COURT FILE NO.: C-1231-14

DATE: 2015-10-14

SUPERIOR COURT OF JUSTICE – ONTARIO

RE: MBN Environmental Engineering Inc., Drew Stoltz, Slug19 Inc., Rob Hoag and Sertin Investments Inc. - Plaintiffs

AND:

Jim Anderson, JP3CA Investments Ltd., and CCS Engineering Inc.

• Defendants

BEFORE: Justice James W. Sloan

COUNSEL: Timothy J. McGurrin - Counsel for the Plaintiffs

Simon J. Adler - Counsel for the Defendants

HEARD: September 30, 2015

ENDORSEMENT

[1] The human parties, Drew Stoltz, Rob Hoag and Jim Anderson, founded MBN Environmental Engineering in 2012 to offer environmental engineering services.

[2] All parties, except CCS Engineering Inc., entered into a Unanimous Shareholders Agreement (“USA”) in 2012. The USA includes arbitration clauses.

[3] Sometime in 2014, the parties had a falling out. The plaintiffs allege Anderson secretly incorporated CCS on November 17, 2014, and eight days later quit MBN. The plaintiffs allege these actions breached numerous terms of the USA and Anderson’s employment contract.

[4] The plaintiffs issued a Statement of Claim on December 24, 2014.

[5] In response, the defendants served a Notice of Arbitration and a Statement of Claim (for the purposes of arbitration) dated January 30, 2015.

[6] The defendants now bring this motion seeking to stay the plaintiffs’ action on the basis that all parties are obligated to arbitrate this dispute.*

[7] For the following reasons, I am ordering a stay of the proceedings.

The Defendants’ Position

[8] Pursuant to s. 7(1) of the Arbitration Act, 1991, S.O. 1991, c. 17, the defendants submit, subject to certain exceptions, if a party to an arbitration agreement commences a proceeding in respect of a matter to be submitted to arbitration, the court “shall”, on the motion of another party to the arbitration agreement stay the proceeding.

[9] Pursuant to s. 7(5) of the Arbitration Act, 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 maters if it finds the following:

(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.

[10] The defendants submit separating the action into two actions, one before an arbitrator and the other before a judge, might create inconsistent results. Therefore, the entire matter must be arbitrated.

[11] If however, there is no possibility of inconsistent results, the court could split the action into two different proceedings.

[12] The defendants further submit, even if the plaintiffs argue the arbitrator does not have jurisdiction, the arbitrator, not a judge, must decide whether or not they have jurisdiction.

[13] Additionally, they submit nothing is severable in the current action because it is essentially one package.

[14] In essence, the plaintiffs allege the defendants were competing with MBN before and after Anderson left MBN. The plaintiffs seek an injunction to protect confidential proprietary information and to prevent solicitation and competition. In addition the plaintiffs seek access to the defendants’ computers, and accounting for profits, claims with respect to personal property and damages in the amount of approximately $3 million.

[15] The defendants submit an arbitrator has jurisdiction to issue all the relief the plaintiffs claim, provided the facts before the arbitrator support such claims.

[16] They submit para. 13 of the Statement of Claim explicitly links the plaintiffs’ claims to one or more breaches of the USA. They further submit para. 22 of the claim details the alleged breaches of confidentiality and noncompetition.

[17] With respect to para. 31, which details Anderson’s alleged breach of his fiduciary duties, the defendants submit any underlying causes for these allegations would be the same as they would be for a breach of the USA.

[18] In summary, the defendants submit the Statement of Claim alleges nothing as a factual wrong committed by the defendants not contemplated by the USA.

[19] Section 11.1 of the USA, under the heading Settling Disputes, reads as follows: “Subject to Section 11.3, if any dispute, claim, question or difference arises with respect to this Agreement or its performance, enforcement, breach, termination or validity (a “Dispute”), the Parties to the Dispute will meet to see if they settle the Dispute.”

[20] Section 11.3, under the heading Arbitration Does Not Apply, reads as follows:

Section 11.1 and 11.2 do not apply to Disputes with respect to determining the Fair Market Value of the Purchased Shares, which will be resolved in accordance with section 9.1. Nothing in Article 11 limits or prevents a Party from seeking to enforce the performance of this agreement by injunction or specific performance upon application to a court of competent jurisdiction without proof of actual damage (and without the requirement of posting a bond or other security), or from defending a claim from a Person not a party hereto or counterclaiming against a Party hereto.

