CITATION: Kanda Franchising Inc. and Kanda Franchising Leaseholds Inc. v. 1795517 Ontario Inc., Iftikhar Hossain and Parveen Hussain, 2017 ONSC 7064
COURT FILE NO.: CV-17-131171-00
DATE: 2017-11-28
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
KANDA FRANCHISING INC. and KANDA FRANCHISING LEASEHOLDS INC.
Applicants
– and –
1795517 ONTARIO INC., IFTIKHAR HOSSAIN and PARVEEN HUSSAIN
Respondents
Ben Hanuka, for the Applicants
Idan Erez, for the Respondents
HEARD: August 17, 2017
REASONS FOR JUDGMENT
[1] This is an application for orders requiring the individual respondents to submit to arbitration and appointing an arbitrator. The application is brought under s. 23(1) of the Arbitration Act, 1991, S.O. 1991, c. 17 (the “Arbitration Act”), as amended, for an order that the applicants’ claims against the three respondents and any counterclaims by the respondents against the applicants, arising from a franchise agreement, be submitted to arbitration. The applicants further apply for an order appointing Gary Caplan as arbitrator and for the costs of their application.
[2] The dispute between the parties relates to the breakdown of the relationship between Kanda Franchising Inc. and Kanda Franchising Leaseholds Inc. (collectively, “Kanda” or “the Franchisor”) and its franchisee, 1795517 Ontario Inc (“the Franchisee”). Kanda operates a franchised network of businesses that provide optician services, including eyewear retail and distribution services. Its franchisee, 1795517 Ontario Inc., operated a “Kanda Optical” store in Richmond Hill. The Franchise Agreement, on its face page, indicates the agreement to be “between Kanda Franchising Inc. and 1795517 Ontario Inc.” The Franchise Agreement requires that, subject to some exceptions that do not pertain here, “all disputes, claims, causes of action, or questions regarding the rights and obligations of the Franchisor or the Franchisee incident to or arising from the terms or conditions of this Agreement, Operations Manual, or the conduct of the parties hereto, whether contractual, tort or otherwise in nature, it is mutually agreed that all disputes, claims, causes of action, or questions regarding the rights or obligations of the Franchisor or the Franchisee shall be submitted to binding arbitration in the Province of Ontario…” (“the Arbitration Agreement”).
[3] On April 20, 2017, Kanda delivered a Notice to Arbitrate to the three respondents. The Notice claims damages for breach of the Franchise Agreement and related agreements, and bad faith conduct under s. 3 of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3.
[4] In response to their receipt of the Notice to Arbitrate, counsel for the respondents wrote to counsel for the applicants. The respondents agreed that the numbered company is bound by the Arbitration Agreement, both as to Kanda’s allegations against it, and as to its counterclaims against Kanda. Counsel for the respondents further advised that neither Iftikhar Hossain (“Hossain”) nor Parveen Hussain (“Hussain”) were bound by the Arbitration Agreement, as they were not parties to the Franchise Agreement and do not consent to participating in any arbitration with Kanda. Hossain is the sole shareholder, director and officer of 1795517 Ontario Inc. (“1795517”). Hussain is Hossain’s wife, and she conducted the day-to-day operation of the store.
[5] The questions to be determined on this application are:
Does this court have jurisdiction to order that Hossain and Hussain submit to arbitration?
If this court has jurisdiction to order that Hossain and Hussain submit to arbitration, does the Arbitration Agreement bind them personally, as well as the numbered company?
Apart from the issues of jurisdiction, should an order appointing Gary Kaplan as arbitrator be made?
Does this court have jurisdiction to order that Hossain and Hussain submit to arbitration?
(a) The positions of the parties
[6] The applicants argue that the question whether Hossain and Hussain are parties to the arbitration agreement should be decided at first instance by the arbitrator, and not by this court. The applicants rely on the “competence-competence” principle, which establishes that a challenge to the arbitrator’s jurisdiction must be resolved first by the arbitrator. They argue that the established exceptions to the competence-competence principle relating to questions of law alone, or questions of mixed fact and law that have an obvious answer, do not pertain, and therefore s. 17(1) of the Arbitration Act allows and requires the arbitrator to decide whether Hossain and Hussain are parties to the arbitration agreement.
[7] The respondents argue that on the face of the Franchise Agreement, it is clear that Hossain and Hussain are not parties to the Arbitration Agreement. Hossain signed the Franchise Agreement in his capacity as director of 1795517 Ontario Inc., not in his personal capacity. Hussain points to the fact that her name and signature appear nowhere in any of the five agreements, and that she is thus a complete stranger to the agreements. The fact that there is reference in the Franchise Agreement to any non-contracting parties does not bind them. The respondent urges me to conclude that because an arbitrator’s jurisdiction is acquired from the agreement of the parties to participate in arbitration, the arbitrator’s jurisdiction in this case is limited to arbitration of the dispute between Kanda and 1795517 Ontario Inc.
