Husky Food Importers & Distributors Ltd v. JH Whittaker & Sons Limited: Ontario’s New Test for Staying Litigation in Favour of Arbitration to Determine the Validity of an Arbitration Agreement

Summary

This article considers the Court of Appeal for Ontario’s recent decision in Husky Food Importers & Distributors Ltd v. JH Whittaker & Sons Limited, 2023 ONCA 260 and its implications for the framework to be applied in assessing stay motions in favour of arbitration.

Relying upon the Supreme Court of Canada’s recent decision in Peace River Hydro Partners v. Petrowest Corp, 2022 SCC 41 (“Peace River“), the Court of Appeal considered what standard of proof a party seeking a stay under the International Commercial Arbitration Act (the “ICAA”) must meet to be granted a stay. The Court in Husky concluded that the moving party must only meet the “arguable case” standard, rather than the more onerous balance of probabilities.

Below, we discuss some implications of the Peace River framework for arbitration in Ontario and how it may affect the evidentiary burdens required for both the party seeking a stay, as well as the party seeking to avoid arbitration.

Brief Factual Background

In 2014, Husky Food Importers & Distributors (“Husky“) entered an initial distribution agreement where they would import, distribute, and market in Canada products of a New Zealand confectionary manufacturer named JH Whittaker & Sons (“Whittaker“). Subsequently, between 2016 and 2020, the parties tried to negotiate a formal long-term exclusive distribution agreement regarding Whittaker’s product, and in early 2020, they exchanged drafts of such an agreement.

On April 19, 2020, Whittaker added and redlined an arbitration clause to Schedule G of the draft long-term distribution agreement, which had not appeared in any prior draft (the “Arbitration Clause”). Husky subsequently emailed a further revised draft on May 15, 2020, which removed the redlining in the Arbitration Clause, and included a slight amendment to a separate part of Schedule G. This email was described in Husky’s evidence as one where the changes made in the April 19 draft were “accepted”. Husky also added s. 8.4 to the main body of the draft agreement:

If there is any inconsistency between any provision or term in the main body of this Distribution Agreement and in any schedule annexed hereto, the terms in the main body of this Distribution Agreement shall have paramountcy to the extent of such inconsistency only.

Both the April 19 and May 15 drafts contained s. 8.7 in the main body of the distribution agreement, whereby the parties agreed to submit to the non-exclusive jurisdiction of the courts of New Zealand to hear and determine all disputes arising from or related to the distribution agreement, or any “transactions contemplated [t]herein”.

While the parties discussed the agreement after May 15, 2020, they ultimately did not sign the new long-term distribution agreement (although Husky subsequent pled that the parties had reached an agreement, notwithstanding the lack of signatures). That summer, a dispute arose between the parties, and Husky commenced an action in Ontario on June 3, 2021. Whittaker moved to stay Husky’s action pursuant to s. 9 of the ICAA:

Where, pursuant to article II(3) of the [New York Convention] or article 8 of the [UNCITRAL Model Law], a court refers the parties to arbitration, the proceedings of the court are stayed with respect to the matters to which the arbitration relates. [emphasis added]

Decision of the Court Below

Before the motion judge, Husky took the position that although the parties executed a distribution agreement, the Arbitration Clause did not form part of the agreement because it was inserted “behind” Schedule G and was not part of the standard purchase agreement order form, such that it was not incorporated by reference into the distribution agreement.

Husky furthermore argued that there was no meeting of the minds between the parties that disputes would be arbitrated, and that the Arbitration Clause ultimately had no effect because (1) section 6.2 of the distribution agreement provided that the terms and conditions contained in Schedule G applied “unless otherwise agreed”, and (2) s. 8.7 of the distribution agreement provided that the parties would attorn to the non-exclusive jurisdiction of the New Zealand courts.

In determining that a stay was warranted, the motion judge applied the then-prevailing test set out in Haas v. Gunasekaram, 2016 ONCA 744, which asks the following questions: (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? and (5) are there grounds on which the court should refuse to stay the action?

In the motion judge’s view, the test for whether there was an arbitration agreement was only whether it was “arguable” that the party was subject to an arbitration agreement. It was not necessary for the party seeking the stay to prove the existence of an arbitration agreement on a balance of probabilities.

Applying the Haas framework, the motion judge concluded it was arguable that there was an arbitration agreement between the parties because Husky engaged with the document, removed the redlining from the document, and did not make changes to the Arbitration Clause.

On this basis, the motion judge granted the motion to stay Husky’s action, and referred the parties to arbitration in New Zealand. Although not expressly stated, the implication of the motion judge’s ruling was that consistent with the competence-competence principle, it would be left to the arbitrator to determine whether there was a valid arbitration agreement between the parties.

The Court of Appeal

Husky appealed the motion judge’s decision on two related grounds:

• first, that the party asking for a stay had to prove the existence of an arbitration agreement on a balance of probabilities, rather than simply whether it was “arguable” that an arbitration agreement existed; and
• second, that the motion judge erred in that it was not arguable there was an arbitration agreement between Husky and Whittaker, because Husky explicitly rejected the inclusion of an arbitration agreement in the distribution agreement.

In rejecting Husky’s appeal, the Court of Appeal first referred to Peace River to reiterate the proposition that a court should normally refer challenges to an arbitrator’s jurisdiction to the arbitrator, which follows from the competence-competence principle. While exceptions to the principle exist, Husky Foods did not fall under those exceptions.

