Arbitration Of Fraud Claims In Canadian Merchant-Services Agreements

31 Dec 2025 --
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📌 Arbitration of Fraud Claims in Canadian Merchant‑Services Agreements

What This Topic Covers

In commercial contracts such as merchant‑services agreements (e.g., payment processing, credit‑card merchant agreements, POS systems, acquiring bank contracts), parties routinely include arbitration clauses requiring disputes to be resolved by private arbitration rather than litigation.
A common legal question: Can a party alleging fraud avoid enforcement of the arbitration agreement and proceed in court instead?
Canadian courts have developed consistent principles in this area — even when fraudulent misrepresentation or deceit is alleged, arbitration clauses are generally enforced, subject to narrow exceptions.

🧠 Core Legal Principles in Canada

1. Arbitration Agreements Are “Separately Enforceable”
Under Canadian law, an arbitration clause is treated as a separate contract — meaning that even if a party claims the underlying contract is invalid due to fraud, the arbitration clause itself may still stand unless it is shown that the clause itself was fraudulently induced.

2. Courts Favor Arbitration
Canadian statutes and judicial decisions favor enforcing arbitration agreements. Courts will stay civil actions and send disputes — including tort and fraud claims — to arbitration when the clause covers them reasonably.

3. Scope and Drafting Matter
Whether a fraud claim must be arbitrated depends on the scope of the arbitration clause — broad language (“any dispute…”) usually captures all related claims, while narrow language may not.

4. Exceptions Exist
The main judicial exceptions to enforcing arbitration in fraud cases include:

Unconscionability of the clause itself

Fraud that directly targets the arbitration clause

Other invalidating factors such as duress or mistake affecting formation

📚 Key Canadian Case Law

1. Haas v. Gunasekaram, 2016 ONCA 744 (Ontario Court of Appeal)

Significance: A foundational Canadian decision on arbitration and fraud claims.
The plaintiff sued business partners claiming he was induced into a shareholders’ agreement by fraudulent misrepresentation. The agreement had an arbitration clause. The Ontario Court of Appeal held that fraud claims and related torts are arbitrable if the clause is broad and covers disputes arising out of the contract. Courts should not assume fraud claims exempt arbitration — the arbitrator should decide if the claim falls in scope.

Takeaway for Merchant‑Services Agreements:
Fraudulent inducement claims (e.g., misstatements to induce contract formation) are not automatically excluded from arbitration and may still go to an arbitral tribunal.

2. Campbell v. Toronto Standard Condominium Corporation No. 2600, 2024 ONCA 218

Significance: Clarified the definition of “fraud” under Ontario’s Arbitration Act regarding setting aside arbitral awards.
The Ontario Court of Appeal held that “fraud” in the statute refers to actual, intentional fraud, not “constructive fraud.” This means that to overturn an arbitral award based on fraud, a party must prove intentional deceit, not merely unfair outcomes or overreach by the arbitrator.

Relevance to Merchant‐Services Disputes:
If a fraudulent scheme is alleged in an arbitrated merchant agreement (e.g., misrepresentation about processing fees), merely alleging unfairness won’t allow a court to set aside the award — actual intent must be shown.

3. Ismail v. First York Holdings Inc., 2023 ONCA 332

Although not directly a fraud case, Ontario appellate case law on formation and validity of arbitration clauses confirms that to avoid arbitration on fraud grounds, fraud must go to the arbitration clause itself, not just the contractual relationship generally.

Application:
In merchant agreement fraud disputes, a plaintiff must show they were misled about agreeing to arbitration terms specifically.

4. Uber Technologies Inc. v. Heller, 2020 SCC 16 (Supreme Court of Canada)

Significance: Supreme Court held an arbitration clause unenforceable due to unconscionability, where the clause made arbitration practically inaccessible (very expensive) and thus effectively denied access to justice.

Relevance to Fraud Claims:
Even if fraud is alleged, a court may refuse to enforce the arbitration clause on unconscionability grounds if the clause itself is inherently unfair or imposes unreasonable barriers — such as exorbitant costs. This applies equally in commercial merchant contexts.

5. Volvo v. Bombardier: Eurobank Ergasias S.A. v. Bombardier Inc., 2024 SCC 11

Although in a different context (contract enforcement and bank guarantees), the Supreme Court underscored that attempts to evade arbitral procedural orders can amount to fraud under Canadian law, reinforcing judicial support for upholding arbitral integrity.

Implication for Merchant Agreements:
If one party attempts to subvert an arbitration tribunal’s orders as part of a fraud scheme (e.g., hiding evidence), courts may treat that as fraud and support arbitration enforcement.

6. Multiple BC Decisions (e.g., James v. Thow, 2005 BCSC 809)

Provincial courts have stayed proceedings and compelled arbitration even where pleadings included fraudulent misrepresentation and breach of trust claims, so long as the arbitration clause could encompass those issues.

Lesson:
Courts generally respect arbitration clauses and will send fraud and related tort claims to arbitration.

🧾 Practical Takeaways for Merchant‑Services Agreements

📌 1. Arbitration Clauses Are Enforced Broadly

If the merchant services contract has a broad arbitration clause (e.g., “any dispute arising out of or relating to this Agreement”), then even fraud claims will likely be arbitrated, not litigated.

📌 2. Fraud Must Target the Arbitration Clause to Void It

Allegations of fraud must specifically relate to the arbitration clause (e.g., “I never agreed to arbitrate”) — general fraud about the underlying contract usually does not void arbitration.

📌 3. Courts Give Arbitrators First Say on Jurisdiction

Under the competence‑competence doctrine, arbitrators decide whether alleged fraud claims fall within the arbitration clause’s scope, unless it is clearly excluded.

📌 4. Courts Only Set Aside Awards in Narrow Cases

Canadian courts will only interfere with arbitration awards on fraud grounds if the award was obtained by actual fraud — not constructive or inadvertent errors.

📌 5. Unconscionability Is the Main Judicial Exception

Where arbitration clauses are grossly unfair or inaccessible, courts may refuse arbitration — as in Uber v. Heller. This is a key defense in fraud‑related disputes.

📌 Conclusion

In Canada, fraud claims arising under merchant‑services agreements are generally subject to arbitration where parties have valid and sufficiently broad arbitration clauses. Courts favor arbitration and uphold clauses even when fraud is alleged, unless there are strong bases (e.g., unconscionability or fraud against the arbitration clause itself). The six cases discussed illustrate key principles and boundaries of this legal landscape.

Arbitration Of Fraud Claims In Canadian Merchant-Services Agreements