Court File and Parties

COURT FILE NO.: 1823/15 DATE: 2017/07/18

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

Allied Accounting & Tax Services Limited and Allied Associates LLP Plaintiffs – and – Karen Pacey Defendant

Counsel: D. Williams and M. Khami, for the Plaintiffs M. E. Craig, for the Defendant

HEARD: July 12, 2017

Grace J.

A. The Background

[1] Karen Pacey is a certified general accountant. She performed services for Allied Accounting & Tax Services Limited (“Allied”) and Allied Associates LLP (the “partnership”) pursuant to an agreement entitled “Allied Representative’s Contract” dated November 9, 2006 (the “Representative’s Contract”). [1]

[2] Ms. Pacey was also a shareholder of Allied. All of the shareholders of the company entered into a Restated and Amended Shareholders’ Agreement with Allied and the partnership dated December 10, 2011 (the “SA”).

[3] The relationship between the parties was terminated by Ms. Pacey. Her last day was December 4, 2013. Ms. Pacey held 14,627 common shares in Allied which were sold back to the company pursuant to a Share Purchase Agreement dated December 2, 2013.

[4] The relationship subsequently deteriorated. Allied and the partnership allege that Ms. Pacey has used confidential information, solicited their employees and clients and competed contrary to provisions contained in the Representative’s Contract and SA.

[5] This action was commenced on September 2, 2015. Allied and the partnership seek a number of remedies including an accounting, damages and injunctions.

[6] Ms. Pacey raised the arbitration provision the SA contains in the statement of defence she filed in November, 2015. On this motion Ms. Pacey asks for an order staying this proceeding.

[7] She relies principally on s. 7(1) of the Arbitration Act, 1991 (“Act”). That subsection establishes a general rule that applies when contracting parties agree to submit a dispute to arbitration. The provision reads:

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.

B. The Factual Context

[8] Section 7(1) of the Act seems simple enough. If the parties to a court proceeding agreed to have their dispute determined elsewhere, the court must defer. The statute is mandatory: Haas v. Gunasekaram, 2016 ONCA 744, at paras. 10 and 12 (“Haas”).

[9] Counsel for Ms. Pacey maintains this is such a case. She relies on the opening words of Article 6.1 of the SA. They follow:

Any question, dispute or disagreement…arising under or pertaining to this Agreement including the interpretation, application or construction of this Agreement or any part thereof shall be determined by arbitration in accordance with the following terms and provisions…

[10] Most of the subparagraphs of Article 6 that appear thereafter detail the mechanics of the selection of one or more arbitrators.

[11] Allied and the partnership maintain that s. 7(1) is not triggered at all. They rely on provisions concerning confidential information, non-solicitation and non-competition found in Articles 8.1 through 8.4 of the SA. Those clauses contain references to the “court” or to “a court of competent jurisdiction”. Properly construed, they argue, disputes concerning one, some or all of those issues are excluded from the arbitration agreement found within the SA.

[12] Counsel for the plaintiffs also notes that statement of claim refers to and relies upon similar provisions contained in the Representative’s Contract. That agreement does not contain an arbitration clause.

[13] Each party advanced alternative arguments that I will mention to the extent necessary below.

C. General Legal Principles Applicable to Arbitration Agreements

[14] Before proceeding further, some principles of general application concerning arbitration provisions should be mentioned.

[15] First, as stated, the law requires that arbitration clauses be given effect: Act, s. 7(1); Haas, supra, at para. 9.

[16] Second, some statutory exceptions exist. For example, the court may refuse to stay a proceeding if there was undue delay before the motion seeking such relief was brought: Act, s. 7(2)4. As well, if the dispute involves a mix of issues that are and are not the subject of an arbitration agreement, the court has jurisdiction to stay the proceeding in part: Act, s. 7(5).