[21] The defendants submit, notwithstanding s. 11.3 of the USA, the Arbitration Act gives an arbitrator jurisdiction to issue an injunction and therefore the plaintiffs have a remedy.

[22] The defendants also submit s. 11.3 of the USA is intended to deal with emergency situations where an interim injunction is requested. Section 11.3 allows any party to the agreement to immediately apply to a court without wasting precious time persuading the other party to agree to arbitration.

Defendants’ Case Law

[23] In Dancap Productions Inc. v. Key Brand Entertainment Inc., 2009 ONCA 135, 246 O.A.C. 226, the court stayed the action. The defendants submit the arbitration clause at issue in Dancap used similar language to the arbitration clause in this case.

[24] The court stated, at para. 32: “It is now well-established in Ontario that the court should grant a stay … where it is ‘arguable’ that the dispute falls within the terms of an arbitration agreement.”

[25] The court stated, at para. 33: “As Charron J.A. explained in Dalimpex at para. 22 ‘a deferential approach’ allowing the arbitrator to decide whether the dispute is arbitrable, absent a clear case to the contrary, ’is consistent both with the wording of the legislation and the intention of the parties to [refer] their disputes to arbitration.’”

[26] The defendants also referred to Ontario Medical Association v. Willis Canada Inc., 2013 ONCA 745, 118 O.R. (3d) 241, with respect to the competence-competence principle. In that case the Ontario Medical Association (“OMA”) argued that the competence-competence principle was decided under legislation based on the Model Law, Ontario’s International Commercial Arbitration Act, R.S.O. 1990, c. I.9, and that the principle had no bearing on matters governed by the Arbitration Act, 1991.

[27] At para. 37, the court rejects OMA’s argument:

Third, there is no basis in principle to define the respective roles of the courts and arbitrators differently under the Arbitration Act, 1991. The competence-competence principle has gained wide acceptance as an appropriate model to determine the jurisdiction of arbitrators, and absent legislative language or binding authority pointing in another direction, I would hold that it applies to the Arbitration Act, 1991.

[28] The defendants therefore argue s. 11.3 of the USA does not preclude an arbitrator from granting an injunction. But even if it does, the arbitrator must first determine whether he or she has jurisdiction to order an injunction.

[29] In essence, the defendants submit an arbitrator must resolve the dispute because the plaintiffs allege the defendants breached the USA. They therefore argue the terms of the USA dictate an arbitrator must resolve the dispute, absent an agreement by the parties.

[30] The defendants submit the fact CCS is not a signatory to the USA is irrelevant. They concede it might be a theoretical question if the plaintiffs had asked for the arbitration, but since CCS voluntarily submitted to the arbitration it is a non-issue.

[31] Although CCS technically has not signed the USA, the plaintiffs allege in the Statement of Claim, at para. 8, Anderson is the sole director, officer and directing mind of CCS and, at para. 9, is a principal of JP3CA.

[32] Paragraphs 18-22 of the Statement of Claim reference alleged wrongful acts of Anderson. Paragraphs 23-30 of the Statement of Claim reference wrongful acts of Anderson and the JP3CA.

[33] Paragraphs 31-32 specifically reference allegations against both Anderson and CCS.

[34] The defendants submit that after distilling these allegations, the plaintiffs really argue CCS is a shell, and CCS and Anderson are essentially the same entity.

[35] Paragraph 35 of the Statement of Claim states: “The plaintiffs state that as the directing mind of CCS and JP3CA, any actions or omissions by Anderson are the actions or omissions of CCS and JP3CA. CCS and JP3CA should be held to the same obligations, contractual and fiduciary, as found to exist for Anderson.”

[36] The plaintiffs make further allegations against CCS and JP3CA stating, at para. 38, “The plaintiffs state that CCS and/or JP3CA have unlawfully interfered with MBN’s economic relations, and induced breaches of the fiduciary obligations owed to MBN and are jointly and severally liable for the resulting damage to MBN.”

[37] The defendants submit paras. 31-38, when read together, basically allege the USA should bind CCS. The defendants submit because of these allegations and CCS voluntarily submitting to the arbitrator’s jurisdiction, nothing impedes the plaintiffs from seeking relief against CCS through arbitration and nothing impedes the arbitrator from giving such relief.

[38] In OMA, the OMA argued they were not a party to the arbitration agreement and only Willis Canada Inc. and Aviva Canada Inc. were parties.

