Bouchan et al. v. Slipacoff et al.
[Indexed as: Bouchan v. Slipacoff]
94 O.R. (3d) 741
Ontario Superior Court of Justice,
O’Marra J.
January 15, 2009
Arbitration — Arbitration agreement — Plaintiff purchasing interest in dental practice and entering into shareholders’ agreement with defendants — Plaintiff forced by ill health to leave practice — Plaintiff rejecting defendant’s offer for his shares based on improvident consideration and bringing action for payment of outstanding bonus and dividend payments, salary and order that defendants purchase his shares pursuant to s. 248 of Business Corporations Act — Defendants moving to stay [page742] proceedings pursuant to s. 7 of Arbitration Act on basis of arbitration clause in shareholders’ agreement — Motion dismissed — Claim for outstanding bonuses, dividends and salary payments falling within arbitration clause but oppression claim beyond scope of arbitration clause — Defendants waiving right to insist on arbitration when they took significant steps in action — Arbitration Act, 1991, S.O. 1991, c. 17, s. 7 — Business Corporations Act, R.S.O. 1990, c. B.16, s. 248.
The plaintiff purchased an interest in two corporations which operated a dental practice and entered into a shareholders’ agreement with the defendants. He was later diagnosed with a major depressive disorder and advised by his doctor to cease practice. The defendants offered to pay him an amount for his shares which was less than half of what he paid for them. The plaintiff rejected that offer based on what he characterized as the improvident consideration and left the practice. He brought an action seeking payment of outstanding bonuses, dividends and salary and an order that the defendants purchase his shares pursuant to s. 248 of the Business Corporations Act. The defendants moved to stay the proceedings pursuant to s. 7 of the Arbitration Act on the basis that the claims fell within an arbitration clause in the shareholders’ agreement.
Held, the motion should be dismissed.
The arbitration clause provided for arbitration of any dispute or question between the parties concerning the interpretation of the shareholders’ agreement or any part thereof. The plaintiff’s claim for outstanding bonuses, dividends and salary payments were matters of dispute between the parties concerning the interpretation of the shareholders’ agreement, and as such fell within the arbitration clause. However, the oppression claim based on the improvident consideration offered by the majority shareholder at a time of disability was not a question of interpretation and was beyond the scope of the arbitration clause. It would not be reasonable to grant a partial stay, as the parties should not be subjected to a multiplicity of proceedings. Even if the claim of oppression did not fall outside the arbitration clause, s. 7(2) of the Arbitration Act applied. There was undue delay in the bringing of the motion. The defendants took a number of significant steps in the action, including filing a statement of defence and counterclaim, before raising the issue of the arbitration clause. In doing so, they waived their right to insist that arbitration apply.
Cases referred to
ABN Amro Bank of Canada v. Krupp MaK Maschinenbau GmbH (1994), 21 O.R. (3d) 511, [1994] O.J. No. 3044, 52 A.C.W.S. (3d) 480, 1994 CarswellOnt 1813 (Gen. Div.); Canadian National Railway Co. v. Lovat Tunnel Equipment Inc., [1999] O.J. No. 2498, 174 D.L.R. (4th) 385, 122 O.A.C. 171, 37 C.P.C. (4th) 13, 89 A.C.W.S. (3d) 486 (C.A.); Dulce Holdings Inc. v. Air Canada (1992), 12 O.R. (3d) 131, [1992] O.J. No. 2382, 98 D.L.R. (4th) 509, 8 B.L.R. (2d) 294, 13 C.P.C. (3d) 72, 36 A.C.W.S. (3d) 724 (Gen. Div.); Greenfield Ethanol Inc. v. Suncor Energy Products Inc., [2007] O.J. No. 4660, 2007 ONCA 823, 162 A.C.W.S. (3d) 533; Kightley v. Beneteau, [1999] O.J. No. 1892, 88 A.C.W.S. (3d) 528 (S.C.J.); Lansens v. Onbelay Automotive Coatings Corp., [2006] O.J. No. 5470, 32 B.L.R. (4th) 113, 156 A.C.W.S. (3d) 598, 2006 CarswellOnt 8814 (S.C.J.); Mantini v. Smith Lyons LLP (2003), 64 O.R. (3d) 505, [2003] O.J. No. 1831, 228 D.L.R. (4th) 214, 174 O.A.C. 138, 34 B.L.R. (3d) 1, 123 A.C.W.S. (3d) 219 (C.A.); Onex Corp. v. Ball Corp., [1994] O.J. No. 98, 12 B.L.R. (2d) 151, 45 A.C.W.S. (3d) 226 (Gen. Div.); Ontario Hydro v. Denison Mines Ltd., [1992] O.J. No. 2948 (Gen. Div.); Woolcock v. Bushert, [2004] O.J. No. 4498, 246 D.L.R. (4th) 139, 192 O.A.C. 16, 50 B.L.R. (3d) 85, 36 C.C.E.L. (3d) 211, 3 C.P.C. (6th) 25, 134 A.C.W.S. (3d) 756 (C.A.) [page743]
Statutes referred to
Arbitration Act, 1991, S.O. 1991, c. 17, s. 7, (1), (2), (5)
Business Corporations Act, R.S.O. 1990, c. B.16, s. 248
MOTION for a stay of proceedings.
