Mantini v. Smith Lyons LLP et al. [Indexed as: Mantini v. Smith Lyons LLP]

64 O.R. (3d) 505

[2003] O.J. No. 1831

Docket Nos. M28399 and C37943

Court of Appeal for Ontario

Catzman, Goudge and Feldman JJ.A.

May 14, 2003

*Application for leave to appeal dismissed with costs March 4, 2004 (McLachlin C.J.C., Major and Fish JJ.).

Arbitration -- Applicability of arbitration clause -- Phrase "in connection with" partnership agreement in arbitration clause having broader meaning than "out of" -- Where agreement provides for arbitration of matters arising "in connection with" partnership agreement, dispute need only be connected with agreement and need not arise from or out of specific provision of agreement -- Arbitration agreement making exception for matters within sole discretion or power of executive or compensation committees -- Exception from arbitration not meaning that action in respect of those matters should not be stayed but rather meaning that there was no recourse at all from committees' decisions on matters within their sole discretion.

Arbitration -- Stay of civil proceedings -- Appeal -- Decision by motions judge that matter is not subject to arbitration falling outside [page506] scope of s. 7 of Arbitration Act -- Appeal from that decision not being barred by s. 7(6) of Arbitration Act -- Arbitration Act, 1991, S.O. 1991, c. 17, s. 7.

The respondent, a partner in the appellant law firm, resigned and withdrew from the partnership. He brought an action asserting certain financial claims arising from his withdrawal, a claim regarding problems with the transfer of client files to his new firm and a claim regarding the validity of the non- competition clause in the Partnership Agreement. The appellant brought a motion for an order staying those claims on the basis that they were the subject of mandatory arbitration under the terms of the Partnership Agreement. The motion judge found that none of the issues raised by the respondent were arbitrable under the terms of the Partnership Agreement and declined to order arbitration of the business claims or stay the action. The appellant appealed. The respondent moved to quash the appeal on the basis of s. 7(6) of the Arbitration Act.

Held, the motion to quash should be dismissed and the appeal should be allowed.

The appeal was not barred by s. 7(6) of the Arbitration Act. Where a motion judge decides that a matter is not subject to arbitration, that is a decision that falls outside the scope of s. 7, and an appeal from that decision is not barred by s. 7(6).

Article 9.01 of the Partnership Agreement provided that "Except for any matters expressly within the sole discretion or power of the Executive Committee or Compensation Committee, any dispute in connection with this Agreement shall be settled by arbitration in accordance with the provisions set out in Schedule G". The phrase "in connection with" has a very broad meaning, broader than "out of". The dispute need only be connected with the Partnership Agreement, even if it does not arise from or out of a specific provision of the agreement. Article 9.01 represented a general or universal resort to arbitration, but for the exception for any matters expressly within the sole discretion or power of the Executive and Compensation Committees. Section 1 of Schedule G describes the four categories of disputes that are subject to arbitration. They concern: (1) the firm or the practice, accounts or transactions thereof; (2) the dissolution or wind-up of the firm; (3) the proper interpretation, construction, intent, meaning or effect of anything in the Partnership Agreement; and (4) the rights or liabilities of the partners or their representatives. This description of the types of dispute that must go to arbitration under the agreement did not derogate from the general nature of the arbitration clause, but reinforced its all-encompassing nature in respect of firm issues. Schedule G also reinforced that an exception existed with respect to disputes or differences which were "within the complete discretion of the Executive Committee or Compensation Committee". Any such disputes would have gone to arbitration but because they are within the sole or complete discretion of the Executive or Compensation Committees, they do not. The motion judge erred in taking the view that because this group of disputes was non-arbitrable, they could be determined by the court and the claims should not be stayed. Rather, any matters that the agreement provided as expressly within the sole discretion of one of the committees was therefore non- appealable and non-justiciable. They were matters that the partners had agreed would be decided by the committees within their sole prerogative, and those decisions would be accepted by the partners as final. The court therefore had to stay any action which sought to appeal or challenge a dispute regarding any of those matters.