(b) This court’s jurisdiction to make the order sought
[8] This application has been brought under r. 14.05(3)(d) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, which provides:
Application under Rules
14.05(3) A proceeding may be brought by application where these rules authorize the commencement of a proceeding by application or where the relief claimed is,
(d) the determination of rights that depend on the interpretation of a deed, will, contract or other instrument, or on the interpretation of a statute, order in council, regulation or municipal by-law or resolution;
[9] The Notice of Application seeks an order that Kanda’s dispute with the individual respondents be submitted to arbitration under s. 23(1) of the Arbitration Act as amended, and paragraph 18.9 of the Franchise Agreement.
[10] Section 23(1) of the Arbitration Act provides:
23(1) An arbitration may be commenced in any way recognized by law, including the following:
A party to an arbitration agreement serves on the other parties notice to appoint or to participate in the appointment of an arbitrator under the agreement.
If the arbitration agreement gives a person who is not a party power to appoint an arbitrator, one party serves notice to exercise that power on the person and serves a copy of the notice on the other parties.
A party serves on the other parties a notice demanding arbitration under the agreement.
[11] In this case, the applicants served a Notice to Appoint an Arbitrator under the agreement. This Notice served to commence an arbitration pursuant to s. 23(1) of the Arbitration Act, and it implicitly asserts that Hossain and Hussain are parties to the Arbitration Agreement. But s. 23(1) of the Arbitration Act does not provide any mechanism by which the validity of such an assertion may be determined.
[12] The Arbitration Act provides, in s. 6, that judicial intervention in the arbitral process is to be strictly limited:
No court shall intervene in matters governed by this Act, except for the following purposes, in accordance with this Act:
To assist the conducting of arbitrations.
To ensure that arbitrations are conducted in accordance with arbitration agreements.
To prevent unequal or unfair treatment of parties to arbitration agreements.
To enforce awards.
[13] In Inforica Inc. v. CGI Information Systems and Management Consultants Inc., 2009 ONCA 642, 97 O.R. (3d) 161, Sharpe J.A. explained:
It is clear from the structure and purpose of the Act in general, and from the wording of s. 6 in particular, that judicial intervention in the arbitral process is to be strictly limited to those situations contemplated by the Act. This is in keeping with the modern approach that sees arbitration as an autonomous, self-contained, self-sufficient process pursuant to which the parties agree to have their disputes resolved by an arbitrator, not by the courts. As Inforica states in its factum, "arbitral proceedings are presumptively immune from judicial review and oversight." The Act encourages parties to resort to arbitration, "require[s] them to hold to that course once they have agreed to do so", and "entrenches the primacy of arbitration over judicial proceedings … by directing the court, generally, not to intervene": Ontario Hydro v. Denison Mines Ltd., [1992] O.J. No. 2948 (Gen. Div.), Blair J.
[14] Section 6 of the Arbitration Act does permit a court to intervene in arbitral matters to ensure that arbitrations are conducted in accordance with arbitration agreements. But the competence-competence principle limits such judicial intervention. In Haas v. Gunasekaram, 2016 ONCA 744, 62 B.L.R. (5th) 1, Lauwers, J.A. described the principle:
[14] ... In Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34, [2007] 2 S.C.R. 801, Deschamps J., speaking for the majority of the Supreme Court, articulated a general rule, at para. 84: “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.” This has become known as the “competence-competence principle”. The exception is where a “challenge to the arbitrator’s jurisdiction is based solely on a question of law, or one of mixed fact and law that requires for its disposition ‘only superficial consideration of the documentary evidence in the record’” (Dell Computer, at para. 84). See also Seidel v. Telus Communications Inc., 2011 SCC 15, [2011] 1 S.C.R. 531, at para. 4.
[15] This court most recently discussed the “competence-competence” principle in Ciano Trading & Services C.T. & S.R.L. v. Skylink Aviation Inc., 2015 ONCA 89, stating “where it is unclear if the arbitrator has jurisdiction, it is preferable to leave the issue to the arbitrator pursuant to the competence-competence principle” (at para. 7).
