In Silpit Industries Co. Ltd. v. Rady et al., 2020 MBQB 96, Mr. Justice Theodor Bock dismissed an attempt to appeal an award on a question of law under The Arbitration Act, CCSM c A120. The award resulted from a court-ordered arbitration which another Manitoba court, in prior litigation, imposed and subjected to the Arbitration Act. Despite the parties being located in different countries, the court did not subject the arbitration to The International Commercial Arbitration Act, CCSM c C151. The earlier court required the parties to arbitrate the value of shares which the court ordered be sold under sections 207 and 234 of The Corporations Act, CCSM c C225 to remedy a break down in the relationship between the two (2) groups of shareholders each holding a 50% interest.
Incorporated in 1971 by a Winnipeg businessman, Silpit Industries Co. Ltd. (“Silpit”) began operations in the garment industry but, in recent years leading up to the dispute, had evolved into an investment vehicle holding real property and transacting in securities. The businessman’s two (2) daughters, E and N, and their respective children each owned 50 % of Silpit’s shares. The Court of Appeal described the nature of Silpit.
“[10] Silpit was, in reality, a partnership in the guise of a corporation. Its shares were owned as described and it was operated on an informal basis, with the decisions being made consensually between David [N’s husband] and Ernest [E’s husband]. There were no directors’ meetings or shareholders’ meetings”.
Despite years of collaboration and informality between the sisters’ families, their relationship ‘unraveled’ following David’s passing and transition to more active involvement by David’s son. In the reasons, E’s family is referred to as the “Radys” and N’s as the “Kaufmans”.
The present note concerns the recent July 15, 2020 decision by Bock J. To appreciate the result in Bock J.’s 2020 decision, two (2) prior decisions require consideration as they set out the process leading to the arbitration award examined by Bock J.
(A) Pre-arbitration – On July 22, 2010, the Radys initiated proceedings in Manitoba’s Court of Queen’s Bench seeking (i) an order under section 207 of The Corporations Act, CCSM c C225 for liquidation and dissolution of Silpit or, in the alternative (ii) an order under section 207 and 210 that one or more of the Kaufmans purchase at fair market value the shares in Silpit owned by the Radys.
Despite the relief sought against the individual shareholders, the Kaufmans were not named as parties to the Radys’ application. During the proceedings, the Radys dropped the request for liquidation and dissolution and sought only the purchase of their shares.
In her decision, Rady et al. v. Silpit Industries Co. Ltd., 2014 MBQB 145 Madam Justice Deborah J. McCawley determined that the relationship between the Radys and Kaufmans had deteriorated sufficiently to justify a order under section 207(2) and 234(2) requiring the Kaufmans to purchase the Radys’ shares in Silpit at “fair value” and that the value would be “determined by an arbitrator”.
In justifying an order against non-parties, McCawley J. at paras 48-49 explained her approach, including the Kaufmans’ knowledge of the order sought and the absence of submissions on the need to name the shareholders.
“[48] Counsel for the respondent raised a question as to whether the court has the jurisdiction to grant the relief sought by the applicants given that the corporation is the only named respondent and none of the individual shareholders are named. No submissions were made in this regard, presumably because of the broad wording of s. 207(2) of the Act which allows the court to make such order as it thinks fit, and s. 234(3)(f) of the Act which empowers the court to make “an order directing a corporation, subject to subsection (6), or any other person, to purchase securities of a security holder.” [emphasis added]
[49] As well, had the issue been pressed, it would have been open to counsel for the applicants to apply to amend the style of cause to include the shareholders of Silpit at the time of the hearing, and indeed it would be open to him to do so even after judgment, if necessary. Such an amendment would not work any prejudice to the shareholders since they are well aware of these proceedings”.
There is no mention in McCawley J.’s reasons of any agreement between the Silpit shareholders, which existed before the Radys’ application was made, to determine such value according to arbitration. Rather, it appears . As the appropriate remedy in the circumstances, and given the broad wording of section 207 of The Corporations Act, McCawley J. might have imposed arbitration as a way to achieve the sale ordered.
“[50] Counsel for the respondent also raises a concern about the possible tax implications of a forced sale and purchase of shares. This legitimate concern is answered by the applicants’ submission that the court order the purchase of the Rady family’s shares in Silpit by the Kaufman shareholders, in a manner to be determined by an arbitrator who will be able to hear the parties and decide the timing of the sale and purchase in light of the relevant tax consequences. If the matter cannot be resolved by arbitration, or indeed if a mutually acceptable arbitrator cannot be chosen, the matter may be referred back to the court for determination”.
On appeal by Silpit, the Kaufmans were granted intervener status. Silpit raised several grounds of appeal, set out at para. 22 of the reasons in Rady et al v. Silpit Industries Co, 2016 MBCA 11. Silpit and the Kaufmans concurred on some, but not all, grounds.
