B.C. – High bar to arbitrate amended claims after attornment – #744

In Hawthorn v Hawrish, 2023 BCCA 182, the BC Court of Appeal addressed the often-difficult question of “who decides” key issues where arbitration agreements and court proceedings collide. The appeal concerned an amended notice of civil claim, which the defendants – who had already attorned to the court in respect of the original notice of civil claim – applied to stay in favor of arbitration. The core question was whether the amendments added new claims. The Court of Appeal affirmed the lower court’s refusal to refer the question first to arbitration, and the conclusion that the amendments were not new.

Background to the appeal The plaintiff, Darren Hawrish, is a minority shareholder and was – until 2020 – a Director of Native Canada Footwear Ltd (“Native”). In February 2021, Hawrish initiated a petition against Scott Hawthorn (the majority shareholder of Native) and Native, alleging oppression under the Business Corporations Act, SBC 2002, c 57. Hawrish alleged that his rights as a minority shareholder, incorporated in a shareholders agreement (“SHA”) and a voting trust agreement, had been violated.

The parties consented to converting the petition to an action, and Hawrish filed a notice of civil claim in July 2021. It alleged oppression, as well as breach of fiduciary duty and breach of trust against Hawthorn, and a tort claim against Native for knowing inducement. Hawrish sought an order requiring Hawthorn or Native to purchase Hawrish’s shares, or requiring the sale of Hawthorn’s shares.

Hawthorn and Native responded to Hawrish’s claim in September 2021, and Native filed an application for summary judgment in November 2021. Writing for the Court of Appeal, Justice Willcock observed, at para. 22, that, “[t]here were, clearly, steps taken in response to the dispute identified in the notice of civil claim.”

Before Native’s summary judgment application was heard, Hawrish filed an amended notice of civil claim which added 28 new sub-paragraphs of factual allegations, and one additional request for relief: an injunction to require Native’s articles to be amended to reflect the minority shareholder protections of the SHA.

In January, 2022, Hawthorn and Native applied under s. 7 of the Arbitration Act, S.B.C. 2020, c. 2 (the “Act”), to stay the proceedings in respect of claims which, they argued, were raised for the first time in the amended notice of civil claim. Justice Wilson of the BC Supreme Court dismissed the application in a decision covered in a previous Arbitration Matters case note, British Columbia – Application to stay amendments falters on attornment – #628.

In short, Justice Wilson found, at para. 42, that the timeliness of the stay application depended on whether it raised new claims: “If the claims are different, the applications should be granted.” However, Justice Wilson concluded, at para. 67, that the claims were not “new or discrete”, noting that Justice McDonald – who decided Native’s summary judgment application – had similarly concluded that “with the exception of a claim in conspiracy, the amendments are simply additional material facts in support of the original causes of action.” Because the claims were not new, and Hawthorn and Native had already attorned to the Court by responding to the original notice of civil claim, Justice Wilson stated, at para. 68, they “cannot now seek a stay in order to arbitrate what are in pith and substance the same matters.

The appealHawthorn and Native appealed on two grounds. First, they argued that the threshold question – whether the amendments raised new claims – should have been referred first to arbitration because it was “arguable” that they had applied for a stay before responding to the substance of new claims added by the amendments. Second, they asserted that Justice Wilson erred in holding on the merits that the amended notice of civil claim did not assert new causes of action.

As to the first ground of appeal, the Court of Appeal explained, at para. 54, that “[a] stay must be granted where the statutory prerequisites in s. 7 have been satisfied.” Moreover, respect for the competence-competence principle embodied in s. 23 of the Act ordinarily requires courts to grant a stay in favor of arbitration where the applicant has shown an “arguable case” that the statutory prerequisites have been met. This is the “rule of systematic referral” described in Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34, at paras. 84-85, which cited the BC Court of Appeal’s decision in Gulf Canada Resources Ltd. v. Arochem International Ltd., (1992), 66 B.C.L.R. (2d) 113, 1992 CanLII 4033 (C.A.)

There are exceptions, though, to the rule of systematic referral. Gulf Canada reasoned that “[o]nly where it is clear that the dispute is outside the terms of the arbitration agreement or that a party is not a party to the arbitration agreement or that the application is out of time should the court reach any final determination in respect of such matters on an application for a stay of proceedings.” In 2007, the Supreme Court of Canada clarified in Dell that courts must refer challenges to arbitral jurisdiction to arbitration first, unless the challenge is based solely on a question of law, or a question of mixed law and fact that requires only superficial consideration of the documentary evidence in the record. As Justice Willcock observed at para. 61, the Supreme Court’s recent decision in Peace River Hydro Partners v. Petrowest Corp., 2022 SCC 41, endorsed the Dell structure for deciding who decides.

