B.C. – arbitral party files counter claim for breach of undertaking to arbitrate and confidentiality triggered by other party instituting litigation – #073

In B & L Holdings Inc. v. SNFW Fitness BC Ltd., 2018 BCSC 849, Mr. Justice Leonard Marchand dealt with a request for an adjournment and, in doing so, gave insight into a seldom discussed by-product of litigation involving arbitration.  Marchand J.’s summary of the procedural history included a note that the defendant parties bound by arbitration with one of the plaintiffs filed a counter claim for damages related to plaintiff’s decision to go to public court rather than confidential arbitration.

Plaintiff, B & L Holdings Inc. (“B&L”), is a holding company owned by a former professional basketball player, Mr. Stephen Nash.   Defendants are SNFW Fitness BC Ltd. (“SNFW”) and two of its shareholders, Mr. Mark Mastrov and Mr. Leonard Schlemm.  SNFW owns a chain of fitness facilities operating under Mr. Nash’s name. Mr. Nash is not a Plaintiff but, with B&L, is a defendant by way of counter claim.

The dispute underlying the court litigation involved SNFW’s contractual right under a licence agreement (“Licence Agreement”) to use Mr. Nash’s name, image and reputation in connection with SNFW’s fitness facilities.

In an earlier stage of the parties’ litigation, Defendants successfully applied under Rule 9-5 of B.C.’s Supreme Court Civil Rules, BC Reg 168/2009 to have B&L’s claim dismissed.  The full reasons by Madam Justice Nitya Iyer appear in B & L Holdings Inc. v. SNFW Fitness BC Ltd., 2017 BCSC 1359, with a summary of the key facts and contractual documents appearing in paras 7-11.  Iyer J. agreed with Defendants that B&L’s claim that Defendants’ claim regarding use of Mr. Nash’s name was unlawful and raised no genuine issue for trial.

B&L applied to set aside the default judgment against it and both B&L and Mr. Nash applied to dismiss the counterclaim against them.  In the midst of other procedural steps being taken or considered by either Plaintiffs or Defendants, Marchand J. was asked to rule on Defendants’ application to adjourn the hearing of the applications of B&L and Mr. Nash.

Marchand J. lists “the current state of affairs in this litigation” at para. 6 of his reasons.  The lengthy list of procedural moments serves not only to situate the reader but also as an implicit endorsement of arbitration.

In October 2016, B&L filed a notice of civil claim to enjoin SNFW from using Mr. Nash’s name and an order for damages from SNFW, Mr. Mastrov and Mr. Schlemm as Defendants for alleged breaches of contract and misrepresentations.  Soon after, in response, in November 2016 Defendants filed a Defense as well as a counterclaim against Plaintiff B&L and adding Mr. Nash (“Counter Claim”). The Counter Claim seeks damages for alleged breaches of contract in relation to the use of Mr. Nash’s name, image and reputation and in relation to confidentiality and arbitration clauses in the Licence Agreement.  In particular, Defendants allege that Mr. Nash has not provided his endorsement and that the filing of the court litigation breaches the confidentiality and arbitration terms in the Licence Agreement.

Marchand J.’s reasons record a seldom discussed by-product of litigation undertaken regarding arbitration.  Court dockets flourish with various types of litigation procedure – litigation instituted despite an undertaking to arbitrate, applications to stay such litigation and refer to arbitration, applications to appoint arbitrators and to recognize, enforce or overturn interim and final awards.  Many of those court procedures breach one of the plumpest promises of arbitration: confidentiality.

The distinction between merely ‘private’ and intentionally ‘confidential’ remains an active discussion for some in some arbitrations.  Hearings are almost always private by virtue of them being held in boardrooms.  That said, unlike Las Vegas, what happens in the boardroom does not always stay there.  The expectation and respect of confidentiality may not always be reciprocal.  Confidentiality may exist by express term of contract, administrative procedural rules. lex arbitri or conduct for example.  Parties are often left to determine how best to react when the other party brings their dispute into the public courts.  Much of the reported reasons deal with the results of having gone to court but few, if any record any concrete result.

Marchand J.’s reasons are one of the few mentions which record one of the possible responses an arbitral party could have to the other’s decision to institute court litigation instead of arbitration: a claim in court for damages stemming from breach of the confidentiality provisions and for breach of the undertaking to arbitrate. It is unclear what the calculation or dollar amount would be for either breach.  It is either ironic or inconsistent, but perhaps not inevitable, that the claims for breaches of the arbitration agreement and confidentiality are made in the public court and not before the arbitrator.  Neither party is obliged to remain court if a stay application is made and granted and confidentiality on some of more sensitive facts can still be preserved

The loss of confidentiality can be collateral damage suffered when litigation is initiated either in intentional violation of the undertaking to proceed to arbitration or in necessary support of it by naming arbitrators or enforcing awards.  This case may provide insights on the valuation the courts will give to such breaches when they stem from one party electing to litigate instead of arbitrating.  Additional perspective will likely follow Plaintiffs’ filing of a response to the Counter Claim and insight on the decision to file litigation rather than arbitration.  Such insights can include arguments on the validity of the arbitration agreement, its scope and relationship to the dispute as framed by Plaintiffs as well as urgency issues.