COURT FILE NO.: CV-21-664957
DATE: 2022 07 05
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: PIONEER CANNABIS CORP., Plaintiff
- and -
2715615 ONTARIO INC. and GURUVEER SINGH SANGHA, Defendants
BEFORE: Associate Justice Todd Robinson
COUNSEL: C. McGoogan, counsel for the defendants (moving parties)
G. Janoscik, counsel for the plaintiff
HEARD: March 31, 2022 (by videoconference)
REASONS FOR DECISION (Motion to Stay)
[1] The defendants move for an order staying this action pursuant to s. 7(1) of the Arbitration Act, 1991, SO 1991, c 17, so that arbitration of the underlying dispute may be pursued.
[2] The dispute involves cannabis retail consulting and brand licensing services that the plaintiff was to provide to the defendants and, in particular, liability for a development loan advanced by the plaintiff. Prior to the parties’ involvement with one another, Guruveer Singh Sangha had been awarded a cannabis retail store license by the Alcohol and Gaming Commission of Ontario. After that award, he sought proposals from potential franchisors. The plaintiff’s proposal was ultimately accepted.
[3] For the purposes of this motion, there are four key agreements entered into between the parties: a Master Cannabis Agreement (the “MCA”), a Retail Services Authorization Agreement (the “RSAA”), a promissory note, and an Assignment, Assumption and Acknowledgement Agreement (the “Assignment Agreement”) by which Mr. Sangha’s rights and obligations under the MCA, RSAA, and the promissory note were assigned to the corporate defendant. The MCA includes an arbitration clause. The defendants argue that the plaintiff’s claim falls squarely within that arbitration clause. The plaintiff disagrees, arguing that since its claim is based on liability under the promissory note, the claim is not captured by the arbitration clause.
[4] The plaintiff’s argument hinges on its position that the promissory note should be viewed as a standalone instrument separate and apart from the MCA and the RSAA. I accept the defendants’ argument that it is not. I am accordingly granting the stay.
Analysis
[5] Section 7(1) of the Arbitration Act, 1991 provides that if a party to an arbitration agreement commences an action dealing with a matter that is subject to arbitration under the agreement, then the court shall stay the proceeding. As confirmed by the Supreme Court of Canada, s. 7(1) is mandatory. An action subject to an arbitration agreement must be stayed unless one of the exceptions listed in s. 7(2) applies: TELUS Communications v. Wellman, 2019 SCC 19 at paras. 63-65.
[6] There are five enumerated exceptions outlined in s. 7(2) under which the court may exercise its discretion to refuse a stay: (i) a party entered into the arbitration agreement while under a legal incapacity; (ii) the arbitration agreement is invalid; (iii) the subject-matter of the dispute is not capable of being the subject of arbitration under Ontario law; (iv) the motion was brought with undue delay; and (v) the matter is a proper one for default or summary judgment.
[7] Both sides agree that the applicable analysis for whether this action should be stayed is set out by the Court of Appeal in Haas v. Gunasekaram, 2016 ONCA 744 at para. 17. The analysis involves addressing five questions:
(a) Is there an arbitration agreement?
(b) What is the subject matter of the dispute?
(c) What is the scope of the arbitration agreement?
(d) Does the dispute arguably fall within the scope of the arbitration agreement?
(e) Are there grounds upon which the court should refuse to stay the action?
[8] The parties have made submissions on each question, which I address in turn.
a. Is there an arbitration agreement?
[9] There is no dispute that the promissory note does not itself contain any arbitration agreement. The defendants rely on s. 20 of the MCA entitled, “Dispute Resolution”. It is undisputed that s. 20.2 contains an arbitration agreement. The disagreement between the parties is over whether that clause applies to the dispute in this action.
b. What is the subject matter of the dispute?
[10] The plaintiff submits that the subject matter of this action is limited to liability of the defendants under the promissory note. However, it is undisputed that Mr. Sangha assigned the promissory note to the corporate defendant pursuant to the Assignment Agreement. The plaintiff specifically pleads that assignment at para. 8 of its statement of claim and asserts that Mr. Sangha nevertheless remains personally liable for the debt under s. 36 of the RSAA and s. 2 of the Assignment Agreement.
