Posted on by Timothy Hughes

Nova Scotia – Court orders stay in favour of arbitration – but with conditions – #858

In Colbourne Chrysler Dodge Ram Ltd., v.  MacDonald et al. v Colbourne, MacDougall, and Denny, 2024 NSSC 204, the Court stayed an action in favour of arbitration. Of interest to readers of this blog, the stay was made “subject to the parties moving forward in an efficient and expeditious manner” with the arbitration. The Court also ordered the arbitrator – notwithstanding that none had been appointed – to “in the first instance, determine any jurisdiction issues and/or defences which may be raised in connection with the claims made against [certain parties which were not signatories to the arbitration agreement].”

The underlying transaction and relevant relationships – In December 2018, a Nova Scotia numbered company (the “Purchaser”; later, “Colbourne Chrysler”) agreed to buy three companies that owned and operated car dealerships in Cape Breton. The transaction structure utilized several related, but separate, instruments:

  • a Share Purchase Agreement between the Purchaser and the individuals, trusts, and companies which collectively held shares in the target companies (the “Vendors”; later, the “Defendants”);
  • a $ 1 million vendor take-back promissory note (the “Note”), by which some of the Vendors (the “Lenders”) agreed to lend money to the Purchaser to finance the transaction. When the SPA closed on May 14, 2019, the Note was amended to add two other corporate entities which, with the Purchaser, are the “Borrowers”; and
  • personal guarantees issued by three individuals (the “Personal Guarantors”), whom the judgment identified, at para. 12, as the directing minds of the Borrowers.

Only the SPA included an arbitration agreement.

The dispute – The Note required the Borrowers to begin repayments on May 14, 2020. But neither the Borrowers, nor the Personal Guarantors, made any payments. Instead, Colbourne Chrysler, as successor of the interest of the Purchaser, claimed that “serious financial and operational misconduct” had been uncovered at one of the car dealerships, giving rise to claims which “more than offset” sums owed under the Note.

In January 2021, the Lenders (which included the Vendors) served a Notice of Arbitration under s. 9.01 of the SPA, seeking payment under the Note. The Notice of Arbitration named, as Respondents, the Borrowers and the Personal Guarantors. Other than the Purchaser, the Respondents were not parties to the arbitration agreement in the PSA.

The Respondents did not formally respond to the Notice of Arbitration, and the arbitration stalled. Then:

  • In October 2021, the Colbourne Chrysler (as successor to the Purchaser), filed a court action against the Vendors under the SPA, alleging a range of claims in connection with the purchase.
  • In February 2022, the Vendors filed a Statement of Defence and a Counterclaim. The Statement of Defence informed the Court that the Vendors had already served a Notice of Arbitration under the SPA. The Counterclaim advanced, as the Court noted at para. 21, “essentially the same claim” advanced in the Notice of Arbitration.
  • In April 2022, the Vendors filed a third-party claim against the Personal Guarantors.
  • In May 2022, the Vendors moved to stay the action in favor of the already commenced (but stalled) arbitration.
  • On July 4, 2024, the Court issued its decision on the stay motion.

The decision addressed three principal issues (para. 3): 

  1. “Did the [Vendors], by their actions, and including the filing of pleadings in this action, attorn to the jurisdiction of this Court and otherwise surrender their right to arbitration?”
  2. “Do the claims made in this action extend beyond the scope and purpose of the arbitration agreement?”
  3. Are the Personal Guarantors proper parties to the arbitration, “even though they did not sign the contract containing the arbitration agreement?”

Issue 1: Attornment / entitlement to stay – Colbourne Chrysler grounded its opposition to the stay motion on Nova Scotia Civil Procedure Rule 4 and the common law of attornment, referring to the arbitration agreement and Nova Scotia’s Commercial Arbitration Act, SNS 1999, c 5 (the “Act”) only “as alternative or secondary submissions.” Colbourne Chrysler relied heavily on the fact that the Defendants had filed pleadings in the action “voluntarily, without being compelled under the threat of default judgment”.

The Court rejected this, noting that the more-specific Act governed the Court’s consideration of the stay motion. Pursuant to “wholesale amendments” passed in 1999, the Act:

  • affirmed, at s. 2, a “statutory intent of promoting and encouraging arbitration”;
  • removed wording that had, at s. 7 of Nova Scotia’s previous Arbitration Act, RSNS 1989, c 19, required a party to seek to stay a court action in favour of arbitration “before delivering any pleadings or taking any other steps in the proceedings”; and
  • introduced, at s. 9, an exclusive list of circumstances in which a Court “may” refuse a motion to stay an action in favor of arbitration.

