MDG Kingston Inc. et al. v. MDG Computers Canada Inc. et al.

[Indexed as: MDG Kingston Inc. v. MDG Computers Canada Inc.]

92 O.R. (3d) 4

Court of Appeal for Ontario,

Rosenberg, Feldman and Simmons JJ.A.

September 30, 2008

Arbitration -- Applicability of arbitration clause -- Normal rules regarding arbitration clauses applying under Arthur Wishart Act -- Arbitration clause in franchise agreement not invalid because franchisor failed to provide disclosure of details of alternative dispute resolution agreement -- Failure to provide disclosure rendering franchise agreement subject to rescission but not making it invalid -- Motion judge erring in dismissing franchisor's motion for stay of action, granting summary judgment for rescission of franchise agreement and ordering trial of issue of damages -- Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3.

Contracts -- Franchise agreements -- Normal rules regarding arbitration clauses applying under Arthur Wishart Act -- Arbitration clause in franchise agreement not invalid because franchisor failed to provide disclosure of details of alternative dispute resolution agreement -- [page5 ] Failure to provide disclosure rendering franchise agreement subject to rescission but not making it invalid -- Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3.

The appellant franchisor and the respondent franchisee entered into two consecutive franchise agreements. Relying on s. 6(2) of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3, the respondent rescinded the second agreement within two years of signing it because the appellant did not deliver a disclosure document as required under s. 5 of the Act. The respondent brought an action for rescission and damages. The appellant moved for a stay of the action based on an arbitration clause contained in both franchise agreements. The respondent brought a cross-motion for summary judgment for rescission of the second agreement. The motion judge found that the appellant was not entitled to a statutory exemption from the disclosure obligation under s. 5(7)(f) of the Act as there were material changes between the two franchise agreements. She found that the appellant was not entitled to rely on or enforce the arbitration clause in the second agreement because the regulations to the Act require that any alternative dispute resolution mechanism contained in a franchise agreement must be described in detail in the disclosure document. There was no disclosure document. The motion judge dismissed the motion for a stay of the action. She granted summary judgment for rescission and ordered a trial of the issue of damages. The appellant appealed.

Held, the appeal should be allowed.

The claims for rescission and damages fell within the arbitration clause. Therefore, subject to the exceptions in s. 7(2) of the Arbitration Act, 1991, S.O. 1991, c. 17, the court was required by s. 7(1) of that Act to stay the action and refer the claims to arbitration. The motion judge erred in law in failing to stay the action based on an effective finding under s. 7(2) of the Arbitration Act that the arbitration clause was invalid because the appellant did not provide disclosure of the details of the alternative dispute resolution agreement. The franchise agreement was not invalid in law; it was subject to rescission. It was not for the court to decide the merits of the right to rescission in this case. The legislature intended that the normal rules regarding arbitration clauses, including the arbitrator's authority to decide its own jurisdiction as well as the severability of an arbitration clause under s. 17 of the Arbitration Act, apply under the Arthur Wishart Act.

Section 7(2)5 of the Arbitration Act provides an exception to the mandatory requirement that courts enforce arbitration clauses and not take jurisdiction where the parties have legitimately agreed to arbitrate their disputes, where the case is properly one for summary judgment. By ordering partial summary judgment dealing only with liability, then a full court trial of the issue of damages, the motion judge failed to give effect to the purpose of the exception for summary judgment in s. 7(2)5 of the Arbitration Act, which is to avoid referral to arbitration where further adjudication is unnecessary. The effect of the order was to remove the damages issue from arbitration and send it to trial in circumstances where the matter did not fall within s. 7(2)5 because the whole matter was not a proper matter for summary judgment. The finding of partial summary judgment was therefore not a proper basis to refuse the mandatory stay under s. 7(1).

APPEAL from the order of MacLeod J., [2007] O.J. No. 5561 (S.C.J.), dismissing a motion for a stay of action and granting partial summary judgment.

