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CASE #011E – Pezo v. Pezo et al
October 21, 2021

Ontario – Court stays OBCA oppression remedy proceeding in favour of mandatory arbitration clause but directs majority shareholder and the corporation to produce documents in the arbitration pursuant to s.6(1) of the Arbitration Act, 1991. Court also directs majority shareholder and corporation to pay the minority shareholder interim disbursements for the arbitration.

CASE #011E
Pezo v. Pezo et al,
2021 ONSC 5406 (CanLII)
Kraft J. August 6, 2021

This case takes a deep dive into several issues which arise in shareholder disputes, particularly where there are parallel family law proceedings and a shareholders’ agreement with an arbitration clause.

Here, there was a motion to stay an OBCA oppression remedy action under s. 7(1) of the Arbitration Act, 1991 in favour of arbitration pursuant to a mandatory arbitration clause in the shareholder’s agreement. There was also 1) a motion to stay part of the court proceedings pending the result of the arbitration, 2) a motion for documentary disclosure in the arbitration; and 3) a request for directions about the order in which the corporate and family law matters should be heard.

E and, K, who were spouses, and K’s friend, H, were shareholders in an OBCA corporation (“SGM Inc.”), that operated a restaurant business. E and K owned 50% and H owned the remaining 50%. The parties signed a shareholders’ agreement (“the SA”), which included a mandatory arbitration clause requiring that any dispute associated with the SA be resolved by arbitration. The SA also contained a buy-sell provision.

E and K separated and were involved in a family law proceeding. After their separation, E and K, received by a Buy-Sell Notice from H. K, the husband, accepted H’s Buy-Sell Offer but E did not, nor did she offer to buy K’s shares. She was therefore deemed to have accepted the offer and required to sell her shares. E refused to complete the transaction and commenced an action claiming relief from oppression, mismanagement and wrongful dismissal against K, H and SGM Inc.

E submitted that the arbitration clause in the SA was invalid as it contravened the Family Arbitration Regulation under the Arbitration Act, 1991, which states that every family arbitration agreement shall contain standard provisions that identifies the law to be applied, rights of appeal, a certificate of independent legal advice and screening for power imbalances and domestic violence by someone other than the arbitrator.

Stay of Court Proceeding

In comprehensive reasons, Justice Melanie Kraft stayed E’s action and held that her claims proceed by way of arbitration under the SA [para. 102]. The Court referred to the test for granting a stay of an action in Haas v. Gunasekaram, 2016 ONCA 744 at para 17 (“Haas”), which directed court to ask five questions:

  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 arguable fall within the scope of the arbitration agreement?
  5. Are there grounds on which the court should refuse to stay the action?

In the present case, all of these questions were answered in favour of staying the action. [para. 49]. The court held that none of the exceptions in s. 7(2) of the Arbitration Act were applicable [para. 50].

The Court considered s.7(5) of the Arbitration Act, which allows the court to partially stay a proceeding if two pre-conditions are met, namely, that 1) the arbitration agreement deals with only some of the matters raised in the proceeding and 2) it is reasonable to separate the matters under the agreement from the matters in the Court proceeding.

The Court held [paras. 52-56] that s. 7(5) confers a discretion while s. 7(1) requires the court to stay the proceeding unless the conditions in s. 7(2) apply. The Court held that the result of the arbitration proceedings could affect financial matters in the family proceeding. The family proceeding was stayed pending the completion of the corporate arbitration. [paras. 51-52]

Motion for Documentary Disclosure

Justice Kraft also dealt with E’s motion for documentary disclosure from H under the Family Law Rules in the context of the family law proceeding. [paras 64 et seq.]  The court held that s. 6(1) of the Arbitration Act allows the Court to intervene to assist the conduct of arbitrations and directed that K deliver documents concerning the business to E for the purpose of the arbitration. [paras. 74-75]

Motion for Interim Disbursements under OBCA, s.249(4)

Finally, the Court also addressed E’s motion for interim disbursements under s.249(4) of the OBCA [paras. 81 et seq.] and analyzed the body of caselaw on that topic.

The Court held that:

  1. E’s court proceeding was stayed in favour of arbitration and directions were provided to appoint an arbitrator and move the arbitration forward;
  2. The family proceeding between E and K was stayed until the corporate arbitration was completed because matters determined in the corporate arbitration would affect issues in the family proceeding;
  3. H and SGM Inc. were directed to produce the documents E requested for the arbitration;
  4. H and SGM Inc. were directed to pay E interim disbursements of $53,995 for the arbitration.

Editor’s Note

This case is important because it demonstrates that even where the Court holds that an action should be stayed in favour of arbitration, the Court still has jurisdiction to make procedural orders which affect the conduct of the arbitration.

In this case, Justice Kraft recognized that the court proceeding could not proceed because of the mandatory arbitration clause in the shareholder’s agreement and that a stay was necessary under s.7(1) of the Arbitration Act.

Having stayed the action, one might expect the Court to say, “it’s now up to the arbitrator to give any interim relief”. Reading between the lines, we see that the Court was sympathetic to the plight of E, the minority shareholder and did not wish to dismiss all of her claims. The result suggests the Court considered that E was being bullied by H, who was in control of the business and likely in a better financial position than E.

The Court found its jurisdiction to direct H, the majority shareholder, to make financial disclosure, not in the Family Law Rules, as E argued, but in s. 6(1) of the Arbitration Act, which permits limited intervention by the court in arbitrations, inter alia, “to prevent unequal or unfair treatment of parties to arbitration agreements.” (although the court does not specify which item of s.6(1) she relied on.) The Court does not address the body case law under s. 6(1) but refers to the requirements for full and frank disclosure in family proceedings. [paras. 70-74].

At the time of these motions, the arbitration was not yet organized. An arbitrator had not been appointed and pleadings were not exchanged. By making these disclosure orders, the Court exercised its authority to move the arbitration forward.

Justice Kraft’s decision to award interim disbursements of $53,995 under s.249(4) of the OBCA [paras. 81-101] addresses the applicable principles in such cases and refers to the jurisprudence, including the leading case of Alles v. Maurice. However, the Court does not discuss, whether, having stayed the oppression action, the Court still has jurisdiction to grant statutory interim relief in the arbitration.

Specifically, Kraft J. does not state whether her decision to award interim disbursements is also an exercise of the Court’s jurisdiction under s. 6(1) of the Arbitration Act. In para. 70, Justice Kraft limits the application of s. 6(1) to the financial disclosure motion. It could be argued that directing the respondents in the arbitration to pay interim disbursements under OBCA s. 249(4) is a “bridge too far” under the Court’s limited intervention powers under s. 6(1).

It might have been more consistent with the tenor of the Arbitration Act for the Court to direct E to bring her motion before the arbitrator but Kraft J. was clearly empathetic to E’s circumstances.

About Us

Arbitration & Business Cases is a blog created by Igor Ellyn and Robin Dodokin in September 2021. Our intention is to provide timely, concise summaries and commentary of Ontario and Canadian case law on arbitration and business matters.

Igor Ellyn,
QC, CS, FCIArb.

iellyn@ellynlaw.com
www.ellynadr.com
416-540-6611
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Robin Dodokin,
FCIArb., Q.Arb., LL.M, Q.Med.

robin@dodokinlaw.com
www.dodokinlaw.com
416-300-6515