B.C. – Stay motion: pleadings sufficient for “arguable case” that arbitration clause applies, despite contrary evidence – #534

In Beck v Vanbex Group Inc., 2021 BCSC 1619,  Justice Fleming granted a partial stay of a proposed class action under s. 7 of the Arbitration Act, S.B.C. 2020, c. 2.  The issue before her was whether the Defendants had any evidentiary burden to meet to establish an “arguable case” that they were both proper parties to the arbitration agreement, thereby warranting a stay. The Plaintiffs argued that although one of the Defendants was not a signatory to the business agreement upon which they were suing and which contained the arbitration clause, both corporate Defendants were essentially alter egos of one another and both were liable to them.  However, they argued that the Defendants’ stay application must be dismissed in the face of the Defendants’ evidence that the two corporate Defendants were entirely separate and one of them was not a proper party to the arbitration agreement. The Defendants agreed that, in the arbitration or at trial, their position would be that one of the Defendants was not a party to the arbitration agreement; however, they were entitled to a stay because: (1) if the Plaintiffs were correct, the action should be stayed; and (2) if the Plaintiffs were not correct, the Plaintiffs had no claim against the non-party Defendant anyway and the action would be dismissed. Justice Fleming agreed that the issues pleaded by the Plaintiffs demonstrated that it was arguable that both corporate Defendants were proper parties, notwithstanding the evidence adduced by the Defendants to the contrary.

Defendant Vanbex Group Inc. operated as a cryptocurrency consulting, marketing, and strategic development practice.  Defendant Vanbex Labs Inc. was created to work on the product development side of “blockchain” and cryptocurrency technology. The action concerned the sale of digital “FUEL” tokens by the Defendants. The Plaintiffs, as purchasers of the “FUEL” tokens, alleged that these Defendants (and certain corporate officers and directors) had breached various provisions of the Securities Act, R.S.B.C. 1996, c. 418, and the Business Practices and Consumer Protection Act, S.B.C. 2004, c. 2 [BPCPA], were unjustly enriched, and had engaged in an unlawful conspiracy.

Purchasers of the FUEL tokens were required to agree to terms of service which contained an arbitration clause.  The Defendants applied for a partial stay of a proposed class action in favour of arbitration, relying on s. 7 of the Arbitration Act, S.B.C. 2020, c. 2ss. 8 and 10 of the Law and Equity Act, R.S.B.C. 1996, c. 253, and the court’s inherent jurisdiction.  (That portion of the claim relating to the relief sought under s. 172 of the BPCPA was not included in the stay application.)

Justice Fleming noted that s. 7 of the Arbitration Act provides for a mandatory stay of an action, so long as three pre-requisites are met (unless the court determines that the arbitration agreement is void, inoperative or incapable of being performed, which was not asserted in this case).  The three pre-requisites are: (a) The applicant must show that a party to an arbitration agreement has commenced legal proceedings against another party to the agreement: (b) The legal proceedings must be in respect of a matter agreed to be submitted to arbitration; and (c) The application must be brought timely, i.e. before the applicant takes a step in the proceeding.

Justice Fleming also noted that the Defendants were required to establish only an “arguable case” regarding each pre-requisite in order to obtain a stay of the action:

“[10] The low threshold reflects the principle of competence-competence that affirms arbitrators are competent to determine their own jurisdiction in the first instance: Uber Technologies Inc. v. Heller2020 SCC 16 at para. 122. Jurisdictional challenges involving a pure question of law, or one of mixed fact and law that require “only superficial consideration of documentary evidence in the record” are an exception: Seidel v. TELUS Communications Inc.2011 SCC 15 at paras. 29 and 114; Dell Computer Corp. v. Union des consommateurs,2007 SCC 34 at paras. 84-85Uber described this superficial consideration at para. 36:

Neither Dell nor Seidel fully defined what is meant by a “superficial” review. The essential question, in our view, is whether the necessary legal conclusions can be drawn from facts that are either evident on the face of the record or undisputed by the parties.…”

The only issue on this application was whether the Defendants could establish pre-requisite (a) –  an “arguable case” that they both were parties to the agreement containing the arbitration clause, thereby justifying the stay. It was undisputed that only the Plaintiffs and Defendant Vanbex Labs were signatories to the agreement containing the arbitration clause, so the issue was whether Vanbex Group was a proper party nonetheless.   

