Alberta – binding valuation of shares not arbitrable, limits claims in litigation over overlapping issues – #472

To resolve the scope of an earlier share valuation and subsequent arbitration unsuccessfully challenging that valuation and their impact on current litigation, Madam Justice Susan E. Richardson in Lischuk v. K-Jay Electric Ltd, 2021 ABQB 280 explored five (5) key legal principles: estoppel by convention, res judicata, issue estoppel, cause of action estoppel and abuse of process by litigation. The parties disputed (i) termination of L’s employment contract with employer K and (ii) valuation of shares held by L’s holding company 997 under a shareholder’s agreement between 997 and employer K. L argued that a reasonable notice period after thirty-five (35) years of employment would extend the date at which his shares would be valued but 997’s contract submitted valuation of the shares as of the date of the termination. Richardson J.’s comments underline (a) the importance of drafting parallel contracts which speak to each other in the event of dispute, (b) the consequences of privity of contract and (c) the binding effect of decisions which the parties agreed would have binding effect.

From 1978 until 2013, GL worked at K-Jay. Two (2) contracts governed GL’s relationship with K-Jay: a contract of employment between GL with K-Jay and a Unanimous Shareholders’ Agreement (“USHA”) between K-Jay and 997878 Alberta Ltd (“997”), GL’s holding company. On November 22, 2013, K-Jay (i) dismissed GL, terminating GL’s contract of employment and (ii) moved to initiate a share buy back process set out in the USHA.

Under the USHA, 997 and K-Jay agreed that the buy back price of the shares 997 held in K-Jay would be the fair market value (“FMV”) at the date GL ceased to be an employee.   The FMV under the USHA were to be settled by a valuator.  Any disputes under the USHA were to be determined by arbitration.

An independent valuator valued the shares at $944,000.00 as of November 30, 2013.  Plaintiffs initiated arbitration in order to “appeal” the valuation.  The arbitration dismissed the “appeal”.  The arbitrator acknowledged that disputes under the USHA were to be arbitrated but final valuation under the USHA buy-back process was not arbitrable or subject to litigation because the USHA clearly provided that the final valuation is “final and binding”.

GL and 997 (“Plaintiffs”) in 2015 instituted a wrongful dismissal action against GL’s former employer K-Jay Electric Ltd (“K-Jay”).  Richardson J. summarized the relief sought. “They sought lost wages and benefits over a defined notice period on behalf of [GL], and on behalf of 997 damages for non-payment of a dividend and damages for the loss of anticipated profit (dividends)”.

Later, in 2017, Plaintiffs applied to amend their Statement of Claim to included alleged losses stemming from the “forced sale of 997’s shares” in K-Jay. 

997 sought any change in FMV between November 30, 2013 and a subsequent notional end date established as a reasonable notice period. “The amendments seek the difference in the valuation of the shares from the date of the sale (November 30, 2013) to the end of [L]’s notice period (the Added Claims)”.

Richardson J. at paras 9-12 outlined procedural efforts by Plaintiffs and K-Jay occasioned by the amendments.  The most recent one involved K-Jay’s application for summary dismissal which Master Schlosser granted it in part. For Master W. Scott Schlosser’s brief decision, see Lischuk v. K-Jay Electric Ltd, 2019 ABQB 870.

Master Schlosser held that the share valuation was final and binding on 997 but deferred to the trial judge any determination as to that valuation’s impact on GL and whether GL was estopped from challenging the valuation.  In his reasons, Master Schlosser expressed the following concerns stemming from privity of contract, involvement in another dispute resolution and the latter’s binding determination.

[9] The question in this case really comes down to whether the Court is willing to imply a term in the employment agreement about share valuation that is directly contrary to the express agreement in the Unanimous Shareholder Agreement. 997 is the party to the Agreement; though it is essentially a one-person company and [GL] is the signatory on behalf of the company. Technically, the Unanimous Shareholder Agreement is not binding on [GL] because he is not a party to it. However, it is difficult to see that the Court would imply a term in the employment contract in favour of [GL] directly contrary to this agreement.

[10] The share valuation as at November 30, 2013, is final and binding vis-a-vis 997. But whether [GL] has other entitlements on the Hawkes principle, and whether ‘or otherwise’ in the USA means and includes wrongful dismissal is best left to the trial judge.

