Canada: Ismail v First York Holdings Inc

Ontario Court of Appeal confirms doctrine of separability cannot save an arbitration agreement contained in a contract that was void from the beginning and never legally binding.

Facts

Mr. Ismail and Mr. Abied began doing business together through First York Global Holdings Inc. (FYGH). They entered into two share purchase agreements with arbitration clauses. Mr. Ismail appointed Mr. Abied as his attorney with authority to sign agreements on his behalf. Three agreements were signed and executed by Mr. Abied on behalf of both parties:

1. A FYGH Purchase of Business Agreement (the FYGH Purchase Agreement).
2. A Shareholders' Agreement regarding the purchase by Mr. Ismail of 20 per cent of the shares of FYGH.
3. A Purchase of Business Agreement of 20 per cent of the shares of another company, National Trade of Canada (National Trade) by Mr. Ismail (the NT Agreement).

National Trade was never incorporated. Mr. Ismail brought an oppression remedy application alleging that the NT Agreement was represented to be part of the entire transaction, but Mr. Abied claimed it was a separate business venture to be incorporated. A case management judge converted the application to an action with several claims, which led to a motion to stay the claims due to the existence of an arbitration clause contained in the NT Agreement. The motion judge refused to stay the action in favour of arbitration on the basis that the stay motion was based on the arbitration clause in the NT Agreement only and that agreement never legally existed.

Decision

The Ontario Court of Appeal dismissed the appeal. The Court concluded that the NT Agreement did not amount to a valid contract as National Trade was never incorporated, the shares never existed and there was therefore no consideration for the agreement. As the NT Agreement was never a legally binding contract (as opposed to a voidable contract) due to lack of subject matter and consideration, the arbitration agreement contained within it could not exist. The agreement to arbitrate cannot "survive" where there was no contract to survive from.

The Court also rejected Mr. Ismail's attempt to rely, in the alternative, on the arbitration agreement contained in the FYGH Purchase Agreement on the basis that the motion for a stay was based on the arbitration clause in the NT Agreement only.

Analysis

The doctrine of separability is a fundamental concept in arbitration. In short, it allows an arbitration agreement/clause contained in a main contract to be separated and to survive even in circumstances where there might be a basis to challenge the validity of the main contract. The justification for the doctrine is that unless the basis for challenging the validity of the main contract also directly impugns the parties' agreement to arbitrate, the arbitration agreement should be preserved and the parties' choice of arbitration respected notwithstanding any challenge to the validity of the main contract. Were this not the case, any challenge to the validity of the main contract would risk undermining the arbitration agreement.

In Ontario, the doctrine of separability is reflected in subsection 17(2) of the Arbitration Act, 1991, which provides that "[i]f the arbitration agreement forms part of another agreement, it shall, for the purposes of a ruling on jurisdiction, be treated as an independent agreement that may survive even if the main agreement is found to be invalid." However, this case suggests that while the doctrine of separability may protect an arbitration clause in a voidable contract, it does not extend to preserve an arbitration clause in a contract that was never legally binding.

Ismail v First York Holdings Inc, 2023 ONCA 332