COURT FILE NO.: 13-CV-478808

DATE: 20131021

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: DAVID MOFFATT and DAVID MOFFATT HOLDINGS INC., Plaintiffs

AND:

DANIEL MAHER, MAHER HOLDINGS, AND MAHER SIGN PRODUCTS INC., Defendants

BEFORE: CHIAPPETTA J.

COUNSEL:
Morris Cooper, for the Plaintiffs

Barry Prentice, for the Defendants

HEARD: October 2, 2013

ENDORSEMENT

Overview

[1] The narrow issue on this motion is whether the plaintiffs’ claim falls within the scope of the parties’ agreement to arbitration. For reasons set out below, I conclude that it is not clear that the dispute falls outside of the scope of the arbitration agreement. Therefore, the claim is properly stayed and the finding with respect to scope is referred to an arbitrator.

The Claim

[2] The plaintiff, David Moffatt (“Moffatt”), is the owner of the plaintiff, David Moffatt Holdings Inc. (“Moffatt Holdings”).

[3] The defendant, Daniel Maher (“Maher”), is the founder and principal of the defendant, Maher Sign Products Inc. (“Maher Signs”). He is also the sole shareholder and principal of the defendant, Maher Holdings Inc. (“Maher Holdings”).

[4] How the Statement of Claim (“the claim”) is framed is critical to the issue on this motion. The claim is therefore reviewed as follows:

i. In or about early 2012, Maher retained Moffatt’s services on behalf of Maher Signs. Moffatt provided sales and marketing services to Maher Signs as an independent contractor. Throughout 2012, Moffatt and Maher discussed and ultimately agreed that Moffatt would purchase shares of Maher Signs and become an employee of Maher Signs. Maher represented to Moffatt that the fair market value of the company was $2,000,000.

ii. Based on the representation as to the value of Maher Signs, Moffatt agreed to purchase 10% equity of Maher Signs from Maher for $200,000 and enter into an employment agreement.

iii. On January 10, 2013, the purchase and sale transaction was completed. Moffatt provided Maher a bank draft of $100,000 and a promissory note for $100,000 with interest at 3% per annum payable monthly and $50,000 being due on each of January 10, 2014 and January 10, 2015.

iv. Coincident with the above, Maher executed an employment agreement with Moffatt as Vice President, Sales & Marketing. The agreement included an annual salary of $144,000 plus incentive compensation, based on achieving objectives to be agreed upon at the commencement of each 12 month fiscal period.

v. On February 8, 2013, Maher advised Moffatt that he could remain employed with Maher Signs if he agreed to have his $144,000 salary reduced to zero, accept a role as sales representative, and receive 10% commission, without any draw or reimbursement of expenses. Otherwise, Maher would return $100,000 to Moffatt on account of the shares less half the legal costs he incurred in restructuring Maher Signs, with such net amount being paid over the following two months.

vi. Ultimately by letter dated February 14, 2013, Maher Signs confirmed Moffatt’s termination effective February 8, 2013. Maher Signs paid Moffatt one weeks’ pay pursuant to the Employment Standards Act, 2000, S.O. 2000, c. 41.

vii. Following termination of Moffatt’s employment, Maher advised Moffatt that he had no intention of cancelling the transaction which led to Moffatt’s share purchase or returning the $100,000 he received from Moffatt on account of those shares. Instead, Maher stated that Moffatt’s rights in relation to the shares are to be governed by the Shareholders Agreement executed at the same time of the purchase transaction. The Shareholders Agreement necessitates a share valuation and payment of the result amount over a period of two years.

viii. Maher also advised Moffatt that, notwithstanding his pre-sale representations as to the value of Maher Signs, the value of Moffatt’s shares is only $130,000 as opposed to the $200,000 he paid.

ix. Maher misled Moffatt as to the value of the shares. He likewise misled Moffatt as to the nature of the promised employment. As a result, Moffatt is entitled to have the purchase transaction and the Shareholders Agreement set aside and declared void. Moffatt is also entitled to damages for wrongful dismissal.

The January 10th Agreements

[5] Various parties to this action entered into three agreements on January 10, 2013:

i. An executive Employment Agreement between Moffatt and Maher Signs

ii. A Share Purchase Agreement between Maher and Moffatt Holdings

iii. A Shareholders Agreement amongst all the plaintiffs and defendants to this action.

