Patel v. Kanbay International Inc. et al.

[Indexed as: Patel v. Kanbay International Inc.]

93 O.R. (3d) 588

Court of Appeal for Ontario,

Winkler C.J.O., Moldaver and Goudge JJ.A.

December 23, 2008

Arbitration -- Application of arbitration legislation -- Plaintiff suing defendants for damages for wrongful dismissal and negligent misrepresentation -- Plaintiff alleging that defendants made negligent misrepresentation about value of shares he would acquire if he accepted offer of employment -- Plaintiff seeking forensic valuation of defendant's stock in support of negligent misrepresentation claim -- Issues in question in action not relating to international commercial arbitration -- International Commercial Arbitration Act not being engaged -- International Commercial Arbitration Act, R.S.O. 1990, c. I.9.

Arbitration -- Arbitration agreement -- Plaintiff suing defendants for damages for wrongful dismissal and negligent misrepresentation -- Plaintiff alleging that defendants made negligent misrepresentation about value of shares he would acquire if he accepted offer of employment -- Plaintiff seeking forensic valuation of defendant's stock in support of negligent misrepresentation claim -- Shareholders' agreement providing for arbitration if parties were unable to resolve claims arising out of transactions contemplated by agreement -- Issues arising in action not arising out of transaction contemplated by agreement -- Action permitted to proceed.

The plaintiff sued the defendants for damages for wrongful dismissal and negligent misrepresentation. The latter claim alleged that representations were made to him that he would acquire valuable shares if he accepted the defendants' offer of employment and that the defendants knew that the shares would be worthless. In support of this claim, he sought a forensic valuation of the defendants' stock. The defendants sought a stay of the action, relying on a shareholders' agreement signed by the plaintiff which they argued contained a waiver of the claims and on the International Commercial Arbitration Act. The application judge refused to refer the matter to arbitration. The defendants appealed.

Held, the appeal should be dismissed.

The issues in question did not relate to an international commercial arbitration as that term is used in the Act and in the UNCITRAL. They arose from a wrongful dismissal action and a tort action for negligent misrepresentation. The question of the value of the plaintiff's share entitlement arose only in the course of determining whether he received a negligent misrepresentation about that value. Moreover, the issues at stake did not come within the scope of the arbitration term in the shareholders' agreement. Only claims arising out of [page589] transactions contemplated by the agreement were to be arbitrated under the agreement. The value of the plaintiff's shares and whether he had waived his rights were matters that arose out of his claims for wrongful dismissal and negligent misrepresentation. Neither of these matters arose out of a transaction contemplated by the shareholders' agreement.

APPEAL from the order of Chapnik J., [2008] O.J. No. 1784, 67 C.C.E.L. (3d) 1215 (S.C.J.) refusing to refer a matter to arbitration.

Cases referred to Dalimpex Ltd. v. Janicki (2003), 2003 34234 (ON CA), 64 O.R. (3d) 737, [2003] O.J. No. 2094, 228 D.L.R. (4th) 179, 172 O.A.C. 312, 35 B.L.R. (3d) 41, 35 C.P.C. (5th) 55, 123 A.C.W.S. (3d) 217 (C.A.) Statutes referred to Arbitration Act, 1991, S.O. 1991, c. 17 International Commercial Arbitration Act, R.S.O. 1990, c. I.9, ss. 2, 8, 13 UNCITRAL Model Law on International Commercial Arbitration, R.S.O. 1990, c. I.9, Sch., arts. 1, 8 Authorities referred to "Report of the Secretary General to the eighteenth session of the United Nations Commission on International Trade Law", The Canada Gazette, Part I, Vol. 120, No. 40, October 4, 1986, Supplement

Brian D. Mulroney, for appellants. Barry Goldman and Nicole Salama, for respondent.

The judgment of the court wad delivered by

[1] GOUDGE J.A.: -- The appellants are a group of related companies. Kanbay Managed Solutions ("KMS"), Kanbay Managed Solutions Canada ("KMS Canada"), Kanbay and Kanbay Canada are all subsidiaries of Kanbay International.

[2] The respondent served as the president of KMS and KMS Canada until his dismissal on January 23, 2006. He has sued the appellants for wrongful dismissal and negligent misrepresentation. The latter claim alleges that prior to becoming president, representations were made to him by representatives of the appellants that he would become an equity owner of KMS if he accepted the offer of employment and that those shares would be an asset of significant value to him. He claims that the appellants knew then that this was false and that the KMS shares would be worthless.

[3] In support of this claim, the respondent seeks a forensic valuation of the stock of KMS and Kanbay International. He proposes to rely on this evaluation to assist in proving the misrepresentation and the damages that he says flow from it. [page590]

[4] The appellants' position is that the respondent's rights and obligations respecting his shareholdings in KMS and the value of those shares must be governed by the shareholders' agreement he signed, effective March 26, 2003, after he commenced his employment. The appellants rely on that agreement and on the International Commercial Arbitration Act, R.S.O. 1990, c. I.9 (the "ICAA") to argue that the evaluation sought by the respondent must be done by arbitration under the shareholders' agreement. They say that the court must refer this issue to arbitration and stay that aspect of the respondent's action. The appellants also argue that the shareholders' agreement contains a waiver by the respondent of these claims, and that this issue must also be arbitrated under the shareholders' agreement, thus also necessitating a stay of the respondent's action.

