Superior Court of Justice – Ontario
Commercial List
Re: Aaron Ford, Plaintiff
And:
GMP Securities LP and Steve Ottaway, Defendants
Before: Penny J.
Counsel: Joseph Groia and David Sischy for the Plaintiff David D. Conklin, Peter Kolla and Brittni Tee for the Defendants
Heard: January 12, 2024
Reasons for Decision
Overview
1There are effectively three opposed motions before the court.
2The defendants, GMP Securities L.P. and Steve Ottaway, move to amend their statement of defence to plead issue estoppel and abuse of process and, assuming the amendment is granted, to have the plaintiff Aaron Ford’s Ontario action dismissed on the grounds that his claims are barred by issue estoppel and are an abuse of process as a result of a 2022 Arbitration Award.
3Mr. Ford moves to amend his statement of claim to add RF Capital Group Inc. as a defendant to this proceeding, along with consequent amendments to the allegations set out in the statement of claim.
4The basic issues arising out of these motions, therefore, are:
(1) should the defendants’ motion to amend their statement of defence be granted?
(2) should the defendants’ motion to dismiss Mr. Ford’s action on the basis of issue estoppel and abuse of process be granted?1 and
(3) should the plaintiff’s motion to amend the statement of claim be granted?
5For reasons that I will explain below, the motion to amend the statement of defence is granted. The motion to dismiss the plaintiff’s claims for breach of contract and negligence/negligent misrepresentation based on issue estoppel is granted. The motion to dismiss the plaintiff’s claims for breach of fiduciary duty/breach of trust based on issue estoppel is dismissed. The plaintiff’s motion to add RF Capital as a party, and to make the attendant amendments to the claim, is dismissed.
Background
6Mr. Ford was one of a number of Series A-2 unitholders in Double Road Holdings LLC (DRH). DRH was licensed to grow cannabis for medical purposes in the United States. In 2016, a company now known as Curaleaf Inc. acquired 51% of the DRH membership interests. The remaining 49% was held by Mr. Ford and other minority unit holders (the A-2s). The A-2s had a put/call option to exchange their units for shares of Curaleaf. A dispute arose between the A-2s and Curaleaf over the applicable exchange ratio. In ongoing negotiations, the A-2s were “mainly represented by DRH’s largest investor, Aaron Ford”2.
7While this dispute was ongoing, in 2018 the A-2s learned that Curaleaf was planning a reverse take over (RTO) of a publicly traded Canadian cannabis company. Curaleaf needed to obtain full control of DRH to do so. The potential benefits of the RTO created an incentive for both sides (Curaleaf and the A-2s) to resolve the exchange ratio dispute and issue Curaleaf shares to the A-2s. GMP was the lead agent for Curaleaf on the RTO. Mr. Ottaway was the senior investment banker for GMP on the file.
8Again, there were ongoing negotiations, seeking to expedite the resolution of the exchange ratio to clear the way for the parties to participate in the benefits of the RTO. Mr. Ford was at the heart of these negotiations, on his own behalf and on behalf of the other A-2s. There were a series of meetings and discussions through September and October 2018. On October 18, 2018, Mr. Ottaway became directly involved in these negotiations. There were further negotiations and discussions, including another critical meeting on October 24.
9Ultimately, the parties agreed to a Stipulation of Settlement which provided for an immediate cash payment to the A-2s, the issue of Curaleaf shares to the A-2s, the potential for the issue of additional shares based on a second appraisal, and a 180-day lock-up agreement governing the A-2s’ newly issued shares. The Lock-Up Agreement provided for a 180-day period within which the A-2s would not sell or otherwise dispose of their shares, with various exceptions. The pertinent exception enabled the A-2 shareholder to sell “with the written consent of GMP, such consent not to be unreasonably withheld, conditioned or delayed, provided that, in the first 30-day period following the completion of the Business Combination [the RTO], the Resulting Issuer’s [Curaleaf’s] written consent should also be obtained”.
10There was an additional complication. Because cannabis remained illegal in most U.S. jurisdictions, trading in cannabis-related stock presented regulatory and legal issues. The Settlement provided that the marketing of the sale of any A-2 shares during the lock-up had to be done through GMP. However, GMP could not itself deal directly with the A-2s as broker. The A-2s had to have accounts with their own separate broker licensed in the U.S. This proved to be problematic in a number of ways. As will be discussed in more detail below, the broker recommended by Curaleaf and GMP, Gar Wood, was ultimately not in a position to act as broker for the A-2s in respect of sales of cannabis-related stock. Further, very few of the A-2s ever actually retained their own broker during the relevant period.
11The RTO closed on October 29, 2018. Curaleaf became a publicly traded company in Canada. The RTO closed at a price of $11.45 per share. The 180-day lock-up expired on April 28, 2019. At the outset of trading on October 29, 2018, the price dropped precipitously and remained below the RTO price until late March 2019.
12During the lock-up period, several A-2’s, including Mr. Ford, made requests to GMP for release from the lockup. Mr. Ottaway took the position that because the trading price was well below the issue price, a rebuilding of the share price would be necessary prior to introducing additional stock to the market. He therefore declined to grant written consent for the A-2s to trade. These requests were renewed in March 2019 when the trading price approached, then exceeded, $11.45. Again, Mr. Ottaway declined to provide written consent because the trading volumes at or above the issue price were too small and unstable. He undertook through his counsel, however, that if current market prices continued, GMP would provide liquidity so long as there was likely to be no discernible impact on the market price.
13Once it was known that Gar Wood would not act as U.S. broker for the A-2s, GMP detailed two other procedures for the A-2s to ensure that they would be in a position to trade if conditions were favourable. One alternative involved the U.S. broker, Haywood Securities. The other was through an offshore entity known as Sage Group Limited. As will be discussed further below, the Arbitrator found that, with one exception (not Mr. Ford), none of the A-2s pursued either of these options.3
14Mr. Ford and other A-2s took great exception to Mr. Ottaway’s refusal to process their trades. They took the position they had been promised “free liquidity” and, in any event, that Mr. Ottaway’s consent to their request to trade was being unreasonably withheld.
