Court File and Parties

Court File No.: CV-18-00598028-00CL and CV-18-597907-00CL Date: 2018-06-29 Superior Court of Justice – Ontario

Re: ICP, Applicants And: JCP, Respondents And Re: JCP, Applicants And: ICP, Respondents

Before: Wilton-Siegel J.

Counsel: Chris G. Paliare and Andrew Lokan, for the Applicants Earl A. Cherniak and Jason Squire, for the Respondents

Heard: June 19, 2018

Endorsement

[1] On these applications, each of the applicants seek the appointment of an arbitrator pursuant to the Court’s authority under s. 10(1) of the Arbitrations Act, 1991, S.O. 1991, c.17 (the “Act”).

Factual Background

[2] Each of the parties has served a notice to arbitrate with respect to matters arising in respect of a notice dated September 18, 2017 of the ICP to sell all of their investment in QCo (the “ICP Offer”) and the JCP’s purported acceptance of the ICP Offer on March 17, 2018 (the “JCP Acceptance”).

[3] The ICP seek the appointment of the Hon. Lee Ferrier Q.C. as sole arbitrator to determine the dispute described in their notice to arbitrate dated April 19, 2018 (the “ICP Notice”).

[4] The JCP seek the appointment of the Hon. Douglas Cunningham Q.C. to an arbitration panel of three arbitrators, to which Mr. Ferrier would be the ICP nominee. Under the JCP proposal, these two appointees would choose a chair and the panel would determine the dispute described in the JCP notice of April 25, 2018 (the “JCP Notice”). The JCP also propose that, if the panel concluded that section 7.3 of the QCo Shareholders Agreement (the “QSA”) requires the issues with respect to the QSA to be arbitrated before a single arbitrator, the chair of the panel would be appointed for such purpose.

[5] In this Endorsement, the ICP Notice and the JCP Notice are collectively referred to as the “Notices”.

The ICP Notice

[6] The ICP Notice was delivered pursuant to section 7.3 of the QSA. The ICP Notice identified the following issues for arbitration:

(1) Whether the alleged short comings of the JCP Acceptance or the promissory note delivered in connection therewith (the “Note”) constituted a rejection by the JCP of the ICP Offer giving rise to an option in favour of the ICP pursuant to section 2.3 of the QSA;

(2) In the event the answer to #1 is in the affirmative, is the ICP option to purchase all of the JCP investment in QCo?

(3) In any event, what are the appropriate and commercially reasonable terms of the Note required to make such effective as payment pursuant to sections 2.2 and 2.3 of the QSA?

(4) Should the time period in section 2.3 of the QSA be tolled from the date of the JCP Acceptance until the date of the final determination of the arbitration? and

(5) Should the running of a second ICP offer dated November 2017 to sell all of their shares in QCo be tolled from the date of the JCP Acceptance until the date of the final determination of the arbitration?

The JCP Notice

[7] The JCP Notice was served pursuant to both section 7.3 of the QSA and section 8 of the agreement among the shareholders of PCo (the “PSA”). The JCP Notice sought the following relief in the arbitration:

(1) A declaration that the JCP Acceptance was a valid and binding acceptance pursuant to section 2.2 of the QSA;

(2) A declaration that the Note meets all the requirements of section 2.2 of the QSA;

(3) A declaration that the sale of ICP’s investment in QCo closed on March 17, 2018, being the date of the JCP Acceptance;

(4) In the alternative, a declaration that the ICP Offer was not made in accordance with the provisions of section 2.1 of the QSA because it did not properly reflect the NAV of QCo’s common shares and, accordingly, the ICP have no rights under section 2.3 of the QSA even if the JCP Acceptance is not a valid acceptance;

(5) A declaration that the ICP infringed their confidentiality obligations under section 4(c) of the PSA and under the QSA in their communications with the Hospitals of Ontario Pension Plan (“HOOP”) in seeking to sell their investment in QCo to HOOP; and

(6) An order restraining the ICP from making any further disclosures to third parties contrary to section 4(c) of the PSA.

