B.C. – Defendants take one procedural step too many and cannot stay court action – #028

In Pixhug Media Inc. v. Steeves, 2017 BCSC 2171,  Mr. Justice Paul J. Pearlman determined that Defendants can successfully contest interim measures obtained by a Plaintiff, including cross-examination on affidavit, document requests and a request security for costs related to the interim measures without risk of being precluded from obtaining the stay.  Defendants could not, however, take any steps which invoked the assistance of the court or advanced the litigation before applying for a stay.

Pixhug Media Inc. (“Pixhug”) is a B.C. corporation created to develop a software platform using social media to link donor corporations with charitable organizations. Steeves Investment Corporation (“SIC”) is a New Brunswick corporation provided software development services to Pixhug.  Bit Creative Inc. (“Bit Creative”) graphic design firm and Scrumsoft Inc. (“Scrumsoft”) is a software development corporations, both of which performed services as subcontractors to SIC.  Adam Steeves (“Steeves”) is former CTO of Pixhug and founder of SIC.  Janice Birtha King (“King”) is also a director of SIC.   Darman Khatri (“Khatri”) was chief software developer at Scrumsoft.

Pixhug and SIC signed a September 25, 2015 Independent Contract Agreement (“ICA”) containing an escalation dispute resolution clause including amicable negotiation, mediation and arbitration administered by the B.C. International Commercial Arbitration Centre in Vancouver. The two parties later signed a Master Services Agreement (“MSA”) on October 16, 2015 with an identical arbitration clause.

Disputes arose around December 2015 eventually leading to SIC issuing a notice of termination of the MSA and Pixhug disabling SIC’s access to Pixhug’s computer and e-mail system. SIC responded by demanding payment under the ICA and the MSA.   The parties attempted mediation between February 10, 2016 and April 12, 2016 but were unsuccessful.

Pixhug filed a notice of civil claim on June 1, 2016 against SIC, Bit Creative, Scrumsoft, Steeves, King and Khatri (collectively “Defendants”) alleging fraud, conversion, breach of trust, breach of fiduciary duty, breach of contract and unjust enrichment related to Pixhug entering into a contract with SIC to develop the software program.

[11] By its notice of civil claim filed on June 1, 2016, Pixhug claims it is a victim of a brazen fraud carried out by the defendants. The plaintiff alleges that the defendants fraudulently induced Pixhug to engage Mr. Steeves as its chief technology officer and to enter into an agreement with SIC to develop the software platform. Pixhug maintains the defendants fraudulently represented they were developing a fully functioning software program for Pixhug when in fact they produced no computer code and did little more than produce graphic mock-ups and demonstration animations. The plaintiff contends that in reliance upon the defendants’ misrepresentations, it paid for work the defendants never performed.

On June 3, 2016, Pixhug obtained an ex parte Mareva injunction against SIC, Scrumsoft, Bit Creative and Steeves.   On July 22, 2016, Defendants filed a jurisdictional challenge followed by a July 25, 2016 notice of application seeking an order:

(a) requiring Pixhug to post security for costs for the trial;

(b) requiring Plaintiff to post security for its undertaking to pay damages in regard to the Mareva injunction; and,

(c) authorizing cross-examination of Pixhug’s expert witness whose report was filed in support of the Mareva injunction.

On August 2, 2016, SIC, Scrumsoft, Steeves and King filed a response to the civil claim.  They admitted certain facts related to their identities, pleaded the arbitration clause and sought a stay in favour of arbitration.  Bit Creative and Khatri filed a response, identical in approach, on August 18, 2016.

On August 17, 2016, Steeves, SIC, King and Scrumsoft applied for an order setting aside the Mareva injunction and requiring Pixhug to pay damages suffered as a result of the having had the Mareva injunction granted.  Pearlman J. later granted the application to set aside, finding that Pixhug had failed to (a) make full and frank disclosure of materials relevant to the assessment of the software development work performed by Defendants and (b) disclose facts concerning the adequacy of its own financial circumstances supporting Pixhug’s undertaking for damages and relevant to the court’s exercise of its discretion on the Mareva injunction.

At a costs hearing, on September 23, 2016, Defendants limited their arguments to security for costs for the costs of their application to set aside the Mareva.  Other steps took place in the litigation, including a March 8, 2017 letter from Defendants to Pixhug regarding deficiencies on Pixhug’s document disclosure.

On March 16, 2017, Defendants applied for a stay pursuant to section 8 of the International Commercial Arbitration Act, RSBC 1996, c 233 (“ICAA”). Pearlman J. relied on City of Nanaimo v. Millennium Nanaimo Properties Ltd., 2010 BCSC 1703 at para. 12 as his departure point for his analysis.  He held that sections 8(1) and 8(2) of the ICAA are essentially identical to the stay provisions contained in sections 15(1) and 15(2) of the Arbitration Act, RSBC 1996, c 55  and therefor the test for a stay of proceedings is the same under both statutes.  He identified three criteria for a stay under section 8(1) of the ICAA:

(a)    the applicant must show that a party to the arbitration agreement has commenced legal proceedings against another party to the arbitration agreement;

(b)    the legal proceedings must be in respect of a matter that the parties have agreed to submit to arbitration; and,

(c)    the application must be brought before the applicant takes a step in the proceeding.

