Haas v. Gunasekaram, 2015 ONSC 5083

minicounsel

Ontario Reports

Ontario Superior Court of Justice,

Akhtar J.

August 14, 2015

127 O.R. (3d) 128 | 2015 ONSC 5083

Case Summary

Arbitration — Stay of proceedings — Parties entering into shareholders' agreement containing arbitration clause which mandated arbitration of disputes "respecting this Agreement or anything contained herein" — Plaintiff suing defendants for misrepresentation, breach of fiduciary duties and oppressive behaviour — Claims of misrepresentation falling outside scope of arbitration clause as they were not claims respecting agreement — Claim that defendants acted in oppressive manner by failing to fulfill contractual obligations falling within arbitration clause — Court declining to grant partial stay of action as doing so would result in multiplicity of proceedings.

The parties went into business together to run a restaurant and entered into a shareholders' agreement. The agreement contained an arbitration clause which mandated arbitration of disputes "respecting this Agreement or anything contained herein". The plaintiff sued the defendants for misrepresentation, breach of fiduciary duty and oppressive behaviour, alleging that he was induced to enter into the shareholders' agreement as a result of a series of fraudulent misrepresentations. The defendants brought an application to stay the action and have it referred to arbitration.

Held, the application should be dismissed.

The claims of misrepresentation and breach of fiduciary duty did not rely upon or refer to the shareholders' agreement and were not contractual in substance. Those claims fell outside the arbitration clause. The claim that the defendants acted in an oppressive manner in failing to fulfill their contractual obligations did fall within the arbitration clause. However, as the bulk of the claim fell outside the arbitration clause, it made little sense to order a partial stay. Doing so would result in a multiplicity of proceedings, leading to duplication, increased costs and delay.

Cosentino v. Dominaco Developments Inc., [2010] O.J. No. 61, 2010 ONSC 208, 183 A.C.W.S. (3d) 695 (S.C.J.); Matrix Integrated Solutions Ltd. v. Naccarato (2009), 97 O.R. (3d) 693, [2009] O.J. No. 3187, 2009 ONCA 593, 60 B.L.R. (4th) 39, 75 C.P.C. (6th) 17, 252 O.A.C. 222, 179 A.C.W.S. (3d) 584, consd

Other cases referred to

Bruce v. John Northway & Son, [1962] O.W.N. 150 (H.C.J.-Master); Dalimpex Ltd. v. Janicki (2003), 2003 34234 (ON CA), 64 O.R. (3d) 737, [2003] O.J. No. 2094, 228 D.L.R. (4th) 179, 172 O.A.C. 312, 35 B.L.R. (3d) 41, 35 C.P.C. (5th) 55, 123 A.C.W.S. (3d) 217 (C.A.); Dell Computer Corp. v. Union des consommateurs, [2007] 2 S.C.R. 801, [2007] S.C.J. No. 34, 2007 SCC 34, 284 D.L.R. (4th) 577, 366 N.R. 1, J.E. 2007-1426, 34 B.L.R. (4th) 155, 44 C.P.C. (6th) 205, EYB 2007-121973, 158 A.C.W.S. (3d) 870; Griffin v. Dell Canada Inc. (2010), 98 O.R. (3d) 481, [2010] O.J. No. 177, 2010 ONCA 29, 259 O.A.C. 108, 64 B.L.R. (4th) 199, 80 C.P.C. (6th) 154, 315 D.L.R. (4th) 723, 185 A.C.W.S. (3d) 12; Leggat v. Direct Leverage Ltd., [2015] O.J. No. 2035, 2015 ONSC 2639 (Div. Ct.), affg, unreported, Spence J. (S.C.J.); Patel v. Kanbay International Inc. (2008), 93 O.R. (3d) 588, [2008] O.J. No. 5256, 2008 ONCA 867, 70 C.C.E.L. (3d) 205, 244 O.A.C. 61, 169 A.C.W.S. (3d) 22; [page129] Precious Metal Capital Corp. v. Smith (2008), 92 O.R. (3d) 701, [2008] O.J. No. 4368, 2008 ONCA 577, 297 D.L.R. (4th) 746, 169 A.C.W.S. (3d) 779; Rosedale Motors Inc. v. Petro-Canada Inc. (1998), 1998 14721 (ON SC), 42 O.R. (3d) 776, [1998] O.J. No. 5461, 87 O.T.C. 180, 31 C.P.C. (4th) 340, 86 C.P.R. (3d) 1, 84 A.C.W.S. (3d) 835 (Gen. Div.); Seidel v. TELUS Communications Inc., [2011] 1 S.C.R. 531, [2011] S.C.J. No. 15, 2011 SCC 15, 301 B.C.A.C. 1, 412 N.R. 195, 2011EXP-936, J.E. 2011-498, EYB 2011-187826, 329 D.L.R. (4th) 577, [2011] 6 W.W.R. 229, 16 B.C.L.R. (5th) 1, 82 B.L.R. (4th) 1, 1 C.P.C. (7th) 221, 199 A.C.W.S. (3d) 1064; Shaw Satellite G.P. v. Pieckenhagen, [2012] O.J. No. 1270, 2012 ONCA 192, 347 D.L.R. (4th) 452, 212 A.C.W.S. (3d) 625; Woolcock v. Bushert, 2004 35081 (ON CA), [2004] O.J. No. 4498, 246 D.L.R. (4th) 139, 192 O.A.C. 16, 50 B.L.R. (3d) 85, 36 C.C.E.L. (3d) 211, 3 C.P.C. (6th) 25, 134 A.C.W.S. (3d) 756 (C.A.)