[8] In addition, in its reply factum on this application, the JCP amended the JCP Notice to include a further request for a declaration that IC, and MCo acting as the agent for or alter ego of IC, (collectively, the IC Respondents”) have breached their obligations under sections 1(b), 3(b) and 5(a) of the PSA by refusing to meet, mediate without preconditions, or otherwise engage constructively in resolving the disputes over the JCP Acceptance and the Note in a manner that preserves the existing ownership structure and management of QCo, PCo and the corporate group that PCo controls. IC is the only ICP member that is bound by the PSA, although IC is not a shareholder of PCo.

[9] The JCP assert that, under sections 1(a) and 3(b) of the PSA, the ICP Respondents were under an obligation to endeavour to ensure the stability of ownership and orderly management succession at the senior levels of the corporate group controlled by PCo. The JCP argue that, therefore, the IC Respondents owed quasi-partnership obligations to the JCP under section 5(a) of the PSA which states that PCo, while organized as a corporation, will be operated, to the extent practical, as a business partnership. The JCP assert that, in proceeding to assert the claim in the ICP Notice, the IC Respondents breached the provisions of the PSA set out above, as well as sections 6.4(c), 7.1 and 7.2 of the QSA. The foregoing claims, to the extent that they seek relief contemplated by the PSA, are herein collectively referred to as the “JCP partnership claims”.

[10] It is significant for the present proceedings that the JCP does not seek a consolidation order respecting the two arbitrations. The ICP submit that consolidation cannot occur without the consent of the parties. They effectively envisage a hearing of the issues raised in both Notices, other than such confidentiality issues and the JCP partnership claims, before a sole arbitrator appointed under section 7.3 of the QSA.

Preliminary Observations

[11] The following considerations inform the conclusions below.

[12] First, there are broadly three common issues between the issues raised in the Notices:

1. Whether the “Purchasing Shareholders” for the purposes of sections 2.1 to 2.3 of the QSA must include all of the parties to the QSA other than the “Selling Shareholders”?;
2. What are the terms of any note, delivered in payment of the investment of a QSA shareholder pursuant to sections 2.1 to 2.3, that are required to satisfy the provisions of section 2.2 thereof?; and
3. Whether the ICP’s calculation of the NAV of the QSA shares complied with the provisions of section 2.1 of the QSA?

Any determination of the issues in this proceeding must provide, or allow for, a procedure that would avoid the possibility of conflicting determinations of these issues.

[13] Second, the court must have regard to the competence – competence principle as codified in s. 17 of the Act and as articulated by the Court of Appeal in Haas v. Gunasekaram, 2016 ONCA 744 at paras. 14-15 and further described in TSCC No. 2130 v. York Bremner Developments Ltd., 2014 ONSC 96 at paras. 16-21.

[14] In this regard, the ICP raise a number of issues regarding the JCP claims respecting the alleged breach of confidentiality obligations by the IC Respondents. These comprise the following:

1. That there is no evidence of any breach of confidentiality obligations under either the PSA or the QSA;
2. That there is no evidence of any damage suffered as a result of the alleged breach;
3. That the purpose of the arbitration is an inquiry rather than arbitration of a dispute;
4. That the arbitration may be premature if the ICP parties succeed in the arbitration contemplated by the ICP Notice;
5. That neither of the two issues identified by the JCP as requiring an arbitral panel to consider both the PSA and the QSA – ownership stability and the ICP’s alleged breach of confidentiality obligations – require an arbitral jurisdiction derived from the PSA: and
6. That the arbitration panel would not have jurisdiction over MCo pursuant to section 8 of the PSA as MCo is not a party to the PSA.

[15] In my view, it is premature for the Court to decide any of these issues raised by the ICP nor is it appropriate to take the ICP’s position on these issues into consideration in determining the arbitration panel to address them. The Court should give effect to the competence – competence principle in respect of these issues to the extent an arbitration panel is appointed to arbitrate the JCP’s claims under the PSA. Accordingly, such arbitration panel, rather than the Court, should address its own jurisdiction to arbitrate these issues raised in the JCP Notice.