[6] The Shareholders Agreement is relevant to this motion and states the following:

WHEREAS Dan, Maherco and Moffattco (hereinafter, collectively referred to as the “Shareholders”, and individually as a “Shareholder”) (collectively) own all of the issued and outstanding shares of the Company as follows:

Name of Shareholder Number and Class of Shares

Maherco 8000 Class 1 Common Shares

Dan 999 Class 2 Common Shares

Moffattco 1001 Class 3 Common Shares

AND WHEREAS the parties wish to establish their respective rights and obligations with respect to:

(i) The shares of the Company owned by them, directly or indirectly; and

(ii) The other matters set forth in this agreement;

NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the respective covenants and agreements of the parties contained herein, the sum of one dollar now paid by each party hereto to each of the other parties hereto, and other good and valuable consideration (the receipt and sufficiency of which is hereby acknowledged by each of the parties hereto), it is agreed as follows:

ARTICLE 1 - REPRESENTATIONS, WARRANTIES AND COVENANTS

1.1 Representations, Warranties and Covenants. Each of Maherco and Moffattco covenants with and represents and warrants to each of the parties hereto, and acknowledges and confirms that such parties are relying on such covenants, representations and warranties in connection with entering into this agreement, that:

(a) it is a corporation duly existing and in good standing under the laws of its jurisdiction of incorporation;

(b) it has the capacity and corporate authority to act as a Shareholder;

(c) it can fulfill its obligations as a Shareholder without violating the terms of its constating documents, bylaws or any agreement to which it is or will become a party or by which it is or will become bound by any law or regulation applicable to it;

(d) it has taken all necessary corporate action to authorize the execution, delivery and performance of this agreement; and

(e) this agreement constitutes a valid and binding obligation of it, enforceable in accordance with its terms.

1.3 Share Ownership. Each Shareholder represents and warrants that:

(i) they are each the registered and beneficial owner of the issued and outstanding shares in the capital of the Company set out opposite their names in the recitals hereto; and

(ii) such shares are free and clear of all claims, liens and encumbrances whatsoever and, except as provided herein, no person has any agreement or option or any right capable of becoming an agreement for the purchase of any such shares, and no person has any agreement or option or any right capable of becoming an agreement for the issuance or subscription of any unissued shares of such Shareholder save and except that the shares owned by Moffatco have been pledged to Dan.

2.1 Put Right of Moffattco. At any time and from and after the date that is eighteen (18) months from the date of this agreement, Moffattco shall be entitled upon notice in writing (a “Put Notice”) to the Company to require the Company to purchase all but not less than all of the shares of the Company owned by Moffattco (the “Purchased Shares”). Upon receipt of such Put Notice, Moffattco (the “Vendor”) shall sell to the Company (the “Purchaser”), and the Purchaser shall purchase from the Vendor, the Purchased Shares upon the terms and conditions set forth in this Article 2 and in the general sale provisions in this agreement.

2.2 Call Right of the Maher Group. At any time and from and after the date that is eighteen (18) months from the date of this agreement, the Company shall be entitled, upon notice in writing (a “Call Notice”) to Moffattco (the “Vendor”), to require the Vendor to sell all but not less than all of the shares of the Company owned by the Vendor (the “Purchased Shares”) to the company (the “Purchaser”). Upon receipt of such Call Notice, the Vendor shall sell to the Purchaser and the Purchaser shall purchase from the Vendor the Purchased Shares upon the terms and conditions set forth in this Article 2 and in the general sale provisions in this agreement.

2.4 Termination of the Services Provided by David/Moffattco. David and Moffattco have agreed to provide certain services to the Company as more fully described in the job description attached hereto as Schedule “A” (the “Services”). In the event that the Services are terminated, the following provisions will apply:

(a) If the Company terminated the Services for cause, then Moffattco shall no longer have the Put Right provided in Section 2.1 hereof, and the Call Right of the Maher Group may be exercised by the Maher Group immediately upon said termination (or any time thereafter), and the restriction on the exercise of the Call Right provided in Section 2.2 hereof is hereby waived. For the purposes of this section 2.4, “for cause” includes, without limitation, any misconduct by David and/or Moffattco in the provision of the Services, any willful breach or non-observance by David and/or Moffattco of any of the conditions or obligations of this agreement and/or any other agreement with respect to the Services, any neglect or refusal by David or Moffattco to carry out any of the Services, any negligent performance of such duties, any insubordinate or insulting behavior and/or threats or threatening behavior by David and/or Moffattco towards the Company, its directors, officers, shareholders and/or clients.