Martine N. Morin, for plaintiff. Christian Jannetta, for defendants.
[1] O’MARRA J.: — The defendants in this action have brought a motion to stay the proceedings pursuant to s. 7 of the Arbitration Act, 1991, S.O. 1991, c. 17, as amended, on the grounds that the claims asserted by the plaintiffs are matters that should be submitted to arbitration in accordance with their shareholder agreements governing the relationship between the parties. On December 9, 2008, at the conclusion of the hearing, I ruled that the motion to stay the proceedings was dismissed in order to permit the proceedings to continue apace with written reasons to follow.
Facts
[2] Dr. Mikhail Bouchan and Dr. Leonard Slipacoff are both dentists licensed to practice dentistry in the Province of Ontario. The practice of dentistry with which they are both associated is carried on in Sarnia, Ontario.
[3] On August 31, 2006, Dr. Bouchan and his numbered corporation, 4098528 Canada Inc. purchased 25 per cent interest in L. Slipacoff Dentistry Corporation, now Slipacoff and Bouchan Professional Corporation (“Professional Corporation”) for a purchase price of $418,882.50. Further, he purchased 25 per cent interest in a dental hygiene practice, now Slipacoff and Bouchan Dental Services Inc. (“Dental Services”) for a purchase price of $139,627.50. Prior to these transactions Dr. Slipacoff, owned all of the shares in the Professional Corporation and his wife, Cindy Slipacoff, owned all of the shares in the Dental Services.
[4] In order to finance the purchase of his interest in the Professional Corporation and Dental Services, the plaintiff secured two bank loans in the amount of $600,000 approximately. The loans were guaranteed by the Professional Corporation through a general security agreement.
[5] On September 1, 2006, a unanimous shareholder agreement was entered into between all of the plaintiffs and defendants governing the Professional Corporation as well as another unanimous shareholder agreement with respect to Dental Services. These unanimous shareholder agreements set out the [page744] manner by which the affairs of the two corporations would be conducted.
[6] Under the shareholder agreements, the plaintiffs were to receive 45 per cent of Dr. Bouchan’s annual billings, together with bonuses and/or dividends from the net earnings of the Professional Corporation in each fiscal year. In addition, Dr. Bouchan entered into an employment agreement with the Professional Corporation to receive an annual salary.
[7] In March 2008, Dr. Bouchan was diagnosed with a major depressive disorder and advised by his physician to immediately cease practice. The factual circumstances at this point become somewhat unclear and conflicting. The plaintiff Dr. Bouchan asserts that on informing Dr. Slipacoff of his medical situation, Dr. Slipacoff advised him that it would be best if he left the practice and it would pay Dr. Bouchan $200,000 for his shares in the two corporations. The amount represented less than half of what Dr. Bouchan had paid for his interest in the corporations in 2006. He refused what he characterized as “the improvident consideration for his shares”. He left the practice due to his health.
[8] The defendants assert that after Dr. Bouchan advised he was unable to practice, he sold his home in Sarnia and advised the defendants that he was “certain that [he] should settle in Toronto”. Further, he failed to confirm that he was returning to his employment with the Professional Corporation. The bank loans secured by the plaintiffs for the share purchases went into default.
[9] It is the defendant’s claim that the plaintiff Dr. Bouchan failed to comply with the provision of the Professional Corporation shareholder agreement, art. 10.3, which stipulated that in the event a shareholder became unable to work because of a disability, including a mental illness, the disabled shareholder would be personally responsible to contribute his proportionate share of the Professional Corporation expenses and to provide a locum replacement at his own expense. The defendants state that Dr. Bouchan has failed to do either since his departure from the practice.
[10] There is agreement that following his departure on or about March 10, 2008, the defendants stopped all payments of dividends and salary to Dr. Bouchan.
