COURT FILE NO.: CV-23-00711298-00CL DATE: 20240408 SUPERIOR COURT OF JUSTICE – ONTARIO COMMERCIAL LIST
APPLICATION under Article 34 of the Model Law on International Commercial Arbitration, set out in Sched. 2 to the International Commercial Arbitration Act, 2017, S.O. 2017, c.2, Sched. 5, and Rules 14.05(2) and 38 of the Rules of Civil Procedure, R.S.O. 1990, Reg. 194
RE: TEHAMA GROUP INC., Applicant AND: PYTHIAN SERVICES INC. and PYTHIAN SERVICES USA INC., Respondents
BEFORE: Penny J.
COUNSEL: Michael Schafler, Chloe Snider and Ekin Cinar for the Applicant Alan Merskey and Kate Byers for the Respondents
HEARD: March 26, 2024
ENDORSEMENT
Overview
1This case arises out of a 2019 cross border asset purchase agreement by which Pythian acquired a business from Tehama.
2Pythian has brought a motion to stay an application brought by Tehama in the Ontario Superior Court of Justice to set aside an arbitral award made by PricewaterhouseCoopers LLP.
3Pythian seeks a stay of the application on the basis that the parties agreed to the exclusive jurisdiction of the courts of New York for purposes of any suit, action or other proceeding arising out of the asset purchase agreement.
4The agreement between the parties also contains arbitration clauses to deal with certain accounting matters, among them a potential $10 million “earn out” payment by Pythian to Tehama if a prescribed adjusted earnings threshold were met in 2021. The parties could not agree on whether the relevant threshold had been met and referred the matter to be dealt with under the arbitration clause. The arbitrator specified by the parties in their agreement was “the Toronto office of PricewaterhouseCoopers LLP”. The 2023 award of PwC denied Tehama’s claim for the “earn out” payment. It is this Award which has given rise to Tehama’s application to the Ontario Superior Court of Justice.
5The issue in this case concerns the relationship between the forum selection clause in the asset purchase agreement and the provisions of articles 20, 31 and 34 of the Model Law on International Commercial Arbitration, incorporated into Ontario’s International Commercial Arbitration Act, 2017 as Schedule 5.
6For reasons I will explain below, the motion for a stay is dismissed.
Background
7Tehama is an Ontario corporation, based in Ottawa, Ontario. It sold a business to Pythian Services Inc. and Pythian Services USA Inc. Pythian Services Inc. is incorporated in British Columbia and is extra provincially registered in Ontario. Pythian Services USA Inc. is a Delaware corporation.
8The asset purchase agreement (APA) between the parties was concluded on September 6, 2019. The payment structure involved a cash payment of $42.5 million, $15 million in deferred compensation and $3 million in equity transferred to Tehama. Section 1.07 of the APA contemplated certain purchase price adjustments as at closing (working capital, final cash, final debt and the like). Section 1.08 of the APA provided for a $10 million contingent payment. If the business generated more than $11 million in adjusted earnings during the 2021 calendar year, Pythian would make an additional $10 million “earnout” payment to Tehama.
9Both s. 1.07 and s. 1.08 of the APA provide that Pythian would prepare a statement dealing with the purchase price adjustments and the contingent payment by a certain date. If Tehama disagreed with Pythian’s calculations, it would file a notice of disagreement. If the parties could not resolve the disputed issues raised in the notices, all matters in dispute would be submitted to and finally resolved by the Accounting Firm. The APA defines Accounting Firm to mean “the Toronto office of PricewaterhouseCoopers LLP or such other internationally recognized independent public accounting firm mutually acceptable to” the parties.
10The dispute resolution procedures governing the submission of disputes to the Accounting Firm are set out in s. 1.07 (c) to (h). Section 1.08 provides that “the dispute resolution procedures set forth in clauses (c) through (h) of Section 1.07 shall apply to such [contingent payment] dispute, mutatis mutandis.” Among other things, s. 1.07 (and s. 1.08) require the Accounting Firm to make its determination within 30 days. It could not hold any hearings or take depositions or other testimony under oath. The final determination of the Accounting Firm had to be in writing, include the Accounting Firm’s calculation of each matter submitted to it and include a brief summary of the Accounting Firm’s reasons for its determination of each issue. The determinations of the Accounting Firm are “final and binding absent fraud, bath faith or manifest error.”
