Ontario – entity invoking arbitration agreement must first demonstrate representative’s authority to act – #236

Before addressing the merits of a challenge to the court’s jurisdiction, Madam Justice Bernadette Dietrich in Jamrock Broadcasting Corporation v. The Estate of Fitzroy Gordon, 2019 ONSC 5732 had to first make a preliminary determination regarding a representative’s purported authority to bind the corporation which made the challenge.  Despite a series of gaps in governance and non-compliance with applicable corporate law and shareholder agreements, Dietrich J. did find that the representative had de facto authority and could hire counsel and instruct on the corporation’s objection to jurisdiction based on an arbitration agreement.

Founded in 2011, Intercity Broadcasting Network Inc. (“IBN”) operates a radio station providing programming which highlights the Caribbean-African community in the Greater Toronto Area.  Four (4) shareholders initially held all the issued shares in IBN: Maja Media Group Inc. (“Maja Media”), the majority shareholder, controlled by Mr. Fitzroy; Jamrock Broadcasting Corporation (“Jamrock”), controlled by Mr. Delford Blythe (“Mr. Blythe”); 2164322 Ontario Inc. (“216 Inc.”); and, Mr. Tony Hamblin (“Mr. Hamblin”).  The shareholders signed a January 25, 2010 shareholders agreement, amended in 2011 and 2012 (“Shareholders Agreement”). The principals of each of corporate shareholder initially held positions as IBN directors.

Over time, Maja Media acquired the shares of 216 Inc. and Mr. Hamblin, resulting in it holding 81% of the shares and Jamrock holding the remaining 19%.  The principals of 216 Inc. and Mr. Hamblin ceased to be directors.  Dietrich J. described Mr. Gordon as the “controlling mind” of IBN and its CEO since its inception.   

Further to differences arising in June 2015, Mr. Gordon terminated a financial and management services agreement IBN had with Mr. Blythe (“FMS Agreement”), denying the latter access to IBN.  Though Mr. Blythe did remain a director and shareholder, Mr. Gordon effectively served as the sole active director until his death April 30, 2019.  Following Mr. Gordon’s death, only Mr. Blythe remained as a director.

Following the June 2015 termination of the FMS Agreement, Mr. Blythe had instituted litigation against Mr. Gordon, alleging oppression and seeking relief.  That litigation had been stayed following Mr. Gordon’s death.

The issue before Dietrich J. involved an application brought by Jamrock and Mr. Blythe to appoint a receiver (“Main Application”) based on alleged financial difficulties facing IBN.  Upon a separate, earlier interim application by Jamrock and Mr. Blythe (“Interim Application”), the court in June 2019 appointed an investigative receiver to oversee, monitor and manage IBN’s records, bank accounts and receivables.  The court-appointed receiver’s duties did not involve active management of IBN’s operations.

In the context of Jamrock’s and Mr. Blythe’s Main Application certain issues arose including those which also apply in the context of arbitration proceedings:

(i) jurisdictional – IBN challenged the court’s jurisdiction to hear the Main Application on the basis that the Shareholders’ Agreement required shareholders to resolve their disputes by arbitration.  IBN sought an order to stay the Main Application or, in the alternative, to quash or vary the June 2019 order on the Interim Application.

(ii) legal and beneficial ownership of IBN – By will, Mr. Gordon appointed his widow the Executrix and Trustee of his estate as well as beneficiary of all his shares in private corporations, including Maja Media.  Two (2) sons from prior marriage challenged (a) the Executrix and Trustee appointments and also (b) the wills on the basis of lack of testamentary capacity and alleged procurement by undue influence.

(iii) directing mind of IBN – IBN’s directing mind had not been determined.  Mr. Blythe, as sole remaining director, sought to clarify governance issues including determining who would serve as IBN’s officers to manage and control IBN and the role, if any, of the receiver.

(iv) approval of receiver fees and counsel – IBN objected to the approving the receiver’s second report, its fees and the fees of its counsel.

Prior to addressing the Main Application or other issues identified above, Dietrich J. focused on a single issue which had to be resolved in order to advance to the court’s consideration of the other issues: whether IBN had the authority to appoint legal counsel to represent its interest in the Main Application.

Her analysis at paras 13-26 review the facts particular to the parties.  Those facts include de facto situations which, despite not having been expressly authorized by the shareholders or compliant with the Shareholders Agreement or common governance practices, had been tolerated for some time and/or specifically authorized by Mr. Gordon as sole, active director.

The reasons list a number of shortfalls in compliance with corporate rules and agreements applicable to the formal appointment of the representative now acting on IBN’s behalf.  Despite the gaps, the representative did receive judicial recognition that she had adequate authority to continue. 

urbitral note – In order to reach the merits of the Main Application, including IBN’s stated objection and its alternative remedies, Dietrich J. had to resolve a genuine dispute as to whether IBN’s objection to the court’s jurisdiction was even validly made. 

The facts she identifies no doubt appear in other corporate governance disputes in which shareholders dispute some participants’ authority to bind the corporation, including instituting or resisting dispute resolution and retaining counsel to do so. 

On the facts, Dietrich J. held that the representative purporting to act on behalf of IBN did have the authority to appoint counsel to represent IBN in the dispute resolution and to bind IBN.

The issue of ostensible or real authority to bind corporate entities in disputes resolution and Dietrich J.’s placement of the issue at the onset of the process apply equally in arbitration.  A party challenging jurisdiction may well be called upon by another party to justify first its representative’s own authority to raise those challenges before the party addresses the merits of its own challenges. In some cases, overlooking more than a few formalities might not be an obstacle to demonstrating the representative’s authority.