Ontario – litigation stayed to permit arbitrator to determine jurisdiction and issues subject to arbitration

In a pair of decisions, Deco Homes (Richmond Hill) Inc. v. Mao, 2019 ONSC 6223 and Deco Homes (Richmond Hill) Inc. v. Li, 2019 ONSC 7501, Mr. Justice Lorne Sossin acknowledged overlap of buyers’ claims subject to statutory arbitration and vendor’s claims for breach of contract not covered by arbitration.  Respectful of competence-competence, Sossin J. stayed the actions to allow an arbitrator to make a first determination, reasoning that vendor’s claims could not be resolved without recourse to questions that lay within the agreement’s exclusive scope. To identify the dispute, he included vendor’s claims and those raised by each buyer.

In his reasons first set of reasons, Sossin J. described Deco Homes (Richmond Hill) Inc. (“Deco”) as a company which constructs and sells new homes.  The dispute arose from a June 8, 2017 agreement of purchase and sale (“APS”) Deco signed with Ms. Mao Xinfang (“Ms. Mao”) for a pre-construction home.  The APS priced the home at $1,663,380.00 for which Ms. Mao gave a $20,000.00 deposit and upgrade fee of $5,586.66.

Deco and Ms. Mao initially agreed to put off the September 19, 2018 closing due to Ms. Mao’s difficulty in securing financing and extended the closing date on consent to November 19, 2018. Prior to the new closing date, the parties in October 2018 began exchanging on claims made by Ms. Mao that Deco had breached the APS by allegedly not completing the “Early Termination Conditions” set out in an addendum to the APS called the “Tarion Addendum”.  

Deco initiated litigation on December 3, 2018 seeking specific performance of Ms. Mao’s commitment to purchase under the APS or, in the alternative, damages in the amount of $1,663,380.00.  On December 13, 2018, Ms. Mao informed Deco that she was initiating arbitration and an arbitrator was appointed December 18, 2018.  Deco disputed Ms. Mao’s decision to initiate arbitration, arguing that the dispute was not arbitrable.

Ms. Mao sought a stay under section 7(1) of Ontario’s Arbitration Act, 1991, SO 1991, c 17 while Deco sought summary judgment on its claim. Sossin J. had to decide whether the dispute would proceed by arbitration or in the courts. 

Deco submitted that, under the wording agreed to by the parties in the APS, arbitration was available only for disputes “other than as a result of breach of contract by the purchaser”, relying on the wording of the APS and sections 11 and 15 of the Tarion Addendum reproduced at paras 14-15 of the reasons.  Deco relied on Ingarra v. 301099 Ontario Limited O/A Previn Court Homes, 2019 ONSC 3347 para 5 as support for its interpretation of the APS terms.

Ms. Mao countered, arguing that the wording of the arbitration agreement had to interpreted in light of the “overall statutory context” which included the obligation in section 17(4) of to submit disputes between owners and purchasers of new homes to arbitration.

17(4) Every agreement between a vendor and prospective owner shall be deemed to contain a written agreement to submit present or future differences to arbitration, subject to appeal to the Divisional Court, and the Arbitration Act, 1991 applies”.

Ms. Mao also distinguished Ingarra v. 301099 Ontario Limited O/A Previn Court Homes, pointing out that the parties in that dispute agreed on the interpretation of their agreement to arbitrate whereas she and Deco did not.

Sossin J. accepted that the agreement to arbitrate had to be consistent with the legislation but held that, on its face, the wording did not cover the dispute as framed by Deco.

[21] The arbitration clause in the Tarion Addendum and incorporated into the APS between Deco and Mao must be interpreted in a way that is consistent with this legislative framework. If the only issue in dispute was Deco’s allegation that Mao breached the APS by failing to make payments by the deadline for closing the sale, however, the scope of the arbitration clause would be straightforward. I am satisfied that under the combined effect of sections 15 and 11 of the Tarion Addendum, Deco’s allegation that Mao breached the APS by failing to make the required payment by the closing date falls outside the arbitration clause”.

