Whether in a shareholder agreement or an employment contract, the enforceability and permissible scope of an arbitration clause have been hot topics in Ontario courts in recent years. Below, we will look at how the courts have interpreted these issues and what it means for arbitration clauses in contracts going forward.

What is an Arbitration Clause?

In many business and employment agreements, parties will include a clause addressing how a dispute between the contracting parties will be resolved, should one arise in the future. An arbitration clause will often first mandate that the parties enter into negotiation to reach a mutually agreeable resolution. Failing that, the clause will then dictate that the parties enter into binding arbitration as opposed to litigation.

Parties signing these contracts, particularly if they are less sophisticated about contract law and legal language, may not realize what they are agreeing to. For example, Uber drivers in Canada found this out when drivers sought an order that the company be required to provide benefits for drivers as mandated under the Employment Standards Act. When the drivers launched a class action suit, Uber sought an order that the matter should be determined via arbitration, which was to be held in the Netherlands, per a clause in the drivers’ contracts.

The motions judge sided with Uber and dismissed the class action, upholding the language of the clause. However, the drivers appealed, and the Court of Appeal overturned the decision, holding that the clause amounted to an illegal contracting-out of employment standards legislation in Ontario, because it deprived drivers of the statutory right to file a complaint with the Ministry of Labour. The SCC has since granted a right to appeal this decision, so the ultimate decision on this issue in Canada remains to be seen.

Arbitration Clauses in Shareholder Agreements

There has also been mixed messaging from courts in relation to arbitration clauses in a shareholder’s agreement. For example, a Superior Court decision granted a shareholder’s right to litigation, refusing to stay the proceedings in light of an arbitration clause in the shareholder agreement. The parties were each shareholders and investors in an Italian restaurant in Toronto. When the restaurant folded, one shareholder, who had contributed $200,000 to the venture, sought to recover his investment by claiming he had been induced to sign the shareholder’s agreement via fraudulent misrepresentations about the restaurant’s viability and management. The other shareholders sought a stay, citing a clause in the agreement that “any dispute … respecting this Agreement or anything herein contained … shall be referred to a single arbitrator …”.

The Superior Court judge refused the stay, holding that the plaintiff’s claims of misrepresentation and breach of fiduciary duty were outside the scope of the contract, and therefore not within the clause’s purview. The Court of Appeal, however, disagreed.

Ultimately, the ONCA found that the lower court had erred as follows:

1. Assuming the tort claims were outside the scope of the arbitration clause. The appeals court found that any dispute relating to the interpretation or implementation of the agreement should be determined by the arbitrator, including deciding whether it should be governed by the clause or not.
2. A fraud allegation does not automatically override an arbitration clause. Again, the arbitrator should be the one to determine and decide on issues of fraud relating to the agreement.

Those drafting shareholder agreements, or any contract with an arbitration clause, should be cautious to ensure the language of the clause is simple, clear and broad. So long as the clause pertains to any dispute arising out of the contract itself or its creation, it will likely be upheld. However, based on the Uber decision, a clause will not be enforced if it overrides basic rights under Ontario law, such as employment rights. We will continue to monitor that case as it goes before the SCC and provide updates accordingly.

If you are involved in litigation resulting from a contract dispute, the exceptionally skilled corporate litigation lawyers at Milosevic & Associates in Toronto can help. Over the years, our team of lawyers has successfully fought for our clients’ rights and our impressive track record speaks for itself. Please contact us by calling 416-916-1387 or connect online for a consultation.