COURT OF APPEAL FOR ONTARIO
CITATION: Novatrax International Inc. v. Hägele Landtechnik GmbH, 2016 ONCA 771
DATE: 20161020
DOCKET: C58088
Doherty, Feldman and Brown JJ.A.
BETWEEN
Novatrax International Inc.
Plaintiff (Appellant)
and
Hägele Landtechnik GmbH, Karl Hägele, Benjamin Hägele and Cleanfix North America Ltd.
Defendants (Respondents)
Craig Bryson, for the appellant
Evan L. Tingley, for the respondents
Heard: June 24, 2016
On appeal from the order of Justice F. Ian Leach of the Superior Court of Justice, dated November 22, 2013.
Brown J.A.:
[1] In July 2006, the appellant, Novatrax International Inc., renewed an Exclusive Sales Agreement (“ESA”) with the respondent, Hägele Landtechnik GmbH, under which it would continue to distribute industrial reversible fans in Canada and the United States. Either party could terminate the ESA on 12 months’ notice, or without notice in specified circumstances.
[2] On November 24, 2009, Hägele notified Novatrax that it was terminating the ESA immediately for cause. In January 2010, Novatrax commenced an action for damages alleging wrongful termination of the ESA and tortious misconduct against Hägele, its principals, the individual respondents Karl Hägele and Benjamin Hägele, and Cleanfix North America Ltd. (“Cleanfix”), a related company set up by Hägele to sell its products directly into the Canadian and American markets.
[3] Section 18 of the ESA contains a forum selection clause which states:
The contractual parties agree that German law is binding and to settle any disputes by a binding arbitration through the “Industrie und Handelskammer” (Chamber of Commerce) in Frankfurt.
[4] The respondents moved to stay the action relying on the forum selection clause. The motion judge granted a stay. Novatrax appeals.
ISSUES ON APPEAL
[5] The parties agree that the motion judge correctly identified the governing principles as those set out by the Supreme Court of Canada in Z.I. Pompey Industrie v. ECU-Line N.V., 2003 SCC 27, [2003] 1 S.C.R. 450, and by this court in Expedition Helicopters Inc. v. Honeywell Inc., 2010 ONCA 351, 100 O.R. (3d) 241, leave to appeal refused, [2010] 3 S.C.R. v (note), and 2249659 Ontario Ltd. v. Sparkasse Siegen, 2013 ONCA 354, 115 O.R. (3d) 241:
(i) The law favours the enforcement of forum selection clauses in commercial contracts. Where the parties have agreed to a forum selection clause, the starting point of the forum non conveniens analysis is that the parties should be held to their bargain;
(ii) A stay of an action should be granted unless the plaintiff shows “strong cause” that the case is exceptional and the forum selection clause should not be enforced;
(iii) The requirement that the plaintiff show “strong cause” presumes that there is an agreement containing a clear forum selection clause and that clause, by its terms, applies to the claims the plaintiff seeks to bring in Ontario; and
(iv) The forum selection clause pervades the forum non conveniens analysis and must be given full weight in the consideration of other factors.
[6] Novatrax submits the motion judge erred in two respects when he applied the strong cause test to its pleaded claims. He erred:
(i) in finding that the language of the forum selection clause – “to settle any disputes by a binding arbitration” – was broad enough to capture both the contract and tort claims pleaded by Novatrax against Hägele; and
(ii) in relying on the forum selection clause to stay the action against the respondents who were not parties to the ESA - Karl Hägele, Benjamin Hägele, and Cleanfix.
FIRST ISSUE: DID THE MOTION JUDGE ERR IN INTERPRETING THE SCOPE OF THE FORUM SELECTION CLAUSE?
The Contract Claims against Hägele
[7] In its Statement of Claim, Novatrax asserts several contract claims against Hägele: (i) wrongful termination of the ESA; (ii) breach of the duty of good faith by accessing confidential Novatrax information when Benjamin Hägele was permitted to set up an office within the appellant’s facility; and (iii) breach of the duty of good faith in communicating the termination of the ESA to Novatrax’s employees and its financial lender.