[15] The question then becomes whether the challenge to the arbitrator’s jurisdiction in this case is based solely on a question of law, or one of mixed fact and law that requires for its disposition only superficial consideration of the documentary evidence in the record. The interpretation of a contract is a question of mixed fact and law “as it is an exercise in which the principles of contractual interpretation are applied to the words of the written contract, considered in light of the factual matrix.” See: Sattva Capital Corp. v Creston Moly Corp.,2014 SCC 53, [2014] 2 S.C.R. 633, at para. 50. Unless the challenge to the arbitrator’s jurisdiction requires for its disposition only a superficial consideration of the documentary evidence in the record, the decision whether that jurisdiction extends to Hossain and Hussain must be made by the arbitrator.
[16] I conclude that the challenge to the arbitrator’s jurisdiction in relation to Hossain and Hussain requires for its disposition only a superficial consideration of the documentary evidence in the record. As I have presently explained, the words of the contract are clear.
[17] I am fortified in my conclusion that I have jurisdiction to determine whether Hossain and Hussain are bound by the Arbitration Agreement by the decision of the parties to submit this dispute to the court for resolution. In Ontario v. Ontario First Nations Ltd. Partnership (2004), 2004 CanLII 34913 (ON CA), 73 O.R. (3d) 439, 191 O.A.C. 269, at para. 27, Juriansz J.A. noted that by deciding a question that the parties had jointly placed before him, “the application judge assisted the parties. This was entirely consistent with s. 6(1) of the Act, and with the principle that the parties should be free to fashion a dispute resolution process that best meets their needs”.
2. If this court has jurisdiction to order that Hossain and Hussain submit to arbitration, does the Arbitration Agreement bind them personally, as well as the numbered company?
[18] The Arbitration Agreement is contained in paragraph 18.9 of the Franchise Agreement between Kanda Franchising Inc. and 1795517 Ontario Inc. Paragraph 18.9 provides:
[B]y executing the Franchise Agreement the Franchisee hereby acknowledges and agrees that except for controversies, disputes or claims related to or based on the Marks, the Franchisor’s rights to injunctive relief, or enforcement of any non-competition, non-solicitation, confidentiality, and non-disclosure covenants or other restrictive covenants, all disputes, claims, causes of action, or questions regarding the rights or obligations of the Franchisor or the Franchisee incident to or arising from the terms or conditions of this Agreement, Operations Manual, or the conduct of the parties hereto, whether contractual, tort or otherwise in nature, it is mutually agreed that all disputes, claims, causes of action, or questions regarding the rights or obligations of the Franchisor or the Franchisee shall be submitted to binding arbitration in the Province of Ontario…
[19] The Franchise Agreement was executed by Kanda and by 1795517 Ontario Inc. More particularly, it was signed by Hossain, in his capacity as director of 1795517 Ontario Inc., above the notation “I have authority to bind the corporation”. The Franchisee is 1795517 Ontario Inc. The Preamble to the Franchise Agreement explicitly confirms this to be so. Article 2.3 of the Franchise Agreement defines “Franchisee” as “the party identified on the cover of this Agreement other than the Franchisor”, being 1795517 Ontario Inc.
[20] Paragraph 19.1 of the Franchise Agreement provides:
This Agreement contains the entire agreement of the parties and supersedes any and all prior agreements concerning the subject matter thereof. The Franchisee agrees and understands that the Franchisor shall not be liable or obligated for any oral representations or commitments made prior to the execution hereof and that no modification of this Agreement shall be effective except those in writing and signed by the parties. The Franchisor is not authorized and will not be bound by any representation of any nature other than those expressed in this Agreement.
[21] I conclude that the Franchise Agreement is clear that the parties to both the Franchise Agreement and the included Arbitration Agreement do not include Hossain and Hussain. There is no ambiguity about this. The dispute resolution mechanism chosen by the parties, in a franchise agreement that was drafted by the applicants, includes an arbitration agreement applicable to “all disputes, claims, causes of action, or questions regarding the rights or obligations of the Franchisor or the Franchisee incident to or arising from the terms or conditions of this Agreement, Operations Manual, or the conduct of the parties hereto [being the Franchise Agreement]”. The Franchisee is 1795517 Ontario Inc. Just as non-parties to an arbitration agreement cannot invoke it (see: Rampton v. Eyre, 2007 ONCA 331, at para. 20), those who are not parties to an arbitration agreement cannot be compelled to submit to arbitration (see: Novatrax International Inc. v. Hägele Landtechnik GmbH, 2016 ONCA 771, 132 O.R. (3d) 481, at para. 24).
[22] The classical approach to contract interpretation includes these principles:
(1) where there is no ambiguity in a written contract it must be given its literal meaning;
(2) words must be given their plain, ordinary meaning, at least unless to do so would result in absurdity;
(3) the contract should be construed as a whole, giving effect to everything in it if at all possible;
(4) the contra proferentem rule: that language should be construed against the authorial party to a contract if the non-authorial party had no meaningful opportunity to participate in negotiation of the contract, and where a stipulation is capable of two meanings equally. See: G.H.L. Fridman, The Law of Contract, 6th ed. (Toronto: Carswell, 2011), at pp. 451-459.
