August 6th, 2020
One of the biggest impediments to an efficient arbitration is a poorly drafted or vague arbitration clause.
King Valley Estates Inc. v Wong et al., 2019 ONSC 4809 and 2020 ONSC 3590, is a cautionary tale for all those who seek arbitration for its speed and cost efficiency. In this case, the arbitration clause did not provide for the appointment of an arbitrator and the parties were unable to agree. This issue (and an earlier jurisdiction issue) delayed the arbitration by some 18 months and required two motions.
First dispute: applicability of the arbitration clause (delay January to September, 2019)
In November, 2016, the respondent purchasers agreed to buy a new home from the applicant builder. The Agreement of Purchase and Sale provided for an “Outside Closing Date” of December 28, 2018. If the transaction was not completed by then the purchasers had 30 days to terminate the agreement. Construction was not completed by the Outside Closing Date and, in early January, 2019, the purchasers gave notice of termination. The builder disputed the validity of the notice on the ground that the purchasers had verbally agreed to extend the Outside Closing Date to April 12, 2019. The purchasers denied any such verbal agreement.
The builder brought an application seeking, inter alia, an order that the arbitration clause in the Agreement of Purchase and Sale was not applicable. The purchasers brought a motion to stay the application under s. 7(1) of the Ontario Arbitration Act, 1991, S.O. 1991, c. 17, and an order referring the dispute to arbitration. The court heard argument on these issues in June, 2019. The decision was released in September, 2019, nine months after the dispute arose.
The arbitration clause
The relevant portion of the arbitration clause in the Agreement of Purchase and Sale stated as follows:
15. Disputes Regarding Termination
(a) Vendor and Purchaser agree that disputes arising between them relating to termination of the Purchase Agreement… shall be submitted to arbitration in accordance with the Arbitration Act, 1991 (Ontario) and subsection 17(4) of the ONHWP Act.
(e) the arbitrator may grant any form of relief permitted by the Arbitration Act, 1991 (Ontario), whether or not the arbitrator concludes that the Purchase Agreement may be properly terminated.
Section 17(4) of the Ontario New Home Warranties Plan Act, R.S.O. 1990, c. O.31 (referred to in the arbitration clause above) provides:
(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.
The builder argued that the parties’ dispute did not fall within the arbitration clause. (And the arbitration clause, read with the applicable statutory provision, is not a model of good drafting!) However, citing the competence-competence principle, the judge stayed the application on the ground that it was “arguable” that the arbitration clause applied and that it was for the arbitrator to determine that issue.
Presciently, the judge stated that if the parties could not agree upon an arbitrator by September 30, 2019 (a period of a few weeks), he would remain seized of the matter for the purpose of appointing an arbitrator pursuant to s. 10(1) of the Arbitration Act, 1991.
Second dispute: failure to agree upon arbitrator (delay September, 2019 to June, 2020)
The judge noted that “almost 10 months later, the parties have been unable to agree on an arbitrator”. The purchasers moved to have the judge appoint an arbitrator and/or give directions with respect to an appointment. The judge articulated the problem as follows:
Following my September 4, 2019 Ruling counsel for [the purchasers] tried repeatedly to have an arbitrator appointed by mutual agreement between the parties. However their efforts have been hampered by [the builder] discharging the law firm who had represented it on the motion before me and retaining new counsel, and then discharging those lawyers and retaining its current counsel.
In October, 2019, the purchasers proposed four candidates (including Arbitrator A). The builder proposed one (Arbitrator B). By the time the matter came back to the judge, the purchasers were advocating for the appointment of the builder’s original choice of candidate and the builder was advocating for the appointment of one of the purchasers’ original candidates.
There was no dispute that both arbitrators were qualified, but that Arbitrator B would be cheaper. Therefore, in June, 2020, the judge appointed Arbitrator B, but ruled that he would remain seized of the matter if Arbitrator B was no longer willing to be appointed or the purchasers were not satisfied with the timetable he proposed. After 18 months, hopefully this will be the end of the matter before the courts so that the arbitration can proceed!
How could this result have been avoided?
1. Where the arbitration clause is in a standard-form contract, there is little the parties can do if the arbitration clause is vague, as was the case here. It simply provided that the arbitration was to be conduced in accordance with the Ontario Arbitration Act, 1991, which provides for a single arbitrator. The standard-form Agreement of Purchase and Sale (and arbitration clause) was imposed upon both the purchasers and the builder by Tarion Warranty Corporation (a Crown corporation which administers the Ontario New Home Warranties Plan pursuant to the Act).
However, in remaining seized of the matter, the judge provided the kind of case management that is often necessary to push matters like this forward. This is especially important when one of the parties is a reluctant participant in the arbitration and seeks to delay it with procedural or jurisdictional objections even before the arbitrator is appointed. Unfortunately, even before COVID-19 it was difficult to obtain early motion dates in most Ontario courts. The judge agreed to hear this motion in writing, which no doubt expedited it. For matters with a connection to Toronto, they may be dealt with more quickly on the Ontario Superior Court of Justice Commercial List, which hears “suitable commercial matters” under the Ontario Arbitration Act, 1991, pursuant to Part II, clause 1(m) of the Consolidated Practice Group Direction Concerning the Commercial List.
2. Where the parties negotiate an arbitration clause in their commercial agreement, they should provide for a process to appoint an arbitrator (or tribunal of three arbitrators) so that court intervention is not necessary. There are lots of model clauses available on line. For example, where the agreement provides for a panel of three, each party appoints an arbitrator, both of whom then appoint the third as chair of the tribunal. Alternatively, the arbitration clause may name an arbitral institution as the appointing authority with the power to make the decision. This is particularly effective when the parties cannot agree upon a single arbitrator. For example, the ADR Institute of Canada (ADRIC) contains rules of procedure that may be adopted by the parties in whole or in part. See Rules 3.1 [Appointment of Arbitrator(s) by the Parties] and 3.2 [Appointment of Arbitrator(s) by the Institute] which provides a list of potential arbitrators to the parties and, if they cannot agree, will make the appointment expeditiously. Other arbitral institutions have similar rules. Invariably, both options are faster and less costly than an application to the court.
3. Similarly, even if the parties’ agreement contains no arbitration clause or the clause does not provide a process for appointing an arbitrator, they may enter into a post-dispute arbitration agreement. It may be a more detailed outline of the procedure to facilitate the smooth running of the arbitration, including an appointment process, now that the parties know the specific nature of the dispute.
Historically it has often been more difficult for parties to enter into a post-dispute arbitration agreement, but it remains to be seen whether parties will be more receptive to this option, even where the matter is already before the courts, now that COVID-19 has caused further delays due to court closures.