Alberta – Misapplication of separability principle in contract dispute – #762

Gutama Estate v Vital Property Services Inc., 2023 ABKB 436, is NOT an arbitration case and the contract at issue contained no arbitration clause. But bear with me! The case involved the alleged repudiation/termination of a shareholders agreement and the consequences to the rights and obligations of the parties as a result. The question: if the contract was repudiated/terminated, were all the parties’ rights unwound? The Court quoted from Heyman v. Darwins Ltd. (, the leading U.K. decision that established the common law principle of separability of the arbitration clause. The Court described Heyman v Darwins as a case that addresses the operation of an arbitration clause where the contract has come to an end: in circumstances in which the contract-terminating event did not go to the very existence of the contract, “it did not matter how the contract came to be terminated: the contract (including its arbitration clause) had existed, and the arbitration clause continued to operate….” The Court then extrapolated that concept and applied it more broadly: “[i]n other words, pre-existing and engaged contractual rights continued to operate despite the later termination (by whatever means) of the contract”. Applying that reasoning to this case where the shareholders agreement was alleged to have been repudiated or terminated by its own terms, the Court said that any such termination did not,  “eclipse the agreement completely ie render it meaningless for all purposes and at all times… [i]nstead, crystalized rights and obligations would continue.”  In other words, “the parties would be discharged from future obligations, but remain bound by rights and obligations that have accrued through partial performance”. Thus the Court imported part of a uniquely arbitration law principle with a specific public policy purpose, separability, into general contract law.

Background facts – The Respondent Vital Property Services Inc (“the Company”) had two shareholders, who entered into a unanimous shareholders agreement. Article 9 contained a provision that addressed the purchase/sale of shares upon the incapacity or disability of a shareholder. For about one year before the death of one of the shareholders (Gutama), he lacked capacity and did not participate in the Company’s business. Under Article 8, Gutama’s incapacity triggered the option, but not the duty, of the other shareholder (Choufi) to buy out Gutama’s shares. Article 10 was a sale-on-death provision, which required the Company to purchase and Gatuma to sell his shares upon his death on certain terms.

The dispute – The issue before the Court was whether the Company should be placed into permanent receivership because of the repudiation or termination of the shareholders agreement.

The personal representative for Gutama (“the Estate”) argued that Choufi had repudiated the shareholders agreement, which was thereby void ab initio. It alleged that instead of exercising his right to purchase Gutama’s 50% of the shares pursuant to the on-disability or on-death provisions of the shareholder agreement, Choufi exercised a “self-help remedy” to obtain Gutama’s shares for no consideration. Alternatively, the Estate argued that the appointment of the interim receiver triggered the termination of the shareholders agreement, which provided that it would be terminated upon the “bankruptcy, receivership or dissolution” of the Company. The result was a shareholders deadlock that required a receiver to break and oversee the sale of the Company. 

Choufi argued that there was no repudiation or termination, that the sale-on-death provisions of the shareholders agreement applied, and that his conducted showed an intention to purchase Gutama’s shares and thus break the deadlock, obviating the need for a receiver.

The Court found that Choufi’s conduct did not constitute repudiation of the shareholders agreement by Choufi and that, in any event, there was no evidence that Gutama or the Estate had accepted the purported repudiation. Further, it was not necessary to decide if an interim receivership triggered the termination provision. Even if it did, this would not render the agreement void ab initio  or “eclipse the  agreement completely ie render it meaningless for all purposes and at all times… [instead], crystalized rights and obligations would continue.”  In other words, “the parties would be discharged from future obligations, but remain bound by rights and obligations that have accrued through partial performance”. Pre-existing rights and obligations continue even after a contract is terminated, without a breach by either party, such as by repudiation or termination of the contract by its own terms. Therefore, the mandatory “sale-on-death” provision in the shareholders agreement applied and the Company was required to purchase Gutama’s shares. 

In support of this conclusion, the Court relied upon Heyman v Darwins, [1942] AC 356:

 “[65] On this point, see Heyman v Darwin [1942] AC 356, which addressed the operation of an arbitration clause where a contract had come to an end.  Per two judges (Viscount Simon LC and Lord Macmillan), and not contradicted by the other judgments, a core distinction exists between defects going to the very existence of the contract (and thus of the arbitration clause itself) and contract-terminating events downstream of a binding contract being made and (by definition) not affecting its initial existence. 

[66] Both held that, in the latter case, it did not matter how the contract came to be terminated: the contract (including its arbitration clause) had existed, and the arbitration clause continued to operate i.e. to disputes falling within its scope.  In other words, pre-existing and engaged contractual rights continued to operate despite the later termination (by whatever means) of the contract.

