Armstrong v. Northern Eyes, Inc. et al. [Indexed as: Armstrong v. Northern Eyes Inc.]

48 O.R. (3d) 442

[2000] O.J. No. 1594

Court File No. 406/99

Ontario Superior Court of Justice

Divisional Court

Archie Campbell, Matlow and Molloy JJ.

April 26, 2000

Corporations -- Shareholders -- Remedies -- Shareholders' agreement providing that disputes between shareholder and corporation to be referred to arbitration and that no appeal lay from decision of arbitrator -- Agreement providing for valuation and redemption of shares of departing shareholder -- Valuation and redemption provisions not conferring upon arbitrator all powers potentially available to court under s. 248 of Business Corporations Act -- Principle that courts have narrow residual discretion to assume inherent jurisdiction if remedy is required which is not available under mandatory arbitration regime imposed by statute having no general application where parties voluntarily crafted their own personal arbitration regime and voluntarily agreed to limit available remedies -- Parties should be held to their agreement to submit disputes to arbitration -- Business Corporations Act, R.S.O. 1990, c. B.16, s. 248.

The applicant, a shareholder of the respondent N Inc., brought an application under the oppression provisions of the Business Corporations Act ("OBCA") claiming that he had been excluded from the operations of N Inc. and dismissed as vice- president of sales and marketing. The shareholders' agreement provided that every disagreement between the parties was to be referred to arbitration and that there was to be no appeal from the award of the arbitrator. The agreement also provided that if a shareholder ceased to be an employee of the corporation, the shareholder was required to tender his or her shares to the corporation to be redeemed at a price equivalent to their fair market value. The parties submitted their dispute to an arbitrator, who dismissed the applicant's motion for a ruling that the arbitrator had jurisdiction to grant the oppression remedies provided by s. 248 of the OBCA and particularly s. 248(3)(f). The applicant then brought a motion asking the court to assume jurisdiction over the entire matter. The motion was allowed on the basis that the arbitration procedure might result in a real deprivation of ultimate remedy. The motions judge accepted the applicant's argument that under the shareholder's agreement, the arbitrator would be able to make an order for the buyout of the applicant's shares based on their "fair market value determined in accordance with such generally accepted valuation procedures as the auditors determine to be appropriate in the circumstance", and that the manner of determination could be unfairly restrictive in comparison with the potential scope of a proceeding under s. 248(3)(f) of the OBCA. N Inc. appealed.

Held, the appeal should be allowed.

It was open to the parties to craft their own narrow private remedy for the valuation and redemption of shares of departing shareholders. It was open to them to agree to resolve their differences through arbitration rather than the potentially wider machinery provided under s. 248 of the OBCA. The dispute in this case was covered expressly by the dispute resolution mechanism freely chosen by the applicant when he signed the shareholders' agreement. The dispute was one which the parties agreed to arbitrate and not to litigate. There were no extraordinary circumstances to suggest that the parties should not be held to their agreement. The principle that the courts have a narrow residual discretion to assume inherent jurisdiction if a remedy is required which is not available under the mandatory arbitration regime imposed by a statute has no general application to a case like this where the parties voluntarily created their own personal arbitration regime and voluntarily agreed to limit the remedies available in the case of a dispute.

APPEAL from an order that a court rather than an arbitrator hear all matters in a dispute between parties.