Sossin J. also found that the dispute also included claims made by Ms. Mao and those claims appeared to draw the dispute into the scope of the agreement.

[22] However, Mao also has alleged breaches of the APS by Deco. These alleged breaches relate to the failure of Deco to finalize the early termination clause in the APS, or to provide the required notice in the event of a waiver of the early termination clause. Mao alleges that the Tarion Addendum also governs these requirements, and therefore, that these alleged breaches trigger the arbitration clause”.

At paras 23-28, Sossin J. sketched the give-and-take between the parties in the lead up to litigation and determined that the issues raised were not only those raised by Deco. To decide the motions, Sossin J. distinguished between the merits of the claim made by Deco for payment and the parties’ dispute before him regarding the scope of issues and the resulting choice of venue: “However strong Deco’s case may be on the merits, its own arguments demonstrate the importance of the fact that Mao was aware that no early termination clause applied to the APS”.

In summary, Sossin J. listed the steps in Deco’s argument which lead Deco to conclude that the scope of the dispute fell beyond the agreement to arbitrate.  By listing them, Sossin J. demonstrated that his task would breach the guidelines set by Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34 (CanLII), [2007] 2 SCR 801 para. 84.

[84] First of all, I would lay down a general rule that in any case involving an arbitration clause, a challenge to the arbitrator’s jurisdiction must be resolved first by the arbitrator.  A court should depart from the rule of systematic referral to arbitration only if the challenge to the arbitrator’s jurisdiction is based solely on a question of law.  This exception is justified by the courts’ expertise in resolving such questions, by the fact that the court is the forum to which the parties apply first when requesting referral and by the rule that an arbitrator’s decision regarding his or her jurisdiction can be reviewed by a court.  It allows a legal argument relating to the arbitrator’s jurisdiction to be resolved once and for all, and also allows the parties to avoid duplication of a strictly legal debate.  In addition, the danger that a party will obstruct the process by manipulating procedural rules will be reduced, since the court must not, in ruling on the arbitrator’s jurisdiction, consider the facts leading to the application of the arbitration clause”.

Sossin J. referred expressly to the competence-competence principle endorsed by the Supreme Court and the determination of what is in or beyond “the purview of the arbitration clause, should be reserved in the first instance for the arbitrator”.  He also referred to the codification of the principle at section 17(1) of the Arbitration Act that arbitrators can rule on their own jurisdiction.

Relying also on Dancap Productions Inc., v. Key Brand Entertainment, Inc., 2009 ONCA 135 para. 34 and Ontario Medical Association v. Willis Canada Inc., 2013 ONCA 745 paras 31-37, he further held that it was “at least arguable” that the dispute fell within the agreement to arbitrate and thereby trigger the court’s enforcement of that agreement.

To arrive at its conclusion, Deco set out a stepped argument which Sossin J. readily set out in his reasons.  The steps though appeared to urge Sossin J. that determining jurisdiction involved a more fulsome review of facts. “I am not satisfied that this case can be resolved without recourse to questions of fact that lay within the exclusive province of the arbitration clause to resolve under sections 15 and 11 of the Tarion Addendum”.  Further on, when concluding, Sossin J. singled out the competing versions of fact that an arbitrator would have to decide.

[35] While section 7(2) of the Arbitration Act, 1991, reproduced above, provides that an exception to the applicability of an arbitration clause arises where a matter is a proper one for summary judgment, the competing allegations of Deco and Mao in this case, and disputes about what was agreed to and what was understood by the parties at the time the APS was signed, lead me to the conclusion that this dispute is not a proper one for summary judgment”.

Sossin J. was alert to the distinctions in the claim made by Deco and the issues raised by Ms. Mao.

[36] While the arbitration clause in the Tarion Addendum may not apply to Deco’s claim, which clearly alleges a breach of the APS by the purchaser, the applicability of the arbitration clause to the circumstances of Mao’s allegations of a breach means that this action must be stayed in favour of arbitration”.

Sossin J. stayed Deco’s action “to permit the arbitration sought by [Ms. Mao] to proceed”.