Cases referred to 1490664 Ontario Ltd. v. Dig This Garden Retailers Ltd., 2005 25181 (ON CA), [2005] O.J. No. 3040, 256 D.L.R. (4th) 451, 201 O.A.C. 95, 7 B.L.R. (4th) 1, 141 A.C.W.S. (3d) 741 (C.A.); Fairfield v. Low (1990), 1990 6955 (ON SC), 71 O.R. (2d) 599, [1990] O.J. No. 58, 44 C.P.C. (2d) 65, 28 C.P.R. (3d) 289, 19 A.C.W.S. (3d) 42 (H.C.J.); [page6 ][cf2]Heyman v. Darwins Ltd., [1942] A.C. 356, [1942] 1 All E.R. 337 (H.L.); Mantini v. Smith Lyons LLP (2003), 2003 20875 (ON CA), 64 O.R. (3d) 505, [2003] O.J. No. 1831, 228 D.L.R. (4th) 214, 174 O.A.C. 138, 34 B.L.R. (3d) 1, 123 A.C.W.S. (3d) 219 (C.A.); Personal Service Coffee Corp. v. Beer (c.o.b. Elite Coffee Newcastle), [2005] O.J. No. 3043, 256 D.L.R. (4th) 466, 200 O.A.C. 282, 2005 25180, 141 A.C.W.S. (3d) 410 (C.A.) Statutes referred to Arbitration Act, 1991, S.O. 1991, c. 17, ss. 2(1)(a), 7, 17 Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3, ss. 5, 6, 10 Rules and regulations referred to Arthur Wishart Act (Franchise Disclosure), 2000, O. Reg. 581/ 00, s. 5, (1), (2)

Geoffrey B. Shaw and Eunice Machado, for appellants. W. Xavier Navarrete and Glen Perinot, for respondents.

The judgment of the court was delivered by

[1] FELDMAN J.A.: -- The Arthur Wishart Act (Franchise Disclosure) 2000, S.O. 2000, c. 3 was passed by the legislature of Ontario in 2000 to level the legal playing field between franchisees and franchisors by protecting franchisees when they enter into franchise agreements. The Act provides a drastic remedy against franchisors who do not provide prior disclosure, in the required disclosure document, of all the relevant information that franchisees may need before deciding whether to enter into a franchise arrangement and to sign the franchise agreement.

[2] The remedy is that the franchisee may rescind the franchise agreement and obtain the return of all moneys paid, equipment purchased, etc., as well as damages. The issue in this case is how that remedy may be enforced procedurally, when the franchise agreement contains an arbitration clause.

Facts

[3] The corporate appellant franchisor, MDG Computers Canada ("MDG Canada"), is a manufacturer, reseller and retailer of computers and televisions with 29 retail franchise stores in Canada. The corporate respondent franchisee, MDG Kingston ("MDG Kingston"), was a franchisee of MDG Canada. The relationship lasted seven years under two franchise agreements. The first was entered into on February 17, 2000, and lasted for five years. The second was entered into on February 17, 2005. However, relying [page7 ] on s. 6(2) of the Arthur Wishart Act, the respondent franchisee rescinded the second agreement on February 16, 2007, within two years of signing it, because the franchisor did not deliver a disclosure document required under s. 5 of the Arthur Wishart Act. The franchisee claimed rescission of the second agreement, as well as damages in respect of both agreements.

[4] Following receipt of the statement of claim for rescission and damages, and after correspondence between lawyers, the appellants moved for a stay of the action based on the arbitration clauses contained in both agreements. The respondents brought a cross-motion for summary judgment for rescission of the second agreement.

[5] The franchisor's claim is that it was not required to deliver the statutorily mandated disclosure document in this case because it was entitled to a statutory exemption under s. 5(7)(f) of the Arthur Wishart Act, on the basis that the second agreement was a renewal of a franchise and there were no material changes from the first agreement. The franchisee said that the exemption did not apply because there were material changes between the first and second agreements. The franchisor also took the tactical position not to incur the cost of making an evidentiary response to the summary judgment cross-motion until the court had determined whether there would be a stay and a referral to arbitration.

