B.C. – BCCA goes deep and wide on partial stays – #838

Davidson v. Lyra Growth Partners Inc., 2024 BCCA 133 concerns whether there is jurisdiction under s. 7 of the Arbitration Act, S.B.C. 2020, c. 2 (“Arbitration Act”) to grant a partial stay of court proceedings concerning only those matters arguably agreed to be arbitrated by the parties or whether a court is required to stay the entire action.  The Court confirmed that partial stays are available under the Arbitration Act where the court action raises some non-arbitrable matters despite there being no express language permitting non-arbitrable matters to proceed in Court – unlike other provincial legislation. It set out factors that should be considered by a court of first instance in determining whether to grant a partial stay or a complete stay. It also emphasized, however, that a stay of those matters arguably agreed to be arbitrated is mandatory if the requirements of s. 7 are met. In this case it had been argued that a stay could be refused as the “essential nature” or “pith and substance” of the court proceedings related to matters not covered by the arbitration agreement. The Court confirmed that there is no “residual” jurisdiction to deny a stay on that basis. This decision aligns with the Supreme Court of Canada’s guidance in TELUS Communications Inc. v Wellman, 2019 SCC 19 (“Wellman”) concerning the mandatory nature of stays of court proceedings that relate to any matter arguably reserved for arbitration.

The Facts – Ms. Davidson was a former employee of Lyra Growth Partners Inc. (“Lyra”), one of the respondents.  She had a written employment agreement that did not contain an arbitration clause.  She also held shares in the respondents through participating in Lyra’s incentive stock option program.  Those shares were the subject of shareholders agreements that contained identical arbitration clauses.  The clauses provided any “disagreement or dispute between the parties with respect to this Agreement” was to be referred to arbitration.

The respondents commenced a court action against Ms. Davidson alleging that in breach of her employment agreement, the share purchase and stock option plans and her fiduciary obligations, she “improperly and unlawfully converted, transferred, misused and/or misappropriated funds from the plaintiffs”.  The respondents claimed various relief including disgorgement of the shares or, alternatively, relinquishment of “all shares held pursuant to the Share Purchase and Stock Option Plans”. 

Ms. Davidson applied for a stay of the action pending arbitration under s. 7(1) of the Arbitration Act, arguing that the share-based claims fell within the arbitration clauses.

Chambers Judge Decision – The central issue was whether one of the prerequisites of s. 7 for granting a stay was met, namely, whether the court proceedings were “in respect of a matter agreed to be submitted to arbitration” because the claim for share-based relief fell within the scope of the arbitration clauses in the shareholder agreements.

The Chambers Judge dismissed the stay application.  He found that the onus rested with the applicant for a stay and that she had not met the onus as there was no nexus between the causes of action for conversion and fraud in her capacity as employee and the matters reserved for arbitration under the shareholder agreements. He also held that the question of whether the equitable remedy of disgorgement should be granted in respect of the shares was not a matter covered by the arbitration agreement.  He stated at paragraph 28:

“In my view, it is manifest that the question of whether, as a result of Ms. Davidson’s alleged breach of fiduciary duty, an equitable remedy of disgorgement should be granted in respect of the shares for either restitutionary or prophylactic purposes (Strother v. 3464920 Canada Inc., 2007 SCC 24 at paras. 74 to 77) is not a matter covered by the shareholder agreement. As such, it cannot reasonably be argued that the parties intended an arbitrator to assess whether a share disgorgement remedy would be appropriate in a case of alleged employee theft of the employer’s property, which is the situation here.”

Court of Appeal Decision – The sole issue on appeal was whether the Chambers Judge erred in law by failing to apply the arguable case test to the share-based claims for relief.  

The Court of Appeal began its analysis by noting that it agreed with Chambers Judge that the onus rests with the applicant for a stay, not the party who has made the claim.  It confirmed the onus is to establish an “arguable case” that the claim is in respect of a matter agreed to be submitted to arbitration.

The Court of Appeal reviewed both the arbitration clauses and the claim. It noted that the arbitration clause and stay provision under s. 7 of the Arbitration Act used the connecting language “with respect to” and “with respect of” (respectively) which is among the widest “of any expression” intended to convey some connection between two related subject matters, citing CanadianOxy Chemicals Ltd. v. Canada (Attorney General), [1999] 1 S.C.R. 743, at paras. 15–17.  While the Chambers Judge concluded that the arbitration clause was intended to apply to “disputes in relation to share transfers, share ownership, and the shareholder’s corporate relationship with the companies in which they hold shares”, the Court of Appeal read the provision more broadly and found it also included disputes concerning the disposition and valuation of shares when a shareholder has been terminated for cause.

The Court of Appeal, after considering the court action, concluded at paragraph 53 that:

“[I]t cannot be said that there is no connection between the claim for share-based remedies…and the provisions in the Shareholders Agreements relating to the transfer of shares acquired under the share option plans, including the redemption of shares when a shareholder’s employment is terminated for cause”. 

 It continued at paragraph 54: 

“[W]hether that necessarily invoked the matters covered by the arbitration agreement cannot be resolved by a superficial consideration of the record, but it is arguable that they do. Under the competence-competence principle, the determination of that issue should in the first instance be made by an arbitrator pursuant to the parties’ agreement”.

It then discussed the “proper approach” where there are multiple issues raised in a court proceeding, some of which are arguably required to be arbitrated.

The Court concluded that, in the absence of an applicable statutory exclusion in s. 7(2) of the Arbitration Act (the arbitration agreement is void, inoperative or incapable of being performed), there is no residual jurisdiction to refuse a stay of matters arguably reserved for arbitration. It came to this conclusion based on the Supreme Court of Canada decision in Wellman, which it said confirmed the mandatory nature of stays when the claim relates to any matter arguably reserved for arbitration.