[16] Third, each of the parties argues that their proposal is the most practical solution in the present circumstances. The Court should, however, as much as possible, seek solely to give effect to the agreements previously reached between the parties and avoid giving one party a strategic advantage over another under the guise of accepting one party’s view of the more “practical solution” over that of the other party. In this regard, the following considerations are relevant.

[17] First, a principal concern of the ICP is that the JCP seeks a process that will delay a determination by the arbitration panel thereby subjecting it to the risk of a market decline in the event it is successful in its claim that it has the right to buy out the entire position of the JCP in QCo. In broad terms, the ICP suggest that a panel of three arbitrators will take longer to deliberate than a panel of one. They also suggest that the evidentiary requirements to determine the JCP allegations of breach of confidentiality obligations and of the JCP partnership obligations will further delay a determination of the issues raised in the JCP Notice. This is a legitimate concern, although I am not certain that I accept the underlying market risk as conceived by the ICP. The ICP concern for timing must, however, be balanced against the right of the JCP to raise all issues relevant to its position on the operation of sections 2.1 to 2.3 of the QSA.

[18] Second, the ICP say that arbitration of the issues raised in the JCP Notice will be more expensive that an arbitration before a single arbitrator limited to the issues raised under both Notices pertaining to sections 2.1 to 2.3 of the QSA. Given the amount at issue in these proceedings, this is not a material consideration and it is therefore disregarded.

[19] Third, the ICP assert that their process would be more efficient than the process proposed by the JCP. This appears to be based on: (1) the assumption that an appointment of a single arbitrator is more efficient than a panel of three; and (2) more particularly, on the nomination of Mr. Ferrier as the sole arbitrator given his involvement in the most recent arbitration in which the issues regarding the JCP Acceptance were raised but not decided for jurisdictional reasons.

[20] I think the first proposition is questionable, apart from the timing considerations already mentioned. In practice, the efficiency of an arbitration panel depends on the approach of the parties and the direction of the arbitrator, rather than the bare number of arbitrators. I acknowledge, however, that the claim of breach of the confidentiality obligations described above and the JCP partnership claims may entail a more extensive evidentiary base and therefore add some time to the arbitration process. With respect to the second proposition, while there may be some modest benefit flowing from Mr. Ferrier’s previous involvement, I do not see this as a material consideration. The issues under the QSA are not so complicated that a new panel could not apprise itself or themselves of the issues and evidence with the assistance of the parties in a timely manner.

Analysis and Conclusions

[21] I propose to address the relief sought in these applications by addressing the following three questions in order:

1. What is the proper subject of the arbitration(s) raised by the Notices?
2. What is the appropriate size of the arbitration panel?
3. Who should be the member(s) of the arbitration panel?

The Arbitrations Raised by the Notices

[22] The two Notices before the Court reflect different conceptions of the issues between the parties. The ICP suggest that the issues between the parties are all addressed in the ICP Notice and that the additional issues raised in the JCP Notice are included simply in an effort to support the JCP claim for a panel of three arbitrators. There may be some truth to this view, although the JCP are entitled to raise the quasi-partnership obligations as a potential consideration in the interpretation of sections 2.1 to 2.3 of the QSA, as discussed below.

[23] For its part, the JCP suggest that the JCP Notice is broader than the ICP Notice and subsumes the issues raised in the ICP Notice. However, the situation is more complex and must be analyzed otherwise.

[24] The ICP Notice raises issues that are limited to the operation of sections 2.1 to 2.3 of the QSA including without limitation the validity of the JCP Acceptance. It pertains solely to matters under the QSA. The JCP Notice principally pertains to such matters as well, although it goes beyond a defence to the ICP claims as the ICP suggests. It also purports to engage two matters that are based on claims of breach of provisions of the PSA for which relief is sought in an arbitration established under section 8 of the PSA – the issues pertaining to confidentiality and the assertion that specific provisions under the PSA impose partner-like obligations on the IC Respondents. Moreover, the JCP partnership claims are asserted both with a view to obtaining relief under the provisions of the PSA and as obligations of the IC Respondents that the JCP say should inform the interpretation of sections 2.1 to 2.3 of the QSA.

