Ontario – Partial stay; oppression claim arbitration to precede related family law action – #528

In Pezo v Pezo, 2021 ONSC 5406, the applicant Elma Pezo brought two claims: a family law claim against her spouse Kabir Pezo; and an oppression remedy claim against Kabir and his friend Hadis Kozo regarding a business they had all operated together. Kazo sought a stay of all claims against him on the basis that the parties had entered into a Shareholders’ Agreement with respect to the business that contained a mandatory arbitration clause. However, Elma argued that it was invalid because the two claims intersected and had to be heard together, but the arbitration clause did not meet the requirements for a family law arbitration set out in Ontario Regulation 134/07 of the Ontario Arbitration Act, 1991, S.O. 1991, c. 17. Justice Kraft disagreed. He found that the arbitration clause covered only the oppression remedy claims and that he had the discretion to grant a partial stay under s. 7(5) of the Arbitration Act because its two pre-conditions had been met: (a) the agreement dealt with only some of the matters in respect of which the proceeding was commenced; (b) it was reasonable to separate the matters dealt with in the agreement from other matters. He stayed the family law claims an ordered an arbitration with respect to the oppression claims to proceed before the action so that the findings of the arbitrator on issues that could affect the family law claim would be before the court.

Elma’s application included: (1) a family law claim arising out of the breakdown of her marriage to respondent Kabir Pezo; and (2) an oppression remedy claim against both Kabir and respondent Hadis Kozo for their conduct with respect to respondent Sarajevo Gill and Meat Inc., which operated a restaurant business. Kozo held 50% of the shares of Sarajevo, while Elma and Kabir each held 25% of the shares. The oppressive conduct alleged included that Kozo had served Elma with a buy/sell notice with respect to her shares in Sarajevo that had a share price that was not in compliance with the terms of the parties’ Shareholders Agreement and that Kozo and Kabir had conspired to pay bonuses to Kabir that Elma did not receive. A key issue before Justice Kraft was the extent to which there was overlap in the two claims.

Kozo sought a partial stay of the application on the basis that claims against him should not be before the court. The parties’ Shareholders Agreement had a mandatory arbitration clause requiring that any disagreement as to any matter associated with the Agreement shall be referred to arbitration.

Elma opposed the partial stay motion for several reasons.

First, the two claims intersected and had to be heard together because Kozo and Kabir had acted in concert to de-value and dispossess Elma of her interest in the business, which was a valuable family asset. They also prevented her from accessing business records that would allow her to value her interest in Sarajevo and her entitlement to spousal support.

Second, the arbitration clause was invalid and unenforceable. It was drafted so that it related only to a commercial dispute and did not meet the requirements of an arbitration clause in a family law proceeding set out in Ontario Regulation 134/07 under the Arbitration Act, 1991, S.O. 1991, c. 17. That regulation sets out standard provisions that identify the law to be applied, rights of appeal, a certificate of independent legal advice, and screening for power imbalances by someone other than the arbitrator. In addition, Elma did not understand the arbitration clause when she signed the Shareholders Agreement and had no independent legal advice.

Third, there was a risk of inconsistent findings on the same issues if the oppression remedy claims were arbitrated and the family law proceedings decided by a court.

Justice Kraft granted the partial stay. Citing Cityscape Richmond Corp. v Vanbots Construction Corp., [2001] O.J. No. 648, Haas v Gunasekaram, 2017 ONCA 744, and TELUS Communications Inc. v Wellman, 2019 SCC 19, he noted that the Arbitration Act, “entrenches the primacy of arbitration proceedings over judicial proceedings once the parties have entered into an arbitration agreement”. Further, arbitration clauses “are to be given a large, liberal and remedial interpretation to effectuate the dispute resolution goals of the parties”. Justice Kraft also referred to s. 6 of the Arbitration Act, which limits the ability of courts to intervene in an arbitration.

Justice Kraft then considered s. 7(1) of the Arbitration Act, which requires that the court “shall” stay a proceeding covered by an arbitration agreement. He applied the analytical framework set out in Haas v Gunasekaram, 2017 ONCA 744 at para. 17, and concluded as follows:

  1. Is there an arbitration agreement? There was no dispute between the parties that the Shareholders Agreement contained an arbitration clause.
  1. What is the subject matter of the dispute? The dispute as between Elma and Kozo arose from their commercial relationship as set out in the Shareholders Agreement. Elma made no family law claims against Kozo and the shareholder dispute had no bearing on the equalization issues between Elma and Kabir because of their equal shareholdings.
  1. What is the scope of the arbitration agreement? The arbitration clause provided that, “in the event there is a disagreement as to any matter associated with this Agreement…such disagreement shall be referred to arbitration pursuant to the provisions of the Arbitration Act, 1991, S.O. 1991, c. 17, as amended.” It also provided that the reference would be to a single arbitrator (with a process for appointment), the arbitrator’s determination would be final and binding with no right of appeal, the arbitrator shall make their determination in writing within 60 days, and the costs of the arbitration would be born by the parties equally.
  1. Does the dispute arguably fall within the scope of the arbitration agreement? The arbitration clause was sufficiently broad to include all of the claims Elma made against Kozo, which arose out of the performance of his obligations under the Shareholders Agreement.
  1. Are there grounds on which the court should refuse to stay the action? None of the grounds under s. 7(2) of the Arbitration Act, which would allow the court to refuse a stay, applied. One of those grounds was that the arbitration agreement was invalid. However, the applicable arbitration clause was not an agreement to arbitrate a family law issue and Elma made no family law claims against Kozo, so the requirements of Ontario Regulation 134/07 did not apply.

