Court of Appeal for Ontario

Date: 2023-05-10 Docket: C70553

Doherty, Feldman and Trotter JJ.A.

BETWEEN

Mohammed Ismail and TART Medical Est. Plaintiffs/Responding Parties (Respondents)

and

First York Holdings Inc. and El Sayed Hassan Abied Defendants/Moving Parties (Appellants)

Counsel: Christopher Yung, for the appellants Gary G. Boyd, for the respondents

Heard: November 14, 2022

On appeal from the order of Justice Pierre E. Roger of the Superior Court of Justice, dated March 15, 2022.

Feldman J.A.:

Overview

[1] The individual parties, the appellant El Sayed Hassan Abied and the respondent Mohammed Ismail, are businessmen who conducted some business together. The nature and extent of that business is the subject of significant dispute between them. However, they entered into two share purchase agreements, both of which contain arbitration clauses.

[2] This action arises out of a falling out between the parties. It began as an oppression remedy application brought by Mr. Ismail. By order of a case management judge, it was converted to an action where the claims were broadened to include misrepresentation and several other claims. That led to a motion by the appellant to stay the claims that he alleges are subject to an arbitration clause.

[3] The motion judge refused to stay this action in favour of arbitration on the basis that the stay motion is based on only one of the share purchase agreements between the parties, and that agreement never existed. The company was never incorporated, the shares never existed and there was therefore no consideration for the agreement. Because there was no contract, there was no arbitration agreement, and no basis to stay the action. [1]

[4] I would dismiss the appeal. The reasons follow.

Background Facts and Procedural History

[5] There are no judicial findings with respect to the background facts that give rise to this proceeding. The appeal record consists of affidavits, certain documents and pleadings.

[6] From the statement of claim, Mr. Ismail is a businessman in the Kingdom of Saudi Arabia and the manager of TART Medical Est. (“TART”), a Saudi Arabian medical supply company. Mr. Abied is a businessman in Ontario who had effective control of the operation of First York Global Holdings Inc. (“FYGH”), an Ontario medical device and healthcare distributor. In 2013 they began to do some business together.

[7] In 2014, the two men agreed to purchase all the shares of FYGH in order to sell and distribute pulp and paper in the Middle East. Mr. Ismail understood that Mr. Abied purchased all the shares of the company on behalf of himself and Mr. Ismail, who would be entitled to 20% of the shares. A number of payments were made by Mr. Ismail. He claims they were for the shares. The purpose of several payments is disputed by Mr. Abied.

[8] In order to facilitate the share purchase, Mr. Ismail appointed Mr. Abied as his attorney for property with the authority to sign agreements on his behalf. Three agreements were signed and executed by Mr. Abied on behalf of both parties: 1) a Purchase of Business Agreement (the “FYGH Agreement”); 2) a Shareholders’ Agreement regarding the purchase by Mr. Ismail of 20% of the shares of FYGH; 3) a Purchase of Business Agreement of 20% of the shares of another company, National Trade of Canada (“National Trade”), by Mr. Ismail (the “National Trade Agreement”). That company was never incorporated. Mr. Ismail says it was represented to be part of the entire transaction but was structured to give Mr. Abied favourable tax treatment. Mr. Abied says it was a separate business venture and that National Trade is a company to be incorporated.

[9] Mr. Ismail seeks an accounting of the funds he paid totalling USD $1,450,000.

[10] He also seeks damages as an oppression remedy with respect to the carrying on of the business of FYGH by Mr. Abied. He also claims that misrepresentations were made by Mr. Abied about the business of National Trade which amounted to fraud. TART also claims for breach of contract in respect of the purchase of medical devices from FYGH.

[11] From the responding affidavit of Mr. Abied on the initial application: he is an officer and managing director of FYGH. The business relationship with Mr. Ismail began with a distribution agreement between TART and FYGH and a joint venture agreement. Mr. Abied claims money is owed to FYGH and its medical division from that joint venture. They then entered into the FYGH Agreement, whereby Mr. Ismail agreed to purchase a 20% interest in FYGH from Mr. Abied. They also signed a shareholders’ agreement regarding FYGH. Mr. Abied signed both agreements on behalf of Mr. Ismail using the power of attorney dated April 20, 2014.