[5] In seeking to stay parts of the respondent's action, the appellants point to the UNCITRAL Model Law on International Commercial Arbitration, which is a schedule to the ICAA. Article 8(1) of the Model Law says this:

8(1) A court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.

[6] Section 8 of the ICAA says the following:

8. Where, pursuant to article 8 of the Model Law, a court refers the parties to arbitration, the proceedings of the court are stayed with respect to the matters to which the arbitration relates.

[7] Finally, the appellants concede that if they are wrong in relying on the shareholders' agreement and the ICAA, they cannot contest Chapnik J.'s decision, pursuant to her discretion under the Arbitrations Act, 1991, S.O. 1991, c. 17, not to refer these issues to arbitration, but to allow the respondent's actions to proceed in its entirety.

[8] In my view, there are two reasons to reject the appellants' position, each of which is fatal.

[9] The first reason is that the issues in question here to do not relate to an international commercial arbitration as that term is used in the ICAA and the UN Model Law. These issues, therefore, do not meet the threshold necessary to engage the ICAA and the Model Law.

[10] Section 2 of the ICAA and art. 1 of the Model Law make the Act and the Model Law applicable only to international commercial arbitration (my emphasis).

[11] What then is the scope of the term "commercial"? Section 13 of the ICAA expressly provides that, for the purpose of interpreting [page591] the Model Law, resort may be had to the Report of the United Nations Commission on International Trade Law to its Eighteenth Session (June 3-21, 1985).

[12] Article 18 of Part II of the Commentary in that report reads in part as follows:

18. The content of the footnote reflects the legislative intent to construe the terms commercial in a wide manner. This call for a wide interpretation is supported by an illustrative list of commercial relationships. Although the examples listed include almost all types of contexts known to have given rise to disputes dealt with in international commercial arbitrations, the list is expressly not exhaustive. Therefore, also covered as commercial would be transactions such as supply of electric energy, transport of liquefied gas via pipeline and even "non-transactions" such as claims for damages arising in a commercial context. Not covered are, for example, labour or employment disputes and ordinary consumer claims, despite their relation to business.

[13] The issues at stake here do not arise from a transaction like the supply of electric energy, or the transportation of liquefied gas via pipeline. They arise from a wrongful dismissal dispute and a tort action for negligent misrepresentation. The question of the value of the respondent's share entitlement arises only in the course of determining whether he received a negligent misrepresentation about that value. The question of waiver arises only in the context of that tort claim and the respondent's wrongful dismissal dispute. Neither question arises in a dispute over a commercial transaction. In the context of this case, the term "commercial" does not apply and the issues cannot be said to require a "commercial" arbitration for their resolution. For that reason, the ICAA and the Model Law are not engaged.

[14] The second reason to reject the appellants' position is that the issues at stake here do not come within the scope of the arbitration provision in the shareholders' agreement. Hence, there cannot be an arbitration about them. Thus, there can obviously be no international commercial arbitration about them, and the ICAA and the Model Law are not engaged. The appellants cannot satisfy the "arbitration" requirement, just as they cannot satisfy the "commercial" requirement.

[15] Article 8.10 of the shareholders' agreement begins as follows:

If the parties are unable to resolve any disagreement, dispute, controversy or claim that may arise out of the transactions contemplated by this Agreement, they shall resolve the disagreement or dispute as follows:

[16] Thus, only claims arising out of transactions contemplated by the shareholders agreement are to be arbitrated under it.

[17] "Transaction" is defined in art. 3.1(b) of that agreement in these terms: [page592]

The term "Transaction" shall mean a single transaction or a series of related transactions constituting (i) a sale or lease of all or substantially all of the assets of the Corporation; (ii) a merger or consolidation with the Corporation or to which the Corporation is a party; (iii) a share exchange in which stock of the Corporation will be acquired by another corporation or the Stock of the Corporation will be issued to stockholders of another corporation; (iv) the purchase of all or substantially all of the assets or shares of capital stock of any Person except in the ordinary course of the Corporation's Business; or (v) the creation or acquisition of a subsidiary other than Kanbay Managed Solutions Canada Inc. (the "Canada Subsidiary Entity").

[18] Article 8(1) of the Model Law requires the court, when the matter is the subject of an international commercial arbitration agreement, to refer it to arbitration (unless it finds one of the defined exceptions apply none of which need to be considered here). In the context of this case, art. 8(1) of the Model Law requires the court to determine whether the issues at stake come within art. 8.10 of the shareholders' agreement. While the case law suggests that any final determination as to the scope of the arbitration agreement is better left to the arbitration tribunal (since the question of jurisdiction is itself within the jurisdiction of that tribunal), where it is clear that the matter does not fall within the arbitration agreement, the court should make that finding and decline to make the referral to arbitration: see Dalimpex Ltd. v. Janicki (2003), 2003 34234 (ON CA), 64 O.R. (3d) 737, [2003] O.J. No. 2094, 228 D.L.R. (4th) 179 (C.A.), at paras. 21 and 22.

[19] That is the case here. The matters raised by the appellants -- the value of the respondent's shares and whether he has waived his rights -- arise out of the respondent's claims for wrongful dismissal and negligent misrepresentation. Neither of these matters arise out of a transaction contemplated by the shareholders' agreement. These matters clearly fall outside the arbitration provision in that agreement. They could not properly be referred to arbitration pursuant to the ICAA and the Model Law. The respondent's action should proceed in its entirety.

[20] For both these reasons, the appeal must be dismissed. Costs to the respondent in the amount $19,500 inclusive of disbursements and GST.

Appeal dismissed.