[39] Unlike CCS in this case, the OMA never agreed to arbitration, however, based on the competence-competence principle, the judge granted a stay of the court proceedings.

[40] The defendants therefore submit, if CCS is at least arguably subject to the USA and the arbitrator’s jurisdiction, this court must grant the stay and send the dispute to arbitration. The defendants backup this submission with a quote from OMA where the Court of Appeal stated, at para. 46, “… Moreover, while the motions Judge did not finally resolve the issue of the arbitrator’s jurisdiction, he did make a preliminary assessment of the case and decide that it was at least arguable that the matter was arbitrable.”

[41] It is interesting to note s. 7(6) of the Arbitration Act states there is no appeal from the court’s decision with respect to whether or not to grant a stay.

[42] The defendants argue there is no appeal for three reasons. First, the competency-competency principle applies. Second, at this stage, no party has lost any rights. Third, the arbitrator should rule first whether they have jurisdiction before wasting money and time conducting an appeal.

[43] To summarize the defendants’ position, they argue the Statement of Claim fundamentally claims damages for the defendants’ allegedly breaching the USA. Although the plaintiffs bring in some other causes of action, the USA requires arbitration.

[44] The defendants submit the only way the matter should not proceed to arbitration is if this court finds the arbitrator has no jurisdiction to order an injunction and no jurisdiction over CCS. But if the court finds it is arguable the matters are within an arbitrator’s jurisdiction, it must stay the action and send it to arbitration.

The Plaintiffs’ Position

[45] The plaintiffs submit the parties agreed to exclude certain matters from arbitration, including those relating to the subject matter of this action.

[46] They point to s. 7(5) of the Arbitration Act:

(5) The court may stay the proceeding with respect to 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.

[47] The plaintiffs submit that the USA specifically removed certain claims from arbitration. In particular they point to s. 10.5 under the heading of Non-Merger which reads, “Any party who has entered into an employment agreement with the Corporation hereby acknowledges and confirms that the employment agreement to which he is a party and the provisions of ss. 10.4 and 10.5 hereof are separate covenants which shall not merge into this Agreement.”

[48] Section 10 of the USA deals with confidentiality obligations, confidentiality expectations, non-competition, and non-solicitation.

[49] The plaintiffs submit all parties to the USA explicitly agreed arbitration was only appropriate where the dispute, inter alia (see s. 11.3 of the USA):

a) is between the parties to the USA;

b) pertains to the parties in their roles as shareholders;

c) can be remedied without injunctive relief; and

d) does not involve responding to a claim against a party to the USA by a third-party.

[50] The plaintiffs also state that they never agreed to arbitrate anything with CCS.

[51] The plaintiffs rely, in part, on Rosedale Motors Inc. v. Petro Canada Inc. (1998), 1998 14721 (ON SC), 42 O.R. (3d) 776 (Gen. Div.), which, at para. 19, effectively states the court was not prepared to grant a stay where the court found allegations of misrepresentation were not arbitrable. In Rosedale Motors all parties to the action were signatories to the agreement.

[52] Based on Rosedale Motors the plaintiffs argue the matter is not arbitrable because they are claiming damages for torts, such as breach of fiduciary duty and unlawful interference with economic relations, which they argue fall outside the USA’s purview.

[53] The plaintiffs also rely on the Ontario Court of Appeal’s decision in Woolcock v. Bushert, 2004 CanLll 35081 (Ont. C.A.).

[54] The motions Judge in Woolcock refused to stay the plaintiff’s court action in favour of arbitration because “... only some of Woolcock’s claims were arbitrable under the Agreement and that a partial or full stay of Woolcock’s action was inappropriate”: at para. 9.

[55] The Court of Appeal however, overturned the motion Judge’s decision, directed a stay of the court action and referred the matters in dispute to arbitration, based on the Appeal Court’s findings that all of Woolcock’s claims came within the Arbitration Agreement.

[56] The plaintiffs drew the court’s attention to the Supreme Court of Canada’s decision in Union des Consommateurs c. Dell Computer Corp., 2007 SCC 34, [2007] 2 S.C.R. 801, where, at para. 85, the court stated:

If the challenge requires the production and review of factual evidence, the court should normally refer the case to arbitration, as arbitrators have, for this purpose, the same resources and expertise as courts. Where questions of mixed law and fact are concerned, the court hearing the referral application must refer the case to arbitration unless the questions of fact require only superficial consideration of the documentary evidence in the record.