Deluce Holdings Inc. v. Air Canada (1992), 1992 7654 (ON SC), 12 O.R. (3d) 131, 98 D.L.R. (4th) 509, 8 B.L.R. (2d) 294, 13 C.P.C. (3d) 72 (Gen. Div.); Weber v. Ontario Hydro, 1995 108 (SCC), [1995] 2 S.C.R. 929, 24 O.R. (3d) 358n, 125 D.L.R. (4th) 583, 183 N.R. 241, 30 C.R.R. (2d) 1, 12 C.C.E.L. (2d) 1, 24 C.C.L.T. (2d) 217, 95 C.L.L.C. 210-027, distd Other cases referred to Boart Sweden AB v. NYA Stromnes AB (1988), 41 B.L.R. 295 (Ont. H.C.J.); Canadian National Railway Co. v. Lovat Tunnel Equipment Inc. (1999), 1999 3751 (ON CA), 122 O.A.C. 171, 174 D.L.R. (4th) 385, 37 C.P.C. (4th) 13 (C.A.); Giorno v. Pappas (1999), 1999 1161 (ON CA), 42 O.R. (3d) 626, 170 D.L.R. (4th) 160, 39 C.C.E.L. (2d) 262, 99 C.L.L.C. 220-026 (C.A.); Kints v. Kints, [1998] O.J. No. 3244 (Gen. Div.) Statutes referred to Arbitration Act, 1991, S.O. 1991, c. 17, ss. 6(3), 7 Courts of Justice Act, R.S.O. 1990, c. C.43, ss. 19(1)(b), 134(1)(c) Labour Relations Act, R.S.O. 1990, c. L.2, s. 45 Ontario Business Corporations Act, R.S.O. 1990, c. B.16, s. 248 Rules and regulations referred to Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rule 62.02(4)

William J. Burden, for applicant. Robert E. Kwinter, for respondents.

The judgment of the court was delivered by

ARCHIE CAMPBELL J. (orally): --

The Issue

[1] Does the principle in Weber v. Ontario Hydro, 1995 108 (SCC), [1995] 2 S.C.R. 929, 125 D.L.R. (4th) 583 compel the court to take this shareholders' dispute away from the arbitrator because the valuation and redemption provisions of the shareholders agreement do not confer upon the arbitrator all the powers potentially available to a court under the oppression remedy provisions of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16 ("OBCA")?

The Appeal

[2] Pursuant to leave to appeal granted by Hartt J., Northern Eyes, Inc. and its majority shareholders appeal against the order of Spence J. who allowed a motion by the minority shareholder, Armstrong, and ordered that the court, rather than the arbitrator, hear all the matters in dispute between the parties.

Factual Background

[3] Northern Eyes, Inc. was incorporated in November of 1993 as a privately held company. At the time of the shareholders agreement in April 1998 it had 100 issued and outstanding shares held as follows:

J. Douglas Thompson 20.5

Dianne E. Thompson 20.5

Douglas Wilson 10

Donald Armstrong 31

Paul Storace 18

The officers of the corporation were:

President J. Douglas Thompson

V.P. Sales and Marketing Donald Armstrong

V.P. Sales Paul Storace

Treasurer Diane E. Thompson

Secretary Douglas Wilson

[4] The company is a wholesale distributor of optical frames in Mississauga.

[5] The relationship between the applicant and the others deteriorated and in December of 1998, he applied to the court under the OBCA for an oppression remedy on the grounds, among others, that he was being excluded from the operations of the company and had been dismissed as vice president of sales and marketing.

[6] The court hearing, scheduled for March 30, 1999 was adjourned pending discussions between the parties with a view to negotiating a resolution.

[7] In April of 1999, the parties submitted their dispute to the arbitrator, the Honourable W.D. Griffiths, who dismissed Armstrong's motion for a ruling that the arbitrator had jurisdiction to grant the oppression remedies provided by s. 248 of the OBCA and particularly s. 248(3)(f) which provides for:

(f) an order directing a corporation . . . or any other person, to purchase securities of a security holder.

[8] The applicant moved before Spence J. and asked that the court assume jurisdiction over the entire matter by making:

An order directing that this court shall hear all of the matters in dispute between the parties for the purpose of determining the entitlement of the applicant. Donald Armstrong ("Armstrong"), to, inter alia, the relief claimed under section 248 of the Ontario Business Corporation Act, R.S.O. 1991, c. B.16 ("OBCA"), the oppression remedy . . .

[9] Spence J. allowed the motion and ordered that the entire dispute should proceed in court and not before the arbitrator, on the basis that the arbitration procedure might well result in a real deprivation of ultimate remedy within the meaning of Weber v. Ontario Hydro, supra, at pp. 958-59.

[10] Hartt J. granted leave to appeal under rule 62.02(4), noting that the clarification of the law with respect to the application of Weber to private commercial arbitrations is a matter of considerable public importance.

