B.C. – broad interpretation of carve out in arbitration clause risks nullifying agreement to arbitrate

In Clayworth v. Octaform Systems Inc., 2019 BCCA 354, Madam Justice Lauri Ann Fenlon granted a stay of non-injunctive proceedings in first instance, acknowledging that Appellant had met the “low threshold” of “some merit” in her appeal.  The issues on appeal concerned whether an exception in an arbitration agreement should be interpreted broadly enough to encompass claims brought in court or is the correct question is whether those court claims are clearly beyond the scope of the mandatory arbitration clause.  The appeal will also resolve when does a court risk reading an exclusion clause so broadly that it nullifies the arbitration clause.

Octaform Systems Inc. (“Octaform Systems”) and Appellant, a former employee, disputed Appellant’s alleged post-employment use of confidential information and intellectual property as well as alleged solicitation of clientele.  Octaform Systems initiated two (2) procedures related to its allegations: mediation in September 2017 and litigation in August 2018. 

The litigation involved a civil claim against Appellant for alleged breach of duty to keep trade secrets confidential, breach of confidence and civil conspiracy.  Octaform Systems’ relief consisted of an injunction, an order for delivery up of documents, damages, an accounting and further payments stemming from the accounting.

Appellant applied, unsuccessfully, for a stay of proceedings pursuant to section 15 of B.C.’s Arbitration Act, RSBC 1996, c 55.  The stay sought did not seek to cover the injunctive relief.  Appellant argued that the November 1, 2013 contract of employment (“Agreement”) contained a dispute resolution clause which covered the breaches alleged by Octaform Systems. 

16. Equitable Remedies

You hereby acknowledge and agree that a breach of your obligations under this Agreement would result in damages to the Company [i.e., Octaform Systems] that could not be adequately compensated for by monetary award. Accordingly, in the event of any such breach by you, in addition to all other remedies available to the Company at law or in equity, the Company will be entitled as a matter of right to apply to a Court of competent jurisdiction for such relief by way of restraining order, injunction, degree or otherwise, as may be appropriate to ensure compliance with the provisions of this Agreement.

17. Dispute Resolution

In the event of a dispute arising out of or in connection with this Agreement or the termination thereof, or in respect of any legal relationship associated with it or from it, which does not involve the Company seeking a court injunction or other relief relating to protection or enforcement of the Company’s intellectual property, confidential information or restrictive covenants as provided in the Agreement, that dispute will be resolved confidentially as follows:

(a) Amicable Negotiation – The Parties agree that, both during and after the performance of their responsibilities under this Agreement, each of them will make bona fide efforts to resolve any disputes arising between them by amicable negotiations;

(b) Mediation – If the Parties are unable to negotiate resolution of a dispute, either Party may refer the dispute to mediation by providing written notice to the other Party. If the Parties cannot agree on a mediator within thirty (30) days of receipt of the notice to mediate, then either Party may make application to the British Columbia Mediator Roster Society to have one appointed. The mediation will be held in Vancouver, B.C., in accordance with the British Columbia International Commercial Arbitration Centre’s (the “BCICAC”) under its Commercial Mediation Rules, and each Party will bear its won costs, including one-half share of the mediator’s fees.

(c) Arbitration – If, after mediation, the Parties have been unable to resolve a dispute and the mediator has been inactive for more than 90 days, or such other period agreed to in writing by the Parties, either Party may refer the dispute for final and binding arbitration by providing written notice to the other Party. If the Parties cannot agree on an arbitrator within thirty (30) days of receipt of the notice to arbitrate, then either Party may make application to the British Columbia Arbitration & Mediation Institute to appoint one. The arbitration will be held in Vancouver, B.C., in accordance with the BCICAC’s Shorter Rules for Domestic Commercial Arbitration, and each Party will bear its own costs, including one-half share of the arbitrator’s fees.

You expressly acknowledge that it is reasonable for any disputes under this dispute resolution paragraph to be mediated and/or arbitrated in Vancouver, British Columbia, given the Company’s agreement to employ you remotely in Ontario.

Note: Founded in 1980, the “British Columbia Arbitration & Mediation Institute” adopted that name in March 1988 but changed that name in October 2016 to the “ADR Institute of British Columbia”.  The latter is a regional affiliate of the ADR Institute of Canada Inc. or ADRIC.

Mr. Justice Kenneth W. Ball heard the application and dismissed it.  See Octaform Systems Inc. v Clayworth, 2019 BCSC 711.

In his analysis, Ball J. sought to interpret and give meaning to the phrase “or other relief relating to the protection or enforcement of the Company’s intellectual property, confidential information or restrictive covenants”. 

