Court File and Parties

Court File No.: CV-15-525513 Date: 2016-04-25 Ontario Superior Court of Justice

Between: ADVANTAGE ENGINEERING INC., Plaintiff – and – POLARIS INDUSTRIES INC., Defendant

Counsel: Pavle Masic for the Plaintiff Jennifer J. Lake for the Defendant

Heard: April 19, 2016

Perell, J.

Reasons for Decision

A. Introduction

[1] In this action, Advantage Engineering Inc. (“Advantage”), which is an Ontario corporation carrying on business in the automotive industry, sues Polaris Industries Inc. (“Polaris”), which is an American corporation carrying on business in the State of Minnesota as a manufacturer of various types of vehicles. Advantage sues Polaris for: damages of $451,732.41 for breach of a Master Supply Agreement including $91,732.41 for unjust enrichment. On this motion, Polaris moves for an order dismissing or staying the action and referring the dispute to arbitration in accordance with an arbitration clause in the Master Supply Agreement. For the reasons that follow, Polaris’s motion is granted.

B. Factual and Procedural Background

[2] Advantage and Polaris entered into a Master Supply Agreement dated May 14, 2012, under which Advantage would supply to Polaris component parts and tooling for vehicles.

[3] Clause 22.6 of the Master Supply Agreement provides that the Agreement will be governed and construed in accordance with the laws of the State of Minnesota. Clause 22.7 of the Master Supply Agreement expressly provides that all disputes with respect to or arising out of the Master Supply Agreement must be submitted to arbitration, which arbitration is required to take place in Minneapolis, Minnesota.

[4] The arbitral clause is an international arbitration agreement under Ontario’s International Commercial Arbitration Act, R.S.O. 1990, c. I.9, which adopts the UNCITRAL Model Law on International Commercial Arbitration. An excerpt from clause 22.7 of the Master Supply Agreement states:

22.7 Disputes with respect to or arising out of this Agreement must be submitted to arbitration under the Rules of the International Chamber of Commerce (the “ICC”) for international disputes and under the Rules of the American Arbitration Association (the “AAA”) for disputes occurring in the United States. A single arbitrator shall be selected in accordance with the rules of the AAA or ICC, as applicable (the “Rules”). The arbitration will take place in Minneapolis, Minnesota and will be conducted in English.

[5] On May 30, 2013, without giving the 180 days’ advance notice that was required by the Master Supply Agreement, Polaris terminated the Agreement effective immediately.

[6] After the termination of the Agreement, Advantage attempted to settle its accounts for unpaid goods and services. It also claimed damages for economic losses caused by the abrupt and improper termination of the Master Supply Agreement.

[7] There were discussions between the parties to settle Advantage’s claims, and several times during these discussions, Lynda Dettinger, Advantage’s Vice-President of Finance, suggested that the dispute should be referred to arbitration if the parties could not come to an agreement.

[8] On July 30, 2013, there was a conference call during which the parties reviewed a spreadsheet that Polaris had temporally posted on an Internet webpage. Participating in the call was: Jim Ludwig, a Purchasing Manager with Polaris; Steve Hengsperger, President of Advantage, Justin R. Fogarty, Advantage’s legal counsel and the managing partner of Regent Law Professional Corporation. Using the spreadsheet, the parties agreed on the amount owing to Advantage for goods in inventory, i.e., $91,732.41, but Polaris refused to pay anything unless Advantage signed a full release of its claims against Polaris. Advantage refused to provide a full release, and Polaris terminated the call.

[9] After the aborted conference call of July 2013, the settlement discussions of the parties continued frustratingly and sporadically for the next 18 or so months.

[10] During this time, in the fall of 2014, Ms. Dettinger was diagnosed with cancer. Her treatments, which are continuing, began in 2015 and her physicians have forbidden her traveling outside Ontario.

[11] On April 7, 2015, Advantage commenced this breach of contract action against Polaris.

[12] Shortly thereafter, Polaris gave notice that it required the dispute to be arbitrated in accordance with the Master Supply Agreement. Polaris stated that if Advantage did not agree to arbitration in Minnesota, then Polaris would bring a motion to have the action in Ontario stayed.

[13] Advantage’s response was that while it was prepared to have the matter arbitrated, the arbitration, like the current action, would have to proceed in Ontario because its chief witness, Ms. Dettinger, could not travel to Minnesota.

[14] This suggestion was unacceptable to Polaris, which sought to enforce the arbitration clause in the Master Supply Agreement, and it brought the motion now before the court to have the action stayed.

[15] Polaris supported the motion with an affidavit from Matthew Sokolsky, who is a lawyer with Teplitsky, Colson LLP, who are the lawyers of record for Polaris. Mr. Sokolsky was not involved in the events, and his evidence was based on a review of the documents and correspondence between the parties.

[16] Advantage opposed the motion with affidavits from Ms. Dettinger and Mr. Fogarty.

[17] On February 10, 2016, Mr. Sokolsky was cross-examined. During his cross-examination, he refused to produce the spreadsheet that had been discussed during the July 30, 2013 conference call.