(b) If the Company terminated the Services for any reason other than for cause, then the Company shall continue to have the Call Right provided in Section 2.2 hereof, and Moffattco shall continue to have the Put Right provided in Section 2.1 hereof, provided in the restriction on the exercise of the Put Right provided in Section 2.1 hereof is hereby waived. In the event that, at any time within twelve (12) months of the closing of the purchase of the shares of Moffattco (the “Purchased Shares”) by the Company pursuant to the exercise of the Call Right in accordance with this subsection 2.4(b), an agreement is entered into between the Company and/or a Shareholder and an arm’s length third party (a “Subsequent Transferee”) for the purchase of the Purchased Shares, Moffattco shall be entitled to 100% of the difference (if any) between the price paid by the Company to Moffattco for the Purchased Shares and the proceeds received for the Purchased Shares from the Subsequent Transferee.

(c) If David or Moffattco terminated the Services for any reason, then Moffattco shall no longer have the Put Right provided in Section 2.1 hereof, and the Call Right of the Maher Group may be exercised by the Maher Group immediately upon said termination (or any time thereafter), and the restriction on the exercise of the Call Right provided in Section 2.2 hereof is hereby waived.

7.1 Arbitration. If any dispute or controversy shall occur between the parties hereto relating to the interpretation or implementation of any of the provisions of this agreement, such dispute shall be resolved by arbitration. Such arbitration shall be conducted by a single arbitrator. The arbitrator shall be appointed by agreement between the parties or, in default of agreement, such arbitrator shall be appointed by a Judge of the Ontario Superior Court of Justice sitting in the Judicial District of Toronto Region, upon the application of any of the said parties and a Judge of the Ontario Superior Court of Justice sitting in the Judicial District of Toronto Region shall be entitled to act as such arbitrator, if he so desired. The arbitration shall be held in the Municipality of Metropolitan Toronto. The procedure to be followed shall be agreed by the parties or, in default of agreement, determined by the arbitrator. The arbitration shall proceed in accordance with the provisions of the Arbitration Act, 1991 (Ontario), S.O. 1991, c. 17. The arbitrator shall have the power to proceed with the arbitration and to deliver his award notwithstanding the default by any party in respect of any procedural order made by the arbitrator. It is further agreed that such arbitration shall be a condition precedent to the commencement of any action at law. The decision arrived at by the board of arbitration, howsoever constituted, shall be final and binding and no appeal shall lie therefrom. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction.

Analysis

[7] Section 7(1) of the Arbitration Act, 1991, S.O. 1991, c. 17 states the following:

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 proceedings.

[8] In Mantini v. Smith Lyons LLP (2003), 2003 20875 (ON CA), 64 O.R. (3d) 505 at para. 17, the Court of Appeal provides directions in determining the jurisdictional dispute present in this case:

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).

[9] The relevant arbitration provision set out above, s. 7.1 of the Shareholders Agreement, is broad. Section 7.1 provides that “any dispute or controversy … relating to the interpretation or implementation of any of the provisions of this agreement … shall be resolved by arbitration.”

[10] The plaintiffs did not take the position that a statutory exception applies to permit this court to assert jurisdiction over the claim, if arbitrable.

[11] Moffatt submits that the “pith and substance” of the claim is restricted to the interpretation and implementation of the Share Purchase Agreement. The arbitration provision in the Shareholders Agreement is irrelevant. The Share Purchase Agreement addresses the financial terms of Moffatt’s share purchase. In contrast, the Shareholders Agreements sets out the parties’ rights and obligations with respect to shares owned by them after a bona fide purchase and sale. The dispute relates to the alleged false representations which induced the plaintiffs to purchase the subject shares. The dispute does not relate to shareholder rights and obligations following a bona fide purchase and sale.

[12] Moffatt submits that the claim seeks to set aside the Share Purchase Agreement. The Share Purchase Agreement does not contain an arbitration provision. Therefore, Moffatt argues that the claim is not subject to an arbitration agreement.