[57] With respect to Dancap, relied on by the defendants, the plaintiffs state, by the time the case was heard in Ontario, a California court had already ordered the parties to arbitration and the parties had already filed arbitration pleadings.

[58] In summary, the plaintiffs submit that a significant portion of the claim falls outside the arbitration clause and one of the parties is simply not a party to the arbitration clause.

The Defendants’ Reply

[59] The defendants attempt to distinguish Rosedale Motors because it was based on allegations of fraudulent misrepresentation that were alleged to have taken place prior to the agreement being signed. There is no allegation in the current case of fraudulent misrepresentation or other torts that took place prior to signing the USA.

[60] The defendants referred the court to Kanitz v. Rogers Cable Inc., 2002 49415 (ON SC), 2002 CarswellOnt 628 (S.C.). This case comments on Rosedale Motors where the plaintiffs advanced a claim for punitive damages. It was argued in Kanitz the plaintiff’s punitive damages claim was within the third exception in s. 7(2) of the Arbitration Act.

[61] In Kanitz, the court stated, at para. 62:

I do not accept that a party can avoid the consequences of an arbitration agreement by simply tacking onto their basic complaint a claim for punitive damages. To hold otherwise would effectively make optional every arbitration agreement since all a party would have to do to avoid arbitration is advance a punitive damages claim. Given the frequency with which such claims are seen in statements of claim in this court, there would be little left to which the arbitration process could apply.

The court went on to quote from Duluce Holdings Inc. v. Air Canada (1992),1992 7654 (ON SC), 12 O.R. (3rd) 131 (Gen. Div.), stating, “It is important to guard against the resort to such a position simply as a tactic to avoid the agreed-upon arbitration procedure, thereby eroding the clear policy of the legislature that parties are to arbitrate what they have agreed to arbitrate.”

[62] The defendants argue this court should deal with the injunctive relief claim the same way the court in Kanitz dealt with the punitive damages claim.

[63] The defendants further submit the plaintiffs cannot rely on s. 10.5 of the USA because there is no employment contract before the court showing a different cause of action than that founded on the alleged breach of the USA.

[64] Because there is no employment contract before the court, the defendants submit the court should infer the USA’s and employment agreement’s obligations are very similar, if not identical.

[65] The defendants further submit if the employment agreement does not merge with the arbitration agreement the arbitrator can still look at both agreements.

[66] Additionally, the defendants submit the USA excluded emergency interim injunctions, not other types of injunctions. This is the case because a judge is always available and it avoids the possibility of a party frustrating an emergency injunction application by not agreeing to the arbitrator.

[67] The defendants also submit Woolcock was decided in 2004, before Dell Computer was decided in 2007 and Dancap was decided in 2009. The defendants again referred to paras. 32-33 of Dancap.

[68] The defendants also referred this court to Dell Computer, which states, at para. 84:

First of all, I would lay down a general rule that in any case involving an arbitration clause, a challenge to the arbitrator’s jurisdiction must be resolved first by the arbitrator. A court should depart from the rule of systematic referral to arbitration only if the challenge to the arbitrator’s jurisdiction is based solely on a question of law. This exception is justified by the courts’ expertise in resolving such questions, by the fact that the court is a forum to which the parties apply first when requesting referral and by the rule that the arbitrator’s decision regarding his or her jurisdiction can be reviewed by a court. It allows a legal argument relating to the arbitrator’s jurisdiction to be resolved once and for all, and also allows the parties to avoid duplication of a strictly legal debate. In addition, the danger that a party will obstruct the process by manipulating procedural rules will be reduced, since the court must not, in ruling on the arbitrator’s jurisdiction, consider the facts leading to the application of the arbitration clause.

[69] Also in Dell Computer the defendants referred this court to para. 86:

Before departing from the general rule of referral, the court must be satisfied that the challenge to the arbitrator’s jurisdiction is not a delaying tactic and that it will not unduly impair the conduct of the arbitration proceeding. This means that even when considering one of the exceptions, the court might decide that to allow the arbitrator to rule first on his or her competence would be best for the arbitration process.

Ruling

[70] Several things are clear in this case as it currently exists.

[71] The court should, as far as possible, avoid dividing one dispute into multiple legal proceedings.

[72] Approximately nine months have passed since the initial Statement of Claim was filed.

[73] No party has ever applied for interim injunctive relief.

[74] If the action had proceeded expeditiously by way of arbitration it may have been concluded already.

