Ontario – court grants partial summary judgment instead of stay and conducts mini-trial for balance of claim – #020

In Arkell v. Brightpath, 2017 ONSC 6612,  Mr. Justice Michael J. Emery combined two of Ontario’s procedural tools – section 7(2)(5) of the Arbitration Act, 1991, SO 1991, c 17  and Rule 20.01 summary judgment of Rules of Civil Procedure, RRO 1990, Reg 194 – to craft solutions to the parties’ disputes. Wielding both, he refused Defendant’s application to stay, agreed with Plaintiffs that both their claims were suitable for summary judgment consideration in preference to arbitration, granted one of Plaintiffs’ claims and kept jurisdiction over Plaintiffs’ other claim for the purpose of a mini-trial on the merits.  

The disputes stemmed from a June 21, 2016 Share Purchase Agreement (“SPA”) by which Defendant, Brightpath Kids Corp. (‘Brightpath”), purchased all the shares from Plaintiffs, Lee-Anne Arkell, The Arkell Family Trust, 2268987 Ontario Inc. and Paigus Investments Pty Ltd (“Arkell”), in two corporations which operated daycare centres in Ontario.  The purchase price was $21,993,150.00.  The transaction provided for two escrow amounts, each deposited with a law firm serving as escrow agent: 

(a) $1.75 million (“Revenue Escrow Amount”).  Out of this amount, Brightpath and Arkell agreed that $875,000.00 would be paid out on October 31, 2016 if an agreed upon adjusted revenue milestone was met.  That first payment is referred to as “tranche one”; and, 

(b) $1 million (“Holdback Escrow Amount”). Out of this amount, Brightpath and Arkell agreed that $875,000.00 would be paid out on January 31, 2017 if a second agreed upon adjusted revenue milestone was met.  That second payment was referred to as “tranche two”. 

To trigger either payment, Brightpath had only to issue a written notice to the escrow agent provided, as the parties had agreed, that it was “satisfied” that the milestones had been met.  In both cases, Brightpath refused to issue the notice.  It invoked an equitable set off for tranche one and disputed the revenue milestone for tranche two. 

The full purchase price had been paid, less a $50,000.00 deposit and the two escrow amounts noted above.  Brightpath refused to issue the first notice to the escrow agent and Arkell sued on December 15, 2016 to obtain either payment of the first tranche or an order obliging Brightpath to issue the notice. Brightpath served a Notice of Arbitration on January 12, 2017. Arkell later amended its claim to include the same relief for the second tranche once the January 31, 2017 date passed without Brightpath issuing the notice to the escrow agent. 

The parties each conceded facts which helped Emery J. navigate the competing applications to either stay or elect to retain jurisdiction in favour of summary judgment.   

Brightpath applied for a stay under section 7(1).  It admitted that the revenue milestone for tranche one had been met. In its Notice of Arbitration, Brightpath only claimed for indemnification against the Holdback Escrow Amount and for legal and equitable set-off against the Revenue Escrow Amount.  It however did not seek arbitration to determine if tranche one was, in fact, owing as of October 31, 2016.   

Arkell applied for summary judgment.  They did not argue that the subject matter of their litigation and the relief they claimed was not a “dispute” within the terms of their arbitration undertaking.  Rather, they did argue that Emery J. should refuse to stay the litigation because their claims were a matter proper for summary judgment.  

Emery J. proceeded in two steps. His analysis serves as a clear guide for other parties applying for either a stay under section 7(1) or summary judgment access under section 7(2)(5).  First, he decided if either dispute was within the narrow exception of section 7(2)(5)’s summary judgment.  If so, he then considered whether or not to grant summary judgment on the facts available to him. 

Emery J. cautioned that his discretion under section 7(2) is a “narrow“.   Referring to comments by the Ontario Court of Appeal in MDG Kingston Inc. v. MDG Computers Canada Inc., 2008 ONCA 656, he observed that access to summary judgment is a one of the few “limited exceptions to the mandatory requirements that courts enforce arbitration clauses“, those exceptions qualifying as when it would be “unfair or impractical to refer the matter to arbitration.” 

