In 12823543 Canada Ltd. v Mizrahi Commercial (The One) GP Inc., 2022 ONSC 6206, Justice Penny granted an application to stay the proceeding commenced before the Superior Court of Justice and referred the matter to the appropriate arbitral tribunal to decide its jurisdiction. He found that the moving parties had raised an arguable case as to the application of the relevant arbitration agreements to the dispute and that the principle of compétence-compétence therefore favoured directing the parties to address their arguments to the arbitral tribunal regarding its jurisdiction. Only two of the three agreements at issue contained an arbitration agreement and yet Justice Penny was swayed by the nature of the dispute, grounded in a broad oppression claim, and considered that the Applicant’s allegations raised issues that went straight to the ability of the shareholders to make decisions of fundamental significance to their joint project.
The parties were involved in a large real estate development project in Toronto, known as The One (the “Project”). Through several entities, Sam Mizrahi (the Respondents), on the one hand, and members of the Coco family (the Applicant), on the other, owned the Project in equal portion. Specifically, the beneficial owner of the Project was a limited partnership, of which the general partner was equally owned by Sam Mizrahi’s holding corporation (Sam Holdco) and a numbered company owned by the Coco family.
Without specifying which individual or entity was party to each, the decision mentions three agreements that were of relevance to the proceedings: a) a 2014 unanimous shareholders’ agreement (“USA”) containing a broad arbitration clause; b) a 2014 Partnership Agreement, also containing a broad arbitration clause; and, c) a 2021 Control Agreement, which expired by its terms on August 30, 2022. The relevant arbitration agreements read as follows.
Section 7.4 of the USA of the limited partnership (or the “Corporation”, the “Partnership” referring to the general partner):
“If (i) any dispute or question (the “Dispute”) shall arise between the Parties concerning the interpretation of this Agreement or (ii) the Shareholders are unable to adopt a resolution or make a decision which any of the Shareholders considers (in its sole judgment) to be of fundamental importance to the Corporation or the Partnership with respect to which no resolution can be achieved and that precludes the Partnership or the Corporation, on its own behalf and in its capacity as general partner of the Partnership, from achieving their business purpose, the Parties shall attempt in good faith to resolve such Dispute. If the Parties have not agreed to settlement of the Dispute within 30 days from the date on which the Dispute first became known to the Parties, then the Parties agree that the Dispute shall be submitted to arbitration pursuant to the Arbitrations Act, 1991 (Ontario) [sic]. Such Dispute shall not be made the subject matter of an action in any court by either or any of such parties unless the dispute has first been submitted to arbitration and finally determined…. Any such action commenced thereafter shall only be for the purpose of enforcing the decision of the arbitrators and the costs incidental to the action. In any such action the decision of the arbitrator shall be conclusively deemed to determine the rights and liabilities as between the parties to the arbitration in respect of the Dispute.”
Paragraph 11.11 of the Partnership Agreement:
“If any dispute or question (the “Dispute”) shall arise, during the term of this Agreement or at any time thereafter, between the General Partner and one or more Limited Partners concerning the interpretation of this Agreement or any part thereof, such parties shall attempt in good faith to resolve such Dispute. If such parties have not agreed to a settlement of the Dispute within 30 days from the date on which the Dispute first became known to both such parties, then such parties agree that the Dispute shall be submitted to arbitration and finally determined…. Any such action commenced thereafter shall only be for the purpose of enforcing the decision of the arbitrators and the costs incidental to the action. In any such action the decision of the arbitrator shall be conclusively deemed to determine the rights and liabilities as between the parties to the arbitration in respect of the Dispute.”
