Court File and Parties

COURT FILE NO.: CV-22-00677220-00CL DATE: 20220503 SUPERIOR COURT OF JUSTICE – ONTARIO (COMMERCIAL LIST)

RE: 2832402 Ontario Inc., Applicant/Responding Party and 2853463 Ontario Inc., QBD Modular Systems Inc. and QBD Cooling Systems Inc., Respondents/Moving Parties

BEFORE: Conway J.

COUNSEL: Timothy J. Hill and Mark van Zandvoort for 2832402 Ontario Inc. Robert W. Staley and Nathan J. Shaheen for 2853463 Ontario Inc., QBD Modular Systems Inc. and QBD Cooling Systems Inc.

HEARD: April 27, 2022

REASONS FOR DECISION

[1] The Respondents bring a motion to stay this application pursuant to s. 7(1) of the Arbitration Act, 1991, S.O. 1991, c. 17 (the “Act”).

The Share Purchase Transaction

[2] 2853463 Ontario Inc. (the “Purchaser”) acquired the shares of QBD Modular Systems Inc. and QBD Cooling Systems Inc. from 2832402 Ontario Inc. (the “Vendor”), pursuant to a share purchase agreement dated August 20, 2021 (the “SPA”). The purchase price for the shares was $126.1 million, subject to post-closing adjustments. At issue on this motion is the post-closing adjustment for working capital (the “Working Capital Adjustment”).

[3] Under s. 2.3(a) of the SPA, the Vendor was required to provide the Purchaser with an estimate of any purchase price adjustments on an “Estimated Closing Statement”. A final determination of the purchase price adjustments was to be made after closing in accordance with s. 2.5 of the SPA. Section 2.5(a) provides that, within 90 days of the closing date, the Purchaser is to prepare and provide to the Vendor the “Final Closing Statement”, which is to address any further purchase price adjustments that are required. The Final Closing Statement is to provide details of any variance between the Final Closing Statement and the Estimated Closing Statement.

[4] Section 2.5(b) of the SPA provides that, within 60 days of receiving the Final Closing Statement, the Vendor can provide an “Objection” to inform the Purchaser of the Vendor’s disagreement with the Final Closing Statement, failing which the Final Closing Statement is deemed to be accepted.

[5] Section 2.5(b) of the SPA provides that all unresolved matters in respect of the Final Closing Statement and any resulting Objection by the Vendor must be referred to an “Independent Accountant”, who is then required to make a binding determination. It reads:

If the Vendor delivers an Objection to the Purchaser within such 60 day period, the Purchaser and the Vendor shall attempt to resolve any differences within 30 days following the Purchaser’s receipt of the Objection. If the Purchaser and the Vendor are unable to come to a resolution with respect to the matters raised in the Objection within five (5) days following the foregoing 30 day period, the Parties shall promptly refer such unresolved matters to the Independent Accountant. The Independent Accountant will, as promptly as practicable (but in any event within 45 days following its appointment), make a determination on the disputed items based solely on written submissions provided by the Purchaser and the Vendor to the Independent Accountant. The Independent Accountant will review only those items that are in dispute as set-out in the Objection, and the Independent Accountant’s determination with respect to such disputed items shall be no less than the lesser of the amount claimed by either the Vendor or the Purchaser and no greater than the greater of the amount claimed by either the Vendor or the Purchaser. The decision of the Independent Accountant as to any disputed items will, absent manifest error, be final and binding upon the Purchaser and the Vendor.

[6] The term “Independent Accountant” is defined as “a certified public accounting firm of international reputation mutually agreed to by the Purchaser and the Vendor.”

[7] The closing date for the share acquisition under the SPA was August 20, 2021. The Purchaser paid the amount indicated on the Estimated Closing Statement to the Vendor, which was $128,550,994.59 and which reflected a $2,450,944.59 purchase price adjustment in favour of the Vendor.

[8] On November 15, 2021, the Purchaser delivered the Final Closing Statement to the Vendor under s. 2.5(a) of the SPA. It indicated that, based on the Purchaser’s accounting, there was a $445,250 variance between the Estimated Closing Statement and the Final Closing Statement, which required a corresponding purchase price adjustment in favour of the Vendor in the amount of $445,250.

[9] Following delivery of the Final Closing Statement, the Vendor made numerous requests to the Purchaser to deliver back-up documentation to finalize its working capital calculations and to finalize and file its financial statements. On January 12, 2022, the Vendor’s counsel sent a letter to the Purchaser’s counsel stating that this documentation was required to respond to the Final Closing Statement and to prepare an Objection to it. The letter stated that, in any event, the Vendor would be delivering a formal Objection by January 14, 2022, being 60 days from delivery of the Final Closing Statement.