Reasons of Arbitrator Griffiths

[11] The learned arbitrator concluded as follows:

In the face of the clear language of the OBCA reserving to the court the oppression remedy and particularly the right to order purchase of the shares of the minority shareholder, I am not persuaded that as an arbitrator I have jurisdiction to award this remedy. Clearly, an arbitrator under the Arbitrations Act has broad powers to grant both legal and equitable remedies. But the oppression remedy is not an equitable remedy; it is a statutory remedy. In the absence of wording in the Shareholders Agreement conferring on the arbitrator jurisdiction to grant remedies as if he were exercising the authority of a judge of the Ontario Court, I declare the arbitrator does not have the authority to grant a section 248 oppression remedy.

Reasons for Judgment: Spence J.

[12] Spence J. in his reasons for judgment said this:

Applicant seeks an order that the Court is to hear all of the matters in dispute between the parties pursuant to the oppression remedy in section 248 of the OBCA. It appears that all of the factual allegations advanced by the applicant fall within the terms of the very broad arbitration clause in the Shareholders Agreement. This does not fully dispose of the question whether resort may be had to the oppression remedy. Based on the decision of the Supreme Court of Canada in Weber 1995 108 (SCC), [1995] 2 S.C.R. 929 at pp. 958-59 it is proper for the Court to consider whether a remedy may be required which the arbitrator is not empowered to grant, so as to avoid "a real deprivation of ultimate remedy". Respondent submits that under the Shareholders Agreement, the arbitrator would be able to make an order for the buyout of the applicant's shares under Article 14 of the Shareholders Agreement, based on their "fair market value determined in accordance with such generally accepted valuation procedures as the auditors [sic] determine to be appropriate in the circumstance". Applicant contends that the manner of determination could be unfairly restrictive in comparison with the potential scope of a proceeding under s. 248(3)(f). For one thing, the issue could be raised as to how the valuation is to be conducted and, if it is to be by outside experts, whether the company's accountants should be eligible. I note also that the words in Article 14 "as the auditors determine to be appropriate" could preclude consideration of the appropriate procedures to be used. For these reasons, the arbitration procedure might well result in "a real deprivation of ultimate remedy". There seems to be no point in waiting to see if that happens. To do so, would raise the possibility of the matter being transferred from arbitration to the Court in mid-course, which it seems desirable to avoid if possible. No prejudice to the respondents is evident if the matter is allowed to proceed pursuant to s. 248. Order to go in favour of the plaintiff applicant. Costs of $2,500 to the applicant forthwith.

Reasons for Leave to Appeal: Hartt J.

[13] In his reasons for granting leave to appeal, Hartt J. said this about the application of the Weber principle to private commercial arbitrations:

In my view, the clarification of the law with respect to the application of the Weber principle in the context of private commercial arbitrations is a matter of considerable importance to the administration of justice in general going beyond the interests of the parties involved.

The Arbitration Clause

[14] Article 22.01 of the 1998 shareholders agreement provides for the arbitration of every disagreement with reference to the agreement or any matter arising under it:

ARTICLE 22.00 -- ARBITRATION

22.01 In the event that any disagreement arises between the parties hereto with reference to this Agreement or any matter arising hereunder and upon which the parties cannot agree, then every such disagreement shall be referred to arbitration pursuant to the provisions of the Arbitrations Act of Ontario (R.S.O. 1980, C. 25, as amended) and the following provisions shall govern any arbitration thereunder . . .

[15] There follow a series of provisions providing for the mechanics of the arbitrator's appointment and the appointment of an umpire if the arbitrator should be unable to make a determination.

[16] Article 22.02 provides that there shall be no appeal from the award of the arbitrator in accordance with the provisions of the Arbitration Act, 1991, S.O. 1991, c. 17.

The Sale of Shares Provisions

[17] The agreement in Article 14 specifically provided machinery to value and redeem the shares of a departing shareholder who, like the applicant, ceased to be an employee.