Pleadings and Proceedings to Date
[11] The following steps taken in this proceeding to date are as follows: [page745]
(1)On June 10, 2008, the plaintiffs issued a statement of claim seeking payment of the outstanding bonus and dividend payments, salary, punitive damages, and an order that the defendants purchase the plaintiff’s shares in the corporations pursuant to s. 248 of the Business
Corporations Act, R.S.O. 1990, c. B.16, as amended.
(2)On July 16, 2008, the defendants filed a statement of defence and a counterclaim seeking damages in the amount of $2 million from the plaintiffs.
(3) On August 15, 2008, the plaintiffs issued a reply and defence to the counterclaim.
(4)On August 18, 2008, the plaintiffs made a request for particulars.
(5)On October 21, 2006, the defendants responded to the request for particulars.
(6)On October 22, the defendants served a request to admit (66 requests) in response to the plaintiffs’ correspondence requesting examination for discovery dates in November 2008.
(7)On October 27, 2008, the plaintiffs provided an affidavit of documents.
(8)On November 5, 2008, counsel for the defendants in correspondence proposed that the matter proceed by way of arbitration.
(9)On November 20, 2008, the plaintiffs served notice of examination.
(10) The plaintiff’s counsel, by letter dated November 12, 2008 sent by facsimile on November 20, 2008, refused arbitration.
Position of the Parties
[12] The defendant’s position is that this is a shareholders’ dispute and that it should be dealt with by arbitration as provided for in art. 15.01 of the unanimous shareholder agreements for both the Professional Corporation and Dental Services. Both agreements contain the identical provision:
Article 15.01:
At any time should any dispute or question arise between the parties herein concerning the interpretation of this agreement or any part thereof which cannot be resolved by agreement among the parties, then such dispute or [page746] question shall, except as otherwise expressly provided herein, be submitted to a single arbitrator by one party giving written notice submitted to a single arbitrator and to the other parties. The notice so given by one party submitting the dispute or question to arbitration shall state the name of an arbitrator and the other parties shall consent to the arbitrator so named or propose the name of another arbitrator by giving written notice to the first party within forty-eight (48) hours of receipt of notice by him. If the parties receiving the initial notice consent, the arbitrator named in the initial notice shall act as the arbitrator. If the parties cannot agree upon the arbitrator within five (5) clear days of the giving of the initial notice, any party may apply to a court of competent jurisdiction by summary application for the appointment of an arbitrator.
[13] The defendants also argue that the employment agreement entered into by the plaintiff is subject to the arbitration clause as a result of the definition of “agreement” in art. 1.1 of the Professional Corporation Agreement. “Agreement” includes “all attached schedules and any agreement or schedule supplementing or amending this agreement”. The defendants contend that it was the intention of the parties to have all disputes arising from the shareholder agreements dealt with by way of arbitration.
[14] It is the position of the plaintiff that the arbitration clauses deal solely with the interpretation of the respective shareholder agreements and that there is no agreement to arbitrate the subject matter of the plaintiffs’ claims. Further, the plaintiffs argue that the main claim in the action is for relief from oppression, and as such lies outside of the agreements to arbitrate.
Arbitration Act, Section 7
[15] Under s. 7(1) of the Arbitration Act, 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.
[16] Under s. 7(2), the court may refuse to stay the proceedings in any of the following cases:
1. A party entered into the arbitration agreement while under legal incapacity.
2. The arbitration agreement is invalid.
3. The subject matter of the dispute is not capable of being the subject of arbitration under Ontario law.
4. The motion was brought with undue delay.
5. The matter is a proper one for default or summary judgment. [page747]
[17] Section 7(1) imposes a mandatory stay of proceedings if the matter at issue in the proceedings comes within the arbitration provision. However, the court may still refuse to stay as mandated by s. 7(1) in the limited circumstances enumerated in s. 7(2).
[18] In Deluce Holdings Inc. v. Air Canada (1992), 12 O.R. (3d) 131, [1992] O.J. No. 2382 (Gen. Div.) (“Commercial List”), Justice Blair observed that the mandatory stay with limited exceptions represents a policy shift where parties have agreed to submit their dispute to arbitration. At para. 60, he states the following:
This legislation represents a shift in policy towards the resolution of arbitrable disputes outside of court proceedings. Whereas prior to the enactment of this legislation the courts in Ontario had a broad discretion whether or not to stay a court action, the focus has now been reversed: the court must stay the court proceedings and allow the arbitration to go ahead unless the matter either falls within one of the limited exceptions or is not a matter which the parties have agreed to submit to arbitration.