[6] The motion judge, however, was prepared to proceed with the summary judgment motion on the record before her. She compared the two franchise agreements on their face and concluded that there were material changes between the two agreements that met the definition of "material change" in the Arthur Wishart Act. On that basis, she found that the franchisor was not entitled to an exemption from providing the disclosure document before entering into the second franchise agreement, and that the franchisee was therefore entitled to rescind the second franchise agreement.

[7] The motion judge also held that the franchisor was not entitled to rely on or enforce the arbitration clause in the second agreement because the regulations to the Arthur Wishart Act require that any alternative dispute resolution mechanism contained in a franchise agreement must be described in detail in the disclosure document. As there was no disclosure document, the motion judge concluded that the franchisor could not rely on the arbitration clause in the franchise agreement.

[8] The motion judge consequently dismissed the franchisor's motion for a stay of the action and granted the franchisee summary judgment for rescission of the second agreement. In its notice of motion, the franchisee had only requested summary judgment for rescission, but requested a trial of the issue of damages [page8 ] arising from the rescission. The trial judge made that order. The franchisee's motion did not ask for any relief regarding its claim for damages under the first agreement, which agreement also contains an arbitration clause. Therefore, that part of the claim has yet to be addressed.

Issues

[9] Did the motion judge err by failing to order a stay of the action so that the claims could be referred to arbitration, and by proceeding to grant summary judgment on the claim for rescission of the second agreement?

Analysis

[10] The issue in this case raises the classic question whether an arbitration clause remains effective when the agreement that contains the clause is terminated or rescinded, or whether that clause terminates or becomes inoperative with the rest of the agreement. The issue is further complicated in this case because the arbitration clause arises in the context of a franchise agreement that is governed by legislation that was enacted to protect franchisees and which contains detailed provisions that govern the relationship between franchisors and franchisees in Ontario.

[11] The starting point for the analysis of the effectiveness of the arbitration clause in this context is s. 2(1)(a) of the Arbitration Act, 1991, S.O. 1991, c. 17, which provides that the Act applies to an arbitration under an arbitration agreement unless "the application of this Act is excluded by law". There is nothing in the Arthur Wishart Act that excludes the application of the Arbitration Act.

[12] Section 7 of the Arbitration Act directs a court to stay an action that is commenced in the face of an applicable arbitration agreement, with limited exceptions. It provides:

7(1) If a party to an arbitration agreement commences a proceeding in respect of a matter to be submitted to arbitration under the agreement, the court in which the proceeding is commenced shall, on the motion of another party to the arbitration agreement, stay the proceeding.

(2) However, the court may refuse to stay the proceeding in any of the following cases: 1. A party entered into the arbitration agreement while under a legal incapacity. 2. The arbitration agreement is invalid. 3. The subject-matter of the dispute is not capable of being the subject of arbitration under Ontario law. [page9 ] 4. The motion was brought with undue delay. 5. The matter is a proper one for default or summary judgment.

[13] The motion judge did not refer to s. 7 of the Arbitration Act. However, in refusing to stay the action, she effectively relied on two of the exceptions in s. 7(2): (1) that the arbitration agreement was invalid; and (2) that the matter was a proper one for summary judgment.

[14] In Mantini v. Smith Lyons LLP (2003), 2003 20875 (ON CA), 64 O.R. (3d) 505, [2003] O.J. No. 1831 (C.A.), this court summarized the approach a court is to take when deciding whether to stay a claim to give effect to an arbitration clause, at para. 17:

In order to determine whether a claim should be stayed under s.7(1) of the Arbitration Act, the court first interprets the arbitration provision, then analyzes the claims to determine whether they must be decided by an arbitrator under the terms of the agreement, as interpreted by the court. If so, then under s. 7(1), the court is required to stay the action and refer the claims to arbitration subject to the limited exceptions in s. 7(2): T1T2 Limited Partnership v. Canada (1994), 1994 7368 (ON SC), 23 O.R. (3d) 66, 35 C.P.C. (3d) 353 (Gen. Div.) at pp. 73-74 O.R.