ARTICLE 14.00 -- TERMINATION OF EMPLOYMENT

14.01 If at any time any one or more of J. Douglas, Dianne, Donald or Paul shall cease to be an employee of the Corporation, for the purposes of this Article 14.00 hereinafter referred to as "Departing Shareholder", then such Departing Shareholder shall be required to tender his/her shares to the Corporation to be redeemed by the Corporation at a price equivalent to the fair market value thereof as determined by the Corporation's accountants as at the date of the departure of such shareholder provided that such fair market value shall be determined in accordance with such generally accepted valuation procedures as the auditors determine to be appropriate in the circumstances, provided further that such fair market value shall be determined without regard to the departure of such Departing Shareholder.

[18] The agreement thus provided an explicit remedy to resolve the very dispute that arose here.

[19] In addition to this specific provision designed to cover situations such as this, the agreement contained in Article 11 a shotgun buy-sell provision.

Appeal Jurisdiction

[20] This is a convenient place to dispose of some technical arguments around appeal jurisdiction. Section 19(1)(b) of the Courts of Justice Act, R.S.O. 1990, c. C.43 gives the court jurisdiction to hear appeals from an interlocutory order of a judge where leave, as here, has been granted pursuant to rule 62.02(4).There was no finding or order in relation to the stay of court proceedings under the specific grounds enumerated in s. 7 of the Arbitration Act, which precludes any appeal. It appears that the order was made pursuant to the wider provisions of s. 6(3) or pursuant to the inherent jurisdiction of the court, both of which are subject to appeal in the same manner as any other interlocutory order.

Non-Issues

[21] Neither party took any issue with the decision of the arbitrator that he lacked jurisdiction to grant the remedies provided under the OBCA and particularly the remedy under s. 248(3)(f), an order directing the corporation or any other person to purchase securities of a security holder. That decision is not in dispute in this appeal.

Arbitration Preferred to Litigation

[22] It is open to shareholders, by agreement, to choose arbitration as the sole means of resolving their disputes and thus, absent extraordinary circumstances as in Deluce Holdings, discussed below, to oust the jurisdiction of the court to entertain oppression remedy proceedings under the OBCA: see, for instance Kints v. Kints, [1998] O.J. No. 3244 (Gen. Div.) (Heeney J.) where the arbitration provision was similar to this one. Heeney J. noted that it did not prejudice the applicant, or advantage the respondent, to direct the applicant to pursue the dispute resolution mechanism that he freely chose when he signed the shareholders agreement.

[23] The parties in this case chose the broad language of Article 22.01 to reflect their intention that all disputes of any kind relating to the operation of the agreement, including the machinery provided by Article 14.01 for the valuation and redemption of the shares of a departing employee, would be resolved by arbitration and not by the courts.

[24] It was open to the parties, as they did here, to craft their own narrow private remedy in s. 14.01 for the valuation and redemption of the shares of departing shareholders. It was open to them to agree, as they did, to resolve their differences through that machinery rather than the potentially wider machinery provided under s. 248 of the OBCA.

[25] When shareholders make this kind of choice, the courts will ordinarily hold them to their agreement. There is a very strong public policy that parties, who by contract resolve their differences by arbitration instead of resorting to the courts, should be held to their agreement: Boart Sweden AB v. NYA Stromnes AB (1988), 41 B.L.R. 295 (Ont. H.C.J.) at p. 303; Deluce Holdings Inc. v. Air Canada (1992), 1992 7654 (ON SC), 12 O.R. (3d) 131 at pp. 151-52, 98 D.L.R. (4th) 509 (Gen. Div.) (R.A. Blair J.); Canadian National Railway Co. v. Lovat Tunnel Equipment Inc. (1999), 1999 3751 (ON CA), 122 O.A.C. 171, 174 D.L.R. (4th) 385, per Finlayson J.A., at para. 20-21.

[26] This is not an extraordinary case like Deluce where the arbitration clause was narrower, there was no general "resort to arbitration" clause as there is here, and the real subject matter of dispute was not a matter which the parties had agreed to submit to arbitration. Neither is there any evidence here to impeach the resort to arbitration so as to render the continuance of the arbitration oppressive, vexatious, or an abuse of process.