[11] Under s. 36 of the RSAA, Mr. Sangha provided a personal guarantee to the plaintiff. Mr. Sangha was released from all obligations other than that personal guarantee by ss. 2.1 and 2.2 of the Assignment Agreement. Those sections confirm that the personal guarantee remains in effect and that Mr. Sangha guarantees that the corporate defendant will make all payments and comply with all obligations under the promissory note.
[12] The defendants argue that Mr. Sangha’s liability to the plaintiff is clearly pleaded to flow from the RSAA and, as acknowledged in oral submissions, the Assignment Agreement. The plaintiff argues that those references in the statement of claim only serve to frame the alleged continued liability of Mr. Sangha under the promissory note, despite the transfer to the corporate defendant. It submits that there is continued direct liability for Mr. Sangha under the promissory note itself.
[13] I must admit that I do not follow the plaintiff’s argument for how Mr. Sangha continues to have any personal liability under the promissory note after the parties executed the Assignment Agreement. The terms of that agreement appear to release Mr. Sangha from all liability other than as guarantor under s. 36 of the RSAA (s. 2.1) and then re-affirms that guarantee under the RSAA and confirms that Mr. Sangha guarantees the promissory note (s. 2.2). Nothing before me supports continued personal liability of Mr. Sangha under the promissory note itself. His liability flows from his guarantees. Also, in my view, the statement of claim supports a claim for continued liability of Mr. Sangha based on his personal guarantee under the RSAA and the Assignment Agreement, not direct liability under the promissory note.
[14] Accordingly, in my view, the pleaded subject matter of the dispute is the corporate defendant’s liability under the promissory note and, if there is such liability, the extent of Mr. Sangha’s liability under his personal guarantees provided in s. 36 of the RSAA and ss. 2.1 and 2.2 of the Assignment Agreement.
c. What is the scope of the arbitration agreement?
[15] The arbitration clause, found at s. 20.2 of the MCA, provides in part as follows:
If any dispute between the parties cannot be resolved by mediation, all disputes, claims and controversies between the parties arising under or in connection with this Agreement or any RSA Agreement (with the exception of those relating to the Marks) or the making, performance or interpretation thereof (including claims of fraud in the inducement and other claims of fraud and the arbitrability of any matter) which have not been settled through negotiation will be settled by binding arbitration with a single arbitrator in Toronto, Ontario. […]
[16] I agree with the defendants that the clause is broadly drafted. The language of “arising under or in connection with” casts a wide net that, in my view, reasonably includes obligations and liabilities contemplated under both the MCA and the RSAA. Notably, s. 29 of the RSAA specifically provides that disputes under the RSAA are to be settled in accordance with the terms of the MCA, reinforcing the intended ambit of the arbitration agreement.
d. Does the dispute arguably fall within the scope of the arbitration agreement?
[17] I agree with the defendants that the dispute between the parties is one that arises under or in connection with the MCA and the RSAA. It is accordingly a dispute captured by the arbitration clause.
[18] The plaintiff has advanced a number of arguments seeking to characterize the promissory note as a standalone agreement with its own governing terms. The plaintiff submits that the promissory note ought to be read and enforced in isolation from the MCA and the RSAA. Ultimately, though, having considered the plaintiff’s arguments, I am unconvinced. In my view, the promissory note and the Assignment Agreement are both inextricably intertwined with both the RSAA and the MCA.
[19] I give no effect to the plaintiff’s submission that the sole matter at issue in this action is the debt owing to the plaintiff under the promissory note and that each of the MCA, the RSAA, the promissory note, the Assignment Agreement, and a further shareholder’s agreement are standalone, separate agreements. The plaintiff has pointed to various provisions in those agreements that specifically refer to the promissory note separately from the other agreements. The plaintiff also correctly points out that the defendants have identified several of those agreements as separate “contractual documents”. However, none of that precludes a relevant interrelationship between the promissory note and the RSAA or MCA.