15Specifically, on April 3 and 18, 2019, Mr. Ford says he learned that GMP had a client looking to purchase a substantial quantity of Curaleaf shares. Mr. Ford sent GMP and Mr. Ottaway orders to sell his shares to this buyer. At that time, Mr. Ford says, Curaleaf was trading higher than the RTO price and on volumes in the millions of shares. Mr. Ford received no response from GMP or Mr. Ottaway.
16Ultimately, to “mitigate” the alleged damages caused by GMP and Mr. Ottaway’s refusal to provide consent during the 180-day restriction period, Mr. Ford says he arranged to sell his shares as soon as he reasonably and administratively could. Those sales occurred at a per share price that was lower than the prevailing market price on April 3 and 18, 2019, resulting in alleged losses to Mr. Ford for which he now claims, in this action, GMP and Mr. Ottaway are liable.
The Litigation
17On October 3, 2019, Mr. Ford commenced this action against GMP and Mr. Ottaway for breach of contract, negligence, negligent misrepresentation, breach of fiduciary duty and breach of trust. Pleadings closed in 2020. The parties exchanged productions in early 2022 but no discovery has been scheduled.
18On January 23, 2020, the A-2s issued an arbitration claim against Curaleaf, alleging fraudulent inducement, breach of contract and breach of the covenant of good faith. All 44 of the A-2s (that is, including Mr. Ford) agreed to commence, and participate in, the Arbitration. Mr. Ford was both deposed and testified as a key witness for the A-2s in the Arbitration hearing. Documents from GMP and Mr. Ottaway were produced and Mr. Ottaway was deposed and testified in the Arbitration hearing. The Arbitration hearing took place for seven days commencing at the end of March 2022, followed by post-hearing and rebuttal memoranda of argument. The A-2s lost.
Brief Summary of The Arbitrator’s Award
19The 43-page Award exhaustively reviews the evidence, makes factual findings and analyzes, and rejects, the A-2’s claims in the Arbitration. The Award is final and binding.
Fraudulent Inducement
20The Arbitrator rejected the A-2s’ claim that Curaleaf and GMP falsely represented to them that they would have “freely tradeable stock”. He found that the possibility of free liquidity was discussed after the October 17 and 18 meetings (which yielded the basic economic terms for the Settlement), but triggered pushback from Curaleaf. Curaleaf’s initial proposal that GMP use “best efforts” to find a buyer for the A-2’s shares during the lock-up changed with the October 23 communication from Curaleaf’s external counsel to the A-2s. In that communication, Curaleaf required a lock-up agreement with the proviso that GMP would not “unreasonably” refuse release from the lock-up. The Arbitrator found that this was a change to which the A-2s “eventually reluctantly consented”: Award, p. 23.
21The Arbitrator emphasized that this change from ‘best efforts’ to ‘not unreasonably withhold’ “reflected an intention on the part of GMP to reserve to itself defined discretion to decline to lift the lock-up in appropriate circumstances” and expressly rejected the A-2s’ argument that “the new provision -- although literally authorizing a lock-up -- was not to be enforced”: Award, p. 23.
22The Arbitrator accepted the testimony of Curaleaf’s external counsel, Ms. Coiteux, and Mr. Ottaway that the lock-up provision was designed and intended as a bona fide retention of discretion for GMP to withhold release of the lock-up depending on the circumstances. Although the details of what was said at the critical October 24 meeting were disputed, the Arbitrator accepted the testimony of Ms. Coiteux that Mr. Ottaway pledged simply to act reasonably under the terms of the lock-up agreement and did not convey any suggestion that GMP would provide free liquidity irrespective of the circumstances.
23The Arbitrator found that the A-2s accepted the risk of uncertainty as to share price and GMP’s interpretation of the lock-up.
24The Arbitrator concluded that the A-2s had failed to establish that: (i) either Curaleaf or GMP made or authorized knowingly false statements about liquidity; (ii) the A-2s had justifiably relied on any implied or explicit representations that the lock-up provisions were not intended to be taken literally or enforced; or (iii) they would have refrained from entering into the Settlement if they had understood that the Lock-Up Agreement imposed a genuine restriction on their ability to trade.
25The Arbitrator also found “a failure of proof that Curaleaf (or GMP), by their statements concerning liquidity, intended to mislead claimants into signing the Settlement Stipulation based on a misunderstanding of its real terms.”
26The Arbitrator found that there was a strong rationale for the insistence of both Curaleaf and GMP on the modified lock-up provision ultimately reflected in the Settlement and the Lock-Up Agreement, and a demonstrated basis for GMP’s refusal to release the A-2s (including Mr. Ford) from the lock-up, either as a group or individually:
... the evidence in this case makes clear that there was a strong rationale for the last-minute insistence of Curaleaf and GMP on a modified lockup […]. Given these circumstances, the record … adequately demonstrates a basis for GMP’s refusal to countenance selling by the claimants – either as a group selling all or most of their shares or as individuals selling small portions of their holdings: Award, pp. 27-28.
27The Arbitrator also rejected the A-2s’ contention that Curaleaf had falsely told them that they would be the only shareholders who would not be locked up, when in fact investors who held less than 0.5% of the shares were not subject to a lock-up. The Arbitrator found that the A-2s were aware of the differential treatment of shareholders holding less than 0.5% of the shares.