Justice Kraft then considered the jurisdictional issue raised by the circumstances and cited Dell Computer Corp. v Union des Consommateurs, 2007 SCC 34 and Uber Technologies Inc. v Heller, 2020 SCC 16 at paragraph 50 of his reasons:

v.…[T[he general rule of “competence-competence” prescribes that an arbitrator shall decide on his or her jurisdiction, not the court. The Supreme Court of Canada confirmed that “in any case involving an arbitration clause, a challenge to the arbitrator’s jurisdiction must be resolved first by the arbitrator.”

vi. The court is only entitled to depart from the general rule of “competence-competence” where the issue in dispute is a pure question of law. Where there are questions of mixed law and fact in dispute, as is the case with this matter, the court must refer the case to arbitration unless the relevant questions of fact require only superficial consideration of the documentary evidence in the record. In such a case, the court must refer the parties to arbitration unless the arbitration agreement is manifestly tainted by a defect rendering it invalid or inapplicable. For an arbitration agreement to be considered manifestly tainted it must be “incontestable” such that no serious debate can arise about the validity.

In this case, Elma had adduced no evidence of unconscionability that would render the arbitration clause invalid and, in fact, relied upon her rights under the Shareholders Agreement in support of her oppression remedy claims against Kozo.

Therefore, Justice Kraft found himself bound to refer the dispute covered by the arbitration agreement to arbitration. He then considered s.7(5) of the Arbitration Act, which allows a court to partially stay proceedings where some of the matters in dispute are not covered by the arbitration agreement so long as two pre-conditions are met: (a) the agreement deals with only some of the matters in respect of which the proceeding was commenced; (b) it is reasonable to separate the matters dealt with in the agreement from other matters.

He noted that in TELUS Communications Inc. v Wellman, 2019 SCC 19, the Supreme Court of Canada interpreted s. 7(5) to confer a discretionary power on the court to order a stay that is triggered if the two pre-conditions are met. Otherwise, the proceeding “must” be stayed under s. 7(1) unless one of the five exceptions in s. 7(2) applies. Justice Kraft noted:

[54] Elma has raised the concern that there is a risk of multiplicity of proceedings in this matter if the corporate issues were determined by arbitration and the family law issues were determined by the court. However, in Wellman, the risk of a multiplicity of proceedings did not trump the language of the statute which expressly contemplates a “bifurcation of proceedings, as it permits the court to order a partial stay, thereby potentially resulting in concurrent arbitration and court adjudication, where the two preconditions outlined in s.7(5)(a) and (b) are met.” In the case at bar, there is no risk of a multiplicity of proceedings. The issues as between the parties as shareholders of Sarajevo are irrelevant to the calculation of both Elma’s and Kabir’s net family property in the family law proceeding, as Elam and Kabir have the same number on his/her NFP statement for his/her interest in Sarajevo.

Justice Kraft found that the two pre-conditions triggering the court’s discretion to grant a partial stay set out in s. 7(5) of the Arbitration Act were met. Therefore, he granted a stay of Elma’s oppression claims against Kozo. He set a timeline for the appointment of an arbitrator, who would hear all the oppression remedy claim issues.

He also ordered that the family law issues were to be determined by the court after a decision had been rendered by the arbitrator. Those findings would affect the value of the shares held by Elma and Kirbo and thereby affect the calculation of net family property. Those findings included whether Elma was oppressed and whether the share price included in Kozo’s buy/sell notice was in compliance with the provisions of the Shareholders Agreement. In addition, a finding as to whether Kabir received bonuses that Elma did not receive would affect his income calculation for support purposes in the family law proceeding.

Editor’s notes:

First, Justice Kraft observed, despite the requirements of s. 7(1) and (2), “if Sarajevo were owned only by [spouses] Elma and Kabir, then it is possible that the Court would intervene. However, Sarajevo was owned by three parties, one of whom is Kozo.

Second, Elma also brought a motion seeking production of financial, business, and corporate records from respondent Sarajevo. Justice Kraft found that the requested disclosure was relevant to both the family law and the oppression remedy claims. Therefore, he exercised his jurisdiction under s. 6(1) of the Arbitration Act to intervene “to assist the conducting of [the] arbitration”. He ordered the requested financial production to be made before the arbitration started.

Third, for other recent Case Notes regarding the stay applications and s. 7 of the Arbitration Act, 1991, S.O. 1991, see Case Note #520: Ontario – Court refers part of dispute to arbitration despite concluding dividing the issues was “unreasonable” in the circumstances; and Case Note #522: Ontario – Court application stayed; jurisdictional issues required analysis of contract’s factual matrix, should be decided by arbitrator.