Ball J. considered the preliminary issue of who should decide whether Octaform Systems’ claims are matters which the parties have “agreed to be submitted to arbitration”.  He reiterated the current approach that, absent the exception in which a challenge to the arbitrator’s jurisdiction involves a pure question of law, such challenges must be resolved first by the arbitrator.  Ball J. referred to Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34 (CanLII) para. 84; Seidel v. TELUS Communications, 2011 SCC 15 (CanLII) para. 29; Fortinet Technologies (Canada) ULC v. Bell Canada, 2018 BCCA 277 (CanLII) para. 30; Sum Trade Corp. v. Agricom International Inc., 2018 BCCA 379 (CanLII) paras 31-35.

Appellant had argued that the wording in their Agreement required that, with the exception of injunctions and other equitable remedies, all disputes connected to the Agreement were to be resolved by arbitration.

Ball J. disagreed with Appellant’s approach, characterizing it as taking “too narrow a view of the exception to dispute resolution” in para. 1 of the Agreement.  At para. 30, he considered that the carve out, in light of the definitions in the Agreement which he recited at para. 11 of his reasons, “cover a wide ambit of relief for the purpose of protecting the business enterprise” of Octaform Systems.  At para. 31, Ball J. emphasized the “broad ambit” of para. 16 of the Agreement and that the “language of that paragraph is not so limited”. 

Ball J. dismissed Appellant’s application for a stay.  He concluded that, “on a plain reading of the Agreement”, the claims made by Octaform Systems in its litigation “are clearly not matters agreed to be submitted to arbitration” and are “captured by the exception” in para. 17 of the Agreement.

Appellant appealed that decision and applied for stay of the proceedings in first instance.  Fenlon J.A. heard the application.  Referring to RJR-MacDonald Inc. v. Canada (Attorney General), [1994] 1 SCR 311, 1994 CanLII 117 (SCC), Fenlon J.A. listed the three (3) elements of the test for a stay:

(1) some merit to the appeal in the sense that there is a serious question to be determined;

(2) irreparable harm would be occasioned to the applicant if the stay was refused; and,

(3) on balance, the inconvenience to the applicant if the stay was refused would be greater than the inconvenience to the respondent if the stay was granted.

Fenlon J.A. granted a stay of the proceedings in first instance pending appeal, other than those proceedings with respect to injunctive relief and the return of confidential information.

(1) merit – Fenlon J.A. found that the issues raised by Appellant met the “low threshold” of “some merit”.  She determined that Ball J.’s analysis focused on a question which Appellant argued was not the “correct question”.

[12] In my view, Ms. Clayworth has satisfied the low threshold of “some merit” to the appeal. The judge’s analysis focused on whether the exception could be interpreted broadly enough to encompass the claims brought by Octaform in the action. The appellant says it is arguable that the judge, therefore, did not focus on the correct question, which was whether those claims were clearly beyond the scope of the mandatory arbitration clause, in effect reading the exclusion clause so broadly that the arbitration clause was nullified.

(2) irreparable harm – Fenlon J.A. examined the scope of the claims Octaform Systems made in civil claim and the fact that there were two (2) forums: mediation and its civil claims.  While summary, the analysis does lend itself to other instances in which a party must participate in both first instance and in appeal.

[15] In my view, if the stay is not granted, Ms. Clayworth would suffer irreparable harm as she will be required to participate in and defend on both fronts, in both forums. The appeal brought by Ms. Clayworth could be largely, or at least to some extent, moot depending on the speed with which matters proceed in the action and the dispatch with which an appeal is pursued and a decision rendered by this Court. There is also the prospect of inconsistent findings within the two proceedings and perhaps — although ultimately less likely, in my view — duplicative orders for damages.

(3) balance of convenience – Fenlon J.A. noted that Appellant conceded that the claims for injunctive relief and the return of confidential information were properly before the court.  However, she also noted that the civil action had been instituted two (2) years after employment ended and the “little progress” had occurred in the last year. “It will not, in my view, cause any significant prejudice to Octaform to delay pursuing other claims in the action until the appeal is heard, especially as injunctive relief remains available to it in that action.

urbitral note – The Court of Appeal will consider how courts should approach such interpretive exercises.   The eventual resolution will rely on the specific phrasing of the Agreement but the issues raised should have broader application.  Many agreements to arbitrate contain phrasing which hives off certain categories of disputes or remedies.  The Court of Appeal’s reasoning will also inform arbitral tribunals in the exercise of their own competence-competence.

Recall that Ball J. had identified at paras 24-27 of his reasons that the task before him “involves contractual interpretation, but is limited”.   The Court of Appeal’s will apply its approach to exclusionary wording in mandatory arbitration clauses.  In doing so, it will likely address how its reasons in such cases fit within the general rule stated by the Supreme Court that such challenges should be first decided by the arbitrator unless the challenge falls within the exceptions identified.

The issues in the appeal will now be before the Court of Appeal to determine:

(i) must an exception be interpreted broadly enough to encompass claims brought by a party in the action or is the correct question whether those claims are clearly beyond the scope of the mandatory arbitration clause; and,

(ii) when does a court (or arbitral tribunal) risk reading an exclusion clause so broadly that the arbitration clause was nullified?