COURT FILE NO.: CV-21-655887

MOTION HEARD: 20210720

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: 743584 Ontario Inc., Applicant

AND:

LAC Otelnuk Mining Ltd. and BDO Canada LLP, Respondents

BEFORE: Master Jolley

COUNSEL: Junior Sirivar and Jacqueline Cole, Counsel for the Moving Party Respondents

David Winer, Counsel for the Responding Party Applicant

HEARD: 20 July 2021

REASONS FOR DECISION

Overview

[1] The respondents bring this motion for an order staying this application pursuant to s. 7(1) of the Arbitration Act, 1991, S.O. 1991, c. 17 (the “Arbitration Act”) in favour of arbitration. In the alternative, they seek an order requiring the applicant to post security for costs in the amount of $250,000.

[2] The applicant takes the position that the application should not be stayed. It argues that the court and not an arbitrator should determine the arbitrator’s jurisdiction as it is either a question of law or a question of mixed fact and law that can be determined on a superficial consideration of the documentary evidence in the record.

[3] It argues that this court should determine the following issues that are issues of law or mixed fact and law: (a) whether a limitation period has expired, (b) whether there is a condition precedent to arbitration and, if so, whether it has been met, (c) the interpretation of the agreement between the parties, applying the contra proferentem doctrine and (d) the impact of the British Columbia Business Corporations Act under which LOM’s liquidation is taking place. (It has withdrawn two issues, one concerning the solvency of LOM and the other raising a purpose trust.)

Background

[4] The applicant (“584”) and the respondent LAC Otelnuk Mining Ltd. (“LOM”) are parties to a royalty agreement (the “Royalty Agreement”) concerning mining claims at the Lac Otelnuk project, an iron ore deposit mine in Québec (the “Project”). 584 entered into the Royalty Agreement with Adriana Resources Inc. on 19 August 2011. LOM became party to the Royalty Agreement on 12 January 2012 when Adriana, through a joint venture, assigned its interest in the Royalty Agreement to LOM. LOM holds the beneficial and registered interest in the Project, subject to the grant of a royalty to 584 and certain other advance royalty payment rights.

[5] LOM paid 584 the advance royalty payments up to 30 November 2018 and thereafter ceased payment and began to unwind its business. The Royalty Agreement provided that if LOM did not make an advance royalty payment by the due date, 584 could terminate the Royalty Agreement and was entitled to the assignment and transfer back of the Project. 584 did not serve notice of termination.

[6] It is LOM’s position that the Royalty Agreement permitted it to elect to abandon the claims upon notice to 584 of its intention to do so. It served such a notice in March 2020 and thereafter a notice of intent to liquidate, with BDO appointed liquidator. In August 2020, BDO delivered LOM’s notice of intention to abandon the mining claims and its notice of liquidation in September 2020.

[7] It is 584’s position that LOM has no right to terminate the Royalty Agreement. Only 584 may terminate the agreement on LOM’s default and it has not done so. As the Royalty Agreement has not been terminated, LOM continues to be obligated to make advance royalty payment to 584.

[8] 584 advised of its intention to pursue LOM for the outstanding advance royalties and took the position in its email to BDO of 26 September 2020 that the matter should be arbitrated if LOM did not recognize its claim. On 29 September 2020, 584 delivered a dispute notice pursuant to the arbitration agreement contained in the Royalty Agreement and indicated that it would file its notice of arbitration in the morning.

[9] After LOM advised that it would not continue the annual royalty payments, the parties discussed the transfer of the claims back to 584, which 584 ultimately accepted on 5 October 2020. LOM filed the transfer documents with the applicable ministry on 6 October 2020. The next day, 584 advised that it wished to cancel the transfer, taking the position that it would accept only those claims with excess expenditure credits. LOM acceded to that request and sent an amended transfer but 584 did not accept it. Instead, on 1 December 2020, 584 delivered a notice of default for failure to remit the 2020 annual advance royalty payment.

[10] In early January 2021, LOM’s counsel advised 584’s counsel of its position that the disputes were covered by the arbitration agreement contained in the Royalty Agreement. On 13 January 2021, 584’s counsel advised that he would review the agreement and advise of its position shortly. On 29 January 2021 it issued this notice of application to have the dispute heard by the court.

[11] On 19 February 2021, LOM served a dispute notice pursuant to the arbitration agreement. It seeks an order requiring 584 to consent to a joint submission to the appropriate Québec ministry for the re-registration of the transferred claims, a declaration that LOM has no further obligation under the Royalty Agreement and a declaration that it is entitled to recoup its advance royalty payments in the event 584 receives future royalty payments from the Project. The dispute notice invoked the dispute resolution procedure in section 9.1 of the Royalty Agreement.

