Court File and Parties

COURT FILE NO.: CV-21-00674275-0000 DATE: 20230811 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN: Daizo Nohdomi Plaintiff – and – Callidus Capital Corporation and The Catalyst Capital Group Inc. Defendant

Counsel: Jane A. Milburn, for the Plaintiff David Moore, for the Defendant

HEARD: July 24, 2023

MERRITT, J.

Overview

[1] The Defendants Callidus Capital Corporation (“Callidus”) and The Catalyst Capital Group Inc. (“Catalyst”) move for an order staying or dismissing the action because the causes of action pled are required to be settled by arbitration, pursuant to the agreement between the parties.

[2] The Plaintiff Daizo Nohdomi ("Mr. Nohdomi") says the arbitration clause is invalid and unenforceable because it contracts out of the Employment Standards Act 2000, S.O. 2000, c. 41 (the “ESA”), the action includes Catalyst which was not a party to the arbitration clause, and the arbitration clause is unconscionable.

Decision

[3] The motion to stay the action is dismissed because the arbitration agreement is invalid.

The Issues

[4] There are 3 issues: a. Is the arbitration agreement invalid under the ESA? b. Should the action be allowed to proceed because Catalyst is not a party to the arbitration agreement? c. Is the arbitration agreement unconscionable?

Issue One: Is the Arbitration Clause Invalid?

[5] Mr. Nohdomi’s position is that the arbitration agreement in his Employment Agreement is invalid because it violates the ESA in two respects. First, it limits his right to make a complaint under the ESA. Second, it is part of termination provisions which violate the ESA.

[6] The arbitration clause in Mr. Nohdomi’s employment agreement (the “Arbitration Agreement”) provides as follows:

13. Governing Law and Arbitration

This agreement shall be construed, interpreted, performed and enforced in accordance with the laws of the Province of Ontario and the laws of Canada. Any controversy or claim arising out of or relating to this Agreement shall be settled by arbitration which shall proceed in accordance with the Rules for the Conduct of Arbitrations of the Arbitrators' Institute of Canada Inc. (the "Rules") in effect at the date of commencement of such arbitration, by one (I) arbitrator (the "Arbitrator") appointed in accordance with the Rules.

The Arbitrator shall have the right to determine all questions of law and jurisdiction including questions as to whether a Claim is arbitrable and shall have the right to grant final and interim damages awards and shall have the discretion to award costs including reasonable legal fees and expenses, reasonable experts' fees and expenses, reasonable witnesses' fees and expenses, pre-award and post-award interest and costs of the arbitration.

[7] The Arbitration Act, 1991, S. O. 1991, c. 17, (the "Arbitration Act") at s. 7(1) provides:

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.

[8] Section 7(2) of the Arbitration Act contains exceptions as follows:

However, the court may refuse to stay the proceeding in any of the following cases:

1. A party entered into the arbitration agreement while under a legal incapacity.
2. The arbitration agreement is invalid.
3. The subject matter of the dispute is not capable of being the subject of arbitration under Ontario law.
4. The motion was brought with undue delay.
5. The matter is a proper one for default or summary judgment.

[9] Section 17 of the Arbitration Act provides that:

(1) An arbitral tribunal 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.

(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.

[10] As a general rule, challenges to the arbitrator's jurisdiction must be resolved first by the arbitrator: Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34, [2007] 2 S.C.R. 801, at para. 84. A court has the discretion to decide otherwise, but only where the jurisdictional question is based on a pure question of law, or of mixed fact and law, requiring not more than a “superficial consideration of evidence": Uber Technologies Inc. v. Heller, 2020 SCC 16, [2020] 2 SCR 118, at paras. 33-34; and Irwin v. Protivini, 2022 ONCA 533, at para. 11.

[11] The issue here is not jurisdictional. Here, as in Heller, if the Arbitration Agreement is valid, Mr. Nohdomi’s claim would fall within it. The issue here is whether the arbitration clause is invalid. It is for the court, and not the arbitrator, to decide whether one of the exceptions in s. 7(2) applies so that the issue of whether to grant a stay becomes discretionary. Heller v. Uber Technologies Inc., 2019 ONCA 1, 145 O.R. (3d) 81, (“Heller (2019)”), at paras. 26 and 39.