[15] The arbitration clause in the second franchise agreement is lengthy and detailed. I have emphasized the relevant portion for ease of reference:

19. General provisions

(23) Arbitration. If, at any time during the continuance of this agreement or after the termination thereof, any dispute, difference or question shall arise between or among any of the parties hereto or their heirs, executors, administrators, successors or assigns touching or concerning the construction, meaning or effect of this agreement or any agreement or covenant entered into pursuant to this agreement or the termination of this agreement or the termination of any such agreements or covenants (other than a matter dealt with in this agreement or any agreement or covenant entered into pursuant thereto whereby such agreement or covenant specifically states that a certain determination shall be final and binding), or the rights or obligations of the parties hereto or their heirs, executors, administrators, successors or assigns, then subject to the exceptions referred to hereinbefore, every such dispute, difference or question shall be submitted to and settled by arbitration and the decision of the arbitrator, appointed as hereinafter provided, to deal with such matter shall be accepted by all the parties to such dispute, difference or question and their heirs, executors, administrators, successors and assigns. The arbitration shall be conducted by a single arbitrator agreed upon by the parties to the matter. If, within five days after notice of the matter has been given by one of such parties to the other or others, such parties cannot agree upon a single arbitrator, then in such event, the arbitration shall be conducted by a single arbitrator appointed by a judge of the Ontario Court (General Division) on the application of any such party with notice to [page10 ]the other or others. The arbitration shall be conducted in accordance with the provisions of the Arbitrations Act, R.S.O. 1990, c. A.24 and of any amendment thereto, or of any successor statute thereof, in force at the time such dispute, difference or question arises. The decision of the arbitrator shall be binding upon all the parties to such dispute, difference or question, and there shall be no appeal therefrom. The prevailing party shall be entitled to an award of arbitration costs. (Emphasis added)

[16] It is clear that the claims in this case, which are for rescission and damages arising from the termination of the franchise agreement after the franchisee exercises its statutory right of rescission, fall within the terms of the arbitration clause. Therefore, subject to the exceptions in s. 7(2) of the Arbitration Act, the court is required by s. 7(1) to stay the action and refer the claims to arbitration.

[17] Under s. 17 of the Arbitration Act, the arbitrator has the authority to rule on his or her own jurisdiction and on the ability of an arbitration clause to survive the termination of the balance of an agreement. Subsections 17(1) and (2) provide as follows:

17(1) An arbitral tribunal may rule on its own jurisdiction to conduct the arbitration and may in that connection rule on objections with respect to the existence or validity of the arbitration agreement.

(2) If the arbitration agreement forms part of another agreement, it shall, for the purposes of a ruling on jurisdiction, be treated as an independent agreement that may survive even if the main agreement is found to be invalid.

(1) Section 7(2)2 of the Arbitration Act: Invalidity of the arbitration agreement

[18] The only reference by the motion judge to the arbitration issue is in the following paragraph near the conclusion of the reasons:

The first agreement in this case, I note, was signed before the Arthur Wishart Act was in force. The defendant cannot rely on the knowledge of the arbitration provisions in the first agreement, and the knowledge acquired during the continuance of that first agreement, to obviate the franchisor's lack of financial disclosure on the renewal of the franchisee on February 17, 2005. The Arthur Wishart Act requires any alternate dispute resolution mechanism in a franchise agreement to be detailed in a disclosure document, if it is to be relied upon.

[19] The motion judge is referring to the combination of s. 5(4)(e) of the Arthur Wishart Act and ss. 5(1) and (2) of the regulations to it contained in Arthur Wishart Act (Franchise Disclosure) 2000, O. Reg. 581/00. The Act requires a prospective franchisor to deliver, as one document, disclosure of all significant information about the franchise business and its promoters that a prospective [page11 ]franchisee may need in order to make an informed decision whether to become a franchisee of the business and to enter into the franchise agreement.

