Alberta – court favours deference to arbitration, holds parties to promise to arbitrate despite inefficiencies created for other litigants – #101

In Macdonald v. Burke, 2018 ABQB 534, Mr. Justice William A. Tilleman forcefully demonstrated the evolution of the court’s diminished discretion to grant a stay of litigation, tracking changes to Alberta’s Arbitration Act, RSA 2000, c A-43’s section 7(1) from the earlier, permissive “may” to the current, mandatory “shall”. He acknowledged that the change in wording to section 7(1) now restricted his discretion to those five (5) circumstances listed in section 7(2) and that none of the latter applied on the facts. Despite overlapping facts and issues in the various disputes, he remained unpersuaded that he should exercise his separate, remaining discretion under section 7(5) to allow the court litigation to continue in parallel to the arbitration.
Plaintiff, Robert MacDonald and a corporation owned by him, Jammin Rock Resources Inc. (“JRRI”) with John and Peter Dowd and their partnership, Dowd & Associates Ltd. (“Dowd & Associates”), created a partnership called Jammin Dowd Land Services (“JDLS”). The prompt to form that partnership stemmed from the proposed Energy East TransCanada Pipeline intended to deliver oil from Alberta to Eastern Canada.

JDLS was formed under the laws of New Brunswick and the parties included a choice of law clause naming New Brunswick. The partnership agreement (“Agreement”) included a broadly worded arbitration provision stipulating that “all matters and difference between the parties in relation to the Partnership Agreement shall be referred to a single arbitrator”.

An initial work services contract was agreed upon between JDLS and TransCanada Pipelines Limited regarding TransCanada Pipelines’ need for land services work in New Brunswick and Nova Scotia. (the “TCPL Contract”). Over time, and due to disagreements between a TransCanada Pipeline employee and a JDLS land agent, TransCanada Pipeline advised Mr. MacDonald and Mr. Peter Dowd that (a) certain work JDLS had been asked to perform would be reduced and (b) TransCanada Pipeline did not want Mr. MacDonald to have a direct or supervisory role with the TCPL Contract.

A key allegation in the proceedings is that, after TransCanada Pipeline advised of those decisions, Dowd & Associates secretly attempted to obtain the TCPL Contract for itself.

In November 2015, Plaintiffs, Mr. MacDonald, JRRI and JDLS initiated litigation against TransCanada Pipeline and Mr. Burke (the “TransCanada Defendants”). The litigation alleged breaches of TransCanada Defendants’ contractual duty of good faith and honesty in the performance of the TCPL Contract with JDLS, defamation, and injurious falsehood.

In November 2016, Plaintiffs added Dowd & Associates, Mr. Peter Dowd and Mr. John Dowd (the “Dowd Defendants”), to the litigation based on information it uncovered about Dowd & Associates’ alleged attempt to obtain the TCPL Contract for itself. The additional cause of action alleged breaches of the common law duties owed by partners and fiduciary duties, breaches of the Agreement and Alberta’s Partnership Act, RSA 2000, c P-3, civil conspiracy and interference with economic relations. A twenty-eight (28) statement list of agreed upon facts was annexed to the reasons as Annex A which provided further nuances to these summary statements.

Tilleman J.’s reasons issued from an appeal of a July 14, 2017 decision by a Master adjudicating an application by Mr. Peter Dowd, Mr. John Dowd and Dowd & Associates without the TransCanada Defendants. Tilleman J. noted that the appeal was a hearing de novo and that the standard of correctness applied, following Rule 6.14 of the Alberta Rules of Court, Alta Reg 124/2010 and Bahcheli v. Yorkton Securities Inc., 2012 ABCA 166 paras 19-30.

He sat as case management judge and identified the following four (4) issues which he had been asked to resolve on the appeal:

1. Should Plaintiffs’ claims against the Dowd Defendants be stayed and referred to arbitration in accordance with the mandatory arbitration clause contained in the Agreement;
2. Alternatively, does he have jurisdiction over the Dowd Defendants regarding the claims alleged by the Plaintiffs;
3. If he does have jurisdiction, should he exercise that jurisdiction over the Dowd Defendants on the basis of forum non conveniens; and,
4. Should JDLS be removed from the action given that the partnership is dissolved?

Tilleman J. undertook an attentive reading and presentation of each group’s arguments and the key legislative and case law in support of each, condensing each to a few detailed paragraphs presenting each in its best light: Dowd Defendants (paras 10-16), TransCanada Defendants (paras 17-30) and Plaintiffs (paras 31-40), Dowd Defendants’ reply (paras 41-43). Each set of paragraphs scaffolds the basic arguments which lend themselves easily to several other similar procedural disagreements arising from like facts and like arbitration legislation.

For example only, Dowd Defendants in their reply (a) drew useful distinctions regarding what was meant by “inextricably linked” and (b) articulated a trend they discerned from recent case law on section 7(5).

(a) “[41] In reply, the Dowd Defendants refer to paragraph 34 in Lamb and say that even if the dispute “overlaps”, it can still be reasonably separated. The test is whether the claims are inextricably linked and the Dowd defendants say they are not. This is because prior to November of 2016, the Dowd defendants were not named and not connected with the other Plaintiffs. The claims between the TCPL Defendants and the Dowd Defendants cannot be inextricably linked now because they were separated before. Further, the fact that there are overlapping facts does not mean the claims are inextricability linked. Referring to Condominium Corporation 0125331 v W De Silva Properties Inc, 2009 ABQB 650 (CanLII), 481 AR 259 at para 51, it is true that some evidence may overlap but the matters can be reasonably separated. Master Prowse’s decision in Canexus Corporation v MEG Energy, 2017 ABQB 739 (CanLII) at para 48, tells the Court that the issue is whether the matter is in arbitration will answer any of the issues in dispute, so it is overlap of issues not the facts that matters.