[18] The motion to stay was heard on April 19, 2016.

C. Discussion and Analysis

[19] Article 8 (1) of the Schedule to the International Commercial Arbitration Act, provides:

8 (1) 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 of 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.

[20] Under the International Commercial Arbitration Act, where there is an agreement to arbitrate, it is mandatory for the court to refer the dispute to arbitration unless the court finds the agreement: (a) null and void, (b) inoperative, or (c) incapable of being performed.

[21] In Seidel v. TELUS Communications Inc., 2011 SCC 1, the Supreme Court of Canada held that absent legislative language to the contrary, courts must enforce arbitration agreements. The court should only refuse a reference to arbitration if it is clear that the matter falls outside the arbitration agreement: Dalimpex Ltd. v. Janicki (2003), 64 O.R. (3d) 737 (C.A.).

[22] Advantage submits that the Master Supply Agreement and its arbitration provision are null and void or inoperative because Polaris repudiated the Master Supply Agreement by terminating it without proper notice. This submission, however, is without merit. A breach of a contract does not make the contract null and void from the outset, and a breach of contract does not nullify the arbitration provisions (or the exculpatory provisions in the contract). An agreement to arbitrate survives a breach of the contract.

[23] Advantage submits that its claims arise outside the Master Supply Agreement and, therefore, its claims are not subject to the arbitration clause. This argument is also without merit for two reasons.

[24] First, to use the language of s. 22.7 of the Master Supply Agreement, Advantage’s so-called unjust enrichment claim and, even more so, its economic loss claim are “disputes with respect to or arising out of [Master Supply] Agreement.”

[25] Second, in accordance with Article 16 of the Schedule to the International Commercial Arbitration Act, the court should refer to the arbitrator the issue of whether the dispute comes within the arbitration clause. Article 16 states:

Competence of arbitral tribunal to rule on its jurisdiction

16(1) The arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement. For that purpose, an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. A decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.

[26] Under what is known as the competence-competence principle, if there is an arguable or prima facie case that the arbitrator has jurisdiction, the court should defer the issue of jurisdiction to the arbitrator: Ontario Medical Association v. Willis Canada Inc., 2013 ONCA 745; Jean Estate v. Wires Jolley LLP, 2009 ONCA 339; Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34; Dalimpex Ltd. v. Janicki, supra; Dancap Productions Inc. v. Key Brand Entertainment Inc., 2009 ONCA 135.

[27] The general rule is that a challenge to the arbitrator’s jurisdiction should be first resolved by the arbitrator. The exception to the general rule is where the challenge is based solely on a question of law. If the challenge raised is a question of mixed fact and law, the court should refer the challenge to the arbitrator unless the question of fact requires only superficial consideration of the documentary evidence in the record. In the circumstances of the immediate case, the general rule applies and it is for the arbitrator to decide whether the dispute is arbitral.

[28] Advantage also argues that there should be no referral to arbitration because the arbitration provision in the Master Supply Agreement is “incapable of being performed.” This submission is largely based on the unfortunate circumstance that its chief witness, Ms. Dettinger, cannot travel to Minnesota. There is no merit to this submission. Apart from the fact that the arbitrator should be able to fashion a solution to enable Ms. Dettinger’s evidence to be heard, the particular circumstances of a witness’s availability does not make an arbitration clause incapable of being performed.

[29] Advantage submits that although before Ms. Dettinger’s illness, it suggested that the dispute be arbitrated; Polaris rebuffed or ignored these suggestions and used them to delay a resolution of the dispute. Advantage submits that these delaying tactics disqualify Polaris from both relying on Advantage’s previous willingness to submit to arbitration and also from requesting arbitration in Minnesota.

[30] I disagree with this submission. Before Ms. Dettinger’s illness, there was nothing stopping Advantage from triggering the arbitration provision. It did not have to suggest arbitration; Advantage could have demanded it as far back as the 2013 termination of the Master Supply Agreement. The answer to Polaris’s dithering about resolving the dispute was to promptly refer the matter to arbitration not to wait for two years and then commence an action in Ontario.

[31] Finally, Advantage argues that although the International Commercial Arbitration Act does not have a provision similar to s. 7(2) para. 5 of the Arbitration Act, 1991, S.O. 1991, c. 17, which provides the court with discretion to refuse to refer a matter to arbitration where “the matter is a proper one for summary judgment,” the court can and should in the immediate case take this factor into account.

[32] For present purposes, I need not decide whether this provision from the Arbitration Act, 1991 can be read into the International Commercial Arbitration Act, because I do not regard the immediate action as a proper one for summary judgment. While the so-called unjust enrichment claim component of the action appears amenable to a summary judgment, the far more substantial and complicated claim is the economic loss claim, which does not appear appropriate for a summary judgment, but a trial. The economic loss claim is a claim within the wheelhouse of a commercial arbitrator, and more to the point, arbitration is what the parties agreed to when they signed the Master Supply Agreement.

[33] For the above reasons, the motion is granted and the action stayed with costs to Polaris fixed at $11,000, all inclusive.

Perell, J. Released: April 25, 2016