28In addition, the Arbitrator also found that the A-2s had not relied on and had no basis to expect “a unique freedom from any lockup”:
Fifth, the evidence reflects that several of the A-2s -- including Messrs. Ford and Birnbaum -- disavowed any reliance on uniqueness of liquidity as essential or even significant in their decision to sign the Settlement Stipulation. […] Sixth, and finally, for reasons already noted, [the A-2s] did not receive free liquidity in the Settlement Stipulation, and thus have no basis to complain that they were denied a unique freedom from any lock-up: Award, p. 30
29The Arbitrator also rejected the A-2s contention that GMP had “boasted of its ability to arrange for the smooth sale of claimants’ shares, possibly in only one or two days, and then failed to provide those services, which assertedly involved overcoming all possible obstacles to a sale.” The Arbitrator found that:
[this] claim is not supported by the record. […] In any case, neither the Settlement Stipulation nor the record evidence evinces any assumed obligation by Curaleaf (or even GMP) to ensure that a willing broker could be produced irrespective of other circumstances: Award, p. 31.
Breach of Contract Claims
30With respect to the claim for breach of the Settlement and Lock-Up Agreement, the Arbitrator rejected the A-2s’ argument that the failure of GMP to consent to release the A-2s from the lockup, before or after the market price exceeded the RTO level and trade volume increased, was unreasonable. He observed that Curaleaf’s expert’s assessment of the circumstances – which involved a major price fall starting at the time of the RTO in October 2018 and continuing until late March 2019, with accompanying thin trading volume and continuing erratic volume even after the price exceeded the RTO figure – “echoed that of Mr. Ottaway in his explanation as to why he was reluctant to approve a release through almost the entirety of the lockup period”: Award, p. 35.
31The Arbitrator concluded that “the record does not reflect unreasoned refusal to address release during this period and that “the caution exhibited by GMP in delaying the approval of a lockup release even after the share price exceeded the RTO price, and while volume fluctuated drastically, was not unreasonable”: Award, pp. 35-36.
No Damages
32The Arbitrator found that the A-2s (including Mr. Ford) could not prove any damages for the alleged breach of contract during the lock-up period, both during the time that Curaleaf’s stock traded lower than the RTO price, and even when it traded above the RTO price. The lock-up in fact had prevented the A-2s from selling in a down market and allowed them to sell on more favourable terms after the lock-up expired. Applying the relevant measure of damages, the Arbitrator concluded that:
the lockup had provided substantial potential savings to [the A-2s] by preventing their early sale of shares during a down market and allowing them to sell on favorable terms immediately after the lockup expired: Award, p. 38.
33The Arbitrator also held that the A-2s (including Mr. Ford) could not prove damages due to their own failure to take measures necessary to trade either during the lock-up or immediately thereafter, including by opening their own required independent brokerage accounts. Even if GMP had consented to trading, the A-2s had no way of actually conducting the trades without a U.S. broker: Award, p. 36.
Analysis
34In the analysis which follows, I shall first address the defendants’ motion to amend to issue estoppel and abuse of process. I shall then address the question of issue estoppel. Finally, I shall address the plaintiff’s motion to add GMP’s parent corporation, RF Capital, as a party.
Defendant’s Motion to Amend
35The defendants move to amend their defence to plead issue estoppel and abuse of process. They are, in effect, seeking the amendment as a foundation to their argument of the very motion now brought before the court. Rule 26.01 requires that leave to amend a pleading shall be granted on such terms as are just, absent non-compensable prejudice. The onus to prove actual prejudice lies with the party responding to the motion to amend (here, Mr. Ford). Non-compensable prejudice does not include prejudice resulting from the potential success of the amended plea.
36The plaintiff takes the position that amending the statement of defence to plead issue estoppel and abuse of process is either premature or moot. The issue is one of timing; which comes first, the chicken or the egg? According to the plaintiff, the motion to amend should be assessed in the light of the outcome of the issue estoppel motion; if granted, amendments may be made, if not, no amendments should be allowed.
37I agree with the defendants that the appropriate sequence is to deal with the amendment motion first, and then deal with the motion to dismiss on grounds of issue estoppel.
38The amendment sought discloses a remedy known to the law. Mr. Ford has provided no evidence of actual or non-compensable prejudice to him if GMP and Mr. Ottaway’s amendments to plead issue estoppel and abuse of process are permitted. The motion to amend the statement of defence is granted.
Res Judicata/Abuse of Process
Overview of the Legal Context
39At the heart of the doctrine of res judicata is the prevention of unfairness. The finality of decisions should be respected and unnecessary re-litigation avoided: British Columbia (Workers’ Compensation Board) v. Figliola, 2011 SCC 52, [2011] 3 S.C.R. 422, at para. 34. The particular variant of the principle of res judicata relevant here is issue estoppel.
40The principle of issue estoppel applies where:
(a) the same question has been decided;
(b) the judicial decision which is said to create the estoppel was final; and
(c) the parties to the judicial decision or their privies were the same persons as the parties to the proceedings in which the estoppel is raised or their privies: Angle v. M.N.R., 1974 CanLII 168 (SCC), [1975] 2 S.C.R. 248, at p. 254.
If the moving party successfully establishes these preconditions, the court must still determine whether, as a matter of discretion, issue estoppel ought to be applied to dismiss the proceeding or any portion of it: Danyluk v. Ainsworth Technologies Inc., 2001 SCC 44, [2001] 2 S.C.R. 460, at para. 33.
41Issue estoppel extends to any “right, question or fact” determined in the earlier proceeding:
When a question is litigated, the judgment of the Court is a final determination as between the parties and their privies. Any right, question, or fact distinctly put in issue and directly determined by a Court of competent jurisdiction as a ground of recovery, or as an answer to a claim set up, cannot be re-tried in a subsequent suit between the same parties or their privies, though for a different cause of action: McIntosh v. Parent, 1924 CanLII 401 (ON CA), [1924] 4 D.L.R. 420 (Ont. C.A.), at p. 422.
42Issue estoppel encompasses “the material facts and the conclusions of law or of mixed fact and law (‘the questions’) that were necessarily (even if not explicitly) determined in the earlier proceedings”: Danyluk, at para. 24.
43Issue estoppel applies to decisions in consensual commercial arbitration proceedings: The Manufacturers Life Insurance Company v. Parc-IX Limited, 2018 ONSC 3625, at para. 43.