Two (2) grounds errors in ordering the Kaufmans to purchase the Radys’ shares despite not being parties to Radys’ application and ordering the shares to be purchased at “fair value” when the Radys’ application sought “fair market value”.
In its decision, the Court of Appeal granted the appeal and varied the orders by (i) ordering Silpit to buy the Radys’ shares (ii) at “appropriate value” (iii) “to be determined by an arbitrator agreed upon by the said parties and, failing such agreement, an arbitrator to be appointed by this Court”. In his 2020 reasons, Bock J. at para. 7(b) noted that the change in valuation terms was made by agreement of the parties during the appeal hearing.
(B) Arbitration – Following the 2016 appeal decision, the parties “then entered into an arbitration agreement”. They agreed to name a specific arbitrator and agreed as follows:
(a) “the Arbitrator shall take account of the substance, findings and decisions of the prior proceedings in the Court of Queen’s Bench and the Manitoba Court of Appeal”;
(b) “The dispute to be arbitrated (the “Dispute”) is between the Rady Family and Silpit and is agreed to be a determination of the appropriate value for the purchase by Silpit of the shares of the Rady Family in Silpit”; and,
(c) “The Arbitration Act (Manitoba), C.C.S.M. Chapter A120 shall govern the conduct of this arbitration, the decision in which shall be final and binding on the Parties, subject to the right of either Party to appeal on a question of law alone”.
Following the Court of Appeal decision, Silpit and the Radys engaged in arbitration and participated in a hearing held April 29-30, 2019. A “lengthy and detailed” award issued September 13, 2019 (“Award”) which “delves deeply into the evidence of experts called by the parties”. Those experts were experienced business valuators.
In the Award, the arbitrator determined that the “appropriate value” for Silpit’s purchase of the Radys’ shares is $5,971,860.00 comprised of a $5,805,725.00 “redemption value” plus $166,135.00 representing 50% of Silpit’s legal fees expended in the shareholder dispute between the Radys and Kaufmans (“Silpit Legal Fees”). That $166,135.00 figure included $17,047.50 payable by the Radys for legal fees incurred after the January 25, 2016 date of the 2016 Court of Appeal decision and date adopted by the arbitrator to determine value of the shares.
(C) Post-arbitration – Silpit appealed, arguing that the arbitrator had committed errors raising questions of law when awarding one half of the legal fees. The Kaufman’s were not party to the proceedings before Bock J.
Silpit argued that the arbitrator (i) exceeded his jurisdiction by “failing to apply the McCawley J. and MBCA decisions (together the “prior proceedings”) in his determination of appropriate value” and (ii) exceeded his jurisdiction and committed an error of law by “ordering an accounting of Silpit”. Both errors, it argued, were reviewed on a standard of correctness.
The Radys disputed Silpit’s characterization of the issues raised on appeal. They argued that the questions involved interpretation and application of certain terms of the agreement to arbitrate were questions of mixed fact and law. As such, the court had no jurisdiction to hear the appeal. Even if a discrete question of law could be extricated, the standard of review is reasonableness.
Both parties relied on Teal Cedar Products Ltd. v. British Columbia, 2017 SCC 32 (CanLII), [2017] 1 SCR 688 which the Court found “instructive, because it also involved an appeal from a commercial arbitration award”. The Court reviewed the determinations made by the Supreme Court, summarized at para. 24, and added that the agreement to arbitrate required that the arbitrator take into account the prior court proceedings to determine appropriate value. The Court held that the arbitrator did just that.
“Accordingly, in order to arrive at his decision the Arbitrator was required to perform at least the following three steps:
(a) take into account “the substance, findings and decisions of the prior proceedings”;
(b) apply the principles of contractual interpretation to arrive at the meaning of the phrase “appropriate value”; and
(c) apply “appropriate value”, as interpreted by him, to the facts before him in order to determine the purchase price that would be paid by Silpit for the Rady shares in Silpit”.
The Court’s review of the Award indicate that the arbitrator performed each of those three steps. The reasons in the Award demonstrate that the arbitrator was “fundamentally engaged in the process of contractual interpretation” and doing so was “properly characterized as a mixed question of fact and law” compliant with Teal Cedar Products Ltd. v. British Columbia. The question raised by Silpit put an appeal “outside this court’s jurisdiction”.
Independent of the result confirming his lack of jurisdiction, Bock J. added at paras 35-45 that the arbitrator’s Award was reasonable and at para. 46 that is was correct.