The question of whether any matter that may be referred to arbitration is excluded from arbitration because it is expressly within the sole discretion of the Executive Committee is a jurisdictional question for the arbitrator to decide. [page507] However, in order to give the arbitration provisions any meaning, and to give commercial sense to the agreement, the scope of the non-justiciable matters must be a very narrow one. In this case, all of the respondent's claims fell within the arbitration clause of the agreement or were non-justiciable.

APPEAL by the defendant from an order declining to stay an action and send claims to arbitration; MOTION by the plaintiff to quash an appeal.

Denison Mines Ltd. v. Ontario Hydro, [1981] O.J. No. 807 (QL) (Div. Ct.), apld Other cases referred to Brown v. Murphy (2002), 2002 41652 (ON CA), 59 O.R. (3d) 404, 212 D.L.R. (4th) 35, 20 C.P.C. (5th) 52 (C.A.); Heyman v. Darwins, [1942] A.C. 356, [1942] 1 All E.R. 337, 111 L.J.K.B. 241, 166 L.T. 306, 58 T.L.R. 169 (H.L.); Huras v. Primerica Financial Services Ltd. (2000), 2000 16892 (ON CA), 137 O.A.C. 79, [2000] O.J. No. 3772 (QL) (C.A.); Ontario v. Abilities Frontier Co-Operative Homes Inc. (1996), 5 C.P.C. (4th) 81 (Ont. Gen. Div.); T1T2 Limited Partnership v. Canada (1994), 1994 7368 (ON SC), 23 O.R. (3d) 66, 19 B.L.R. (2d) 72, 35 C.P.C. (3d) 353 (Gen. Div.) Statutes referred to Arbitration Act, 1991, S.O. 1991, c. 17, ss. 7, 17

C. Clifford Lax, Q.C., and Rocco Di Pucchio, for appellant Smith Lyons LLP. John B. Laskin and Frank Cesario, for respondent.

The judgment of the court was delivered by

[1] FELDMAN J.A.: -- The respondent resigned as a partner from the appellant law firm, and commenced an action asserting certain financial claims arising from his withdrawal from the partnership, a claim regarding problems with the transfer of client files to his new firm and a dispute regarding the validity of the non-competition clause in the Partnership Agreement (the "business claims"). He also brought a defamation action based on a letter and a newspaper interview following his departure from the firm.

[2] The appellant moved for (1) an order dismissing the defamation action; and (2) an order staying the business claims on the basis that they are the subject of mandatory arbitration under the terms of the firm Partnership Agreement. The motion judge granted the relief dismissing the defamation action, but declined to order arbitration of the business claims, or to stay the action. Both aspects of the order below were appealed to this court. In response to the portion of the order refusing to stay the business claims and send them to arbitration, the respondent moved to quash the appeal on the basis of s. 7(6) of the Arbitration Act, 1991, S.O. 1991, c. 17. [page508]

[3] The appeal of the dismissal of the defamation claim is the subject of separate reasons for judgment released together with these reasons. With respect to the business claims, I would dismiss the motion to quash and allow the appeal. The following are my reasons.

Facts

[4] In his Statement of Claim, the respondent makes three general claims. First, he alleges that on his withdrawal from the appellant firm, the appellant either refused to transfer certain client files to the respondent's new firm or imposed conditions on transfer of the files. The respondent states that these actions amounted to a breach of the appellant firm's legal and professional obligations, carried out by the appellant for the purpose of causing inconvenience, embarrassment and damage to the respondent.

[5] Second, the respondent claims that the appellant failed to comply in some cases with the Smith Lyons Partnership Agreement, or in other cases with the firm's practice in respect of withdrawing partners or with assurances made to the respondent, as well as with its fiduciary duty in respect of (a) repayment of the respondent's capital in the amount of $350,000; (b) allocation of profits for the year 2000; (c) payment of the respondent's WIP (work in progress) account; and (d) payment of the respondent's goodwill account. The respondent also seeks to have the non-competition portion of the Partnership Agreement declared void and unenforceable.

[6] There is provision in the Partnership Agreement for withdrawal from the partnership in Article 5 and Schedule E of the Agreement. Article 5.06 provides:

5.06 Payments on Withdrawal: The amount and timing of all payments to a Withdrawing Partner on withdrawal from the Firm shall be as determined pursuant to Schedule E.