[17] Third, the “competence-competence principle” must be applied. It reflects the court’s strong preference that an arbitrator be allowed to determine the scope of the arbitrator’s jurisdiction as the Act permits: Act, s. 17(1); Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34, [2007] 2 S.C.R. 801, at para. 84.

[18] Fourth, the “competence-competence principle” does not prevent the court from determining the jurisdiction issue if based solely on a question of law or a mixed question of law and fact that necessitates only a minimal analysis of the documentary record. [2] The court will refuse a stay and allow an action to continue only if it is clear the dispute falls outside the arbitration agreement. [3] If it is arguable that the dispute falls within the terms of the arbitration agreement, the issue of jurisdiction should be left to the arbitrator. [4] Sharpe J.A. explained the court’s limited role in Dancep Productions Inc. v. Key Brand Entertainment, Inc., 2009 ONCA 134, at para. 32:

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.

D. Does this Dispute arguably fall within the scope of the Arbitration Agreement?

[19] I have already recited the introductory paragraph of Article 6.1 of the SA. Broad language is used. According to its terms any dispute pertaining to the contract shall be determined by arbitration.

[20] The statement of claim alleges that Ms. Pacey breached the confidentiality and non-competition provisions found in Article 8 of that contract.

[21] Article 8.1 contains the agreement of the shareholders of Allied not to disclose confidential information of the company “at any time”. Article 8.2 addresses the consequences of a breach in these terms:

Availability of Equitable Relief:

Each Shareholder agrees that the restriction contained in section 8.1 is reasonable and that in the event of any breach by the Shareholder thereof, the Corporation shall be entitled to equitable relief, including an injunction and specific performance, in any competent court having jurisdiction over the Shareholder, in addition to all other remedies available at law or in equity.

[22] The phrase “court of competent jurisdiction” appears in the provisions dealing with non-competition (Article 8.3) and the hiring of employees of Allied and the partnership (Article 8.4), albeit in the context of a consideration of their geographical and temporal reasonableness.

[23] The heading “Governing Law” introduces Article 10.9 of the SA. It provides:

This Agreement shall be governed by and construed in accordance with the laws of the Province of Ontario and the federal laws of Canada applicable therein and each of the parties hereto irrevocably agrees to conform [sic] to the non-exclusive jurisdiction of the Courts of such Province.

[24] Allied and the partnership submit that Article 6.1 of the SA is not exhaustive but instead qualified by the wording to which I have referred. They maintain that when properly interpreted, the SA expressly permits them to initiate and continue proceedings in this court, provided the cause of action arises from and remedies are sought in relation to alleged breaches of Article 8.

[25] Ms. Pacey submits that the reference to “court” in Articles 8.2, 8.3 and 8.4 includes an arbitrator. She notes that arbitral tribunals have the statutory authority to “decide a dispute in accordance with law, including equity, and may order specific performance, injunctions and other equitable remedies”: Act, s. 31. Alternatively, the moving party submits those provisions were drafted carelessly and were never intended to displace the comprehensive language Article 6 contains.

[26] In my view, the position of Allied and the partnership on this point is the correct one. I have reached that conclusion for these reasons.

[27] First, the words “court” and “arbitrator” are separately defined in the Act: s. 1. “Court” was also defined in the former Act. Court and arbitrator mean different things in those statutes. The fact an arbitrator has broad jurisdiction under the Act does not alter the decision-maker’s status or transform a private process into a public one. [5] The words “arbitrator”, and “arbitration” in Article 6 on the one hand and “court” in Article 8, are not and were never intended to be synonymous.

[28] Second, it is not unusual for certain disputes to be excluded from a provision requiring the use of an alternative method of dispute resolution. As lawyer Ben Hanuka noted in a 2016 article:

It is common in some types of arbitration agreements to exclude interlocutory injunction remedies and leave them to the jurisdiction of the court. Sometimes, the exclusion is discretionary at the election of one or both of the parties to the agreement. [6]

[29] The observation makes good sense. A party alleging a breach of a confidentiality or non-competition provision often alleges immediate and irreparable harm. An arbitration agreement may, as it does here, contain a detailed and potentially time consuming process for the selection of an arbitrator that may unduly impede the pursuit of an urgently needed interim or interlocutory remedy.

