B.C. – a stay is not a dismissal

In Clayworth v. Octaform Systems Inc., 2020 BCCA 117, B.C.’s Court of Appeal held that interpretation of the scope of an agreement to arbitrate is a question of mixed fact and law, not a question of law.  As such, the courts are to apply the “arguable case” test whereby jurisdictional issues relating to the scope of the arbitration agreement are to be resolved in first instance by the arbitrator. The Court also emphasized the distinction between a stay and a dismissal. A stay simply holds proceedings in abeyance until the arbitrator completes the work which the parties agreed should be arbitrated. If the arbitrator determines the dispute is not one referred to arbitration or there are matters which remain unresolved after arbitration, a stay could be lifted upon application.

Appellant and Octaform Systems Inc. (“Octaform”) were parties to a November 2013 contract of employment (“Employment Contract”) which provided for a stepped dispute resolution clause to resolve “any disputes arising between them”.  The clause provided for amicable negotiation, mediation in accordance with the Commercial Mediation Rules of the British Columbia International Commercial Arbitration Centre’s (“BCICAC”) and then arbitration.

(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.

(d) 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”.

Appellant resigned June 22, 2016 and ceased working with Octaform July 22, 2016.

Octaform alleged that Appellant was liable to it for breach of contract, breach of duty of loyalty and conspiracy as well as use of confidential information.  Despite exchanges relating to amicable negotiation and mediation, no resolution occurred and Octaform filed a Notice of Civil Action in B.C. Supreme Court seeking injunctive relief, an accounting of profits, payment of amounts due following the taking of account, damages, interest and costs.

Appellant applied to the court for a stay for those claims covered by the Employment Contract other than the injunctive relief, interest and costs.  Her application was dismissed in first instance in Octaform Systems Inc. v. Clayworth, 2019 BCSC 711.

In his reasons, the chambers judge framed the issue before him as follows:

[28] Whether the plaintiffs’ claims fall within the exception to dispute resolution under the Agreement is a question of law. It involves interpreting the pleadings in relation to the Agreement. The issue, therefore, is whether there is an arguable case that the plaintiffs’ claims in this action fall within the matters agreed to be submitted to arbitration. If so, the action must be stayed”.

On appeal, Appellant submitted that “the first sentence of the judge’s statement of issue is wrong; the third sentence is a correct statement of the issue, but is not the question the chambers judge addressed”. See paras 33-36 of Ball J.’s reasons in first instance.

In its reasons, as part of its own analysis, the Court of Appeal identified the “general rule on stay applications” under B.C.’s Arbitration Act (paras 20-30), recognized the “question of law exception” (paras 31-35), considered whether the question before the chambers judge was a questions of law (paras 41-45) and analysed whether the chambers judge applied the “arguable case test” (paras 46-48).

(i) General rule on stay applications (paras 20-30) – The Court of Appeal reproduced section 15 of the Arbitration Act and noted that the “general rule” in B.C. on stay applications under that section is that proceedings should be stayed “whenever the applicant makes out an arguable case that the parties have agreed that the dispute is one that is to be resolved by arbitration”.

The Court referred to Gulf Canada Resources Ltd. v. Arochem International Ltd., 1992 CanLII 4033 (BC CA) which considered a stay under section 8 of the ICCA and commented that “the wording of which is virtually identical to the amended s. 15 of the current Arbitration Act”.  That decision is presented as the source for the “arguable case” test: “Where it is arguable that the dispute falls within the terms of the arbitration agreement or where it is arguable that a party to the legal proceedings is a party to the arbitration agreement then, in my view, the stay should be granted and those matters left to be determined by the arbitral tribunal”.  See also Prince George (City of) v. A.L. Sims & Sons Ltd., 1995 CanLII 2487 (BC CA) para. 40, St. Pierre v. Chriscan Enterprises Ltd., 2011 BCCA 97 paras 24-30,   McMillan v. McMillan, 2016 BCCA 441 para. 27 and Sum Trade Corp. v. Agricom International Inc., 2018 BCCA 379 para. 35.

