Arbitration Clause Effective Despite Action Against Insurer Clause: Trade Finance Solutions v. Equinox Global Limited (Take Two)

The Ontario Court of Appeal has released its decision confirming that where it is possible to give effect to a mandatory arbitration clause, the court will strive to do so.

As described in our earlier blog post, the plaintiff, a Toronto based company, commenced an action in Ontario against its insurers, Equinox Global Limited and Lloyd’s Underwriters. The policy of insurance contained an arbitration clause with the seat of arbitration in London, England.  The endorsements, which prevailed over the Policy to the extent of any conflict, contained a provision as follows:

In any action to enforce the obligations of the Underwriters they can be designated or named as “Lloyd’s Underwriters” and such designation shall be binding on the Underwriters as if they had each been individually named as defendant. Service of such proceedings may validly be made upon the Attorney In Fact in Canada for Lloyd’s Underwriters, whose address for such service is 1155 rue Metcalfe, Suite 2220, Montreal, Quebec H3B 2V6. (the “Action Against Insurer Clause”)

The Policy provided:

This policy shall be governed by the laws of England and Wales. Any dispute arising in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration under the LCIA Rules, which Rules are deemed to be incorporated by reference into this clause. The number of arbitrators shall be three. The seat, or legal place of, the arbitration, shall be London. The language used in the arbitral proceedings shall be English. (the “Mandatory Arbitration Clause”)

When faced with a motion by the Defendants to stay in the Ontario proceeding, the Plaintiff asserted, successfully at first instance, that the Action Against Insurer Clause coupled with the Mandatory Arbitration Clause contained in the Policy, was to permit the Plaintiff to choose whether it wished to proceed by way of action or arbitration. Given this conclusion, the Motion Judge “read down” the word “shall” in the Mandatory Abitration Clause to a “may” and refused to stay the action in favour of Arbitration.

The Court of Appeal, in a decision found here, reversed the decision of the Motion Judge finding that he erred in two respects.

First, the Court of Appeal concluded that the Motion Judge incorrectly interpreted the contract. The Court of Appeal concluded that the Motion Judge failed to properly apply the law requiring him to construe the contract as a whole and avoid an interpretation that renders one or more of its terms ineffective. The Court of Appeal concluded that the Action Against Insurer Clause was a “service of suit” clause detailing how notice of any action, including an arbitration, would be served.  It did not operate to create a right of action in the Ontario courts. In doing so, the Court of Appeal relied on very similar decisions in the United Kingdom[1]and Newfoundland and Labrador.[2]  It would violate the principles of contract interpretation to “read down” the Mandatory Arbitration Clause when an alternate interpretation would not require such a reading down.  Accordingly, the Court of Appeal stayed the Ontario action and ordered that the dispute be resolved through arbitration as contemplated in the Mandatory Arbitration Clause.[3]

Second, although unnecessary to its granting of the appeal, the Court of Appeal thought it important to make clear that the Model Law and the ICAA do apply even when arbitration is not the sole method of dispute resolution. To the extent that the Motion Judge concluded that was not the case, the Court of Appeal concluded that he erred in so doing. Where arbitration is merely optional the Model Law may not apply, but where an agreement requires certain but not all disputes to be referred to arbitration, the Model Law will apply to those certain disputes subject to arbitration.

As discussed in our last blog post, this case demonstrates clarity in drafting is key, particularly when a standard form contract is the starting point of the contract. In this case, that lack of clarity means the Plaintiff has waged a battle over the forum in which to resolve its claim against its insurers for well over a year (having started the action in 2016), is subject to costs awards payable to its insurer of $100,000 (leaving aside its own legal fees incurred to date) and is no further ahead in addressing the merits of its case. A clause in the endorsement clearly stating that arbitration was not mandatory would have avoided such an outcome.

[1] Ace Capital Ltd. v. CMS Energy Corp.[2008] EWHC 1843

[2] Oppenheim v. Midnight Marine Limited2010 NLCA 64 (CanLII)

[3] Subject to the question of whether Ontario Law applied given s. 123 of the Insurance Act, R.S.O. 1990, c.I.8, which question would be determined by the arbitration panel.



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