Schedule E details the payments to be made to withdrawing partners and includes a non-competition clause.

[7] The respondent makes a third claim that the appellant firm breached its agreement not to require repayment of a loan it made to the respondent of $457,638. The loan is alleged to have been made to assist the respondent to meet obligations incurred by him as a result of the negligence of the appellant firm.

[8] The Smith Lyons Partnership Agreement contains an arbitration clause which provides:

Arbitration: Except for any matters expressly within the sole discretion or power of the Executive Committee or Compensation Committee, any dispute in connection with this Agreement shall be settled by arbitration in accordance with the provisions set out in Schedule G.

(Emphasis added) [page509]

[9] Section 1 of Schedule G must also be set out. It provides:

1. If during the continuance of the Firm or at any time after the dissolution or termination thereof, any dispute or difference, other than as within the complete discretion of the Executive Committee or Compensation Committee, shall arise between the Partners or any of them or their heirs or legal representatives, in any way concerning:

(a) the Firm or the practice, accounts or transactions thereof;

(b) the dissolution or winding-up thereof;

(c) the proper interpretation, construction, intent, meaning or effect of anything in the Partnership Agreement; or

(d) the rights or liabilities of the Partners or their representatives;

which the Executive Committee cannot resolve at first instance, such dispute or difference shall be referred to arbitration pursuant to the following provisions and such reference shall be a condition precedent to the right of any Partner, or the Partner's heirs or legal representatives, or of the Firm, to take legal action in or about the premises.

[10] The powers of the Executive Committee are set out in Article 2.01 of the Partnership Agreement:

2.01 Powers: The administration and conduct of the Firm's business and affairs shall be vested exclusively in a committee of Partners (the "Executive Committee") to which, subject to the express provisions of this Agreement, is delegated by all of the partners all power and authority to so administer and conduct such business and affairs.

[11] Article 3.10 provides that the Compensation Committee is to allocate the profits among the Partners. Article 3.10(d) states that "the decisions of the Compensation Committee shall not be subject to appeal or arbitration." [See Note 1 at end of document]

[12] The motion judge found that none of the issues raised by the respondent were arbitrable under the terms of the Partnership Agreement. In respect of the first claim for failing to transfer files, the motion judge found that arbitration could not govern and that the sole discretion of the Executive Committee could not "stand in the way" of the plaintiff's action. Regarding the claims for capital, profits, WIP and goodwill, the motion judge found that those claims may be completely unsustainable because they were matters within the sole discretion of the committees, but clearly they were not arbitrable. As to the loan matter, the motion judge concluded that it was also a matter within the sole discretion of the Executive Committee and therefore non-arbitrable. [page510]

[13] The motion judge also addressed the issue of a partial stay on the alternative basis that one of the claims may be arbitrable, and determined that in that event, he would not exercise his discretion to order a partial stay under s. 7(5) of the Arbitration Act. He concluded that because of the interrelated nature of the claims, they should all be tried in the same forum at the same time.

Issues

(1) Does s. 7(6) of the Arbitration Act bar this appeal?

(2) If not, did the motion judge err by failing to order a stay of the respondent's claims and by failing to order that the claims be referred to arbitration?

(3) If only some of the claims are subject to arbitration, did the motion judge err in failing to stay those claims and refer them to arbitration?

Analysis

(1) Does s. 7(6) of the Arbitration Act bar this appeal?

[14] This issue is raised by the respondent by motion to quash the appeal, which was argued with the appeal. Section 7 of the Act is key to both the motion and to the appeal. It provides:

7(1) 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.

(2) However, the court may refuse to stay the proceeding in any of the following cases:

1. A party entered into the arbitration agreement while under a legal incapacity.

2. The arbitration agreement is invalid.

3. The subject-matter of the dispute is not capable of being the subject of arbitration under Ontario law.

4. The motion was brought with undue delay.

5. The matter is a proper one for default or summary judgment.

(3) An arbitration of the dispute may be commenced and continued while the motion is before the court.

(4) If the court refuses to stay the proceeding,

(a) no arbitration of the dispute shall be commenced; and[page511]

(b) an arbitration that has been commenced shall not be continued, and anything done in connection with the arbitration before the court made its decision is without effect.