[20] The regulation sets out the details of the required information. Section 5 of the regulation addresses alternative dispute resolution and provides:

5(1) If an internal or external mediation or other alternative dispute resolution process is used by a franchisor in disputes with a franchisee, a disclosure document shall include, together with the statement referred to in subsection (2), a description of the mediation or other alternative dispute resolution process, and the circumstances when the process may be invoked.

(2) Every disclosure document shall include the following statement:

Mediation is a voluntary process to resolve disputes with the assistance of an independent third party. Any party may propose mediation or other dispute resolution process in regard to a dispute under the franchise agreement, and the process may be used to resolve the dispute if agreed to by all parties.

[21] It is agreed that because the Arthur Wishart Act was not in force when the original franchise agreement was entered into, the Act is not applicable to that agreement. It is also agreed that the Arthur Wishart Act was in force when the second agreement was entered into, and that the franchisor did not provide a disclosure document to the franchisee before they entered into the second agreement.

[22] The franchisor says that it was not required to provide disclosure due to the exemption in s. 5(7)(f). That subsection states that the disclosure document required by s. 5 does not apply to: (f) the renewal or extension of a franchise agreement where there has been no interruption in the operation of the business operated by the franchisee under the franchise agreement and there has been no material change since the franchise agreement or latest renewal or extension of the franchise agreement was entered into.

[23] The question for the court is how these provisions of the Arthur Wishart Act and the regulations, as well as the Arbitration Act, interact. In particular, is the arbitration agreement "invalid" for the purpose of s. 7(2) of the Arbitration Act because no disclosure document was provided, even though an exemption is claimed?

[24] In cases where the dispute is about whether the agreement was breached by one party and consequently terminated by the other, and whether that termination has the effect of terminating the arbitration clause as well, the case law makes it clear that the court is not to determine the merits of that issue on a stay motion. Instead, the issue of whether the entire contract was properly terminated and the effect of any such termination is for [page12 ]the arbitrator. Otherwise, arbitration clauses would be rendered ineffective in many disputes, even when, in the end, they should have applied. However, in cases where the agreement was void ab initio because it was illegal, or where no agreement was ever reached, the arbitration clause will not apply because it was never validly agreed to: see, for example, Fairfield v. Low (1990), 1990 6955 (ON SC), 71 O.R. (2d) 599, [1990] O.J. No. 58 (H.C.J.), at paras. 20-23, and Heyman v. Darwins Ltd., [1942] 1 All E.R. 337, [1942] A.C. 356 (H.L.).

[25] In this case, there is no suggestion of fraud or that the franchise agreement was void ab initio. Therefore, it was not "invalid". Nor does the statutory right of rescission make the original agreement invalid, in the sense that it was void ab initio. The rescission remedy is statutory rather than equitable, and its consequences are dictated by the statute, not by the common law. In 1490664 Ontario Ltd. v. Dig This Garden Retailers Ltd., 2005 25181 (ON CA), [2005] O.J. No. 3040, 201 O.A.C. 95 (C.A.), this court explained, at para. 28, that a right to statutory rescission is different from equitable rescission and that the principles of equitable rescission do not apply.

[26] However, the court in that case also stated that once the agreement was rescinded, it was no longer in existence and could not be affirmed by the franchisee continuing to operate the business thereafter. Furthermore, where there was non- disclosure, the franchisee was no longer bound by the agreement and was entitled to full financial relief and compensation from the franchisor. However, in Dig This Garden Retail Ltd., the court was not dealing with an arbitration clause and the effect of rescission of the agreement on that specific clause.

[27] The Arthur Wishart Act itself provides some guidance on the consequences of rescission. Under s. 6(1) and (2), where there is either an incomplete disclosure document or no disclosure document, the franchisee may, within prescribed time limits, rescind the franchise agreement "without penalty or obligation". If the arbitration clause is a "penalty" or "obligation" within the meaning of s. 6 of the Arthur Wishart Act, then after a franchisee rescinds the franchise agreement, the franchisee will not be bound by the arbitration clause. In Black's Law Dictionary, 8th ed. (Thompson West, 1999), the word "obligation" is defined as:

(1) A legal or moral duty to do or not do something. The word has many wide and varied meanings. It may refer to anything that a person is bound to do or forbear from doing, whether the duty is imposed by law, contract, promise, social relations, courtesy, kindness, or morality.

