Cottages, Activists and Arbitrators: When Legislation Overrides an Agreement to Arbitrate

By Ren Bucholz – Lenczner Slaght

When disputes arise between parties to an agreement containing an arbitration provision, the first step is often a fight over the scope of the arbitrator’s jurisdiction. These tussles can be motivated by a party’s realization that the arbitration will be seated in their opponent’s backyard, or that the costs of the proceeding will be borne by the parties. Whatever the strategic motivation, courts are routinely asked to decide the scope of what the arbitrator can hear.

This scenario arose in the recent case of Zwack v Pocha, [2013] 354 DLR (4th) 83 (Sask. Q.B.) [Zwack], where the plaintiffs purchased a lakefront property on which they planned to build their dream cottage. They found a builder on the Internet and were contacted by the builder’s agents. The plaintiffs, the builder, and his agents signed a sales agreement, and construction began.

As Justice Schwann noted, “it did not proceed smoothly.”

The plaintiffs eventually hired another builder to finish the work and commenced an action for the recovery of lost construction costs. The builder relied on the arbitration clause in the sales agreement, which provided that “any dispute” between the parties would be referred to mediation and arbitration in the state of Washington, under Washington law. The Saskatchewan-resident plaintiffs later amended their pleadings to include claims under provincial consumer protection legislation.

In some cases, litigants seeking to escape an arbitration clause will plead their claims to take advantage of statutory causes of action or remedies that can only be ordered by a court. The theory is that such claims and remedies render the arbitration clause “null and void, inoperative or incapable of being performed”, which is one of the only ways for a court to avoid the common law and statutory directions to stay court proceedings where the parties have agreed to arbitration. This test comes from Article 8(1) of the UNCITRAL Model Law on International Commercial Arbitration, UN Doc. (Sales No. E.08.V.4) (2008) [Model Law], which has been adopted in every Canadian province, including Ontario.

In Zwack, the plaintiffs adopted this approach and argued that their claims were like those considered by the Supreme Court of Canada in Seidel v Telus Communications Inc., [2011] 1 SCR 533 [Seidel]. That case involved British Columbia consumer protection legislation that creates broad statutory rights of action that can be pursued by virtually anyone, including those who have suffered no damage as a result of the alleged shabby conduct. The B.C. legislation specifically contemplates the claims being brought as court proceedings. The Court in Seidel reasoned at para. 32 that, “[o]pening the door to private enforcement in the public interest vastly increases the potential effectiveness of the Act and thereby promotes adherence to the consumer standards set out therein.” The Court went on to say at para. 40 that this provision “offers remedies different in scope and quality from those available from an arbitrator and constitutes a legislative override of the parties’ freedom to choose arbitration.”

Justice Schwann considered Seidel and found that the analogous Saskatchewan legislation did not have the same clear mandate for “consumer activism”, and that the mere existence of statutory rights of action do not result in “legislative override” of an arbitration provision. Without cogent evidence of legislative intent to bar arbitration, Justice Schwann found that the Model Law’s direction to stay the court proceedings must be followed.

The reasons in Zwack are clear and well-researched, and they provide a useful guide to analyzing whether legislation that does not specifically bar arbitration may nonetheless amount to a legislative override of an arbitration clause. The threshold for finding such an override remains high, which is consistent with Canada’s support for the private arbitration system.