(5) The court may stay the proceeding with respect to the matters dealt with in the arbitration agreement and allow it to continue with respect to other matters if it finds that,

(a) the agreement deals with only some of the matters in respect of which the proceeding was commenced; and

(b) it is reasonable to separate the matters dealt with in the agreement from the other matters.

(6) There is no appeal from the court's decision.

[15] The scope and effect of s. 7(6) of the Act have been considered by this court in two recent decisions, Huras v. Primerica Financial Services Ltd. (2000), 2000 16892 (ON CA), 137 O.A.C. 79, [2000] O.J. No. 3772 (QL) (C.A.) and Brown v. Murphy (2002), 2002 41652 (ON CA), 59 O.R. (3d) 404, 212 D.L.R. (4th) 35 (C.A.). Those cases explain that where a motion judge decides that a matter is not subject to arbitration, that is a decision that falls outside the scope of s. 7, and an appeal from that decision is not barred by s. 7(6).

[16] Therefore, because the motion judge determined that all of the respondents' claims fall outside the arbitration agreement, s. 7(6) does not bar the appellant's appeal. The motion judge also referred to s. 7(5) in the alternative, to refuse a stay even if one of the claims is arbitrable, on the basis that all of the claims should be dealt with in a single proceeding. Because of my conclusion on the main issue, there will be no need to consider the application of s. 7(6) to that part of the decision.

(2) Did the motion judge err by not referring the respondent's claims to mandatory arbitration in accordance with the Partnership Agreement?

[17] In order to determine whether a claim should be stayed under s. 7(1) of the Arbitration Act, the court first interprets the arbitration provision, then analyzes the claims to determine whether they must be decided by an arbitrator under the terms of the agreement, as interpreted by the court. If so, then under s. 7(1), the court is required to stay the action and refer the claims to arbitration subject to the limited exceptions in s. 7(2): T1T2 Limited Partnership v. Canada (1994), 1994 7368 (ON SC), 23 O.R. (3d) 66, 35 C.P.C. (3d) 353 (Gen. Div.) at pp. 73-74 O.R.

[18] I have set out above both the arbitration clause as well as other relevant sections of the Partnership Agreement. The arbitration clause (Article 9.01) requires that "any dispute in connection with this agreement" (emphasis added) must be arbitrated. [page512] The only exception is matters which are expressly within the sole discretion of the Executive or Compensation Committees.

[19] In the case of Denison Mines Ltd. v. Ontario Hydro, [1981] O.J. No. 807 (QL) (Div. Ct.), the court interpreted the words "arising in connection with" as having "a very broad meaning". The court referred to the House of Lords decision in Heyman v. Darwins, [1942] A.C. 356, [1942] 1 All E.R. 337 (H.L.) where Lord Porter stated at p. 399 A.C. that the words "'arising out of' have a wider meaning" than "under". The Divisional Court went on to hold that "the words 'arising in connection with' are at least as wide as the words 'arising out of' and have a very broad meaning" (para. 15). I agree with these interpretations and in particular with the conclusion that the phrase "in connection with" has a very broad meaning. In my view, it has a broader scope than the phrase "out of", as the dispute need only be connected with the Partnership Agreement, even if it does not arise from or out of a specific provision of the agreement. I conclude that this clause represents a general or universal resort to arbitration, but for the exception for any matters expressly within the sole discretion or power of the Executive and Compensation Committees.

[20] By Article 2.01, the Executive Committee is vested exclusively with all power and authority to administer and conduct the firm's business and affairs. In Article 3.09, the Compensation Committee is given the authority to divide the profits of the firm. By Article 3.10(d), the decisions of the Compensation Committee are not subject either to appeal or to arbitration. There are other Articles and Schedules to the Partnership Agreement which make specific provision for aspects of firm governance, such as voting rights, withdrawal and retirement from the firm (see Article 5 and Schedule E above), admission of new partners and dissolution.