Statutes referred to

Arbitration Act, 1991, S.O. 1991, c. 17, s. 7, (5)

Rules and regulations referred to

Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rule 26.02

Authorities referred to

Model Law of International Commercial Arbitration, art. 8

APPLICATION to stay an action.

Andrew Ottaway and David Alderson, for plaintiff.

Avrum D. Slodovnick and Raffaele Sparano, for Gunasekaram and Feng.

James Camp, for Luca Viscardi.

AKHTAR J.: —

Factual Background

Brief overview

Factual Background

1The defendants, Danushan Gunasekeram, Luca Viscardi and Shenlu Feng (the "defendants"), apply, pursuant to s. 7 of the Arbitration Act, 1991, S.O. 1991, c. 17 and art. 8 of the Model Law of International Commercial Arbitration (the "Model Law"), to stay Andreas Haas' action and have it referred to arbitration.

2The litigants in this case went into business together to run an Italian restaurant known as Osteria Dei Ganzi. A shareholders' agreement (the "SHA") was drawn up to formalize their arrangement. It included an arbitration clause providing for mandatory arbitration in cases where the parties fell into dispute (the "arbitration clause"). One of the defendants, Viscardi, however, failed to sign the SHA. His position on this motion is that despite the absence of his signature, he became a party through oral discussions with the others. [page130]

3Haas, an overseas resident, launched the main action against the defendants on January 28, 2014. He alleges that he was induced to enter into the SHA as a result of a series of fraudulent misrepresentations concerning the restaurant's business prospects and the way in which it would be managed. His action seeks to recover what he can of his investment. The defendants argue that Haas' complaints are captured by the arbitration clause and should be dealt with by an arbitrator rather than proceed in the courts.

The arbitration clause

4Paragraph 16 of the SHA contains the clause mandating arbitration in the event of a dispute. It reads as follows:

If at any time during the currency of this Agreement, or after the termination hereof, any dispute, difference or question shall arise, or any failure to agree as specifically herein above referred to, shall occur among the parties hereto or certain of them, respecting this Agreement or anything herein contained then every such dispute, difference or question or failure to agree shall be referred to a single arbitrator to be appointed by the parties to the dispute within 10 days of such referral[.]

The governing statutes

Section 7 of the Arbitration Act

The governing statutes

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:

A party entered into the arbitration agreement while under a legal incapacity.
The arbitration agreement is invalid.
The subject-matter of the dispute is not capable of being the subject of arbitration under Ontario law.
The motion was brought with undue delay.
The matter is a proper one for default or summary judgment.

(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 [page131]

(b) it is reasonable to separate the matters dealt with in the agreement from the other matters.

Article 8 of the Model Law on International Commercial Arbitration

Article 8. Arbitration agreement and substantive claim before court

(1) A court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.

The Legal Principles

5In my view, since the subject matter of this action is situated in Ontario, the Arbitration Act would apply.

6That being said, in practical terms, there is no meaningful difference between the two Acts. The common law principles set out by the courts apply to both the Arbitration Act and the Model Law. Any case involving an arbitration clause where a party opposes the arbitrator's jurisdiction must, at the first stage, be resolved by the arbitrator: Dell Computer Corp. v. Union des consommateurs, [2007] 2 S.C.R. 801, [2007] S.C.J. No. 34, 2007 SCC 34, at para. 84. If the challenge to jurisdiction is a matter of pure law, or one of mixed fact and law which requires only superficial consideration of the documentary evidence in the record, a court may decline to refer the matter to arbitration: Dell, at para. 85; Seidel v. TELUS Communications Inc., [2011] 1 S.C.R. 531, [2011] S.C.J. No. 15, 2011 SCC 15, at para. 29.