[8] Novatrax submits the motion judge erred by failing to find that it had shown strong cause not to enforce the forum selection clause. Novatrax points to the decision in Expedition Helicopters where, at para. 24, this court stated one factor which may justify departure from the general principle of enforcing a forum selection clause in a commercial contract is where “the claim or the circumstances that have arisen are outside of what was reasonably contemplated by the parties when they agreed to the clause.” Novatrax contends the high-handed and wrongful manner in which Hägele terminated the ESA was not contemplated at the time it entered into the contract, so the forum selection clause should not be enforced in the circumstances.
[9] I do not accept that submission for three reasons.
[10] First, the scope of a forum selection clause is not determined by the professed subjective intention of one of the contracting parties at the time the contract was formed. Whether the nature of a claim lies outside of what was reasonably contemplated at the time the contract was signed turns on the interpretation of the forum selection clause in accordance with general contract law principles and the degree of connectedness between the nature of the claims pleaded and those covered by the clause.
[11] Second, the forum selection clause requires the parties to “settle any disputes by a binding arbitration…in Frankfurt.” Disputes can arise in respect of any stage in the life of a contract: formation, performance, and termination or expiration. Novatrax’s contractual claims against Hägele concern the performance and termination of the ESA. The language of s. 18 of the ESA is broad enough to include, within the term “any disputes”, claims relating to any stage of the ESA's life-cycle, including the wrongful termination and breach of duty of good faith claims pleaded by Novatrax.
[12] Third, the motion judge correctly held that the severity of the alleged breach of contract does not play a role in the strong cause analysis. As the Supreme Court of Canada stated in Pompey, at para. 31:
[A] court, in the context of an application for a stay to uphold a forum selection clause… must not delve into whether one party has deviated from, or fundamentally breached an otherwise validly formed contract. Such inquiries would render forum selection clauses illusory since most disputes will involve allegations which, if proved, will make the agreement terminable or voidable by the aggrieved party.
[13] In the present case, Novatrax’s claims of wrongful termination and breach of the duty of good faith all concern the performance and termination of the contract between the parties. They clearly fall within the scope of s. 18 of the ESA, and the motion judge was correct in so holding.
The Tort Claims against Hägele
[14] Novatrax also pleads claims in tort against Hägele, specifically that: (i) Hägele misrepresented the circumstances of the ESA’s termination to Novatrax’s employees and bank for the purpose of interfering with Novatrax’s relationship with its employees, customers, and bank; and (ii) Hägele engaged in unfair competition by setting up Cleanfix, through which Hägele sold its products after terminating the ESA. Novatrax submits that the motion judge erred by holding the forum selection clause covered “not only breaches of contract stemming from the agreement in which such clauses are found, but also related tortious causes of action arising out of the same circumstances.”
[15] I see no error in the motion judge’s conclusion. It is well-established that a broad forum selection clause covering “any disputes” applies not only to contract claims, but also tort claims – such as misrepresentation, interference with economic relations and civil conspiracy – that arise from the contractual relationship: Crown Resources Corporation S.A. v. National Iranian Oil Company (2006), 2006 CanLII 28334 (ON CA), 273 D.L.R. (4th) 65, [2006] O.J. No. 3345 (C.A.), at para. 33, citing with approval Scalas Fashions Limited v. Yorkton Securities Inc., 2003 BCCA 366, 17 B.C.L.R. (4th) 65, at para. 35.
SECOND ISSUE: DID THE MOTION JUDGE ERR IN STAYING THE ACTION AGAINST THE RESPONDENTS WHO WERE NOT PARTIES TO THE ESA?
[16] Novatrax has sued Karl Hägele and Benjamin Hägele, whom the Statement of Claim describes as the “principals and/or employees, officers or directors” of Hägele, as well as Hägele’s related company, Cleanfix. Both individual respondents reside in Germany. Cleanfix is a CBCA corporation incorporated in June 2009.
