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Arbitration clauses in contracts backed by Superior Court of Ontario

John Bleasby
Arbitration clauses in contracts backed by Superior Court of Ontario

Arbitration clauses appear in contracts for a reason, as one Ontario developer discovered.

Katerinaville Developments Ltd. was a syndicate member in joint venture with Garthwood Homes Ltd. for the development of several housing projects. Garthwood held both a 20 per cent interest in the syndicate and acted as the bare lands trustee.

Katerinaville commenced an action in early 2020 against Garthwood, alleging breach of fiduciary duty and breach of trust, among other things. More specifically, Katerinaville claimed the two prime shareholders of Garthwood not only conducted their business in an oppressive manner, but that the two knowingly participated in the breach of fiduciary duty.

While that action was ongoing, a cash call was issued in early 2023 to all syndicate members due to a depletion of funds. Katerinaville did not comply. Other syndicate members then stepped forward to buy Katerinaville’s shares, as allowed under the terms of agreement.

Notwithstanding the ongoing action initiated by Katerinaville in 2020, Garthwood separately pursued Katerinaville’s failure to meet the cash call with a notice of arbitration issued in July 2023. Garthwood sought declaratory relief to allow them to effect the sale or transfer of Katerinaville’s interest.

In response, Katerinaville moved to “quash” Garthwood’s arbitration notice. Reasons included claims that arbitration in this instance was impractical and unfair. If Garthwood was seeking to commence arbitration, Katerinaville said it should have taken steps to reduce a duplication of efforts by staying the 2020 action claiming oppression.

Justice Jana Steele of the Superior Court of Ontario dismissed Katerinaville’s motion to quash the notice of arbitration, and ordered Katerinaville to pay Garthwood’s costs in the amount of $10,000 inclusive of taxes and disbursements.

“Garthwood, as a signatory to the syndicate agreement, had standing to initiate the arbitration,” writes Sarah McEachern, partner at Borden Ladner Gervais LLP. “(The Court) found that section 7 of the (Ontario Construction) Act allows a defendant to seek a stay of proceedings in favour of arbitration, but a plaintiff does not have the converse right to move to quash the notice of arbitration in favour of court proceedings.”

Justice Steele also rejected Katerinaville’s claim the arbitration was unfair or impractical due to the ongoing action undertaken in 2020. Not all the syndicate members were parties named in the earlier action initiated by Katerinaville against Garthwood, she wrote.

“The syndicate members, parties to the (Joint Venture) Agreement, are entitled to rely on the arbitration clause in the agreement to seek relief,” Justice Steele wrote.

The arbitration matter was separate and related to whether Katerinaville was in default of the (Joint Venture) Agreement such that the other syndicate members were entitled to purchase Katerinaville’s interest.

Justice Steele also drew attention to the matter of additional costs related to Katerinaville pursuing its 2020 action against Garthwood while concurrently having to deal with arbitration.

“While I understand that arbitration may be costly, there is no evidence that the cost of the arbitration would preclude the plaintiff from continuing the litigation. The additional cost in this case is the cost of the arbitrator. There are no filing fees or other barriers. Even if there may be some degree of duplication (which is not clear based on the record before me), this does not mean that the arbitration is rendered unfair.”

McEachern, who practices law in British Columbia, points out Justice Steele’s comments concerning the multiplicity of proceedings and whether it renders the arbitration unfair, “should be read in the context of the applicable laws in Ontario. The same reasoning may not be applicable in other jurisdictions such as British Columbia.”

In fact, she points out that courts in British Columbia may allow a partial stay of arbitration when separate actions have some overlapping issues and when those can be reasonably separated. At the same time, a stay can also be denied by the B.C. courts, so as to not endorse multiple proceedings and inconsistent decisions.

John Bleasby is a Coldwater, Ont.-based freelance writer. Send comments and Legal Notes column ideas to editor@dailycommercialnews.com.

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