Court File and Parties

Court File No.: CV-12-453980 Date: 2012-12-11 Superior Court of Justice – Ontario

Re: Ben U and Amy U, Plaintiffs And: Watters Environmental Group Inc. and Robert Watters, and Kevin French, Defendants/Moving Parties

Before: Stinson J.

Counsel: D. Jared Brown, for the plaintiffs/responding parties Samuel M. Robinson, for the defendants/moving parties Watters Environmental Group Inc. and Robert Watters No one appeared on behalf of the defendant Kevin French

Heard: November 28, 2012

Endorsement

[1] The defendants Watters Environmental Group Inc. ("WEGI") and Robert Watters move to stay this action pursuant to s. 7(1) of the Arbitration Act, 1991, S.O. 1991, c. 17 on the grounds that this dispute is caught by an arbitration clause in a unanimous shareholders agreement ("USA") signed by the parties to this proceeding. The action arises out of the termination of Ben U's employment as an officer and director of WEGI and the subsequent compulsory acquisition of his shares in WEGI. In the amended statement of claim, the plaintiffs allege that the defendants' motive in terminating Mr. U's employment was to permit them to acquire his shares pursuant to the compulsory acquisition mechanism in the USA. He asserts claims for relief under the oppression remedy provisions of the Canada Business Corporations Act, R.S.C. 1985, c. C-44 ("CBCA"), as well as claims for wrongful dismissal and punitive damages.

[2] The action has been discontinued as against the defendant Kevin French, who was a fellow director and officer and shareholder of WEGI. Mr. French has since departed WEGI and is engaged in his own litigation against the company.

[3] The motion before me raises considerations as to the applicability of s. 7(1) of the Arbitration Act, the scope of the arbitration clause contained in the USA, and its application to the claims advanced by the plaintiffs in the statement of claim.

[4] The plaintiffs are now former shareholders of WEGI. They were parties to the USA, which was a unanimous shareholders' agreement of all of the shareholders of WEGI. The USA provided that Mr. U (along with Mr. Watters and Mr. French) was to be a director and officer of WEGI. It further provided that Mr. U. could be removed from these positions by the vote of two-thirds of the Board of Directors (that is, if both Mr. Watters and Mr. French voted to remove him). According to the allegations in the statement of claim, that event occurred and Mr. U's employment with the corporation was terminated.

[5] Significantly, the USA further provided that, upon the termination of the employment of the shareholder, WEGI had the option of requiring the terminated shareholder to sell his shares to the corporation for "fair market value" (a defined term). Following the termination of Mr. U's employment, WEGI purported to exercise the compulsory sale provision and acquired the plaintiffs' shares and paid for them a total consideration of $189,642.50.

[6] There is no suggestion in the statement of claim that the amount paid on the compulsory acquisition of Mr. U's shares was not the "fair market value" determined by the formula in the USA. The plaintiffs allege, however, that there had been an understanding between the parties that the formula for "fair market value" in the USA would not apply. The plaintiffs go on to allege in the statement of claim that the sole motivation for the termination of Mr. U's employment was to permit the defendants to acquire his shares pursuant to the compulsory sale provision, using the formula for "fair market value" in the USA. Specifically, in paragraph 59 of the statement of claim, the plaintiffs allege:

Mr. U pleads that in terminating Mr. U's employment on October 25, 2010, Watters and French were not acting honestly, in good faith or with a view to the best interest of the corporation. They were not acting for any valid or proper corporate purposes, but rather to enable Watters and French to purport to exercise the Option to purchase Mr. U's shares at a price below that which had been agreed by the parties and to eliminate Mr. U as a fellow shareholder.

[7] Against the foregoing factual backdrop, the plaintiffs have commenced this action, seeking the above-described remedies under the oppression remedy provisions of the CBCA, as well as damages for wrongful dismissal. In response, WEGI and Watters have brought this motion to stay pursuant to s. 7 of the Arbitration Act. It is the position of the defendants that the arbitration clause in the USA requires the plaintiffs to proceed by way of arbitration in respect of the claims advanced and thus the action should be stayed.

[8] The plaintiffs deny that this is an appropriate case for arbitration. Among other grounds, they assert that the USA did not provide for matters relating to Mr. U's employment and accordingly, the parties did not agree that disputes with respect to his employment would be subject to arbitration. They also argue that a majority of shareholders ought not to be able to rely on an arbitration mechanism to disadvantage a minority shareholder, and contend that the arbitration clause should not be applied where proceeding to arbitration would advance the majority shareholders' objective of oppressing the minority. In effect, the plaintiffs contend that using the arbitration clause would amount to a further act of oppression. The position of the defendants is that the scope of arbitration clause is sufficiently broad that the mandatory provision in s. 7(1) of the Arbitration Act is applicable.

[9] The following is the text of the relevant portions of the arbitration clause in the USA.

8.1 Dispute Resolution

Any disputes and questions whatsoever which shall arise between any of the parties in connection with this Agreement which touch upon the validity, construction, meaning, performance or effect of this Agreement or the rights and liabilities of the parties hereto or any matters arising out of or connected with this agreement shall be subject to arbitration pursuant to the Arbitration Act ….

[10] Section 7 of the Arbitration Act provides as follows

Stay

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.

Exceptions

(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.

Arbitration may continue

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

Effect of refusal to stay

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

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

(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.

Agreement covering part of dispute

(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.

No appeal

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

[11] The correct approach to this problem is directed by the Court of Appeal in Mantini v. Smith Lyons LLP (2002), 2003 CanLII 20875 (ON CA), 64 O.R. (3d) 505, [2003] O.J. No. 1831 at para. 17 (C.A.):

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): [citations omitted].

