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Arbitration Clause Is A Separate Enforceable Agreement

What happens when an arbitration clause is contained within a commercial agreement that one party says never came into existence or is unenforceable? And what if the dispute involves persons who are not parties to the commercial agreement? Is the arbitration clause still enforceable? Yes, the Ontario Court of Appeal recently said in Kolios v. Vranich.

The Background

The dispute arose from a shareholders agreement which contained an arbitration clause. Vranich commenced an action in the Ontario Superior Court and sued both parties to the shareholders agreement and other parties. Kolios moved to stay the action so far as the claim against parties to the shareholders’ agreement, asserting that that claim must be dealt with by arbitration. Vranich said that the parties had never reached an agreement on a schedule to the shareholders’ agreement relating to shareholders loans, and therefore had never reached an agreement on the whole agreement.

Section 7(1) of the Ontario Arbitrations Act, 1991 (the Act), provides that, subject to certain exceptions, if a party to an arbitration agreement commences a proceeding in respect of a matter to be submitted to arbitration, the court shall stay the action. The Ontario Superior Court dismissed an application to stay the action under this sub-section. The Ontario Court of Appeal allowed the appeal and stayed the action against the defendants who were parties to the shareholders agreement, and allowed the action to proceed against the defendants who were not parties to that agreement.

The Court of Appeal applied two sub-sections of the Act. Section 17(1) provides that the arbitral tribunal has authority to determine its own jurisdiction and in doing so, to rule on the validity or existence of the arbitration agreement. This sub-section introduces into Ontario law the now well-know principle of “competence-competence”, that is, that an arbitral tribunal is competent to decide its own competence.

The Court of Appeal also applied Section 17(2) which says that, if an arbitration agreement forms part of a main agreement, then the arbitration agreement shall be treated as an independent agreement for the purposes of a ruling on jurisdiction, even if the main agreement is invalid.

Based on these sub-sections, the Ontario Court of Appeal held that it was up to the arbitral tribunal to decide the question of the validity of the shareholders agreement, not the court. In so holding, the Court of Appeal noted that Vranich did not assert that the shareholders agreement was invalid or void ab initio.

Moreover, the fact that the action would proceed against other defendants did not disturb the Court of Appeal since those other defendants had not sought a stay. The Court of Appeal did not mention sub-section 7(5) of the Act but that sub-section expressly authorizes the court to stay that part of an action which is dealt with in an arbitration agreement, and allow to proceed to trial the balance of the action not covered by the arbitration agreement.

This decision of the Court of Appeal demonstrates the sea change that has taken place in Canada with respect to the stay of actions based upon arbitration agreements. A generation ago, a Canadian court would have had no hesitation in permitting an action to proceed when some of the allegations or some of the parties were not subject to the arbitration agreement. Three fundamental changes have occurred.

First, Section 7(1) uses the “shall” word and thereby mandates arbitration, unless very specific exceptions apply. The courts are reading those exceptions very narrowly. Before 1992, the Arbitration Acts of Ontario used the “may” word and gave the courts discretion to stay or not stay an action brought in the face of an arbitration clause. In those days, the courts were usually prepared to exercise that discretion in favour of the action proceeding and not the arbitration.

Second and as noted above, the Act now clearly addresses, in section 17, many of the former objections to arbitration and provides the arbitrator with the jurisdiction to determine them, even in the face of objections that the main agreement or the arbitration agreement is unenforceable or that the dispute involves persons who are not parties to the agreement. These sections effectively drive all disputes about the subject matter or its arbitrability back to the arbitral tribunal.

Third, the attitude of Canadian judges has fundamentally changed. Judges do not now consider that courts are the superior means of adjudicating disputes. Indeed, they recognize that courts have become so expensive and time-consuming that parties are well advised to go elsewhere to have their dispute resolved. And when they do, judges also now give great, indeed overriding, effect to the parties’ choice to go to arbitration, and are prepared to hold the parties to their bargain.

Further Questions

Some further question remains. How will arbitrators deal with the new authority which they have to determine their own jurisdiction? Will the future track record of arbitrators’ decisions demonstrate that arbitrators are making these jurisdictional decisions responsibly? Or will arbitrators tend to rule that they have jurisdiction, so that they can continue with the arbitration? Will the legislature’s decision to hand these jurisdictional disputes to arbitrators be justified, and will arbitrator’s jurisdictional disputes be upheld by the courts? And since arbitrator’s decisions are made privately and are unknown to the public unless challenged in court, how will the track record of arbitrators relating to jurisdictional matters be judged?

Only time and judges will tell. Ironically, it will take the decisions of judges, and a developed body of judicial decisions reviewing the jurisdictional decisions of arbitrators, to determine how well arbitrators are discharging their responsibility to determine their own authority.

Arbitration agreement – challenging arbitral award – enforcing –

Kolios v. Vranich, 2012 ONCA 269

Thomas G. Heintzman O.C., Q.C., FCIArb May 20, 2012

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