2021 ONSC 2684

COURT FILE NO.: CV-21-00000069-0000

DATE: 20210409

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: KINGSTON AUTOMATION TECHNOLOGY INC., Applicant

AND:

MONTEBELLO PACKAGING, A DIVISION OF GREAT PACIFIC ENTERPRISES INC., Respondent

BEFORE: Mr. Justice Graeme Mew

COUNSEL: R. Steven Baldwin, for the Applicant

Zohar R. Levy, for the Respondent

HEARD: 7 April 2021, at Kingston by video conference

ENDORSEMENT

[1] The applicant wishes to challenge an arbitration award dated 11 February 2021. There is an application presently returnable on 28 May 2021. At that time, the applicant will seek an order of the court setting aside the arbitral award, pursuant to s. 46 of the Arbitration Act, 1991, S.O. 1991, c. 17 and, or in the alternative, leave of the court to appeal the award on a question of law, pursuant to s. 45 of the Arbitration Act.

[2] The respondent is in the process of filing an application to enforce the arbitral award of 11 February 2021 as well as a subsequent award made by the arbitrator on 21 March 2021.

[3] This endorsement deals with a motion by the applicant seeking a stay of the awards of 11 February 2021 and 22 March 2021 and to stay the arbitration generally pending the disposition of its application for leave to appeal the awards and/or set aside the awards pursuant to sections 45 and 46 of the Arbitration Act.

[4] As matters presently stand, the awards by the arbitrator require the applicant to return to the respondent three blow moulding machines (“BMM”s) that it was working on and to refund a payment made by the respondent in respect of orders for two production machines in the amount of US$288,732 plus interest of US$19,285.12 for a total of US$308,017.12. The machines are to be returned to the respondent by 9 April 2021.

[5] A case conference has been scheduled with the arbitrator for 13 April 2021 to determine the procedure for the continuation of the arbitration.

Background

[6] The applicant, Kingston Automation Technology Inc. (“KAT”) makes automated production equipment. On 8 January 2016, it entered into a contract known as the Shaped Container Engineering Agreement (the “SCEA”) with the respondent, Montebello Packaging, pursuant to which KAT was to design and build a BMM for Montebello. These machines utilise a new technology to shape aluminium containers using heat and compressed air.

[7] Montebello ordered two BMMs from the applicant pursuant to the terms set out in the SCEA.

[8] On 18 May 2018, Montebello gave notice to KAT of a material breach of the SCEA as a result of KAT’s failure to deliver the BMMs ordered by Montebello. The respondent also confirmed its previous cancellation of other purchase orders which are referred to in the arbitration award as the “non-SCEA POs”.

[9] The SCEA provides for a step dispute resolution process which provides that all matters other than certain specified disputes (not applicable to the present circumstances) that cannot otherwise be resolved “will be settled by final and binding arbitration pursuant to the provisions of the Arbitration Act (Ontario)”. The dispute resolution process, including the arbitration provision, applies to “any dispute or disagreement between the Parties with respect to the interpretation of any provision [of the SCEA], the performance of either Party…or any other matter that is in dispute between the Parties arising from or in connection with or related to [the SCEA]”.

[10] A five-day arbitral hearing was conducted by the appointed arbitrator, The Honourable Douglas Cunningham Q.C. His 44-page award was released on 11 February 2021. As previously noted, the arbitrator rendered a further decision, dealing with certain implementation issues arising from his initial award, on 22 March 2021.

[11] KAT commenced this application on 4 March 2021.

Stay of Award Pending Disposition of Application

[12] Section 50 of the Arbitration Act provides a mechanism for the enforcement by the court of an arbitration award made in Ontario or elsewhere in Canada. Subsection 3 provides that the court shall give judgment enforcing an award made in Ontario unless, inter alia, there is a pending appeal or application to set the award aside.

[13] The applicant submits that section 50(3) establishes a presumption in favour of ordering a stay. However, subsection 5 provides that if an appeal or application to set the award aside is pending, the court may (a) enforce the award; or (b) order, on such conditions as are just, that enforcement of the award is stayed until the pending appeal or application is finally disposed of. Subsection 6 provides that if the court does stay the enforcement of an award made in Ontario pending the final disposition of an appeal or application, it may give directions for the speedy disposition of the proceeding. Although the language of subsection (5) is inelegant, in my view it qualifies the application of subsection (3).