[17] Novatrax pleads it involved the individual respondents in its “future strategic business decisions” when Hägele asked it to allow Benjamin Hägele to set up an office within Novatrax’s facility. Novatrax alleges Benjamin Hägele thereby gained access to its confidential and proprietary information. Hägele, the individual respondents, and Cleanfix are then alleged to have utilized that access to Novatrax’s information to terminate the ESA, notify employees and the bank about the termination, and enable Cleanfix “to springboard into the North American marketplace and allow these defendants to compete directly, but unfairly, with Novatrax in this specialized sales market.”
[18] The motion judge held that the individual respondents were added as parties to the action because of their relationship to Hägele, and Cleanfix was added because it was the corporation created by the other respondents to further their common purpose. Citing Momentous.ca Corporation v. Canadian American Association of Professional Baseball Ltd., 2010 ONCA 722, 103 O.R. (3d) 467, at para. 53, aff’d 2012 SCC 9, [2012] 1 S.C.R. 359, the motion judge concluded:
[W]here the plaintiff itself takes a position in its claim, (and supports the position by advancing allegations of a nature that make its position clear), that the allegations against the parties not privy to the contract are so intertwined with the claims being asserted against a party that is a party to the contract that they should be heard and decided together, and where the allegations clearly all relate to and arise out of the dealings between the parties to the contract, that the choice of forum clause agreed to by the plaintiff should govern [citation omitted].
[19] Novatrax submits the conduct of the non-contracting respondents was not within the reasonable contemplation of the contracting parties when the ESA was made and therefore the motion judge erred in concluding the language of s. 18 was broad enough to encompass the claims pleaded against them.
[20] I do not accept that submission. The motion judge correctly followed and applied the reasoning of this court in Momentous.ca. In that case, a professional baseball team in Ottawa ceased operations, as a result of which the league in which the team was a member drew down a letter of credit posted by the team. The agreements between the team and the league contained a choice of forum clause requiring all disputes with the league to be resolved by arbitration in the state of North Carolina.
[21] The team commenced an action in Ontario asserting contract and tort claims against the league, its principals, and the City of Ottawa – the owner of the stadium in which the team played its games. In upholding the stay of the action granted on the basis of the forum selection clause, this court observed that the plaintiff’s claims for relief against the defendants who were not parties to the contract containing the forum selection clause all arose out of the same transactions and occurrences and raised common questions of fact and law. This court continued, at para. 53:
In the light of these allegations, the plaintiffs cannot maintain that they ought to be allowed to proceed separately in Ontario against the City of Ottawa and Wolff personally. Their claims against the City and Wolff personally are so intertwined with the claims against the Can-Am defendants that they must all be dealt with together. Moreover, the claims against the City and Wolff all relate to and arise out of the plaintiffs' dealings with the League. The choice of forum clause agreed to by the plaintiffs must therefore govern where their claims should be heard. Thus, even though neither the City nor Wolff personally is a party to an agreement containing a choice of forum clause, on the present state of the pleadings, the claims against them should be dealt with not in Ontario but in North Carolina.
[22] The motion judge concluded that those comments by this court in Momentus.ca “are equally applicable to this case.” I agree. As this court emphasized in Expedition Helicopters, at para. 11, the forum selection clause pervades the forum non conveniens analysis and must be given full weight in the consideration of other factors. Even though Cleanfix and the individual respondents are not parties to the ESA, the claims pleaded against them all arise out of the same transactions and occurrences and raise common questions of fact and law linked to the claims pleaded against Hägele. The factually-intertwined nature of the claims pleaded by Novatrax against all respondents requires, at this stage of the litigation, that the forum selection clause drive the stay analysis.
[23] In her dissent, my colleague disagrees with that result, stating that it would be tantamount to adopting the proposition that a party who has not agreed to arbitration with another can be forced to arbitrate its claims against that party. In my respectful view, that would not be the effect of dismissing the appeal.
[24] I agree with my colleague that a court lacks the jurisdiction to compel those who are not parties to an arbitration agreement to submit their claims to arbitration. I also agree with my colleague that the factors set out by the Alberta Court of Appeal in UCANU Manufacturing Corp. v. Calgary (City of), 2015 ABCA 22, [2015] A.J. No. 58, offer useful guidance to a court faced with a motion to stay an action by reason of an arbitration clause where some of the claimants are not parties to the arbitration agreement.