[13] I find that the dispute is not clearly outside the scope of the arbitration agreement in the Shareholders Agreement. Rather, the claim is framed in a way that arguably relates to the interpretation and implementation of the Shareholders Agreement:

i. The claim seeks as against Maher Holdings and Maher Signs a declaration of the value of the shares held by Moffatt Holdings. This will require an interpretation of sections 2.1, 2.2, and 2.4 of the Shareholders Agreement.

ii. The claim seek an order requiring Maher Sings to purchase or redeem the shares held by Moffatt Holdings. This also requires an interpretation of sections 2.1, 2.2, and 2.4 of the Shareholders Agreement.

iii. In the alternative, the claim seeks to invalidate the series of transactions dated January 10, 2013, including the Shareholders Agreement.

iv. The claim (by way of reply) seeks to set aside and declare void the Shareholders Agreement.

[14] Similarly, the statement of defence relies on provisions of the Shareholders Agreement for the consequences of Moffatt’s termination and the corporation’s rights to acquire the shares owned by Moffatt Holdings.

[15] The resolution of the issues raised in the pleadings appears to require more than a simple reference to the Shareholders Agreement. The relief requested arguably requires interpretation of specific sections in the Shareholders Agreement.

[16] The Court of Appeal directs the court to render a final determination on the scope of an arbitration agreement in limited circumstances, including “[o]nly where it is clear that the dispute is outside the terms of the arbitration agreement”: Dalimpex Ltd. v. Janicki (2003), 2003 34234 (ON CA), 64 O.R. (3d) 737 (C.A.), at para. 21. For reasons set out above, I conclude that it is not clear that the dispute is outside the terms of the arbitration agreement. Rather, it is arguable that the dispute reasonably falls within the arbitration agreement. For this reason, the stay should be granted pending an arbitrator’s determination as to whether the dispute is subject to arbitration.

[17] Maher seeks to stay the plaintiffs’ claims, other than Moffatt’s claims for damages for wrongful dismissal against Maher Signs.

[18] Moffatt submits that, if a stay is appropriate, the interest of justice nonetheless requires that the court maintain jurisdiction to avoid duplication of proceedings. The claims on the Share Purchase Agreement, the Shareholders Agreement, and the Employment Agreement each arise from the same series of facts. To leave the wrongful dismissal claim with the court and permit arbitration on the remaining claims would increase costs. It would require two proceedings to deal with all issues. Maher relies on Martin v. Cordiano, 2011 ONSC 5724, 208 A.C.W.S. (3d) 648 and Bouchan v. Slipacoff (2009), 2009 728 (ON SC), 94 O.R. (3d) 741 (S.C.).

[19] When the dispute may include matters both inside and outside the scope of the arbitration agreement, the court is asked to avoid a multiplicity of proceedings, with appropriate deference to the arbitration agreement. In my view, to avoid the arbitration provision, the action outside the arbitration provision would need to be so tightly connected to the actions inside the provision such that denying the parties’ arbitration agreement is sufficiently explained by s. 138 of the Courts of Justice Act, R.S.O. 1990, c. C.43.

[20] I am not persuaded that it is appropriate to deny the stay because of the wrongful dismissal claim. Similar facts are relevant to the wrongful dismissal claim and the claims within the scope of arbitration provision. However, the wrongful dismissal action will consider a different cause of action in the context of a distinct contractual agreement between only two of the parties. This is distinguishable for example from a claim for relief against oppression.

[21] Furthermore, I find that this relief would not be appropriate given the Court of Appeal’s above noted direction in Dalimpex.

Disposition

[22] The plaintiffs’ claims, other than Moffatt’s claim for damages for wrongful dismissal against Maher Signs, are hereby stayed pending a determination by an arbitrator appointed under s. 7.1 of the Shareholders Agreement and the Arbitration Act, 1991 as to whether the matters raised therein are subject to arbitration.

Costs

[23] The parties are encouraged to agree on an appropriate award of costs for this motion. If they are unable to agree, I will receive written submissions of no more than two pages. The defendants shall submit first within 30 days. The plaintiffs shall submit within 20 days thereafter.

CHIAPPETTA J.

Date: October 21, 2013