being performed". Relying on Gary Born's treatment of this issue, the Court concluded that a waiver of the right to arbitrate renders an arbitration agreement "inoperative" within the meaning of the Model Law.
As a result, Click's appeal was dismissed.
Analysis
The most apparent takeaway from Bergmann is the importance of acting in accordance with an arbitration agreement, including all of the positive and negative obligations therein. Accordingly, parties to an arbitration agreement must ensure that they understand all of the obligations imposed on them, especially prior to taking steps to enforce their rights under the arbitration agreement. These obligations may arise through the arbitration agreement itself, any institutional rules that it incorporates, as well as any applicable legislation.
Similarly, despite Canadian courts generally adopting a pro-arbitration stance and regularly granting stays in order to enforce arbitration agreements, Bergmann demonstrates that courts may be unforgiving to parties who attempt to "double dip" by seeking to enforce their right to arbitrate at the same time as they attempt to participate in the substantive merits of the litigation. Courts will not allow parties to enforce their rights under an arbitration agreement if they have not met the minimum technical prerequisites for doing so.
As such, parties to arbitration agreements must take care to ensure that they do not attempt to seek any substantive relief in court prior to – or in parallel with – requesting a stay of proceedings in favour of arbitration. As was demonstrated in Bergmann, a party can unintentionally waive its rights under an arbitration agreement by taking steps to enforce its rights in a court proceeding.
All of that being said, it bears emphasizing that Bergmann arose specifically in the international arbitration context, where the applicable legislation (and the relevant case law, such as Peace River) is clear that taking a step that amounts to substantive participation in litigation proceedings will disentitle a party from seeking to enforce their arbitration agreement. However, the situation is arguably less clear in Ontario's domestic arbitration context, where the Arbitration Act, 1991 does not incorporate the Model Law and, as noted by the Court in Bergmann, stipulates a different test for determining whether a stay of proceedings should be ordered. Indeed, the Arbitration Act, 1991 does not contain any language about the effect on the availability of a stay by a party to an arbitration agreement taking a further "step" in the court proceeding.
As we have noted in relation to the Peace River decision (here), the Arbitration Act, 1991 includes the following exceptions to a stay:
- A party entered into the arbitration agreement while under a legal incapacity.
- The arbitration agreement is invalid.
- The subject-matter of the dispute is not capable of being the subject of arbitration under Ontario law.
- The motion was brought with undue delay.
- The matter is a proper one for default or summary judgment.
From the foregoing list, the closest comparable to the "void, inoperative or incapable of being performed" exception found in the Model Law is likely the invalidity exception. However, case law arguably suggests that "invalid" is more closely analogous to "void" rather than "inoperative".1 As a result, there is a lack of clarity as to how an Ontario court, faced with a similar issue under domestic arbitration legislation, might resolve the issue. Accordingly, this remains a question for another day.
Footnote
1. See, for example, Uber Technologies Inc. v. Heller, 2020 SCC 16, where the Supreme Court of Canada found that an arbitration agreement was invalid under Ontario's Arbitration Act, 1991 because it was unconscionable. In Peace River, the majority at paragraph 136 identify unconscionability as a basis for finding an arbitration agreement void.
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