Arbitration proceedings between the parties were initiated in 2019 and 2020, as a result of which awards were made, until, in June 2020, the parties – presumably as an attempt to settle their disputes – “entered into an agreement whereby the Mizrahi-owned entities would buy out the Coco family interests in the Project” (the “Purchase Agreement”) (para. 8). This attempt failed and the Purchase Agreement never closed because Mizrahi could not obtain adequate financing. In a further attempt to settle, the parties entered a Control Agreement in 2021, based on the premise that Mizrahi would buy out the Coco family interests and “become sole beneficial owner and manager of the Project”, granting Mizrahi’s holding company sole control and management of all aspects of the Project (para. 9), the whole to further extend the delay for closing the Purchase Agreement. The events that led to this more recent chapter of the dispute are summarized as follows: “[w]hen it became apparent that the purchase agreement could not be closed, in July 2022 Mizrahi sought an extension of the Control Agreement. Coco refused. Using the purported powers under the Control Agreement, Mizrahi unilaterally caused the General Partner to pass a resolution (“the Resolution”) granting Sam Holdco sole control and management of all aspects of project and appointing Mizrahi as the managing director, with sole power and authority to manage all of the business and affairs of the General Partner” (para. 9).
As a result, the Coco family brought an application to the Superior Court of Justice seeking, among other things: (1) the revocation of the Resolution under the oppression remedy in the Ontario Business Corporations Act, section 248 (2) and the enforcement of one of the arbitral awards rendered earlier on October 21, 2020, made in the prior arbitration proceedings but which were not enforced as a result of the parties’ attempts at settlement. The Mizrahi-owned entities responded by bringing a motion to stay the court application, under section 7(1) of the Ontario Arbitration Act, 1991, SO 1991, c 17 (the “Act”), and to refer the all matters raised by the Applicant to arbitration on the basis that the grounds of dispute fell within the terms of the arbitration agreements contained in the USA and the Partnership Agreement.
The analytical framework – From the outset, Justice Penny noted three key principles in deciding an application to stay. First, that “the law favours giving effect to arbitration agreements” (para. 13). Second, that, “[i]n general, in any case involving an arbitration clause, a challenge to the arbitrator’s jurisdiction must be resolved first by the arbitrator” (the compétence-compétence principle discussed in Dell Computer Corp. v Union des consommateurs, 2007 SCC 34) (para. 14). Third, that the burden the Respondents were required to meet on such a motion was to show that it was “arguable” that the dispute fell within the terms of the arbitration agreements, without requiring the court to make a final determination in that respect (para. 15). This means that the party seeking the stay must show something like “a reasonable prospect of success” it will convince the arbitral tribunal of its jurisdiction or that such an attempt was “not obviously doomed to fail”, which is “less than the standard of ‘correctness’ or even ‘likely to succeed’” (para. 36). In short, the Court should adopt a “deferential approach”, allowing the “arbitrator to decide whether the dispute is arbitrable, absent a clear case to the contrary”, as the Court of Appeal for Ontario had done in Dancap Productions Inc., v Key Brand Entertainment, Inc., 2009 ONCA 135.
Justice Penny applied the framework laid out by the Ontario Court of Appeal in Haas v Gunasekaram, 2016 ONCA 744, which requires the judge seized of an application to stay proceedings in favour of arbitration to answer five questions (para. 17):
(1) Is there an arbitration agreement?
(2) What is the subject matter of the dispute?
(3) What is the scope of the arbitration agreement?
(4) Does the dispute arguably fall within the scope of the arbitration agreement?
(5) Are there grounds on which the court should refuse to stay the action?
Justice Penny addressed each of these questions in turn.
First, as to the existence of an arbitration agreement, the Applicant argued that the subject matter of the dispute was the Resolution, which relied for its authority on the Control Agreement in respect of which the parties did not include an arbitration agreement. Justice Penny quickly dispatched the contention that there was no arbitration agreement between the parties. At para. 18, he noted that the USA and the Partnership Agreement both contained an arbitration agreement, and that the issue was therefore whether there was a dispute that fell within the scope of those arbitration agreements.