[11] The Applicants argue that [GL] is estopped from challenging the valuation. He participated in the valuation process and there was a subsequent arbitration at which the arbitrator declined jurisdiction.

[12] I agree that 997 cannot go behind this valuation but I have difficulty applying this to the individual Plaintiff. The issue appears to be whether the individual Plaintiff has waived his [Hawkes v. Levelton Holdings Ltd., 2013 BCCA 306] entitlements by participating in a contractually mandated process under an agreement to which he is not a party. In my view, this is best left to the trial judge as well”.

Plaintiffs and K-Jay both appealed Master Schlosser’s decision. Plaintiffs “say the Master erred in determining that 997 was bound by the previous arbitration decision, which set the share value as at the time of dismissal instead of at the end of a reasonable notice period”.

Richardson J. applied the standard of correctness to an appeal of a Master’s decision and noted that an “appellate judge may substitute his or her own discretion and views for the Master’s”, citing Bahcheli v. Yorkton Securities Inc., 2012 ABCA 166.

Richardson J. canvassed five (5) separate legal principles and determined that Master Schlosser’s decision was correct and dismissed the appeal and the cross-appeal.  Her reasons were divided as follows: (i) estoppel by convention – paras 64-80; (ii) res judicata – paras 81-85; (iii) issue estoppel – paras 86-98; (iv) cause of action estoppel – paras 99-106; and, (v) abuse of process by litigation – paras 107-113

Each of the sections contains principles, leading cases and Richardson J.’s own analysis, each and all relevant for practitioners focused on arbitration. Each section merits close reading. 

The following passages only excerpt certain passages to point to Richardson J.’s analysis and serve as prompts for a fuller reading.  Richardson J.’s comments underline (a) the importance of drafting parallel contracts which speak to each other in the event of dispute and (b) the binding effect of decisions which the parties agreed would have binding effect.

(i) estoppel by convention – paras 64-80

[71] In the valuation process, both parties gave their respective valuators November 30, 2013, as the date to use for the valuation of 997’s shares. The parties then jointly instructed the final valuator to use November 30, 2013 for the Final Valuation.

[72] The Plaintiffs initiated arbitration to contest the Final Valuation. K-Jay says the Plaintiffs expressly agreed, in the Agreed Statement of Facts provided to the arbitrator, that November 30, 2013, was the appropriate date for valuation.

[73] The arbitrator held that the Final Valuation was final and binding. The Plaintiffs did not seek judicial review of that decision and instead sought payment of the Final Valuator’s share value of $944,000 from K-Jay, which paid the money to 997.

[74] K-Jay argues that it has established the first element of the test for estoppel by convention because, for the four years following [L]’s termination, the parties’ entire dealings were based on shared assumptions of fact and law – that is, that the appropriate valuation date for 997’s shares was November 30, 2013.

[75] I agree. Throughout the four-year period from November 2013 to 2017 when the Added Claims application was brought, the parties operated on the mutual understanding that the valuation date for 997’s shares was November 30, 2013. No complaint was raised by the Plaintiffs throughout the valuation process, and the arbitration (and appeal) process that followed. The first indication that the valuation date was disputed was the 2017 application to amend the pleadings”.

(ii) res judicata – paras 81-85  

[83] There are two purposes behind the doctrine of res judicata. First, there is a public interest in having an end in litigation. Second, no one ought to be subjected to proceedings more than once for the same cause: [Las Vegas Strip Ltd. v. Toronto (City), 1996 CanLII 8037 (ON SC)] at p 12 (CanLII).

[84] The Defendant’s have established that the doctrine of res judicata also applies to this factual record, in respect of the valuation date of 997 shares being held to November 30, 2013. The USA established a process for valuing the shares. The parties agreed that any disputes on the valuation of 997’s shares were to go to arbitration and that the arbitrator’s decision was “final and binding”. A dispute arose, and that dispute went to arbitration. The Plaintiffs challenged the arbitrator’s ruling and he declined any appeal with reference back to the terms in the USA”.

See also Fortinet Technologies (Canada) ULC v. Bell Canada, 2018 BCCA 277 paras 34-35.