The Court noted, at para. 31, that only s. 9(2)(d) of the Act – which permits a Court to refuse a stay if “the motion to stay the proceeding was brought with undue delay” – was potentially applicable in this case. The legislative history demonstrated an intent to reduce the significance of filing pleadings and to fold that issue “into the larger question of whether the Defendants have acted with ‘undue delay’”.

The facts, as the Court explained at paras. 44-46, did not support a finding of undue delay:

  • The Defendants had initiated arbitration about 8 months before Colbourne Chrysler initiated the action;
  • The Defendants’ pleadings in the action had been filed in a relatively short period (about 3 months) and without “unreasonable or undue” delay in the circumstances; and
  • The pleadings had “consistently raised and claimed the right to proceed by arbitration.”

The Court concluded, at para. 47, that the Defendants:

“did not attorn to the jurisdiction of the Court in a manner which would override the provisions of the Commercial Arbitration Act and justify refusing the requested stay under s. 9 of that Act. The Defendants also did not act with ‘undue delay’ sufficient to justify refusing a stay under s. 9(2)(d) of the Commercial Arbitration Act.”

Issue 2: Scope of the Arbitration Agreement – Colbourne Chrysler alleged fraud and misrepresentation that, it said, were beyond the scope of the arbitration agreement in the SPA. The Court rejected this argument at paras. 51-52, finding that Colbourne Chrysler’s claims “are very clearly grounded in its rights as purchaser under the [SPA] and its allegations relate to issues governed by that agreement.”

Issue 3: Claims against the Personal Guarantors – whether they were proper parties even though they did not sign the contract containing the arbitration agreement

The Personal Guarantors were parties to the action only because the Vendors brought third party claims against them – yet, as the Court pointed out at para. 57, “it is also the [Vendors] who seek to stay the entire action.”

The Court explained the context of this issue at paras. 60-64, setting out the relationships between the SPA, Note, and the Personal Guarantees:

  • the Note and Personal Guarantees (among other documents), by the express provisions of the SPA, are “an integral part of [it]”;
  • the SPA specified the form of and parties to the Note, as well as associated collateral – the Personal Guarantees;
  • One of the Personal Guarantors signed the SPA on behalf of the Purchaser and signed the Note for the Borrowers.
  • The other two Personal Guarantors did not sign the SPA or Note in any capacity.

At para. 67, the Court observed that “liability under the personal guarantee is secondary or collateral to the primary obligations of the Borrowers.” But the Court concluded that it would be premature to rule on the scope of the SPA arbitration agreement and whether the Personal Guarantors were bound by the arbitration clause. Rather, at para. 68, the Court found that “the arbitrator will be in a better position to consider the various factual matters that may bear upon the issues including, for example, jurisdiction and the nature of any defences or issues raised by the Personal Guarantors and their connection to the issues to be arbitrated…”

Finally, although it is not clear whether any party requested it, the Court tolled the relevant limitations period: “[m]oreover, for greater clarity, the running of any limitation period related to the liability of the Personal Guarantors’ [sic] does not run while these preliminary issues are being determined – including, potentially, the amount owing by the Borrowers under the…Note.”

Contributor’s Notes:

Several things jump out of this case.

The first is time. Forty-two months elapsed between the Lenders’ Notice of Arbitration in January 2021 and the Court’s decision to stay Coulbourne Chrysler’s action and refer the parties to arbitration in July 2024. The decision does not disclose all the relevant circumstances, so it is difficult to draw conclusions about why that happened. In any event, is a startling amount of time to spend before addressing the merits before any Court or tribunal.

A second point relates to drafting. The SPA, Note, and Personal Guarantees were in service of the same overall transaction. But each involved different parties signing in different capacities. There was no single arbitration agreement which all the relevant parties – both individual and corporate – had signed. As the judgment contemplates, that may not be fatal to arbitral jurisdiction over non-signatory parties. As a drafting point, it is often prudent for parties and their counsel to ensure that if there is a dispute, all necessary parties will be in the arbitration.

Arbitration Matters has previously covered other recent jurisprudence from across Canada on the applicability of arbitration agreements to non-signatories. In Québec, a line of cases borne from the 1996 decision in Décarel inc. c. Concordia Project Management Ltd., 1996 CanLII 5747, appears to support a broad assertion of arbitral jurisdiction over non-signatories where, as our contributor Marie-Claude Martel explained in a recent post, the non-signatory party has an intimate or intertwined relationship with the dispute and the parties to the arbitration agreement: Marie-Claude’s 2022 Hot Topic: Binding non-signatories – A new trend arising in Québec? – #697.

We have also covered non-signatory issues in several other recent case notes:

Third, the judgment raises some interesting questions:

1. Does the Court have jurisdiction to order a stay with conditions, i.e., “subject to the parties moving forward in an efficient and expeditious manner”?

This order might strike readers of this blog as unusual. It raises at least two further questions. First, is it within the Court’s power? Second, is it a good idea?