[12] While 584 never did file the notice of arbitration it threatened in September 2020, LOM filed such a notice in April 2021. As a result, there are two proceedings now pending – this application by 584 and an arbitration by LOM. 584 takes the position that LOM did not comply with section 9 of the Royalty Agreement when it received 584’s dispute notice in September 2020 and, as a result, has no right to commence its arbitration.

[13] In this application, 584 seeks a declaration that LOM has breached the Royalty Agreement, including the payment terms, an order that it pay the outstanding advance royalties and an order requiring LOM to transfer certain claims to 584.

Relevant Royalty Agreement Terms

[14] Section 9 of the Royalty Agreement sets out the arbitration provisions as follows:

9.1 The parties will seek to avoid disputes whenever possible. In the event of a question or a matter in dispute respecting the interpretation or implementation of this Agreement, including without limitation the calculation of or amounts taken into account in the determination of the Royalty, the parties shall use commercially reasonable efforts to settle the dispute without the need for arbitration. In this regard, the party which considers that a dispute exists shall provide written notice to the other party (the “Dispute Notice”) and the president of one of the joint venture partners of the Payor and the president of the Recipient, shall forthwith make commercially reasonable efforts to resolve the dispute in good faith within ten (10) business days from the delivery of the Dispute Notice.

9.2 If the question or matter in dispute is not resolved by the process under Section 9.1, then it shall be exclusively and irrevocably submitted to arbitration in Ontario by the Recipient or the Payor pursuant to the terms hereof.

9.3 It will be a condition precedent to the right of any party to submit any matter to arbitration pursuant to the provisions hereof, that any such party will have given not less than 30 days prior written notice of its intention to do so to the other party together with reasonable particulars of the matter in dispute (the "Arbitration Notice"). Failure to deliver an Arbitration Notice within (a) 90 days following the completion of an audit or inspection by the Recipient pursuant to Section 4.15 in the case of a dispute respecting the calculation of or amounts taken into account in the determination of the Royalty; (b) 90 days following the delivery of an Objection Notice pursuant to Section 4.7 if the Recipient did not request to inspect or audit under Section 4.15; and (c) one year after the occurrence related to any other dispute, constitutes an irrevocable waiver of that claim.

[15] The balance of section 9 sets out the arbitration process, substantially following the Arbitration Act.

[16] Section 15.5 of the Royalty Agreement provides:

15.5 This Agreement shall be governed and construed exclusively and strictly according to the laws of the Province of Ontario and the laws of Canada applicable therein and the Parties hereby irrevocably attorn to the exclusive jurisdiction of the Courts of Ontario in respect of any and all matters arising hereunder; no other jurisdictional authority shall be recognized by the Parties regardless of the issue under dispute.

Framework for determining a motion to stay in favour of arbitration

[17] The parties agree that where a proceeding is commenced in respect of a matter that is subject to arbitration under an agreement, it must be stayed, subject to certain exceptions, which 584 argues apply here. (see Arbitration Act, s. 7(1)).

[18] They are agreed on the five stage framework set out in Haas v. Gunasekaram 2016 ONCA 744 (“Haas”). They also agree that issues of jurisdiction should be left to the arbitrator to determine under the competence-competence principle, subject to limited exceptions. That principle derives from 17(1) of the Arbitration Act which states that:

17(1) An arbitral panel may rule on its own jurisdiction to conduct the arbitration and may in that connection rule on objections with respect to the existence or validity of the arbitration agreement.

[19] This competence-competence principle has been upheld in the decisions of Dancap Productions Inc. v. Key Brand Entertainment Inc. 2009 ONCA 135, Ciano Trading & Services C.T. & S.R. L & Skylink Aviation Inc. 2015 ONCA 89 and Haas, supra, among others.

[20] As noted in two of the Court of Appeal cases cited above (Haas, supra at paragraphs 14-16, 51 and Dancap, supra at paragraphs 32-33), where is it unclear whether an arbitrator has jurisdiction, it is preferable to leave that issue with the arbitrator to determine. The Supreme Court of Canada in Dell Computer Corporation v. Union des consommateurs 2007 SCC 34 laid down this approach as a general rule – a challenge to the arbitrator’s jurisdiction must be resolved first by the arbitrator, subject only to two exceptions – where a challenge to the arbitrator’s jurisdiction is based solely on a pure question of law or where the question is one of mixed fact and law that requires only a superficial consideration of the documentary evidence in the record. “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.” (Dell, supra at paragraphs 84 and 85).

[21] The parties disagree about whether those exceptions apply in this instance.

[22] 584 argues that the impact of the parties’ contractual limitation period, the applicability and impact of contra proferentem, the existence and applicability of a contractual condition precedent to arbitration and the exclusive jurisdiction of the courts over the liquidation process are all matters that involve pure questions of law or are questions of mixed fact and law that can be determined on the basis of a superficial consideration of the documentary evidence in the record.