Justice Fleming stated that, as a matter of law, the proper parties to an arbitration agreement can go beyond the signatories, “where there is an agency relationship between a party and a non-signatory; or the corporate relationship between a parent and its subsidiary is sufficiently close to justify piercing the corporate veil and holding one corporation legally accountable for the actions of the other, along with other circumstances: DNM Systems Ltd. v. Lock-Block Canada Ltd., 2015 BCSC 2014 at para. 77.”

Further, quoting the DNM Systems case at paragraph 76, Justice Fleming found that a stay is appropriate where it is unclear whether a party to the action is a party to the arbitration agreement, so that the issue can be determined by the arbitral tribunal.

The Defendants argued that they had established an “arguable case” that Vanbex Group was a party to the arbitration agreement. If the Plaintiffs’ theory was accepted and Vanbex Group was responsible for the conduct of Vanbex Labs on the basis that the two corporations were “inextricably interwoven” and agents of one another, Vanbex Group was, at least arguably, a non-signatory party to the arbitration agreement.

The Plaintiffs’ argued that the stay application must be dismissed; the Defendants’ position could not be sustained because of its evidence that the corporate Defendants operated separately.

Therefore, Justice Fleming had to consider whether the “arguable case” standard involved an evidentiary burden or whether it could be met based upon the parties’ pleadings or a “purely hypothetical argument to the effect that the arbitrator might have jurisdiction”,  relying on AtriCure, Inc. v. Meng2020 BCSC 341 at para. 62.

Justice Fleming found that the Plaintiffs could not take a position on this application that was inconsistent with both their pleading and the necessary implication of their pleading, which was that Vanbex Group was a non-signatory party to the arbitration clause. Therefore, she found that the Plaintiffs’ pleading alone was sufficient to establish that there was an “arguable case” that Vanbex Group was a non-signatory party to the arbitration agreement.

Also, Justice Fleming found that this approach to the jurisdictional issue was consistent with the “superficial review” prescribed in the Uber case:

“[23] … Without deciding whether the dispute that arises from the pleadings and [the Defendants’] evidence involves a mixed question of fact and law, as opposed to a purely factual question, this approach, in my view, accords with the superficial review prescribed in Uber and the case law’s recognition that arbitrators have the jurisdiction to decide first who the proper or necessary parties to an arbitration agreement are.  Here, any necessary legal conclusions cannot be drawn from facts that are either evident on the face of the record or undisputed by the parties. It is not clear that Vanbex Group is not a party.”

Ultimately, Justice Fleming granted the stay, but only in respect of certain claims.  The Plaintiffs’ claims for relief under s. 172 of the BPCPA could not be stayed, based on the Seidel v TELUS Communications Inc. case. And those claims against other Defendants who were clearly not parties to the arbitration agreement, the corporate officers and directors, were not stayed.

Editor’s notes:

First, the agreement containing the terms of service also contained a Dispute Resolution clause with a class action waiver that read:

“a. Arbitration. Except for any disputes, claims, suits, actions, causes of action, demands of proceedings (collectively, “Disputes”) in which either you or the Company seeks to bring an individual action in small claims court or seeks injunctive or equitable relief for the alleged unlawful use of intellectual property, including, without limitation, copyrights, trademarks, trade names, logos, trade secrets, or patents, all Disputes arising out of or in connection with these Terms, or in respect of any legal relationship associated therewith or derived therefrom, will be referred to and finally resolved by arbitration administered by the British Columbia International Commercial Arbitration Centre (“BCICAC”) pursuant to BCICAC Rules. …

“b. No Class Arbitrations, Class Actions or Representative Actions.Any Dispute arising out of or related to these Terms is personal to you and the Company and will be resolved solely through individual arbitration and will not be brought as a class arbitration, class action or any other type of representative proceeding. There will be no class arbitration or arbitration in which an individual attempts to resolve a Dispute as representative of another individual or group of individuals. Further, a Dispute cannot be brought as a class ….

The enforceability of this clause, requiring that any disputes be resolved by individual arbitration, was not before Justice Fleming.

Second, for recent Case Notes on the “superficial review test” see:  Québec – case referred to arbitration despite some parties and some claims possibly not covered by the arbitration agreement – #517 and Ontario – Court application stayed; jurisdictional issues required analysis of contract’s factual matrix, should be decided by arbitrator – #522.

Third, for a refresher on Uber Technologies v Heller, 2020 SCC 16, see Case Note Supreme Court – courts should not refer jurisdiction challenge to arbitrator if real prospect that challenge might never be resolved – #344.