As to the first question, a stay does not oust the Court’s supervisory jurisdiction over the parties to the action – naturally, a stay is not the same as dismissal. Under Rule 2.03 of Nova Scotia’s Rules of Civil Procedure, a judge of the Supreme Court of Nova Scotia has general discretion, subject to some limits, to “give directions for the conduct of a proceeding before the trial or hearing.”

On the other hand, an arbitration is a different proceeding from the action in Court. The Nova Scotia Act purports – at s. 8 – to restrain courts from intervening in arbitration except for specific, enumerated purposes. In turn, s. 9 of the Act authorizes a court to refuse a stay only in the limited circumstances set out above. The Act does not give courts hearing arbitration-related matters the sort of general discretion expressed in the Rules of Civil Procedure. There is at least a colorable argument that the Court’s order is outside the limited scope of what the Act authorizes.

The second question is one of practicality or prudence. The Court in Colbourne Chrysler explained, at para. 30, how the Act was revamped in 1999 to “encourage and promote the use of arbitration as an alternative to court proceedings” (emphasis added). Casting arbitration as an alternative is in tension with the Court’s order, which places the Court in a monitoring role over the parties’ conduct in the arbitration. If there is a delay in the arbitration, will one of the parties seek a finding of civil contempt for breach of the Court’s order?  How will the Court supervise this term? Beyond that, if a party does not move “forward in an efficient and expeditious manner” – whatever that means – will the Court reassert jurisdiction over the entire dispute? By fashioning the stay as “subject to” compliance with certain conditions, the Court appeared to leave that door open, notwithstanding the one-way nature of referrals to arbitration under the Act.

2.  Does the Court have jurisdiction to impose constraints on the (not-yet-appointed) arbitrator’s procedural discretion?

This question arises from the Court’s order to the arbitrator to “in the first instance, determine any jurisdiction issues and/or defences which may be raised in connection with the claims made against” the Personal Guarantors. While the Court may have the technical power to do this (as discussed above), it does not sit well with the legislative intent to allow parties to resolve disputes substantively and procedurally by arbitration. Notably, s. 22(1) of the Nova Scotia Act specifically empowers the arbitral tribunal to determine procedure.It seems incongruous for the Court to have referred jurisdictional questions to the arbitrator’s decision in the first instance – giving effect to the competence-competence principle – while fettering the arbitrator’s procedural authority about those very questions.

3.  Did the Court need to make the specific findings it did in connection with the scope of the arbitration agreement?

Curiously, the judgment does not mention the Supreme Court of Canada’s recent guidance in Peace River Hydro Partners v Petrowest Corp., 2022 SCC 41(“Petrowest”), on motions to stay litigation in favor of arbitration. Petrowest was covered in previous Arbitration Matters Case Notes: Supreme Court – Peace River v Petrowest Part 1: Separability Clarified? – #682, and Supreme Court – Peace River v Petrowest Part 2: no conflict between arbitration, bankruptcy law – #687.

Petrowest established, at para. 76, a two-step framework: (1) technical prerequisites for a mandatory stay, and (2) statutory exceptions to a mandatory stay. At the technical prerequisite stage, the applicant for a stay needs only to show an “arguable case” – a threshold “lower than the usual civil standard” – that each is met.

The technical prerequisites, which the Supreme Court explained are similar in provincial arbitration legislation across Canada, are:

  • an arbitration agreement exists;
  • court proceedings have been commenced by a “party” to the arbitration agreement;
  • the court proceedings are in respect of a matter that the parties agreed to submit to arbitration; and
  • the party applying for a stay in favour of arbitration does so before taking any “step” in the court proceeding (or undue delay language).

Both (c) and (d) are relevant in this case, but there is no indication that the parties or the Court applied the “arguable case” standard to whether the proceedings were in respect of a matter to be submitted to arbitration, or whether the application for a stay was brought without undue delay. The low bar of the “arguable case” standard exists to promote arbitration where the parties have chosen it, and to limit the burden on courts and parties at the referral stage. It also may help to avoid pre-judgment of issues referred to arbitration – for instance, specific findings of a court on, e.g., the scope of an arbitration agreement, may give rise to res judicata arguments before a tribunal that multiply cost and complexity.

Here, though, the Court reached findings of fact and conclusions of law on both issues that appear to go beyond the limited inquiry Petrowest prescribes. It may not have made a difference because the Defendants got the stay, despite the Court’s more searching analysis, but it is notable that Petrowest does not appear to have played a role in this case.

The Court’s findings in respect of “undue delay”, as that term is used in s. 9 of the Nova Scotia Act, merit a final comment. In this case, before seeking a stay of the action, the Vendors previously filed a Statement of Defence, a Counterclaim, and third-party claims to bring in the Personal Guarantors. Consider: