SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: CV-14-10788-00-CL
DATE: 20141223

RE: ALLARD’S PAINT AND BODY SHOP LTD. and O.K.O.N. HOLDINGS LTD., Applicants

AND:

CARSTAR AUTOMOTIVE CANADA INC., Respondent

BEFORE: L.A. Pattillo J.

COUNSEL:
William McDowell and Katie Pentney, for the Applicants

Rick Simmons and Sam Nash, for the Respondent

HEARD: December 17, 2014

ENDORSEMENT

Introduction

[1] On December 5, 2014, the applicants, Allard’s Paint and Body Shop Inc. (“Allard’s”) and O.K.O.N. Holdings Ltd. (“OKON”) commenced an application (the “Application”) against the respondent Carstar Automotive Canada Inc. (“Carstar”) seeking, among other things, a determination of rights under a Licence Agreement and Amending Agreement both dated October 18, 2011 between Allard’s and Carstar (collectively the “Licence Agreement”) and in particular that Carstar is not entitled to payment of certain licence fees. OKON seeks an order for removal of a caution registered by Carstar against property located at 33 Edgewater Street in Kanata, Ontario (the “Property”) owned by OKON.

[2] In response, Carstar has brought this motion for an order, among other things, staying the Application in order that the issues between the parties can be determined by an arbitrator pursuant to an arbitration clause in the Licence Agreement.

Background

[3] Allard’s, which operates as CARSTAR Kanata, has carried on an automotive repair and paint business since approximately 1968 at various locations throughout the City of Ottawa. It currently carries on business at the Property which it leases from OKON pursuant to a lease dated May 28, 1994 which was extended in writing dated June 1, 2014. The lease expires on October 18, 2016.

[4] Carstar is a franchisor of automotive repair shops and has the sole and exclusive right within Canada to use and licence to end users the CARSTAR System.

1) The Licence Agreement

[5] The Licence Agreement, which has a term of five years with an option to renew, provides to Allard’s a non-exclusive right and licence to use the CANSTAR System and trademark in connection with the operation of an automotive paint and body repair business at the Property.

[6] The Licence Agreement addresses Allard’s right to sell the business to a third party, subject to a number of conditions. Section 19 of the Licence Agreement provides that Allard’s can transfer the Business to a third party if two conditions are fulfilled:

a) Carstar has been granted a first right of purchase, which it did not accept within thirty (30) days; and

b) Carstar has provided its written consent to the transfer, which consent can not be unreasonably withheld.

[7] Section 19.9 of the Licence Agreement sets out Carstar’s right of first purchase.

[8] Section 20.1 of the Licence Agreement provides:

Dispute Resolution – Except to the extent that the Licensor seeks injunctive or other equitable relief to enforce provisions of this Agreement, and except for controversies, claims or disputes based on the Licensee’s failure to pay any fees due hereunder when due or the Licensee’s use of the Marks, all controversies, claims or disputes between the Licensor and the Licensee arising out of or relating to (i) this Agreement or any other agreement between the Licensee and the Licensor, (ii) the relationship between the Licensor and the Licensee, or (iii) the validity of this Agreement or any other agreement between the Licensor and the Licensee shall be determined by arbitration. Such arbitration shall be conducted before a single arbitrator agreed to by the parties or failing agreement, by a judge of the Superior Court of Ontario. The decision of the arbitrator shall be final and binding and no appeal shall lie therefrom. The arbitration proceeding shall be conducted in Hamilton, Ontario, unless the parties agree otherwise agree or unless otherwise required by the laws of the province in which the Business is operated. The arbitration will be conducted on an individual, not a class-wide basis, and the arbitration proceeding may not be consolidated with any other arbitration proceeding between the Licensor and any other person …

2) The Sale of Allard’s and the Property

[9] On October 24, 2014, following lengthy negotiations, Allard’s and its shareholders (OKON, Yvon Allard and Margaret Allard) entered into a Share Purchase Agreement with Assured Automotive Ontario East Inc. (“Assured”) with respect to the sale of Allard’s and its automotive collision repair business (the “SPA”).

[10] During the same time period as the SPA negotiations, negotiations took place with respect to the sale of the Property which culminated in an Agreement of Purchase and Sale dated September 30, 2014 between OKON as vendor and 2428920 Ontario Inc. as purchaser (the “APS”). 2428920 Ontario Inc. is owned 50% by a company related to or affiliated with Assured and 50% by unrelated parties.

[11] Both the SPA and the APS become null and void by their terms if the SPA is not completed by January 30, 2015.

[12] On October 28, 2014, counsel for Allard’s and OKON sent copies of the SPA to Carstar pursuant to the first right of purchase provision in Section 19 of the Licence Agreement. The letter also enclosed the APS and advised “for full disclosure purposes” that a principal of 2428290 Ontario Inc. was an associated party to Assured, the purchaser of the shares under the SPA.

3) The Dispute

[13] Upon receipt of the sale information concerning both Allard’s and the Property, Carstar took the position that if Allard’s transferred the business to a purchaser that did not continue business as a Carstar Licensee, Section 16 of the Licence Agreement required Allard’s to pay the remaining Licence fee under the Licence Agreement calculated to be $387,253.89 plus $50,000.00 on account of a lost bonus. Carstar also took the position that its right of first purchase provided for in the Licence Agreement extended to both Allard’s business and the Property. In that regard, on November 26, 2014, Carstar advised Allard’s that it would be exercising its right of first purchase to purchase both the business and the Property on the same terms as Assured. Allard’s disagreed that it owed any fees to Carstar upon termination of the Licence Agreement or that the right of first purchase in the Licence Agreement extended to the Property.