[23] With respect, I do not agree. Each of these issues requires something more than a superficial consideration for its determination.

Contractual Limitation Period

[24] 584 argues that the arbitration agreement required LOM to deliver an arbitration notice within one year after the occurrence related to any dispute. It did not do so and a court can determine as a matter of law or mixed fact and law on a superficial review of the evidence that LOM’s arbitration is now out of time. That would leave the 584 application as the default stream for these issues to be heard.

[25] 584 argues that the dispute concerns the failure to pay the advance royalty payment due 30 November 2019. 584 sent a default notice on 1 December 2019 and argues that LOM was required to deliver a notice of arbitration within a year of that date if it wished to arbitrate that issue. Having not done so, it must have these issues determined by the court.

[26] LOM argues it did not miss any limitation period. In its view, the dispute concerns whether it is entitled to terminate the Royalty Agreement or abandon the claims, an issue that 584 agrees is also central to the payment dispute. LOM also argues that what flows from the termination issue is whether it can transfer the claims in question to 584 and whether 584 must accept those claims. It argues that 584’s refusal to accept the transfers did not crystallize until September 2020 and any such limitation period would run from that date. LOM also argues that its request for declaratory relief (even though it would have consequences for the payment of advance royalties) is not based on an “occurrence” per se, other than the parties’ dispute on that issue, that would start the clock running.

[27] LOM argues in the alternative that any failure to comply with the limitation period cannot convert a mandatory arbitration route into a court proceeding. If it missed the limitation period, the claim is irrevocably waived and it is open to 584 to raise this as a defence.

[28] As part of determining whether there is a termination right, I find it will be necessary to consider the surrounding circumstances to the Royalty Agreement. 584 notes in its materials that there is a long history behind the Royalty Agreement. The parties’ relationship commenced with an option agreement in 2005, which was subsequently amended and the later clarified in 2009. It was subject to a lawsuit in 2010, which was settled in 2011 and gave rise to the Royalty Agreement in 2011. 584 alleges that, as part of the settlement, LOM’s predecessor ceded its right to terminate the agreement, a right it had under the original 2005 option agreement. Given it could not terminate the Royalty Agreement, LOM continues to owe the advance royalty payments.

[29] I find that, however the issue is characterized, neither whether the limitation period has passed nor whether LOM has a right to terminate is a matter that can be answered on a superficial review of the evidence. It requires, at a minimum, a review of the factual matrix of the Royalty Agreement and a determination of the parties’ intention about the termination right, which, following 584’s argument, will necessitate a review of the earlier option agreement and the 2011 settlement. This does not fall within the exception to the competence-competence principle.

Contra Proferentem

[30] 584 argues that the court is best suited to determine the applicability of the doctrine of contra proferentem and its impact on the interpretation of the Royalty Agreement and the arbitration clause. It argues that there is a conflict between section 15.5 of the Royalty Agreement, reproduced at paragraph 16, above, which provides that the parties irrevocably attorn to the exclusive jurisdiction of the Ontario courts in respect of any and all matters and eschews any other jurisdictional authority and section 9.2 of the Royalty Agreement which provides that matters concerning the interpretation or implementation of the Royalty Agreement, “including without limitation the calculation of or amounts taken into account in the determination of the Royalty”, are to be determined by arbitration. It argues that there is no severability provision that would permit section 9 to be interpreted independent of section 15.5.

[31] Given its assertion that LOM drafted the agreement, 584 argues that the inconsistency ought to be interpreted against LOM and that 584 be permitted to continue its application in the exclusive jurisdiction of the Ontario courts as mandated by section 15.5. It further argues that this is a legal matter for the court to determine.

[32] LOM relies on section 17(2) of the Arbitration Act, which states:

17(2) If the arbitration agreement forms part of another agreement, it shall, for the purposes of a ruling on jurisdiction, be treated as an independent agreement that may survive even if the main agreement is found to be invalid.

[33] It argues that there is no conflict between section 15.5 and section 9 as section 17(2) directs that the arbitration agreement in section 9 be treated as an independent agreement, even without the existence of a severability clause. It argues in the alternative that the sections can be reconciled, with section 9 dealing with matters involving the interpretation or implementation of the agreement, including the calculation of royalty payments and section 15.5 directing that any other matter proceed to court.

[34] Like the limitation period and termination issues, I find that any determination of this meaning and intent of the parties on this point requires an analysis of the factual matrix of the Royalty Agreement, including its history. 584 notes that section 15.5 contains language such as “irrevocably” and “exclusive” to describe the attornment to the court’s jurisdiction. It places these terms in juxtaposition to the earlier option agreement where such language was absent.