[25] However, whether the issues for arbitration are substantially the same as those in the action requires consideration of how the plaintiff has pleaded its claim. Here, the claims pleaded by Novatrax against all respondents are factually-intertwined and turn on the determination of the threshold issue of whether Hägele wrongfully terminated the ESA. As well, it is very doubtful that the claims pleaded against the two individual respondents – both officers and directors of Hägele – are sustainable as claims distinct from those against Hägele because they do not exhibit a separate identity or intent from that of the company so as to make the act or conduct complained of that of the individuals: Budd v. Gentra (1998), 1998 CanLII 5811 (ON CA), 111 O.A.C. 288, at para. 25; Density Group Ltd. v. HK Hotels LLC, 2014 ONCA 605, 324 O.A.C. 292, at paras. 163-9.
[26] The practical effect of the motion judge’s exercise of his discretion in the present case is to require the issue of whether Hägele wrongfully terminated the ESA to be decided first in an arbitration. That exercise of discretion is entitled to considerable deference on appeal absent an error in principle, misapprehension of the evidence, or unreasonable decision: Lapointe Rosentein Marchand Melançon v. Cassels Brock, 2016 SCC 30, [2016] S.C.J. No. 30, at para. 54. In my view, the motion judge did not commit any such error nor did he reach an unreasonable result by including the claims against Cleanfix and the individual respondents within the ambit of the stay.
DISPOSITION
[27] For the reasons set out above, I would dismiss the appeal. Based on the agreement reached by counsel, I would award the successful respondents their costs of the appeal fixed at $7,500, inclusive of disbursements and HST.
“David Brown J.A.”
“I agree Doherty J.A.”
Feldman J.A. (dissenting in part):
[28] There are two legal issues in this case. The first is the application of the choice of law, choice of forum and arbitration clause in the Exclusive Sales Agreement between the appellant, Novatrax International Inc., and the corporate respondent, Hägele Landtechnik GmbH, to the appellant’s claims against the corporate respondent, Hägele. The second is its application to the appellant’s claims against the other respondents, Karl Hägele, Benjamin Hägele and Cleanfix North America Ltd., with whom the appellant had no agreement.
[29] I agree that on the first issue, the motion judge was entitled to find that the appellant failed to show strong cause why the choice of law, choice of forum and arbitration clause in the contract with the corporate respondent Hägele should not be enforced, and therefore to stay the appellant’s claims against Hägele in Ontario.
[30] However, I do not agree with Brown J.A.’s decision to uphold the motion judge’s order that the appellant’s claims against the non-contracting respondents should also be stayed and referred to arbitration in Germany. The motion judge concluded on that issue:
I think there is also little or no practical benefit of suggesting that the claims against one or more defendants proceed in Germany while other proceedings proceed on a separate course here in Ontario, (at least according to the state of the existing pleading), and that such multiplicity of such proceedings is not to be encouraged.
So – on that basis then, I think that the analysis that I set forth earlier in relation to enforcement of choice of forum clauses and enforcement of arbitration clauses applies in equal measure to the remaining defendants; that is, the defendants other than the German corporate defendant.
[31] Both the motion judge and Brown J.A. rely on this court’s decision in Momentous.ca Corp. v. Canadian American Association of Professional Baseball Ltd., 2010 ONCA 722, 103 O.R. (3d) 467, as the basis for that decision. In my view, Momentous.ca is distinguishable, and does not stand for the proposition that a party, like the appellant, who has not agreed to arbitration with another, can be forced to arbitrate its claims against that party.
[32] It is trite law that an arbitration agreement gives an arbitrator jurisdiction only over disputes between the parties to the agreement. Where it is clear on the face of the arbitration agreement that a party to the litigation is not a party to the agreement, that issue can and should be determined by the court on a stay application. Moreover, an arbitrator cannot make an arbitral award that disposes of the rights between a party and a non-party to the agreement. See Gulf Canada Resources Ltd. v. Arochem International Ltd. (1992), 1992 CanLII 4033 (BC CA), 66 B.C.L.R. (2d) 113 (C.A.), at paras. 39-40; Ontario v. Imperial Tobacco Canada Ltd., 2011 ONCA 525, 338 D.L.R. (4th) 282, at paras. 119, 141-42.