[14] There are two issues raised by the parties in the Application. The first issue, which is raised by Allard’s, is whether Carstar is entitled to the fees it claims are owing upon Allard’s termination of the Licence Agreement. The second issue as raised by Carstar is whether its right of first purchase in the Licence Agreement applies to both Allard’s business and the Property.

Discussion

[15] Carstar submits in the first instance that the question as to whether the arbitrator has jurisdiction to determine the issue of the applicability of the right of first purchase should be decided by the arbitrator pursuant to the competence-competence principle. Accordingly, the Application should be stayed.

[16] The competence-competence principle provides, as a general rule, that arbitrators are allowed to first rule on the issue of their own jurisdiction. That principle, however, does not apply where it is clear that the dispute is outside the terms of the arbitration agreement. See: Ontario Medical Assoc. v. Willis Canada Inc., 2013 ONCA 745, 118 O.R. (3d) 241 (C.A.).

[17] As was stated by Charron J.A. (as she then was) in Dalimplex Ltd. v. Janicki (2003), 2003 34234 (ON CA), 64 O.R. (3d) 737 (C.A.) at para 21:

……… Only where it is clear that the dispute is outside the terms of the arbitration agreement or that a party is not a party to the arbitration agreement or that the application is out of time should the court reach any final determination in respect of such matters on an application for a stay of proceedings.

Where it is arguable that the dispute falls within the terms of the arbitration agreement or where it is arguable that a party to the legal proceedings is a party to the arbitration agreement then, in my view, the stay should be granted and those matters left to be determined by the arbitral tribunal.

[18] Allard’s submits that the issue of whether the right of first purchase applies to the Property under the Licence Agreement is clearly outside the provisions of the arbitration clause because OKON, the owner of the Property, is not a party to the Licence Agreement and therefore not subject to the arbitration clause.

[19] Carstar submits that it is arguable that OKON is subject to the arbitration clause under the Licence Agreement. In support of that submission, it points to the non-arm’s length relationship between Allard’s and OKON and alleged misrepresentation by Allard’s at the time the Licence Agreement was entered into.

[20] Yvon Allard and his wife Margaret are officers, directors and shareholders of Allard’s. Mr. and Mrs. Allard are also officers, directors and shareholders of OKON. There is no suggestion by Carstar that OKON is a sham corporation or that it was put in place to avoid compliance with the Licence Agreement. OKON was incorporated in 1985 and owned the Property long before the Licence Agreement was entered into. Similarly, the lease for the Property was entered into long before the Licence Agreement. Notwithstanding the common ownership between Allard’s and OKON, OKON is a separate legal entity and is entitled to be treated as such.

[21] Counsel for Carstar submitted in argument that there was some form of misrepresentation on the part of Allard’s principals concerning the Property at the time when the Licence Agreement was entered into. There is no evidence in the record to support that allegation. In order for an issue to be arguable, there must be some basis to support it.

[22] The arbitration clause in the Licence Agreement provides, with certain exceptions, that “all controversies, claims or disputes between the Licensor and the Licensee arising out of or relating to (i) this Agreement…” The Licence Agreement defines Carstar as the Licensor and Allard’s as the Licensee. OKON, which is a separate legal entity, is not a party to the Licence Agreement nor is it a party to the arbitration clause. As the issue of whether the right of first purchase applies to the Property involves OKON as the owner, it cannot be decided pursuant to the arbitration clause. Nor in my view has Carstar established it is arguable that OKON is a party to the arbitration clause. On that basis, I am not prepared to grant a stay.

[23] In addition, and given the issues between the parties, I am also of the view, given the urgency in resolving the issues, it is more expeditious to have them decided by the court in the first instance. Allard’s issue concerning whether certain fees are payable upon termination of the Licence Agreement cannot be heard by an arbitrator because it has been expressly excluded from the arbitration clause. Specifically, the clause excludes “controversies, claims or disputes based on the Licensee’s failure to pay any fees hereunder….”

[24] Accordingly, if the right of first purchase issue is decided against Carstar by an arbitrator, the dispute must return to the court to resolve the fee issue. Such bifurcation is simply not an efficient way in which to resolve the disputes between the parties, particularly given the January 30, 2015 deadline.

Conclusion

[25] For the above reason’s Carstar’s motion for a stay of the Application is dismissed.

[26] Given the January 30, 2015 deadline for completion of both the SPA and the APS, it is necessary to deal with the issues raised by the parties forthwith. Accordingly, the Application and Carstar’s cross-issue concerning the right of first purchase shall be heard on January 19, 2015, before me (three hours).

[27] Counsel are directed to agree on a timetable as soon as possible dealing with all of the steps required to enable the issues to be heard on January 19. This includes dates for any further material if necessary; cross-examinations, if required; and the filing of factums and briefs of authorities. Counsel shall attend before me at a 9:30 a.m. appointment on a date to be agreed during the week of January 5, 2015, to confirm the timetable and discuss any other issues.

[28] Costs of the motion reserved to the hearing of the Application.

L. A. Pattillo J.

Released: December 23, 2014