New Brunswick – “reasonable likelihood” applied as “minimal” standard for stay application – #127

Using “reasonable likelihood” as the “minimal” standard an applicant must meet for a stay, Madam Justice Judy L. Clendening in Knowcharge v. NB Innovation et al., 2018 NBQB 181 stayed litigation involving shareholders, directors and corporations so that the arbitration tribunal could determine its own jurisdiction. Her analysis rested also on the wording of the parties’ agreement to arbitrate which provided that disputes “involving” shareholders and not just “between” shareholders would go to arbitration. That wording was sufficient to include litigation filed by the non-shareholder plaintiff corporation which had signed the arbitration agreement.

Knowcharge Inc. (“Knowcharge”) commenced an action in which it alleged that directors and their nominators effectively blocked and frustrated efforts to raise capital and thereby terminated Knowcharge’s opportunity to do business. Knowcharge alleged that the individuals breached their fiduciary duties, duties of care, duties of loyalty and duties to act in good faith, further detailed in Knowcharge’s Statement of Claim.

Three (3) of five Defendants – The New Brunswick Innovation Foundation Inc. (“NBIF”) and two (2) individual shareholders – applied for an order under section 7 of New Brunswick’s Arbitration Act, RSNB 2014, c 100 staying the action between them and Plaintiff, Knowcharge Inc. (“Knowcharge”) in accordance with the arbitration agreement set out in an August 15, 2011 Amended and Restated Unanimous Shareholders Agreement (“ARUSA”) to which Knowcharge is a party. The other Defendants – First Angel Network and another individual – were not parties to the motion but Clendening J. did note that these two Defendants raised mention of the section 7.10 of the ARUSA in their Statements of Defense. The manner in which they did so is not explained in the reasons.

The ARUSA at section 7.10, entitled “Conflict Resolution” contained a mediation-then-arbitration clause:

7.10 In the event of a dispute involving any of the Shareholders, the parties hereby agree to first attempt to resolve such dispute through mediation, using good faith efforts to achieve a resolution quickly and efficiently. Should the mediation efforts be unsuccessful, the parties hereby agree to settle such dispute by binding arbitration with one arbitrator, mutually agreed upon by the parties to the dispute, or where there is no agreement, then each of the parties can appoint their own arbitrator who will, in conjunction with the other appointed arbitrator(s), appoint an independent arbitrator to settle the matter. Notwithstanding the foregoing, nothing herein shall prevent any party from seeking injunctive relief.

Applicants argued that :
– both Knowcharge and NBIF are parties to the ARUSA;
– the two individuals named as Defendants and joining the application for a stay were only named as Defendants as a result of actions allegedly taken as nominee directors for NBIF pursuant to NBIF’s rights under the ARUSA;
– the dispute set out in Plaintiff’s Statement of Claim is a dispute “involving any of the Shareholders” and therefore subject to section 7.10 of the ARUSA; and,
– section 7.10 provides for binding arbitration and the Court has no jurisdiction over the matters raised by Knowcharge as Plaintiff in its Statement of Claim.

Knowcharge resisted, arguing that:
– the ARUSA has no application because it only applies in the event of a dispute involving any of the shareholders;
– Knowcharge is not a shareholder;
– though some of Defendants are shareholders, the litigation does not involve any dispute between them; and,
– Applicants have filed no evidence that mediation has been attempted.

Faced with conflicting characterizations of section 7.10 and the nature of Knowchage’s claims made in its court litigation, Clendening J. identified and resolved four (4) issues: (1) examine Knowcharge’s allegations closely to determine the nature of its dispute; (2) identify the applicable standard for applications for a stay of proceedings; (3) evaluate the scope of the parties’ own wording in the ARUSA; and, (4) consider whether it was appropriate to refer the issue of jurisdiction to the arbitration tribunal for determination.

First, Clendening J. determined that Knowcharge alleged that NBIF had duties of a director by virtue of the combined effect of the ARUSA and section 146(5) of Canada Business Corporations Act, RSC 1985, c C-44 which read as follows:

146(5) To the extent that a unanimous shareholder agreement restricts the powers of the directors to manage, or supervise the management of, the business and affairs of the corporation, parties to the unanimous shareholder agreement who are given that power to manage or supervise the management of the business and affairs of the corporation have all the rights, powers, duties and liabilities of a director of the corporation, whether they arise under this Act or otherwise, including any defences available to the directors, and the directors are relieved of their rights, powers, duties and liabilities, including their liabilities under section 119, to the same extent.

Knowcharge’s allegations against NBIF are more fully summarized at paragraph 5 of the reasons. Clendengin J. considered that the dispute framed by Knowcharge in the court litigation fell within the terms of section 7.10 of the ARUSA.

Second, in order to properly state the applicable standard which a moving party has to meet when applying for a stay, Clendening J. reviewed the case law, including 669610 N.B. Ltd. v. Thunder Process Group Inc., 2015 NBQB 87 and UBS Holding Canada Ltd. v. Harrison et al., 2014 NBCA 26. The latter, at para. 27, commented on the appropriate way to express the standard:

[27] While I have opined that in the jurisprudence the terms “prima facie” and “arguable” are synonymous, I prefer the use of the term “prima facie”. Those words connote the minimal standard of “reasonable likelihood” in a manner that is, in my view, not met by the word “arguable”.

She identified Applicants’ own approach in which they argued that “the test has been held to be synonymous with the moving party establishing that it is arguable that the arbitration clause applies to the dispute under consideration”. Clendening J.’s reading of the case law lead her to accept that the standard was “a minimal standard”, described by 669610 N.B. Ltd. v. Thunder Process Group Inc. as a prima facie one and by the Court of Appeal UBS Holding Canada Ltd. v. Harrison et al. as a “reasonable likelihood”. She determined that Applicants had met the standard.

Third, a key determination stemmed from the parties own wording as set out in the ARUSA. Clendening J. examined section 7.10, underlining the importance of the parties’ own agreement. “I find that Knowcharge’s claims, or allegations, do come within the scope of article 7.10 because the dispute involves shareholders and the article does not state between shareholders.” The solution lay in the parties’ own choice of words.

Fourth, Clendening J. stated that the “crux” of the matter before her was whether New Brunswick’s Arbitration Act provided jurisdiction for the arbitration tribunal to rule on its own jurisdiction. She agreed with the approach set out in 669610 N.B. Ltd. v. Thunder Process Group Inc. that it is more appropriate to leave the determination of jurisdiction to the arbitration tribunal. Clendening J. then confirmed, by reference to section 17 of the Arbitration Act, that the arbitration tribunal had the necessary jurisdiction. Observing that none of the exceptions listed in section 7 of the Arbitration Act applied, that “the court should try to avoid the multiplicity of proceedings unless it is absolutely necessary” and that no dispute that ARUSA’s section 7.10 was a valid arbitration clause, Clendening J. ordered that “the interpretation or scope of that clause is for the mediation and arbitration process”.

As a result, Clendening J. granted the stay under section 7(1) of the Arbitration Act “so that this dispute may be referred to the mediation and arbitration process as provided in ARUSA”.

Note: as an alternative conclusion to their motion for a stay, Applicants also requested an order from the Court under Rule 3.02(1) of New Brunswick’s Rules of Court, NB Reg 82-73 to extend the time to file and serve (a) a request for particulars and, following receipt of those particulars, (b) their Statement of Defence. In some jurisdictions, with different rules triggering deemed waiver of the right to apply for a referral to arbitration, even minor applications to the court or steps taken in a court litigation can be grounds for the other party to argue waiver. The result on the principal relief sought by Applicants pre-empted any consideration of the alternative relief.