[30] Third, the language used in the SA is clear and unambiguous. Although executed in 2011, some of its wording is clearly drawn from a different time. For example, Article 6.1(c) outlined the circumstances in which an arbitrator would be appointed by a judge of the “Ontario Court (General Division)”. That court was renamed in 1999.

[31] Article 6.1(e) refers to the Arbitrations Act, R.S.O. 1990, c. A.24 (the “former Act”). That statute was repealed by the Act when it came into force on January 1, 1992.

[32] The historical wording is significant. The SA contemplated amendments to the former Act. However, it did not mention the Act even though it had been in force for almost two decades by the time the SA was executed. Clearly the drafter of the agreement had the provisions of the former Act in mind. That statute did not contain a provision that gave an arbitral tribunal the authority to “order…injunctions and other equitable remedies”: Act, s. 31. Article 8 was necessary to fill the legislative gap. It gave Allied a means of seeking such relief in the event of a breach of the obligations the clauses comprising that Article contain.

[33] In my view, it is apparent from a superficial review of the SA that s. 7(1) of the Act has not been triggered. I turn briefly to an alternative basis for my decision in case that conclusion is incorrect.

E. If the arbitration agreement applies, should the court refuse to stay the proceeding because the motion was brought with undue delay?

[34] As mentioned earlier, the court may allow the proceeding to continue if the moving party unduly delayed bringing the motion for a stay: Act, s. 7(2)4.

[35] Allied and the partnership bear the onus of establishing undue delay. [7] The exercise is fact driven. [8]

[36] I return to this case.

[37] As mentioned, Ms. Pacey’s relationship with Allied and the partnership ended in early December, 2013.

[38] Allied and the partnership alleged breaches of Article 15 of the Representative’s Contract and Article 8 of the SA in a January 31, 2014 letter sent by their solicitors to Ms. Pacey. The penultimate paragraph contained this caution:

If you have any intention of soliciting Allied clients for their tax work in the upcoming tax season, we would recommend that you refrain from doing so. Allied values its client base and will take all action necessary to protect its interest therein.

[39] Ms. Pacey’s lawyer responded at length the following month. Her February 14, 2014 letter explained why “any court would strike down the non-competition clauses contained in the Representative’s Contract and in the Shareholders’ Agreement”. Ms. Pacey’s lawyer also maintained that the Representative’s Contract had been superseded by the entire agreement (Article 10.5) and termination of prior agreements (Article 10.15) provisions included in the SA.

[40] Months passed before there was further contact. Allied’s chief executive officer Wayne Ryan provided an explanation in his March 30, 2017 affidavit:

As Karen Pacey was denying all of our allegations, we had to conduct a forensic investigation of Karen Pacey’s work laptop in order to determine when Karen Pacey had accessed our information and to what extent. That took some time to do as it had to be done by an expert. [9]

[41] Correspondence flowed again during the period from November, 2014 to March, 2015. No progress was made. Litigation followed.

[42] The statement of claim was issued September 2, 2015 and sent to Ms. Pacey’s lawyer about three weeks later. Service was accepted on her behalf on October 1, 2015.

[43] Paragraph 44 of the November 16, 2015 statement of defence addresses the arbitration issue as follows:

The defendant further states that this matter has been improperly commenced at [sic] the Superior Court of Justice, as Article 6 of the Shareholders’ Agreement requires that such matters be brought to and decided upon by way of arbitration. The defendant submits that his honourable [sic] Court therefore does not have jurisdiction over this matter.

[44] The plaintiffs served a reply early the following month. It did not address the quoted portion of the statement of defence but advanced reasons why the positions of Allied and the partnership should prevail.