[12] In the event that I am wrong on this point, I will consider the competence-competence principal in Dell, at para. 70. As set out above, challenges to an arbitrator's jurisdiction should be referred to the arbitrator unless the challenge raises a pure question of law or raises a question of mixed fact and law that requires only a superficial consideration of the evidence in the record. In this case, the issue of whether the Arbitration Agreement is invalid as it constitutes a contracting out of the provisions of the ESA is a question of mixed fact and law, and it can be resolved on the face of the record.

Making a Complaint

[13] The complaint investigation process under the ESA is an employment standard. The arbitration clause amounts to an illegal contracting out of an employment standard and is therefore invalid. Accordingly, the mandatory stay provided for in s. 7(1) of the Arbitration Act does not apply and I have discretion under s. 7(2) to refuse to stay the proceeding.

[14] Section 5 of the ESA provides:

Subject to subsection (2), no employer or agent of an employer and no employee or agent of an employee shall contract out of or waive an employment standard and any such contracting out or waiver is void.

[15] Under s. 1(1) of the ESA, an employment standard is defined as follows:

"employment standard" means a requirement or prohibition under this Act that applies to an employer for the benefit of an employee.

[16] One of the benefits under the ESA is the right of an employee to make a complaint to the Ministry of Labour that his employer has contravened the ESA, pursuant to s. 96(1):

A person alleging that this Act has been or is being contravened may file a complaint with the Ministry in a written or electronic form approved by the Director.

[17] This investigative process constitutes an employment standard as that term is defined in the ESA. The investigative process, once triggered, is mandated by the ESA and both the employee and, more importantly the employer, are required to participate in that process. The process is thus a "requirement" that "applies to an employer for the benefit of an employee" and, accordingly, meets the definition of an employment standard: Heller (2019), at para. 36.

[18] The Supreme Court of Canada decided Heller on the basis that the arbitration clause was unconscionable. The majority did not address whether the arbitration agreement was void and whether the ability to file a complaint was an employment standard. Justice Côté, dissenting, would have allowed the arbitration to proceed on the condition that Uber pay the arbitration fees. In her dissent, she also said that the ability to file a complaint under s. 96 of the ESA is not an "employment standard": para. 299. However, I am bound by the decision of the Ontario Court of Appeal’s decision in Heller (2019).

[19] Mr. Nohdomi’s Arbitration Agreement constitutes a contracting out of the ESA and deprives him of the right to have an Employment Standards Officer investigate his complaint. It is irrelevant that Mr. Nohdomi has not filed a complaint under the ESA for two reasons.

[20] First, if the Arbitration Clause offends s. 5(1) of the ESA because it contracts out of the investigative process, the provision is invalid, irrespective of what the appellant does or does not do. Second, it is the appellant's right, under the ESA, to avail himself of the "civil proceeding" exception to the complaint process. It is his choice whether to take that route, and he is only barred from making a complaint if he chooses to take it. The Arbitration Clause essentially transfers that choice to Uber who then forces the appellant (and all other drivers) out of the complaints process: Heller (2019), at paras. 42-43.

[21] Under s. 5(2) of the ESA:

If one or more provisions in an employment contract or in another Act that directly relate to the same subject matter as an employment standard provide a greater benefit to an employee than the employment standard, the provision or provisions in the contract or Act apply and the employment standard does not apply.

[22] The Defendant says the arbitration provisions in this case also do not offend the contracting out provisions of the ESA as they do not create an inferior procedural dispute resolution method, or otherwise provide for a lesser benefit that is contained in the ESA. I disagree.

[23] The ESA proscribes a process by which the employee can engage at no cost, and under which the Ministry of Labour bears the burden of investigating. The question is not whether, at the end of the day, the employee would ultimately receive a greater sum of money under an ESA complaint process or under an arbitration. Rather, the question is whether the Arbitration Agreement provides a greater benefit than the ESA which gives the employee the option to pursue an ESA complaint and investigation at no cost.

[24] The Arbitration Agreement requires Mr. Nohdomi to pay $7,500 at the outset to commence the arbitration, and an indeterminate amount more throughout the arbitration process for procedural matters. If unsuccessful, he may have to pay some portion of the defendants' legal costs. The costs associated with the arbitration process mean that it does not provide a greater benefit than the no-cost Ministry of Labour process.