[12] With respect to National Trade, Mr. Abied says there were discussions about entering into an agreement regarding a potential company, but the deal never transpired and no shareholders’ agreement was entered into, nor did Mr. Ismail provide any funds towards the proposed business.

[13] Mr. Abied says that Mr. Ismail caused FYGH to fail as a business, with details regarding the loss or non-performance of a number of contracts and improper competition.

[14] As a result, Mr. Abied decided to dissolve FYGH and called a meeting of shareholders. Because his health was also suffering, he sold his shares pursuant to the right of first refusal in the shareholders’ agreement to a third shareholder, Walid Mahmoud Eldib.

[15] The procedural history makes up the rest of the background to this motion. Mr. Ismail commenced an application against Mr. Abied and FYGH. The application sought the following relief: an order restraining the dissolution of FYGH under s. 237 of the [Business Corporations Act, R.S.O. 1990, c. B.16]; an interim interlocutory injunction prohibiting FYGH from voting on any dissolution resolution; production of financial records; appointment of a receiver-manager; and an order requiring the respondents to purchase Mr. Ismail’s shares. It sought no relief in respect of any investment in National Trade.

[16] On June 4, 2021, McLeod R.S.J. made a case management endorsement and order. By that time the parties had agreed that the application could not be determined on a paper record and should proceed as an action. There is no reference to the issue of arbitration in the endorsement and order. The applicant had already delivered a draft statement of claim. The case management judge noted that the parties acknowledged that parallel proceedings would not be useful and would be costly. As a result, he stayed the application in favour of the action upon the issuing of the statement of claim.

[17] By a Fresh as Amended Notice of Motion dated January 14, 2022, the appellants moved for a stay of the claims set out in paras. 1 and 19-47 of the statement of claim issued on June 8, 2021, in favour of mediation and, failing that, arbitration “as agreed by the parties”. The grounds for the motion refer to the two purchase agreements, one for FYGH shares and the other for National Trade shares, and the identical mediation/arbitration clauses contained in those agreements.

Decision of the Motion Judge

[18] In his oral reasons for decision, the motion judge described the motion brought by Mr. Abied as a motion under s. 7 of the [Arbitration Act, 1991, S.O. 1991, c. 17], seeking a stay of paragraphs 1, 19-47, and 58-63 of the statement of claim. [2] (Reference to sections 58-63 must have been added during submissions.) In deciding the arbitration issue, he referred only to the National Trade Agreement and not to the FYGH Agreement.

[19] He found that the facts of the case distinguished it from all the other authorities cited to him by the appellants. In all those cases, the subject-matter of the agreement that contained the arbitration clause existed, whereas in this case, National Trade was never an incorporated entity, and there were never any shares to transfer. As a result, there was no consideration for the National Trade Agreement, the contract did not exist, and therefore there was no arbitration agreement.

[20] He distinguished the other cases cited to him, where the subject matter of the contract existed, but fraud or misrepresentation were alleged. In this case, “[t]he agreement [was] not about a promise to transfer share[s] in a future corporation or in the future, but the agreement was about a transfer of shares of an existing corporation which did not exist.”

[21] As an alternative submission, Mr. Ismail argued that the motion should be adjourned to allow the moving parties to deliver their statement of defence in order to be better positioned to address whether the matter was a proper one for summary judgment, one of the grounds listed in s. 7(2) of the [Arbitration Act] for refusing a stay.

[22] The motion judge rejected this submission, observing that the facts relevant to the resolution of the dispute were far from clear and did not suggest that summary judgment would be available. He added: “Moreover, the facts relating to both transactions are intertwined and this would not be an appropriate case for what at best would be a partial motion for a summary judgment, leaving much of the same factual issues to be decided at trial.”