[Emphasis in original]
[19] The philosophy underlying the legislation is to encourage parties to submit their differences to a consensual dispute resolution process outside the regular court process and to hold them to that course once they have agreed to do so: see Ontario Hydro v. Denison Mines Ltd., [1992] O.J. No. 2948 (Gen Div.).
Analytical Framework
[20] To determine whether a court proceeding should be stayed under s. 7(1), the court must first determine whether the claim comes within the arbitration clause of the agreement. The approach to be taken has been set out in Mantini v. Smith Lyons LLP (2003), 64 O.R. (3d) 505, [2003] O.J. No. 1831 (C.A.) by Feldman J.A., at paras. 17 and 29:
In order to determine whether a claim should be stayed under s. 7(1) of the Arbitration Act, the court first interprets the arbitration provision, then analyze the claims to determine whether they must be decided by an arbitrator under the terms of the agreement, as interpreted by the court. If so, then under s. 7(1) the court is required to stay the action and refer the claims to arbitration subject to the limited exceptions in s. 7(2): T1T2 Limited Partnership v. The Queen (1994), 23 O.R. (3d) 66 (Gen. Div.) at 73-74.
. . . . .
With the scheme of the agreement in mind, then one turns to the specific claims in the action. In order to determine whether a claim that has been brought in a court action must be stayed under s. 7(1) of the Act, the court must assess whether the claim comes within the arbitration clause of the agreement, that is, whether the claim is one “in connection with” the Partnership Agreement. If it is, then the action must be stayed. Conversely, if it [page748] is not a claim “in connection with the partnership agreement”, then it is outside the scope of the arbitration clause, it will not be stayed and can continue as a court action.
Analysis
[21] The first step in the analysis is to examine the arbitration clause. The second step is to analyze the claims to determine whether they come within the arbitration clause of the agreements. As noted above, the arbitration clause, art. 15.01, states in part that:
At any time should any dispute or question arise between the parties herein concerning the interpretation of this agreement, or any part thereof…then such dispute or question shall…be submitted to a single arbitrator. (Emphasis added)
[22] The plaintiffs submit that the provision deals only with the interpretation of the agreement and as such has a narrow application. His claims do not require an interpretation.
[23] On the other hand, the defendants contend that in comparison to other arbitration clauses courts have examined containing phrases such as “in connection with” or “related to” that were interpreted broadly to permit arbitration of the disputed matter, the word “concerning” in the arbitration clause in this case should similarly permit a broad interpretation: see Woolcock v. Bushert, [2004] O.J. No. 4498, 192 O.A.C. 16 (C.A.), at paras. 21-22; Martini v. Smith Lyons LLP, supra, at para. 19; and Greenfield Ethanol Inc. v. Suncor Energy Products Inc., [2007] O.J. No. 4660, 2007 ONCA 823, at paras. 10-11.
[24] Where the language of an arbitration clause is capable of bearing two interpretations, one of which provides for arbitration, the courts have tended to uphold that option: see Onex Corp. v. Ball Corp., [1994] O.J. No. 98, 12 B.L.R. (2d) 151 (Gen. Div.) and Canadian National Railway Co. v. Lovat Tunnel Equipment Inc., [1999] O.J. No. 2498, 122 O.A.C. 171 (C.A.), at paras. 20-21.
[25] In my view, the plaintiff’s claim for outstanding bonuses, dividends and salary payments are matters of dispute between the parties concerning the interpretation of the shareholders’ agreements, and as such fall within the arbitration clause. In reviewing the agreements, art. 3.2 of the Professional Corporation Agreement and art. 5.6 of the Dental Services Agreement govern the payments of bonuses and dividend payments. With respect to salary payments and/or claims under the employment agreement, while separate from the shareholder agreements, it is captured by the definition of agreement in art. 1.1. Further, [page749] art. 3.2 of the Professional Corporation unanimous share holder agreement refers specifically to the employment agreement:
3.2 Each Dentist practicing dentistry at the Premises shall be an employee of the Corporation pursuant to an employment agreement entered into between each Dentist and the Corporation as of the date hereof, as amended from time to time (an “Employment Agreement”). Until the parties agree otherwise, each Dentist, under his Employment Agreement, shall receive 40 per cent of their respective Production
. . .