The Positions of the Parties

7The defendants seek a stay of the action pending arbitration. They rely upon the arbitration clause found in the SHA and the provisions of the Arbitration Act and the Model Law. They agree there is no real difference in the application of both sets of statutory principles. They submit the action constitutes a dispute concerning the SHA and triggers the arbitration clause contained therein.

8Haas resists the motion on the basis that the dispute does not fall within the arbitration clause in the SHA. In the alternative, he argues that the action falls within the exceptions contained within the Arbitration Act and the Model Law. Finally, he advances the position that even if this court finds the arbitration clause applies, Viscardi was not a party to the SHA and [page132] therefore cannot claim the benefit of arbitration. In that case, severing the proceedings would result in an undesirable multiplicity of proceedings and the court should exercise its discretion under s. 7(5) of the Arbitration Act to dismiss the stay application.

Does the Action Constitute a "Dispute" within the Shareholder Agreement?

9In Dalimpex Ltd. v. Janicki (2003), 2003 34234 (ON CA), 64 O.R. (3d) 737, [2003] O.J. No. 2094 (C.A.), the Court of Appeal for Ontario indicated that the arbitrator, not the courts, must decide whether a particular dispute falls within the arbitration clause. The court should only refuse a reference to arbitration if it is clear that the matter falls outside the arbitration agreement: Dalimpex, at para. 22; Patel v. Kanbay International Inc. (2008), 93 O.R. (3d) 588, [2008] O.J. No. 5256, 2008 ONCA 867, at para. 18.

The amended statement of claim

10Identifying the "dispute" would, in the normal course of events, be a simple matter of referring to Haas' statement of claim. In this case, Haas' original statement of claim was amended after he was notified of the defendants' intention to bring this motion.

11Haas' original statement of claim, filed on February 27, 2015, pleaded allegations of misrepresentation, breach of contract and fiduciary duties related to the SHA. On April 1, 2015, the defendants notified Haas that they would be seeking a stay of the action due to the application of the SHA's arbitration clause. On June 5, 2015, Haas served an amended statement of claim removing the allegations of breach of contract.

12Haas argues that since his amended statement of claim deals only with tortious allegations which deal with the creation of the agreement rather than any breach of the SHA, the arbitration clause does not apply. The defendants, on the other hand, take the position that the amendments to pleadings were an improper attempt to bypass the arbitration clause. They submit that the inquiry into whether the dispute is covered by the arbitration clause should be confined to the original pleadings. Since those pleadings alleged a breach of contract with respect to the SHA and sought damages flowing from that breach, the arbitration clause must apply.

Which statement of claim defines the claim?

13I find that the amendments did not require leave, as per rule 26.02 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 [page133] as the pleadings had not closed at the time the amendments were made.

14The defendants argue that, even if Haas amended the statement of claim in accordance with the Rules, the original proceedings preserve their rights with respect to the arbitration clause. They rely on Cosentino v. Dominaco Developments Inc., [2010] O.J. No. 61, 2010 ONSC 208 (S.C.J.), where MacKenzie J. held, at para. 10, that "the rights of a moving party are determined as they existed as of the date of service of the notice of motion and the moving party's rights cannot be prejudiced by anything done after the notice of service of motion". In coming to this conclusion, MacKenzie J. relied on the decision of Bruce v. John Northway & Son, [1962] O.W.N. 150 (H.C.J.-Master).

15The Cosentino case was one in which the defendant sought to strike the plaintiff's statement of claim before they could amend. I do not agree that the same reasoning ought to apply in this case. As a general rule, it makes very little sense for a party to be referred to arbitration on claims that no longer exist because of an amendment to pleadings. I find support for this view in Matrix Integrated Solutions Ltd. v. Naccarato (2009), 97 O.R. (3d) 693, [2009] O.J. No. 3187, 2009 ONCA 593, where the plaintiff amended its statement of claim to remove allegations of contractual breaches. The amendment took place in response to a stay motion brought by the defendant so that the matter could be heard in Texas in accordance with a "forum selection clause" which stipulated that all disputes arising out of their agreement were the exclusive jurisdiction of courts in Texas. It was accepted by the Court of Appeal for Ontario that the motivation behind the amendment was to avoid this requirement. The court, however, refused the defendant's motion for a stay despite acknowledging the plaintiff's motivations.

16Accordingly, I find the pleadings in the amended statement of claim constitute the proper allegations of dispute in this case. In practical terms, however, this issue may be more of a red herring when it comes to determining whether the allegations fall within the arbitration clause. In my view, the determinative factor is the pith and substance of the allegations.