In rejecting Husky’s position as to the appropriate standard of proof, the Court of Appeal confirmed that the Haas framework was overtaken by the framework adopted by the Supreme Court of Canada in Peace River. Though the Peace River framework was made for domestic arbitration legislation, the Court of Appeal confirmed that the framework was equally applicable to international arbitrations under the ICAA.

In any event, the Peace River framework (which our firm discussed in an earlier article here) first requires the applicant for a stay to establish four technical prerequisites on the applicable standard of proof:

1. an arbitration agreement exists;
2. court proceedings have been commenced by a “party” to the arbitration agreement;
3. the court proceedings are in respect of a matter that the parties agreed to submit to arbitration; and
4. the party applying for a stay in favour of the arbitration does so before taking any “step” in the court proceedings.

If all four prerequisites are met, the mandatory stay provision is engaged, at which point the party seeking to avoid arbitration must show that one of the statutory exceptions apply. In Husky Foods, there were no applicable statutory exceptions, such that the case turned entirely on the first phase of the analysis.

The Court of Appeal disagreed with Husky’s submission that the ‘balance of probabilities’ standard was the applicable standard of proof for proving the existence of an arbitration agreement in the context of a stay applicable, relying on the proposition articulated in Peace River, that “the standard of proof applicable at the first stage is lower than the usual civil standard… the applicant must only establish an ‘arguable case’ that the technical prerequisites are met.” As such, the Court of Appeal concluded that the motion judge applied the correct legal test for this matter.

Regarding the second ground of appeal, the Court of Appeal summarily rejected Husky’s submission that the evidence demonstrated that it did not agree to submit disputes to arbitration, and that the motion judge ignored certain material facts in Husky’s favour. Instead, the Court of Appeal observed that the motion judge was alive to Husky’s submissions in respect of the allegedly ignored “material facts”, and that in any event, determining the issue of the existence of the arbitration agreement would require a thorough review of the parties’ competing evidence.

Accordingly, Husky’s appeal was dismissed.

Analysis

Although the result in Husky Foods was perhaps unsurprising, it is nevertheless a welcome affirmation of Ontario courts’ respect for the competence-competence principle and arbitration as a co-equal forum for dispute resolution more generally. Of the same token, maintaining some burden of proof to justify a stay is equally important to preserving the legitimacy of arbitration as a dispute resolution forum, as absent any burden of proof, parties might simply rely upon stay motions (and arbitration) as a delay tactic and abuse of process – outcomes which should of course be avoided.

In that regard, Husky Foods is also welcome for the clarification that it provides with respect to the applicable test for a stay. Under the Haas framework, moving parties were arguably required to meet a higher evidentiary bar of proving the arbitration agreement exists, before moving to the lower, “arguable” standard of whether the dispute in question fell within the scope of the arbitration agreement. Whatever the case, the Haas framework entailed a more comprehensive review by a court of the evidence in order determine whether to grant a stay. By contrast, the Peace River framework consistently relies upon the “arguable” standard in assessing all of the prerequisites for a stay.

Interestingly, however, the application of the Peace River framework requires some elaboration as it relates to domestic arbitration in Ontario, insofar as the Arbitration Act, 1991 is somewhat idiosyncratic with respect to its stay provisions. Readers will recall that Peace River involved the application of British Columbia’s Arbitration Act, 1996, which specifically provided that a party could move for a stay so long as it had not taken “any other step in the [litigation] proceedings”. Similarly, Ontario’s ICAA – which is based on the Model Law – provides that a party may seek a stay “not later than when submitting his first statement on the substance of the dispute”.

By contrast, the Arbitration Act, 1991 provides that a court will stay litigation on the motion of a party to the arbitration agreement; however, it may reject the motion if (among other things) the motion was brought with “undue delay”. The case law appears settled that taking several steps in the litigation constitutes “undue delay”, although it is less clear whether taking a single step (such as filing a statement of defence) in the litigation and then moving for a stay constitutes “undue delay” (see, for example, Leon v. Dealnet Capital Corp., 2021 ONSC 3636 at paras 47-52, and Bombino v. Serendipity Homes, 2022 ONSC 1410 at paras 52-58). It appears that with respect to domestic arbitration in Ontario, the test is far more holistic and flexible; and in any event, the onus is on the party asserting the delay to prove that it was undue. This may be particularly relevant as it relates to construction matters since, for example, a party might need to take certain steps in litigation to preserve statutory rights (such as lien rights).

Finally, it will be interesting to see if parties wishing to pursue litigation will now seek to frame jurisdictional issues as questions of law rather than mixed fact in law, in order to avoid having the jurisdictional issue referred by a court to the relevant arbitrator for determination pursuant to their own jurisdiction. As the Court in Husky Foods observed, challenges to the jurisdiction of an arbitrator must normally be referred to the arbitrator, unless they involve (1) pure questions of law or (2) questions of mixed fact and law that can be determined by a superficial review of the evidence in the record.

Since a “superficial review” is one where the necessary legal conclusions can be drawn from facts that are either evident on the face of the record or are undisputed by the parties, it may stand to reason that parties will attempt to avoid this narrow eye of the needle and instead frame the issue as a question of law in order to create the opportunity to fully brief the issue before a court and persuade the court to hear the challenge (and assume jurisdiction). To some degree, this approach would parallel attempts by parties and appellate courts following Sattva to be overly expansive in identifying extricable questions of law in order to gain jurisdiction in appeals from arbitral awards, which approach was ultimately cautioned against by the Supreme Court in Teal Cedar Products Ltd. v. British Columbia, 2017 SCC 32.

Jeffrey Wong (summer student) contributed to the production of this article.

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