The Court of Appeal concluded, at paras. 63-64, that the issue in Hawrish – “whether a new claim that might be stayed in favor of arbitration appeared by way of amendment” – was a question of law “that could be extracted with only a superficial consideration of the evidentiary record.” In fact, at para. 62, the judgment quoted the factum of Hawthorn and Native conceding that point. Justice Wilson was, accordingly, squarely seized of the issue and it “should not have been referred to arbitration.”

The second question on appeal was whether Justice Wilson correctly concluded that the amendments did not disclose new claims.

The “essence” of the original dispute, according to Hawthorn and Native (at para. 46), was “the denial of Hawrish’s entitlement to be a director, and the source of this entitlement was not the shareholders’ agreement but the voting trust agreement between Hawrish and Hawthorn.” Hawthorn and Native argued that while the original notice of civil claim had referred to breaches of the SHA, “they were incidental, not essential”, and that Hawrish’s original claims were “personal” to him. In contrast, Hawthorn and Native asserted that the amendments introduced claims and requests for relief that related to the interpretation, performance and enforceability of the SHA, affecting all shareholders and the constating documents of Native. 

Hawrish countered that the amendments were “in pith and substance” related to the same matter as the original notice of civil claim (para. 50). Further, he claimed that the amendments, if brought in a subsequent litigation, would have been improper – underlining their connection to the original claims.

Justice Willcock began by considering, without deciding, whether s. 7 of the Act applied at all to the appellants’ stay applications. He noted, at paras. 66 and 67, that there are several “arguable” readings of s. 7, including that it is unavailable after a party’s first response to the substance of the dispute, or that it only applies where a stay is mandatory (“i.e., at the outset of proceedings where the parties have not yet attorned to court, the arbitral agreement applies to the dispute, and the arbitration clause is relied upon to foreclose proceedings.”). Hawthorn and Native’s stay applications arose in a different posture, not expressly addressed in the Act

In the end, at para. 71, the Court of Appeal did not decide whether s. 7(1), or the court’s inherent jurisdiction, applied to the stay; it did not matter. Fundamentally, at para. 72, “the matter of the breach of the shareholders’ agreement was pleaded in the original notice of civil claim, and […] the amendments were so closely tied to the dispute identified from the outset that it would have been abusive to commence separate, free-standing proceedings with respect to the matter first raised by amendment.”

To analyze the connection between amendments and original claims, Justice Willcock approved the approach of the Court of Appeal for England and Wales in Ahad v. Uddin, [2005] E.W.C.A. Civ. 883 and urged by counsel for Hawrish. In Ahad, Lord Phillips (as Master of the Rolls) concluded that a stay of claims introduced by amendment would be appropriate only if they were “discrete matters in respect of which [legislation] entitled the defendant to insist that they be arbitrated.” To test this analysis, Lord Phillips suggested that if pursuing the amendment issues before a different court would be an abuse of process, then they belong in the original action. Justice Willcock agreed in para. 85, observing that while it is more stringent than simply asking whether the amendments “arose from the same factual matrix”, it “fairly reflects the deferential approach to questions of arbitral competence reflected in Uber Technologies Inc. v. Heller, 2020 SCC 16; Wellman; Seidel; and Peace River.”

Contributor’s Notes:

First, Lord Phillips opened the judgment in Ahad with this observation: “This is an ill-advised piece of satellite litigation. It raises nonetheless a point of procedure of some importance on which there appears to be no authority.

Likewise, Hawrish addresses an uncommon, but important, procedural question in litigation that may overlap with the scope of arbitration agreements. The judgment highlights several key strategic questions for parties and their counsel to consider, ideally well in advance of a dispute. They include whether to attorn to court, the scope and precision of arbitration agreement(s), and the coherence of the dispute resolution framework in multi-party and multi-contract scenarios.

Most importantly, a party that attorns to court instead of invoking an applicable arbitration agreement must be aware that compelling arbitration of future claims added by amendment may be difficult. The Court of Appeal recognized, at para. 46, that Hawthorn and Native likely could have sought to compel arbitration of the entire dispute at the outset “given the explicit pleading that oppression arose from the failure to observe the covenants in the shareholders agreement.” They did not, and the Court of Appeal’s judgment reflects concerns over the waste of judicial resources and abuse of process that could result if there were an easy path to a second bite at the arbitration apple.