Perfect strangers: recent decisions force non-contracting parties into arbitration

Publication November 2016

Who can be forced to adjudicate a dispute by arbitration when that dispute involves strangers to the arbitration clause? The Court of Appeal for Ontario in the recent Novatrax International Inc. v Hagele Landtechnik GmbH1 decision wrestled with this question and not for the first time. It is trite law in Ontario that parties will be required to have their dispute adjudicated by arbitration where (a) they have agreed to arbitrate disputes between themselves and (b) the dispute falls within the scope of the arbitration clause.2 When strangers to the arbitration clause are involved in the dispute, however, these foundational principles are not dispositive.


Motion to stay

In Novatrax, the court considered whether a plaintiff who brought an action in the Ontario Superior Court of Justice could be forced into arbitration with the defendants when only one of the defendants was party to the contract containing the arbitration clause. The defendants – all of whom were related entities – moved to stay the action brought by the plaintiff in favour of arbitration in Germany. The plaintiff objected to the stay on the basis that it did not agree to adjudicate disputes by arbitration with some of the defendants.

Ontario Court of Appeal decision

A 2-1 majority held, on the basis of the Ontario Court of Appeal’s decision in Momentous.ca3, that a party to an arbitration clause can be forced to arbitrate its dispute with a stranger to that arbitration clause if (i) the plaintiff and one of the defendants have agreed to arbitrate, (ii) the dispute falls within the scope of the arbitration clause, and, crucially, (iii) the plaintiff’s pleading raises common issues of fact and law that join all of the defendant parties, including the strangers to the arbitration clause. In the majority’s view, the claims against the non-contracting defendants as alleged in the plaintiff’s pleading could not stand independently. As such, the pleadings were read to impute the plaintiff’s consent to adjudicate the dispute by arbitration with all of the defendants.

In dissent, Justice Feldman raised an important question about the viability of enforcement of a future arbitral award involving the non-contracting defendants. Furthermore, she raised concerns about whether forcing a party to arbitrate against non-contracting parties to the arbitration clause, largely on the basis of its pleading, would upend the fundamental principles (namely freedom of contract) that support arbitration as a dispute resolution forum in the first place.

Implications

The Momentous.ca and now Novatrax decisions are clear indications that courts are willing to keep the plaintiff to its bargain to adjudicate by arbitration even if that bargain was not made with some of the defendants.

In Novatrax, it appears that the contracting and non-contracting defendants were aligned in their intent on proceeding to arbitration. Under different facts, could a contracting defendant force a non-consenting non-contracting co-defendant into arbitration simply because the contracting defendant moved to stay in favour of arbitration and the plaintiff had pleaded common issues of fact and law among all the defendants? The impact of the Novatrax decision on these types of scenarios remains to be seen.

Footnotes

1 2016 ONCA 771 (Novatrax).

2 See e.g. Nazarinia Holdings Inc. v 2049080 Ontario Inc., 2010 ONSC 1766 at paras 19-20, affirmed 2010 ONCA 739.

3 Momentous.ca Corp. v. Canadian American Association of Professional Baseball Ltd., 2010 ONCA 722, 103 O.R. (3d) 467, affirmed 2012 SCC 9, [2012] 1 S.C.R. 359 (Momentous.ca).


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