Motion to Strike Waives Right to Arbitrate: Ontario Court of Appeal

Overview

In RH20 North America Inc. v. Bergmann, the Ontario Court of Appeal affirmed that a motion to strike arbitrable claims amounts to a waiver of the right to arbitrate and disentitles the moving party to a stay of the court action in favour of arbitration.

Background

RH20 North America Inc. (RH20) licensed wastewater treatment systems for sale in Canada from Bergmann Group companies in Germany (Bergmann Group) and control panels from Click+Clean GmbH (Click). The license agreement between RH20 and Click (Click License) mandated the arbitration of disputes in the United Kingdom, while a related agreement between RH20 and Click for a customer service web portal (Web Portal Agreement) contained a forum selection clause directing the determination of disputes in Germany.

RH20 and its subcontractor, Unit Precast Breslau Ltd. (Unit), brought an action against the Bergmann Group, Click and several of RH20’s former employees, alleging, among other things, wrongful termination of the license agreements and misuse of confidential information.

Some of the defendants, including Click, brought a motion to strike some of RH20’s claims and all of Unit’s claims as disclosing no reasonable cause of action. Click also sought an order staying RH20’s claims against it in favour of arbitration under Section 9 of the International Commercial Arbitration Act, 2017 (ICAA) and Article 8 of the UNCITRAL Model Law on International Commercial Arbitration (Model Law).

Motion Decision

The Motion Judge struck all of Unit’s claims and some of RH20’s claims as lacking a reasonable cause of action but refused to stay the remaining claims in favour of arbitration.

Having determined that the ICAA and the Model Law governed the dispute, the Motion Judge refused the stay for the following three reasons:

• The arbitration agreement in the Click License was “incapable of being performed” under Article 8(1) of the Model Law because it conflicted with the forum selection clause in the Web Portal Agreement

• The multiplicity of agreements and the conflicting dispute resolution clauses provided “strong cause” not to enforce the forum selection clause in the Web Portal Agreement

• By joining the other defendants’ request to strike claims, Click had invoked the court’s jurisdiction and waived its right to arbitrate, rendering the arbitration clause “inoperative” under Article 8(1)

RH20 and Unit appealed the striking of their claims, and Click cross-appealed the denial of a stay.

Court of Appeal Decision

The Court dismissed the appeals and cross-appeal, agreeing that the claims lacked a reasonable cause of action and that Click had waived its right to arbitrate by joining the other defendants’ request to strike.

The Court explained that an arbitration agreement gives rise to a “negative obligation” not to seek the resolution of disputes subject to arbitration in domestic courts. This obligation is recognized and enforced under the Model Law and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards and is a common conceptual element of most Canadian domestic and international arbitration regimes. A breach of this obligation amounts to a waiver of the right to compel arbitration and renders the arbitration agreement inoperative.

The Court agreed that Click breached the negative obligation when it sought substantive relief beyond challenging the court’s jurisdiction. The Court emphasized that while procedural steps taken within the confines of a jurisdiction motion may not breach the negative obligation, a party seeking a final determination on the merits of substantive claims will have effectively waived its right to arbitrate.

In upholding the refusal of the stay, the Court clarified how the two-part framework for stays in favour of arbitration established by the Supreme Court of Canada in Peace River Hydro Partners v. Petrowest Corp applies in the context of an international arbitration agreement when the party requesting a stay concurrently takes a step in the court action.

The Peace River framework asks:

• Whether the technical prerequisites for a stay of court proceedings are met; and, if so,

• Whether any statutory exceptions precluding a stay apply, such as when the arbitration agreement is “void, inoperative or incapable of being performed.”

One of the technical prerequisites described in Peace River is that the party seeking a stay must not have taken any other step in the court proceeding. However, the Court clarified that in the context of an international arbitration agreement, a breach of the negative obligation not to litigate arbitrable disputes is properly characterized as triggering a statutory exception to the grant of a stay because it renders the arbitration agreement “inoperative” under Article 8(1) of the Model Law.

Key Takeaways

• Prior to taking any steps to enforce rights under an arbitration agreement, parties must be sure that they understand all of the obligations imposed on them and act in accordance with the terms of the arbitration agreement.
• A breach of the negative obligation not to litigate arbitrable disputes is a waiver of the right to arbitrate and renders the arbitration agreement inoperable.
• A motion to strike all or part of an arbitrable claim is a breach of the negative obligation and disentitles the moving party to a stay in favour of arbitration.