The pith and substance of the action

17In Woolcock v. Bushert, 2004 35081 (ON CA), [2004] O.J. No. 4498, 246 D.L.R. (4th) 139 (C.A.), the court held, at para. 23, that "[t] he words aerelating to' enjoy a wide compass. So long as the matter in dispute is referable to the interpretation or implementation of some [page134] provision of the Agreement, it is arbitrable . . .". This principle was applied in Matrix, where the court summarized the law in the following way, at para. 16:

In Dalimpex Ltd. v. Janicki (2003), 2003 34234 (ON CA), 64 O.R. (3d) 737("Dalimpex"), at paras. 41-43, this court adopted and applied the test for applying a contractual provision which employs the words "disputes arising out of or in connection with" the parties' contract used by the Alberta Court of Appeal in Kaverit Steel and Crane Ltd. v. Kone Corp. (1992), 1992 ABCA 7, 87 D.L.R. (4th) 129 ("Kaverit Steel"), at p. 135, leave to appeal to S.C.C. refused, [1992] S.C.C.A. No. 117, [1992] 2 S.C.R. vii. According to that test, a dispute is caught by the provision "if either claimant or defendant relies on the existence of a contractual obligation as a necessary element to create the claim, or to defeat it."

18In the Matrix case, the court held that the pith and substance of the plaintiff's claim was one of a breach of fiduciary duty and conspiracy that could not be described as "contractual in substance". The arbitration clause in that case was simply part of the factual background which explained the nature and existence of the relationship that existed between the various parties. The claims did not arise out of or in connection with the arbitration clause.

19What then is the pith and substance of Haas' claims? A review of his amended statement of claim in this case indicates three types of wrongdoing alleged: misrepresentation, breach of fiduciary duty and oppressive behaviour.

20The meat of this case is based on the allegations of representations made by the defendants with the purpose of inducing Haas into joining the business venture. The SHA is pleaded as part of the instrumentality used by the defendants as part of the inducements. The subject matter of these allegations does not, in my view, rely on contractual obligations contained in the SHA. In other words, the claim is not for breach of contract but the fraudulent misrepresentation of facts which caused Haas to enter into the business agreement. Factually, this case bears a strong resemblance to Leggat v. Direct Leverage Ltd., a decision of Spence J., (S.C.J.), unreported, affd [2015] O.J. No. 2035, 2015 ONSC 2639 (Div. Ct.), where the same conclusion was arrived at.

21The breach of fiduciary duty allegations centre on the defendants working for rival companies at the same time that they were supposed to manage the jointly owned Osteria dei Ganzi. Haas also alleges that two of the defendants, Gunasekeram and Viscardi, opened a competing Italian restaurant within one kilometre of Osteria dei Ganzi. Once again, these allegations do not rely upon or refer to the SHA as a basis for their validity and are not contractual in substance: [page135] Precious Metal Capital Corp. v. Smith (2008), 92 O.R. (3d) 701, [2008] O.J. No. 4368, 2008 ONCA 577.

22However, I find the claim that the defendants acted in an oppressive manner does rely upon the contractual clauses in the SHA. Despite Haas' attempts to delete the references to "the requirements of the agreement" in the amended statement of claim, it is clear that Haas is alleging, in paras. 26(h) to (j), that the defendants failed to fulfil their contractual obligations in failing to issue shares, failing to register as directors and paid salaries not authorized by the SHA. These allegations, in my view, fall within the arbitration clause.

Should a partial stay be ordered?

23Under s. 7(5) of the Arbitration Act, a court may order a partial stay if it is reasonable to separate the matters which fall within the arbitration clause. Otherwise, the court should exercise its discretion to refuse the application for a stay: Rosedale Motors Inc. v. Petro-Canada Inc. (1998), 1998 14721 (ON SC), 42 O.R. (3d) 776, [1998] O.J. No. 5461 (Gen. Div.). In the circumstances of this case, separation of the matters is unreasonable.

24The bulk of Haas' claims fall outside the arbitration clause. It makes little sense to order a partial stay referring the minority of the allegations to arbitration but permitting the rest to continue as an action, particularly when each case would be founded on the same factual matrix. There would be a multiplicity of proceedings resulting in duplication, increased costs and delay: Shaw Satellite G.P. v. Pieckenhagen, [2012] O.J. No. 1270, 2012 ONCA 192, 347 D.L.R. (4th) 452, at para. 10. See, also, Griffin v. Dell Canada Inc. (2010), 98 O.R. (3d) 481, [2010] O.J. No. 177, 2010 ONCA 29, at para. 47.

Conclusion and Costs

25The defendants' motion to stay the proceedings is dismissed.

26If the parties cannot agree on costs, I invite Haas to submit a written application for costs no longer than five pages within 30 days of these reasons. The defendants are to file written reasons of the same length within a further 20 days.

Application dismissed.

End of Document