Why this case matters
In April 2022, we examined the motion court's decision to grant a stay of an action commenced in Ontario and refer the dispute to arbitration in New Zealand. The Court of Appeal for Ontario recently upheld that decision, and while doing so, offered guidance on the analysis for a stay under Ontario's arbitration legislation.
The Court of Appeal's decision in Husky Food Importers & Distributors Ltd. v. JH Whittaker & Sons Limited ("Husky Food")1 demonstrates the Court's deference to the arbitration process, where the parties have submitted themselves to a clear arbitration clause in their commercial agreement.
The underlying motion and decision
Husky Food Importers & Distributors Ltd. ("Husky") was the Canadian distributer of chocolates imported from a New Zealand manufacturer, JH Whittaker & Sons Limited ("Whittaker"). The parties' distribution agreement was nebulous, consisting of both written and oral commitments. Husky eventually commenced an action for breach of contract and other causes of action.
Whittaker moved to stay the action in favour of arbitration. The manufacturer argued that the parties' distribution agreement contained a clause to arbitrate disputes in New Zealand. Husky argued that the parties never agreed to arbitrate their disputes and that the impugned clause was fortuitously inserted into a schedule to the agreement.2
The motion court found that an arbitration agreement arguably existed and granted Whittaker's motion for a stay. Under the relevant legislation, a court must refer a dispute to arbitration if it is subject to an arbitration agreement.3 Since the parties' distribution agreement arguably contained an arbitration clause and that clause was not rendered inoperative, the Ontario action was stayed.
The Court of Appeal offers clarity on the stay analysis
Husky appealed the decision. It argued that the incorrect legal standard – the "arguable" standard - was applied to conclude that an arbitration agreement existed. The Court of Appeal rejected Husky's arguments and seized the opportunity to clarify the test for granting a stay.
Justice Brown, writing for the court, held that the framework for granting a stay is spelled out in the Supreme Court's 2022 ruling in Peace River Hydro Partners v. Petrowest Corp ("Peace River").4 The Peace River framework identifies two-part test to determine when a stay of proceedings should be granted in favor of arbitration. The first component consists of the threshold/technical prerequisites for a stay, which are:
- whether an arbitration agreement exists;
- whether court proceedings have been commenced by a party;
- whether the court proceedings are in respect of a matter that the parties agree to submit to arbitration; and
- whether the moving party seeks a stay before taking any steps in the court proceedings.5
The second part of the test is the determination of whether any statutory exceptions to a stay apply.
On the first requirement of the first component of the test, the motion court had determined that the applicable standard is whether there is an "arguable case" that an arbitration agreement exists.6 The Court of Appeal upheld that determination and dismissed Husky's argument that a standard of a "balance of probabilities" applied.7
Arbitration agreement arguably existed
The Court of Appeal also rejected Husky's submission that the motion judge "ignored certain material facts which clearly demonstrate that Husky did not agree" to the arbitration clause.8 The evidence supported the motion court's conclusion that an arbitration agreement arguably existed between Husky and Whittaker.
The Court of Appeal highlighted three facts that supported the conclusion:
- The Ontario action was predicated on a May 2020 distribution agreement that contained "all the material terms";
- Drafts of that agreement included an arbitration clause that was "accepted" by Husky; and
- Husky was aware of the arbitration clause, having reviewed the Standard Terms of Trade circulated by Whittaker, removed track changes from the Terms, while keeping the arbitration clause in place.9
Concluding Thoughts
Husky Food reinforces that parties should always turn their minds to the existence of and terms of an arbitration provision when drafting agreements.
The decision also provides clarity on the proper analysis for engaging a stay provision under Ontario's arbitration legislation. The Court was clear that the test as set out by the Supreme Court of Canada in Peace River applies. Moreover, the Peace River framework applies to both domestic and international arbitration statutes. Justice Brown rejected the previous framework for a stay espoused by the Court in the 2016 decision of Haas v. Gunasekaram, which was relief on by the motion court.10
Footnotes
1. Husky Food Importers & Distributors Ltd. v. JH Whittaker & Sons Limited, 2023 ONCA 260 ("Husky Food").
2. Husky Food Importers v. JH Whittaker & Sons, 2022 ONSC 1679, at para. 10.
3. Article 8 of the UNCITRAL Model Law on International Commercial Arbitration states that in an action brought in a matter which is the subject of an arbitration agreement, a court shall refer the parties to arbitration, unless the court finds the agreement is null and void, inoperative or incapable of being performed
4. Peace River Hydro Partners v. Petrowest Corp., 2022 SCC 41 ("Peace River"). Although Justice Conway did not apply this test in her decision, the Court of Appeal found that she applied the same legal standard found in Peace River, at para. 30. Our analysis of the Supreme Court's decision can be found here.
5. Husky Food, at para. 24, citing Peace River at para. 83.
6. Husky Food, at para. 28. The Court of Appeal found that this standard applies to each of the four components of the first leg of the Peace River test.
7. Husky Food, at para. 29. Balance of probabilities, the Court of Appeal clarified, does apply to the second component of the Peace River test of whether there are any statutory exceptions to a stay of proceedings.
8. Husky Food, at para. 32.
9. Husky Food, at para. 33.
10. Haas v. Gunasekaram, 2016 ONCA 744.
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