[20] In my view, the plaintiff’s arguments avoid or ignore that the promissory note flows from the RSAA, which is itself an agreement expressly contemplated in the MCA. (A draft form of the RSAA was appended as Exhibit A to the MCA.) Not only is a promissory note contemplated in the RSAA, but the quantum of the promissory note is dictated by the RSAA.
[21] The plaintiff points out that neither the MCA nor RSAA contain the terms of the development loan between the parties that is secured by the promissory note. Section 4.2 of the MCA does provide that the terms of the loan will be set out in the promissory note. Section 7 of the RSAA expressly contemplates the $1.25 million development loan, and notes that it will be pursuant to terms in the promissory note. However, the form of promissory note is appended as Schedule A to the RSAA. That form appears to be identical to the form executed by Mr. Sangha. I was directed to no difference between the schedule and the executed promissory note.
[22] The plaintiff relies on the Alberta Court of Appeal’s decision in Autoweld Systems Ltd. v. CRC-Evans Pipeline International Inc., 2009 ABCA 366. In that case, the court rejected the appellant’s argument that a settlement agreement between the parties incorporated by reference the arbitration clause from a separate license agreement, holding that the dispute under the settlement agreement was not subject to arbitration. That case turned on its facts, including that the language used in the arbitration clause limited its application to disputes under the license agreement. The court looked to that language when declining to read the clause as extending to disputes arising under the separate settlement agreement.
[23] The language of s. 20.2 of the MCA is much broader than appears to have been the case in Autoweld. It extends to disputes “arising under or in connection with” the MCA or the RSAA. Also, nothing in the Alberta Court of Appeal’s decision in Autoweld suggests that the licensing agreement at issue required the parties to execute the settlement agreement. Here, the RSAA requires the promissory note to be in the form appended as Schedule A to the RSAA. The promissory note is not incorporated by reference into the RSAA. It is prescribed by it.
[24] The plaintiff also submits that the promissory note is beyond the scope of all arbitration agreements between the parties because it expressly provides that it is to be enforced in the Ontario courts. Specifically, it includes a clause that states as follows:
The undersigned and the Creditor hereby agree that the Courts of the Province of Ontario shall have jurisdiction to entertain any action or other legal proceedings based on any provisions of this Note. The undersigned and the Creditor hereto do hereby attorn to the jurisdiction of the Courts of the Province of Ontario.
[25] I accept the defendants’ argument that the above clause is properly characterized as a choice of law and forum selection clause. Forum selection clauses are not to be equated with arbitration agreements: Haas, supra at para. 31. However, even if I am wrong in that characterization, the clause only provides that the Ontario courts have jurisdiction. It does not provide for exclusive jurisdiction of the Ontario courts. There is no clause in the promissory note that precludes consideration or application of other agreements between the parties. In fact, the promissory note expressly includes a clause acknowledging that the promissory note, the RSAA, and the MCA constitute the entire agreement of the parties pertaining to the indebtedness evidenced by the promissory note.
[26] The foregoing supports that the promissory note arises under the RSAA and exists in direct connection to it. The promissory note was executed pursuant to the parties’ agreement in the RSAA and the defendants’ obligations outlined therein. The Assignment Agreement is similarly an agreement arising in connection with the MCA and RSAA, since it assigned all right, title, and interest in those agreements, and the promissory note, from Mr. Sangha to the corporate defendant.
[27] For these reasons, in my view, the dispute in this action about liability under the promissory note clearly falls within the parties’ arbitration agreement in s. 20.2 of the MCA.
e. Are there grounds upon which the court should refuse to stay the action?
[28] Once it is determined that an arbitration clause applies to the dispute in an action, s. 7(1) requires that the action be stayed in favour of arbitration unless the plaintiff establishes that one of the exceptions under s. 7(2) applies. Since s. 7(2) provides that the court “may” refuse to stay the proceeding if an exception applies, the decision to refuse a stay is discretionary: TELUS Communications, supra at para. 65.
[29] In my view, none of the exceptions in s. 7(2) apply:
(a) The plaintiff doe does not argue and nothing before me supports that any of the parties were under any legal incapacity when the agreements were negotiated.