(2) A formal, binding agreement or acknowledgment of a liability to pay a certain amount or to do a certain thing for a particular person or set of persons; esp., a duty arising by contract. [page13 ]

(3) Civil law. A legal relationship in which one person, the obligor, is bound to render a performance in favour of another, the obligee. And a "penalty" is defined as:

(1) Punishment imposed on a wrongdoer, usu. in the form of imprisonment or fine; esp., a sum of money exacted as punishment for either a wrong to the state or a civil wrong (as distinguished from compensation for the injured party's loss). Though usu. for crimes, penalties are also sometimes imposed for civil wrongs.

(2) An extra charge against a party who violates a contractual provision.

(3) Excessive stipulated damages that a contract purports to impose on a party that breaches. If the damages are excessive enough to be considered a penalty, a court will usu. not enforce that particular provision of the contract. Some contracts specify that a given sum of damages is intended "as liquidated damages and not as a penalty" -- but even that language is not foolproof.

[28] It is clear that an arbitration agreement does not fall within any definition of a penalty. In my view, neither is it an obligation, as defined. It is an obligation in the sense that both sides to the agreement are required to comply with it. However, because it is wholly mutual, it is not an obligation in the sense of something that must be done for the other party as a consequence of the termination of the agreement. However, as the word "obligation" could arguably include a mutual obligation, in order to try to discern the intent of the legislature, one should consider the entire Arthur Wishart Act and the regulations made under it.

[29] The effect of the phrase "without penalty or obligation" was considered by this court in the case of Personal Service Coffee Corp. v. Beer (c.o.b. Elite Coffee Newcastle), [2005] O.J. No. 3043, 2005 25180 (C.A.). There the issue was whether a franchisor retained any rights against the franchisee following the franchisee's exercise of the rescission remedy under s. 6. The court held [at para. 39] that the rescission of the agreement "without penalty or obligation" on the franchisee, did not deprive the franchisor of its right to fair dealing and to pursue remedies of its own under s. 9. The court again stated that upon rescission there is no longer a franchise agreement. However, the court did not have to consider whether an arbitration clause was a penalty or obligation of the franchisee, and whether such a clause could survive the rescission of the balance of the agreement.

[30] There is nothing in the Arthur Wishart Act to suggest that an arbitration clause is such a penalty or obligation, or that it could not survive the rescission of the balance of the agreement. Nor does the Act limit or restrict the right of parties to a franchise agreement to agree to resolve any disputes by arbitration. What the Act does in s. 10 to protect franchisees procedurally is it [page14 ]prohibits inclusion of a provision in a franchise agreement that restricts the application of the law of Ontario or restricts jurisdiction or venue to a forum outside Ontario. However, subject to the restrictions regarding law and venue in s. 10 of the Act, the disclosure regulation (s. 5(1)) recognizes that parties may want to agree to alternative dispute resolution as the method to be used to resolve their differences.

[31] Although in this case no disclosure document was provided at all, the rescission remedy also applies where the disclosure is incomplete. As a result, a disclosure document that contains the required description of the arbitration clause in the franchise agreement can still be rescinded if it is incomplete in some other way. Having specifically recognized that franchise agreements may contain arbitration agreements for dispute resolution, the Arthur Wishart Act does not address whether rescission of a franchise agreement for inadequate disclosure will also rescind either a disclosed or an undisclosed arbitration clause. As the purpose of the Arthur Wishart Act is to protect franchisees, one would have expected that had the legislature believed that rescission of the arbitration clause was necessary for that protection, it would have provided that consequence specifically in s. 6, in addition to the reference to penalties and obligations.