11The APA also includes a broad forum selection clause, which requires that “any suit, action or other proceeding arising out of this Agreement” or any other documents relating to the transaction be brought exclusively in the state or federal courts of New York:
Section 7.08. Consent to Jurisdiction
Each Party irrevocably submits to the exclusive jurisdiction of the courts of the State of New York, located in New York County or in the United States District Court for the Southern District of New York, for the purposes of any suit, action or other proceeding arising out of this Agreement, the other Transaction Documents (unless a Transaction Document specifies otherwise) or any transaction contemplated hereby or thereby. Each Party agrees to commence any such action, suit or proceeding in the courts of the State of New York, located in New York County or in the United States District Court for the Southern District of New York…Each Party irrevocably and unconditionally waives any objection to the laying of venue of any action, suit or proceeding arising out of this Agreement, the other Transaction Documents (unless a Transaction Document specifies otherwise) or the Transactions in courts of the State of New York, located in New York County or in the United States District Court for the Southern District of New York, and hereby further irrevocably and unconditionally waives and agrees not to plead or claim in any such court that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum. This Section 7.08 shall not apply to any dispute under Section 1.07 that is required to be decided by the Accounting Firm [emphasis added].
12The APA also contains a choice of law provision: the law of New York applies:
Section 7.09. Governing Law.
This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York applicable to agreements made and to be performed entirely within such State, without regard to the conflicts of law principles of such State that would cause the application of the Laws of any other jurisdiction.
13Following receipt of its 2021 audited financial statements, Pythian prepared its statement of adjusted earnings. This showed that the $11 million threshold had not been met such that the contingency payment was not owing. Tehama disagreed with Pythian’s calculations. It delivered its notice of objection. The parties were unable to resolve their disagreement. No “other” accounting firm was suggested or agreed to. Accordingly the issue of adjusted earnings and the contingency payment under s. 1.08 of the APA was duly submitted to the Toronto office of PricewaterhouseCoopers LLP by both parties without complaint, using the dispute resolution procedures set out in Section 1.07(c) through (h) of the APA.
14In accordance with the provisions of s. 1.07 of the APA, the dispute was heard entirely in writing. No hearing was held. No viva voce evidence was tendered. No party representative or counsel attended in Toronto on behalf of Pythian or Tehama. Instead, Pythian and Tehama each submitted written initial and reply submissions and supporting documentation to PwC in Toronto.
15The responsible partner in the Toronto office of PwC, Mr. Polson, delivered the PwC decision (the Award) on September 19, 2023. PwC generally accepted Pythian’s approach to the relevant calculations and concluded that the $11 million adjusted earnings threshold had not been met, such that no contingency payment was owed.
16Tehama initiated this application in the Ontario Superior Court of Justice for an order setting aside the Award under article 34 of the Model Law, essentially on procedural fairness grounds. Tehama also alleges that the arbitral procedural was not conducted in accordance with the agreement of the parties.
17Pythian then commenced an antisuit injunction in New York, based on the choice of forum provision in the APA. In turn, Tehama brought a motion in the New York proceeding for a stay of Pythian’s motion and any enforcement proceedings pending the outcome of its application in Ontario to set aside the Award. Those motions are fully briefed but yet to be argued.
18Pythian’s stay motion is the first of these proceedings to be heard, by order of Kimmel J. dated January 22, 2024.
The Issue
19The issue joined in this motion is whether the choice of forum clause in s. 7.08 of the APA requires Tehama’s application to set aside the Award to be brought before the New York courts under New York law or whether, by virtue of the procedures set out in s. 1.07 and 1.08 and the selection of the Toronto office of PwC as the arbitrator, the International Commercial Arbitration Act (and the Model Law) requires Tehama’s application to set aside the Award be brought in Toronto, Ontario before the Superior Court of Justice. The resolution of this dispute turns on the interpretation of sections 1.07, 1.08 and 7.08 of the APA and the relevant provisions of the ICCA and Model Law.