[33] The decision in Momentous.ca does not purport to contravene these propositions.
[34] In that case, the plaintiffs were related companies that owned a baseball team. They entered into agreements with the defendant baseball league to facilitate the operation of the team within the league, playing in Ottawa at a municipally-owned stadium. They also entered into a letter agreement with Mr. Wolff, who was a director of the league, as well as part owner of the relevant league membership rights. After its first year in operation, the team was not financially successful, causing the league to call on a $200,000 letter of credit given by one of the plaintiffs.
[35] The plaintiffs’ agreements with the league contained choice of forum and arbitration clauses, which required all disputes to be arbitrated, resolved, and enforced in North Carolina. Mr. Wolff and the City of Ottawa were not parties to the plaintiffs’ agreements with the league.
[36] The plaintiffs sued the defendants in Ontario for wrongfully terminating their membership in the league and calling on the letter of credit. The claim alleged that all defendants conspired by misrepresentation and other means to wrongfully enforce the letter of credit, to force the plaintiffs out of the league and to cause them to suffer financial loss.
[37] In their statement of claim, the plaintiffs specifically pleaded that the claims against all parties were properly joined “on the ground that the claims for relief against the defendants arise out of the same transactions and occurrences; there are common questions of fact and law; damage and loss has been caused to the plaintiffs by the defendants and the joinder of all claims will promote the convenient administration of justice”: para. 56. The plaintiffs further pleaded that every named defendant “is a person or party whose presence is necessary to enable the court to adjudicate effectively and completely on the issues in a proceeding”: para. 57.[^1]
[38] After determining that the plaintiffs had not shown strong cause why the North Carolina choice of forum and arbitration clauses contained in the plaintiffs’ agreements with the league should not govern their claims against it, the court turned to the plaintiffs’ submission that Mr. Wolff and the City of Ottawa, who were not parties to those agreements, should submit to the jurisdiction of the Ontario court.
[39] Laskin J.A. held that the plaintiffs’ position might have some validity “but for the way they have pleaded their claim”: para. 52. Because the plaintiffs specifically alleged that all the defendants were necessary parties to the same action, that they conspired together against the plaintiffs, that the claims raised common questions of fact and law, that they arose out of the same occurrences, and that their joinder would promote the convenient administration of justice, the plaintiffs could not maintain that they should be allowed to proceed separately with the action in Ontario against the City of Ottawa and Mr. Wolff personally. The court therefore concluded that despite the fact that those two defendants were not parties to the agreements containing the choice of forum and arbitration clauses, “on the present state of the pleadings”, the claims against them should be dealt with in North Carolina: para. 53.
[40] However, Laskin J.A. went on to say that the severable claims against Mr. Wolff personally, and against the City for reneging on its long-term lease commitment with the plaintiffs, could be redrafted and asserted in a new action in Ontario. Laskin J.A.’s analysis was adopted by the Supreme Court of Canada: see Momentous.ca Corp. v. Canadian American Association of Professional Baseball Ltd., 2012 SCC 9, [2012] 1 S.C.R. 359, at para. 11.
[41] This court in Momentous.ca did not discuss the fact that an arbitrator would have no jurisdiction over a dispute between the plaintiffs and the two non-parties to the arbitration agreement unless on consent of all of them. However, in my view, it is clear from the court’s analysis that the court took from the plaintiffs’ pleading that they understood that jurisdiction over the claims as pleaded was an all or nothing proposition. Therefore, the plaintiffs would be expected to consent to arbitration in North Carolina against the two strangers to the arbitration agreement if the court in Ontario did not allow them to proceed in this jurisdiction on the claims as pleaded. Alternatively, as Laskin J.A. suggested, they could redraft their claims and recommence an action in Ontario only against Mr. Wolff and the City of Ottawa.
[42] To be clear, the court in Momentous.ca was not suggesting that the plaintiffs could be forced, without their consent, to arbitrate out of the jurisdiction with parties with whom they had no arbitration agreement, and be deprived of their right to access to a court. That would be a change in the law of arbitration that would have required a significant jurisprudential and policy analysis.