[45] Silence reigned after the close of pleadings until May, 2016. At that time the plaintiffs suggested mediation. Ms. Pacey declined.

[46] An unsworn affidavit of documents was served on behalf of Allied and the partnership in mid-November, 2016. Ms. Pacey’s lawyer was asked to provide available dates for examinations for discovery. She did not respond. A further inquiry was made by the plaintiffs’ counsel in early December.

[47] The parties’ lawyers spoke on January 5, 2017. A February 14, 2017 letter from Ms. Pacey’s lawyer eventually followed. In part she wrote:

Further to our telephone call on January 5, 2017, my client will be bringing a motion to stay the proceedings – asserting that the court does not have jurisdiction to hear this matter given the arbitration clause contained in the Shareholders’ Agreement.

[48] Motion materials were served about two weeks later.

[49] In those circumstances, was this motion “brought with undue delay”?

[50] Ms. Pacey addressed the passage of time in her March 1, 2017 affidavit. She deposed that silence followed each time she took a step. Ms. Pacey continued:

Each time the plaintiffs delayed responding, I wondered whether they would indeed continue to pursue this matter. With the provision of the Affidavit of Documents, the first step towards litigation that the plaintiffs had taken since the pleadings stage, it appeared to me for the first time that the plaintiffs intended to pursue the litigation process. [10]

[51] I do not, with respect, accept that statement. No comfort could reasonably have been taken from the passage of time. The existence and extent of the dispute were well known before an action was commenced. Several pieces of correspondence had been exchanged over a period of more than a year.

[52] The statement of claim sent an unmistakeable message. Wrongs were alleged. Redress was sought. Ms. Pacey responded with a forty-five paragraph statement of defence. A thirteen paragraph reply soon followed.

[53] The exchange of extensive pleadings was indicative of the nature and depth of the dispute. Allied and the partnership raised the possibility of a mediation. A telling response was delivered on behalf of Ms. Pacey. After the salutation, the May 4, 2016 e-mail read:

Thanks for your call yesterday. I’ve spoken with my client and she is not agreeable to mediation at this time. That’s not to say that at some point later in the process it wouldn’t be a possibility.

[54] The defendant and her counsel knew they were engaged in a “process”. The continuation of the action was a certainty, although its pace was not.

[55] Sachs J. addressed the issue of undue delay in Amec, supra, at para. 29 when she wrote:

There are circumstances where a stay should be refused because of undue delay. Delay on the part of a party in invoking the arbitration clause of an agreement can signal that that party is not really interested in arbitration, but rather in seeking to use the arbitration agreement to gain a tactical advantage of some kind.

[56] The analysis is contextual. After considering all of the surrounding circumstances, I have concluded the delay in this case was undue.

[57] Familiarity with the provisions of the SA is apparent from the February 14, 2014 letter sent on Ms. Pacey’s behalf. As noted, the arbitration clause contained within the SA was specifically raised in the statement of defence dated November 16, 2015. However, no other steps were taken.

[58] The delivery of the plaintiffs’ reply clearly signalled their intention to continue with the action even though that pleading did not expressly address the arbitration clause Ms. Pacey had raised.

[59] If the position of Allied and the partnership seemed unclear, clarification could have been sought and the intention to pursue a motion for a stay, if necessary, communicated.

[60] However, no concession was requested or future course of action outlined, let alone promised. No letter was sent. Until early 2017, the arbitration issue was not raised in an e-mail or telephone conversation. No motion was brought until March, 2017. By then Ms. Pacey had known of this action for more than sixteen months. The dispute had been ongoing for more than three years.

[61] The moving party’s conduct in May, 2016 is significant. While the chance to mediate was declined, no mention was made of an arbitration.

[62] No steps were taken to suggest names of arbitrators who would be acceptable to Ms. Pacey despite the fact an arbitration may be commenced and continued even while a motion to stay the proceeding is before the court: Act, s. 7(3).