44The dispute in this case centres on the first and third components of the test for issue estoppel: a) was the “same question” decided; and, b) were the “parties or their privies” the same.
45In the following analysis, I will address first the question of whether the “parties or their privies” are the same in both proceedings. I will then turn to the critical issue of whether the “same questions” arise in both proceedings.
Parties or Their Privies
46There are two issues raised under this element of the test.
47First, Mr. Ford argues he was not a party or privy to the A-2 Arbitration. Second, Mr. Ford argues that neither GMP nor Mr. Ottaway were parties or privies in the Arbitration.
Was Mr. Ford a Party?
48Mr. Ford argues that there were eight individuals and six entities that made up the A-2 unitholders. The six entities act as holding companies for their underlying individual shareholders. In total, there were 44 individuals on whose behalf the Arbitration was initiated. They all invested for different reasons and had their own investment strategies and risk tolerances. He argues that it was not he, but Mr. Siegart, another A-2, who was appointed as the claimants’ representative in the Arbitration proceedings. Mr. Ford claims he had no authority or control over the conduct of the Arbitration. He was only one of 11 witnesses who testified.
49Mr. Ford claims that he had no authority to make any litigation decisions, did not have a say in the litigation strategy, did not have a meaningful voice in the proceedings, and did not have the opportunity to present his claims against GMP and Mr. Ottaway in the Arbitration. Therefore, Mr. Ford submits, he cannot be considered a party or privy to the Arbitration.
50I am unable to accede to this argument.
51In my view, Mr. Ford was plainly a party to the Arbitration. On cross-examination, Mr. Ford admitted that all of the A2s were the claiming parties in the U.S. arbitration and that he was one of the A2s:
Q. […] The A2s are the moving parties in an arbitration in the United States that was against PalliaTech, which is now called Curaleaf, and that is the arbitration that we are talking about. Do you understand that to be correct?
A. Yes.
Q. Thank you. You are one of those A2s?
A. Yes.
52Mr. Ford also admitted that he was represented by Quinn Emanuel, the A2s’ counsel:
Q. Quinn Emanuel is representing the A2s, and you are one of those A2s. Correct?
A. Yes.
Q. So Quinn Emanuel is also your counsel in that proceeding. Correct?
A. It was, yes.
53Mr. Ford is incorrect when he asserts there were no claims in the Arbitration for his “particular losses”. The A-2s’ pleading in the Arbitration refers specifically to Mr. Ford’s April 3 and April 18 requests to sell, characterizing them as “the A-2s’” requests, and the A-2s claimed damages for breach of contract because “they were denied consent to sell shares at 14.00, 14.50 and 15.18 CAD”, relying on Mr. Ford’s April 18, 2019 email for these figures. If the A2s’ claims in the Arbitration had been successful, he would have shared in that success.
54Mr. Ford chose to participate in the U.S. arbitration. The evidence is clear that he had the ability to opt out and that he chose not to do so. Further, his protestations of lack of voice and input notwithstanding, it is clear from the Award that Mr. Ford was the largest single A-2 unit holder and the key A-2 fact witness. It is also clear that he was at the forefront of the negotiations, meetings and discussions which lead to the Settlement and the Lock-Up Agreement, both of which were at the heart of the A-2s’ claims.
55Clearly, Mr. Ford was a party to the Arbitration proceedings and is bound by the result.
Were GMP and Mr. Ottaway “Privies” of Curaleaf?
56It is conceded that GMP and Mr. Ottaway were not parties to the Arbitration. The more challenging question is whether GMP and Mr. Ottaway were “privies” of Curaleaf in the context of the Arbitration.
57Privity may arise out of an interest in the previous litigation or its subject matter: Dableh v. Ontario Hydro, 1994 CanLII 7432 (Ont. Gen. Div.), at para. 11. There must be a “sufficient degree of identity between the successful defendant and the third party” so as to “make it just to hold that the decision to which one was party should be binding in proceedings to which the other is party”: Gleeson v. Wippell & Co. Ltd. [1977] 1 W.L.R. 510 (Ch. D.) at 515. The privity requirement provides an assurance of “mutuality”. It ensures that a stranger to the earlier proceeding is not entitled to insist that a party is bound by the earlier decision while he himself is not bound by it: Danyluk, at para. 59.
58The concept of privity in this context is an elastic one, to be decided on the particular facts of each case. Relevant factors include where there is “a clear community of interest”, where the privy has had a “meaningful voice” in the prior proceeding and where the non-party was involved in the prior proceeding, such as by being present and by giving evidence: Dableh, at para. 12; Catalyst Capital Group Inc. v. VimpelCom Ltd., et al., 2018 ONSC 2471, at paras. 96, 97 and 102, aff’d 2019 ONCA 354, leave to appeal to S.C.C. refused, [2019] S.C.C.A. No. 284.
59Mr. Ford makes the point that no claim was made against GMP or Mr. Ottaway in the Arbitration. He says the fact that GMP was an agent for Curaleaf in the RTO or that Mr. Ottaway testified for Curaleaf at the Arbitration is not determinative of anything. He argues that there is no mutuality between Mr. Ottaway’s role in the Arbitration versus his role, and GMPs, as defendants in the Ontario action. A finding of liability for breach of contract against Curaleaf in the Arbitration, for example, would not have bound GMP and Mr. Ottaway in Mr. Ford’s Ontario claim.
60I am unable to agree with these arguments. Mr. Ford’s argument effectively reads the “privies” qualification out of the test. It also assumes too narrow a view of the role of issue estoppel, which applies not only to conclusions of law or of mixed fact and law but to any finding on a material “right, fact or question”.