Analysis
20Pythian argues that, on a motion for a stay of proceedings based on a forum selection clause, the parties ought to be held to their bargain. This is particularly important in the context of international commercial contracts where certainty and security are of paramount importance. “Strong cause” or “exceptional circumstances” must be shown in order for a forum selection clause not to be enforced. Pythian places great weight on the language of s. 7.08 of the APA and the clear intention of the parties that the New York courts would have exclusive jurisdiction over (and New York law would apply to) all suits, actions and other proceedings arising out of the APA.
21Acknowledging that s. 7.08 contains an exception for “any dispute under Section 1.07 that is required to be decided by the Accounting Firm”, Pythian argues that this dispute is not under the purchase price adjustment provisions of s. 1.07 but is a contingent payment dispute under s. 1.08. The exception to the choice of forum clause under s. 1.07 therefore does not apply. In the alternative, Pythian argues that the ICAA and the Model Law could only apply to oust the forum selection clause if Toronto, Ontario was the “place” of the arbitration, which it was not. Finally, Pythian relies on principles of forum non conveniens to argue that, in any event, the forum selection clause should prevail.
22I am unable to accept these arguments.
Is a dispute under s. 1.08 subject to the s. 1.07 exception to the application of s. 7.08 of the APA?
23Section 7.08 specifically provides that the forum selected in that section (the exclusive jurisdiction of the courts of New York) “shall not apply to any dispute under Section 1.07 that is required to be decided by the Accounting Firm.” Section 1.07 specifically refers disputes over purchase price adjustments to the Accounting Firm. Section 1.08 also specifically refers disputes over the contingent payment to the Accounting Firm. Pythian’s argument, that s. 1.08 disputes are not subject to exception from the forum selection clause because s. 7.08 only excepts disputes under s. 1.07 results in a logical absurdity -- disputes under s. 1.08 are subject to the exclusive jurisdiction of the courts of New York, while at the same time must be resolved by the Accounting Firm. It is a fundamental tenet of contract interpretation that commercial absurdities are to be avoided. I also note that Pythian pursued the contingent payment dispute using the arbitration process set out in the APA without exception or complaint. If that dispute was not subject to the s. 1.07 exception, it ought to have been brought before the courts of New York.
24Pythian’s argument also ignores the proviso in s. 1.08 which states that “the dispute resolution procedures set forth in clauses (c) through (h) of Section 1.07 shall apply to such dispute, mutatis mutandis”. The phrase mutatis mutandis means, in the context of contracts, “all necessary changes having been made”. It is a phrase used to incorporate terms from one agreement or part of an agreement, into another: NexusLexus, The Legal Glossary (2024). Applied here, it means that all of the provisions of 1.07 (c) to (h) are incorporated by reference, all necessary changes having been made, into s. 1.08 as well.
25Finally, the parties themselves accepted that: a) the s. 1.08 dispute was subject to determination by the Accounting Firm; and b) the dispute was submitted to the Accounting Firm under both s. 1.07 and s. 1.08. The PwC engagement letter, signed by both parties, states:
Sections 1.07 and 1.08 of the APA address disputes between the Purchasers and Sellers … regarding the Contingent Payment provided for in section 1.08.
26Pythian’s argument for excluding the s. 1.08 procedure from the exception to the forum selection clause available under s. 1.07 is formalistic in the extreme, results in logical inconsistency/absurdity and is plainly contrary to the intentions of the parties to the APA, as determined by the words they used and read in the context of the agreement as a whole.
27The s. 1.08 arbitration procedure is, like the s. 1.07 arbitration procedure, subject to the s. 1.07 exception from the application of the s. 7.08 forum selection clause.
28This determination does not end the matter, however. It is still necessary to determine where any challenge to the validity of the Award is properly brought. That question is addressed in the next section of these reasons.
Do the ICAA and the Model Law apply to the arbitration conducted by the Accounting Firm?