Termination Provision

[25] In this case, the Employment Agreement provides that Mr. Nohdomi’s employment can be terminated for just cause:

10. Termination of Employment

(ii) Callidus may terminate your employment at any time for just cause. For the purposes of this Agreement, "just cause" shall mean: (a) any failure by you to observe and perform any of your covenants and obligations hereunder including, without limitation, the provisions of Articles 6, 7 and 8; (b) your insolvency or bankruptcy; (c) fraud, wilful misconduct or gross negligence by you in connection with the performance of your duties hereunder; (d) any commission of a crime by you including your conviction for (or your pleading guilty or no contest to) a felony; (e) any use or abuse of alcohol or drugs or other controlled substances by you which adversely affects your ability to perform your duties hereunder; and (f) any other grounds that amounts to just cause at common law.

(ii) We may also terminate your employment at any time without just cause by providing the working notice and severance entitlement under the Employment Standards Act, 2000 or similar applicable employment standards legislation, as well as an additional lump sum payment of between one and up to six months' base salary less applicable deductions. In no event will your disability benefits continue beyond the statutory notice period. After the effective date of such termination, you shall be entitled to no further rights or benefits hereunder or in connection with your employment with us.

The foregoing amounts represent our maximum termination and severance obligations to you. However, and as set out above, in no event will you receive less than your entitlements to notice and severance under the Ontario Employment Standards Act, 2000. In order to receive the amounts payable under this Article and Article 5, other than your statutory entitlements, you will be required to execute a Release in favour of the protected entities, in a form acceptable to Callidus. This Article shall remain in full force and effect unamended notwithstanding any other alterations to your terms and conditions of employment or to this Agreement, whether fundamental or otherwise, unless amended or waived in writing.

[26] In this case, termination is contemplated in two circumstances: with just cause, and without just cause. Each circumstance is set out in a separate clause, although both are labelled (ii), which appears to be a typographical error. It is only in the event of a termination without just cause that any notice or payment in lieu of notice is contemplated.

[27] The second clause relating to termination without just cause provides for notice and severance under the ESA, plus between one and six months base salary. It also provides: “However, and as set out above, in no event will you receive less than your entitlements to notice and severance under the Ontario Employment Standards Act, 2000”.

[28] Employment agreements are interpreted differently than other contracts for many reasons. Work is a vital aspect of the human condition. Employees usually have less bargaining power, and many employees are unfamiliar with the ESA. The ESA is remedial legislation, and employers should be encouraged to draft contracts that comply with the ESA. As employees are most vulnerable when their employment is terminated, they should know their entitlements when this occurs: Rossman v. Canadian Solar Inc., 2019 ONCA 992, 444 D.L.R. (4th) 131, at paras 20-23.

[29] If a provision within a termination clause conflicts with the minimum standards prescribed by the ESA, the entire termination clause is invalid, and it is not open to the court to simply strike out the offending provision. If even one provision contravenes the ESA, that alone will render the termination clause void and unenforceable: Rossman, at para. 18; Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158, 134 O.R. (3d) 481 at para. 21; Andros v. Colliers Macaulay Nicolls Inc., 2019 ONCA 679, 437 D.L.R. (4th) 546, at para. 20.

[30] The saving provision here in the paragraph relating to termination without just cause, which attempts to provide for compliance with the ESA, may not serve to cure the provisions of the clause dealing with termination without just cause, which violates the ESA: Rossman, at para. 35. It may well be that the entire termination provision is invalid but that does not necessarily invalidate the entire employment agreement, including the Arbitration Agreement.

[31] Counsel have provided no cases in which an invalid termination clause also invalidates other provisions of the employment agreement such as an arbitration clause. All of the cases referred to above which address termination provisions that violate the ESA, find that the termination provisions of the employment contracts are void. It would not make sense for an invalid termination provision to also invalidate other, separate provisions of the contract such as entitlement to specific wages, vacation pay, etc. Given that I have found that the Arbitration Agreement is invalid because it violates the ESA with respect to the filing of a complaint, it is not necessary for me to decide if the termination provision is invalid and whether the Arbitration Agreement is part of the termination provision. The issue of the validity of the termination provision is best left for another day.

[32] Having found that the Arbitration Agreement is invalid because it requires Mr. Nohdomi to arbitrate all disputes arising out of the Employment Agreement and contracts out of the complaint procedure under the ESA, I have discretion to refuse to order a stay under s. 7(2) 2 of the Arbitration Act. In exercising my discretion to refuse to order a stay, I am mindful of the fact that in its letter terminating Nohdomi’s employment, the Defendants said that if he agreed to settle with them, they would not “sue” him for return of his past bonus payments. The termination letter demonstrates that the Defendants did not intend to be bound by the provisions of the Arbitration Agreement.