[43] The facts and findings in Momentous.ca make it wholly distinguishable from this case. The statement of claim in this case deals separately with the claims against the corporate respondent Hägele for breach of contract and wrongful termination of the Exclusive Sales Agreement. It then makes claims against all of the respondents for other conduct.
[44] The claims against the two principals of Hägele, Karl Hägele and Benjamin Hägele, are for negligence, unfair competition, misrepresentation, bad faith and interference with economic relations. The appellant pleads that the two principals requested that the appellant involve them in its future strategic business decisions, and also that Benjamin Hägele be given an office at the appellant’s facility and access to its information. The appellant further pleads that the two principals then misused and diverted that information in order to transfer the fan distribution business to their new corporation, Cleanfix, contacting the appellant’s customers, financial lender and employees.
[45] Cleanfix is a Canadian corporation that was incorporated by the principals of Hägele in 2009, three years after the Exclusive Sales Agreement was entered into. It is not a subsidiary of the corporate respondent. The appellant claims that Cleanfix engaged in unfair competition, and requests an accounting of profits as well as a prohibition order, among other forms of relief.
[46] The conduct of the other respondents is relied on by the appellant to substantiate its claim that Hägele’s wrongful termination of the agreement was part of a planned strategy to obtain control of the business market in North America.
[47] However, there is no specific claim by the appellant that its claims must all be dealt with together. Certainly, it would be convenient to have all matters arising out of the breakdown of the business relationship among these parties dealt with in one proceeding. But unlike in Momentous.ca, there is no plea by the appellant that they must be. Nor are the claims necessarily so intertwined that the claims against the individual respondents for their deliberate conduct and the new Canadian corporation for wrongfully appropriating the appellant’s business could not be heard separately from the claims against Hägele. There is no basis to infer consent by the appellant to arbitrate its claims against the non-contracting parties in Germany or to apply German law.
[48] As there is no basis to infer consent to arbitrate by the appellant, in my view, it is an error of law to purport to send the claims against the respondents who were not parties to the choice of law, choice of forum and arbitration clause contained in the Exclusive Sales Agreement to arbitration, as was done in Momentous.ca.
[49] The next issue is whether the court should have ordered a stay of the non-arbitrable claims against those respondents, pending the outcome of the arbitration with Hägele, and what test should have been applied.
[50] The issue of how to fairly address the question of jurisdiction where some parties are subject to an arbitration agreement and some clearly are not has been considered more frequently in the Alberta courts. Those courts have consistently recognized that where parties are not subject to an arbitration agreement, claims arising under their contracts cannot be referred to arbitration. It is in that context that the Court of Appeal of Alberta has developed a principled approach to determine when a stay of the non-arbitrable claims should be ordered. Importantly, the purpose of the stay is not to refer the non-arbitrable claims to arbitration together with the arbitrable claims, but to await the result of the arbitration of the claims between the agreeing parties.
[51] In Kaverit Steel and Crane Ltd. v. Kone Corp. (1992), 1992 ABCA 7, 120 A.R. 346, at paras. 13-15 and 19-21, leave to appeal to S.C.C. refused, [1992] S.C.C.A. No. 117, the Court of Appeal of Alberta explained the governing principles where a court is asked to stay an action that involves claims against non-parties to an arbitration agreement pending arbitration:
I agree with the learned chambers judge that he has no authority to order these other plaintiffs to submit their claims to arbitration. (I do observe that he can stay claims pending arbitration if indeed they are derivative and must await the arbitration decision.)
Similarly, I agree with the learned Queen's Bench judge that he cannot send the distributor's claims against the licensor's subsidiaries to arbitration in the absence of consent by all the parties. Again, counsel for the licensor accepted this point during argument. (Again I note that a judge might stay a suit against them if the arbitration will effectively resolve the claim against them.)
Associated and connected parties like subsidiaries, shareholders, directors, employees, agents and the like might be required to join an arbitration in one of three ways: by the governing law, by the submission itself, to the extent the parties to the contract can bind other parties, or by the later agreement of the other parties. None of these three yet applies here.