[67]  Per Viscount Simon:

… If the parties are at one on the point that they did enter into a binding agreement in terms which are not in dispute, and the difference that has arisen between them is as to their respective rights under the admitted agreement in the events that have happened, for example, whether the agreement has been broken by either of them, or as to the damage resulting from such breach, or whether the breach by one of them goes to the root of the contract and entitles the other party to claim to be discharged from further performance, or whether events supervening since the agreement was made have brought the contract to an end so that neither party is required to perform further — in all such cases it seems to me that the difference is within such an arbitration clause as this. …

… If the dispute is whether the contract which contains the clause has ever been entered into at all, that issue cannot go to arbitration under the clause, for the party who denies that he has ever entered into the contract is thereby denying that he has ever joined in the submission.  Similarly, if one party to the alleged contract is contending that it is void ab initio (because, for example, the making of such a contract is illegal), the arbitration clause cannot operate, for on this view the clause itself also is void. But, in a situation where the parties are at one in asserting that they entered into a binding contract, but a difference has arisen between them whether there has been a breach by one side or the other, or whether circumstances have arisen which have discharged one or both parties from further performance, such differences should be regarded as differences which have arisen “in respect of,” or “with regard to,” or “under” the contract, and an arbitration  clause which uses these, or similar, expressions should be construed accordingly. … [from pp 360-361 and 366] [emphasis in original]

[68] Per Lord Macmillan:

… an admittedly binding contract containing a general arbitration clause may stipulate that in certain events the contract shall come to an end.  If a question arises whether the contract has for any such reason come to an end I can see no reason why the arbitrator  should not decide that question.  … [from p 371] [emphasis in original]

After this review of Heyman v Darwins, the Court concluded:

“[69] In the same way, other pre-existing rights and obligations are typically not eclipsed when a contract is terminated, whether via an accepted repudiation or simply the contract’s own terms (which arguably happened here) i.e. without any breach by any party.”  

Editor’s Notes:

First, the principle of separability vexes both arbitration counsel and judges regularly. One of the problems is that no Canadian case has definitively articulated the scope of the principle under Canadian law. This may be due to the fact that the language that expresses the principle is not uniform. See Art. 16(1) of the Model Law, provincial arbitration legislation [for example, B.C. Arbitration Act, SBC 2020, c 2 s.23 and Ontario Arbitration Act, 1991,  s. 17(2)], and in the procedural Rules that many parties choose for their arbitration [for example, ICC 2021 Arbitration Rules Art. 6 -9]. In those provinces that don’t have arbitration legislation that includes the separability principle [for example, Nova Scotia], it is not clear whether the common law contains such a principle and if so whether its scope is the same as that set out in Heyman v Darwins. The best analysis I know of this issue is found in Professor Anthony Daimsis’s paper “Liquidating Separability: Peace River v Petrowest and the Meaning of Separability” in Canadian Journal of Commercial Arbitration (2021) 2:1 Can J Comm Arb at 102. The paper also has a very helpful chart showing the different language used to define the separability principle. 

Second, the principle of separabilty essentially holds that where there is a challenge to the tribunal’s jurisdiction, it may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration clause, and for that purpose an arbitration clause is to be treated as independent of or autonomous from the other terms of the contract. A complete reading of Heyman v Darwins shows this. A decision that the contract is null and void does not necessarily mean that the arbitration clause is invalid. The principle’s purpose is to preserve the arbitration clause and the jurisdiction of the tribunal, where there is a challenge to the parties’ main contract, thereby preventing a party from avoiding its contractual obligation to arbitrate simply by making an allegation that the main contract is void. It is therefore consistent with competence-competence. See Brian J. Casey, Law of Arbitration in Canada; Practice and Procedure (Toronto: Juris 2022) at 3.2, another excellent resource.

Third, Heyman v. Darwins Ltd. ( must be understood in that context. It was not a simple breach of contract case. It involved a challenge to the main contract in circumstances in which the parties’ agreement contained an arbitration clause. The Court ordered a stay of the action on the ground that the dispute fell within the scope of the arbitration clause so that the matter could be decided by the arbitrator. This case was a clear misapplication of the Heyman v Darwins decision. Fourth, for previous Arbitration Matters case notes that discuss separability, see: B.C. – doctrine of separability allows receiver to disclaim agreement to arbitrate while litigating main contract – #399 ; Supreme Court – Peace River v Petrowest Part 1: Separability Clarified? – #682; Supreme Court – Peace River v Petrowest Part 2: no conflict between arbitration, bankruptcy law – #687; Ontario – Doctrine of separability cannot apply where contract nonexistent – #749; and many more. All case notes discussing separability can be found here.