Issue 2: Does the Arbitration Clause Apply to Catalyst?

[33] The statement of claim pleads the common employer doctrine. The Employment Agreement provides that Mr. Nohdomi’s employment is with Callidus, and he reported to David Reese (President and COO of Callidus) and Newton Glassman (CEO and Executive Chairman of Callidus). Mr. Nohdomi did not generally do work for Catalyst and he had no written or oral agreement with Catalyst. He also generally did not receive instructions from Catalyst. Mr. Nohdomi says Catalyst controlled aspects of his work and the basis of his termination was related to tasks for Catalyst which the Defendants say he failed to perform.

[34] The Plaintiff says Catalyst was not a signatory to the employment contract containing the arbitration clause. To stay this action would allow a common employer to benefit from an arbitration clause that they are not a party to and effectively bar the plaintiff from making a claim against Catalyst.

[35] The Defendants concede that if Catalyst and Callidus are common employers, both are parties to the Employment Agreement and bound by the Arbitration Agreement. The Defendants argue that if they are not common employers, it is not reasonable to separate the issues against each of them and there is no basis to stay the proceeding with respect to Catalyst but allow it to continue with respect to Callidus.

[36] Section 7(5) of the Arbitration Act provides:

Agreement covering part of dispute

The court may stay the proceeding with respect to the matters dealt with in the arbitration agreement and allow it to continue with respect to other matters if it finds that, (a) the agreement deals with only some of the matters in respect of which the proceeding was commenced; and (b) it is reasonable to separate the matters dealt with in the agreement from the other matters.

[37] The effect of s. 7(5) is that there are two preconditions: 1) The arbitration agreement deals with only some of the issues in the proceeding; and 2) it is reasonable to separate the issues. If both preconditions are met, then a stay of the issues dealt with in the arbitration agreement may be granted and the proceeding with respect to the issues not dealt with in the arbitration agreement may proceed. If the two preconditions are not met, then the general rule under s. 7(1) applies, unless one of the exceptions under s. 7(2) applies. Put another way, if it is not reasonable to separate the issues, then the entire proceeding must be stayed unless another exception applies: TELUS Communications Inc. v. Wellman, 2019 SCC 19, [2019] 2 S.C.R. 144, at paras. 66-70.

[38] In this case, the factual and legal issues against the two defendants as pled, including the main issue of whether Mr. Nohdomi’s employment was terminated for just cause, as well as the common employer issue and the inducing breach of contract issue, are closely related and it would not make sense to separate them. To do so would risk inconsistent verdicts. Therefore s. 7(5) has no application. However, as set out above, I find that the exception under s. 7(2) 2 applies.

Issue 3: Is the Arbitration Clause Unconscionable?

[39] Heller is the leading case on unconscionably of an arbitration clause in an employment context. In Heller, the Supreme Court determined that the arbitration agreement was unconscionable because it imposed prohibitive fees for initiating arbitration, which amounted to a “brick wall” between Heller and the resolution of his claims against Uber and required him to travel to Amsterdam. The Court stated that the arbitration clause made the substantive rights under the contract unenforceable because the arbitration was realistically unattainable and amounted to no dispute resolution mechanism at all: paras 95-97.

[40] In this case, given my finding that the arbitration clause is invalid, it is not necessary for me to decide whether it is also unconscionable. Given that a determination regarding unconscionability may well impact the validity of other provisions of the Employment Agreement, it would be more appropriate to conduct such an enquiry on the basis of a full record and not on a motion for a stay.

[41] The parties are encouraged to agree on costs. If they cannot do so, they may make submissions in writing of no more than 3 pages in length in addition to costs outlines, by September 15, 2023.

Merritt, J. Released: August 11, 2023

COURT FILE NO.: CV-21-00674275-0000 DATE: 20230811 ONTARIO SUPERIOR COURT OF JUSTICE BETWEEN: Daizo Nohdomi Plaintiff – and – Callidus Capital Corporation and The Catalyst Capital Group Inc. Defendant REASONS FOR JUDGMENT Merritt, J. Released: August 11, 2023