B.C. – non-parties to agreement to arbitrate granted stay of counterclaim along with plaintiff – #459

Pursuant to section 7(2) of the Arbitration Act, SBC 2020, c 2 and section 10 of Law and Equity Act, RSBC 1996, c 253, Madam Justice Carla L. Forth in Kwon v. Vanwest College Ltd., 2021 BCSC 545 stated a Defendant’s counterclaim against Plaintiff and non-parties to the agreement to arbitrate,.  Forth J. relied on (i) precedent adopting a generous interpretation of “arising out of” in the agreement to arbitrate, (ii) the intertwined, overlap of factual matrices and (iii) avoidance of multiple proceedings and inconsistent decisions to grant a stay in regard to Plaintiff and to include the arbitral non-parties as defendants to that counterclaim. Defendant requested Forth J. also stay Plaintiff’s claim against it on the basis that Defendant sought an equitable set-off.  Forth J. refused, considering that the parties’ claims did not arise out of the same matter and that, even if Defendant’s counterclaim arose out of the same contract giving rise to Plaintiff’s claim, the counterclaim did not go to the “root” of Plaintiff’s claim.

Plaintiff provides international education consulting services through her sole proprietorship CK International Education Consulting (“CK International”).  Vanwest College Ltd. (“Vanwest”) operates an English language school. By July 15, 2011 consulting and management agreement (“Consulting Agreement”), Plaintiff provided managing and consulting services through CK International to Vanwest from 2011 to 2015 in exchange for a $7,000.00 monthly fee plus reimbursement of expenses incurred.  Plaintiff claims non-payment by Vanwest of fees owing between July 2011 and April 2014.

Plaintiff became a Vanwest employee in October 2013 and, as of October 29, 2014, a director and shareholder of Vanwest.  For her interest as shareholder, Plaintiff entered into a shareholders agreement (“Shareholders Agreement”) with Vanwest and two (2) other individuals, CPP and TCP.  The Shareholders Agreement contained an agreement to arbitrate.

16.1 Arbitration – Except for any determination of the value of an Interest made in accordance with subsection 13.2 [Determination of Fair Market Value], which determination shall be final and binding on the parties, all disputes arising out of, or in connection with, this Agreement shall be referred to and finally resolved by a single arbitrator (the “Arbitrator”) pursuant to the Commercial Arbitration Act, R.S.B.C. 1966, c. 55, as amended. The place of arbitration will be Vancouver, British Columbia. The language of arbitration will be English.

16.2     Final and Binding – The decision of the Arbitrator on all issues or matters submitted to the Arbitrator for resolution shall be conclusive, final and binding on all of the parties”.

The Shareholders Agreement included terms involving non-competition and confidentiality reproduced at para. 13 of Forth J.’s reasons.

Plaintiff notified Vanwest July 26, 2018 of her resignation effective September 3, 2018 and on March 10, 2020 filed a notice of civil claim to recover $53,831.76 in fees (“Claim”), later amended November 5, 2020, for an additional amount of $7,000.00 related to attendance at a 2015 professional event held in South Korea. 

Vanwest filed a May 12, 2020 response to civil claim (“Response”) to Plaintiff’s Claim and a May 14, 2020 counterclaim naming as defendants by counterclaim, Plaintiff and three (3) others, BE, DB and YS, , who each had an employment or consulting relationship with Vanwest (“Counterclaim”).

In its Response, Vanwest admitted owing $45,823.62 but disputed $8,000.00 because some expenses were allegedly not supported by invoices or a reasonable explanation or not authorized by Vanwest.  Vanwest also in its Response, before filing the Counterclaim, alleged that Plaintiff breached her employment contract, the Shareholders Agreement as well her fiduciary duty, causing Vanwest to suffer loss and injury, and claimed a set-off with special and general damages claimed by Vanwest.  At para. 19 of her reasons, Forth J. set out the details of Vanwest’s allegations made in its Counterclaim.

Forth J. noted that Plaintiff and all defendants in Counterclaim (“Applicants”) “filed jurisdictional responses submitting that this Court did not have jurisdiction or ought not to exercise jurisdiction over them”.

At the outset of her reasons, Forth J. commented on the former and current versions of B.C.’s domestic arbitration legislation.  She noted that Plaintiff had no initiated arbitration as of the date of her reasons.

[2] The applicable legislation at the time the notice of application was filed on January 15, 2021, was the Arbitration Act, S.B.C. 2020, c. 2, which repealed and replaced the Arbitration Act, R.S.B.C. 1996, c. 55, effective September 1, 2020, through the Arbitration Regulation, B.C. Reg. 160/2020. Throughout these reasons I will be referring to the sections in the current Arbitration Act, which would apply to this application since, it is my understanding that, no arbitral proceedings have been commenced yet”.