[32] An agreement to arbitrate is mutually applicable, and has become a common and cost-effective method of dispute resolution. If the arbitration clause is fairly drafted, there is no reason that it should be viewed as a disadvantage for the franchisee. In my view, it is fair to conclude, based on the Arthur Wishart Act and the regulations, that the legislature intended that the normal rules regarding arbitration clauses, including the arbitrator's authority to decide its own jurisdiction as well as the severability of an arbitration clause under s. 17 of the Arbitration Act, would apply under the Arthur Wishart Act.

[33] I conclude, therefore, that the motion judge erred in law by failing to stay the action based on an effective finding under s. 7(2) of the Arbitration Act, that the arbitration clause was invalid because the franchisor did not provide disclosure of the details of the alternative dispute resolution agreement. The franchise agreement was not invalid at law; it was subject to rescission. It was not for the court to decide the merits of the right to rescission in this case. The two issues of whether, on the merits, the franchisee was entitled to rescind the agreement, and the jurisdiction of the arbitrator, were for the arbitrator to determine. [page15 ]

(2) Section 7(2)5 of the Arbitration Act: Summary judgment

[34] The motion judge also found that the respondent was entitled to partial summary judgment for rescission of the franchise agreement. Subsection 7(2)5 of the Arbitration Act allows a judge to refuse a stay where the matter is one that is "a proper one for default or summary judgment".

[35] On a motion for summary judgment, the issue to be determined is whether the case can be decided based on the evidence produced on the motion, or whether that evidence shows that there is a genuine issue that requires a trial. However, based on the evidence before her on the motion, the motion judge was not able to determine the issue of damages. She therefore ordered a trial of that issue, with pleadings to be exchanged and the action to be set down "in the normal course". The notice of motion did not ask the court to address the other claim in the statement of claim for an accounting, damages and compensation for unjust enrichment in respect of the period from 2000 to 2005 under the first franchise agreement, which also contained an arbitration clause. Therefore, along with the trial of the damages issue on the second agreement, the disposition of the part of the action respecting the first agreement has yet to be adjudicated.

[36] One has to examine this result in the context of s. 7(2) of the Arbitration Act and the purpose of that section. It provides a list of five circumstances where a court is not required to stay an action in the face of an arbitration clause in an agreement. They are all cases where it would be either unfair or impractical to refer the matter to arbitration; unfair because there was no legal agreement to arbitrate or because a party effectively waived the agreement by undue delay in objecting to the court action, or impractical because a party was not disputing the claim or it was a claim that was clear and could be resolved by summary judgment without a referral to arbitration.

[37] The purpose of s. 7(2) of the Arbitration Act is to provide a limited exception to the mandatory requirement that courts enforce arbitration clauses and not take jurisdiction where the parties have legitimately agreed to arbitrate their disputes. One of those exceptions arises when one party defaults and there is therefore no need to enlist an arbitrator to make any findings. Another is where the case is properly one for summary judgment, i.e., there are no genuine issues for trial, and therefore, as with a default situation, there are no issues that require the assistance of an arbitrator.

[38] The motion judge approached the summary judgment motion without considering whether this was a proper case for summary judgment in the context of s. 7(2) of the Arbitration Act [page16 ]and the stay motion brought by the franchisor. By ordering partial summary judgment dealing only with liability, then a full court trial of the issue of damages, the motion judge failed to give effect to the purpose of the exception for summary judgment in s. 7(2)5, which is to avoid referral to arbitration where further adjudication is unnecessary.

[39] The effect of the order was to remove the damages issue from arbitration and send it to trial in circumstances where the matter did not fall within s. 7(2)5 of the Arbitration Act because the whole matter was not a proper matter for summary judgment. The finding of partial summary judgment was, therefore, not a proper basis to refuse the mandatory stay under s. 7(1).

Conclusion

[40] The motion judge erred by failing to stay the action. I would allow the appeal, set aside the summary judgment and stay the action. In light of the novelty and importance of the issue, I would award no costs of the appeal. The costs of the motion shall be in the discretion of the arbitrator.

Appeal allowed.