B.C. – stay issued despite procedural complexity, further legal proceedings prohibited without leave – #301

In Houm Services Inc. v. Lettuce Eatery Development Inc., 2020 BCSC 430, Madam Justice Heather MacNaughton stayed claims filed by plaintiff against defendant and its employees, pending resolution of claims which did fall within the agreement to arbitrate.  She held that the agreement was valid and compliant with B.C.’s Franchises Act, SBC 2015, c 35 and any further relief, beyond the scope of the agreement to arbitrate, could be pursued in court after arbitration despite any “procedural complexity” or delays.  She also issued an order under the Supreme Court Act, RSBC 1996, c 443 prohibiting plaintiff and its representative from instituting further legal proceedings against defendant and/or its employees without leave of the court.

Houm Services Inc. (“Houm”) and Lettuce Eatery Development Inc. (“LEDI”) signed a May 6, 2014 franchise agreement (“Franchise Agreement”) to operate a branded franchise on Nelson Street in Vancouver.  On July 24, 2019, LEDI issued a formal notice to Houm regarding alleged non-compliance with terms in the Franchise Agreement.  LEDI issued a further September 5, 2019 notice of default and an October 25, 2019 notice of termination.  LEDI eventually applied November 18, 2019 for an interlocutory injunction which, when granted November 19, 2019 by the court, prohibited Houm and any person with notice of the order from:

(a) using the trademarks referred to in the Franchise Agreement, including by operating the restaurant under the trademark name;

(b) disposing of, encumbering, dissipating, or relocating any of the “operating assets” as that term was defined in the Franchise Agreement; and

(c) operating any “competitive business” as that term is defined in the Franchise Agreement from the location at the Nelson Street location.

On November 19, 2019, LEDI issued a notice to arbitrate as provided for under the Franchise Agreement.

In addition, disputes arose between Houm and the landlord of the Nelson Street building in which the franchise had operated resulting in termination of the lease plus issuance of a notice of re-entry and change of locks.

LEDI attempted to and did succeed in finding a new franchisee to operate the Nelson Street location and also to buy the operating assets, as per LEDI’s option under the Franchise Agreements.  LEDI notified Houm of its intentions and the price at which it sought to exercise that option.  The parties were far apart on the amounts each assigned to those assets and LEDI relied on an independent appraiser to confirm its valuation.

Paras 12-41 set out the facts in some detail for each of the points of conflict, including Houm’s response following the court injunction, LEDI’s purchase of the operating assets, exchanges involving the new franchisee and further issues with the landlord.

Aside from litigation against the landlord, Houm filed four (4) civil actions regarding operation of the franchise:

(i) para. 12 – notice of civil claim against LEDI seeking “1. Comply Franchises Act and Fair dealing; 2. Purchase back any supplies and equipment that we had purchased under the franchise agreement at a price equal to the purchase price paid by us; 3. Compensation for economic losses”;

(ii) para. 20 – notice of civil claim against an LEDI employee and landlord employee seeking “1. stop illegal actions against Houm Services Inc.; and 2. compensation for economic losses”;

(iii) para. 25 – notice of civil claim against beneficial owners of new franchisee operating Nelson Street location, corporate counsel of LEDI, independent appraiser and the LEDI employee included in the second notice of civil claim seeking “1. Stop illegal actions against Houm Services Inc.; and 2.   compensation for economic losses”; and,

(iv) para. 40 – a petition against LEDI and landlord seeing various orders to clarify relief sought in Houm’s other actions.

LEDI applied under section 15 of B.C.’s Arbitration Act, RSBC 1996, c 55 to stay Houm’s claims against it and its employees.  It did not apply to stay the claims filed against the beneficial owners of the new franchisee.

MacNaughton J. observed that the case law is “clear” that “as a general rule, the arbitration panel is the first decision-maker with respect to the jurisdictional issues, absent narrow exceptions, which do not apply here”.  She was satisfied that the claims against LEDI and its employees as framed by Houm fell within the scope of the agreement to arbitrate.

[50] In ABOP LLC v. Qtrade Canada Inc., 2007 BCCA 290 at para. 24, the court held that if there was still a dispute between the parties, requiring additional relief outside the scope of the arbitration clause, the matter could be pursued in the courts after the conclusion of the arbitration. A stay of the actions and the petition simply holds those proceedings in abeyance until an arbitrator does the work that the parties have agreed should be arbitrated if the parties to the Franchise Agreement cannot resolve their issues”.

Though the terms of the agreement to arbitrate were not provided, MacNaugthon J. did note that “the arbitrator is given broad remedial powers, including the power to award damages and to make orders for specific performance, injunctive relief, and costs”.  She further found that the terms, including a default to arbitration in B.C., complied with B.C.’s Franchises Act, SBC 2015, c 35 and that the agreement to arbitrate was valid between Houm and LEDI.

MacNaughton J. records Houm’s consent to the dismissal of its claims against the beneficial owners of the new franchisee and LEDI’s corporate counsel.  MacNaugthon J. made two (2) orders.

First, she stayed certain of the remaining claims.

[55] All of the actions filed by Houm against LEDI and its employees, and the petition proceeding, are stayed as against LEDI, pending the outcome of the arbitration process commenced by LEDI. It is in that forum that Houm will be able to raise concerns about the terms, operation, and application of the Franchise Agreement”.

Second, she ialso granted LEDI’s second application and issued an order under section 18 of the Supreme Court Act, RSBC 1996, c 443 prohibiting Houm and its representative from instituting further legal proceedings.

[56] Because Houm has filed a number of duplicative proceedings, arising from the same set of facts, I conclude that it is appropriate to make an order under s. 18 of the SCA, prohibiting Houm and/or Mr. Xiao from instituting further legal proceedings naming LEDI and/or its employees or agents as defendants without leave of this Court”.

urbitral note – First, para. 24 of ABOP LLC v. Qtrade Canada Inc. provided additional statements by the Court of Appeal which acknowledged that a stay will be granted even if it delays the court’s involvement or causes procedural complexity.  The B.C. Court of Appeal relied on a decision of the Northern Ireland Court of Appeal.

[24] As pointed out in [Wine Inns Limited, In the Matter of, [2000] NICA 15], this might cause some procedural complexity.  However, that cannot form the basis for the determination of this case.  To paraphrase Maher, I find no “proper reason” why the courts should not “give effect to that wish”, the parties’ agreed-to wish being for arbitration to resolve disputes arising out of the shareholders agreement.  The involvement of the courts might well be delayed, or not required at all with respect to the two non-arbitrable issues being pursued by ABOP, but its jurisdiction has not been ousted”.

Second, despite not being parties to the agreement to arbitrate, the LEDI employees did benefit from its application asserted on their behalf by LEDI.  Even if the effect of the decision was not to impose arbitration on non-parties, arbitration justified the stay.  That stay issued expressly to allow Houm and LEDI to arbitrate those issues which did fall within the scope of their agreement to arbitrate and then, following that resolution, return to court for resolution of any other remaining issues.  Those latter issues may include the alleged involvement of LEDI’s employees if they were not included formally in the arbitration either by the parties’ conduct following or comprehension of the stay order.