The recent decision of the Court of Appeal for Ontario in RH20 North America Inc. v. Bergmann provides guidance on the appropriate timing of a motion to stay litigation in favour of arbitration. The answer is clear: early – and before any other motion is brought to deal with the substance of the claim.
In this case, the moving party brought a motion to stay in favour of arbitration at the same time as a motion to strike out the statement of claim as disclosing no reasonable cause of action. The motions judge struck out certain portions of the statement of claim, but dismissed the stay motion on the basis that a stay motion should be brought before seeking substantive relief, including on a motion to strike. The Court of Appeal upheld both decisions.
Background
The plaintiffs, RH20 North America Inc. (RH20) and Unit Precast (Breslau) Ltd. (Unit Precast), started a claim against several defendants alleging that they had (i) wrongfully terminated licensing agreements, (ii) set up a competing business, and (iii) misused confidential information.
The defendants, including Click+Clean GmbH (Click), brought a motion to strike out several of the claims. At the same time, Click also moved to stay the action against it on the basis that the dispute should be referred to arbitration, relying on the arbitration clause in its license agreement with RH20. That clause provided:
All disputes arising in connection with this contract […] shall be finally decided in accordance with the rules of the London Court of International Arbitration (LCIA Arbitration Rules) by exclusion of taking recourse to the courts of law. The place of the arbitration proceedings is London, U.K. The number of arbitrators is one […] This contract is subject to the law of the Federal Republic of Germany.
The motions judge: (i) struck out all of the claims made by Unit Precast without leave to amend, (ii) struck out certain claims made by RH20 with leave to amend, (iii) ordered RH20 to deliver an amended statement of claim, and (iv) dismissed Click’s motion to stay on the basis that Click had waived its right to arbitrate by joining the other defendants in moving to strike the claim.
Unit Precast appealed the decision striking out certain of its claims without leave to amend, including conspiracy and intentional interference with contractual relations. The Court of Appeal dismissed the appeal. The motions judge had correctly identified and applied the principles relating to the disclosure of a reasonable cause of action and the constituent elements of the causes of action.
Click cross-appealed the stay motion decision. The Court of Appeal also dismissed the cross-appeal. This case note focuses on the cross-appeal and the timing of the stay motion.
Decision
The main issue was whether Click had waived its right to arbitrate by bringing a strike motion at the same time as the stay motion. Specifically, the Court of Appeal considered whether Click’s participation in the motion to strike out certain claims was equivalent to waiving the agreement to arbitrate, thereby rendering the arbitration agreement “inoperative” within the meaning of article 8(1) of the UNCITRAL Model Law (the Model Law), which provides:
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.
The Court of Appeal relied on the frameworks set out in Peace River Hydro Partners v. Petrowest Corp. and summarized in Husky Food Importers & Distributors Ltd. v. JH Whittaker & Sons Limited at paras. 23-25:
[In Peace River] the Supreme Court identified two general components common to stay provisions in provincial arbitration legislation: (i) the technical prerequisites for a mandatory stay of court proceedings; and (ii) the statutory exceptions to a mandatory stay of court proceedings. The applicant for a stay must establish the technical prerequisites “on the applicable standard of proof”; if the applicant does so, the party seeking to avoid arbitration then must show that one of the statutory exceptions applies, such that a stay should be refused: at paras. 76-79.
[….] As the Supreme Court observed in Peace River, at para. 83, provincial arbitration legislation typically contains four relevant technical prerequisites:
(a) an arbitration agreement exists;
(b) court proceedings have been commenced by a “party” to the arbitration agreement;
(c) the court proceedings are in respect of a matter that the parties agreed to submit to arbitration; and
(d) the party applying for a stay in favour of arbitration does so before taking any “step” in the court proceedings.
If all the technical prerequisites are met, the mandatory stay provision is engaged. The court should then move on to the second component of the analysis, which concerns the statutory exceptions to granting a stay, such as whether an arbitration agreement is “void, inoperative or incapable of being performed”. [emphasis added]
The Court of Appeal focused on the fourth requirement (bolded above) and the “negative obligation of parties to an arbitration agreement not to seek the resolution of disputes subject to an arbitration agreement in domestic courts.” (paras. 41 and 45) This negative obligation is a common conceptual element shared by most Canadian domestic and international commercial arbitration regimes.
Here, article 8(1) of the Model Law applied to Click’s motion for a stay. Article 8(1) supported the concept of a negative obligation not to seek the resolution of a dispute in the national courts, while also seeking to stay in favour of arbitration.
The Court of Appeal held that article 8(1) requires a motions judge to consider two timing–related issues (para.50):
- whether the party has requested a court to refer the parties to arbitration “not later than when submitting his first statement on the substance of the dispute”; and
- whether before making the request to stay the party has sought assistance from the court on the substantive claims.
The Court of Appeal concluded further (para 51) that a stay request made after either submitting a first statement on the substance of the dispute or seeking assistance from the court on the substance of a claim “would be inadmissible as its timing would signal that the requesting party had not adhered to its fundamental negative obligation not to litigate disputes that are subject to litigation.”
In this case, while Click did not bring a stand-alone motion to stay the proceeding, by joining the other parties’ strike motion, Click sought “substantive relief” and accordingly was “not … entitled to the benefit of the litigation process while also preserving its ability to reject that same process in favour of arbitration.” The Court of Appeal concluded that the motions judge, “properly treated Click’s request that the court dismiss some of the plaintiffs’ substantive claims as disclosing no reasonable cause of action as, in its effect, an election by Click to have some of the substantive claims against it dealt with by the court.” (para. 58)
Takeaways
This decision provides clear direction as to when a motion to stay in favour of arbitration should be brought: before making any submission on the substance of the claim or requesting substantive assistance from a domestic court – including on a motion to strike.
It will not suffice to bring a jurisdictional challenge and a motion to strike at the same time.
There are practical implications that flow from this decision. Given the long delays in Ontario’s civil justice system, it seems understandable that a party would want to bring multiple motions at the same time, rather than waiting for one motion to be heard followed by a long wait for the second. However, the court’s current heavy case load might be precisely why this case was decided as it was – had the motion to stay been heard first, it is possible that the motion to strike (at least the one brought by these defendants) need not have been heard.
This case is instructive to counsel considering preliminary motions, as the order and timing of such motions impact their outcome.
For more information on this case or any questions related to the legal implications of this decision on your business, please contact the authors, Chloe Snider or Camila Maldi.
