B.C. – court grants stay to non-signatories to arbitration agreement – #004

In his September 7, 2017 reasons for judgment in Northwestpharmacy.com Inc. v Yates, 2017 BCSC 1572, Mr. Justice George Macintosh granted an application by several defendants to stay the litigation in favour of arbitration even though none of them were signatories to that undertaking to arbitrate.  Macintosh J. relied in part on Plaintiff’s own insistence that it had dealt contractually with certain Defendants, though under oral agreements separate from the written one in which the arbitration clause was included. 

Defendants presented two applications.  First, all Defendants sought an order dismissing the action on the basis that the B.C. courts lacked territorial jurisdiction.  Second, all Defendants save one argued that, in the alternative, the action should be stayed based on an arbitration agreement between Plaintiff and a corporation non-party to the litigation.   

Though the Supreme Court of Canada Dell Computer Corp. v. Union des consommateurs, [2007] 2 SCR 801, 2007 SCC 34 has recommended that courts defer fact-based jurisdictional questions to arbitrators when the facts are complex, the two Defendant groups obliged Macintosh J. to sift through the facts in order to determine the first of their two applications, namely whether B.C. courts had jurisdiction over the dispute and parties.  Having done so, the economy of the process was best served by also ruling on the second application by the largest group of Defendants, dealing with the application of the arbitration clause.

At paragraph 98, Defendants did argue to refer the arbitration issue to the arbitrator but Macintosh J.’s closing disposition suggests he has taken the decision definitively.  Doing so is not unusual on the particular facts of the case as it is clear that, for the B.C. courts, this case cannot come back to it even if the arbitrator has a conflicting opinion. 

Macintosh J. does an admirable job of condensing the complex case facts in order to allow readers to follow his reasoning to its result.  As Plaintiff’s name suggests, “Northwestpharmacy.com” is in the business of the online sale of prescription drugs to retail customers mostly located in the U.S.  Major credit card companies had refused to accept to payments for such sales because they perceive the business as being high-risk related to, inter alia, alleged consumer safety and potential liability due to third parties such as rogue merchants.  Plaintiff therefore sought alternative payment mechanisms offered by some of Defendants.  They offered to allow Plaintiff to accept payment from client without them using their credit cards.  (The court is careful to note that some Defendants have no or little involvement in the facts but he refers to them as a group for simplicity.)   

The payment loops between Plaintiff and its clients are long and intricate but Macintosh J. does determine that few if not none of the key facts tie any of the relevant activity to the judicial district of B.C.  For the purpose of the jurisdictional challenge, Macintosh J. held that Plaintiff failed to establish territorial competence. Aside from two preliminary meetings held in B.C., he found that there was no serious question of any real or substantial connection between B.C. and the facts on which Plaintiff needed to base its case for fraudulent misrepresentation.  

The key fact in the case is that Plaintiff signed a contract with Omega Group Inc. (“Omega”).   Plaintiff asserted that it entered into three April 2015 oral agreements with individual Defendants named as such in the B.C. litigation.  Macintosh J. concluded that any such oral agreements were overtaken by the June 2015 written agreement between Plaintiff and Omega to provide one of two types of payment processing systems, namely “Image Cash Letter” (“ICL”). (Those interested in learning the structure of such payment loops can read the detail provided at paragraph 23 of the reasons). 

Omega provided Plaintiff with a draft written contract under which Omega would provide ICL payment processing and in return Plaintiff would pay fees for the services performed by Omega.  Plaintiff reviewed the draft, negotiated changes and suggested adding an arbitration clause which was agreed to.  The arbitration clause reads as follows:  

11.2 – Jurisdiction.  The Parties [i.e., Omega doing business as Paynet Services and the Plaintiff, represented by Mr. Long Nguyen] hereby submit to a binding arbitration under the International Rules of the American Arbitration Association with one arbitrator for all disputes arising out of or relating to this agreement and agree that all claims, evidence and rulings shall remain and be confidential.” (parenthetical additions in the original) 

Despite having a written contract with Omega, Plaintiff did not sue Omega in the B.C. litigation or initiate arbitration proceedings against it.  Rather, Plaintiff chose to sue several Defendants with which it had no written contracts alleging fraudulent misrepresentations.   Macintosh J. remarked on the procedural omission of Omega three times in his reasons:  

[11] The Plaintiff elected not to sue Omega in this proceeding.  The reasons for it not suing Omega are not entirely clear, but from the submissions and the evidence before me, I believe a primary reason was to avoid the application of the arbitration clause, which calls for the arbitration of all disputes arising out of or relating to the contract.  The arbitration clause was inserted at the Plaintiff’s request.”   

