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When Does a Party’s Conduct Impact its Ability to Enforce an Arbitration Agreement and Stay a Court Proceeding?

In CSI Toronto Car Systems Installation Ltd. v. Pittasoft Co., Ltd., 2021 ONSC 5117 (“Pittasoft”), Justice Sharma of the Ontario Superior Court of Justice refused to grant a stay of proceedings in favour of arbitration due to the conduct of the defendant, which estopped them from enforcing their arbitration agreement.

Why This Decision Matters 

A party cannot rely on an arbitration clause “as if its prior conduct had not occurred.”[i] Here, Pittasoft, the defendants in this action, began a claim in Korea against the plaintiff, CSI Toronto Car Systems Installation Ltd (“CSI”). The court invoked estoppel by conduct principles from both local and foreign jurisprudence to support its finding that a party’s conduct may preclude its ability to enforce an arbitration clause to its benefit later. 

While the court may forgive accidental slips that are quickly corrected, parties should keep in mind that even though there is a high threshold to render an arbitration clause unenforceable, commencing litigation in a court may foreclose a party’s ability to enforce an arbitration clause and stay a court proceeding.[ii] 

Underlying Facts 

In March 2018, the plaintiff CSI, an auto electronic installation company, entered into a Sales Agreement with Pittasoft, a Korean company that manufactures dashboard cameras. The Sales Agreement included an arbitration clause, referring a dispute to arbitration.

A dispute arose between the parties. CSI brought two actions in Ontario against Pittasoft. The first action concerned allegations of libellous statements about CSI on Pittasoft’s website. Pittasoft defended that action.

A second action was commenced by CSI, which repeated the same allegations in the first action, but also included breach of contract and torts claims. The second action also named another defendant, Automobility, claiming that it interfered in CSI’s economic relations.

Rather than commencing arbitration proceedings, Pittasoft brought its own court against CSI in Korea. Pittasoft seemingly brought the action as a means of obtaining leverage to negotiate the dismissal of the Ontario actions brought against it in Ontario. Pittasoft ultimately abandoned its action in Korea when it brought its motion seeking to stay the second Ontario action in favour of arbitration.[iii]

The Parties’ Positions

One of the main issues before the Court was whether the second Ontario court action should be stayed in favour of arbitration in Korea. CSI argued that the arbitration clause could not be relied on by Pittasoft because its own conduct estopped it from doing so. 

Pittasoft argued that CSI did not meet the strong cause test required to establish that the arbitration clause should not be enforced.

Legal Context 

It is trite law that parties are held to their bargain – an arbitration and forum selection clauses are no different. The law, therefore, requires the plaintiff to demonstrate “strong cause” that the arbitration clause should not be enforced. The “strong cause” threshold is a high one and must follow the test outlined in Z.I. Pompey Industrie v. ECU-Line N.V., 2003 SCC 27: 

In the context of international commerce, order and fairness have been achieved at least in part by application of the “strong cause” test. This test rightly imposes the burden on the plaintiff to satisfy the court that there is good reason it should not be bound by the forum selection clause. It is essential that courts give full weight to the desirability of holding contracting parties to their agreements. There is no reason to consider forum selection clauses to be non-responsibility clauses in disguise. In any event, the “strong cause” test provides sufficient leeway for judges to take improper motives into consideration in relevant cases and prevent defendants from relying on forum selection clauses to gain an unfair procedural advantage. (emphasis added)

The governing international arbitration legislation in Ontario, the International Commercial Arbitration Act, S.O. 2017, c. 2 (“ICAA”), requires the court to respect arbitration agreements and the requirements enforced by the UNCITRAL Model. The only way a court can avoid referring a matter to arbitration is if the agreement is null and void, inoperable or incapable of being performed, and the party requesting the enforcement of the clause must do so no later than when submitting its first statement on the substance of the dispute.[iv]

The Court’s Decision

Justice Sharma found that Pittasoft’s Korean action for alleged breach of contract against CSI was their “first statement on the substance of the dispute”. This meant that the time for Pittasoft to enforce the arbitration clause had passed by the time it had brought its motion seeking the stay. 

Justice Sharma similarly found that the Korean action rendered the arbitration clause inoperative. Justice Sharma considered both foreign and Canadian jurisprudence when finding that Pittasoft’s conduct has estopped it from relying upon the arbitration clause. A case from the Singapore High Court reiterated that estoppel is one of the ways in which an arbitration clause is inoperative under a contractual agreement.[v] Similarly, in a decision from the High Court of Ireland, the court held that it is the party’s conduct, particularly choosing to litigate in the courts, that will estop that party from relying on am arbitration clause.[vi] 

Here, the Court determined that Pittasoft’s conduct had rendered the arbitration agreement inoperable and estopped it from relying on it to stay the court proceeding in Ontario. 

Concluding Thoughts

Where an arbitration agreement exists, attention must be given at the outset of a dispute to determine the appropriate route of adjudication. Commencing a parallel court-proceeding (even if it is later withdrawn) or responding to a court-proceeding without raising an objection to the route of adjudication, may foreclose a party’s ability to seek a stay of the proceeding in favour of arbitration at a later date.

[i]Pittasoft at para 31.

[ii]Pittasoft at para 32.

[iii]Pittasoft at para 32.

[iv]Pittasoft at para 24.

[v]Pittasoft at para 27 citing Dyna-Jet Pte Ltd v Wilson Taylor Pte Ltd [2016] SGHC 238.

[vi]Pittasoft at para 28 citing Mitchell v Anor v. Mulvey Developments Ltd., [2012] IEHC 561.

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