61Mr. Ottaway was the lead investment banker for GMP, which was Curaleaf’s agent on the RTO. Mr. Ottaway was central to the negotiation of the Lock-Up Agreement. The A-2s’ allegations in the Arbitration emphasized the central role played by Mr. Ottaway and their reliance on his alleged misrepresentations in entering into the Settlement and the Lock-Up Agreement. This was the central issue in the Arbitration. The documents produced in the Ontario action were produced in the Arbitration. Mr. Ottaway was deposed in advance of the Arbitration hearing. He was cross examined by the A-2s’ counsel at the hearing. His evidence played a significant, indeed critical, role in the Arbitrator’s reasons and analysis of the A-2s’ claims.
62It may be true that, by the time of the Arbitration hearing itself, Mr. Ottaway no longer worked for GMP. That does not change the fact that his statements to the A-2s in October 2018 as the representative of GMP, itself an agent of Curaleaf, would have bound Curaleaf had, for example, the Arbitrator found that Mr. Ottaway made the material misrepresentations alleged. Although a witness has limited rights of participation, both Mr. Ottaway and GMP were represented by Goodmans before, during and after the Arbitration. Their counsel was well aware of, indeed took an active role behind the scenes in, the Arbitration proceedings. In these circumstances, a finding of fact by the Arbitrator that Mr. Ottaway had made material misrepresentations to the A-2s as they alleged would, in my view, not only have bound Curaleaf in the Arbitration, but would also have bound Mr. Ottaway and GMP in the Ontario proceedings. It does not matter that Mr. Ottaway and GMP were not, or could not be, found liable for any monetary damages in the Arbitration itself (because they were not named as parties). As noted earlier, it is not only conclusions of legal liability that are caught in the issue estoppel net.4 Findings of material fact regarding misrepresentations made by Mr. Ottaway (had the Arbitrator made such findings) would have bound Mr. Ottaway and GMP in the Ontario proceedings. The assurance of mutuality is, in my view, met in the circumstances of this case.
63I find, therefore, that Mr. Ottaway and GMP were “privies” of Curaleaf within the meaning of that term in the context of the third element required to find that issue estoppel applies.
Same Question
64This brings me to the real issue in this case -- whether the rights, questions, or facts distinctly put in issue and directly determined by Arbitrator in dismissing the Arbitration claim are the same as any material rights, questions or facts put in issue, or required to be proved, in the Ontario proceedings.
The Pleaded Allegations
65Both the claims in the Arbitration and the claims in the Ontario action alleged the same or similar material facts:
(a) GMP assured the A-2s that GMP would have “no problem” placing the A-2s shares following the RTO;
(b) GMP would likely “take down the entire block at once” and place it with institutional clients;
(c) GMP would facilitate trading by the A-2s, and address any other issues arising out of the fact that the A-2s were U.S. shareholders, such as setting up accounts with U.S. brokers;
(d) GMP would be able to trade the A-2s shares within days of the RTO;
(e) although all Curaleaf shareholders were subject to the lockup, GMP and Curaleaf were prepared to provide the A-2s with unique exceptions to the strict lockup agreement;
(f) at no point did GMP indicate that GMP’s consent to release the lockup was contingent on the relevant market price of the shares relative to the offer price;
(g) GMP was in a position of undisclosed conflict because it was acting for Curaleaf on two other transactions in which Curaleaf was acquiring shares, where Curaleaf’s interests were in opposition to the interests of the A-2s;
(h) contrary to its alleged representations, GMP insisted upon exercising the discretion it held under the terms of the lockup agreement to deny its consent. It did so on the basis of previously undisclosed considerations: 1) “market conditions”, meaning it would not consent until the market price exceeded the offer price; and 2) even when the market price rose to and above the offer price, the trading was too thin to support release of the A-2s lockup because there was insufficient “institutional demand”; and,
(i) as a result of GMP’s refusal to trade the A-2s’ shares, the A-2s were wrongfully deprived the ability to sell at advantageous prices, and later, after the lock-up expired, had to sell at lower prices.
66The A-2s’ pleaded claims in the Arbitration were for breach of contract, fraudulent misrepresentation and breach of the implied covenant of good faith. Mr. Ford’s pleaded claims in the Ontario action are for breach of contract, negligence, negligent misrepresentation and breach of fiduciary duty/breach of trust.
67Mr. Ford relies heavily on the fact that his pleaded causes of action are largely different from the pleaded causes of action in the Arbitration; only breach of contract is common to them both. Mr. Ford’s factum, at para. 25, lists fifteen issues in the Ontario litigation which, he argues, were not determined in the Arbitration. These range from whether GMP’s refusal to consent to release Mr. Ford from the lockup agreement when asked to do so was unreasonable and therefore in breach of contact, to whether GMP owed Mr. Ford a duty of care as his broker, to whether GMP owed duties of a fiduciary nature to Mr. Ford and whether Mr. Ford suffered damages as a result of GMP’s alleged breaches of its obligations to him.
68Mr. Ford further submits that any limited commentary on any of these issues in the Arbitrator’s decision is merely obiter dicta.
Breach of Contract
69The breach of contract claims in both the Arbitration and the Ontario action are founded on the same material allegation – that GMP failed to provide the promised liquidity and unreasonably withheld its consent to release the A-2s’ shares from the lock-up.
70I will return to the alleged misrepresentation claims below, but on the core contract breach claim, the Arbitrator squarely and unambiguously found that there was no promise of “free liquidity” and that GMP’s refusal of consent was entirely reasonable in the circumstances. This issue is dealt with primarily at pp. 35 to 38 of the Award. There was no “unreasoned refusal to address release”. The caution exhibited by GMP in delaying the approval of a lock-up release, even after the market price exceeded the offer price, “was not unreasonable.” The Arbitrator accepted Mr. Ottaway’s evidence that if the RTO had been successful, he would have been willing to release the lock-up. The A-2s, the Arbitrator concluded, “ultimately were willing to take the risk of uncertainty as to both how the share price would fare and how GMP would interpret the lockup terms.”
