The Ontario Court of Appeal has confirmed that a stock option agreement structured as a standalone equity arrangement – expressly disconnected from an employee’s employment contract – will be governed by the dispute resolution mechanism in the option agreement itself, not by an arbitration clause in the employment agreement. The decision carries important lessons for both employers offering equity to Ontario-based employees and employees navigating multi-document compensation structures.
Background
Declan Friel joined HUB International HKMB Limited (“HUB Ontario”), an Ontario-based insurance brokerage, in 2012. His employment was governed by an employment agreement subject to Ontario law, which included a dispute resolution clause (the “ADR clause”) requiring that any claim “contemplated by or arising out of or in connection with” the employment agreement be resolved through mediation-arbitration in Ontario under the Arbitration Act, 1991.
In December 2014 – separately and two years after commencing employment – Mr. Friel was granted options to purchase Class B shares in Hockey Parent Inc. (“HPI”), a Delaware-incorporated parent entity of his employer. He entered into a share option agreement with HPI (the “Option Agreement”), which incorporated an Equityholders Agreement containing a forum selection clause designating the Delaware Court of Chancery as the exclusive forum for any disputes arising under the Option Agreement. Mr. Friel did not sign the Equityholders Agreement directly, but did not dispute that he had access to it before signing the Option Agreement.
The options vested on December 22, 2021. Mr. Friel resigned the following day to join a competitor. When he served notice to exercise his vested options in March 2022, the respondents acknowledged that the options had validly vested but maintained that his move to a competitor constituted “misconduct” under the Equityholders Agreement – entitling them to buy back any acquired shares at cost, effectively stripping the options of their value.
| “The Option Agreement unambiguously stated that the grant of options did not constitute employment compensation, was not a term or condition of employment and did not form part of the Employment Agreement.”
– Court of Appeal for Ontario, Friel v. HUB International Limited, 2026 ONCA 313, at para. 14 |
Mr. Friel commenced proceedings in Ontario, seeking a declaration that the dispute fell within the ADR clause, an order appointing an arbitrator, and a declaration that the Delaware forum clause was unconscionable. The motion judge rejected all three arguments. The Court of Appeal agreed.
The three issues on appeal
| ISSUE 1
Should the arbitrator – not the court – have decided whether the ADR clause applied? (Competence-competence) |
ISSUE 2
Did the Ontario ADR clause cover a dispute about equity options issued by a Delaware parent? |
ISSUE 3
Was the Delaware forum selection clause unconscionable given the power imbalance? |
The Court’s analysis
Competence-competence: a court can decide first
Mr. Friel argued that questions of arbitral jurisdiction must ordinarily be referred to the arbitrator under the competence-competence principle. The Court of Appeal confirmed that this principle, while important, is not absolute. Where the jurisdictional question can be resolved through a focused interpretation of the relevant contracts – without the need for extensive review of the evidentiary record – a court is entitled to resolve the question itself. Citing the Supreme Court of Canada’s decisions in Peace River Hydro Partners v. Petrowest Corp., 2022 SCC 41, and Uber Technologies Inc. v. Heller, 2020 SCC 16, the Court held that this was precisely such a case: jurisdiction turned entirely on reading three contracts, and there was no reason to defer to an arbitrator.
The ADR clause did not reach the options dispute
This was the most consequential finding. The Court upheld the motion judge’s conclusion that the options dispute did not fall within the scope of the ADR clause in the Employment Agreement. Two features of the Option Agreement were determinative.
First, the Option Agreement contained unambiguous language stating that the grant of options was not employment compensation, did not form part of the Employment Agreement, and was not a term or condition of Mr. Friel’s employment. Second, the Option Agreement specified that it was to be governed by Delaware law and that the Delaware Court of Chancery had exclusive jurisdiction over any disputes.
The Court applied well-established principles of contractual interpretation – reading the agreements as a whole and giving effect to their clear language – and declined to import the options dispute into the employment agreement’s ADR clause simply because Mr. Friel had an employment relationship with a subsidiary of the option-granting entity. The mere fact that the options were offered in connection with his employment did not make the Option Agreement a document “contemplated by or arising out of or in connection with” the Employment Agreement.