[12] My first task, therefore, is to interpret the arbitration provision in the USA. In my view, the scope of the provision is very wide. It is applicable to "any disputes and questions whatsoever … in connection with this agreement … which touch upon the … performance or effect of this agreement or the rights or liabilities of the parties or any matter arising out of or connected with this agreement …." [Emphasis added.] As noted by Feldman J.A. in Mantini at para. 19:

[T]he 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.

[13] In my opinion, the foregoing comments are equally applicable to the arbitration clause in the USA in the present case. The plaintiffs argue, however, that the USA does not expressly provided for the employment of Mr. U and thus his wrongful dismissal claim is outside the scope of the USA. The plaintiffs further argue that the assertion by them that Mr. U's termination was carried out for an improper purpose so as to trigger the operation of the compulsory sale provision is an act of oppression and the further resort to the arbitration clause amounts to ongoing oppression by the defendants.

[14] The principal authority relied upon by the plaintiffs is Deluce Holdings Inc. v. Air Canada (1992), 1992 CanLII 7654 (ON SC), 12 O.R. (3d) 131, [1992] O.J. No. 2382 (Gen. Div.) and the cases that have followed and applied that authority. In Deluce, the defendant had commenced an arbitration to determine the price it had to pay to acquire the plaintiff's shares in a jointly owned holding company. The arbitration clause in question was confined to disputes concerning the valuation of the shares. The plaintiff, however, asserted that the defendant had acted in an oppressive way in order to trigger the compulsory acquisition clause and to force it into an arbitration in which the sole issue was the share valuation; the plaintiff's true position was that it should not be required to sell its shares at all. The plaintiff therefore sought an order staying the arbitration.

[15] In that case, Blair J. concluded as follows (at para. 69 and 70):

69 … I see no difficulty in concluding that if the "oppressive" acts of the majority are what are relied upon to trigger the arbitrable mechanism in the agreement, to the advantage of the majority and to the disadvantage of the minority, the majority ought not to be entitled to rely upon that mechanism to effect its wrongful objective. The real subject matter of the dispute, in such circumstances, is not a matter which the parties have agreed to submit to arbitration, but rather one which strikes at the very underpinning of the contractual mechanism itself. It therefore lies beyond the scope of s. 7 of the Arbitration Act, 1991, and brings into play the customary principles respecting the stay of arbitration proceedings.

70 In this case I am assisted in drawing the conclusion that the issues may be dealt with outside the confines of s. 7 by the terms of the unanimous shareholders' agreement itself -- or, rather, by the terms which are lacking therein. The only provision for arbitration is the one contained in art. 8.01 which states that any dispute under the Agreement with respect to the fair market value of the parties' shares is to be referred to arbitration. There is no general "resort to arbitration" clause in the event of any dispute arising in connection with the Agreement, as there is in many such agreements.

[Emphasis added.]

[16] In Armstrong v. Northern Eyes Inc. (2000), 2000 CanLII 29047 (ON SCDC), 48 O.R. (3d) 442, [2000] O.J. No. 1594 (Div. Ct.), a minority shareholder sought to have the court, rather than an arbitrator, hear matters in dispute between the parties. In that case, Archie Campbell J. for the court said as follows (at paras. 24 to 27):

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. [Citation omitted.]

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. ….

[17] In my opinion, the comments of Archie Campbell J. are apposite to the present case. The arbitration clause in the present case is very broad. It extends to "questions … in connection with this Agreement which touch upon the … meaning, performance or effect of this Agreement or the rights or liabilities of the parties … or any matter … connected with this Agreement." This is an extremely broad provision, as I have noted. More importantly, at the heart of the plaintiffs' complaint is the assertion that his dismissal was improper such that the mandatory purchase provisions of the USA were not properly triggered. In my view, that is clearly a dispute regarding the rights or liabilities of the parties connected with the agreement.

[18] Additionally, I do not accept the submission that to require the plaintiffs to proceed by arbitration would be oppressive, unlike Deluce. In Deluce, the only remedy available to the plaintiff under the arbitration agreement was a review of the price that was to be paid for its shares. That arbitration clause would not have permitted the plaintiff to attack the propriety of the underlying transaction by which the share sale was allegedly forced upon it.

[19] By contrast, in the present case, the arbitration provision is very broad. It would not be unfair or oppressive to require the plaintiffs to proceed by arbitration. As counsel for the defendants conceded during the course of argument before me, all of the remedies that the plaintiffs seek to advance in the action are open to them to pursue in the arbitration. These include the plaintiffs' claims for oppression relief pursuant to the provisions of the CBCA and the claim for damages. In the face of the concession by the defendants that all of the claims being advanced by the plaintiffs can be pursued in the arbitration and that there was no issue as to the authority of the arbitrator to grant CBCA remedies, this is not, unlike Deluce, a case in which the trigger of the arbitration mechanism in the agreement is to the advantage of one party and the disadvantage of the other. Rather, both sides will proceed on an equal footing, albeit in the forum of a private arbitration rather than in a courtroom.

[20] For these reasons, I conclude that an order should issue staying the action in favour of an arbitration to be conducted pursuant to the Arbitration Act, in accordance with the arbitration provisions in the USA.

[21] Pursuant to the parties' agreement, the successful party, the moving defendants, is entitled to costs in the agreed upon sum of $3,500. That sum shall be paid within 30 days.

Stinson J.

Date: December 11, 2012