71Further, the Arbitrator found that even if consent ought to have been given, the A-2s could not prove that the refusal caused any damages. This was because the Arbitrator accepted Mr. Ottaway’s evidence that the A-2s were told, and knew, about the possible difficulty of arranging for brokerage services for American investors in cannabis stock and that the A-2s had to have open accounts with a U.S. broker in order to trade. Almost none of them, including Mr. Ford, had such accounts at the time the consents were being sought. The one exception, a Mr. Birnbaum, contacted a broker recommended by GMP, who was able to set up an account and remove “restrictive legends” such that Mr. Birnbaum was trading at favourable prices by May 21, 2019. Indeed, the Arbitrator accepted the evidence of Curaleaf’s expert that the lockup had actually provided substantial potential savings to the A-2s by preventing their early sale of shares during a down market and allowing them to sell on favourable terms immediately after the lockup expired (assuming they had undertaken the steps necessary to enable them to trade at that point by opening the necessary U.S. accounts, etc.).
72For these reasons, the findings in the Award are dispositive of Mr. Ford’s breach of contract allegations in the Ontario action. Issue estoppel applies to this claim.
Negligence/Negligent Misrepresentation
73Mr. Ford’s Ontario action pleads that GMP owed Mr. Ford a duty of care as his broker to act reasonably. As a result of the “conduct described above” and the “various misrepresentations he made to Mr. Ford in the course of negotiations” leading up the lockup agreement, he alleges, Mr. Ottaway fell below the standard of reasonable care. Importantly, the “conduct described above” and the “various misrepresentations” referred to in paras. 39 and 40 of the statement of claim are essentially the same allegations relied upon in relation to the breach of contract claim.
74Mr. Ford relies heavily on the fact that the misrepresentation claim in the Arbitration was for fraudulent misrepresentation, whereas his Ontario action alleges negligence and negligent misrepresentation. The higher standard of scienter, or making statements knowing they are false, he says, distinguishes his claim from the claims in the Arbitration.
75While Mr. Ford is correct that fraud is different than negligence because of the “knowingly” requirement, this does not end the enquiry. This is because there are five necessary elements to a claim of fraudulent misrepresentation under Delaware law, only one of which turns on knowledge of the alleged falsity. These factors were listed in the Arbitrator’s decision: (i) a false representation; ii) the defendant’s knowledge that the representation was false; iii) an intent to induce the plaintiff to act or refrain from acting; iv) the plaintiff’s action or inaction taken in reasonable reliance on the representation; and v) damage to the plaintiff as a result.
76It is well established that two causes of action that share material facts in common can give rise to issue estoppel: The Catalyst Capital Group Inc. v. VimpelCom Ltd., 2019 ONCA 354, at para. 44.
77At least three of the elements of fraudulent misrepresentation under Delaware law are shared with negligent misrepresentation under Ontario law: i) a false representation (i.e., one that is untrue, inaccurate or misleading); ii) reasonable reliance by the plaintiff on the misrepresentation; and iii) detriment in the sense that it caused the plaintiff to suffer damage.
78Regarding the representations which were alleged to be untrue, inaccurate or misleading, the Arbitrator specifically addressed the A-2’s contentions that Mr. Ottaway represented that the shares would be freely tradable; that the A-2s were falsely told they were the only shareholders who would not be locked up; and that GMP would be able to arrange for the smooth sale of the A-2 shares. The Arbitrator dismissed all of these allegations:
We find credible the testimony of Ms. Coiteux that Mr. Ottaway pledged simply to act reasonably under the terms of the Lockup Agreement, and did not convey any suggestion that he would provide free liquidity irrespective of circumstances.
In [the A-2s] Amended Statement of Claim, they focus heavily on the contention that [Curaleaf] falsely told them that they would be the only shareholders who would not be locked up, whereas in fact all investors who held less than .5 percent of the shares were not subject to a lockup. […] This claim fails for a variety of reasons.
The remaining basis for [the A-2s]’ fraudulent-inducement claim is their contention that GMP had boasted of its ability to arrange for the smooth sale of [the A-2s]’ shares, possibly in only one or two days, and then failed to provide those services, which assertedly involved overcoming all possible obstacles to a sale. […] Apart from the failure to plead what [the A-2s] now describe as a claim founded on representations about GMP’s ability to handle all aspects of these transactions “seamlessly”, the claim is not supported by the record: Award, pp. 27 to 31
79Regarding reasonable reliance, the Arbitrator found that the A-2s had not relied on any of the alleged representations but had accepted the risk of uncertainty as to the share price and GMP’s interpretation of the requirement that consent to trade not be unreasonably withheld. He concluded, “it appears that [the A-2s] ultimately were willing to take the risk of uncertainty as to both how the share prices would fare and how GMP would interpret the lockup terms.”
80Finally, regarding detrimental reliance, the Arbitrator concluded that the A-2s had failed to establish either that they had justifiably relied on any representations that the lock-up provisions were not intended to be taken literally or enforced, or that they would have refrained from entering into the Settlement if they had understood that the lock-up agreement imposed a genuine restriction on their ability to trade.
81These findings in the Award are determinative of Mr. Ford’s negligence and negligent misrepresentation claims against GMP and Mr. Ottaway in the Ontario action. Accordingly, issue estoppel applies.
The Exercise of Discretion
82The second step in the issue estoppel analysis requires consideration of whether, if the requirements for issue estoppel are met, the court should nevertheless decline to exercise its discretion to dismiss the claim.
83Issue estoppel is an equitable doctrine. The doctrine of issue estoppel is designed as an implement of justice and a protection against injustice. It inevitably calls upon the exercise of judicial discretion to achieve fairness according to the circumstances of each case. In exercising this discretion the court must ask: is there something in the circumstances of this case such that the usual operation of the doctrine of issue estoppel would work an injustice?: Danyluk, at para. 63.