[10] On January 14, 2022, the Vendor delivered an Objection pursuant to s. 2.5(b) of the SPA. The Objection addressed the Vendor’s request for back-up documentation. The letter acknowledged that some, but not all, of that documentation had been provided by the Purchaser and that the Vendor had prepared the Objection based on its own working papers. It said that the Working Capital Adjustment was $11.7 million higher than what the Purchaser had calculated in the Final Closing Statement.

[11] The parties proceeded to try to resolve their differences within the 30-day period after delivery of the Objection. No resolution was reached.

[12] On February 16, 2022, the Vendor’s counsel advised the Purchaser’s counsel that it would be issuing a notice of application seeking an order for production of the back-up documentation and, once that documentation was obtained, the Vendor would be prepared to discuss candidates for the Independent Accountant. The next day, the Purchaser’s counsel responded that it would be bringing its application for appointment of the Independent Accountant.

[13] The Vendor filed its notice of application on February 16, 2022 (the “Production Application”). The application seeks a declaration that the Respondents are in breach of their obligations under the SPA, including ss. 7.1(b) and (c) and 10.2, by failing to provide certain information, documents, and working papers of the Purchaser and QBD Group required “in order to calculate certain post-closing adjustments.” The notice of application makes it clear that the documentation is for purposes of calculating the Working Capital Adjustment and filing an Objection with the Independent Accountant under s. 2.5(b).

[14] The Purchaser responded on March 2, 2022 with its notice of motion seeking to stay the Production Application. The Purchaser also brought an application to appoint MNP LLP, Kroll LLC, or another accounting firm as the Independent Accountant.

[15] On March 14, 2022, the Vendor delivered an amended notice of application, which stated that the requested back-up documentation was required for the preparation of tax returns, [^1] in addition to calculating the Working Capital Adjustment.

The Issue

[16] Section 7(1) of the Act states:

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.

[17] The key issue on this motion is whether the Production Application is a proceeding “in respect of a matter to be submitted to arbitration” under an arbitration agreement. If so, s. 7(1) requires that it be stayed.

[18] The Purchaser submits that s. 2.5(b) of the SPA contains an arbitration clause. It says that the parties agreed that all disputes relating to purchase price adjustments, including the Working Capital Adjustment, would be decided by the Independent Accountant. Since the Production Application relates to the Working Capital Adjustment, it is a matter to be dealt with by the Independent Accountant. The Purchaser points out that the Act confers powers on an arbitrator to determine questions of law or refer them to this court (s. 8(2)), order the inspection of documents (s. 18(1)), and determine its own procedure (s. 20(1)). It is for the arbitrator to decide in the first instance.

[19] The Vendor submits that s. 2.5(b) is not an arbitration clause. Rather, the Vendor says that the clause calls for expert determination by the Independent Accountant. The Vendor submits that s. 2.5(b) is a narrowly drafted clause that sets out a process for resolving the amount of the items in dispute set out in the Objection to the Final Closing Statement in order to determine the final purchase price under the SPA.

[20] The Vendor further argues that even if the court regards s. 2.5(b) as an arbitration clause, it should not grant a stay as the issue for the arbitrator is only determination of the purchase price, not the production issue. It submits that under s. 7(2) and (5) of the Act, the court should decline to stay the Production Application and proceed to determine this discrete issue.

Legal Principles

[21] In Sport Maska Inc. v. Zittrer, [1988] 1 S.C.R. 564, the Supreme Court of Canada considered whether an agreement between the parties was an agreement to arbitrate or an agreement to obtain a professional opinion from a third-party. Citing Lord Wheatley’s “brilliant summary” of the law in Arenson v. Casson Beckman Rutley & Co., [1975] 3 All E.R. 901 (H.L.), the Supreme Court, at pp. 589-590, set out “certain indicia” that courts can draw upon to determine whether a particular clause requires arbitration as opposed to expert determination:

1. There is a dispute or difference between the parties that has been formulated in some way or another;
2. The dispute or difference has been remitted by the parties to the person to resolve in such a manner that they are required to exercise a judicial function;
3. Where appropriate, the parties must have been provided with an opportunity to present evidence or submissions in support of their respective claims in the dispute; and
4. The parties have agreed to accept the decision.

