In Randhawa v. Randhawa, 2021 ONSC 3643, Justice Koehnen considered whether the arbitrator appointed by the parties had jurisdiction when he issued an award appointing an inspector to conduct an investigation. The applicant (Paul) and the respondent (Rana) were brothers, who were involved in a dispute about the separation of their interests in various businesses which they once ran together. Paul commenced an oppression remedy application in March 2018, which was resolved by Minutes of Settlement dated October 1, 2018. The Minutes of Settlement called for the dissolution or sale of the businesses and provided that any disputes arising from the implementation of the Minutes of Settlement were to be resolved by way of arbitration. Disputes arose and the arbitrator issued an award under the Ontario Business Corporations Act , R.S.O. 1990, c. B. 16, appointing an inspector to conduct an investigation. During the arbitration, Paul brought a court application for the appointment of a receiver over a portion of the brothers’ businesses. Although Rana agreed to the receiver’s appointment, he contested the receiver’s right to conduct an investigation that involved third parties. He also contested the arbitrator’s jurisdiction when he awarded the appointment of an investigator under the OBCA at all and because the investigation included the affairs of a third party. Justice Koehnen granted Paul’s application. He found that there was no previous case and nothing in the parties’ arbitration clause that prohibited an arbitrator from awarding a statutory remedy, including the appointment of an inspector. The arbitrator acknowledged that his jurisdiction was limited to the parties to the arbitration agreement and that any investigation of a third party would require the assistance of the court, which Justice Koehnen ordered. In addition, the parties had agreed to the appointment of a receiver and there was ample evidence of the need to investigate the affairs of the third party as they affected the issues in the dispute between the brothers.
On the second issue, Rana argued that the arbitrator had no power to award a statutory remedy, including the appointment of an inspector, because s. 162(1) of the OBCA provides that “the court may appoint an inspector” and “court” is defined as the Ontario Superior Court of Justice. Further, Rana argued that the powers given to inspectors under the Act can affect third parties, which can never fall within the jurisdiction of a private arbitrator.
Justice Koehnen set out the following analytical framework to determine whether the arbitrator had the jurisdiction to order a statutory remedy and concluded that he did:
(a) Whether an arbitrator in principle has the power to grant a statutory remedy. Justice Koehnen found that recent Ontario cases make it clear that statutory remedies, and in particular OBCA remedies, can be pursued through arbitration. Although the OBCA refers to the court appointing an inspector, the whole principle underlying arbitration is that parties are free to contract out of the court system and submit their disputes to an arbitrator unless precluded by statute or public policy.
(b) Whether there are reasons in a particular case that might make it inappropriate for an arbitrator to grant a statutory remedy. In this case, the only principled reason to prevent the arbitrator from ordering a statutory remedy was the possibility that it might affect third parties. Here, the arbitrator acknowledged that if the inspector’s investigation extended beyond the signatories to the arbitration agreement, the parties would have to obtain the assistance of the court as third parties were outside his jurisdiction.
(c) The scope of the arbitration clause at issue. The parties clearly agreed to submit their disputes to arbitration. Further, the Minutes of Settlement set out a process whereby the parties were to exchange information to allow a determination to be made as to whether one of them had obtained an unequal benefit from the businesses, and allowed for the appointment of an arbitrator to determine the amount of the unequal benefit. The arbitrator found that Rana had breached his disclosure obligations. Therefore, the arbitrator’s appointment of an inspector to allow him to make such a determination was squarely within the powers given to him under the Minutes of Settlement.
(d) A judicial concern that a party may be deprived of a remedy if they are limited to arbitration. There was no concern in this case. The arbitrator directed the parties to apply to the court if there was a risk that the inspector’s investigation would affect third parties, which he acknowledged was outside his jurisdiction. That is what the parties did in this application before Justice Koehnen.
On the first issue, Justice Koehnen found that the arbitrator’s detailed findings of fact justified the need for an investigation by a court-appointed receiver. Rana had “perpetuated a lack of transparency” and a “lack of good faith” in providing financial and operational information required to sell the businesses and there were some findings that would constitute red flags for potential fraud. In addition, there were suspicious sales of assets of the businesses to a third party, which had a connection to Rana in that Rana’s son was an employee of the third party with both accounting and operational responsibilities. The third party had the opportunity to make submissions before Justice Koehnen, which consisted of contesting some of the arbitrator’s findings of fact and making allegations of inconvenience. The parties agreed that it was appropriate for a receiver to be appointed with respect to one of their businesses, but disagreed upon the scope of the receiver’s powers. Justice Koehnen made an order that the receiver was entitled to examine the affairs of the third party, but that all that was required was for that third party to provide an image of its records. Whether this investigation was conducted by the inspector appointed by the arbitrator or the court-appointed receiver made no difference.
Editor’s Notes:
Justice Koehnen analyzed – and distinguished – earlier cases which Rana argued precluded the arbitrator from awarding a statutory remedy.
First, Armstrong v Northern Eyes Inc., 2000 CanLII 29047 (ON SCDC), in which the parties’ shareholders agreement contained an arbitration clause and provided for a specific remedy for a departing shareholder. In these circumstances, the arbitrator’s jurisdiction was limited to the specific remedies the parties had agreed upon. Therefore, Justice Koehnen stated that this case does not stand for the proposition that an arbitrator has no power to award a statutory remedy. Since arbitration is a matter of contract, the arbitrator in that case had no power to go beyond the contractual remedy and provide a statutory remedy simply because one party regretted the bargain he had made in the shareholders agreement.
Second, Pandora Select Partners, LP v. Strategy Real Estate Investments Inc., 2007 Can LII 8026 (ON SC) concerned conflicting provisions in a subscription agreement with respect to shares in an OBCA company. One clause provided that the agreement was to be construed in accordance with and governed by the laws of the State of New York and that any disputes were to be litigated solely in state or Federal Court in New York City. There was doubt, however, about whether a New York court is a “court” for the purposes of granting OBCA remedies. Another clause called for any dispute to be resolved exclusively by arbitration to be conducted in New York in accordance with the rules of the American Arbitration Association. Justice Koehnen found that the application judge, Justice Lax, distinguished between the parties’ rights under the arbitration clause which governed the subscription agreement and the core obligations of an OBCA corporation. The investors’ complaint that the corporation had not produced audited financial statements as it was required to do under the OBCA raised a fundamental right to which shareholders are entitled and a core obligation of the corporation. She found that the arbitration clause applied only to issues arising from the transaction contemplated by the subscription agreement and that the investors had not contracted out of the right to apply to an Ontario court for relief about the manner in which the corporation was to be governed. Therefore, Justice Koehnen concluded that this case does not express the view generally that an arbitrator has no power to award OBCA remedies.
Third, in ABOP LLC v. QTrade Canada Inc., 2007 BCCA 290, the court found that oppression relief was not available in the arbitration in that case, but Justice Koehnen said that it is not clear whether this finding was grounded in a legal rule to the effect that statutory remedies are not available in arbitration or whether it was grounded in the interpretation of the arbitration clause that applied in that case.