The Ontario Superior Court of Justice recently delivered a brief decision which placed an important caveat on the enforceability of arbitration clauses.

As discussed in previous posts, there is little doubt that mandatory arbitration clauses are given considerable deference by the courts in Canada. The fly in the ointment for the defendants in Trade Finance Solutions v Equinox Global Limited, 2016 ONSC 7988, who were hoping to enforce an arbitration clause, was that their insurance agreement with the plaintiff included both a mandatory arbitration clause and an endorsement addressing certain steps to be taken in the event of a court action.

The plaintiff, Trade Finance Solutions Inc. (“TFS”), was a Toronto-based international financier, engaged in the business of paying for international shipments undertaken by clients, in exchange for a fee. As part of its business, TFS took out an insurance policy underwritten by the defendants, Equinox Global Limited and Lloyd’s Underwriters.

The base wording of the policy contained an arbitration clause which held that any dispute arising from the policy would be referred to arbitration and would be governed by the rules of the London Court of Internal Arbitration.

However, the Policy also contained certain endorsements in order to bring it into compliance with both Canadian and Ontario insurance legislation.  The endorsements included a term stipulating that in the event of a conflict between the wording of the endorsements and the policy, the endorsements would prevail. Furthermore, the endorsements contained a section entitled “Action Against Insurer” which included an address for service to be used “in any action to enforce the obligations of the underwriters”.

For reasons not explained in the decision, TFS commenced an action against the defendants in Ontario, following which the defendants sought an order to stay the action on the basis of the arbitration clause included in their agreement with the plaintiff.

In dismissing the defendants’ motion, the Court held that the entire agreement between the parties allowed for alternative methods of proceeding in the event of a dispute,[1] and that the endorsements preserved TFS’ right to commence an action against the defendants in Ontario.[2]

The Court also rejected the argument submitted by the defendants that the Ontario International Commercial Arbitration Act[3] applied to the case at bar. The Act allows for a stay of proceedings in the event that a dispute is governed by an agreement with an arbitration clause. Section 8 of the Act cites Article 8 of the UNCITRAL Model Law on International Commercial Arbitration, which directs courts to enforce arbitration agreements when “an action is brought in a manner which is the subject of an arbitration agreement.” The Court held that section 8 applies to disputes where the arbitration clause is the only mode of dispute resolution contemplated in the agreement.

When entering contracts, including insurance contracts, it is critical to ensure that they are internally consistent and coherent so that rights and obligations can be more readily enforced.  Trade Finance Solutions serves as a stark reminder of this in the context of arbitration clauses.  Any party who wishes to rely on an arbitration clause is well advised to ensure that there are not any other terms of the agreement which could be construed as giving a right to commence a court action. While we expect arbitration clauses will continue to be shown a great deal of deference by Canadian courts, Trade Finance Solutions demonstrates that this deference is not without limits.

We note that the defendants have appealed this decision. Please check back for further developments.

[1] TFS, supra 1, para 10.

[2] Ibid, para 13.

[3] RSO 1990, c I9.