BRITISH COLUMBIA – Arbitration – Application for Stay of Court Proceedings – Whether the claims of non-signatories to shareholder agreements were subject to the arbitration clause in those agreements is a question of mixed fact and law that cannot be answered based on a superficial review of the record. It is a question to be determined by the arbitrator in the first instance.

3-Sigma Consulting Inc. v. Ostara Nutrient
Recovery Technologies Inc., 2023 BCSC 100
2023 BCSC 100 (January 23, 2023)
Supreme Court of British Columbia (Matthews J.)

The defendant corporation and its majority shareholders, directors, and senior management sought an order staying the plaintiffs’ claims that they had deprived them of any value in their shares in the corporation on the basis that the claims were caught by the mandatory arbitration clause in Ostara’s shareholder agreement. (para.1) The plaintiffs argued that not all the parties signed a shareholder agreement containing an arbitration clause, that their claims were in tort and thus, did not “arise under”, nor were they “in connection with”, the shareholder agreement at issue. (para. 2)

Citing Peace River Hydro Partners v. Petrowest Corp., 2022 SCC 41 at para. 39, Justice Matthews held that “competence-competence” is the “guiding principle” of an application under s. 7 of the Arbitration Act, S.B.C. 2020, c. 2 (the “Act”). That principle provides that, in the first instance, the arbitrator is to resolve jurisdictional issues relating to the scope of the arbitration agreement. (para. 7)

The Court found that the central issue was whether there was an arguable case that would require a mandatory stay of proceedings under s. 7(1) of the Act. To determine that issue, the Court applied the following three-part test established by the BC Court of Appeal in Prince George (City) v. A.L. Sims & Sons Ltd. and McElhanney Engineering Services Ltd., 1995 CanLII 2487, with a modification to the third question to take into account the updated version of the Act:

1. a) A party to an arbitration agreement has commenced legal proceedings against another party to the agreement;
2. b) The legal proceedings are in respect of a matter agreed to be submitted to arbitration; and
3. c) The application must be brought before the applicant takes a step in the proceeding, which requires that an application for a stay be made before the applicant responds to the substance of the dispute. ( 12-13)

The Court noted that “jurisdictional challenges often arise out of one or more of the following circumstances: the party seeking to avoid the stay argues that the arbitration agreement does not cover the subject matter of the legal proceeding; the party seeking to avoid arbitration establishes that the arbitration agreement is void, inoperative, or incapable of being performed (s. 7(2)); or there is no real prospect that a bona fide jurisdictional challenge will be resolved by an arbitrator.” (para. 14)

If one of the above circumstances arises, a court must then consider whether the issue is a pure question of fact, a pure question of law, or a question of mixed fact and law. (para. 15) Pure questions of fact are generally referred to an arbitrator. However, where there is an accessibility issue to arbitration, such that the jurisdiction issue may never be decided, the court may consider a pure question of fact. (para. 16)

A pure question of law is properly heard by the court. (para. 17) A court may only decide a mixed question of fact and law where it can do so with a “superficial regard to the record”. (para. 18)

The BC Supreme Court held that whether the dispute falls within the scope of the agreement is usually a question of mixed fact and law, not one of pure law, because “[i]t requires an analysis of the nature of the dispute and an interpretation of the arbitration clause, considered with the terms of the contract as a whole in their factual context.” (para. 19) If more than a superficial review of the record is needed to determine whether the dispute falls within the scope of the arbitration agreement, the court must leave the issue for the arbitrator to decide on a thorough review of the evidence. (para. 19)

The Court followed the Supreme Court of Canada’s decision in Telus Communications Inc. v. Wellman, 2019 SCC 19, holding that: “The legislative purpose of giving effect to the contractual agreements where the contract was valid while not interfering with claims not bound by an arbitration clause was only served if the stay was restricted to those parties bound by an arbitration clause, notwithstanding the efficiency of having the claims resolved in the same proceeding.” (para. 28) In light of that, the Court had to decide whether the claims of the non-signatories to the Ostara shareholder agreements were subject to the arbitration clause in those agreements. (para. 29)

The Court determined that this was an issue of mixed fact and law. (para. 30) The legal issue of “whether non-signatories to the shareholders agreement are nevertheless bound by them in certain circumstances” could only be determined through factual context, which required more than a superficial review of the record. (para. 31) The Court concluded that there was an arguable case on this issue that ought to be determined in the first instance by an arbitrator. (para. 34)

On the issue of whether the claims fell within the arbitration agreement, the Court held that use of the word “otherwise” in the arbitration clause broadened the clause to include “claims arising under or in connection with the agreement in addition to claims that are a ‘disagreement involving the interpretation or enforcement of any provision of this Agreement or breach thereof.’” (para. 49)

The plaintiffs argued that they did not allege breaches of the shareholders agreements and that the shareholders agreements were irrelevant to the common law causes of action relating to breach of directors’ and officers’ duties upon which they relied. (para. 51)

The defendants focused on the words “or in connection with” in their argument that the arbitration clause should be very broadly interpreted. (para. 56)

The Court found that it could not resolve the issue on a superficial review of the record. (para. 61) It concluded that “the evolution of the law since Kaverit [Kaverit Steel & Crane Ltd. v. Kone Corporation, 1992 ABCA 7, leave to appeal ref’d [1992] S.C.C.A. No. 117] supports referring to arbitration those disputes, where an agreement that includes an arbitration clause, has a nexus to the dispute in the sense of being relevant, even if the relevance does not rise to the level of being an element of the claim or defence.” (para. 62) The Court therefore stayed the court proceeding so that an arbitral tribunal may address the jurisdiction issue. (para. 65)

In coming to its decision, the Court also observed that while courts are concerned with the open court concept in court proceedings, “an agreement to private dispute resolution does not offend the open court principle.” (para. 64)