(iii) issue estoppel – paras 86-98

[95] The doctrine of issue estoppel precludes 997 from litigating the amount and the timing of the share valuation. In this respect, the Master was correct to grant summary dismissal of this part of the Added Claims. The Defendant and 997 were the signatories to the USA, which agreement set the terms for resolving disputes, which terms were applied to the dispute over the timing and the amount of the share valuation, and which agreement established unambiguously that the arbitrator’s decision was final. 997 is therefore estopped from re-litigating this claim”.

See also Fortinet Technologies (Canada) ULC v. Bell Canada, 2018 BCCA 277 paras 26-27.

(iv) cause of action estoppel – paras 99-106

[104] K-Jay argues the Added Claims meet the test for cause of action estoppel because:

– The arbitrator’s decision was a final decision dealing with the appropriate valuation of 997’s shares.

– The parties and their privies are the same.

– The cause of action leading to the share valuation and the arbitration involved the same set of facts as those underlying the Added Claims. There are no distinct and separate causes of action. Specifically, [L]’s dismissal triggered a share buy-back process under the USA. This process led to the Final Valuation, which [L] challenged in arbitration. The arbitrator held that the Final Valuation was final and binding. The Plaintiffs are now trying to use a slightly different argument in saying the valuation date used was improper.

– The Plaintiffs’ slightly different argument could and should have been argued at arbitration. The arbitrator invited the Plaintiffs to consider the issue of the valuation date and the Plaintiffs specifically opted not to.

[105] I agree that cause of action estoppel applies to the 997’s Added Claim relating to the timing and amount of the share valuation, thus the Master was correct to summarily dismiss this part of the Added Claims”.

(v) abuse of process by litigation – paras 107-113

Richardson J. noted that “[a]buse of process by litigation is a separate doctrine that may be used to prevent claims in situations where the elements of estoppel are not present”.  After excerpting from Fortinet Technologies (Canada) ULC v. Bell Canada, 2018 BCCA 277 paras 22-24, Richardson J. held that  a finding on abuse of process by litigation was not necessary given her conclusions on estoppel arguments.

Conclusions – Throughout her reasons, Richardson J. noted her agreement or disagreement with various submissions, either in principle or on the facts. In closing, she determined that Master Schlosser’s decision was correct.

[139] I find that the Master’s decision was correct. 997 is estopped from bringing the Added Claims to revisit the share valuation process and amount. The process was determined by the USA, a contract that bound 997 and the Defendant corporation. Both parties participated in the process mandated by the USA. The Plaintiffs appealed the valuation to an arbitrator, who declined jurisdiction citing the terms of the USA to the effect that “share valuation is final”. The USA also contained a clause that there was no appeal from a decision of the arbitrator”.

urbitral notes – First, see the earlier Arbitration Matters note on Fortinet Technologies (Canada) ULC v. Bell Canada, 2018 BCCA 277, “B.C. – arbitration parties cautioned to present their full case or risk post-award issue estoppel – #107”. B.C.’s Court of Appeal cautioned arbitration parties not to “hold back arguments” or change their position afterwards when challenging the resulting award in court. The Court held that “issues” can be decided either explicitly and implicitly by awards and that (a) issue estoppel prevents a party in the post-award period from raising an issue it failed to raise or overlooked during the arbitration and (b) abuse of process prevents a party from taking a position inconsistent with that taken during the arbitration.

Second, for another case referencing Fortinet Technologies (Canada) ULC v. Bell Canada, 2018 BCCA 277, see also the Arbitration Matters note “B.C. – broad interpretation of carve out in arbitration clause risks nullifying agreement to arbitrate – #237” regarding Clayworth v. Octaform Systems Inc., 2019 BCCA 354. Madam Justice Lauri Ann Fenlon granted a stay of non-injunctive proceedings in first instance, acknowledging that Appellant had met the “low threshold” of “some merit” in her appeal.  The issues on appeal concerned whether an exception in an arbitration agreement should be interpreted broadly enough to encompass claims brought in court or is the correct question is whether those court claims are clearly beyond the scope of the mandatory arbitration clause.  The appeal will also resolve when does a court risk reading an exclusion clause so broadly that it nullifies the arbitration clause.