In Sherif Gerges Pharmacy Professional Corporation et al. v Niam Pharmaceuticals Inc. et al., 2025 ONSC 2058, the court granted the applicant leave to bring derivative actions, rather than refusing leave based on the respondents’ argument that leave should be denied because of an arbitration agreement contained in a shareholders agreement. In Peace River Hydro Partners v Petrowest Corp., 2022 SCC 41, the Supreme Court of Canada recognized four technical requirements for a stay of court proceedings in favour of arbitration, one of which is that the party applying for a stay of the court proceedings has not taken a step in the proceeding. Rather than bringing a motion to stay the applicant’s leave request under s. 7(1) of the Arbitration Act, 1991, SO 1991, c 17, the respondents participated in the litigation and only raised arguments about an arbitration agreement in their factum responding to the applicants’ leave application. The court applied Peace River, which would have applied had the respondents brought a stay motion, and found that the respondents did not satisfy the technical requirements for a stay, having taken a step in the court proceeding. Because those requirements are a precondition to a stay, the court did not engage with the respondents’ arguments related to the competence-competence principle, and refused to dismiss the application for leave to bring derivative actions on the basis that the court proceeding should proceed by way of arbitration.
Background – The application arose from alleged improper business dealings by one of two business partners.
The individual applicant, Sherif Gerges (“Gerges”), and the individual respondent, Adesh Vora (“Vora”), had been business partners since approximately 2010. At the time of the application, they owned Seva Drug Mart (“Seva”), Eglinton Drugs Inc. (“Eglinton”), and Woodbine Downs Health Care Realty Inc. (“Woodbine”).
Gerges and Vora each owned, directly or indirectly, 50% of the shares in Seva, Eglinton, and Woodbine. They were parties to shareholder agreements in respect of Seva and Eglinton. Those shareholder agreements provided that “…any dispute or difference between the Shareholders which cannot be resolved or settled by the Shareholders, shall be settled by arbitration in accordance with Arbitration Act, 1991 (Ontario)…” The arbitration provisions of the shareholder agreements did not prevent a party from applying to court with respect to the detention, preservation and inspection of property.
Vora was alleged to have engaged in a variety of wrongful conduct in respect of Seva, Eglinton, and Woodbine. With respect to Woodbine, Vora amended the company’s corporate profile report to remove Gerges as a director, then proceeded to sell real properties owned by Woodbine and transfer the net proceeds outside the company. With respect to Seva and Eglinton, there were several inconsistencies in the financial records, including an alleged pattern of undisclosed related-party transactions.
The Application – Gerges and his related companies brought an application seeking orders (i) appointing an inspector under ss. 161 or 248 of the Business Corporations Act, RSO 1990, c B.16, to investigate and report on the business and financial affairs of Seva and Eglinton; (ii) requiring the costs of the investigation to be borne by Vora; and (iii) granting leave under s. 246 of the Business Corporations Act to prosecute actions on behalf of Seva, Eglinton, and Woodbine. The respondents to the application were Vora and his related companies (collectively referred to as “Vora” in this case note).
The court granted the inspection order, finding that Gerges had met the low bar of a prima facie case of oppression. The costs of the investigation were to be borne by Seva and Eglinton, subject to further consideration on the final merits determination.
With respect to Gerges’ request for leave to commence derivative actions, Vora argued that the leave request should be dismissed under ss. 6 and 7(1) of the Arbitration Act, 1991. Section 6 sets out the purposes for which a court may intervene in matters governed by the Arbitration Act, 1991. Section 7(1) provides that “If a party to an arbitration agreement commences a proceeding in respect of a matter to be submitted to arbitration under the agreement, the court in which the proceeding is commenced shall, on the motion of another party to the arbitration agreement, stay the proceeding.”
Vora did not bring a motion seeking a stay of the application, as contemplated by s. 7(1). Instead, he participated in the application, including filing responding material, participating in a case conference, and participating in cross-examinations. He only raised the argument on this issue in his responding factum, taking the position that the arbitration agreements in the Seva and Eglinton shareholder agreements applied to the relief sought to be pursued in the derivative actions in respect of Seva and Eglinton.
The court addressed this position by applying the law that would apply had Vora brought a motion pursuant to s. 7(1) of the Arbitration Act, 1991. The court cited Peace River Hydro Partners v Petrowest Corp., 2022 SCC 41 (“Peace River”), later followed in Wasylyk v Lyft, 2024 ONSC 664, for the four technical requirements for a stay of court proceedings in favour of arbitration:
- an arbitration agreement exists;
- a party to the arbitration agreement has commenced litigation;
- the court proceedings are within the scope of the arbitration agreement; and
- the party applying for a stay of the court proceedings has not taken a step in the proceeding.