Issues on the Appeal

1. Does s. 7(6) of the [Arbitration Act] preclude this appeal?
2. Did the motion judge err by failing to stay the action based on the arbitration clause contained in the FYGH Agreement?
3. Did the motion judge err by finding that the National Trade Agreement did not exist because National Trade was never incorporated and its shares did not exist, and therefore there was no contract and no arbitration agreement?

Analysis

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

[23] Section 7(6) of the [Arbitration Act] provides that there is no appeal from the court’s decision made under s. 7.

[24] Section 7(1) requires the court to stay an action where there is an arbitration clause that applies. Section 7(2) provides 5 circumstances where the court may refuse a stay. In this case, the court refused a stay. There is no appeal if the decision to refuse a stay was made under s. 7 of the Act.

[25] However, where the decision to refuse a stay is based on a finding that there is no arbitration agreement, then the decision to refuse a stay is not made under the Act, and therefore an appeal is not barred by s. 7(6): [Toronto Standard Condominium Corporation No. 1628 v. Toronto Standard Condominium Corporation No. 1636, 2020 ONCA 612, 454 D.L.R. (4th) 126], at paras. 4, 47-49, 62; [Huras v. Primerica Financial Services Ltd. (2000), 137 O.A.C. 79 (C.A.)]. That is the situation in this case; s. 7(6) does not preclude this appeal.

(2) Did the motion judge err by failing to stay the action based on the arbitration clause contained in the FYGH Agreement?

[26] The appellant sought the stay under s. 7(1) of the [Arbitration Act] which provides:

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.

[27] The appellant submits that the question before the motion judge whether there was an arbitration agreement was not limited to the National Trade Agreement, but included the FYGH Agreement. The existence of that agreement which contains an arbitration clause was never in dispute.

[28] The appellant’s factum for the motion relies on both agreements and both arbitration clauses. The respondent’s factum disputes the inclusion of the FYGH Agreement because the fresh as amended notice of motion relies on para. 1 of the statement of claim and not para. 2. Paragraph 1 deals with claims relating to the National Trade Agreement while para. 2 deals with claims relating to the FYGH Agreement.

[29] While the motion judge did not explicitly refer to the statement of claim, it is clear from his reasons that he accepted the respondent’s argument that the only agreement in issue before him was the National Trade Agreement. This is apparent from two aspects of his reasons. First, the determinative finding is only that the National Trade Agreement was not a contract because the subject matter did not exist and there was no consideration for the promise to pay. The motion judge does not discuss or even refer to the applicability of the arbitration agreement in the FYGH Agreement.

[30] Second, he refers to “both transactions” – the FYGH Agreement and the National Trade Agreement – when he discusses the alternative argument for summary judgment, and in that context, he refers to the fact that the factual circumstances are intertwined and affect both agreements. This comment indicates that he had turned his mind to the FYGH Agreement and that he found that he was being asked to stay the action only in respect of the National Trade Agreement, not the FYGH Agreement.

[31] While it is clear that para. 1 of the statement of claim refers exclusively to the National Trade claims, the later paragraphs referenced in the motion material refer to facts that may be relevant to both National Trade and FYGH. However, as the motion judge observed, all the facts related to the transactions appear to be intertwined, so that the inclusion of facts relating to FYGH does not undermine his conclusion that the motion sought relief only in respect of the National Trade Agreement.

[32] Based on my reading of the statement of claim, I see no basis to find that the motion judge made any error in his conclusion that the motion for a stay was based on the arbitration clause in the National Trade Agreement only.

(3) Did the motion judge err by finding that the National Trade Agreement did not exist because National Trade was never incorporated and its shares did not exist, therefore there was no contract and no arbitration agreement?

[33] The appellant makes three arguments to support his position that the motion judge erred when he denied a stay of the action in favour of arbitration by finding that the National Trade Agreement, including the arbitration clause, was of no effect and lacked consideration because National Trade was never incorporated and did not exist.