[25] In my view, the issues raised in the JCP Notice should therefore be addressed in separate arbitrations under the QSA and the PSA as follows: (1) an arbitration under the QSA with respect to the rights and obligations of the JCP and the ICP thereunder in respect of the JCP Acceptance; and (2) an arbitration under the PSA with respect to the rights and obligations of the JCP and the IC Respondents under the PSA in respect of the confidentiality issues, insofar as they are arbitral, and the JCP partnership claims to the extent that relief is sought under the PSA based on the provisions of that agreement. In short, the proper approach requires separate arbitrations of the disputes arising under the QSA asserted by both parties and of any remaining disputes arising under the PSA asserted by the JCP.

[26] On this basis, the appropriate disposition of the issues before the Court in these applications is to appoint an arbitrator to arbitrate the issues between the parties under the QSA pertaining to the ICP Offer and the JCP Acceptance separately from the remaining issues asserted by the JCP for which relief is sought under the PSA. To be clear, it is the Court’s expectation that, on this basis, all issues pertaining to the JCP Acceptance and the ICP Offer would be addressed in the arbitration under the QSA and that, to the extent necessary, the Notices would be amended accordingly. It is also the Court’s expectation that the issues to be addressed in that arbitration would include the JCP assertion of the relevance of the alleged quasi-partnership obligations of the IC Respondents for the interpretation of sections 2.1 to 2.3 of the QSA. The arbitration would not, however, extend to consideration of the JCP partnership claims to the extent that the JCP seek relief under the provisions of the PSA based on a breach of the any provisions of that agreement. In this regard, I agree with the ICP that the Court cannot mandate a process that effectively consolidates disputes under the PSA with disputes under the QSA without the consent of the parties.

The Size of the Arbitration Panel

[27] The parties take different positions on the size of the panel contemplated by section 7.3 of the QSA. The ICP say that s. 9 of the Act applies to mandate a single arbitrator. The JCP say that the language of section 7.3, as well as past practice, indicate an intention of the parties that any dispute under the QSA would be arbitrated before a panel of three arbitrators.

[28] In section 7.3 of the QSA, the parties agreed:

“… to resolve material disagreements through binding arbitration exercised through the appointment of a mutually respected business colleague, failing which a panel of arbitrators will be appointed and function in accordance with the rules of arbitration prescribed by the Province of Ontario.”

[29] Section 9 of the Act provides that an arbitration panel shall be composed of one arbitrator “[i]f the arbitration agreement does not specify the number of arbitrators who are to form the arbitral tribunal.”

[30] In earlier proceedings that led to the appointment of Mr. Ferrier as the arbitrator of a dispute between the parties regarding the validity of the ICP Offer, Dunphy J. determined that the language of section 7.3 of the QSA required the appointment of a single arbitrator. He reasoned that section 9 of the Act applied. Pursuant to s. 10(2) of the Act, the decision of Dunphy J. was not appealable.

[31] On this hearing, the ICP assert that this matter is res judicata as between the parties as a matter of issue estoppel. The JCP submit that the matter was not fully argued before Dunphy J. They say, in particular, that both the ICP and the JCP had accepted the appointment of panels of three arbitrators in all previous arbitrations between the parties under section 7.3 of the QSA.

[32] The leading Canadian decision on issue estoppel remains Angle v Minister of National Revenue, [1975] 2 SCR 248 (1974); 47 D.L.R. (3d) 544 (S.C.C.), in which at p. 554 Dickson J. confirmed the requirements for issue estoppel as follows:

… (1) that the same question has been decided; (2) that the judicial decision which is said to create the estoppel was final; and, (3) that the parties to the judicial decision or their privies were the same persons as the parties to the proceedings in which the estoppel is raised their privies….