Second, as to the nature of the dispute in regard to the scope of the arbitration agreements, Justice Penny determined that the arbitration agreements in the USA and the Partnership Agreement applied to disputes concerning their interpretation. More importantly, the arbitration agreement in the USA applied to circumstances where the shareholders are unable to adopt a resolution or make a decision which any of the shareholders considers to be of fundamental importance, which fell within the circumstances of this case.
Third, as to the essence of the dispute, Justice Penny found that it concerned the validity of the Resolution as an alleged misuse of the powers granted by the Control Agreement (paras. 31-32), including with respect to one of the prior arbitral awards that the Coco family was seeking to enforce. The Respondents opposed the enforcement of that award on the basis that it had been superseded by the powers conferred in the Resolution. However, the Applicant argued that enforcement of the award had been suspended by the terms of the Control Agreement, which was now expired, and it wanted the benefits of the award. The Applicant was of the view that the passage of the Resolution put the parties into a deadlock such that the shareholders were unable to make a resolution or resolve a decision which they considered fundamental to the Project, which triggered the arbitration agreement under the USA. An evaluation of the validity of the Resolution also called for an interpretation of the terms of the USA and of the Partnership Agreement to determine if the Resolution was passed in breach of those terms. Ultimately, Justice Penny stated that “[i]nterlocking agreements must be read together” and that the “adjudication of the oppression claims will require interpretation of the USA and Partnership Agreement as well as the Control Agreement” (para. 34).
In short, the Applicant had an arguable case, because both sides made arguments that had merit (para. 36).
Finally, Justice Penny did not find grounds to refuse the stay. The motion had been brought without undue delay (it had been within a “matter of days”, at para. 42). Mizrahi had also not attorned to the jurisdiction of the Court in consenting to schedule the application brought by the Coco family (paras. 41-42).
First, Justice Penny provided a valuable advocacy tip to parties seeking to refer shareholders disputes to arbitration where the shareholder agreement contains an arbitration agreement, but the dispute pertains, at least in part, to other agreements between the shareholders or involving third parties or even extracontractual claims. He noted that “oppression depends on the reasonable expectations of the parties” and that “[s]shareholder agreements are a prima facie indication of the reasonable expectations of the shareholders” (para. 34). In doing so, he arguably limited considerably the number of shareholder disputes that would not be referred to arbitration in the context described above, because advocates will be inclined to draw connections between the legitimate expectations of shareholders and disputes between shareholders that do not specifically pertain to the shareholder agreement, thereby making an arguable case that the arbitration agreement in the shareholder agreement applies. It will be interesting to see if the Québec Court of Appeal will adopt a similar approach in the case of Istanboulian v Kalajian, 2022 QCCA 1259, which presents some analogies with the present case in that it involves multiple agreements between some or all shareholders of a corporation, in addition to the shareholder agreement, which contains an arbitration agreement. That appeal will be heard in February 2023 (see Québec – Fragmentation of shareholders dispute stayed pending appeal on jurisdiction – #678).
Second, the arbitration agreement in the USA may appear lengthy and wordy, but that transactional lawyers might want to note that it suggests a clever way to ensure the arbitration agreement in a shareholder agreement encompasses all significant disputes between the shareholders, irrespective of the precise cause of action. Here, it was determining that the scope of Section 7.4 USA extended to circumstances where “the Shareholders are unable to adopt a resolution or make a decision which any of the Shareholders considers (in its sole judgment) to be of fundamental importance to the Corporation or the Partnership with respect to which no resolution can be achieved and that precludes the Partnership or the Corporation, on its own behalf and in its capacity as general partner of the Partnership, from achieving their business purpose”. Language to the same effect ensures that a wide variety of disputes will be submitted to arbitration not based on their effect on the ability of the corporation to achieve its business purpose. On the flip side, drafters may also want to use language that stipulates that disputes of less than “fundamental” importance will also be submitted to arbitration, or risk introducing much uncertainty into the scope of the arbitration agreement.