[23] The Supreme Court of Canada in Sattva Capital, at para. 47, described the proper approach to contract interpretation as a "practical, common-sense approach not dominated by technical rules of construction." The overriding concern is to determine "the intent of the parties and the scope of their understanding." In order to achieve this, “a decision-maker must read the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract.”
[24] The applicant argues that the Franchise Agreement imposed obligations on Hossain and Hussain, which had the effect of making them parties to the agreement. That argument fails because the Franchise Agreement specifically and explicitly limits the rights and remedies thereunder to the named parties of that agreement, being the Franchisor and Franchisee. The explicit provisions of the Franchise Agreement are clear. There is no reason to look beyond the plain wording.
[25] Further, the fact that the agreement did describe obligations of Hossain and Hussain highlights the fact that the Arbitration Agreement applies, on its express terms, only to the Franchisor and the Franchisee. Had the parties wished to extend the application of the Arbitration Agreement to Hossain and Hussain personally, they could and would have said so in the agreement.
[26] Even if an ambiguity arises in respect of whether the Arbitration Agreement extends to include Hossain and Hussain, the contract must be interpreted contra proferentem. Kanda, as the authorial party, had the opportunity to expand the scope of the Arbitration Agreement to include shareholders, directors, and employees of the franchise and either chose not to do so or was aware that the Franchisee, the non-authorial party, would not have accepted such a term.
3. The appointment of the arbitrator
[27] The Arbitration Act provides in s. 10(1)(a) that the court may appoint the arbitral tribunal, on a party’s application, if the Arbitration Agreement provides no procedure for appointing the arbitral tribunal.
[28] The Arbitration Agreement in this case provides that any arbitration "shall be conducted “before a single arbitrator who is independent of the parties”, and that “[t]he arbitration shall be conducted under the Arbitration Act, 1991, S.O. 1991, c. 17”. The agreement provides no procedure for appointing the arbitral tribunal. Therefore, pursuant to s. 10(1)(a) of the Arbitration Act the court may appoint the arbitrator.
[29] The applicants propose the Mr. Gary Caplan be appointed as the arbitrator. The evidence indicates that Mr. Caplan is a lawyer, certified mediator, and chartered arbitrator. I have reviewed his curriculum vitae, which forms part of the record, and have no doubt that he is a highly qualified arbitrator. He has litigated, mediated and arbitrated “scores” of franchise disputes.
[30] The respondents take the position that “if an arbitration is to be imposed on Iftikhar [Hossain] and Parveen [Hussain], they should be entitled to choose the arbitrator”. They propose the appointment of Mr. Steven Goldman on the basis that he is more experienced than Mr. Caplan in arbitrating franchising disputes, and because his fees would be lower than those charged by Mr. Caplan. I have been provided with a printout of Mr. Goldman’s webpage. I have not been provided with a curriculum vitae for Mr. Goldman. The webpage indicates that Mr. Goldman acts as a mediator and arbitrator in franchise and other commercial disputes, but does not support the conclusion that he is more experienced than Mr. Caplan in arbitrating franchising disputes. The difference in their fees is not sufficiently significant to influence the choice of arbitrator. My conclusion that arbitration will not be imposed on Hossain and Hussain substantially attenuates their expressed concerns about who the arbitrator will be.
[31] I appoint Mr. Gary Caplan to arbitrate the dispute between Kanda and 1795517 Ontario Inc.
- Costs
[32] The parties have agreed that costs of this application, in the amount of $12,000, be awarded to the successful party. In the result, their success is mixed. The issue relating to whether Hossain and Hussain should be compelled to attend the arbitration was significantly more complex than the application to appoint the arbitrator, and this was reflected in the time and effort devoted to it in the written materials and the oral argument. Costs are awarded to the respondents in the amount of $10,000.
J. Speyer, J.
Released: November 28, 2017
CITATION: Kanda Franchising Inc. and Kanda Franchising Leaseholds Inc. v. 1795517 Ontario Inc., Iftikhar Hossain and Parveen Hussain, 2017 ONSC 7064
COURT FILE NO.: CV-17-131171-00
ONTARIO
SUPERIOR COURT OF JUSTICE
KANDA FRANCHISING INC. and
KANDA FRANCHISING LEASEHOLDS INC.
Applicants
– and –
1795517 ONTARIO INC.,
IFTIKHAR HOSSAIN and
PARVEEN HUSSAIN
REASONS FOR JUDGMENT
Justice J. Speyer
Released: November 28, 2017