There was no dispute that the first two requirements were met here. However, Gerges argued that neither the third nor fourth requirement was met:
- The proposed derivative actions were not within the scope of the arbitration agreements because they applied only to disputes between shareholders, not to disputes brought on behalf of the companies or disputes brought against parties other than the shareholders.
- Vora had taken steps in the application. He was aware of the arbitration agreements at the outset of the application, as they were referenced in the notice of application, but he participated in the litigation rather than bringing a motion for a stay of the relevant relief.
Vora submitted that, pursuant to the competence-competence principle, an arbitrator should be allowed to rule on their own jurisdiction at first instance, including whether non-parties should be part of the arbitration proceeding. The court acknowledged that this might be correct, but it was not material because the technical requirements referred to in Peace River must be met first, before a court is open to grant a stay.
On the evidentiary record, those technical requirements were not satisfied. Therefore, the arbitration agreements were no basis to dismiss Gerges’ leave request.
Having found no impediment in the arbitration agreements, the court proceeded to consider whether it was appropriate to grant leave to bring a derivative action pursuant to the statutory requirements set out in ss. 245 and 246 of the Business Corporations Act. The court held that the proposed actions were in the best interests of Seva, Eglinton, and Woodbine, and granted leave for Gerges to commence the proposed derivative actions.
Contributor’s Notes:
This case is an interesting addition to the growing body of case law interpreting the Peace River decision, for a couple of reasons.
First is the context in which the Peace River principles were applied in this case. Typically, applications of the principles governing stays of proceedings in favour of arbitration arise in the context of stay motions focused on seeking that relief. Here, the principles were applied on an application seeking leave to commence a derivative action. The respondents were not seeking to stay the present proceeding; they effectively were trying to prevent the proposed proceeding for which leave was sought, before it could even be authorized or commenced. In other words, the respondents used the stay provision in the Arbitration Act, 1991, defensively rather than offensively. Arguably, the proper forum for the respondents’ concerns about arbitral jurisdiction was a stay motion brought in the context of the derivative action once commenced. Instead, it seems the court was willing to apply the Arbitration Act, 1991 stay principles even beyond the strict confines of an application or motion brought pursuant to the Arbitration Act, 1991, and effectively make a preliminary determination of whether a proposed action should or should not be stayed in favour of arbitration.
Second, this case exemplifies an apparent trend of Ontario courts giving significant procedural leeway to parties in arbitration-related matters. In another Arbitration Matters case note earlier this year, I covered the Ontario Court of Appeal’s decision in Toronto Standard Condominium Corporation No. 2299 v Distillery SE Development Corp., 2024 ONCA 712 (“TSCC No. 2299”) (Ontario – Appeal prohibition applies beyond limits of arbitral appointment applications – #889 – Arbitration Matters), where the court considered an application to appoint an arbitrator as having been brought under s. 10 of the Arbitration Act, 1991, despite that the application was brought under s. 6, the general provision that allows for court intervention in arbitrations, and did not refer to s. 10. Nor did the underlying motion decision. Similarly, in this case, the court applied the legal principles that would have applied had the respondents brought a stay motion, despite that they did not do so. The courts in both cases could (and should?) have held parties to the strict terms of the Arbitration Act, 1991, and required them to act in accordance with the express procedural requirements of the statute. Instead, they took a broader approach to the relevant statutory provisions. Here, that approach gave the respondents the opportunity to make an argument against the propriety of leave based on the principles in Peace River, when arguably that position should not have been entertained at all in the absence of a stay motion.
Another commonality between this case and TSCC No. 2299 is the use of s. 6 of the Arbitration, Act, 1991. As noted above, s. 6 sets out the purposes for which a court may intervene in matters governed by the Arbitration Act, 1991. It is, in my view, an interpretive aid for other provisions of the statute, rather than an independent source of jurisdiction for the court to grant relief (which is consistent with TSCC No. 2299). Nevertheless, in both cases, parties relied on s. 6 in support of their positions on matters that are governed by more specific sections of the statute – s. 10 in TSCC No. 2299, and s. 7(1) in this case. Parties increasingly seem to be citing s. 6 of the Arbitration Act, 1991 as if it’s a basket clause, when it actually should be construed narrowly to appropriately limit the court’s role in arbitrations.
For further discussion of Peace River, see the following previous blog posts: Supreme Court – Peace River v Petrowest Part 1: Separability Clarified? – #682 – Arbitration Matters; Supreme Court – Peace River v Petrowest Part 2: no conflict between arbitration, bankruptcy law – #687 – Arbitration Matters.