[21] In order to interpret the arbitration clause, it must be read in the context of the agreement as a whole, and its intended meaning gleaned within that context. Schedule G, is incorporated into Article 9 and informs the interpretation of the intended scope and application of the arbitration provision. Section 1 of Schedule G first clarifies that it is disputes between partners or their legal representatives that are subject to arbitration, then describes in four categories the types of disputes or differences that are subject to arbitration. They concern: (1) the firm or the practice, accounts or transactions thereof; (2) the dissolution or wind- up of the firm; (3) the proper interpretation, construction, intent, meaning or the effect of anything in the Partnership Agreement; and (4) the rights or liabilities of the Partners or their representatives. This description of the types of [page513] dispute that must go to arbitration under the agreement does not derogate from the general nature of the arbitration clause, but reinforces its all-encompassing nature in respect of firm issues.

[22] Schedule G also restates which disputes or differences are within the exception to arbitration as: "other than as within the complete discretion of the Executive Committee or Compensation Committee" (emphasis added). Any such disputes would have gone to arbitration but because they are within the sole or complete discretion of the Executive or Compensation committees, they do not.

[23] In the court below, the motion judge took the view that because this group of disputes was non-arbitrable, the court does not stay the claims and they continue as disputes to be determined by the court. In my view, the motion judge erred in that conclusion. Rather, any matters that the agreement provides as expressly within the sole discretion of one of the committees is therefore non-appealable and non-justiciable. They are matters that the partners have agreed will be decided by the respective committees within their sole prerogative, and those decisions will be accepted by the partners as final. The court must therefore stay any action which seeks to appeal or challenge a dispute regarding any such matters.

[24] In summary, the scheme of the Partnership Agreement is that all disputes in connection with that agreement, which include all firm business and affairs (Article 2.01), are to be decided by arbitration, except those that arise from a matter expressly within the sole discretion of the Executive or Compensation Committees, from which decisions there is no recourse. That scheme therefore excludes [the] court as a vehicle for dispute resolution in respect of all firm business or affairs.

[25] This conclusion can be tested using the division of profits as an example. The Partnership Agreement provides that the Compensation Committee decides the division of profits each year and that there is no appeal or arbitration of that decision. In other words, the partners have entrusted that decision to the Compensation Committee and are prepared to abide by it. Otherwise, if a dispute arises as to whether the division of profits is fair or acceptable, because appeal and arbitration have been specifically excluded, a partner could bring an action in court to determine the division of profits among the partners each year.

[26] Because arbitration is the method of dispute resolution provided in the agreement, by excluding arbitration, the partners have excluded the possibility of any recourse should they be unhappy with the decision of the Compensation Committee. There is no basis to conclude that the intent of the agreement is [page514] that a court is to decide the issue rather than an arbitrator. That conclusion would not accord with common sense, with business practice or with any provision of the agreement. I agree with the statement made by the appellant in its factum that:

. . . by agreeing to such a broadly-worded arbitration provision, the parties expressed a clear intention to have the disputes between them arbitrated in a private setting as opposed to being litigated in a public forum. Indeed, there are very logical reasons for wishing the internal affairs of a law firm such as Smith Lyons to be kept private and confidential, and so it is unremarkable that the parties would have agreed to such an all-encompassing arbitration provision.

[27] The question of whether any other matter that may be referred to arbitration is excluded from arbitration because it is expressly within the sole discretion of the Executive Committee is a jurisdictional question for the arbitrator to decide: See: T1T2 Limited Partnership v. Canada; Ontario v. Abilities Frontier Co-Operative Homes Inc. (1996), 5 C.P.C. (4th) 81 (Ont. Gen. Div.) at pp. 92-93; s. 17 of the Arbitration Act. However, in order to give the arbitration provisions any meaning, and to give commercial sense to the agreement, the scope of the non-justiciable matters must be a very narrow one. In its factum, the appellant firm identifies only the Compensation Committee profit allocation decision as an expressly discretionary and non-justiciable decision coming within the exception. There would be little point in articulating in Schedule G four categories of disputes arising out of the agreement that would go to arbitration for resolution, if all of such matters were excluded as within the sole discretion of the Executive Committee.

