Ontario – Arbitration or expert determination?  Stay granted, referral to “Independent Accountant” – #620

In 2832402 Ontario Inc. v 2853462 Ontario Inc., QBD Modular Systems Inc., and QBD Cooling Systems Inc., 2022 ONSC 2694, Justice Conway was asked to decide whether the parties had agreed to arbitration or expert determination. The parties had entered into a Share Purchase Agreement (“SPA”), which contained a dispute resolution clause to deal with disagreements as to post-closing purchase price adjustments, which disputes were to be determined by an “Independent Accountant”. A dispute arose and the Vendor brought a court application against the Purchaser for production of documents to allow it to calculate the post-closing adjustments. The Vendor argued that even if the parties had agreed to arbitration, the document production issue was outside the jurisdiction of the Independent Accountant. Justice Conway considered the various indicia of arbitration and concluded that the clause in the SPA was an arbitration clause. Therefore, she stayed the application and referred the production issue to the Independent Accountant. That issue was relevant to the Independent Accountant’s ability to decide the parties’ dispute as to the amount of the post-closing purchase price adjustment.

The Applicant 2832402 Ontario Inc. (“the Vendor”) sold the shares of Respondents QBD Modular Systems Inc. and QBD Cooling Systems Inc. to Respondent 2853463 (“the Purchaser”) pursuant to the SPA dated August 20, 2021. The purchase price for the shares was $126.1 million, subject to post-closing adjustments. The parties disputed the post-closing adjustment for working capital. One of the issues was that the Vendor demanded additional back-up documentation to finalize its working capital calculation and to finalize and file its financial statements. The Purchaser calculated a $445,250 purchase price adjustment in favour of the Vendor. The Vendor’s calculation, using its own working papers, showed that it was entitled to an additional $11.7 million. 

Section 2.5(b) of the SPA provided that all unresolved matters in respect of post-closing purchase price adjustments must be referred to an “Independent Accountant”, who was then required to make a binding determination. The procedure allowed the Vendor to object to the Purchaser’s Final Closing Statement and for an “Independent Accountant” to resolve their differences:

“If the Vendor delivers an Objection to the Purchaser within such 60 day period, the Purchaser and the Vendor shall attempt to resolve any differences within 30 days following the Purchaser’s receipt of the Objection. If the Purchaser and the Vendor are unable to come to a resolution with respect to the matters raised in the Objection within five (5) days following the foregoing 30 day period, the Parties shall promptly refer such unresolved matters to the Independent Accountant. The Independent Accountant will, as promptly as practicable (but in any event within 45 days following its appointment), make a determination on the disputed items based solely on written submissions provided by the Purchaser and the Vendor to the Independent Accountant. The Independent Accountant will review only those items that are in dispute as set-out in the Objection, and the Independent Accountant’s determination with respect to such disputed items shall be no less than the lesser of the amount claimed by either the Vendor or the Purchaser and no greater than the greater of the amount claimed by either the Vendor or the Purchaser. The decision of the Independent Accountant as to any disputed items will, absent manifest error, be final and binding upon the Purchaser and the Vendor.

The term, “Independent Accountant” was defined as a “certified public accounting firm of international reputation mutually agreed upon by the Purchaser and Vendor.”

The parties tried to resolve their differences within the 30-day period provided for in the PSA, but could not do so. 

On February 16, 2022, Vendor filed a notice of application seeking a declaration that the Purchaser was in breach of its obligations under the SPA by failing to provide certain information, documents and working papers required in order to calculate the working capital adjustment. This would allow the Vendor to file its Objection to the Purchaser’s working capital post-closing adjustment with the Independent Accountant for determination under the SPA dispute resolution clause.

On March 2, 2022, the Purchaser brought a motion for a stay of the production application pursuant to s. 7(1) of the Ontario Arbitration Act, 1991, SO 1991, c. 17, and to appoint an Independent Accountant. Section 7(1) of the Act states:

“If a party to an arbitration agreement commences a proceeding in respect of a matter to be submitted to arbitration under the agreement, the court in which the proceeding is commenced shall, on the motion of another party to the arbitration agreement, stay the proceeding.”

Justice Conway held that the key issue on the motion was whether the production application was a proceeding “in respect of a matter to be submitted to arbitration” under an arbitration agreement. If so, s. 7(1) required that it be stayed.

The parties disagreed upon whether s. 2.5(b) was an arbitration clause or whether it provided for expert determination; the Purchaser submitted that it was an arbitration agreement, while the Vendor argued that it was not. In addition, the Vendor argued that even if the dispute resolution clause was an arbitration agreement, the Independent Accountant’s jurisdiction was limited to determining the purchase price and it did not have jurisdiction to decide the production application. Therefore, the production application should not be stayed.

