It is very common for commercial contracts to include clauses requiring parties to submit disputes to arbitration.  Despite this, when an actual dispute arises, a party may wish to pursue court proceedings, in which case a court may have to decide whether to stay those proceedings and allow the dispute to proceed through arbitration.  In the case of Husky Food Importers & Distributors Ltd. v. JH Whittaker & Sons Limited, the Court of Appeal considered the appropriateness of granting such a stay where the parties disagreed on whether an arbitration agreement existed.

Parties Spent Years Negotiating an Exclusive Distribution Agreement

In Husky Food, the parties had an ongoing distribution arrangement whereby the appellant, Husky Food Importers & Distributors Ltd. (“Husky Food”), imported, distributed and marketed products of the respondent, JH Whittaker & Sons Limited (“JH Whittaker”).  JH Whittaker was a New Zealand company.  Over several years, they negotiated an exclusive distribution agreement and exchanged various revised drafts.

In April 2020, JH Whittaker sent a draft of the agreement to Husky Food that contained a Schedule that included an arbitration clause.  Among other things, the clause stipulated that where the “Customer” was “located outside of New Zealand,” any dispute connected with the agreement “or any question regarding its existence” would be referred to the “New Zealand International Arbitration Centre.”

Husky Food made further revisions to the documents and emailed them back to JH Whittaker in May 2020.  An affidavit filed on behalf of Husky Food confirmed that this email was one in which the changes made by JH Whittaker in the April draft “were accepted.”  The revisions sent back to JH Whittaker in that May email inserted language in the main body of the agreement stating that if there were any inconsistency between the agreement and any schedule annexed to it, the agreement itself would have “paramountcy to the extent of such inconsistency only.”  There was also a clause elsewhere in the main body of the agreement stating that the laws of New Zealand would govern it and that the parties submitted to “the non-exclusive jurisdiction of the courts of Wellington, New Zealand, to hear and determine all disputes.”  This clause had been present in both the April and May 2020 versions of the draft agreement.

The agreement was not signed, and a dispute subsequently arose between the parties.  In its Statement of Claim, Husky Food ultimately sued JH Whittaker and alleged that “Husky and JWH reached agreement on all the material terms as of May 15, 2020.”  The claim was based on the allegation that JWH breached that agreement.

JH Whittaker Brought a Motion to Stay Court Proceedings Pursuant to the International Commercial Arbitration Act

JH Whittaker brought a motion seeking to stay Husky Food’s court claim.  The motion was brought pursuant to section nine of the International Commercial Arbitration Act (the “Act”), which provides that where a court “refers the parties to arbitration” under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (Schedule 1 of the Act) or the UNCITRAL Model Law on International Commercial Arbitration (Schedule 2 of the Act), court proceedings are stayed.

Husky Food opposed the motion on the grounds it had never agreed to bring disputes under the agreement to arbitration.  The motions judge concluded, however, that a stay should be issued, and Husky Food appealed.

Husky Food raised two grounds of appeal.  First, it argued the motions judge had erred in finding that a stay should be granted where it is only “arguable” that an arbitration agreement exists, as opposed to when the existence of such an agreement is proven on a balance of probabilities.  Second, it argued the motions judge erred in finding that “arguably” such an agreement existed.

What Standard Will a Court Apply in Determining Whether an Arbitration Agreement Exists for the Purpose of Granting a Stay?

The Court of Appeal began its analysis by reiterating the general legal principle that “challenges to an arbitrator’s jurisdiction” should be referred to the applicable arbitrator.  The Court also noted the broad authority of arbitrators under Ontario legislation “to determine issues of their jurisdiction.”

In Haas v. Gunasekaram, the Court of Appeal set out the steps to be considered by a court in determining whether to grant a stay in an arbitration context; however, the Court in Husky Food confirmed that this approach had been superseded by the approach taken by the Supreme Court of Canada in Peace River Hydro Partners v. Petrowest Corp.  In the latter case, the Court noted that a party seeking a stay under provincial arbitration legislation must meet the “technical prerequisites for a mandatory stay of court proceedings” on the “applicable standard of proof.”  If the party does this successfully, then the other party has an opportunity to “show that one of the statutory exceptions applies.”

With respect to the first part of the two-step framework, the Court in Husky Food noted the comment of the Supreme Court of Canada in Peace River that “provincial arbitration legislation typically contains four relevant technical prerequisites,” namely an arbitration agreement must exist, a party to that agreement must have commenced court proceedings, the proceedings must concern “a matter that the parties agreed to submit to arbitration,” and the party seeking the stay must do so before taking any steps in the “court proceedings.”  If these criteria are met, then the second step of the framework is triggered.

The Court in Husky Food confirmed that this approach also applies to stays sought under section 9 of the International Commercial Arbitration Act.

With respect to the first of these four prerequisites, Husky Food argued that JH Whittaker had the duty to prove an arbitration existed on a balance of probabilities.  However, the Court again referenced Peace River and noted that JH Whittaker only had to “establish an ‘arguable case’ that the technical prerequisites” were met.  Accordingly, Husky Food’s argument was rejected.

Evidentiary Record Supported the Conclusion of the Motion Judge That an Arbitration Agreement “Arguably” Existed

Husky Food further submitted that the motion judge erred in finding that an arbitration agreement arguably existed.  Among other things, Husky Food pointed to evidence that it had removed an arbitration clause from drafts of the distribution agreement that had pre-dated 2020 and further that the May 2020 draft specifically stated that an inconsistency between the main agreement and a provision in a schedule to it was to be resolved in favour of the former.  Ultimately, the Court rejected this argument, pointing to the fact that Husky Food had specifically based its action against JH Whittaker on the fact that the May 2020 draft was a binding agreement and that Husky Food had accepted JH Whittaker’s changes from April 2020.  Accordingly, Husky Food’s appeal was dismissed.

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