In his follow up reasons in Deco Homes (Richmond Hill) Inc. v. Li, Sossin J. referred to his earlier Deco Homes (Richmond Hill) Inc. v. Mao and indicated that they had been “argued together with a companion motion”.  As with the facts in the dispute involving Deco and Ms. Mao, the dispute between Deco and Ms. Li Chummei (“Ms. Li”) raised a “key question”: whether the arbitration clause contained in the agreement of purchase and sale (“APS”) which the parties signed applies in the circumstances of the alleged breach of the APS in this case.

Sossin J. reviewed the facts giving rise to the dispute between Deco and Ms. Li which involved Ms. Li not completing the transaction for her agreement of purchase and sale which priced the home at $1,127,280.00. Ms. Li had paid a deposit of $120,000.00 and upgrade fees of $38,000.00.

Deco and Ms. Li adopted arguments similar to those raised in the earlier case. Sossin J. held that, for the reasons he gave in that case, I find that this case similarly cannot be resolved without recourse to questions that lay within the exclusive province of the arbitration clause to resolve under sections 15 and 11 of the Tarion Addendum”.  In addition to adopting that earlier reasoning, Sossin J. also included references to the same cases as support for the condensed argument he set out in the comparatively briefer, second set of reasons.

Despite the reference to his earlier reasons, Sossin J. did highlight the role of the legislation relied on by Ms. Mao in her argument.

[16] To the extent there are ambiguities regarding the scope of an arbitration clause, the competence-competence principle also suggests that determining what is within and beyond the purview of the arbitration clause, should be reserved in the first instance for the arbitrator; Dancap, at para. 34.

[17]  For these reasons, and relying on the analysis of the APS and applicable statutory provisions in Deco Homes (Richmond Hill) Inc. v. Mao, I find that the action by Deco is stayed to permit the arbitration sought by Li to proceed”.

urbitral note – First, Sossin J. stays the litigation to allow Ms. Mao’s and Ms. Li’s claims to proceed and resolve their claims.  It is not clear whether, in each case, (i) the “stay” operates to “suspend” and not “dismiss”, subject to the arbitrator’s decision on (a) whether jurisdiction covers both Deco’s and the buyer’s claims and/or (b) the buyer’s claims under the legislation and, having done so, resume the action on Deco’s claims. 

Second, the scope of the Ontario New Home Warranties Plan Act is not explained.  Sossin J. notes that Ms. Mao and Ms. Li both referred to that legislation and that the legislation requires parties to relevant contracts to insert arbitration agreements.

17(4) Every agreement between a vendor and prospective owner shall be deemed to contain a written agreement to submit present or future differences to arbitration, subject to appeal to the Divisional Court, and the Arbitration Act, 1991 applies.

Deco did not contest that the legislation applied to it. Rather, Deco argued that (i) the APS contained an arbitration agreement and (ii) the arbitration agreement did not cover differences involving non-payment of the APS.

On one hand, the legislation does not appear to offer parties the opportunity to put in any type of arbitration agreement and, having done so, meet their statutory obligation.  Even a reduced scope arbitration agreement must still submit “present or future differences” but without stipulating over what type of issues.  On the other hand, by its title and provisions, the legislation appears to limit its scope to those disputes over a category of obligations involving warranties and not to just all disputes related to new home constructions. 

The reasons do not reproduce the parties’ arguments, if any more detailed, regarding whether the Ontario New Home Warranties Act required only arbitration of disputes related to warranties or those specific statutory obligations mentioned by Ms. Mao’s counsel in their October 23, 2018 letter referred to at para. 32 of the first set of reasons.

In his second set of reasons, Sossin J. mentions that the resolution of claims made by Deco, not covered by arbitration, had to be resolved by determining in arbitration those issues raised by the buyer. “I find that this case similarly cannot be resolved without recourse to questions that lay within the exclusive province of the arbitration clause to resolve under sections 15 and 11 of the Tarion Addendum”. It is not clear if that arbitration is a condition precedent to further action or subject to the arbitrator’s determination of whether jurisdiction covers both Deco’s and the buyers’ claims.