[14] Both parties agree that in exercising its discretion as to whether or not to order a stay, the principles established in RJR-MacDonald Inc. v. Canada (Attorney General), 1994 CanLII 117 (SCC), [1994] 1 S.C.R. 311. This requires the court to:

a. undertake a preliminary assessment of the merits of the case to ensure that there is a serious question to be tried;

b. determine whether the applicant would suffer irreparable harm if the application were refused; and

c. assess which of the parties would suffer greater harm from the granting or refusal of the remedy pending a decision on the merits.

See generally J. Kenneth McEwen and Ludmila Herbst, Commercial Arbitration in Canada: A Guide to Domestic and International Arbitrations, Carswell Online at §12:4.

[15] The arbitration clause in the SCEA makes no provision for appeals. Accordingly, section 45(1) of the Arbitration Act restricts KAT’s appeal remedy to an appeal to this court on a question of law, with leave, which the court shall grant only if satisfied that:

a. The importance to the parties of the matters at stake in the arbitration justifies an appeal; and

b. Determination of the question of law at issue will significantly affect the rights of the parties. It is well established that provisions, such as the arbitration clause in this case, which provide for the “final and binding” resolution of disputes by arbitration reflect a clear intention to exclude a right of appeal.

[16] The applicant does not, however, require leave of the court to bring an application to set aside an award on one or more of the grounds set out in section 46(1) of the Arbitration Act which, for the purposes of the present case, would include the award dealing with a dispute that the arbitration agreement does not cover (excess of jurisdiction) and the applicant not having been treated equally and fairly.

[17] In Louis v. Poitras, 2020 ONCA 815, the court observed:

[15] In RJR-MacDonald Inc. v. Canada (Attorney General), 1994 CanLII 117 (SCC), [1994] 1 S.C.R. 311 (S.C.C.), the Supreme Court of Canada articulated, at p. 334, a three-part test for obtaining a stay of a judgment pending appeal: (1) is there a serious question to be tried (i.e., to be determined on the appeal); (2) will the moving party suffer irreparable harm if the stay is not granted; and (3) does the balance of convenience favour granting the stay?

[16] The factors are not watertight compartments; the strength of one may compensate for the weakness of another: Circuit World Corp. v. Lesperance (1997), 1997 CanLII 1385 (ON CA), 33 O.R. (3d) 674 (Ont. C.A. [In Chambers]), at p. 677. As well, they are interrelated in the sense that the overriding question is whether the moving party has shown that it is in the interests of justice to grant a stay: BTR Global Opportunity Trading Ltd. v. RBC Dexia Investor Services Trust, 2011 ONCA 620, 283 O.A.C. 321 (Ont. C.A. [In Chambers]), at para. 16; Circuit World, at p. 677.

[17] As put by the authors of Sopinka and Gelowitz on The Conduct of an Appeal, 4th ed. (Toronto: LexisNexis, 2018), at §2.187, the factors to be considered by a motion judge "are generally designed to assess the prejudice to the parties if the order sought is granted or refused."

[18] Since this is a stay motion in the context of a motion for leave to appeal to this court, to the standard RJR-MacDonald factors must be added a consideration of the principles governing applications for leave to appeal….

[18] With respect to the arbitrator’s alleged errors of law, the applicant points to a number of examples where it says the arbitrator fundamentally misconstrued the provisions of the SCEA to KAT’s detriment, and in doing so, ignored the evidence of KAT’s witness, Ben Pilon, who had negotiated the contract on behalf of KAT, concerning the intention of the parties, despite no contrary evidence having been adduced by Montebello.

[19] I pause to observe that whereas traditionally, the determination of contractual rights and obligations was considered a pure question of law, since the decision in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, the interpretation of contracts is now regarded as a question of mixed fact and law and, thus, the bar for obtaining leave to appeal issues of contractual arbitration has, arguably, been raised: see generally, Harvin Pitch and Lucas Kittmer, “Arbitral Awards: Appeals, Setting Aside and Enforcement”, in Huberman (ed.), A Practitioner’s Guide to Commercial Arbitration, (Toronto: Irwin Law, 2017), at 394.

[20] The jurisdictional issue raised is an unusual one. KAT initiated the arbitration proceedings and asserted that all of its purchase orders were subject to the SCEA and, thus, are arbitrable.

[21] Montebello appears to have taken the position that while the non-SCEA POs were not governed by the terms and conditions of the SCEA, disputes relating to them were nevertheless arbitrable because they came within the description of “any other matter that is in dispute between the Parties arising from or in connection with or related to” the SCEA. The arbitrator evidently agreed with Montebello (see para. 119 of the 11 February 2021 award).

