Ontario – agreement to arbitrate not unconscionable where governing law preserves executive’s Employment Standards Act rights – #490

In Leon v. Dealnet Capital Corp., 2021 ONSC 3636, Master Barbara McAfee declined to exercise her discretion under section 7(2) of the Arbitration Act, 1991, SO 1991, c 17 to refuse a stay.  She dismissed the senior executive’s reliance on Uber Technologies Inc. v. Heller, 2020 SCC 16 to invalidate the agreement to arbitrate contained in the employment agreement, noting that the governing law preserved the executive’s right to file an Employment Standards Act, 2000 S.O. 2000, c.41 complaint.  Master McAfee also disagreed that (i) the Business Corporations Act, RSO 1990, c B.16 oppression claim, contained in employer’s counterclaim, was not arbitrable or (ii) the employer had attorned by filing a defense and counterclaim or applied for a stay with “undue” delay. Master McAfee confirmed there was no evidence that employer or its current counsel “noticed” the agreement to arbitrate contained in the employment agreement until later in the action.

Defendant employed Plaintiff as a senior executive from July 1, 2014 to July 6, 2018.  Plaintiff’s employment with Plaintiff as of July 1, 2014 followed his prior employment with a corporation acquired by Plaintiff in 2014.  Defendant and Plaintiff entered into an April 10, 2017 employment agreement (“Employment Agreement”) which contained the following agreement to arbitrate:

8.1 All disputes arising out of or in connection with this contract, or in respect of any legal relationship associated therewith or derived therefrom, will be referred to mediation and, if unsuccessful, finally resolved by arbitration under the statutes of the Province of Ontario (the Arbitration Clause)”.

Following an April 11, 2018 resignation letter given by Plaintiff to Defendant, the parties signed a letter agreement (“Letter Agreement”) extending the resignation notice period given by Plaintiff.  See para. 7 for details about that Letter Agreement.

Plaintiff commenced an action against Defendant in Ontario Superior Court on May 29, 2019.  He sought, among other relief listed at para. 8, a declaration that Defendant was in breach of the Employment Agreement and damages for breach of contract, unjust enrichment, and/or breach of the good faith duty of honesty in contractual performance.

Defendant served a defence and counterclaim on July 19, 2019.  It sought, among other relief listed at para. 9, a declaration under section 248 of Ontario’s Business Corporations Act, RSO 1990, c B.16 (“OBCA”) that the Letter Agreement’s compensation provisions were oppressive, unfairly prejudicial and unenforceable, damages for breach of confidence, breach of fiduciary duty, inducement of breach of contract as well as punitive damages and aggravated damages.

At paras 10-16, Master McAfee inventoried the procedural steps taken in the action including service of: (i) Plaintiff’s August 2, 2019 request to inspect and demand for particular and Defendant’s August 19, 2019 response; (ii) Plaintiff’s August 27, 2019 amended statement of claim; (iii) Defendant’s September 5, 2019 reply and defence to counterclaim; and, (iv) Plaintiff’s February 14, 2020 draft affidavit of documents.  The chronology of those steps led up to Defendant’s February 18, 2020 notice to Plaintiff that Defendant intended to rely on the agreement to arbitrate contained in the Employment Agreement.  Master McAfee set out the circumstances prompting that notice.

[16] On or about February 18, 2020, the next business day after Leon’s service of the draft affidavit of documents and Schedule “A” productions, [Defendant]’s general counsel reviewed the Employment Agreement for confidentiality and return of information provisions, due to concerns regarding the confidential nature of Leon’s productions. When reviewing the Employment Agreement, [Defendant]’s general counsel discovered the arbitration clause for the first time. There is no evidence before me that [Defendant]’s current in-house legal team or external counsel had noticed the Arbitration Clause before this time”. 

Master McAfee referred to section 7(1) of Arbitration Act, 1991, SO 1991, c 17 and set out the “five (5) part framework” established in Haas v. Gunasekaram, 2016 ONCA 744 para. 17 to determine whether to grant a stay, reproduced here:

[17] An analytical framework has emerged from the jurisprudence. It breaks the judge’s task of considering a stay under s. 7 down into a number of sub-issues:

(1)  Is there an arbitration agreement?

(2)  What is the subject matter of the dispute?

(3)  What is the scope of the arbitration agreement?

(4)  Does the dispute arguably fall within the scope of the arbitration agreement?

(5)  Are there grounds on which the court should refuse to stay the action?