[34] First, he says that the agreement was an exchange of promises to transfer shares in the future, and therefore the fact that the company did not exist when the agreement was made was irrelevant to the existence of a binding agreement. Second, the motion judge did not apply the principles set out in [Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633] to consider the surrounding circumstances when interpreting the agreement. Those circumstances included the fact that the language of the National Trade Agreement was the same as the language of the FYGH Agreement signed one week earlier, both apparently drafted by the appellant. The motion judge should have overlooked the language that stated National Trade was an existing corporation and found that it was arguable that there was a contract and an arbitration agreement. Third, the motion judge failed to apply s. 17(2) of the [Arbitration Act] and find that even if the contract never existed, the arbitration clause survived.

[35] The motion judge proceeded by considering the five question test set out in this court’s decision in [Haas v. Gunasekaram, 2016 ONCA 744, 62 B.L.R. (5th) 1], at para. 17. [3] The five questions are:

1. Is there an arbitration agreement?
2. What is the subject matter of the dispute?
3. What is the scope of the arbitration agreement?
4. Does the dispute arguably fall within the arbitration agreement?
5. Are there grounds on which the court should refuse to stay the action?

[36] This five part test arises from ss. 7(1) and 7(2) of the [Arbitration Act] which read:

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.

[37] The motion judge asked the first question from the Haas test and concluded that there was no arbitration agreement. The text of s. 7(1) makes clear that a decision on whether to stay a proceeding under s. 7 requires the existence of an arbitration agreement. He therefore did not need to proceed any further with the analysis.

[38] The evidence before the motion judge was that National Trade was never incorporated and did not exist. That fact is undisputed. The agreement for the sale of 20% of the shares of National Trade made between Mr. Abied as seller and Mr. Ismail (named Mohammed Jafar Al Allsmail in the agreement) as purchaser, was executed by Mr. Abied, the appellant, on behalf of both parties on June 25, 2014.

[39] The agreement provides that the seller is the owner of all the shares to be sold of National Trade, “which carries on the business of Commodity Trade and Agencies under the operating name National Trade of Canada[,] in the Province of Ontario.” Paragraph 2 recites that the agreement is made in reliance on the representations, warranties and conditions in the agreement. The shares are to be transferred at closing. The full purchase price is USD $800,000, with the down payment of USD $200,000 payable on signing the agreement. The closing and transfer of shares is to take place upon payment of the full purchase price, with the last instalment due on July 1, 2015.

[40] Paragraph 9 is a list of the seller’s 17 representations and warranties, including that the corporation is “duly incorporated or continued, validly existing, and in good standing and has all requisite authority to carry on business as currently conducted”, and that the seller is the “absolute beneficial owner of the Shares”. Paragraph 22 provides that if any condition precedent is not satisfied or waived by the closing date, then the agreement is null and void. Paragraphs 43 and 44 are the mediation and arbitration clauses.

[41] Mr. Ismail’s understanding was that Mr. Abied wanted to split the purchase price for the sale of 20% of his business into two agreements for tax purposes and Mr. Ismail was accommodating him. That was the reason why USD $800,000 of the purchase price was to be paid ostensibly for the shares of National Trade, while the rest was paid for the shares of FYGH. Mr. Abied denies this and says it was a separate deal. The two agreements were executed one week apart. However, the National Trade Agreement was never implemented or proceeded with. This was confirmed by Mr. Abied in para. 26 of his affidavit dated August 26, 2020, where he stated: “Contrary to paragraphs 14, 15 and 17 of the Mohammed Affidavit, while Mr. Ismail and I discussed entering into an agreement regarding a potential company we would call National Trade of Canada, this deal never transpired. We did not even enter into a Shareholder Agreement with respect to this proposed business relationship.”

[42] Given that 1) National Trade was never incorporated and never existed, 2) the National Trade Agreement is premised on the existence of National Trade which is warranted by the agreement, 3) Mr. Abied confirmed in his evidence on the original application that the National Trade deal “never transpired”, it was open to the motion judge to find that the National Trade Agreement failed for lack of subject-matter and consideration, and therefore never existed as a legally binding agreement. This conclusion addresses the appellant’s first two submissions.

