Ontario – courts cannot imply terms which legislation requires be express to have valid arbitration agreement

In Magotiaux v. Stanton, 2020 ONSC 4049, Madam Justice Jennifer Mackinnon denied to stay court proceedings, having determined that the parties’ otherwise detailed agreement to arbitrate was subject to, but did not comply with all of, certain formal requirements required by the Family Law Act, RSO 1990, c F.3 and the Family Arbitration, O Reg 134/07, the sole regulation made to the Arbitration Act, 1991, SO 1991, c 17. Mackinnon J. recognized that courts can imply terms into a contract following the approach in Pacific Hotels Ltd. v. Bank of Montreal, 1987 CanLII 55 (SCC) but, where legislation has mandated express terms, courts cannot imply terms to produce a binding agreement to arbitrate compliant with that legislation. 

JM and KS, spouses, entered into a September 23, 2019 interim parenting agreement (“IPA”) which provided that, in the event of disputes over specific issues, JM and KS would resolve those disputes through a dispute resolution process set out in the IPA.  Some time after signature of the IPA, JM sought to bring a motion to court to decide an issue but KS objected, applying for a stay under section 7 of Ontario’s Arbitration Act, 1991, SO 1991, c 17

KS argued that the IPA constituted a binding agreement to arbitrate, entered into with independent legal advice. “He says the agreement makes the agreed upon alternate dispute resolution process mandatory and shows an intention to execute a formal secondary arbitration agreement in future when necessary”.  JM responded, arguing that the IPA did not bar her from proceeding in court. 

The IPA’s dispute resolution process provided as follows:

6.1 If [JM] and [KS] disagree about any parenting issue or child support, they will first try to resolve the dispute through negotiation, either between themselves or with their respective counsel, on the following terms:

 (a) The parties will jointly retain [JG] to act as a mediator/arbitrator/Parenting Coordinator. The parties shall share the up-front costs of the process equally.

(b) [JG] shall retain the right to apportion costs between the parties during any of these processes.

 (c) [JG]’s decision shall be binding on the parties.

(d) [JG] must conduct an arbitration, the parties waive section 35 of the Arbitration Act and will constitute a secondary arbitration under the Arbitration Act and the Family Law Act”.

In her analysis, Mackinnon J. considered the definition of “arbitration” and “family arbitration” in section 1 of the Arbitration Act, provisions of the Family Arbitration, O Reg 134/07 (“FA Regulation”), the sole regulation made to the Arbitration Act, as well as provisions of the Family Law Act, RSO 1990, c F.3 (“FLA”) applicable to arbitration, including sections 59.7(1) and 59.7(2).

The FA Regulation stipulated the contents of valid agreements to arbitrate which Mackinnon J. reproduced at para. 13 of her reasons.  Mackinnon J. dismissed certain arguments raised by KS regarding the application and binding effect of the IPA.

Mackinnon J. disagreed that a court could imply terms into an IPA so that it would include a binding agreement to undertake arbitration compliant with the FA Regulation.  Her analysis and KS’ argument were framed by the reasoning in Horowitz v. Nightingale, 2017 ONSC 2168

In Horowitz v. Nightingale, the court denied a stay because the parties’ agreement did not comply with the FA Regulation’s mandatory requirements.  Evaluating JM’s and KS’ IPA against the same FA Regulation, Mackinnon J. determined that their IPA was not a valid arbitration.  Horowitz v. Nightingale at paras 44-45 distinguished between implying terms into a contract and expressly stating those terms required by specific legislation:

[44] In M.J.B. Enterprises Ltd. v. Defence Construction (1951), 1999 CanLII 677 (SCC), [1999] 1 S.C.R. 619, at page 634, Justice Iacobucci referencing Justice LeDain in Pacific Hotels Ltd. v. Bank of Montreal, 1987 CanLII 55 (SCC), [1987] 1 S.C.R. 711, states:

…terms may be implied in a contract: (1) based on custom or usage; (2) as the legal incidents of a particular class or kind of contract; or (3) based on the presumed intention of the parties where the implied term must be necessary “to give business efficacy to a contract or as otherwise meeting the ‘officious bystander’ test as a term which the parties would say, if questioned, that they had obviously assumed” (p. 775). …

 [45] This reasoning does not apply in the circumstances of this case as the Legislature has chosen to make certain formal requirements necessary in order to have a legal and binding arbitration.  If the respondent were correct, the court would be implying a process as opposed to “terms”.  This it cannot do.  The contractual arrangement that Justice LeDain was focused upon was purely private, not governed by legal formal requirements as is the case before me”.