84As described earlier, in the context of Mr. Ford’s voluntary and active participation in the Arbitration, Mr. Ford had his day in court on critical elements of the claims he now asserts against Mr. Ottaway and GMP. There is nothing about the circumstances of this case which persuades me that the usual operation of the doctrine of issue estoppel would work an injustice. Accordingly, the plaintiff’s claims for breach of contract, negligence and negligent misrepresentation are dismissed.
Breach of Fiduciary Duty/Breach of Trust
85Mr. Ford’s allegations of breach of fiduciary duty and breach of trust in the Ontario action present different, and more complex, problems of legal analysis. I will start with the pleadings. Mr. Ford alleges (at paras 45 to 49 of the statement of claim):
GMP was the sole broker that was able to approve sales of Mr. Ford’s shares during the lockup;
Mr. Ford was in, or effectively in, a client/broker relationship with GMP and Mr. Ottaway;
as his broker, GMP and Mr. Ottaway owed a fiduciary duty to act in Mr. Ford’s best interest;
at the same time that GMP was refusing to sell Mr. Ford’s shares, GMP was engaged in other lucrative business assignments with Curaleaf, unbeknownst to Mr. Ford, and stood to benefit from its refusal to sell Mr. Ford’s shares. The two engagements were a $1.27 billion all stock transaction to acquire the state-regulated cannabis business of Cura Partners Inc. and a $50 million share buyback program;
in both engagements, GMP had a strong incentive to cause the price of the Curaleaf shares to appreciate;
this placed GMP and Mr. Ottaway in an irreconcilable conflict of interest (because the release of Mr. Ford’s shares from the lockup would have had a depressing effect on the Curaleaf share price), which the defendants failed to disclose to Mr. Ford;
in refusing to grant Mr. Ford’s requests to be released from the lockup, the defendants favoured their own interests over those of Mr. Ford, all in breach of their fiduciary duties and in breach of trust; and
an appropriate remedy for the breach is disgorgement of any fees the defendants earned in respect of the two conflicting engagements.
86Mr. Ford argues that the pleading of breach of fiduciary duty/breach of trust raises several issues that were not before the Arbitrator, and were not dealt with in the Award. These include:
whether GMP and Mr. Ottaway as the sole broker able to approve the sale of his shares, owed Mr. Ford a fiduciary duty to act in his best interests;
whether GMP was required to obtain the necessary licences or regulatory approvals to perform as the sole broker for Mr. Ford’s shares;
whether GMP and Mr. Ottaway had a conflict of interest as a result of their involvement in the Cura Partners transaction and the share buyback transaction;
whether, in view of this conflict, GMP and Mr. Ottaway should have permitted Mr. Ford to trade through another broker during the 180-day restricted period;
whether GMP and Mr. Ottaway breached their fiduciary duty to Mr. Ford in refusing to grant him consent to trade, refusing to permit him to trade with any other broker, and failing to disclose their conflict of interest;
whether GMP, as a fiduciary and Mr. Ford’s broker, was required to assist Mr. Ford in removing the restrictive legend and to share with him how and with whom he could sell his shares in a timely manner; and
whether Mr. Ford’s damage claim in the circumstances should extend to disgorgement of profits from the alleged improper conduct of GMP and Mr. Ottaway.
87The defendants argue that Mr. Ford’s claims for breach of fiduciary duty and breach of trust are grounded in his allegation, at paragraph 39 of the statement of claim, that GMP was required to be Ford’s broker during the 180-day lockup period. The suggestion that there was a broker/client relationship between Mr. Ford and GMP (or Mr. Ottaway), they say, is directly contrary to the facts on which the Arbitrator grounded his dismissal of the A-2s’ fraudulent-inducement claim -- that “GMP had boasted of its ability to arrange for the smooth sale of claimants’ shares”. The defendants say the Arbitrator found that Mr. Ottaway specifically referred Mr. Ford to a broker known as Gar Wood. He also found that “for claimants to trade promptly during the lock-up period, they would have been required to open a brokerage account”. This finding, they say, was fundamental to the conclusion that the A-2s had failed to prove their damages and is directly contrary to Mr. Ford’s claim that he was in a broker/client relationship with GMP (or Mr. Ottaway).
88It is worth remembering that this is not a motion for summary judgment. It is no part of my task, in this motion, to assess the merits (or even the sufficiency) of any pleaded claim. My task is a narrow one: to determine whether the claims of breach of fiduciary duty/breach of trust (or, more precisely, any material fact essential to establishing the torts of breach of fiduciary duty/breach of trust) were resolved against Mr. Ford by the Arbitrator in his Award.
89I am driven to the conclusion that they were not. The claim in the Arbitration does not allege that the defendants in the Ontario action acted in the capacity of fiduciaries or trustees. The finding of the Arbitrator that Mr. Ottaway did not promise free liquidity or boast about his ability to place the A-2s’ shares in a matter of days, is not dispositive of an allegation that, as a result of their unique position under the terms of the Settlement and Lock-Up Agreement, the defendants owed Mr. Ford duties of a fiduciary or trust nature.
90The fact that Mr. Ottaway lined up Gar Wood as a possible U.S. broker to conduct the A-2s’ trades, or later found someone else to fill that role when Gar Wood declined to act, is again not necessarily dispositive of whether the defendants were fiduciaries or trustees bound to act in Mr. Ford’s best interests or whether they breached that duty. The Arbitrator’s findings about those issues relate to whether any alleged breach of contract or false representation was the cause of a loss based on inability trade during the lockup period. Those findings, while possibly relevant to some of the fiduciary duty/trust allegations, are not dispositive of whether: a) the defendants owed independent duties to Mr. Ford as a broker; b) the defendants breached those duties or c) an appropriate remedy for breach of fiduciary duty might be disgorgement of fees earned on the alleged competing engagements.