[26] Even though bonuses, dividends and salary payments all fall within the ambit of the arbitration clause, the plaintiffs’ claim for relief of oppression under the Business Corporations Act falls outside of it. In Deluce Holdings Inc. v. Air Canada, supra, at para. 69, Blair J. states the following:
…I see no difficulty in concluding that if the “oppressive” acts of the majority are what are relied on to trigger the arbitral mechanism in the agreement, to the advantage of the majority and to the disadvantage of the minority, the majority ought not to be entitled to rely on the mechanism to affect its wrongful objective. The real subject matter of the dispute in such circumstances is not a matter which the parties have agreed to submit to arbitration, but one that strikes at the very underpinnings of the contractual mechanism itself. It therefore lies beyond the scope of s. 7 of the Arbitration Act, 1991. . .
[27] The shareholder agreements provide for a buy-sell and share valuation process in the event of default. However, the dispute is not one that will be resolved through an interpretation of the terms of the agreement. In Kightley v. Beneteau, [1999] O.J. No. 1892, 88 A.C.W.S. (3d) 528 (S.C.J.), a case that dealt with a claim of oppression and a similarly worded arbitration clause in the shareholder agreement, Spence J. concluded, at para. 8: Section 18.1 is the substantive provision as to arbitration. Reasonably understood, that provision provides for arbitration where there is a dispute as to the interpretation of the terms of the Shareholders Agreement. The oppression claim is not such a dispute. It is outside the scope of the arbitration clause.
[28] In this instance, I am satisfied that the oppression claim based on the “improvident consideration” offered by the majority shareholder at a time of disability is not a question of interpretation and beyond the scope of the arbitration provision.
[29] I have given consideration to the application of s. 7(5) in this matter permitting the court to stay proceedings with respect to those matters that could be dealt with by the arbitration agreement and allowing the proceedings to continue with respect to the claims for relief against oppression and punitive damages. However, in my view it would not be reasonable to do so in these circumstances. The parties should not be subjected to [page750] a multiplicity of proceedings. Moreover, such a course would undermine the objective of resolving disputes efficiently.
[30] Even if I am in error with respect to the claim of oppression falling outside of the arbitration clause and all of the claims are appropriately subject thereto, I am of the view that s. 7(2) applies in this case. The defendant’s motion to stay proceedings was brought with undue delay.
[31] The defendants did not advance their position at the earliest opportunity. Significant steps have been taken in this matter since the plaintiffs issued the statement of claim. In Lansens v. Onbelay Automotive Coatings Corp., [2006] O.J. No. 5470, 32 B.L.R. (4th) 113, 2006 CarswellOnt 8814 (S.C.J.), Granger J. stated the following, at para. 33:
Where a party takes steps in response to litigation, such as issuing a statement of defence, the party has waived its right to have the matter proceed by arbitration. See Armstrong v. Camroux, [1995] B.C.J. No. 121 (S.C.).
[32] In my opinion, if the defendants did have a right to have the issues in this action determined by an arbitrator, they abandoned such right when they took steps within this action. Accordingly, the defendants waived their right to insist that these claims be arbitrated.
[33] In ABN Amro Bank of Canada v. Krupp MaK Maschinenbau GmbH (1994), 21 O.R. (3d) 511, [1994] O.J. No. 3044, 1994 CarswellOnt 1813 (Gen. Div.), at para. 30, Haley J.’s following comment is apposite to this case: I do not see how this applicant can take the definitive step of serving and filing a statement of defence and counterclaim in the action and say simultaneously that it seeks a stay for an arbitration to deny jurisdiction of the court. It is similar to a party’s filing a pleading in an action where it disputes the jurisdiction of the court. By filing the pleading the party attorns to the jurisdiction of the court and it loses its right to dispute the jurisdiction. By the same token when the applicant filed statement of defence and counterclaim in this action, although the arbitration clause was mentioned in the pleading, it was waving its right to arbitration.
[34] A number of significant steps have been taken in this matter, more particularly the issuance of the statement of defence and counterclaim. Resort to the arbitration clause was not referenced in any of the pleadings. It was first raised by the defendants when the plaintiff sought to schedule examinations for discovery. The defendants in this action waived their right to insist that arbitration apply when they took steps within the action.
[35] In the result, the motion to stay proceedings pursuant to s. 7 of the Arbitration Act, 1991 is denied. [page751]
[36] Costs are awarded to the plaintiffs. I advised counsel at the conclusion of the hearing that if they were unable to agree as to the amount, they may submit written argument no more than two pages in length together with a draft bill of costs within 15 days of the release of this judgment.
Motion dismissed.