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24 Aug

Arbitration clauses in employment agreements: are they enforceable?

Wednesday, August 24, 2016Bryan SkolnikEmployment Law, LitigationArbitration, Employment Agreements, Sales Incentive Plan

Many employment agreements contain clauses which require the parties to submit to arbitration or some other dispute resolution mechanism prior to or instead of commencing court action.

In cases of national and international employers, those same clauses may require that the arbitration take place in and be subject to the laws of a jurisdiction other than where the employee resides. Often, that location can be more than just inconvenient. It may serve as a practical impediment to an employee seeking redress.

Employment lawyers in Ontario regularly commence actions despite the existence of an arbitration clause which requires attornment to an inconvenient jurisdiction in the hope that the defendant employer will not take issue with so doing. However, section 7(1) of the Arbitrations Act states:

“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.”

A recent case in Ontario’s Superior Court of Justice (Morrison v. Ericsson Canada Inc., 2016 ONSC 3908 ) found that once section 7(1) is invoked, there is no discretion in the court to allow the lawsuit to continue.

In that case, the plaintiff, Morrison worked for the defendant, Ericsson which is a global telecommunications company founded in Sweden with the various affiliated companies around the world. Ericsson’s North American headquarters were located in Plano, Texas. The employment agreement specified that Morrison would be subject to all applicable policies of the company including its annual Sales Incentive Plan (“SIP”).

While the employment agreement itself indicated that it was subject to the laws of the province of Ontario, the SIP contained a dispute resolution mechanism whereby Morrison was entitled to bring any dispute or controversy over his SIP entitlement first to his manager and thereafter to successive “higher” levels of management. Ultimately, if he was still dissatisfied with the outcome, the parties were to submit to binding arbitration. That arbitration was to take place in Dallas, Texas.

A dispute over Morrison’s entitlement under the SIP arose. Morrison escalated his dispute through the various levels of management. He was faced with unfavourable decisions at every level of management. Rather than submit to the arbitration in Texas, Morrison resigned from his employment and commenced an action in Ontario in which he alleged constructive dismissal as well as an entitlement to commissions under the SIP.

Ericsson moved for an order dismissing the action pursuant to Rule 21.01(3) of the Rules of Civil Procedure or, alternatively, staying the action and for an order compelling the plaintiff to proceed with the arbitration in Dallas, Texas.

Among other things, Morrison argued that:

  1. his claim included other types of damages as well as the SIP payment and as such he would have to return to Ontario in any event to proceed with those claims;
  2. it would be prohibitively expensive for him to travel to Texas for the arbitration, particularly in light of the value of the Canadian dollar.

In response, Ericsson argued that the dispute arose entirely from a contractual obligation and thus must proceed to arbitration first. The mere fact that Morrison sought other damages did not mean that the action ought to proceed.

In siding with Ericsson, Justice Darla Wilson found that Morrison’s claim for wrongful dismissal was premised on a finding that he is entitled to a commission under the SIP. The fact that the employment agreement specified the law of Ontario was to govern was of no assistance to Morrison on the motion.

Justice Wilson found that the language in the SIP was clear and unambiguous. Moreover, the language of section 7(1) of the Arbitrations Act is mandatory and requires the court to stay a proceeding when there is an agreement to arbitrate and the dispute is properly within the mandate of the arbitrator.

The motion was granted. The Ontario action was stayed and Morrison was directed to proceed with the arbitration in accordance with the employment agreement.

Lawyers for employers and employees alike ought to carefully examine dispute resolution/arbitration clauses in the employment agreements. Employees who bring actions in the face of an arbitration clause may be subject to the action being stayed together with an adverse cost awards. While from the employer’s side the thought of staying a “local” action would seem like a good outcome, that is not always so. I recently raised the issue with a U.S. client of mine who had a U.S. attornment clause in its employment agreement. Notwithstanding that clause, it was more convenient/cost-effective for my client to have the matter dealt with in Ontario than “back home”. 

Bryan Skolnik

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