Macintosh J. returns to the issue and remarks that “[18] Were it not for that procedural dilemma, I expect that Omega would have been sued in the ordinary course. 

In support of choosing the B.C. courts to sue Defendants, Plaintiff asserted that it considered that it had dealt with them personally.  

[28]        In his affidavits, Mr. Arora, for the Plaintiff, asserts repeatedly that the Plaintiff took the view that it was contracting with Messrs. Yates and Tozman, and that “any corporate entity that became involved would merely be the vehicle through which” Messrs. Yates and Tozman would provide their services.  As such, Mr. Arora says, the Plaintiff was “prepared to sign a contract with whichever entity” Messrs. Yates and Tozman directed, and “did in fact do so“. 

This assertion would be recycled by Defendants against Plaintiff when seeking the stay in favour of arbitration.  

Macintosh J. determined that Plaintiff knew from the onset that the individuals were not exchanging with Plaintiff in their personal capacities.  This determination was based on both the particular facts and the scope of the obligations undertaken. 

[18]When the Plaintiff dealt with Messrs. Yates and Tozman in 2015, it knew that they would employ corporate vehicles for the payment processing, rather than contracting in their personal names.  The Plaintiff did not care what companies Messrs. Yates and Tozman employed for supplying the payment processing.  ECG and Omega were the companies they used, and the Plaintiff acknowledges in its pleadings that Messrs. Yates and Tozman said that they represented ECG and Omega. 

[29]        In my view, the Plaintiff entered into a written contract with Omega in the ordinary course.  Commercial agreements of this size and complexity are almost always entered into between companies instead of individuals.  Both sides in this dispute were fully aware that corporate entities would be employed on both sides.  As with any such written contract, its terms need to be negotiated by people.  That of course does not make the people the parties to the contract.  Perhaps to repeat somewhat, but for the Plaintiff’s wish to now avoid arbitration, I expect Omega would have been joined as a defendant, and the Plaintiff’s claim of $1,244,273.80 US would be proceeding primarily against Omega. 

Macintosh J. dismissed Plaintiff’s presentation of the contractual dealings as being based on oral contracts with certain Defendants.  He determined that, of the $1,244,273.80 US claimed in the B.C. litigation, only $27,897.13 US related to ICL transactions processed before the contract with Omega. 

In their application to stay the action, Defendants relied on section 8 of the International Commercial Arbitration Act, R.S.B.C. 1996, c 233 (“ICAA”).  Macintosh J. paid a high compliment to the attorneys representing nine of Defendants by ‘accepting as correct’ their written submissions on several points and reproducing verbatim paragraphs 93-138 of their submissions at paragraph 54 of his reasons.  The well-drafted submissions are worth reading as they give a concise mini-primer on several key aspects of arbitration law.   

Defendants focused on the definition of “party to the arbitration agreement” which they emphasized included “a person claiming through or under a party” as provided by section 2 of ICAA.  Defendants referred to B.C. case law in which the courts accepted that non-signatories could be proper parties to arbitration. 

Defendants were alert to the unusual status of their case and distinguished their case from the others. “These cases each involved situations where the applicant sought a stay of proceedings, or to enforce an arbitral award, as against a non-signatory, whereas in this case the parties applying for the stay are non-signatories who seek a stay against a signatory to the arbitration agreement. 

Defendants relied on Lambsmead Limited v. Pharmawest Pharmacy Ltd., 2014 BCSC 218 in which plaintiff treated defendants as nominees of a signatory to the contract or as the true parties to the contract containing the arbitration clause.  Macintosh J. applied that reasoning to the facts in the case before him, relying of the submissions cited from Defendants. 

 (110) The plaintiff has thereby asserted that John Yates, Michael Yates and Michael Tozman are the true parties to the contract, as in Lambsmead, and are estopped from denying their status as parties claiming through the signatory to the Arbitration Agreement.  Alternatively, Yates, Yates and Tozman were acting as agents for Omega in the creation of the Written Contract and are therefore entitled to assert the Arbitration Agreement as parties claiming under or through Omega.  On either basis, it is arguable that Yates, Yates and Tozman are properly parties to the arbitration agreement with the plaintiff. 

“(112) The Court should not permit a party to avoid an arbitration clause – which that party itself bargained for – by naming related parties as defendants but declining to name the signatory to the contract.  To do so would elevate form over substance and permit parties to arbitration agreements to avoid the application of those agreements through selective and artful pleading.  Having sought the benefits of the arbitration clause, the plaintiff should not be able to escape the burdens. 

The extract of the written argument includes other elements of interest such as a discussion of the scope of the arbitration agreement and the doctrine of severability.