Emery J. noted that Arkell as Plaintiffs bore the burden of satisfying the court that the section 7(2)(5) exception applied and to exercise his “narrow discretion” in Arkell’s favour.  Emery J.’s review of a sampling of the case law on access to section 7(2) excerpted variations on how exceptional it would be to not enforce the parties’ contractual undertaking to arbitrate: “limited exception”, “clear and definitive“, “sparingly exercised“, “only exercised in the simplest and clearest of cases“, “no basis whatsoever for disputing the claim“. 

For summary judgment under Rule 20, Emery J. relied on Hino Motors Canada v. Kell, 2010 ONSC 1329 for the evidentiary burden facing both parties, namely that each had to “put its best food forward.”  

For tranche one, Brightpath admitted in affidavit material that revenue milestone had been met for tranche one.  It disputed Arkell’s entitlement because Brightpath sought to offset amounts it claimed were owing to it by Arkell and which Brightpath claimed exceeded tranche one.  Emery J. applied the principles established by the Supreme Court of Canada in Holt v. Telford, [1987] 2 SCR 193, 1987 CanLII 18 for a claim or defence of equitable set-off.  He determined that, based on the evidence provided, Brightpath’s claim was not so clearly connected with and did not go to the root of Arkell’s tranche one claim.  In addition, Brightpath’s set-off stemmed from equity and not from the parties’ contracts.  Emery J. determined that Brightpath was in essence seeking execution before judgment against Arkell, seeking to “preserve an exigible asset to execute against should it be granted an arbitral award.”   

Relying on the Ontario Court of Appeal in Butera v. Chown, Cairns LLP, 2017 ONCA 783, Emery J. noted he had authority to issue a partial summary judgment.  As a result, Emery J. exercised his discretion, “as narrow as that discretion may be” to refuse Brightpath’s motion to stay because Arkell had met their burden under section 7(2)(5): 

[53] I am exercising my discretion, as narrow as that discretion may be, to refuse the Brightpath motion to stay the action. I find on the evidence that the action fits within the limited exception provided by section 7(2)5, and that it would be unfair to refer the plaintiffs’ claims for the release of revenue escrow payments to arbitration: MDG Kingston Inc. Viewed from a dispassionate perspective, this is one of the simplest and clearest of cases where there is no basis on the record to dispute the claim made by the moving party. This finding is subject to the plaintiffs’ burden to prove all allegations of material fact pleaded that would entitle them to judgment. 

He therefore issued partial summary judgment in favour of Arkell for Brightpath to provide the written notice to the escrow agent for the payment of tranche one.   

For tranche two, Brightpath disputed that the milestone had been met and provided Emery J. with sufficient evidence to demonstrate a live dispute over whether certain accounting adjustments were made in accordance with generally accepted accounting principles.  The answer would require expert witness testimony.  Emery J. concluded that there was a genuine issue for a trial with regard to whether the revenue was below or above the milestone agreed upon to trigger tranche two.    

Rather than refer the parties to arbitration, Emery J. instead provided the parties with an elegant solution, relying of the remarks made by the Supreme Court of Canada in Hryniak v. Mauldin, [2014] 1 SCR 87, 2014 SCC 7.  With regard to the dispute over tranche two, Emery J. determined that it was still appropriate for him to remain seized of the dispute over the payment of tranche two.   

I am therefore invoking the enhanced fact finding powers given to a motions judge under Rule 20.04 (2.1), and ordering the parties to give oral evidence at a mini-trial on the terms and directions set out below to exercise those powers. 

He directed that a mini-trial be held before him personally regarding the parties’ rights to those remaining funds held in escrow for tranche two.  (It is not clear if the mini-trial will include Brightpath’s equitable set off or whether that will be arbitrated under Brightpath’s pending Notice of Arbitration)  Emery J. directed the parties to follow a five step list of steps, under Rule 20.05(2) setting out a firm timetable for the mini-trial. 

The result crafted by Emery J. demonstrates a solution to certain procedural delays often associated with parties’ disputing whether to stay in court or go to arbitration.  The opening to section 7(2)(5) and Emery J.’s application of the Rule 20.01 summary judgment principles allowed the parties to obtain a result in a reasonable period of time.  While confidentiality had already been sacrificed by the application to the court (assuming it was part of the parties’ bargain), the result moved the parties forward to an imminent resolution.