In Richcraft Homes Ltd. v. Urbandale Corporation et al., 2020 ONSC 411, Mr. Justice Robert J. Smith dismissed a minority shareholder’s action which alleged oppression based on a majority shareholder requesting a legal opinion favourable to its interests and then submitting the interpretation to arbitration. Smith J. held that any party to a commercial agreement, including a majority shareholder, is entitled to seek a legal opinion concerning interpretation its rights under a contract and, instead of acting illicitly on any interpretation, refer interpretation of the contract to arbitration.
Richcraft Homes Ltd. (“Richcraft”) and Urbandale Corporation (“Urbandale”) collaborated on two (2) projects – Riverside South and Kanata Lakes – to develop land and sell residential lots. Smith J. outlines the Parties’ operations and the structure of their business relationships at paras 6-12 of his reasons.
Regarding Riverside South, Richcraft and Urbandale had earlier litigated the interpretation of a 2005 Agreement of their Limited Partnership Agreement (“LPA”) in which Richcraft’s interpretation of the LPA had prevailed. Regarding Kanata Lakes, Richcraft and Urbandale disputed the interpretation of a co-tenancy agreement (“CTA”) which allocates building lots. A November 2019 order (unpublished) referred interpretation of the CTA and the 2005 Agreement to arbitration.
Richcraft has commenced an action against five (5) Defendants seeking declaratory relief related to activities which Richcraft alleged contravened section 248 of Ontario’s Business Corporations Act, RSO 1990, c B.16 (“OBCA”). Richcraft alleged that Urbandale and one of its officers and directors carried on business or threatened to carry on business in a manner that was oppressive, unfairly prejudicial or unfairly disregarded Richcraft’s interests. In particular, the alleged conduct involved : (i) Urbandale sought a legal opinion concerning Urbandale’s rights under the CTA; (ii) Urbandale referred interpretation of its rights under the CTA to arbitration; and, (iii) Urbandale proposed to implement a certain agreement of purchase and sale in 2016. The full details are set out at para. 15 of the reasons.
Urbandale applied under Rule 21 of Ontario’s Rules of Civil Procedure, RRO 1990, Reg 194 for an order to strike Richcraft’s action on the basis that it was plain and obvious that Richcraft’s claims have no reasonable prospect of success. Rule 21.01(1)(b) provides that a judge may strike out a pleading on the ground that it discloses no reasonable cause of action. Rule 21.01(2) states that no evidence is admissible on such motions.
Though R. v. Imperial Tobacco Canada Ltd., 2011 SCC 42 (CanLII),  3 SCR 45 originated from B.C., by agreement of the Parties, Smith J. referred to the test stated in that case for a motion to strike under Ontario’s Rule 21.01(1)(b).
“ A motion to strike for failure to disclose a reasonable cause of action proceeds on the basis that the facts pleaded are true, unless they are manifestly incapable of being proven: Operation Dismantle Inc. v. The Queen, 1985 CanLII 74 (SCC),  1 S.C.R. 441, at p. 455. No evidence is admissible on such a motion: r. 19(27) of the Supreme Court Rules (now r. 9-5(2) of the Supreme Court Civil Rules). It is incumbent on the claimant to clearly plead the facts upon which it relies in making its claim. A claimant is not entitled to rely on the possibility that new facts may turn up as the case progresses. The claimant may not be in a position to prove the facts pleaded at the time of the motion. It may only hope to be able to prove them. But plead them it must. The facts pleaded are the firm basis upon which the possibility of success of the claim must be evaluated. If they are not pleaded, the exercise cannot be properly conducted.”
Smith J. added his own summary of the standard:
“The Supreme Court stated therein that the test is whether it is plain and obvious that the claim has no reasonable prospect of success. Facts alleged in the statement of claim must be taken as true unless they are patently ridiculous or manifestly incapable of being proven. The Court must give the statement of claim a generous reading, assume the truth of the facts as pled, and construe these in the light most favourable to the plaintiff.”
At paras 18-24, Smith J. flagged the key elements to an oppression claim which, among others, required that a plaintiff assert (i) compensable injury and (ii) a causal link between the wrongful breach of expectations and the loss. See BCE Inc. v. 1976 Debentureholders, 2008 SCC 69 (CanLII),  3 SCR 560, Landvis Canada Inc. v. Ocean Choice International Limited Partnership, 2016 CanLII 544 (NL SC), , NLTD (G) 4, aff’d 2016 NLCA 36, 1181 A.P.R. 49 and Aronowicz v. Emtwo Properties Inc., 2010 ONCA 96, 316 D.L.R. (4th) 621, Ciup v. Weinreb, 2018 ONSC 639.