Master McAfee reviewed each of the five (5) components. For the first three (3), she determined that:

(i) the agreement to arbitrate in the Employment Agreement;

(ii) the “pith and substance” of the action concerned “a dispute between an employer and a former employee concerning what rights either of the parties has in relation to employment contracts between them, and whether the former employee breached the duties and obligations he owed to the employer arising from the employment relationship”; and,

(iii) the “broad language” resembled that in Dancap Productions Inc., v. Key Brand Entertainment, Inc., 2009 ONCA 135.

Master McAfee next considered fourth component, namely whether the dispute fell within the terms of the agreement to arbitrate.  Having referred to the competence-competence principle and section 17(1) of the Arbitration Act, Master McAfee offered two (2) observations regarding the approach to take.

The court must only be satisfied that a dispute “arguably” falls within the scope of an arbitration clause in order to stay a proceeding. This is because there is an expectation that the determination of jurisdiction will be made by the arbitrator, and not the court”.

The Court of Appeal has held that where it is unclear if the arbitrator has jurisdiction, it is preferable to leave the issue to the arbitrator. It is not for the court on an application for a stay of proceedings to reach any final determination as to the scope of an arbitration agreement ([Haas v. Gunasekaram, 2016 ONCA 744]at paras. 14-16, 41 and [Dancap Productions Inc., v. Key Brand Entertainment, Inc., 2009 ONCA 135] at paras. 32-33)”.

Adopting that approach to the dispute and the agreement to arbitrate, Master McAfee determined that she was “satisfied that this proceeding meets the test of “arguably” falling under the Arbitration Clause”.

For the fifth component, Master McAfee recorded that Plaintiff relied on three (3) of the exceptions in section 7(2) which permitted her to exercise her discretion and refuse the stay: the agreement to arbitrate is invalid; the dispute’s subject matter is not capable of arbitration under Ontario law; and the motion was brought with undue delay.  Master McAfee noted that Khomovych v. Bomar 2 Inc. o/a Colony Park Homes, 2019 ONSC 3982 had observed that such discretion is “exercised sparingly” and that Plaintiff had the onus of establishing that one of section 7(2)’s exceptions applied.  See Kanitz v. Rogers Cable Inc., 2002 CanLII 49415 (ON SC) paras 7-8.

(a) agreement to arbitrate invalid (paras 38-42) – Plaintiff argued that the agreement to arbitrate “forecloses him from making complaints about perceived violations of the Employment Standards Act, 2000 S.O. 2000, c.41 (ESA) to the Ministry of Labour contrary to s. 5(1) of the ESA and is therefore invalid” and referred to Uber Technologies Inc. v. Heller, 2020 SCC 16.

Master McAfee disagreed. First, the governing law clause, reproduced at para. 39, expressly reserved application of the Employment Standards Act, 2000 S.O. 2000, c.41 (“ESA”).

This Agreement shall be subject to the Employment Standards Act, 2000 (Ontario), as amended or replaced. If the Employee is entitled to any rights or payments under that legislation which are not reference [sic] in this Agreement or which exceed amounts payable under this Agreement, the provisions of that legislation shall supersede the provisions of this Agreement. The failure of any provision of this Agreement to reference or acknowledge the provisions of that legislation shall not invalidate that provision (the Governing Law Clause)”.

She noted that the governing law clause preserved Plaintiff’s rights and “does not purport to remove” Plaintiff’s rights to file a complaint to the Minister of Labour.

Second, Master McAfee distinguished between the status of the workers covered in the Uber agreement and Plaintiff.

[41] Heller is also distinguishable because it involved an arbitration clause in a contract of adhesion found to be invalid on the basis of unconscionability. In Heller vulnerable workers were compelled to pay large up-front costs in order to resolve disputes overseas under foreign law. In contrast, the Arbitration Clause before me is a term of an employment contract with a senior executive not subject to foreign law. There is no issue of unconscionability before me”.

(b) dispute’s subject matter not arbitrable (paras 43-46) –  Plaintiff argued that the oppression remedy is not arbitrable.  Master McAfee disagreed.  First, she noted that the OBCA does not expressly exclude arbitrating oppression disputes.  Second, including allegations of oppressive conduct does not prevent make the dispute not arbitrable.  See Haas v. Gunasekaram para. 22, Armstrong v. Northern Eyes Inc. 2000 CanLII 29047 (ON SCDC) paras. 24-25 and Kassem v. Secure Distribution Services Inc., [2004] O.J. No. 508 (Ont. S.C.J.) paras 31-36.

Master McAfee noted that Defendant offered in oral argument to abandon its oppression remedy claim if that barred referral to arbitration. “For the purposes of this motion, [Defendant]’s claim for an oppression remedy is not a barrier to arbitration”.