Regarding the arbitrator’s decision to impose costs on the Radys, Bock J. agreed with the arbitrator that the initial court proceedings concerned a shareholder dispute between the Radys and the Kaufmans. Ordering Silpit to pay the Radys half the legal costs Silpit paid reflected the result of a “calculated benefit” experienced by the Kaufmans in those initial court proceedings. See paras. 40-42.
urbitral note – First, the reasons in all three (3) decisions (2014, 2016, 2020) omit mention of the facts justifying the order in the first decision which subjected the parties (i) to arbitration and (ii) to Manitoba’s domestic arbitration legislation. The parties might have already made the choice to arbitrate by way of shareholders agreement or, when asked in submissions in 2014, have agreed to arbitration and to the application of The Arbitration Act, CCSM cA120.
Second, even if the order issued by agreement of the parties, query whether parties can agree to submit to the domestic legislation if the international legislation applies.
Assuming that the parties had no prior agreement to submit to arbitration, then some issues arise from the 2014 decision. As noted in its 2016 reasons, at para. 6, the Court of Appeal stated that “[t]he Rady family has lived in San Diego, California, since approximately 1966 and the Kaufman family in Winnipeg, where Silpit is located, and Toronto”.
With Silpit located in Canada since its incorporation and the Radys located in the U.S. since 1966 should Manitoba’s The Arbitration Act, CCSM c A120 have applied or should The International Commercial Arbitration Act, CCSM c C151 have applied? If the latter, no right of appeal would have been included on any question.
For analysis of party autonomy, see two (2) earlier Arbitration Matters notes:
The B.C. Supreme Court in McHenry Software Inc. v. ARAS 360 Incorporated, 2018 BCSC 586 held that parties could not waive the application of B.C.’s International Commercial Arbitration Act, RSBC 1996, c 233 (“ICAA”) because its application was mandatory. In addition, despite the parties having conducted their entire arbitration according to the Arbitration Act, RSBC 1996, c 55 , Madam Justice Loryl D. Russell also determined that the party seeking to rely on the ICAA, and its more limited appeal provisions, could not be estopped from doing so as the ICAA was enacted for a public purpose.
The Newfoundland and Labrador Supreme Court, Trial Division, provided a precedent-setting analysis of arbitration parties’ ability to contract out of legislated court review of a commercial arbitration award. At the same time, Mr. Justice Robert P. Stack in his August 30, 2017 reasoning in Newfoundland and Labrador v. ExxonMobil Canada Properties, 2017 CanLII 56724, also tested the UNCITRAL Model Law on International Commercial Arbitrations, 1985, U.N. Doc. A/40/17 (1985, Ann. I) as a substitute for that review.
Third, section 207(2) provides that a court may make such order under this section or section 234 as it thinks fit. Section 234(3) lists a broad range of measures a court can order including “creating or amending a unanimous shareholder agreement” or to order the corporation to purchase securities of a security holder. Such measures arguably include the authority to include terms in such shareholder agreements including an agreement to arbitrate and to order the purchase of securities subject to a process the court determines, including arbitration perhaps.
It is true that the court issuing the order in 2014 ordered arbitration as an appropriate remedy under Manitoba corporation legislation but, in doing so, would the court be limited or not by the province’s own arbitration legislation streaming resolution of disputes under one or the other legislation?
Section 2(1) of the domestic arbitration legislation stipulates to its application by saying it applies unless the International Commercial Arbitration does apply.
“2(1) This Act applies to an arbitration conducted under an arbitration agreement or authorized or required under an enactment unless
(a) the application of this Act is excluded by law; or
(b) Part II of the International Commercial Arbitration Act applies to the arbitration”.
Schedule B to the International Commercial Arbitration Act is comprised of the UNCITRAL Model Law on International Commercial Arbitration (as adopted by the United Nations Commission on International Trade Law on 21 June 1985) (“Model Law”). The Model Law at Article 1(3) stipulates that an arbitration is international if “the parties to an arbitration agreement have, at the time of the conclusion of the that agreement, their places of business in different States”.
Part II, section 4(1) of the International Commercial Arbitration Act provides that International Law, defined earlier at section 1(1) as meaning the Model Law, applies in Manitoba.
If the Radys lived, since 1966 in the U.S. and arbitrated with Silpit located in Canada, is it not arguable that the applicable arbitration legislation is the international version and not the domestic one?
Fourth, the agreement to arbitrate imposed terms on the arbitrator’s resolution of the dispute. The agreement required that the arbitrator “shall take account of the substance, findings and decisions of the prior proceedings in the Court of Queen’s Bench and the Manitoba Court of Appeal”. This stipulation saved the arbitrator and the parties from having to re-establish or re-determine agreed or disputed facts but also imposed limits on the arbitrator. The stipulation may have saved hearing time (which only lasted two (2) days) but also added potential grounds to dispute the result should a party claim non-compliance with those terms.