[43] The appellant’s third submission is that even if the agreement did not exist, the meaning and effect of s. 17(2) of the [Arbitration Act] is that the arbitration clause must be treated as an independent agreement that remains effective for the purpose of allowing the arbitrator to determine its own jurisdiction. This submission is incorrect in law.

[44] Sections 17(1) and (2) of the Act provide:

17(1) An arbitral tribunal may rule on its own jurisdiction to conduct the arbitration and may in that connection rule on objections with respect to the existence or validity of the arbitration agreement.

(2) If the arbitration agreement forms part of another agreement, it shall, for the purposes of a ruling on jurisdiction, be treated as an independent agreement that may survive even if the main agreement is found to be invalid.

[45] As Perell J. explained in [Electek Power Services Inc. v. Greenfield Energy Centre Limited Partnership, 2022 ONSC 894], at paras. 152-156, this section is effectively a codification of the common law arising out of the seminal House of Lords decision in [Heyman v. Darwins Ltd., [1942] A.C. 356 (H.L.)]. That case stands for the proposition that where an agreement is breached and becomes unenforceable or invalid, that does not rescind the agreement to arbitrate. That provision survives to allow the dispute to be referred to an arbitrator to determine jurisdiction, and if there is jurisdiction, to decide the dispute. To hold otherwise would undermine the intent and effect of including an arbitration clause in an agreement.

[46] However, the agreement to arbitrate cannot “survive” where there was no contract to survive from. In those circumstances, s. 17(2) has no application. This was explained in [MDG Kingston Inc. v. MDG Computers Canada Inc., 2008 ONCA 656, 92 O.R. (3d) 4], at para. 24, leave to appeal to S.C.C. refused, [2010] S.C.C.A. No. 94:

In cases where the dispute is about whether the agreement was breached by one party and consequently terminated by the other, and whether that termination has the effect of terminating the arbitration clause as well, the case law makes it clear that the court is not to determine the merits of that issue on a stay motion. Instead, the issue of whether the entire contract was properly terminated and the effect of any such termination is for the arbitrator. Otherwise, arbitration clauses would be rendered ineffective in many disputes, even when, in the end, they should have applied. However, in cases where the agreement was void ab initio because it was illegal, or where no agreement was ever reached, the arbitration clause will not apply because it was never validly agreed to: see, for example, [Fairfield v. Low (1990), 71 O.R. (2d) 599, [1990] O.J. No. 58 (H.C.J.)], at paras. 20-23, and [Heyman v. Darwins Ltd., [1942] 1 All E.R. 337, [1942] A.C. 356 (H.L.)].

[47] As a result, the motion judge did not err by not referring to s. 17(2).

Conclusion

[48] The motion judge made no error by refusing to stay this action. I would dismiss the appeal with costs to the respondent fixed in the agreed amount of $6,000 inclusive of disbursements and HST.

Released: May 10, 2023 “D.D.” “K. Feldman J.A.” “I agree. Doherty J.A.” “I agree. Gary Trotter J.A.”

[1] The motion judge also held that the arbitration agreement was “invalid”. However, counsel acknowledged in the oral hearing that it is clear from the reasons as a whole that he was not making a finding under s. 7(2) but rather found that there was no arbitration agreement entered into. [2] The Fresh as Amended Notice of Motion dated January 14, 2022 and the parties’ factums before the motion judge, do not reference a potential stay of paras. 58-63. [3] In [Husky Food Importers & Distributors Ltd. v. JH Whittaker & Sons Limited, 2023 ONCA 260], at para. 23 this court noted that the Supreme Court of Canada decision in [Peace River Hydro Partners v. Petrowest Corp., 2022 SCC 41] changes the Haas framework. However, it does not change the prerequisite that an arbitration agreement must exist before a stay can be considered: Husky Food, at para. 27.