Applicable principles for stay of proceedings – Forth J. referred to Prince George (City of) v. A.L. Sims & Sons Ltd., 1995 CanLII 2487 (BC CA) para. 22 as setting out the prerequisites for granting a stay of proceedings.  If those prerequisites are met, the court must stay proceedings “unless the arbitration agreement is void, inoperative, or incapable of being performed” under section 7(2) of the Arbitration Act.  Pointing to Goel v. Dhaliwal, 2015 BCSC 2305 para. 65, Forth J. closed by observing that the court had no residual discretion if those prerequisites exist.

Forth J. added that the onus is on the party commencing the claim “in this case the counterclaim” to demonstrate that its claim is not in respect of a matter which the parties had agreed to submit to arbitration.  See Range v. Bremner, 2003 BCSC 2038 para. 27 Range v. Bremner, 2003 BCCA 675.  She added that courts have taken “a deferential approach” on jurisdictional challenges and allow the arbitrator to determine “at first instance” whether the dispute is arbitrable, thereby “giving precedence to the agreement between the parties”, citing St. Pierre v. Chriscan Enterprises Ltd., 2011 BCCA 97 para. 24.  See also Seidel v. TELUS Communications Inc., 2011 SCC 15 (CanLII), [2011] 1 SCR 531 paras 29 and 114.

Vanwest did not dispute the parties’ agreement to arbitrate disputes under the Shareholders Agreement or a stay related to it.  Rather, Vanwest limited its contestation to which parts of the Counterclaim should be stayed.  Applicants argued for a broad application of the agreement to arbitrate, relying of the words “arising out of” and the decision in Campney & Murphy v. Bernard & Partners, 2002 FCT 1136.  See paras 32-41 of Forth J.’s reasons.  Plaintiff also urged that Forth J. consider the potential for inconsistent findings.

Applicants argued that non-parties to the agreement to arbitrate can obtain a stay, citing Darby v. Lasko, 2003 BCCA 584 paras 9–11 and Ts’kw’aylaxw First Nation v. Graymont Western Canada Inc., 2018 BCSC 2101 paras 31-32.

Vanwest proposed that the arbitration and the civil litigation proceed in parallel, each resolving different aspects of the claims in the Counterclaim.

[42] Vanwest submits that the most cost effective and efficient way to deal with the claims is to arbitrate the breach of the Shareholders Agreement and at the same time allow the claims for breaches of the employment contracts and fiduciary duties to continue. There may be some overlap in the evidence that goes to prove or disprove breaches of a fiduciary duty and a breach of the Shareholders Agreement, but that overlap is unavoidable and of no real consequence”.

Forth J. determined that Vanwest failed to meet its onus of satisfying her that the Counterclaim was not in respect of a matter subject to the agreement to arbitrate.  Examining Vanwest’s own pleading in the Counterclaim, Forth J. at paras 45-46 determined that the Counterclaim made no separate allegations for the employment and shareholding breaches.  Forth J. also considered that the claims against the other non-parties to the arbitration were intertwined with the claims against Plaintiff.

[48] The existence of the Shareholders Agreement is inextricably tied to the allegations of breaches of fiduciary duties. I am not persuaded that the claims being advanced in the counterclaim clearly fall outside of the arbitration agreement.  As noted in Goel at para. 78, if it is arguable that the dispute falls within the arbitration agreement, the court should grant the stay and leave the scope of the arbitration agreement to be assessed by the arbitrator. In my view this is the appropriate course to follow. If the arbitrator declines jurisdiction over the claim for breach of employment then Vanwest is still free to pursue that claim as a separate claim.

[49] Further, hiving off only the claim for breach of the Shareholders Agreement and submitting that claim to arbitration, while allowing the remainder of the counterclaim to proceed prior to the arbitration, would create a risk of inconsistent findings between the arbitration and the Court”.

Forth J. expressly referred to the overlap of the factual matrices and avoidance of multiple proceedings and inconsistent decisions as grounds to grant a stay in regard to the non-parties.

[50] The final issue is that the counterclaim advances claims against non-parties to the arbitration agreement. In my view, the claims made against [Plaintiff] are intertwined with the claims made against the non-parties. The claims arise from the same factual matrix and the same conduct of [Plaintiff]. [Plaintiff]’s conduct is alleged to have induced the alleged breaches of contract by the other former employees. To permit the claim against the non-parties would be to endorse multiple proceedings and the risk of inconsistent decisions, which should be avoided:  Law and Equity Act, [RSBC 1996, c 253] s. 10; Ts’kw’aylaxw at para. 33. Once the arbitration is settled it may eliminate the claims against the other parties, or it may provide new grounds for asserting those claims”.