[22] These indicia are non-exhaustive and need not be unanimous in favour of one position or another. Instead, they are merely “tools used to determine the intention disclosed by the documents and other instruments, in order to establish the function the parties actually meant to assign to the third party chosen by them”: Sport Maska, at p. 605. The fact that a provision does not expressly refer to “arbitration” does not preclude a court from holding that it is, in fact, an arbitration clause: Precision Drilling Corp. v. Matthews Equipment Ltd., 2000 ABQB 499, 267 A.R. 286, at para. 34.

[23] Although Sport Maska arose from Quebec, the indicia referenced therein have subsequently been followed by Canadian common law courts. For example, in Precision Drilling the court had to consider whether the parties’ share purchase agreement provided for dispute resolution through arbitration or, alternatively, dispute avoidance through valuation, to settle the final purchase price of shares. The provision at issue read:

If the parties are unable to agree on the calculations set out in the Adjustment Statement […] either of the parties will have the right to submit the matter to […] (the “Firm”) to resolve the dispute […] The parties will deliver all necessary information to the Firm for it to make its final determination, including a copy of this Agreement, the Adjustment Statement, the Vendor’s comments on the Adjustment Statement and a summary of the arguments of the parties. […] The decision of the Firm when rendered will be binding upon the parties and the parties are deemed to agree with the decision.

[24] After referencing the various Sport Maska indicia, the court concluded that this provision was an arbitration clause. It found that: (i) the language of provision was formulated as a disagreement over calculations set out in the purchaser’s adjustment statement; (ii) the parties were required to submit all necessary information and argument to the Firm so that it could make a final determination; and (iii) the parties agreed to be bound by the Firm’s decision: at paras. 30-33. On the basis of these indicia alone, [^2] the court held that the provision at issue required arbitration rather than expert valuation. It came to this conclusion notwithstanding the fact that the word “arbitration” was not explicitly referenced in the provision: at para. 34.

[25] More recently, in Applied Industrial Technologies, LP v. Sirois, 2018 ABQB 818, the court commented on some of the Sport Maska indicia. It noted, for example, that Sport Maska’s “formulated difference or dispute” criterion requires “something more than the fact the parties who may be affected by the decision have opposed interests or that the decision is on a matter which is not agreed between them”: at para. 116. It also stated that while arbitration clauses are often final and binding, the presence of such language does not preclude a court from finding that a provision is an expert determination clause, as this language is also common to such clauses: at para. 119. Ultimately, however, the court in Applied Industrial proceeded on the basis that the parties agreed that their share purchase agreement called for expert determination rather than arbitration: at paras. 86, 113, and 120. In other words, it was not required to undertake a detailed application of the Sport Maska indicia.

Analysis

[26] I have reviewed the SPA and in particular the provisions of s. 2.5(b). Applying the legal principles set out above, I have concluded that s. 2.5(b) is an arbitration clause and that the Production Application must be stayed.

[27] Section 2.5(b) sets out a formulated dispute to be resolved by the Independent Accountant. After the closing date, the Purchaser delivers the Final Closing Statement pursuant to s. 2.5(a). The Vendor then files the Objection pursuant to s. 2.5(b) within 60 days. That crystallizes the matters in dispute for the Independent Accountant to decide.

[28] The parties have the opportunity to make submissions. Indeed, the Independent Accountant is required to decide the dispute based solely on the written submissions provided by the parties.

[29] The Independent Accountant is required to address “unresolved matters”. The parties agreed to “promptly refer such unresolved matters to the Independent Accountant.” The Independent Accountant is required to “make a determination on the disputed items” and “review only those items that are in dispute as set-out in the Objection”. In my view, the Independent Accountant is exercising a judicial function in fulfilling its mandate under s. 2.5(b).

[30] The parties have agreed to accept the decision of the Independent Accountant. Its decision is, absent manifest error, final and binding on the parties.

[31] In light of the way s. 2.5(b) is structured, I cannot accept the submission that it calls for an expert determination rather than an arbitration. There is (i) a formulated dispute between the parties that (ii) requires the Independent Accountant to “make a determination on the disputed items” (i.e., exercise a judicial function) based on (iii) the submissions provided by the parties and which is (iv) final and binding upon them (absent manifest error). All of the indicia referenced in Sport Maska point towards arbitration.

[32] In my view, the cases in which courts have found that a particular provision calls for expert determination as opposed to arbitration, and on which the Vendor relies, do not support a different conclusion in this case. For example, while the court in Applied Industrial, at para. 116, noted that “[p]rice determination clauses in purchase and sale agreements have often been found to be expert determinations […] rather than arbitrations”, this has not precluded courts from finding the opposite. In Precision Drilling, for instance, the court concluded that the provision at issue was an arbitration clause notwithstanding that it concerned a pricing determination.