[33] It is an important requirement of the operation of issue estoppel that a decision which is said to create the estoppel have been a final decision. In this regard, there is case law that suggests that a decision that is not appealable cannot be considered to be final and therefore cannot create issue estoppel: see Donald J. Lange, The Doctrine of Res Judicata in Canada, (Markham: LexisNexis, 2015) at pp. 106 et seq. As suggested by a commentator referred to in that text at page 107, the inability to appeal makes the application of res judicata unjust if not illogical.

[34] While the circumstances in which this principle has been applied differ from the present, I think that it is nevertheless applicable in this case. Moreover, it is arguable that the concern for finality that grounds issue estoppel is less relevant in respect of this issue than in the usual circumstances insofar as the flexibility to establish a panel that is appropriately responsive to the nature of the issue to be arbitrated may be more in keeping with the intentions of the parties.

[35] In any event, in the absence of any right to appeal the ruling of Dunphy J., I am of the opinion that the issue of the size of the panel contemplated by section 7.3 of the QSA is not res judicata. The Court therefore has the authority to revisit the issue de novo in the context of the arbitration described above.

[36] While I accept that the language of section 7.3 of the QSA is potentially subject to conflicting interpretations, I think that, on a balance of probabilities, it must refer to a panel of three arbitrators for two reasons – the reference to “arbitrators” in section 7.3 and the post-contractual conduct of the parties – which I will address in turn.

[37] First, section 7.3 expressly refers to “arbitrators” in the plural. The wording rules out a panel comprised of a sole arbitrator. Given that any panel other than an odd number would be unusual at best, if not unworkable, and also given that a panel of greater than three would be highly unusual, I think it is clear that the parties must therefore have intended a panel of three. If any other panel size had been contemplated, given the unusual nature of such a panel, they would have made such a choice express in the language of section 7.3.

[38] In addition, section 7.3 expressly refers to arbitration before a single arbitrator who is a “mutually respected business colleague”, failing which a “panel of arbitrators” will be appointed. This strongly indicates an intention that, if it is not possible to agree upon a single arbitrator, the deadlock would be resolved by the establishment of a panel to which each would be entitled to appoint a nominee of their choosing and the remaining panel member would be appointed in accordance with the Act.

[39] Second, as mentioned, the historical practice of the parties has been to conduct arbitrations between them under the QSA before a panel of three arbitrators, other than the most recent panel appointed by Dunphy J. In my view, this is post-contractual conduct that reflects the intentions of the parties that arbitrators under section 7.3 shall proceed before panels of three arbitrators comprised of a nominee of each of the parties and a third arbitrator agreed upon by the two nominees or appointed under the Act. This view is reinforced by the absence of any legal objection to a panel so constituted in the case of the earlier arbitrations prior to the hearing before Dunphy J.

[40] Given the foregoing, I also conclude that section 9 of the Act is not applicable in the present circumstances. Section 9 provides that an arbitration panel shall be composed of one arbitrator “[i]f the arbitration agreement does not specify the number of arbitrators who are to form the arbitral tribunal.” In this case, section 7.3 refers to arbitration before a “panel of arbitrators”, that is, before “arbitrators” in the plural. By using the plural term, the parties clearly indicated that the number of arbitrators was to be more than one. On its own, this is arguably sufficient to exclude the operation of section 9. On this basis, section 9 does not apply because the logical alternative to a sole arbitrator, being a panel of three, is effectively specified in section 7.3. In any event, for the reasons set out above, I am of the opinion that section 7.3 of the QSA does specify that the panel of arbitrators shall be comprised of three persons with the result that section 9 of the Act does not apply.

[41] Accordingly, I conclude that the arbitration contemplated by the Notices should be conducted before a panel of three arbitrators.

The Members of the Arbitration Panel

[42] The remaining issue is the composition of the arbitration panel. As mentioned, the ICP has nominated Mr. Ferrier. The JCP does not oppose his nomination as a member of a panel of three arbitrators. His nomination is therefore confirmed.