29It is not in dispute that the proceeding employed by the parties regarding the dispute over the calculation of 2021 adjusted earnings was an international commercial arbitration. Section 5(3) of the ICAA provides that the Model Law applies to international commercial arbitration agreements and awards made in international commercial arbitrations. Section 5(1) of the ICAA provides that the Model Law has the force of law in Ontario. Specifically, s. 6(1) of the ICAA provides that, regarding Article 34 of the Model Law (which confers jurisdiction to “set aside” an international commercial arbitration award on certain grounds), the law of Ontario applies. Section 6(2) of the ICAA states that “court” in the context of the Model Law means the Ontario Superior Court of Justice.
30Article 1(2) of the Model Law provides that, with certain exceptions not relevant here, the provisions of the Model Law apply only if the “place of arbitration is in the territory of” Ontario. Article 20 deals with the place of arbitration. Article 20(1) provides:
The parties are free to agree on the place of arbitration. Failing such agreement, the place of arbitration shall be determined by the arbitral tribunal having regard to the circumstances of the case, including the convenience of the parties.
31The choice of “place” of an arbitration is not a geographical choice as much as a legal choice. The choice of place determines the arbitral law applicable to the arbitration. The law of the arbitration is separate and distinct from the substantive law of the contract. The law of the arbitration includes setting aside the award and court intervention in the arbitration process generally: J. Brian Casey, Arbitration Law of Canada: Practice and Procedure, 4th ed. (Juris 2022), ch. 3.12.5, p. 100.
32Article 31(3) of the Model Law provides that the award shall state its date and the place of arbitration as determined in accordance with article 20(1). Article 31(3) goes on to state: “The award shall be deemed to have been made at that place.”
33Article 34 provides that recourse to a court against an arbitral award my be made only by an application to set aside. By virtue of articles 6 and 34(2), an application to set aside an award under the Model Law may only be made to the Superior Court of Justice. This is important, given clear law which stipulates that, if the Model Law applies to the particular dispute in question, the parties cannot contract out of the right of a party to apply to the Superior Court of Justice to set aside the award under article 34: Popack v. Lipszyc, 2015 ONSC 3460, aff’d 2016 ONCA 135; EDE Capital Inc. v. Guan, 2023 ONSC 3273.
34By virtue of this brief overview of the relevant statutory provisions, it is readily apparent that the “place” of the arbitration determines whether the ICAA and the Model Law applies.
[35] Pythian argues that:
- the choice of the Toronto office of PwC was not a choice of place but of arbitrator
- where the arbitration happens to occur is not dispositive of its “place”
- there was, in any event, no hearing, no viva voce evidence and no oral submission made by either party in Toronto.
In these circumstances, Pythian argues that the choice of forum and choice of law provisions of the APA should prevail. The “place” of the arbitration should be considered to be New York.
36I am unable to agree.
37The arbitration agreement embodied in s. 1.07 and s. 1.08 of the APA specifies that any dispute over purchase price adjustments or the contingent payment shall be resolved by the “Accounting Firm”. The parties further agreed that the Accounting Firm was “the Toronto office of PricewaterhouseCoopers LLP or such other internationally recognized independent public accounting firm mutually acceptable to” the parties. No other internationally recognized independent accounting firm was proposed or agreed upon. No other place is suggested by the arbitration provisions of the APA. The parties chose PwC as the arbitrator and specifically chose the Toronto office of PwC to perform that role. As article 20(1) of the Model Law says, the parties are free to choose the place of the arbitration. In my view, on a plain reading of the APA, the parties chose Toronto as that place.
38I would add that the choice of law provision in s. 7.09 of the APA is in no way dispositive of the issue before the court. This is because the question of the substantive law which governs the international commercial contract is clearly different from the question of the law of the arbitration itself.
39Alternatively, article 20(1) of the Model Law also says that, if the parties have not determined the “place” of the arbitration, the place shall be determined by the arbitral tribunal having regard to the circumstances of the case, including the convenience of the parties. In this case, it was obviously convenient to the parties to conduct the arbitration in Toronto, since that is what they chose and what they did. There is no evidence that the arbitration was conducted anywhere else.