He also held that if the applicant establishes an arguable case that the conditions of section 8(1) are met, then, under section 8(2), the court must grant the stay unless it determines the arbitration agreement is null and void, inoperative or incapable of being performed.  Perhaps given the allegations of fraud in the proceedings, Pearlman J. added that in order for fraud to render an arbitration agreement null and void, the allegations of fraud must relate “directly and specifically” to the arbitration agreement, rather than to the contract as a whole, relying on James v. Thow et al, 2005 BCSC 809.

In his analysis, Pearlman J. readily distinguished between the types of steps taken in a proceeding which may or may not cause Defendants to lose the benefit of section 8(1).   A step taken by Defendants for the purpose of protecting their rights in the face of Pixhug’s interim protective measure is not incompatible with the arbitration clause and does not disqualify Defendants from seeking a stay. Pearlman J. referred to the B.C. Court of Appeal in No. 363 Dynamic Endeavours Inc. v. 34718 B.C. Ltd., 1993 CanLII 1294 (BC CA) as authority.

Pearlman J. rejected Defendants’ reliance on Rule 21-8 of the Supreme Court Civil Rules, BC Reg 168/2009 which enable a party to challenge issues of forum non conveniens. As held in Bodnar v. Payroll Loans Ltd., 2009 BCSC 1205, that provision could not be used to invoke the arbitration agreement in support of a stay.  Unless Defendants could meet the criteria under section 8(1) of the ICAA, the court would retain jurisdiction.  Defendants had raised but did not pursue the forum non conveniens argument.

Defendants met the first of the three criteria.   Pearlman J. relied on Darby v. Lasko, 2003 BCCA 584 to allow those Defendants who were not parties to the arbitration agreement to apply for a stay.  The plain wording of the legislation distinguishes between parties to the arbitration agreement and parties to the litigation.  Read literally, that section allows any parties to the litigation to apply for the stay if other parties to the arbitration agreement have initiated court litigation.

Defendants also met the second of the three criteria. The arbitration agreement included broad wording.  The parties had agreed to mediate and arbitrate “all disputes arising out of or in connection with this contract, or in respect of any legal relationship associated with it or from it.”  A review of the key allegations led Pearlman J. to conclude that the dispute set out in the pleadings fell well within the arbitration agreement.

The third criteria raised a higher bar for Defendants given the lapse of time.  Nine months elapsed between commencement of the action and Defendants applying for a stay. Pearlman J. reviewed the results in prior cases which illustrated that the plain wording of section 8(1) was not a plain as it appeared.  Rather, the purpose of the procedural step was key.  Any step undertaken to contest an interim measure was not incompatible with the arbitration agreement.   A proceeding which sought the assistance of the court in the administration or advancement of the court litigation, however nominal, could be a step in the proceeding disqualifying Defendants.

A party that takes a step in the proceedings forfeits its right to apply for a stay under section 18(1), regardless of whether it has expressed an intention to refer the dispute to arbitration.

Pearlman J. accepted prior case law that an application for security for costs for the trial is a step in the proceeding.  Though Defendants had only proceeded on the application for security for costs for the Mareva, “they could not undo a step already taken in the action.”

Had Defendants limited their response to the civil claim with a request to stay based on the arbitration agreement, they might have met the third criteria.  Examining Plaintiff’s expert or seeking further documents were characterized as part of Defendants’ contestation of the interim measures sought by Pixhug.

Defendants had not confined themselves to requesting a stay of proceedings.  By the applications, they had sought the benefit of the court and had lost the opportunity to apply for a stay.

[88] The defendants, by their notice of application of August 17, 2016, also sought an order requiring Pixhug to pay damages to be assessed for losses suffered as a result of the Mareva injunction, or to post $200,000 as security for damages. By seeking an order for damages to be assessed, the defendants sought the assistance of the court, and indicated their willingness to pursue a remedy in court, rather than by arbitration. In my view, the application for damages to be assessed, or alternatively, for security for damages, constituted a further step in the proceedings.

It is arguable whether Defendants – especially those not bound by the arbitration agreement in the ICA or MSA – were unjustified in asking the court to sanction Plaintiff’s misuse of the court’s procedures.  Except for SIC, none of the applicants were parties to the arbitration agreement.  Those Defendants’ only redress for alleged damage is to apply to the court and could not pursue such claims before the arbitrator.  Perhaps the reasoning in the court is that after a stay those Defendants might apply to the court for compensatory remedies stemming from the interim measures.

Pearlman J. concluded that Defendants took steps in the proceedings before bringing their stay application and were precluded from relying on section 8(1) of the ICCA.  He dismissed their application for a stay.   As a result of that conclusion, he refrained from determining whether the arbitration clause was null and void on the basis of alleged fraud.