I accept that forcing the subsidiaries to partake in the arbitration may well be sensible and practical. I insist only that it is for the parties or the Legislature, not me, to decide what procedure is right for these cases.
I think it prudent to emphasize the limited nature of this ruling. One must distinguish between jurisdiction to grant relief and jurisdiction to consider actions. The subsidiaries are not parties to the arbitration in the sense that the claimant might get relief against them directly. But arbitrators might nevertheless decide that, for the purpose of relief against the principal, they can rely upon what the subsidiaries did. Moreover, the arbitrators might decide that the actions of the subsidiaries make the principal liable, and might offer relief against the principal for what they did.
I agree with the learned Queen's Bench judge that he cannot refer any of the claims of any of the "extra" parties to arbitration. I add only that he might nevertheless stay claims pending arbitration when it would appear just and equitable to do so. He might also strike a claim for failure to disclose a cause of action. Both opportunities await another day in Queen's Bench. Subject to the right to apply in Queen's Bench for another kind of stay, I would reject these grounds of appeal. [Emphasis in original.]
[52] In UCANU Manufacturing Corp. v. Calgary (City of), 2015 ABCA 22, [2015] A.J. No. 58, the Court of Appeal of Alberta endorsed three factors to be considered when determining whether to stay an action that is not subject to arbitration pending the outcome of arbitration. Those factors are: 1) whether the issues in the arbitration are substantially the same as the issues in the action; 2) whether the defendant has satisfied the court that continuing the action would work an injustice on him or her; and 3) whether the defendant has satisfied the court that staying the action would not cause an injustice to the plaintiff.
[53] Those factors were applied recently in Alberta in Toyota Tsusho Wheatland Inc. v. Encana Corp., 2016 ABQB 209, 84 C.P.C. (7th) 360. Toyota Tsusho Wheatland Inc. (“Toyota”) and Encana had entered into a number of agreements for oil and gas development, two of which contained agreements for international arbitration of disputes. PrairieSky Royalty Ltd., a former subsidiary of Encana, was not a party to the agreements. When Toyota sued Encana and PrairieSky in Alberta, Encana moved for a stay of the entire action so that all issues could be referred to arbitration. Toyota and PrairieSky both opposed the stay.
[54] The court stayed the action against Encana, but allowed the action against PrairieSky to proceed based on the following considerations, at paras. 74-75:
I have considered the three factors identified in UCANU:
The issues in the Arbitration and in the Action are substantially similar as the key issue in both proceedings is whether the PrairieSky Transactions constituted a breach of the Royalty Agreement.
Encana may be inconvenienced if it is required to produce witnesses or documents in the Action or if it is third partied by PrairieSky as it could be subjected to duplicative processes and be required to participate simultaneously in both proceedings. It might also face the prospect of inconsistent decisions in the Action and in the Arbitration, although as other courts have noted, this is unlikely: Kaverit at para 47. While Encana may suffer some inconvenience, it has not demonstrated that continuance of the Action would cause it to suffer significant substantive injustice. When parties elect to enter into broadly drafted arbitration agreements, they are presumably aware that those agreements will not bind third parties who may be involved in disputes that may arise and that litigation proceeding at the same time as the arbitration may be required to resolve those disputes.
Both [Toyota] and PrairieSky will be delayed in having the serious issues between them that are raised in the Action determined if the Action is stayed. Moreover, if the Arbitration is decided, it will not determine the rights and obligations as between [Toyota] and PrairieSky or any third party claims between PrairieSky and Encana, so there is little reason in the circumstances for postponing the Action as between them pending the Arbitration.
[Toyota] and PrairieSky would suffer significantly greater prejudice if the Action were stayed between them, than would Encana if the Action against PrairieSky is permitted to proceed. As a result, the Action will be stayed only against Encana pending the determination of the Arbitration. The Action against PrairieSky may proceed, including any third party proceedings that may be commenced by PrairieSky against Encana.