Stay refused of Plaintiff’s claim – Forth J. dismissed Vanwest’s request to also stay Plaintiff’s claim on the basis that Vanwest sought an equitable set-off.  With reference to Coolbreeze Ranch Ltd. v. Morgan Creek Tropicals Ltd., 2009 BCSC 151 paras 37-38 and Nie v. Kwang Chyun Enterprise Ltd., 2017 BCSC 1941 para. 46, Forth J. pointed out that, among the principles required for equitable set-off, the claim and cross-claim must arise out of the same matter.

Forth J. considered that the claims did not arise out of the same matter.  In addition, even if the Counterclaim arises out of the same consulting contract giving rise to Plaintiff’s debt claim, the Counterclaim did not “go to the “root” of the plaintiff’s claim”.

[58] As I noted earlier, the root of the counterclaim relates to the alleged breaches of a Shareholders Agreement which came into existence in October 2014. It is likely that any fiduciary duties [Plaintiff] owed to Vanwest arose from the Shareholders Agreement and not her role as an employee or consultant. The necessary and sufficient nexus between the claims does not exist.  The evidentiary underpinning is insufficient to establish the requisite close connection needed between the claims. The claims are separate and independent of each other”.

urbitral notes – First, cited by Forth J., Prince George (City of) v. A.L. Sims & Sons Ltd., 1995 CanLII 2487 (BC CA) relied on its earlier reasons in Gulf Canada Resources Ltd. v. Arochem International Ltd., 1992 CanLII 4033 (BC CA).

Second, in Range v. Bremner, 2003 BCSC 2038 at para. 27 referred to by Forth J., the court referred to two (2) decisions, following one and identifying the other from Manitoba as not applicable in B.C.

[27] The onus is on the wife to prove that the claim is not in respect of a matter agreed to be submitted to arbitration:  [Dome Petroleum Limited v. Burrard Yarrows Corporation, 1983 CanLII 588 (BC SC)].  The principles with respect to onus discussed in [Injector Wrap Corp. Ltd. v. Agrico Canada Ltd., 1990 CanLII 11253 (MB CA)] do not apply in British Columbia”.

The Alberta court in Sehdev v. Colours by Battistella Inc., 2008 ABQB 248 distinguished that Manitoba decision also but specified that it relied on legislative wording different from Alberta’s.

[18] The Purchasers refer to Injector Wrap Corp. v. Agrico Canada Ltd (1990), 1990 CanLII 11253 (MB CA), 67 Man. R. (2d) 158 (C.A.) in which the Manitoba Court of Appeal set aside a stay of an action for payments due under an equipment leasing contract on the grounds that the contract contained an arbitration clause. The court concluded that the party seeking the stay had failed to properly define the “precise nature of the dispute”, which the court found to be a necessary prerequisite. As Colours pointed out, the Manitoba legislation at issue in the Injector Wrap, supra, decision was worded differently than the Act and provided broader discretion to the court when a stay of litigation pending arbitration was sought than does the legislation in Alberta”.

Third, Campney & Murphy v. Bernard & Partners, 2002 FCT 1136 cited to para. 22, reads as follows, including reference to an earlier 1996 B.C. Court of Appeal decision relying on the phrase “arising out of” to give a “generous interpretation” to the scope of the agreement to arbitrate and, in effect, the availability of a stay.

[9] Finally, I should return to the concept that the present arbitration clause, framed in terms of “arising out of”, deserves a generous interpretation. Here I would refer first to The Oceanic Mindoro (1997), 1996 CanLII 1537 (BC CA), 26 B.C.L.R. (3d) 143, a decision of the BC Court of Appeal, at page 150. In The Oceanic Mindoro the Court of Appeal referred to and adopted the generous approach to the phrase “arising out of” used in Ethiopian Oilseeds v. Rio del Mar Foods Inc., [1990] 1 Lloyd’s Law 86 (QB). There Mr Justice Hirst relied upon Mustil and Boyd on Commercial Arbitration, 2nd Edition at page 120:

“Arising out of”

These words have been given a wide meaning. It has been said that they cover every dispute except a dispute as to whether there was ever a contract at all. If the parties to a contract make provision in it as to their rights should certain events occur in the course of the contract, and a dispute arises between them as to their rights following the occurrence of those events, then that dispute as to their rights arises out of the contract”.