91The same can be said about the allegations in the Arbitration, and the Arbitrator’s findings, relating to the two competing engagements – the Cura Partners acquisition and the share buyback. These facts were pleaded by the A-2s in the Arbitration claim as background colour and to provide, presumably, a motive for the conduct said to have constituted the breach of contract and the fraudulent misrepresentations of Curaleaf and its agent, GMP. They were not pleaded in connection with any allegation that these circumstances gave rise to a conflict of interest or breach of fiduciary duty. Nor does the Award disclose any findings on these factual allegations sufficient to constitute an estoppel against the allegations of breach of fiduciary duty made by Mr. Ford against these defendants in the Ontario action.
92I agree with counsel for the defendants on the following point: to the extent that findings of the Arbitrator may ultimately be considered relevant to these questions, it may be that those findings cannot be relitigated in the Ontario proceedings. That will be for the judge hearing the matter on the merits to decide. What I am deciding in this motion, however, is that those findings (even though some of them may be relevant) are not dispositive of all “rights, questions or facts” necessary to found a cause of action for breach of fiduciary duty or breach of trust.
93The findings of the Arbitrator in the Award are not dispositive of the breach of fiduciary duty/breach of trust claims. Issue estoppel does not apply to these claims. The motion to dismiss these claims is therefore dismissed.
Plaintiff’s Motion to Amend
94The plaintiff seeks to amend the statement of claim to add a party and to plead the consequent amendment to include a claim against that party.
95The party sought to be added is RF Capital. RF Capital was formerly known as GMP Capital Inc. It is the parent company of its wholly-owned operating subsidiary, the defendant, GMP. In essence, the plaintiff is concerned that recent changes in corporate structure and certain business transactions and other decision call into question whether GMP will continue as a going concern and/or retain assets sufficient to satisfy any eventual judgment Mr. Ford may obtain against GMP.
96Mr. Ford says that as the directing mind of GMP, RF Capital should be held responsible for GMP’s actions. Mr. Ford’s claim against RF Capital may require that the court pierce the corporate veil or otherwise hold the parent liable for the actions of its subsidiary. He argues that, if GMP is not good for its liabilities in future, RF Capital should be held responsible for them.
97The substantive plea made against RF Capital is set out in two paragraphs, as follows:
In December 2019, RF Capital sold substantially all of its capital market business to Stifel Financial Corp, including most of GMP’s assets. GMP continued to provide carrying broker services to Richardson Wealth Limited and Stifel Canada. On January 5, 2023, those carrying broker services were outsourced to Fidelity. In April 2023. GMP resigned its membership with the Canadian Investment Regulatory Organization and resigned as an approved participant of Bourse de Montreal Inc.
RF Capital is liable for the actions and omissions of GMP by reason of, inter alia, the following facts: (a) GMP’s profits were treated as profits of RF Capital: (b) Persons conducting business for GMP were appointed by RF Capital; (c) RF Capital is the directing mind of GMP; (d) RF Capital decided what should be done in relation to the matters at issue in this action; (c) RF Capital has taken steps to wind up the business of GMP and move its assets out of reach of the Plaintiff.
98Rule 5.04(2) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, states as follows:
At any stage of a proceeding the court may by order add, delete or substitute a party or correct the name of a party incorrectly named, on such terms as are just, unless prejudice would result that could not be compensated for by costs or an adjournment.
Rule 5.04, unlike Rule 26.01, uses the discretionary “may” rather than the mandatory “shall”.
99The motion to amend is dismissed. I come to this conclusion for several reasons. First, the motion to amend is premature. Mr. Ford has no judgment against GMP and may never have one. If Mr. Ford obtains a judgment, GMP may or may not be good for it, but the time for making that assessment is after a judgment is obtained. If there have been reviewable transactions or fraudulent preferences, those should be asserted by way of separate action against the offending entities once it is established that GMP is liable and that it cannot pay.
100Second, the amendments are untenable at law. They are fundamentally inconsistent with the principle of Salomon v. Salomon and the separate identity of a corporation from its shareholders. If the plaintiff is able to sue the parent on the strength of the bare bones allegations in this case, plaintiffs would be able to do it in virtually every case involving a corporate defendant, just to hedge their bets against future contingencies.
101Mr. Ford asserts that it was only in 2023 that he “discovered that there might be an issue with GMP’s ability to satisfy a judgment made against it”, namely public disclosure that GMP would no longer provide carrying broker services in respect of matters unrelated to this litigation. This event, assuming it to be true, is not actionable and does not create a basis to make RF Capital a defendant to this action: it is unconnected to the allegations in the original claim against GMP and Mr. Ottaway.
102Mr. Ford has pled no material facts in support of his allegation that RF Capital directed GMP’s assets to be transferred out of Mr. Ford’s reach, nor a separate cause of action against RF Capital in respect of any alleged improper conduct. The conclusory allegations in this regard are, on their face, entirely speculative.
103Even the evidence put forward by the plaintiff on this motion exhibits the speculative nature of the proposed claim. The only affidavit Mr. Ford put forward in support of this motion was sworn by his lawyer, whose best evidence on the topic is that it is “not clear what assets GMP has after its recent reorganization to satisfy judgment.”
104Third, if the plaintiff actually believes GMP’s assets are being stripped or taken beyond the jurisdiction of the court, his remedy is to bring a motion for a Mareva order.
Costs
105The parties agreed that all-inclusive partial indemnity costs should be awarded to the winning party in the amount of $85,000. However, there has been divided success. The parties’ agreement did not address that contingency. If the parties can agree on an appropriate disposition, they shall advise me within five business days of the release of these reasons. If further submissions are required, they shall be limited to two typed, double-spaced pages, to be delivered to the Commercial List, to my attention, within 10 business days.
Penny J.
Date: April 5, 2024
Footnotes
- There are several sub-issues requiring consideration which I will set out in the course of my analysis below.
- September 26, 2022 Award of Arbitrator Dolinger (the Award), p. 3
- Award, p. 20.
- It is, in any event, common ground that GMP and Mr. Ottaway have a contractual indemnity from Curaleaf in respect of their role as Curaleaf’s agent in the RTO.