[55] I would adopt the principled approach that has been developed and applied by the Court of Appeal of Alberta in the cases referred to above, according to which the court must consider the following three factors: 1) whether the issues in the arbitration are substantially the same as the issues in the action; 2) whether the defendant has satisfied the court that continuing the action would work an injustice; and 3) whether the defendant has satisfied the court that the stay will not cause an injustice to the plaintiff.
[56] Turning to the first factor, the issue to be determined in the arbitration is whether the corporate respondent Hägele wrongfully terminated the Exclusive Sales Agreement with Novatrax. According to the statement of claim, the agreement provides for ordinary termination if either party gives 12 months’ written notice, as well as for extraordinary termination without notice in particular circumstances. It is alleged that Hägele’s termination was not in accordance with the contract. It is also alleged that the termination was part of a deliberate strategy to obtain control of sales in the North American market.
[57] It is only this latter claim, if pursued, that could involve some or all of the same issues as are pleaded against the other respondents. There may therefore be some risk of inconsistent verdicts if that claim is pursued in the arbitration, as well as in the Ontario action. That risk will depend on how the appellant chooses to proceed with the arbitration in Germany. The appellant may well decide to limit its claims in the arbitration to breach of contract and wrongful termination, and to pursue the issues arising out of the conduct of the principals of the company and Cleanfix only in the Ontario action.
[58] That being said, the result of the arbitration in Germany will not dictate the result against the individual respondents and Cleanfix in the Ontario action. That is, even if the arbitrator determines that Hägele rightfully terminated the agreement without notice, it is possible that a court here could find that the actions of the individual respondents and Cleanfix were wrongful under Ontario law.
[59] The second factor is whether there would be an injustice to the individual respondents and Cleanfix if the Ontario action were continued. There could be some duplication of witnesses, depending on how the appellant proceeded in the arbitration, as well as the timing of the arbitration and the action. However, as the Alberta court in Encana pointed out, that is one possible consequence of including a wide-ranging arbitration clause in a contract between two parties where disputes may arise that also involve others.
[60] Moreover, in my view, the respondents have not demonstrated that they would suffer an injustice if the Ontario action were to continue. Everything that occurred, as well as Cleanfix’s ongoing business, is in Ontario. Many likely witnesses are in Ontario, and therefore will not be inconvenienced in terms of travelling. In fact, the respondents conceded before the motion judge that, if a traditional forum non conveniens analysis were applied, Ontario would be the more convenient and appropriate forum to litigate this dispute.
[61] The third factor is whether the respondents have demonstrated that a stay will not cause the appellant an injustice. The appellant alleges that its business has been ruined. The respondents are now proceeding to carry on that business in Canada to the exclusion of the appellant. There will already be significant expense for the appellant to proceed with arbitration with Hägele in Germany. The appellant’s claims against the other respondents are made in accordance with the law of Ontario. Whether such claims also exist under the law of Germany is not known. The fact that another law will apply to these claims if they are arbitrated in Germany is prima facie prejudicial to the appellant, which did not agree with those respondents to that choice of law, and is therefore entitled to sue in Ontario. In my view, there will be prejudice to the appellant if a stay is ordered of its claims against the individual respondents and the Canadian corporation, Cleanfix.
Conclusion
[62] The motion judge erred in law by referring claims to arbitration in Germany against respondents with whom the appellant made no agreement at all and no agreement to arbitrate, depriving the appellant of its right to litigate those claims in Ontario under Ontario law. As he erred in law, no deference is owed to his decision.
[63] I would allow the appeal in part, and set aside the stay of the claims in the Ontario action against the non-parties to the Exclusive Sales Agreement –
namely, Karl Hägele, Benjamin Hägele, and Cleanfix. I would grant partial indemnity costs to the appellant in an amount to be determined.
Released: October 20, 2016 (DD)
“K. Feldman J.A.”
[^1]: The next paragraphs in the statement of claim refer to the fact that the letter agreement with Mr. Wolff contained a choice of law and choice of forum clause in favour of Ontario. It appears therefore that the intent of the joinder plea was to persuade the Ontario court to take jurisdiction over the entire proceeding and not to give effect to the North Carolina choice of forum clause contained in the other documents.