The Court noted that this test had the effect of confirming the competence-competence principle which provides the jurisdictional issues relating to the scope of an agreement to arbitrate are determined first by the arbitrator.

The Court then drew attention to the resolution arrived at in Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34 (CanLII), [2007] 2 SCR 801 which framed the test as a “prima facie analysis” whereby disputes would be referred to arbitration if on a prima facie analysis they were within the terms of the agreement to arbitrate.  The Court noted that, despite Dell Computer Corp. v. Union des consommateurs arising from a dispute governed by Québec legislation, the B.C. Court of Appeal in MacKinnon v. National Money Mart Company, 2009 BCCA 103laid to rest the uncertainty’ that the Supreme Court reasons also applied to B.C.’s legislative regime.  See para. 30.

In concluding, the Court expressly noted that the Supreme Court in Dell Computer Corp. v. Union des consommateurs referred to the 1992 B.C. Court of Appel decision in Gulf Canada Resources Ltd. v. Arochem International Ltd. as an example of the prima facie test.  As a result, the Court remarked that there was no difference in substance between the “arguable case” test and “prima facie analysis” test and that, consistent with its own line of reasons, would refer to the test as the “arguable case analysis” test.

[30] As suggested in Dell, I do not consider there to be a difference in substance between the arguable case test articulated in Gulf Canada Resources or the prima facie test expressed by Deschamps J. The significance of both standards is that there is room for a judge to dismiss a stay application when there is no nexus between the claims and the matters reserved for arbitration, while referring to the arbitrator any legitimate question of the scope of the arbitration jurisdiction. This avoids duplication and respects the competence-competence principle. I will follow the guidance of this Court’s judgments in Gulf Canada Resources and Sum Trade and refer to the test as the “arguable case” test”.

(ii) Question of law exception (paras 31-35) – The Court added that Dell Computer Corp. v. Union des consommateurs identified an exception to that “general rule” which authorized a court to resolve the jurisdictional issue if doing so involved a question of law determined on undisputed facts.  Seidel v. TELUS Communications Inc., 2011 SCC 15 (CanLII), [2011] 1 SCR 531 reiterated this exception but framed it as being a “pure question of law”.

(iii) Whether the question before chambers was a question of law (paras 41-45) – The chambers judge stated at para. 28 of his reasons that “[w]hether the plaintiffs’ claims fall within the exception to dispute resolution under the Agreement is a question of law”.   The Court of Appeal disagreed, holding that interpretation of the scope of the agreement to arbitrate was a question of mixed fact and law.

[43] I agree with the appellant that a disagreement as to whether a particular dispute falls within an arbitration clause is not a question of law. To the extent that the chambers judge treated the issue before him as a question of law, and therefore exempt from the general rule in Dell that in any case involving an arbitration clause a challenge to the arbitrator’s jurisdiction must be resolved first by the arbitrator, the judge was in error”.

(iv) Whether the chambers judge applied the “arguable case test” (paras 46-48) – The Court agreed that the chambers judge did later state, in para. 28 of his reasons, the proper question (“whether there is an arguable case that the plaintiffs’ claims in this action fall within the matters agreed to be submitted to arbitration”) but disagreed that he applied it.

[47] In my opinion, while the chambers judge did state the correct test in the part of para. 28 of his judgment that Octaform relies on, his analysis does not support the conclusion that he applied the test he had stated. He did not assess the question whether there was an arguable case that the dispute fell within the arbitration clause, but instead made a final determination as to the scope of the exception to the arbitration clause, contrary to Gulf Canada Resources. Where a judge states the test correctly but fails to apply that test, the judge commits an error of law: Teal Cedar Products Ltd. v. British Columbia, 2017 SCC 32 at para. 44”.

