How (Not) to Inadvertently Waive Your Right to Arbitrate

June 14, 2024

Written By David Wahl, Martin Valasek, Ian Mahood and Nathan Fournier

The recent Ontario Court of Appeal decision in RH20 North America Inc v Bergmann, 2024 ONCA 445 serves as useful reminder that a party can inadvertently waive its right to arbitrate a dispute if the party takes a step in the wrong direction. Specifically, a party subject to an arbitration agreement which seeks judicial assistance on a substantive aspect of a dispute before seeking a stay in favour of arbitration will waive its right to arbitrate the dispute.

Background

The plaintiffs, RH20 North America Inc (RH20) and Unit Precast (Breslau) Ltd, commenced a lawsuit against various defendants alleging that the defendants had wrongfully (1) terminated a License Agreement, (2) conspired to set up a competing business, and (3) taken confidential information.

One such defendant, Click+Clean GmbH (Click), had supplied RH20 with control panels for its wastewater systems, and had entered into two contracts, a Licence Contract and a Web Portal Agreement, to facilitate these transactions. The Licence Contract contained an arbitration clause between Click and RH20 that required all disputes between them to be resolved by arbitration under Ontario's International Commercial Arbitration Act, which implements the UNCITRAL Model Law on International Commercial Arbitration (Model Law).

In response to the plaintiffs’ claim, a group of defendants brought a motion to strike out several of the claims (Strike Application). Click joined the other defendants in the Strike Application. Click also brought a motion to stay the action against it on the basis that the dispute should be referred to arbitration pursuant to the arbitration agreement between itself and RH20 (Stay Application).

The Decisions

The motion judge allowed the Strike Application, but dismissed Click’s Stay Application. The plaintiffs appealed the motion judge’s decision on the Strike Application and Click cross-appealed the decision regarding the Stay Application on the basis that it had not waived its right to arbitration by participating in the Strike Application.

The Ontario Court of Appeal disagreed with Click, holding that by seeking the judicial determination of a substantive, non-jurisdictional aspect of its dispute (i.e., by participating in the Strike Application), Click had waived its right to arbitrate the dispute.

In explaining its decision, the Court of Appeal stated that parties to an arbitration agreement must abide by a negative obligation to refrain from seeking the resolution of those disputes in domestic courts. In determining a stay application, courts will assess whether the party applying for a stay in favour of arbitration has made its application before taking any “step” in the court proceedings. Where a party has taken a “step” in the court proceedings, that party may have waived its rights to arbitrate under the arbitration agreement.

In this case, the Stay Application was governed by Article 8(1) of the Model Law, which provides:

A court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.

The Court of Appeal, citing the Supreme Court of Canada decision in Peace River Hydro Partners v Petrowest Corp, 2022 SCC 41, explained that a stay application has two separate components: (1) whether the four technical requirements for a stay application are met, and (2) whether a statutory exception applies. For the first component of the test, the four technical requirements are:

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 arbitration does so before taking any “step” in the court proceedings.

The Court of Appeal’s decision focused on the fourth technical requirement (i.e., whether Click had taken any “step” in the court proceeding). The Court of Appeal held that the fourth technical requirement had two distinct timing-related matters that had to be assessed when determining stay applications. First, the decision-maker must determine whether the party seeking a stay has requested a court to refer the parties to arbitration “not later than when submitting his first statement on the substance of the dispute”. Second, the decision-maker must determine whether the party had sought assistance from the court on the substantive claims asserted against it before making the request for a stay.

In coming to its decision, the Court of Appeal found that Click had fulfilled the first aspect of the timing requirement. Namely, Click brought its Stay Application before submitting its statement of defence. Click, however, failed the second aspect of the timing requirement. By participating in the Strike Application, Click breached its negative obligation under the arbitration agreement—amounting to a waiver of its right to arbitrate. Click’s waiver rendered the arbitration agreement “inoperative” within the meaning of Article 8(1) of the Model Law. Accordingly, the Court of Appeal held that Click had waived its right to arbitrate and dismissed Click’s cross-appeal.

Key Takeaways

Before participating in any substantive procedure or application in court in a dispute under a contract containing an arbitration clause, it is important to assess whether such participation could waive a right to arbitrate. Attempting to take a step towards resolving a dispute by seeking judicial assistance on a substantive claim runs the risk of attorning to the court’s jurisdiction and rendering any arbitration agreement inoperative. If court assistance is necessary to stay a court action in favour of arbitration, parties should make a stand-alone stay application without seeking any ancillary relief, to avoid waiving their right to arbitrate.

If you have any questions about this decision, applications to stay court proceedings in favour of arbitration, or commercial arbitration in general, please contact a member of the Bennett Jones International Arbitration group. 

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