Referring further to Giddings v. Giddings, 2019 ONSC 7203 para. 29, Mackinnon J. reiterated the need for parties to abide by “certain formalities” in order to engage in a valid family arbitration.  Mackinnon J. also noted, at para. 27, that KS provided no precedent which contracted Horowitz v. Nightingale and allowed a court to imply terms which the FA Regulation required be expressly stated.

Mackinnon J. also distinguished Lopatowski v. Lopatowski, 2018 ONSC 824, which attributed knowledge of the FA Regulation’s formal requirements to counsel representing the parties in that case.  That knowledge, coupled with principles of good faith arising on the facts in that case, lead the court to determine that the parties in that case had met the requirements of the FA Regulation and, in doing so, bound themselves to arbitrate particular disputes.

Mackinnon J. cautioned that the presumption of knowledge attributed to the presence of counsel in Lopatowski v. Lopatowski, was not a general one or applicable in other cases and spoke to the reasons why the FA Regulation imposed mandatory provisions.

[26] I am not persuaded that the presumption in Lopatowski about the knowledge parties would have when represented by counsel is one that should be made. This is no reflection on counsel in this or any other case. The Standard Provisions in the Regulation are for the protection of the parties and are mandatory. Presuming that represented clients know and agree to an arbitration process including those terms runs the risk of significantly diluting the intended protection”.

Mackinnon J. further noted that the IPA provided that the arbitrator’s decision be binding but the FA Regulation required that a choice be made between the rights of appeal in section 45(1) of the Arbitration Act.  This further inconsistency added support to her determination that the IPA did not contain a binding agreement to arbitrate compliant with legislation.

In closing, Mackinnon J. underlined the interplay of specialized legislation, like the FLA, and the Arbitration Act.  Her comments acknowledged both (i) the primacy of the FLA as specialized legislation and (ii) the compliance required with the Arbitration Act’s regulations.

[29] Finally, the Family Law Act is legislation that will prevail over the Arbitration Act in the event of conflict between the two. Yet in section 59.6(1)(a) of the FLA the legislator confirmed that for a family arbitration award to be enforceable it must comply with regulations made under the Arbitration Act.  In section 59.7(1) the FLA enacted special rules for secondary arbitration, choosing to exempt them from some provisions of the Arbitration Act, and from one but not all of the Standard Provisions mandated in the Regulation (independent legal advice)”.  

Based on the above, Mackinnon J. determined that the IPA did not bar JM from filing her motion in court and Mackinnon J. dismissed KS’ motion for a stay.

Parties need to ensure that their agreement complies with the necessary formalities required by statute and regulation. Where the legislator has mandated express terms for family arbitration agreements the court may not imply them”.

JM and KS had not executed an IPA compliant with the FLA and the FA Regulation issued under the Arbitration Act.  Had they, Mackinnon J. commented that the court “might” order a party in breach of that agreement to comply with the agreement to arbitrate.

urbitral note – First, the reasons underscore that parties’ agreement to arbitrate may have to comply with the express formalities required by subject-specific legislation.  Despite the mention of family law legislation in the present case, the principle applied by Mackinnon J. has equal and wider application to other subject-specific legislation.

Second, absent specific circumstances, a court is unlikely to impute knowledge to the parties of express formalities required by subject-specific requirements.  Just because the parties may have been represented by counsel does not justify, by itself, imputed knowledge of mandatory formalities necessary to make the agreement to arbitrate valid.

Third, Mackinnon J. identifies the interdependence of subject-specific legislation and the Arbitration Act.  The FLA may have primacy but once it issues a compliant award it must comply with regulations under the Arbitration Act to be enforceable.  In the present case, the Arbitration Act has only a single regulation, the FA Regulation.

Fourth, courts can imply terms into a contract following the approach in Pacific Hotels Ltd. v. Bank of Montreal, 1987 CanLII 55 (SCC), but courts cannot imply terms which legislation requires to be express.

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