The Court closed its analysis with a consideration of the role equitable relief played in determining jurisdiction.  Though it acknowledged, without deciding, the argument limiting an arbitrator from granting equitable relief, the Court held that a litigant’s decision to seek equitable relief had “no relevance” to the issue of jurisdiction before the chambers judge. “In my view, the fact that Octaform has chosen to seek equitable remedies in their civil action has no relevance to the issue that was before the chambers judge. The question on the stay application was whether there was an arguable case that the dispute between the parties was one that the parties had agreed should be decided by arbitration”.

Just prior to closing its reasons, the Court affirmed an important distinction between a stay and a dismissal, referring to the recent Houm Services Inc. v Lettuce Eatery Development Inc., 2020 BCSC 430 para. 50.

A stay is not a dismissal; it simply holds the proceedings in abeyance until the arbitrator does the work that the parties agreed should be arbitrated: Houm Services Inc. v. Lettuce Eatery Development Inc., 2020 BCSC 430 at para. 50. If the arbitrator determines the dispute is not one that has been agreed to be referred to arbitration for resolution, or there are matters that remain unresolved after the dispute resolution procedures chosen by the parties have run their course, it is open to the respondents to apply to lift the stay”.

The Court allowed the appeal and stayed the action.

urbitral note – First, the reminder that “a stay is not a dismissal” is helpful and deserves emphasis.  Cases do mention both as if they were equivalents but each has a different impact.  The Court’s reference at para. 57 of its reasons to the 2020 decision refers readers to that latter’s case’s own reliance on the 2007 Court of Appeal decision in ABOP LLC v. Qtrade Canada Inc., 2007 BCCA 290

Houm Services Inc. v. Lettuce Eatery Development Inc., 2020 BCSC 430 – “[50] In ABOP LLC v. Qtrade Canada Inc., 2007 BCCA 290 at para. 24, the court held that if there was still a dispute between the parties, requiring additional relief outside the scope of the arbitration clause, the matter could be pursued in the courts after the conclusion of the arbitration. A stay of the actions and the petition simply holds those proceedings in abeyance until an arbitrator does the work that the parties have agreed should be arbitrated if the parties to the Franchise Agreement cannot resolve their issues”.

ABOP LLC v. Qtrade Canada Inc., 2007 BCCA 290, at paras 22-24 mentioned that access to the courts is “delayed, or not required at all” but not “ousted”:

[22] In the case at bar the situation is not comparable to [James E. McCage Limited and others, In the Matter of, [2000] NICh 4].  There is no suggestion in the case at bar that ABOP is “debarred from pursuing” any statutory claim or remedy.  In the instant case the judge simply held that the fact there are two “concerns” that are court matters “does not mean that the [entire] matter should necessarily be resolved by the courts, rather than by arbitration.”  He added:

[23] … Simply put[,] in oppression relief[,] claims should not automatically oust the jurisdiction of the arbitration clause the parties agreed to. 

[24] … Once the arbitrator has done his work, if there is still a dispute between the parties which requires the additional relief requested in the petition, the oppression relief, under the federal Business Corporations Act, then that matter can be pursued in the Courts at that time.  …

[23] Counsel for Qtrade made the following submission with which I agree:

The arbitrator will make all the necessary findings of fact and come to a decision on the issues before him.  If he finds in favour of Qtrade then there will be no foundation for an oppression action.  If he finds in favour of ABOP it can carry on with the oppression petition to the court.

[24] As pointed out in [Wine Inns Limited, In the Matter of, [2000] NICA 15], this might cause some procedural complexity.  However, that cannot form the basis for the determination of this case.  To paraphrase [Maher v. Chertkow, 2003 BCSC 48], I find no “proper reason” why the courts should not “give effect to that wish”, the parties’ agreed-to wish being for arbitration to resolve disputes arising out of the shareholders agreement.  The involvement of the courts might well be delayed, or not required at all with respect to the two non-arbitrable issues being pursued by ABOP, but its jurisdiction has not been ousted”.

Second, the bulk of the Court’s reasons target the distinction chambers/applications judges are required to make when considering if a dispute falls within an agreement to arbitrate.  The Court stressed that such tasks involve interpretation of contracts and therefore raise questions of mixed fact and law.