The forum clause was not unconscionable
Mr. Friel’s final argument was that the Delaware forum clause was unconscionable given the inequality of bargaining power between himself and the respondent corporations. The Court acknowledged a power imbalance existed, but held that an inequality of bargaining power alone cannot render a contractual provision unconscionable. There must also be evidence that the resulting bargain is improvident – that is, unfair in substance. There was no evidence that litigating in Delaware would put a remedy effectively out of Mr. Friel’s reach. The forum clause therefore stood, and the Delaware Court of Chancery has exclusive jurisdiction over the dispute.
The appeal was dismissed with costs fixed at $15,000 inclusive of HST and disbursements.
Key takeaways
| For employers |
| Careful drafting of equity documents pays off.
The employer’s success turned entirely on express language in the Option Agreement stating that the options were not employment compensation and did not form part of the Employment Agreement. Employers offering equity through parent-company arrangements should ensure option agreements contain similar carve-out language. Forum selection clauses in equity plans will generally be enforced. Designating a foreign forum – including Delaware – for equity disputes is not inherently unconscionable. Courts will look for evidence that the forum is inaccessible or the deal is substantively unfair, not merely that the employee had less bargaining power. Equity and employment documents must be structurally distinct. Cross-referencing equity plans in employment agreements, or otherwise blurring the line between the two, creates a litigation risk that an employment arbitration clause could be read to capture equity disputes. Keep the two carefully separated. Post-departure competition clauses in equity plans carry real enforcement power. Even though Mr. Friel’s options had vested before he resigned, the respondents were able to invoke misconduct provisions that would strip the options of value upon competition. Employers should ensure these provisions are clearly drafted and brought to employees’ attention before they sign. |
| For employees |
| Every document you are given access to counts.
Mr. Friel did not sign the Equityholders Agreement, but the Court held him to its terms because he had access to it before signing the Option Agreement. Employees should read all documents incorporated by reference before executing equity agreements, and seek legal advice on any forum or governing law provisions. Your Ontario employment arbitration clause may not protect you when it comes to equity. An ADR clause in an employment agreement has a defined scope. If equity is issued through a separate agreement with a foreign parent – and that agreement expressly disavows any connection to employment – the employment ADR clause will likely not apply. Vesting is not the end of the story. The fact that options have vested does not mean their value is secure. Post-vesting misconduct or competition provisions in equityholders agreements can still allow the issuing entity to buy back shares at cost. Understand the full lifecycle of your equity before making career decisions. Challenging a foreign forum clause requires more than pointing to a power imbalance. Courts will not strike a forum clause simply because the employee had less negotiating leverage. Evidence that the designated forum is practically inaccessible – or that the substantive terms of the deal are fundamentally unfair – is required to make out unconscionability. |
Why this decision matters
Equity compensation has become a standard feature of employment packages at many Ontario companies, particularly those with private equity or multinational ownership structures where equity is issued through holding companies incorporated in Delaware or other US jurisdictions. Friel is an important reminder that these arrangements involve two legally distinct relationships: the employment relationship (governed by Ontario law and Ontario dispute resolution mechanisms) and the equity relationship (governed by the terms of the option or shareholder agreement, which may designate a foreign forum).
When those two sets of documents are carefully drafted to remain separate – as they were here – courts will respect that separation. When they are not, the exposure for employers can be significant: an Ontario arbitration clause that captures an equity dispute could deprive the employer of its preferred forum and potentially of the efficiency of its chosen dispute resolution mechanism.
The decision is also a useful practical guide to the limits of the competence-competence principle. Not every jurisdictional dispute must be sent to an arbitrator. Where the answer flows straightforwardly from reading the contracts, a court is entitled – and in many circumstances better positioned – to resolve the question itself.
This digest is for general information only and does not constitute legal advice. Readers should obtain specific legal advice with respect to their own circumstances. Friel v. HUB International Limited, 2026 ONCA 313, was decided on May 4, 2026 by Trotter, Zarnett, and Madsen JJ.A.
