ONTARIO – An “Estimate of Fair Market Value” clause of a Shareholders Agreement was held to provide for an arbitration, not a valuation, even though the nominee had to be a chartered accountant. The arbitrator, not the Court, should determine the valuation date. If the parties could not agree on the selection of the arbitrator, the Court will do so.
MacBryce Holdings Inc. et al. v Magnes Partnership et al.
2022 ONSC 321 (CanLII) January 14, 2022
Ontario Superior Court, Justice C. Gilmore
The Shareholders Agreement in this case provided for a process to determine the fair market value (“fmv”) of the shares, if there was a dispute, with the following parameters: para. 8.
- An arbitrator, who shall be a current or former partner of a major national Canadian firm of chartered accountants.
- The arbitrator will review all material documentation including earlier valuation reports.
- The arbitrator will determine the fmv, which will be the purchase price for the shares; and
- The fair market value determined by the arbitrator will be final and binding on the parties.
The issue was whether the process described in the agreement was a valuation or an arbitration. Justice C. Gilmore held that, on the basis of the words used by the parties in the Shareholders’ Agreement, the parties intended that an arbitrator, not a valuator, should determine the fmv: paras. 41-42.
The difference between a valuation and an arbitration is that the latter invokes the requirements and protections of the Ontario Arbitration Act, 1991 (“the Act”) and specifically, the fairness requirements of s. 19. Under s. 3 of the Act, no party can contract out of s. 19. This is to ensure procedural fairness for both sides: para. 44.
Justice Gilmore referred to the SCC decision in Sport Maska Inc. v. Zittrer, 1988 CanLII 68 (SCC), where the Court mentioned the importance of identifying “the precise function the parties intended to entrust to the third party.”: para. 46.
The Court has jurisdiction under s. 6 of the Act to intervene, in limited circumstances, to assist in the conduct of arbitrations. Justice Gilmore held that the Court should assist the parties in selecting the arbitrator but that neither of the nominees was suitable because even the Respondent’s nominee had no experience in insurance brokerage arbitrations.
The Court held that the nominees should provide valuation reports and that the parties should select an arbitrator according to the parameters in the shareholder agreement: para. 56. If the parties could not agree on an arbitrator, Justice Gilmore will assist in the selection in a case conference: para. 58 c.
The Court referred to the Act s. 6, which sets out the limited circumstances in which a Court can intervene and assist in the conduct of an arbitration. In this case, Gilmore J. declined to determine the valuation date as the record was incomplete. The determination of valuation date can be answered by a qualified arbitrator with a complete record, including expert evidence as part of the arbitration: para. 53
As to the arbitration process, the Court held that the parties had agreed to an unrestrictive valuation and that the arbitrator, not the Court should determine any jurisdictional challenges under the “competence –competence“ principle: para.47 and 58 b.
In domestic arbitrations, court intervention in the arbitration process is limited by s.6 of the Act, which provides that “No court should intervene in matters governed by the Act, except for the following purposes, in accordance with this Act:”
The exceptions set out in s. 6 are as follows.
- To assist in the conducting of arbitrations.
- To ensure that arbitrations are conducted in accordance with the arbitration agreements.
- To prevent unequal or unfair treatment of parties to arbitration agreements.
- To enforce awards.
Canadian courts have tended to view arbitration as an autonomous process where commercial parties have agreed in a contract to resolve their disputes through arbitration rather than the courts. Arbitration agreements are generally upheld unless there are public policy or legislative provisions such as consumer protection, prohibiting same or the agreement is unconscionable, unfair, or illegal. See Seidel v. Telus Communications Inc, 2011 SCC 15 at paras.23 and 50.
In Heller v. Uber Technologies Inc., 2019 ONCA 1, the Ontario Court of Appeal found an arbitration clause in a standard form contract invalid for unconscionability. That clause required Uber drivers earning $400-600 weekly to arbitrate disputes in the Netherlands at a cost of US$14,500 exclusive of related expenses. Writing for the Court, Nordheimer J.A. concluded that the clause represented a “substantially improvident or unfair bargain,” with the presence of a “significant inequality of bargaining power” (para. 68).
The Ontario Court of Appeal held that the arbitration clause, in the context of the agreement and its circumstances, was unconscionable and therefore invalid. The SCC agreed with the court of appeal and found the arbitration clause unconscionable.(2020 SCC 16: paras. 4, 72 and 95. The SCC also reviewed the competence-competence principle and that any challenge to an arbitrator’s jurisdiction should be referred at first instance to the arbitrator unless the challenge is a delaying tactic or would unduly impair the conduct of the arbitration: paras. 32-33, 39-43.