[75] If the action had proceeded expeditiously through the court system, it is likely that pleadings and affidavit of documents would have been exchanged, and examinations for discovery either held or at least scheduled. The parties would then have been in a position to set this matter down for trial and their trial would likely have been reached during the trial sittings commencing January 25, 2016.

[76] The two main sections of the USA the parties have made submissions on are ss. 10 and 11.

[77] Section 10 is under the heading Confidentiality and Noncompetition.

[78] Section 10.1, titled Confidentiality Obligation, defines confidential information and essentially states that none of the parties to the USA will disclose confidential information except as the USA permits.

[79] Section 10.2, titled Confidentiality Exceptions, indicates the restrictions in s. 10.1 do not apply where the information is generally available to the public, required to be disclosed by law or permitted in writing to be disclosed by the person who owns such confidential information.

[80] Section 10.3, titled Non-Competition, restricts parties to the USA, while shareholders of MBN and for 18 months afterwards, from competing in any way with MBN.

[81] Section 10.4, titled Non-Solicitation, restricts parties to the USA from soliciting business or enticing away employees from MBN.

[82] Section 10.5, titled Non-Merger, states that each party’s employment agreement and the provisions of ss. 10.4 and 10.5 are separate covenants, “which shall not merge into this Agreement.”

[83] Section 11 is under the heading Arbitration.

[84] Section 11.1 indicates the parties will meet to see if they can settle the dispute. Here the parties met, but did not resolve the dispute.

[85] Section 11.2 states at the start, “Subject to section 11.3, except as is expressly provided in this Agreement” the parties will proceed to arbitration and the section sets out some procedures and time limits.

[86] Section 11.2(g) states, “All Disputes referred to arbitration (including the scope of the agreement to arbitrate, any statute of limitations, set-off claims, conflict of laws, rules, tort claims and interest claims) are governed by the substantive law of Ontario.”

[87] Section 11.3, under the heading Arbitration Does Not Apply, states the following:

Sections 11.1 and 11.2 do not apply to Disputes with respect to determining the Fair Market Value of the Purchased Shares, which will be resolved in accordance with section 9.1. Nothing in this Article 11 limits or prevents a Party from seeking to enforce the performance of this Agreement by injunction or specific performance upon application to a court of competent jurisdiction without proof of actual damage (and without the requirement of posting a bond or other security), or from defending a claim from a Person not a party hereto and counter-claiming against a Party hereto.

[88] There is no employment contract before me. However, given the nature of this case the parties’ employment contracts in all probability contain similar fiduciary and other obligations to those set out in the USA. This position is bolstered by the fact the employment contracts are not part of the application record and if they were dramatically different, the court would have expected them to form part of the record.

[89] The issue of whether CCS is a party to the agreement appears to be a red herring. CCS has submitted itself to the jurisdiction of the arbitrator. In addition, for all practical aspects of this case CCS is essentially the alter ego of Mr. Anderson who incorporated it and is its sole officer, director and directing mind.

[90] The injunction issue is another red herring. As stated before, no party has ever applied for an interim injunction. The prohibition period against noncompetition appears to be 18 months. Mr. Anderson left over nine months ago so more than half of this prohibition period has already passed.

[91] At this stage of the proceedings there do not appear to be any practical reasons to separate the matters in this dispute and to allow the parties to proceed down separate legal paths. To do so may very well create inconsistent results.

[92] It is at least arguable that this dispute falls within the terms of the USA. Therefore, an arbitrator must decide if he or she has jurisdiction to deal with the dispute.

[93] Because I have ruled the dispute arguably falls within the USA’s terms, I do not have discretion to continue the matter before me. As a result, I do not need to deal with the plaintiffs’ argument that a judge, under s. 7(5) of the Arbitration Act, may have discretion to forgo a stay and continue the proceedings as one if the arbitration agreement covers some, but not all, matters in the dispute.

[94] I therefore order a stay of this action and direct that the matters in dispute be determined by arbitration in accordance with the USA, including the arbitrator ruling on his or her jurisdiction to deal with the dispute.

[95] If the parties are unable to agree on costs, Mr. Adler shall forward his brief submissions of no more than 5 pages (exclusive of time dockets and case law) on costs to me by October 21, 2015. Mr. McGurrin shall forward his likewise brief response to me by October 27, 2015. Mr Adler shall then forward his reply, if any, to me by October 30, 2015. Cost submissions may be sent to my attention by email, care of Kitchener.Superior.Court@ontario.ca

Date: October 14, 2015 Justice James W. Sloan