If You Don’t Invite Everyone to the Arbitration Party, You May Come to Regret It: ATS Automation Tooling Systems Inc. v. Chubb Insurance Company of Canada
While it is rare to see a Master ruling on an important issue affecting international arbitrations, Master Short of the Ontario Superior Court of Justice just did that in this case involving international shipping and insurance contracts. Like the case of Toyota Tsusho Wheatland Inc v Encana Corporation discussed in our prior blog post (here), the Court in this case grappled with a request for a stay where one of the parties to the court proceeding was not a party to the arbitration agreement.
The dispute arose from damage to equipment worth $15,000,000 which had been sold by a subsidiary of ATS to a customer located in India. There was a dispute about whether the damage occurred during the sea portion of the transportation from Thailand to India (for which ATS had obtained insurance from Chubb) or during inland transportation once the equipment arrived in India (for which the customer was to have obtained insurance although ATS was asserting the Chubb policy may have to respond). The contract between ATS and its customer contained an arbitration clause requiring any dispute to be arbitrated in India. The contract of insurance between ATS and Chubb did not contain an arbitration clause.
ATS notified Chubb of a potential claim. Chubb investigated and determined that the damage did not occur during the sea portion of transportation and denied the claim. Accordingly ATS started an action in Ontario against Chubb even though no arbitration had yet been launched in India by its customer. Chubb then threatened a motion for summary judgment on the basis that ATS had suffered no loss and in any event, there was no coverage for any loss it might sustain. ATS responded by seeking to stay its own Ontario action pending the outcome of any arbitration in India. No arbitration had been commenced in India and the limitation period to commence such an arbitration in India would not expire until 2019 (due to informal dispute mechanisms in the contract and India’s limitation period). On the other hand, the limitation period in Ontario for the commencement of a claim by ATS against Chubb would have expired in 2017.
Master Short ultimately declined to stay the action. In doing so he articulated the test for temporarily staying an action pending resolution of a related foreign arbitral proceeding. Unlike most stay cases in the face of arbitration clauses where both parties to the arbitration clause are before the court (like the case discussed here), this case was not an attempt to stay a proceeding that ought to have been commenced by way of arbitration. Accordingly, the court was faced with determining the case in accordance with the test articulated by the Court of Appeal in Novatrax International Inc. v. Hägele Landtechnick GmbH, 2016 ONCA 771. In particular:
- Are the issues in the arbitration and the action substantially similar?
- Has the party seeking the stay demonstrated that continuing the action would work an injustice?
- Has the party seeking the stay satisfied the court that a stay would not cause prejudice to the responding parties?
Largely because there had not yet been an arbitration commenced in India, and indeed there was no certainty such a claim would be commenced, the Master concluded that there was no injustice to ATS in refusing to stay its action against Chubb. Master Short ultimately concluded that Chubb would be more prejudiced by having to wait to have the issues determined because it was required to maintain a reserve for the claim on its books, which wait was potentially indefinite. While not expressly stated, given that Chubb would not be a party to the arbitration in India, it is not apparent whether or not it would have even be bound by a finding in that arbitration that the loss had occurred at sea.
This case illustrates one of the potential challenges that can arise if you choose to include an arbitration clause in your contract. Moreover, choice of law clauses and contractual limitation periods may result in mismatched limitation periods for related claims. If all parties who might have an interest in that dispute do not have an arbitration agreement, and indeed likely identical arbitration provisions (e.g. provisions that have arbitration occurring in the same location, pursuant to the same law and pursuant to the same arbitration rules and limitation proceedings), there is a risk of inconsistent findings in different legal forums related to the same underlying issues. Where there are interrelated contracts, it is crucial to ensure consistent arbitration clauses in each contract. That said, given that insurance contracts are almost always standard form agreements and often are provided on an enterprise basis this is not particularly practical advice. In this case, the weighing of the potential prejudice might have tipped differently if the arbitration had already been commenced. Accordingly, it is worth considering in including arbitration clauses (including informal dispute mechanisms as a precursor to commencement of litigation) how the timelines might impact on insurance or other claims against third parties.
For the decision, see here: ATS Automation Tooling Systems Inc. v. Chubb Insurance Company of Canada, 2018 ONSC 6139
international arbitration consolidation stay of proceedings dispute resolution