In his reasons, Smith J. applies that test to evaluate the strength of the Richcraft’s claims against all Defendants, not all of which were parties to the LPA or CTA or involved in the prior litigation or upcoming arbitration. For example, at paras 26-52, Smith J. considered Richcraft’s claims against Urbandale Construction Limited, an entity related to Urbandale.
This note focuses on that portion of Smith J.’s reasons which addressed the role of arbitration as a basis for a claim in oppression. At paras 87-89 and 90-94 respectively, Smith J. analysed whether (a) the request for the legal opinion and (b) the submission to arbitration met the key elements of an oppression remedy.
(a) legal opinion – At paras 15i) and 15ii), Smith J. detailed Richcraft’s allegations involving the legal opinion.
“i) Urbandale Sought a Legal Opinion. On May 23, 2018, Urbandale sought a legal opinion from Paul LaBarge, a former law partner of Mr. Weinstein, without first advising Richcraft. Urbandale asked whether the previous judgments related to the Riverside South LPA and the 2005 Agreement also applied to the allocation of building lots under the CTA in the Kanata Lakes project. The legal opinion was shared with Richcraft when it was received.
ii) Weinstein is Alleged to Have Acted and Participated Inappropriately in Obtaining the Legal Opinion From His Former Law Partner. Richcraft alleges that Weinstein’s objective was to transfer some of the Kanata Lakes lots to HN Homes (owned by Weinstein) from Richcraft’s share of these lots. It alleges that this is oppressive conduct. In addition, Richcraft pleads that Weinstein was in a conflict of interest and acted inappropriately when Urbandale sought the legal opinion from his former law firm and former law partner.”
Smith J. summarily dismissed these allegations as a sufficient pleading for oppression. In addition to having the issue determined in arbitration, seeking a legal opinion is a right and, without more, is not indicative of bad faith or oppressive conduct.
“ This claim has no reasonable chance of being found to amount to bad faith, or oppressive or threatened oppressive conduct. Any party to a commercial agreement, including a majority shareholder, is entitled to seek a legal opinion concerning the interpretation its rights under a contract. This is so even if the majority shareholder hopes to receive a legal opinion favourable to its interests over the minority shareholder’s interest. Therefore, assuming the facts alleged are proven, it is plain and obvious that the conduct in question does not constitute material facts that could reasonably support a cause of with any reasonable chance of success.”
(b) submission to arbitration – Smith J.’s analysis of this ground followed on from his consideration of whether a request for a legal opinion could qualify as oppressive conduct. Richcraft omitted pleading that the legal opinion would cause imminent compensable harm or facts suggesting the director breached his duties. A decision to submit a resulting interpretation to arbitration did not alter that qualification. Smith J. determined that “[i]t is plain and obvious that the submission of an issue to arbitration pursuant to an agreement entered into by both parties has no reasonable chance of success, on its own, of establishing that Urbandale or Weinstein threatened to act or acted oppressively”.
Smith J. added the following:
“ As stated previously, there is nothing oppressive or improper about a seeking and obtaining of a legal opinion from a law firm – even if the instructions were that the lawyer consider possible interpretations that were more favourable to Urbandale than to Richcraft. Likewise, there was no related threatened oppressive conduct because Urbandale did not threaten to implement any aspect of the LaBarge legal opinion. The opinion was obtained on August 8, 2018, and the issue of the interpretation of the agreement was referred to arbitration in November 2018 by Urbandale. It is clear that, rather than illicitly acting on the legal opinion despite Richcraft’s disagreement, Urbandale sought to have the interpretation of the CTA decided by arbitration.”
urbitral note – First, Smith J.’s analysis accepted that litigants might meet the test for oppression based on more fulsome allegations involving compensable injury and a causal link between the wrongful breach of expectations and the loss. However, the mere fact of seeking a legal opinion, even one favourable to one’s own position, and then submitting that interpretation to arbitration is not, in and of itself, oppressive. A majority shareholder’s use of the arbitral dispute resolution process to support its position is not oppressive conduct.
Second, Urbandale did not invoke provisions of Ontario’s Arbitration Act, 1991, SO 1991, c 17. It did not seek a stay of litigation in favour of arbitration. Rather, is sought dismissal of the litigation based on a cause of action asserting that the arbitral process was part of oppressive conduct. Urbandale did not claim that the dispute in court was covered by the arbitration but, instead, that arbitration was lawful and not oppressive. It was “plain and obvious” that any litigation based on that arbitration as being improper was bound to fail.
Third, the arbitration, requested by Urbandale in November 2018 and ordered in November 2019, resurfaces throughout the reasons when Smith J. underlines that an issue raised in argument before him would not be his to decide but determined by that arbitration. See paras 70, 72, 85 and 89. Smith J.’s various mentions underline his support for arbitration as a different venue and his willingness to maintain its separate purpose distinct from the litigation before him.