Contract interpretation principles – Justice Conway cited the Supreme Court of Canada decision of Sport Maska Inc. v. Zittrer, 1988 CanLII 68 (SCC) for the non-exhaustive indicia or “tools used to determine the intention disclosed by the documents and other instruments, in order to establish the function the parties actually meant to assign to the third party chosen by them” (p. 605):

1. There is a dispute or difference between the parties that has been formulated in some way or another;

2. The dispute or difference has been remitted by the parties to the person to resolve in such a manner that they are required to exercise a judicial function;

3. Where appropriate, the parties must have been provided with an opportunity to present evidence or submissions in support of their respective claims in the dispute; and

4. The parties have agreed to accept the decision.

Further, she found that the parties’ failure to refer explicitly to the procedures under the relevant arbitration legislation did not preclude her from finding that the dispute resolution clause was an arbitration clause (para. 33), relying upon Applied Industrial Technologies LP v Sirois, 2018 ABQB 818. Further, she found that the fact that a provision does not expressly refer to “arbitration” is not determinative, relying upon Precision Drilling Corp. v. Matthews Equipment Ltd., 2000 ABQB 499 at para. 34. Justice Conway also found that, in that case:

“[24] After referencing the various Sport Maska indicia, the court concluded that this provision was an arbitration clause. It found that: (i) the language of (sic) provision was formulated as a disagreement over calculations set out in the purchaser’s adjustment statement; (ii) the parties were required to submit all necessary information and argument to the [third party] so that it could make a final determination; and (iii) the parties agreed to be bound by the [third party’s] decision: at paras. 30-33. On the basis of these indicia alone, the court held that the provision at issue required arbitration rather than expert valuation. It came to this conclusion notwithstanding the fact that the word “arbitration” was not explicitly referenced in the provision: at para. 34.

Justice Conway concluded that: (1) the dispute resolution clause was an arbitration clause, and (2) the production application had to be stayed.

Role of the Independent Accountant – Justice Conway interpreted the language and the structure of the dispute resolution clause and found that the parties had intended arbitration for the following reasons:

“[31] In light of the way s. 2.5(b) is structured, I cannot accept the submission that it calls for an expert determination rather than an arbitration. There is (i) a formulated dispute between the parties that (ii) requires the Independent Accountant to “make a determination on the disputed items” (i.e., exercise a judicial function) based on (iii) the submissions provided by the parties and which is (iv) final and binding upon them (absent manifest error). All of the indicia referenced in Sport Maska point towards arbitration.

[32]       In my view, the cases in which courts have found that a particular provision calls for expert determination as opposed to arbitration, and on which the Vendor relies, do not support a different conclusion in this case. For example, while the court in Applied Industrial, at para. 116, noted that “[p]rice determination clauses in purchase and sale agreements have often been found to be expert determinations […] rather than arbitrations”, this has not precluded courts from finding the opposite. In Precision Drilling, for instance, the court concluded that the provision at issue was an arbitration clause notwithstanding that it concerned a pricing determination.

[33]… Moreover, as noted, s. 20(1) of the Act empowers arbitrators in Ontario to determine their own procedures. The failure of s. 2.5(b) to reference arbitration procedures is therefore not necessary given this default statutory power.

Stay motion – Because she found that s. 2.5(b) of the SPA was an arbitration clause, Justice Conway stayed the production application, without prejudice to the Purchaser bringing another application, provided that it was not related to any purchase price adjustments that were the subject of s. 2.5(b) of the SPA. She found that the request for documentation “squarely relates to the calculation of the Working Capital Adjustment and is to be addressed by the Independent Accountant”. The request for the documentation to support the Vendor’s preparation of tax returns was “intertwined”.

Justice Conway referred the document production request to the Independent Accountant, once appointed, to be determined.

Motion to appoint Independent Arbitrator – The reasons do not address the Purchaser’s application, which may have been heard separately from the stay application.

Editor’s Notes:

First, the Vendor submitted that even if Justice Conway found that s. 2.5(b) of the SPA was an arbitration agreement, she should exercise her discretion not to grant the stay. She declined to do so. The Reasons do not set out the Vendor’s submissions on Justice Conway’s authority exercise her discretion to deny the stay in these circumstances. There is no reference, for example, to any of the exceptions to the mandatory stay found in s. 7(2) of the Ontario Arbitration Act, 1991. At the outset of her Reasons, Justice Conway quoted s. 7(1) of Act and found that if the dispute resolution clause was an arbitration agreement, 7(1) “requires that it be stayed” (para. 17). Section 7(1), by its language, applies only where the plaintiff/applicant has brought a court proceeding and the defendant/respondent seeks a stay. That was the case here. Where the party seeking the stay is the plaintiff/applicant, a stay may be sought under s. 106 of the Ontario Courts of Justice Act, RSO 1991, c. C.43. On such an application, the court has discretion.

Second, the arbitration clause is interesting because it contains its own standard of review term: the decision of the Independent Accountant is “absent manifest error…final and binding”.

Third, as Justice Conway’s summary of the relevant case law shows, it is very difficult to predict when a dispute resolution clause will be found to call for arbitration of expert determination. Sometimes the timelines found in the clause assist. Here the Independent Accountant was required to determine the dispute within 45 days of appointment. It is possible to conceive of an arbitration that could take place within that short period of time, on written submissions only (which the clause provides), on a discrete issue. 

Fourth, this dispute could have been avoided by clear language in the dispute resolution clause. For an excellent summary of the issues parties should consider in drafting a clause that calls for expert determination, and provides draft language for such a clause, see J. Brian Casey’s book, “Arbitration Law of Canada: Practice and Procedure” (3d ed, 2017, Chapter and”. For example, the choice of expert determination versus arbitration also has other consequences the parties should consider – enforcement, as well as grounds and avenues to challenge the decision. See also the ICC Rules for the Administration of Expert Proceedings and the CEDR (Centre for Effective Dispute Resolution) Rules, which may be included in a clause in which the parties seek expert determination.