(b) No argument has been advanced that the arbitration clause is invalid.
(c) No argument has been advanced that the subject matter of the parties’ dispute is not capable of being the subject of arbitration under Ontario law.
(d) This motion was promptly brought after the defendants were served with the statement of claim. The delay in the motion being heard is a result of the backlog caused by the pandemic and reduced judicial resources, not through any fault of the defendants.
(e) As discussed below, I am not convinced that this matter would be proper for summary judgment.
[30] The plaintiff argues that summary judgment is appropriate in this case, characterizing it as a “simple debt collection action.” I do not agree.
[31] The plaintiff relies on Jencel 407 Young Street Inc. v. Bright Immigration Inc., 2021 ONSC 6030, arguing that the defendants were required to raise a genuine issue requiring a trial and have failed to do so. Jencel involved a commercial lease dispute. In that case, the court held that disputes over arrears of base rent, additional rent, and landlord mitigation did not require a trial and could be properly resolved on a summary judgment motion. In my view, the facts of that landlord-tenant dispute are quite different than the facts of this case, which involves more complex commercial agreements and a much more intricate relationship between them than was the case in Jencel.
[32] Neither party has tendered evidence dealing with whether this matter is appropriate for summary judgment. While the plaintiff argues that the defendants have failed to tender evidence supporting a genuine issue requiring a trial, the plaintiff has similarly tendered no evidence to support that there is no genuine issue requiring a trial. For example, although there is evidence from the plaintiff on the agreements and the demand made on the defendants, there is no evidence on what advances were made under the loan and to what extent, if any, the loan has been repaid.
[33] The plaintiff argues that its evidence on demand being made on the promissory note includes the claimed amount. I do not agree that the fact of the claim amount being included in the demand is sufficient. In my view, nothing in Jencel supports that only the defendants are required to lead cogent evidence on whether there are any genuine issues requiring trial. I do not think it fair or just to deem that there are no genuine issues based solely on evidence of an unsubstantiated demand for payment and a lack of specific responding evidence.
[34] I agree with the defendants that their Response to Notice Demanding Arbitration and Counterclaim, which was delivered in response to the plaintiff’s pre-litigation Notice of Arbitration, is indicative of the nature and extent of defences that the defendants will be pursuing. Those include delays by the plaintiff in locating premises for the defendants, failing to provide services contemplated under the RSAA, failing to provide agreed advertising and branding, failing to provide agreed consulting services, disputes over whether loan funds now being claimed were advanced, improper termination of the RSAA, and misrepresentations.
[35] In my view, the plaintiff’s characterization of this proceeding as a “simple debt collection action” is an over-simplification of the genuine issues in dispute. I am satisfied that the positions of the parties are not conducive to resolution by summary judgment.
[36] Even if I am wrong in that, my decision to refuse a stay under s. 7(2) is discretionary, not mandatory. The law favours giving effect to arbitration agreements: Haas, supra at para. 10. Based on the record before me, there are clearly disputes between the parties not yet joined in this action that the defendants are entitled to address by arbitration under s. 20.2 of the MCA. Since, in my view, the plaintiff’s claim falls within that arbitration clause, I see no reason why this action should be addressed separately from the parties’ other disputes. I am thereby satisfied that the circumstances of this case are such that I should not be exercising my discretion to refuse the requested stay.
Disposition
[37] For the reasons set out above, this action is hereby stayed.
Costs
[38] The defendants have been successful and are entitled to their costs of this motion. They seek $7,716.10 on a partial indemnity basis. Although not an overly complex motion, the stay issue was important to the defendants given broader disputes under the parties’ agreements. The plaintiff conceded that the defendants’ costs claim was reasonable in the event the defendants were successful. I note that the plaintiff’s own costs claim for this motion was more than double that of the defendants.
[39] The defendants shall accordingly have their requested partial indemnity costs of the motion fixed in the amount of $7,716.10, including HST and disbursements, payable forthwith.
ASSOCIATE JUSTICE TODD ROBINSON
DATE: July 5, 2022