[28] The only allusion to recourse to the court is in the closing words of s. 1 of Schedule G, which suggests that a partner or the firm may be able to take legal action if the dispute has first been referred to arbitration in accordance with the procedural provisions of the Schedule. In my view, this reference does not derogate from the structure of the agreement that all disputes go to arbitration (at least initially), except those for which there is no appeal or recourse to dispute resolution.

Applying the Arbitration Clause to the Claims in the Action

[29] With the scheme of the agreement in mind, one then turns to the specific claims in the action. In order to determine whether a claim that has been brought in a court action must be stayed under s. 7(1) of the Act, the court must assess whether the claim comes within the arbitration clause of the agreement, that is, whether the claim is one "in connection with" the Partnership Agreement. If it is, then the action must be stayed. Conversely, if [page515] it is not a claim "in connection with the Partnership Agreement", then it is outside the scope of the arbitration clause, it will not be stayed and can continue as a court action. The third possibility is that it is a claim in connection with the partnership agreement but non-arbitrable because it is expressly within the sole discretion of one of the committees. In that case, the action will also be stayed because any matter that is in connection with the agreement will either be arbitrable or non- justiciable. In no event is it to proceed in court.

[30] Turning to the claims of the respondent, the first is the claim arising from the appellant firm's failure to promptly send client files to the respondent's new firm following his withdrawal from the partnership. Although this claim is couched as a breach of the firm's legal and professional obligations, the act of not transferring the files is an act of the firm dealing with the files of firm clients and with a partner who had withdrawn from the firm. As such, it is part of the administration and conduct of firm business and affairs and is therefore clearly a matter in connection with the Partnership Agreement and must be referred to arbitration.

[31] If either side were to take the position before the arbitrator that this, or any other matter is one that is within the sole discretion of the Executive Committee, that would be a jurisdictional issue for the arbitrator to decide. However, although it may be arguable, depending on the firm practice and evidence before the arbitrator, that some day to day administrative matters are within the sole discretion of the Executive Committee and are non-justiciable, the scope of matters in that category will be very narrow, in order to give effect to the arbitration clause in the context of the full partnership agreement.

[32] The second set of claims is for money to which the respondent says he is entitled upon withdrawal from the partnership. These matters (other than the claim for a larger share of the 2000 profits which is specifically not arbitrable) are clearly in connection with the withdrawal provisions of the partnership agreement and must be referred for arbitration.

[33] The other claim in this group is the validity of the non-competition clause of the Partnership Agreement; again, that is a matter that arises in connection with that agreement and must be brought before an arbitrator.

[34] The final claim relates to the loan. In my view, this is also a claim which is connected with the business, conduct and administration of the firm, and therefore falls within the general resort to arbitration. The respondent argued that the loan arose from a letter agreement and not from the Partnership Agreement. That [page516] point is answered by the language of the arbitration clause, which refers to matters "in connection with" the Partnership Agreement, and includes all conduct of firm business and affairs.

Summary

[35] The motion judge erred in his conclusion that the three types of claims brought by the respondent are excluded from arbitration under the Partnership Agreement. They are each of a type that comes within the general resort to arbitration.

[36] The action must therefore be stayed and the claims referred to arbitration in accordance with the terms of the arbitration clause and Schedule under the Partnership Agreement except for the claim regarding profit allocation for the 2000 year, which is expressly stated to be non-arbitrable.

[37] In light of my conclusion that all of the respondent's claims fall within the arbitration clause of the agreement or are non-justiciable, it is unnecessary to deal with issue number 3, the motion judge's alternative decision under s. 7(5) of the Act in the event that only one of the claims is subject to arbitration.

Conclusion

[38] I would allow the appeal, set aside the order of the motion judge and substitute an order that the respondent's action be stayed.

[39] The appellant shall have its costs of the appeal and of the motion to quash on a partial indemnity basis. If the parties cannot agree on the costs, the appellant shall file its Bill of Costs within seven days of release of these reasons, and the respondent shall have five days thereafter to make any submissions. All material is to be [filed] to the attention of the Senior Legal Officer of the court.

Motion to quash dismissed; appeal allowed.

Notes

Note 1: There is no reference to any appeal process in the agreement, nor is the term "appeal" defined. In this context the reference may be to preclude an appeal to the Executive Committee from the decision of the Compensation Committee.