(c) undue delay to bring motion (paras 47-55) – Regarding whether Defendant had brought the motion with “undue” delay, Master McAfee noted that qualifying the delay is “fact specific and determined by the circumstances of the case”.

With reference to other instances, Master McAfee identified a series of such similar facts and circumstances such as: a party’s and counsel’s lack of knowledge of the agreement to arbitrate, filing of statements of defence and counterclaim, document production and examination scheduling.

In the case before her, Master McAfee noted that it remained in its “infancy” and, given the little activity so far, “[t]here would be nothing lost if the matter is re-directed to an arbitration”.  See Obcorp Holdings Inc v Mammoet Canada Western Ltd, 2019 ABQB 960 para. 21, referred to by Master McAfee, wherein Master B.W. Summers noted that there was “nothing unfair” in staying the action and that “[t]he parties may use their pleadings and the plaintiff’s affidavit of records in the arbitration”.

Plaintiff argued that Defendant had attorned to the court’s jurisdiction by filing a statement of defence and counterclaim but Master McAfee noted Defendant counsel’s lack of knowledge of the agreement to arbitrate.

As noted above, at the time the statement of defence and counterclaim was delivered, [Defendant]’s counsel were unaware of the Arbitration Clause. This action is at an early stage and I am not satisfied of undue delay. In these circumstances, I am not satisfied that [Defendant]’s delivery of a statement of defence and counterclaim is fatal to its reliance on the Arbitration Clause”. 

Master McAfee declined to exercise her discretion under section 7(2) to refuse the stay.

urbitral notes – First, for the earlier Arbitration Matters note on Uber Technologies Inc. v. Heller, 2020 SCC 16, see “Supreme Court – courts should not refer jurisdiction challenge to arbitrator if real prospect that challenge might never be resolved – #344”.  The Supreme Court of Canada introduced a third exception to its general rule that jurisdiction challenges should be referred first to the arbitrator. The exception contemplates scenarios in which validity of the arbitration agreement might not be determined if arbitration is too costly or inaccessible due to costs, distance or even a choice of law clause circumventing mandatory local policy.  Staying an action in favour of arbitration would deny relief for claims made under the agreement and insulate disputes from resolution.  The Court also asserted that unconscionability involves both inequality and improvidence but does not require intention.  The Court further confirmed that employment disputes are not “commercial” for the purpose of the International Commercial Arbitration Act, RSO 1990, c I.9.

Second, for recent decisions involving the arbitrability of employment agreements and application of arbitration legislation, see the earlier Arbitration Matters notes:

(i) “B.C. – court enforces parties’ choice to apply International Commercial Arbitration Act to employment disputes – #465” regarding Johnston v. Octaform Inc., 2021 BCSC 536. Mr. Justice Nigel P. Kent dismissed an application to set aside an interim award which confirmed among other things that (i) disputes between the parties arising from employment agreements were subject to the International Commercial Arbitration Act, RSBC 1996, c 233 and (ii) the arbitrator had jurisdiction to grant equitable remedies.  Kent J. held that the manner in which the parties framed their pleadings (i) supported application of the ICAA as a choice expressly made and (ii) was “an explicit recognition” of the arbitrator’s equitable jurisdiction and their agreement to apply Nevada law as the substantive law under section 28 of the ICAA reinforced that jurisdiction. 

(ii) “Québec – rule shielding employee with Québec residence/domicile from litigating outside province applies to arbitration – #277” regarding Chung v. Merchant Law Group, 2020 QCCS 398. Mr. Justice Sylvain Lussier held that a clause, removing jurisdiction from the courts of Québec for an employment dispute, had no effect because it violated a rule of public order in Québec’s Civil Code of Québec, CQLR c CCQ-1991.  Though the case dealt with a clause by which the parties submitted any issues to the exclusive jurisdiction of Saskatchewan’s Court of Queen’s Bench, the rule has application to related attempts to submit similar employment relationships to arbitration.

Third, for the earlier Arbitration Matters note on Obcorp Holdings Inc v. Mammoet Canada Western Ltd, 2019 ABQB 960, see “Alberta – Defendants obtain stay after filing defence once they discover contract contained arbitration clause – #251”. Master B.W. Summers stayed litigation in favour of Defendants who, in “particularly unique” circumstances, had already pleaded to the action but did so unaware of the arbitration clause.  Based on uncontradicted evidence, Defendants had acted promptly upon learning of the arbitration clause included in an updated version of their contract communicated by Plaintiff during the document discovery phase and had proposed that the few court pleadings be used to frame the issues in arbitration.

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