[43] The JCP has nominated Mr. Cunningham. This nomination is opposed by the ICP. Mr. Cunningham is a highly experienced and respected arbitrator with a considerable background in commercial arbitrations. I am reluctant not to appoint him to the arbitration panel. I have no doubt that Mr. Cunningham would approach the arbitration with impartiality.

[44] Nevertheless, there are special circumstances in this case. The issue for the Court is whether there is a basis for a finding of a reasonable apprehension of bias in the sense that an informed person, viewing the matter realistically and practically – having thought the matter through – would conclude that a person in Mr. Cunningham’s position might be perceived as not being able to approach this arbitration with a totally fresh and open mind: see R v. Nolin, [1982] M.J. No. 29 at para. 2.

[45] Mr. Cunningham was a member of an earlier arbitration panel that addressed other matters between these parties. While those matters are not related to the specific issues to be arbitrated in the present proceedings, that arbitration panel made findings of credibility that were unfavourable to IC. In these circumstances, there is a reasonable apprehension of bias arising in two contexts: (1) in making any necessary credibility findings in these arbitrations; and (2) in the actual decision, insofar as the earlier credibility findings may unconsciously influence the decision.

[46] Accordingly, I do not think that it is appropriate in the present circumstances to appoint Mr. Cunningham to the arbitration panel.

[47] The JCP submit that, in the circumstances in which the Court does not appoint Mr. Cunningham as the JCP nominee, it should appoint Mr. Charles Scott as its nominee. The ICP also oppose the appointment of Mr. Scott. The ICP do not, however, propose anyone else. I note that I have advised the parties of my association with Mr. Scott and no objection was raised regarding my consideration of him as an appointee to the arbitration panel.

[48] In my view, it is appropriate to nominate Mr. Scott as the JCP nominee for the following reasons. First, I do not think that there can be a reasonable apprehension of bias based solely on his involvement at a previous law firm between 1972 and 1998 on behalf of a predecessor of the corporate group controlled by QCo and PCo as such predecessor existed at that time. There is no suggestion that, in such capacity, Mr. Scott acted for any of the members of the JCP or the ICP personally. The interests of the parties are separate and distinct from the interests of the corporate group which they collectively control. There is also no suggestion that there is any issue of confidential information pertaining to either of the parties that would have been obtained in any earlier retainer on behalf of that corporate group which, in any event, was, at the latest, twenty years ago. Second, the ICP say that Mr. Scott’s previous firm declined the retainer for the JCP in these applications because of Mr. Scott’s association, although he was not being retained personally. Apart from the fact that there is a suggestion that it took this action because of some relationship with IC rather than JC in which Mr Scott was not involved, which may negative any reasonable apprehension of bias on its own if correct, the reason for this decision is not in evidence. In the absence of a more complete understanding of the circumstances giving rise to that decision, I cannot conclude that this action demonstrates a reasonable apprehension of bias.

[49] Accordingly, I conclude that Mr. Scott should be appointed as the JCP nominee to the arbitration panel.

Conclusion

[50] Based on the foregoing, I therefore appoint Mr. Ferrier and Mr. Scott to the arbitration panel and direct that, in accordance with past practice, these two individuals are to select a third arbitrator who will act as the chair of the panel. The foregoing determination does not address the appointment of a separate arbitration panel to address the remaining issues raised by the JCP Notice that pertain to compliance with the PSA and that would be arbitrated pursuant to section 8 of the PSA. It is not clear to the Court whether the JCP seeks the appointment of such a separate panel in the circumstances of the Court’s decision in this Endorsement. If it does so, the JCP should advise the ICP and the Court in order that the Court can address a procedure for resolution of this matter. As neither party is substantially successful in these proceedings given the relief sought by each, each party shall bear its own costs of these applications in accordance with the agreement between them.

Wilton-Siegel J. Date: June 29, 2018