Canada – Arbitration Clause Not Consideration; Provides Only Detriment to Contracting Party

This article was first published on the Arbitration Matters blog, here.

In Goberdhan v Knights of Columbus, 2022 ONSC 3788, Justice Harris dismissed the Defendant’s motion to stay the Plaintiff’s wrongful dismissal action in favour of arbitration. The parties signed three employment contracts over a period of 8 years; the last two each contained a mandatory arbitration clause. The Plaintiff argued that there was no consideration for the second and third contracts, so he was entitled to sue. The Defendant argued that the arbitration clause itself was consideration and that a stay should be ordered because it was “arguable” that the dispute fell within the terms of the arbitration agreement. Justice Harris rejected the Defendant’s argument. He found that the last two contracts lacked consideration because there was no benefit flowing to the Plaintiff; essentially, he gave up his right to sue, which was a detriment, and gave him nothing in return. Therefore, because the main contract failed for lack of consideration, so too did the arbitration clause.

The Plaintiff was a field agent employed by the Defendant to sell insurance. The Plaintiff sued for wrongful dismissal after his employment was terminated on May 23, 2019. The Defendant sought a stay of the action in favour of arbitration pursuant to s. 7 of the Ontario Arbitration Act, 1991, S.O. 1991, c. 17.

There were three contacts signed by the parties. The first was dated April 17, 2001. The second was dated October 5, 2018, and contained a clause that provided for mediation and, if that failed, mandatory arbitration. The third was dated April 5, 2019, and was substantially the same as the second contract.

The Defendant argued that the Plaintiff was required to arbitrate. The Defendant asserted that a stay should be imposed whenever it is arguable that the dispute falls within the arbitration agreement, relying upon Haas v. Gunasekaram, 2016 ONCA 744 (Ont. C.A.) at para. 15-16. The Defendant asserted that the dispute arguably fell within the valid arbitration clause and therefore should be stayed.

The Plaintiff disagreed. He said that there was no consideration for entering into the second and third contracts, which were therefore null and void and the arbitration agreement was “ineffective”. Therefore, the action should be allowed to proceed.

Justice Harris agreed with the Plaintiff; there was no fresh consideration for the second and third contracts. The first contract did not contain an arbitration clause, so the Plaintiff was not required to arbitrate. He rejected the Defendant’s argument that the new requirement for mediation and arbitration in the second and third contracts constituted fresh consideration because, “removal of the right to sue is clearly not a benefit to the plaintiff” and “[T]rial by jury is a fundamental right”, the removal of which was a curtailment of the Plaintiff’s rights. He concluded that:

“[22] For these reasons, I disagree that there was consideration for the new contracts. The new agreements in October 2018 and April 2019 in every material respect diminish the plaintiff’s contractual rights while giving him nothing in return. This exemplifies the unfair bargaining relationship between employer and employee alluded to in the cases.”

Justice Harris distinguished Haas v Gunasearam, relied upon by the Defendant, on the ground that it dealt with the interpretation of the scope of a valid arbitration clause, while the issue in this case was whether the arbitration clause was valid. He found that the facts met the exception to the mandatory stay under s. 7 of the Ontario Arbitration Act because he had found the contracts containing the arbitration clause to be invalid for lack of consideration:

“[24] However, this [Haas v Gunasekaram] this concerns with (sic) the interpretation of an arbitration agreement, not its very existence. Section 7(2) of the Act provides in part:

7(2) Exceptions

However, the court may refuse to stay the proceeding in any of the following cases:

2. The arbitration agreement is invalid.

[25] As the contract fails for lack of consideration, so too does the arbitration term in the contact. The arbitration agreement is invalid under Section 7(2) of the Act.”

Therefore, Justice Harris dismissed the stay motion and allowed the action to continue.

Editor’s Notes:

First, s. 7 of the Ontario Arbitration Act, 1991, contains a mandatory stay provision where there is an arbitration clause in the parties’ agreement, subject to five specified exceptions, including where the arbitration agreement is invalid:

“Stay

7(1) If a party to an arbitration agreement commences a proceeding in respect of a matter to be submitted to arbitration under the agreement, the court in which the proceeding is commenced shall, on the motion of another party to the arbitration agreement, stay the proceeding…

Exceptions

(2) However, the court may refuse to stay the proceeding in any of the following cases:

  1. A party entered into the arbitration agreement while under a legal incapacity.
  2. The arbitration agreement is invalid.
  3. The subject-matter of the dispute is not capable of being the subject of arbitration under Ontario law.
  4. The motion was brought with undue delay.
  5. The matter is a proper one for default or summary judgment…”

This language requires the court to determine whether the arbitration agreement, NOT the main contract, is invalid. The word “invalid” is not defined in the Act, but because of the principle of separability, the arbitration agreement is to be considered a separate contract and if the arbitration agreement does not comply with the principles of contract formation, such as the need for consideration, it may be held to be invalid. (The Plaintiff does not seem to have relied upon duress to invalidate the contract or arbitration clause, despite his assertion that he lacked bargaining power when he signed the last two contracts.) In other words, even if the main contract is invalid, that does not necessarily mean that the arbitration clause is invalid. If the arbitration agreement is not valid, the court will not order a stay of the action. In this case, Justice Harris’s analysis of the validity of the main contract would likely also apply to the arbitration clause and the result would likely have been the same.

Second, in a case commentary prepared for arbitration practitioners, I cannot help but ask: Why was the removal from the first contract of the right to sue in favour of arbitration “clearly not a benefit to the Plaintiff”?

author

Lisa C. Munro

Lisa Munro is a partner at Lerners LLP, whose practice is limited to work as an arbitrator in domestic and international commercial arbitrations (both ad hoc and under institutional rules). She brings to this role more than 25 years of experience as counsel in commercial/business litigation and both international and…

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