[22] Section 46(3) of the Arbitration Act precludes a court from setting aside an award on jurisdictional grounds if the party has agreed to the inclusion of the dispute or matter. Furthermore, a party objecting to an arbitral tribunal’s jurisdiction shall make such objection no later than the beginning of the arbitration hearing: Arbitration Act, section 17(3). No such objection was taken by KAT at the outset of the arbitration (although it was raised by KAT, to quote the arbitrator “rather late in the game”).

[23] One of the issues raised by the applicant, both as a matter of fairness and error of law, is what it regards as a selective and inconsistent application of the SCEA which resulted in provisions of the SCEA which would have benefited KAT being ignored despite other provisions of the agreement being applied.

[24] As already alluded to, at this stage the assessment of the merits is preliminary in nature.

[25] In my view, there is enough substance in the issues raised by KAT to satisfy me that there are serious questions to be determined on the application for leave to appeal and on the request to set aside the award.

[26] The remaining criteria in the RJR-MacDonald test, namely whether the applicant would suffer irreparable harm if the application were refused and where the balance of convenience lies cannot, however, be so readily determined in favour of the applicant.

[27] In his decision of 22 March 2021, the arbitrator declined to order a deadline for payment by KAT of the US$308,017.12 awarded to Montebello, pending completion of the outstanding issues relating to the non-SCEA invoices and credit notes.

[28] As a result, the object of the stay of enforcement of the award would be limited to the return to Montebello of assets and equipment. There is no dispute that the assets and equipment in question were subject to the SCEA. Furthermore, in its notice of application, KAT seeks, among other things, an order of the court to vary the award to order KAT to deliver the equipment subject to the SCEA to the respondent, albeit after the respondent has paid the monies which the applicant claims to be owed pursuant to the SCEA. In its factum and in oral argument, KAT candidly acknowledges that it wishes to retain the equipment in question, principally the BMM machine, as security against the ultimate indebtedness which it believes Montebello will incur if the agreement is correctly interpreted and applied.

[29] Furthermore, as the respondent points out, KAT has failed to put forward any admissible evidence of irreparable harm and submits that, in any event, the harm could be entirely quantified and cured through the payment of money.

[30] The respondent also submits that another factor favouring denial of the stay is that it paid the amounts sought by KAT in the arbitration into trust prior to the hearing in an effort to facilitate a timely return of its equipment. As a result, if KAT is successful in its application and Montebello is ordered to pay funds to KAT, there is compelling evidence that Montebello can and will do so.

[31] I agree with the respondent’s submissions on irreparable harm and balance of convenience.

[32] While I have found that there are serious issues to be tried, I do not find the strength of the applicant’s position on that element to be sufficient to overcome the countervailing effect of the second and third RJR-MacDonald factors.

[33] Accordingly, I would not grant a stay of Montebello’s application to enforce the award pending KAT’s motion for leave to appeal and application to set aside the award.

Staying the Balance of the Arbitration Proceeding

[34] The arbitration is not yet finished. The kompetenz-kompetenz principle applies. This is reflected in section 17(1) of the Arbitration Act which provides that an arbitral tribunal may rule on its own jurisdiction. Coupled with that, section 20(1) empowers the arbitral tribunal to determine the procedure to be followed in the arbitration. An application for a stay of the arbitral proceeding itself should, accordingly, be made to the arbitrator. No such application has been made. There is, accordingly, no basis upon which the court could or should intervene.

[35] The applicant also raises concerns about the efficiency of allowing the further accumulation of costs in the arbitration proceeding to accrue while there is an appeal and or the possible setting aside of the award pending. Certainly, if KAT is right, there is the potential for wasted time and expense. But that can be compensated for, at least to some extent, by appropriate awards of costs. And it is not, in any event, a basis for displacing the kompetenz-kompetenz principle by interfering with the arbitrator’s management of the arbitration.

[36] Accordingly, I decline to order a stay of the arbitral proceedings.

Disposition

[37] For the foregoing reasons, the applicant’s motion for a stay of enforcement of the arbitral award and for a stay of the arbitration proceedings is denied.

[38] The costs of this motion should be reserved to the judge hearing the application.

Mew J.

Date: 09 April 2021

Corrected, 20 April 2021:

Paragraph 32

The word “not” is inserted after the word “do”: “While I have found that there are serious issues to be tried, I do not find the strength of the applicant’s position on that element to be sufficient to overcome the countervailing effect of the second and third RJR-MacDonald factors.”