[33] Likewise, the fact that the court in Applied Industrial, at para. 119, referenced the parties’ failure to explicitly refer to the procedures under Alberta’s Arbitration Act, R.S.A. 2000, c. A-43 in their agreement does not mean that I am precluded from holding that s. 2.5(b), which also does not refer to the Act’s procedures, is an arbitration, rather than expert determination, clause. The Sport Maska indicia embrace function over form. No explicit reference to procedures under arbitration legislation is required for a court to hold that a particular provision is, in fact, an arbitration clause. Moreover, as noted, s. 20(1) of the Act empowers arbitrators in Ontario to determine their own procedures. The failure of s. 2.5(b) to reference arbitration procedures is therefore not necessary given this default statutory power.

[34] In any event, as noted, the parties in Applied Industrial agreed that the provision at issue called for an expert determination rather than arbitration: at paras. 86, 113, and 120. The court was therefore not purporting to undertake a detailed analysis of whether the agreement at issue required arbitration or expert determination. [^3]

[35] Cummings v. Solutia SDO Ltd. (2008), 49 B.L.R. (4th) 307, aff’d 2009 ONCA 510, 59 B.L.R. (4th) 23 is also distinguishable. In that case, Newbould J. held that the failure to reference “arbitration” in a sophisticated agreement negotiated by experienced counsel was a factor favouring expert determination: at para. 32. The Vendor points to this passage and submits that, likewise, the SPA was drafted by sophisticated parties represented by counsel — had the parties wanted to provide for arbitration, they would have thus done so explicitly.

[36] With respect, this submission overlooks decisions in which courts have found arbitration clauses embedded in sophisticated agreements notwithstanding the absence of the term, “arbitration”. See, Precision Drilling, at para. 34. It also ignores the other bases on which Newbould J. resolved the arbitration versus expert determination clause issue in Cummings. For example, at para. 23, he found that there was no “formulated dispute” between the parties (as discussed in Sport Maska). Moreover, in contrast to typical arbitration clauses which allow parties to make submissions, Justice Newbould noted that the agreement in Cummings consisted of a valuator “interviewing the parties in search of information and […] determining what information it required”: at para. 37. It also permitted the valuator to conduct their own review of publicly available information (i.e., information extending beyond that provided by the parties): at para. 41. Section 2.5(b) lacks similar powers and procedures. To the contrary, it precludes the Independent Accountant from resolving the dispute based on anything other than the written submissions provided by the Purchaser and the Vendor.

[37] Since s. 2.5(b) is an arbitration clause, the Production Application must be stayed pursuant to s. 7.1 of the Act. The request for backup documentation squarely relates to the calculation of the Working Capital Adjustment and is to be addressed by the Independent Accountant. While the Vendor argues that the Production Application also relates to the preparation of tax returns, it is clear from the application materials that the two are intertwined. The entire Production Application must therefore be stayed. [^4]

[38] Finally, the Vendor submits that if I find that s. 2.5(b) is an arbitration agreement, I should exercise my discretion and not grant the stay. I decline to do so. As noted, the issue of document production relates to the Working Capital Adjustment. The parties agreed that the Independent Accountant is the one to determine the Working Capital Adjustment. In my view, all issues related to the determination of the Working Capital Adjustment should therefore go to the Independent Accountant, and not the court, in the first instance.

Decision and Costs

[39] For the reasons set out above, the Production Application is stayed.

[40] If the parties are unable to come to an agreement on costs, they may schedule a half hour case conference before me (through the Commercial List office) to discuss the process for determining them.

Conway J. Date: May 3, 2022

Footnotes

[^1]: The tax returns were filed on February 18, 2022. The Vendor states that it filed them on a preliminary basis based on the information it had available to it at the time. [^2]: Although there were some pre-contractual letters of intent exchanged between the parties referencing “arbitration”, the court did not rely on these letters of intent, nor any pre-contractual negotiations, in arriving at its conclusion: at para. 35. [^3]: To the extent that the court in Applied Industrial, at para. 119 suggested that provisions referencing “firms” are more likely to be regarded as expert determination clauses, I note that the provision at issue in Precision Drilling also referenced a “national accounting firm”. Nonetheless, the court concluded that it was an arbitration, rather than expert determination clause. [^4]: However, the stay is without prejudice to the Purchaser bringing another application, provided that it does not relate to any purchase price adjustments that are the subject matter of s. 2.5(b).