The Court also looked at the statutory history of s. 7. 

It noted that under the Commercial Arbitration Act, S.B.C. 1986 c. 3, the stay provision included an express discretion to refuse to stay legal proceedings if the party opposing the stay “shows a good reason why the court proceedings should continue in place of the arbitration”.  That provision was replaced in 1988 with a stay provision based on s. 8 of the UNICITRAL Model Law, which did not include that express jurisdiction. Substantially identical wording to s. 8 of the Model Law was also adopted as part of the International Commercial Arbitration Act. The Court concluded the current Arbitration Act, enacted in 2020, follows the UNCITRAL Model Law approach, with a stay provision that is substantially identical to s. 8 of the International Commercial Arbitration Act and the 1988 amendment to the Commercial Arbitration Act.  

The respondents had argued that the Chambers Judge was entitled to rely on the “essential nature” or “pith and substance” of the claim being in relation to matters not agreed to be arbitrated in refusing a stay.  However, the Court of Appeal stated that:

“[81]      In my view, the pith and substance or essential character approach provides little assistance in determining whether there is a connection between the claims brought by a plaintiff and any of the matters reserved for arbitration by the parties. It may well be, as in the case at bar, that the core of the claim is non-arbitrable, but the plaintiff has included in the claim arbitrable matters. If so, the arbitrable matters must be stayed, even if the essential character of the claim involves matters that are not arbitrable.”

The Court next considered whether it is necessary in British Columbia to stay the entire proceeding, or whether a partial stay can be ordered to cover only arguably arbitrable matters as was done in Wellman.

It confirmed that a partial stay is available despite the fact that in many jurisdictions in Canada, but not in British Columbia, there is express authority in the legislation permitting non-arbitrable claims to proceed in court even when paired with arbitrable claims by granting a partial stay of the proceedings. In coming to this conclusion it reviewed a number of cases including Prince George (City) v. McElhanney Engineering Services Ltd. (1995), 1995 CanLII 2487 (BC CA), 9 B.C.L.R. (3d) 368 (C.A.) all demonstrating the availability of a partial stay.

It acknowledged that separating the arbitrable from the non-arbitrable issues might be “cumbersome” or “a difficult exercise in certain cases” but noted that in Wellman the Supreme Court of Canada concluded that “this concern cannot be permitted to trump the language of the statute”.  It quoted the following passage from Wellman:

“[90]      Lastly, while s. 138 of the Courts of Justice Act stipulates that courts “shall” avoid a multiplicity of proceedings, it tempers this language by indicating that the court must do so only “as far as possible”. Accordingly, where the application of an Ontario statute, properly interpreted, leads to a multiplicity of proceedings, the court must give effect to the will of the legislature, even if the consequence is to potentially create a multiplicity of proceedings. …”

The Court of Appeal stated a partial stay was awarded in Wellman to give effect to the mandatory wording of the stay provision even if the result was a multiplicity of proceedings.  

The Court of Appeal concluded:

“[106]      In the case at bar, it was not open to the chambers judge to dismiss the application for a stay on the basis that the plaintiffs’ claim is fundamentally a claim for relief in respect of alleged torts of conversion and fraud. The arbitrable portion can be separated from the non-arbitrable so that those claims that are unconnected to the Shareholders Agreement can proceed in the courts. But the proceeding in relation to the matter that is arguably a matter agreed to be submitted to arbitration must be stayed pending the arbitrator’s determination on jurisdiction.”

Guidance for Lower Courts – The Court observed there is little authority concerning the factors that must be considered in determining whether the stay of the court action should be partial or complete. It noted that in Wellman, the Supreme Court of Canada made clear that matters reserved for arbitration must be stayed but observed that the mandatory stay provisions were not intended to keep parties who either never agreed to or are not bound by an arbitration agreement out of court.  The Court stated that whether to stay the entire action where there are arbitrable claims or grant a partial stay is a matter of discretion for the judge of first instance and, at paragraph 108, that:

“One of the non-exclusive factors to be considered will be whether the arbitrable and non-arbitrable issues are so intertwined that they must be heard together, in which case a complete stay of the action will be appropriate… Another factor will be whether the core of the claim concerns non-arbitrable matters, in which case a partial stay may be more appropriate.” [Authorities omitted.] 

Contributor’s Notes: 

Davidson v. Lyra Growth Partners Inc., 2024 BCCA 133 confirms that in British Columbia there is the discretion, even in the absence of the express statutory authorization found in other provincial legislation, to stay only those matters that are arguably arbitrable and allow the others to proceed in court.

It also provides another example of a post-Wellman decision of a Court of Appeal clarifying that courts do not have the discretion to allow all matters raised in a court action to proceed to court where some of them are covered by a valid arbitration clause. 

Prior to Wellman, some courts employed a “pith and substance” analysis to to avoid staying matters raised in court proceedings that had arguably been agreed to be arbitrated. Courts also relied on what Brian Casey describes in his text, Arbitration Law of Canada as the “bootstrap” argument.  That is, Courts found the discretion to refuse a stay based on provincial “Courts of Justice” or “Judicature” acts that mandate the avoidance of a multiplicity of proceedings.  A few Courts went as far as to find the power to stay an arbitration in favour of court proceedings where there were overlapping arbitrable and non-arbitrable issues based on the language of the domestic arbitration acts.  See for example Alberta – Power to prevent “manifestly unfair treatment” not power to stay arbitration – #706 and the cases cited in the Contributor’s Notes.  None of these lines of cases are good authority post-Wellman.