[35] 584 notes that LOM’s predecessor commenced an action in the face of the arbitration agreement in the option agreement and it is suggested that the parties intended to strengthen the provision concerning the court’s jurisdiction in their next agreement by using the language they did, requiring the parties to exclusively attorn to the court. By 584’s argument, it seems the factual matrix will be relevant to determine the intention of the parties, including the interrelationship of section 9 and section 15.

[36] I find that the applicability of contra proferentem cannot be answered by a superficial consideration of the evidence. I agree that the outcome may need to consider who drafted the agreement (which is disputed on this motion), whether the parties had counsel, whether the terms were negotiated, how the agreement was viewed against the backdrop of the option agreement and the litigation that ensured, etc.

Condition Precedent

[37] The same can be said for 584’s argument that LOM has not made commercially reasonable efforts to resolve the dispute. Not only do the parties not agree whether this is in fact a condition precedent to LOM’s arbitration, they disagree on whether the alleged precondition has been met. LOM argues that, even if 584 were correct and this was a condition precedent, this is a defence to the claim, not an issue that affects an arbitrator’s right to determine his or her jurisdiction.

[38] I find that, in order to determine whether this is a condition precedent and, if so, whether it was met, will require the decision maker by definition to have to wade into the evidence to determine what efforts were made. He or she may also need industry evidence to determine whether whatever efforts that were made meet the commercially reasonable test. It is not a matter that can be determined on a superficial read of the evidence.

Jurisdiction under the British Columbia Business Corporations Act, SBC 2002, C. 57 (“BCBCA”)

[39] Lastly, 584 argues that the liquidator correctly directed 584 to use the process under the BCBCA should it wish to dispute the liquidator’s determination of the quantum that LOM owed to it. Having followed that advice and commenced this application, the respondents are estopped from objecting.

[40] This application may arguably not fall within section 325 of the BCBCA in any event as the BCBCA directs that the amount set by the liquidator is final unless the creditor brings a “legal proceeding” to dispute the quantum. “Legal proceeding” is defined to “include a civil, criminal, quasi-criminal, administrative or regulatory action or proceeding”. While it is not clear whether “includes” could include an arbitration, what is clear is that the liquidation process is set out in Division 4 of the BCBCA, entitled “Powers and Duties of the Court” and “court” is defined to mean the BC Supreme Court. There are specific sections carved out of that definition when the legislature intends to refer to courts outside British Columbia (see, by way of example, section 124(2) where those courts are described as “a court, in Canada or elsewhere”). This, too, is a matter best left to the arbitrator.

Conclusion

[41] I find the applicant had it right in the first instance when it served its own dispute notice under the arbitration agreement before changing courses and commencing this application. Its application seeks a declaration that LOM breached the Royalty Agreement by failing to pay advance royalties each year and seeks payment of past and future royalty payments, an order with respect to the title of the disputed claims and a declaration that LOM has no ability to terminate the Royalty Agreement. In my view, these all concern the interpretation of the Royalty Agreement or the implementation of the Royalty Agreement including sums due under that Agreement, as described in the arbitration agreement at section 9.

[42] For the reasons set out above, I find that the issues raised by 584 cannot be determined as pure questions of law nor by a superficial review of the evidentiary record on those questions of mixed fact and law. As such, it is appropriate that this matter be stayed.

Security for costs

[43] Had I dismissed the motion and permitted the application to continue, I would not have ordered 584 to post security for costs. LOM tendered no evidence in support of its belief that 584 was impecunious. Further, it is undisputed that BDO is holding $450,000 to the credit of 584 such that it is not impecunious. Nor did LOM tender any evidence in support of the quantum of $250,000 requested.

Costs

[44] Each party provided a costs outline and made costs submissions at the conclusion of the motion. As the successful party, LOM is entitled to some costs. 584 would have sought $10,482.91 on a partial indemnity basis had it been successful on the motion. LOM seeks $61,959.24. In addition to taking into account success on the motion, I have considered three additional factors.

[45] First, it was not unreasonable for 584 to commence this application when it was directed to do so by BDO. It was not even unreasonable to commence the application in Ontario, given the language of the Royalty Agreement that set the Ontario courts as the court of exclusive jurisdiction and “no other jurisdictional authority [to] be recognized”. The respondents must take some responsibility for 584’s decision to commence proceedings in court. Second, a fair portion of the motion materials was directed to the issue of security for costs, including a reply affidavit. Had that portion of the motion proceeded, I would have found in favour of 584 on that issue. Lastly, I have taken into account that LOM spent roughly five times the number of hours on this motion as did 584. Certainly, some of that is understandable as it was the moving party and bore the onus. However, I do not find the bill submitted would be a fair and reasonable amount that 584 would have expected to pay.

[46] Considering all of the circumstances, I order 584 to pay LOM the all-inclusive sum of $15,000 on a partial indemnity basis within 30 days hereof.

Master Jolley

Date: 28 July 2021