[27] The dispute here is at the heart of the matters set out in the shareholders agreement, particularly the valuation and redemption of the shares of a departing employee as provided in Article 14. The dispute here is covered expressly by the dispute resolution mechanism freely chosen by the applicant when he signed the shareholders agreement. This dispute is a dispute which the parties agreed to arbitrate and not to litigate. There are no extraordinary circumstances, as there were in Deluce to suggest the parties should not be held to the agreement. Unless Weber compels a different result in these circumstances, settled principles require that the parties be held to their arbitration agreement.

The Weber Principle

[28] Does the application of the Weber principle to these facts displace the strong presumption that the arbitration clause should be honoured?

[29] Weber, a case about the mandatory arbitration regime imposed by s. 45 of the Labour Relations Act, R.S.O. 1990, c. L.2, upon the parties to a collective agreement, has little application to the very different personal arbitration regime established privately by the parties to the shareholders agreement. In Weber, the Supreme Court of Canada held that tort claims arising out of the operation of a collective agreement should be dealt with by arbitration and not in the courts, but that certain Charter claims should be allowed to proceed in court.

[30] The proposition in Weber, that the courts have a narrow residual discretion to assume inherent jurisdiction if a remedy is required which is not available under the mandatory arbitration regime imposed by statute, has no general application to a case like this where the parties voluntarily crafted their own personal arbitration regime and voluntarily agreed to limit the remedies available in the case of a dispute. Mr. Weber had no choice to decline to submit to the mandatory arbitration regime imposed by law in the context of the collective agreement negotiated by his union. The applicant in this case had every choice to decline to enter the voluntary private arbitration agreement which he freely and personally negotiated.

[31] The learned motions judge concluded that the court should assume jurisdiction on the basis of Weber because the applicant might well be deprived of an ultimate remedy if forced to proceed under the limited valuation method he agreed to in Article 14 instead of the potentially wider method that might be ordered under s. 248(3)(a) of the OBCA.

[32] The first difficulty with this proposition is that, as noted above, the need for a tightly constricted safety valve as in Weber to mitigate against the consequences of a mandatory statutory arbitration regime does not obtain in the case of a voluntary private arbitration regime such as this.

[33] The second difficulty is that even under Weber, the mere existence of a court remedy which is unavailable by way of arbitration does not end the matter. The question is not whether the court can provide an extra remedy, but whether the arbitrator is empowered to remedy the wrong in a case like this where the facts surrounding the dispute fall within the terms of the arbitration clause.

[34] It might also be noted that the remedies open to the arbitrator under Article 14 are comparatively close to the remedies available under OBCA s. 248(3)(f). The remedies are operationally identical in the sense that they require the majority to purchase the applicant's shares. What may differ, depending on the view that might be taken by the court in an oppression hearing, is the scope of the methodology used to achieve the valuation. If not completely identical, the remedies are comparatively close.

[35] Where the essential character of the dispute is subject to arbitration, there is no real deprivation of ultimate remedy so long as the applicant is able to pursue an appropriate remedy through the specialized vehicle of arbitration, Giorno v. Pappas (1999), 1999 1161 (ON CA), 42 O.R. (3d) 626 at p. 631, 170 D.L.R. (4th) 160 (C.A.), per Goudge J.A.

[36] Such is the case here. The applicant agreed in Article 14 that on leaving the company, he would tender his shares to be redeemed by the company at fair market value to be determined by the company's accountants. The applicant's problem is not that he lacks an appropriate remedy. His problem is that the method of valuation within the remedy to which he agreed may not be as potentially advantageous to him as that which might be imposed by a court under the OBCA. There is nothing unequal or unfair, within the meaning of s. 6(3) of the Arbitration Act, in holding the applicant to his agreement. Absent the extraordinary circumstances contemplated by cases such as Deluce, the Weber principle does not oust the arbitrator simply because the applicant now prefers the potential of a valuation method that might be more advantageous to him than the method to which he agreed.

Conclusion

[37] Because the Weber principle does not in these circumstances displace the strong presumption that the arbitration clause should be honoured, the appeal is allowed, the matter is remitted to the arbitrator, and the court proceedings are stayed pursuant to the authority of s. 134(1) (c) of the Courts of Justice Act.

[38] Costs of the motion, the appeal, and the leave application to the appellants, fixed in a total of $5,500 to be set off against the shareholders loan.

Appeal allowed.