[63] Ms. Pacey was content to do nothing. The suggestion that Ms. Pacey only took this proceeding seriously when an unsworn affidavit of documents was served and a request for discovery dates was made is disingenuous given the history of this matter.

[64] The insincerity is further indicated by the fact there was no response to the plaintiffs’ November 16, 2016 inquiry. A reminder was required. By the time the parties’ counsel finally spoke, more than six weeks had passed. Another five weeks went by before Ms. Pacey’s intention to pursue this motion was communicated. This issue was finally pursued soon afterward.

[65] The conclusion that this motion was a tactical one is inescapable. The delay was extreme or to use the wording of s. 7(2)4 of the Act, undue. In those circumstances, I would have declined to stay the action even if I had concluded this dispute was arguably caught by the SA’s arbitration clause.

[66] Given the conclusions I have reached, it is unnecessary for me to consider the importance of the fact this action also includes claims arising from the Representative’s Contract. As noted, that agreement does not contain an arbitration clause. An analysis of s. 7(5) of the Act and the authorities that have interpreted and applied the subsection does not need to be undertaken in the circumstances.

F. Conclusion and Costs

[67] For the reasons given, the motion is dismissed.

[68] I encourage the parties to attempt to reach an agreement on the issue of costs. If they cannot do so written submissions not exceeding five pages in length may be submitted by Allied and the partnership by the close of business on August 4, 2017 and by the same time on August 22, 2017 by Ms. Pacey.

“Justice A.D. Grace” Grace J.

Released: July 18, 2017

Footnotes

[1] That contract describes her as Karen Lund.

[2] Dell Computer Corp. v. Union des consommateurs, supra, at para. 84; Seidel v. Telus Communications Inc., 2011 SCC 15, [2011] 1 S.C.R. 531, at para. 4; Haas, supra, at para. 14.

[3] Ontario First Nations Limited Partnership v. Ontario Lottery and Gaming Corp., 2013 ONSC 4166 (S.C.J.), at para. 22; Ontario Medical Association v. Willis Canada Inc., 2013 ONCA 745, at paras. 32-33.

[4] 1338121 Ontario Inc. v. FDV Inc. (2011), 2011 ONSC 3816, 92 B.L.R. (4th) 1, at para. 30; 1146845 Ontario Inc. v. Pillar to Post Inc. (2014), 2014 ONSC 7400, 65 C.P.C. (7th) 282 (S.C.J.), at para. 68.

[5] I recognize that Ontario Review Board was determined to be “a court of competent jurisdiction” in R. v. Conway, 2010 SCC 22, [2010] 1 S.C.R. 765. See, too, R. v. Mills, [1986] 1 S.C.R. 863. I do not believe those cases are applicable to the issue of contractual interpretation that is before me.

[6] Ben Hanuka, Two roads to obtaining injunctive relief, The Lawyer’s Daily, October 27, 2016 accessed at www.thelawyersdaily.ca/articles/1630/two-roads-to-obtaining-injunctive-relief. See, too, Olymel S.E.C. v. Premium Brands Inc. (2005), 14 C.P.C. (6th) 313 (Alta. Q.B.).

[7] Puigbonet-Crawford v. Crawford, [2006] O.J. No. 4626 (S.C.J.) at para. 13.

[8] McLaughlin v. Healthcare Employees’ Pension Plan, 2010 MBQB 98, at para. 30; Anatex Development Inc. v. Palm Enterprise Ltd., 2004 MBQB 83; Amec E & C Services Ltd. v. Nova Chemicals (Canada) Ltd., [2003] O.J. No. 2663 (S.C.J.), at paras. 29-30 (“Amec”); Sala (In Trust) v. Jack Aaron & Co. (2009), 60 B.L.R. (4th) 157 (Ont. S.C.J.).

[9] This excerpt is drawn from para. 4 of Mr. Ryan’s affidavit.

[10] The excerpt is drawn from para. 25 of Ms. Pacey’s affidavit.