Ontario – resort to arbitration commercially reasonable to resolve ambiguous non-compete clause – #393

In Way v. Schembri, 2020 ONCA 691, Ontario’s Court of Appeal set aside a decision granting summary judgment which, among other determinations, had held that it was “commercially unreasonable” to consider that arbitration was suitable to resolve disputes over an ambiguous non-competition clause.  As part of his reasoning, the judge in first instance had observed that one party’s “suggestion that the answer to the ambiguities and lack of details in [non-competition clause] would be resolved by an arbitrator is commercially unreasonable and something that no businessperson would agree to”.  The Court of Appeal disagreed, noting that “[g]iven the presence of arbitration provisions in countless business agreements, it cannot be that their existence alone is commercially unreasonable”.

Through their numbered companies, two (2) real estate developers entered into a joint venture agreement and subsequently formed a corporation to pursue specific development opportunities. The shareholders’ agreement contained the following Clause 13:

13. NON-COMPETITION During the period which [SF] is a shareholder of the Corporation, it shall have the ongoing obligation to present [KF] and the Corporation all real estate development opportunities (the “Project”) which it may have acquired within the Regional Municipality of Waterloo. This obligation to [KF] and the Corporation shall also extend to [GS] personally, and any other legal entity in which he has an interest, either directly or indirectly, financially or otherwise. [KF] and the Corporation shall have FIFTEEN (15) days following the presentation of the Project to them to determine if it is economically feasible using the typical budget model consistently utilized by them in such circumstances and, if at the expiry of the FIFTEEN (15) day period neither of them have indicated to [SF] in writing that it is taking on the Project, then [SF] (or its designate) shall be free to pursue the Project without the involvement of [KF] or the Corporation”.

Disputes arose and litigation commenced, leading to two (2) separate court actions, a “Main Action” and a Right of Right of First Refusal (“ROFR Action”).  In the latter, defendant S brought a motion for summary judgment, seeking to strike out the claim in its entirety or in part and, in the alternative, to bifurcate liability and damage issues. In first instance, after extensive analysis of the facts and the parties’ respective arguments, the judge granted the motion.  In doing so, he made a number of determinations including the following three (3).

First, Clause 13 was not a binding agreement.

[193] Based on Mr. [W]’s answers, particularly with respect to the powers of an arbitrator, and also based on Mr. [V]’s answers, the court can come to no other conclusion than that Clause 13 was/is nothing more than an agreement to agree.  This agreement to agree would arise anew each and every time the parties discussed the new project”.

Second, Clause 13 was ambiguous for various reasons.  See paras. 183-191.

Third, in submissions excerpted in the reasons in first instance, the judge identified answers provided by defendant regarding the role of arbitration as an answer to the ambiguity of Clause 13.

[47] The defendants submit that [W]’s attempt to answer the ambiguities and lack of details in Clause 13, relies solely upon the arbitration clause contained in Clause 15 of the Shareholder Agreement.  In answer to question 863 at page 377 of the Compendium which reads:

Well if I understand your position, in the absence of an agreement an arbitrator would decide all aspects of the development that you and [S] could not agree upon?

[48] Way replied: “I believe that would be the purpose of the arbitrator.”

[49] In answer to question 568 on page 372 of the Compendium, with respect to what would happen if [S] asked for sweat equity and they could not agree on a number, [W]’s answer was:

If it is not reasonable then we would go to arbitration because the arbitration clause, and discus… or any dispute in the shareholders’ agreement goes to arbitration”.

Fourth, the judge considered that reliance on the arbitrator to resolve the ambiguities was “commercially unreasonable”.  “Way’s suggestion that the answer to the ambiguities and lack of details in Clause 13 would be resolved by an arbitrator is commercially unreasonable and something that no businessperson would agree to”.

Based on those findings, as well as other, the judge granted the summary judgment motion and dismissed plaintiffs’ action.  Dissatisfied with the result, plaintiffs appealed successfully.  The Court of Appeal held that the dispute was “not a matter that ought to have been dealt with by way of summary judgment”, set aside the decision and reinstated plaintiffs’ action.

As part of its analysis, the Court examined whether the dispute was a proper one for summary judgment.  Among other comments made and concerns raised in its reasons, the Court questioned the judge’s determination that arbitration of an ambiguous clause was “commercially unreasonable”.

[19] That, however, is not the only problem with employing summary judgment in this case. The motion judge made a number of findings about clause 13 that demonstrate that summary judgment was not, in fact, an appropriate route to take in this action. First, he found that clause 13 is a restrictive covenant, although it is not clear what the motion judge meant in making that finding. Clause 13 is, in fact, a right of first refusal. Second, the motion judge found that clause 13 was ambiguous in several respects. He found its spatial parameters were ambiguous; he found at least four phrases to be ambiguous; and he found the requirement for Schembri to “present all real estate development opportunities” to be ambiguous. Third, the motion judge found clause 13 to be “commercially absurd” and not necessary to “protect Triumph’s or Kingsley’s legitimate interests”. Fourth, the motion judge found that no “typical budget model” had been presented to the court and thus concluded that this phrase was also ambiguous. Fifth, the motion judge found that the arbitration provision in the Shareholders’ Agreement, by which any disputes were to be resolved by arbitration, was “commercially unreasonable and something that no businessperson would agree to””.

The Court found that the judge’s reasons did not refer to the necessary factual foundations required for each of the above determinations, including interpreting contracts according to the approach identified in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 (CanLII), [2014] 2 SCR 633 namely, in manner consistent with the surrounding circumstances known to the parties at the time of the formation of the contract.

[22] It is also unclear what factual foundation the motion judge relied upon for his conclusion that the arbitration provision was one that was commercially unreasonable. That finding would require consideration of the application of the clause in the particular commercial context that existed, none of which is examined by the motion judge. Given the presence of arbitration provisions in countless business agreements, it cannot be that their existence alone is commercially unreasonable. Further, the motion judge’s view that no businessperson would agree to such a clause appears to be contradicted by the very facts of this case, as both [W]’s and [S]’s companies signed the Shareholders’ Agreement as did [W] and [S] personally”.

urbitral notes – First, despite the endorsement that resort to arbitration is commercially reasonable to resolve ambiguous non-compete clause, the Main Action and ROFR Action proceeded in court.

Second, contrast the party’s resistance to arbitration in this case with over-reliance on arbitration as a cure-all resisted by the court in Naimer v. Naimer, 2018 QCCS 5210.  In that case, one party suggested that day-to-day disputes be resolved by arbitration.  See the earlier Arbitration Matters note “Arbitration not appropriate to conduct business or resolve daily business disagreements”.

The court held that such an approach was not workable.  It rejected a post-trial solution by some of the litigants to impose arbitration as a way to avoid future deadlock in the operation of the litigants’ business. Though proposed in answer to his invitation to provide a lasting solution once the safeguard orders expired after the trial decision issued, The court readily held that arbitration was not appropriate to resolve conflicts regarding day-to-day business decisions. The lack of any basis for arbitrators to decide on business initiatives, the non-arbitrable nature of business decisions and the anticipated delay in instituting arbitration for each disputed business decision lead the court to dismiss the proposal.