40It is conceded that the Award was made in Toronto, Ontario. Apparently, neither party made an issue of the place of arbitration during the arbitration process itself. Not surprisingly, therefore, this issue is not addressed as a standalone issue in the Award. However, the parties’ submissions were directed to Mr. Poulson at PwC’s Toronto office. The Award is rendered on the letterhead of PwC with the address: PwC Tower, 18 York Street, Suite 2600, Toronto, Ontario M5J 0B2. The Award thus confirms that the place of the arbitration was Toronto. By virtue of the provisions of article 31(3), therefore, Toronto is deemed to be the place of the arbitration.
41Further support for this conclusion can be found in the engagement letter of PwC signed by both parties. The engagement letter provides that Mr. Poulson will be the independent accounting expert. Mr. Poulson is a partner with the Toronto office of PwC, holding certification as a charter professional accountant in Canada. The engagement letter sets out the terms of the PwC engagement. PwC is to make a “final and binding determination” of the issues in dispute in accordance with s.1.07 and s. 1.08 of the APA subject to the process set out in Appendix A. Appendix A is essentially a timetable for written submissions from the parties to PwC, a period of time for PwC to request additional information, for the parties to respond and reply, and a schedule for the delivery of PwC’s final determination on the disputed issues. The engagement agreement provides that it “shall be governed by and interpreted in accordance with the laws of the Province of Ontario and the federal laws of Canada applicable therein.” While I accept that the law governing the engagement of PwC by the parties is not necessarily the same as the law of the arbitration, in the circumstances of this case, this proviso in the engagement letter is further confirmation of the parties’ common intention that Toronto, Ontario would be the place of the arbitration.
Is the doctrine of forum non conveniens relevant to assist in the resolution of this dispute?
42As an alternative, or make-weight, argument, Pythian turns to the factors determining whether a particular forum is the convenient one. It argues that these factors support the conclusion that any “set aside” challenge to the Award should be conducted in New York before the New York courts, not in Toronto before the Superior Court of Justice.
43In my view, the question before the court is one of jurisdiction, not convenient forum. Thus, the factors relevant to the determination of convenient forum have no application.
Conclusion
44Pythian relies heavily on the commercial goals of certainty and security in international contracting. It submits that the parties agreed to New York as the forum and law governing all suits, actions and other proceedings arising out of the APA. Tehama, it says, should be held to its bargain and be required to litigate its concerns with the Award in New York, not in Ontario.
45Certainty and security are indeed important goals in international commercial contract-making. But it was a purpose of the Model Law to advance and enhance these purposes. As the Explanatory Notes of the UNCITRAL secretariat (at p. 26) state:
The territorial criterion governing most of the Model Law was adopted for the sake of certainty…In addition to the law governing the arbitral procedure, the territorial criterion is of considerable practical importance in respect of articles 11, 13, 14, 16, 27 and 34, which entrust State courts at the place of arbitration with functions of supervision and assistance to arbitration.
46The parties chose Toronto as the place of arbitration for all disputes arising out of purchase price adjustments (under s. 1.07) and the contingent payment (s. 1.08). These disputes are specifically excepted from the choice of forum provisions of s. 7.08. Having chosen Toronto as the place of the arbitration, the Model Law applies. Any application to set aside the Award must be made to the Ontario Superior Court of Justice.
47Tehama is not seeking to avoid the consequences of its bargain by bringing its challenge to the Award in Ontario. It is required to do so. This is what the parties agreed to. It is Pythian which is seeking to avoid the consequences of that bargain.
48For these reasons, the motion for a stay of Tehama’s application to the Superior Court of Justice is dismissed.
Costs
49Tehama submitted a partial indemnity cost outline of about $45,000 (all in). Pythian submitted a partial indemnity cost outline od about $30,000 (all in). In my view, $35, 000 (all in) is an appropriate cost award for the successful party in this case. It is so awarded to Tehama.
Penny J.
Date: April 8, 2024