(b) “[42] Finally, they say the newer cases considering section 7(5) of the Arbitration Act are moving away from finding the Court has the discretion to send matters subject to an arbitration clause to litigation if they are linked to other claims not subject to arbitration. Instead, the cases are favoring enforcing arbitration agreements through issuing stays and allowing related litigation to proceed: see Toyota Tsusho Wheatland Inc v Encana Corp, 2016 ABQB 209 (CanLII) ; and Husky Oil Operations Ltd v Saipem Canada Inc, 2017 ABQB 489 (CanLII), which relied on UCANU Manufacturing Corp v Graham Construction and Engineering Inc, 2013 CarswellAlta 2979 (ABQB).

Tilleman J.’s own response to those arguments and his statement of the relevant law and its application to the facts appears at paras 44-54 in the section entitled “Findings”.

Tilleman J. found no dispute that the Agreement’s arbitration clause required arbitration of the JDLS partners’ disagreements. The key issue was the effect of that arbitration on a lawsuit involving non-parties to that partnership.

Acknowledging that no party argued “strenuously” that the Agreement’s arbitration clause did not cover Plaintiffs’ claims against the Dowd Defendants, Tilleman J. still held that those claims fell within that clause. He noted that scope of mandatory arbitration clauses had been interpreted broadly enough to include both contract and tort claims between partners: Agrium Inc. v. Babcock, 2005 ABCA 82 at para. 15, Chrystal Rose Home Ltd v Alberta New Home Warranty Program (1994), 1994 CanLII 9090 (AB QB); and, Highland Produce Ltd v Canadian Egg Marketing Agency, 2004 ABQB 52.

Pre-empting any undue enthusiasm for a court to exercise its discretion, Tilleman J. expressly held that the new wording in section 7 in Alberta’s Arbitration Act was enacted to “take away the discretion a court once had to decide whether or not an action should be stayed or not when the plaintiff was a party to a contract with an arbitration clause”. He referred to the Alberta Court of Appeal’s emphasis in Agrium Inc. v. Babcock paras 7-8 on the change from the legislation’s earlier permissive wording “may” to the new mandatory language “shall”. See also International Resource Management (Canada) Ltd. v. Kappa Energy (Yemen) Inc., 2001 ABCA 146, para. 12.

Readily concluding that Plaintiffs’ claims against the Dowd Defendants be sent to arbitration, Tilleman J. then paused to decide the “complicating factor”: what should happen to the balance of the litigation against the TransCanada Defendants.  Section 7(5) provides an opportunity, permissive not mandatory, for the court to consider:

7(5) The court may stay the proceeding with respect to the matters in dispute dealt with in the arbitration agreement and allow the proceeding to continue with respect to other matters if it finds that
(a) the agreement deals with only some of the matters in dispute in respect of which the proceeding was commenced, and
(b) it is reasonable to separate the matters in dispute dealt with in the agreement from the other matters.

Based on the cases submitted by the parties, Tilleman J. identified two (2) competing opinions regarding section 7(5)’s scope:

[48] Having read the various cases (ably presented by all counsel,) it is clear that there is a difference of opinion regarding the scope of section 7(5). The approach in Lamb allows a court to bypass an arbitration clause if it determines that the matters in a lawsuit relating to a third-party’s involvement are inextricably linked. This approach favours avoiding duplication in proceedings and the potential danger of having different findings on factual or legal matters that overlap. On the other hand, the approach in UCANU favours providing deference to arbitration clauses and holding parties to their contractual promise to arbitrate, despite the inefficiencies/inconsistencies it might inevitably create.

Given the reasoning presented by both competing opinions, Tilleman J. determined that the latter approach best fit with section 7. First, it sides with the evolution of the wording in the legislation from permissive to mandatory. Second, nothing in section 7(5) suggests the court is given back the discretion to ignore or override the arbitration clause.

Tilleman J. pursued his analysis and, on the facts of the case, held that the requirements of section 7(5) had not been met.

[50] However, in this case, I find that the requirements in s 7(5) have not been made out; that is to say, it is not reasonable in this case to separate the matters in dispute subject to arbitration from the other matters. I find that both actions related one way or another to the same subject matter, which is the TCPL contract, and the actions of all of the parties in relation to the demise of that contract. There will be common factual determinations, and related legal issues and conclusions, to be made regarding the firing of Craig Barry and Mr. Burke’s actions during and after that event. The Plaintiffs’ claim against the Dowd Defendants for breach of fiduciary duty and their claim against the TransCanada Defendants for breach of good faith and honesty both have as a common foundation, potential collusion in moving the TCPL contract from JDLS to the Dowd Defendants. These common underlying facts are referenced in the Amended Statement of Claim (from October 2017) at paragraph 21, subparagraphs (n) through (s), and paragraphs 29(a) and (b). The “Dowd Manifesto” is also a key document to be interpreted in both actions. Thus, there are clearly intertwined issues of fact and law in the actions that could impact the determination of the respective claims.

Tilleman J. exercised his option to refer the claims against the Dowd Defendants to arbitration and, at the same time, stay the claims against TransCanada Defendants. He referred to a further series of court decision in the litigation which lead to the decision in UCANU Manufacturing Corp v Graham Construction and Engineering Inc, 2013 CarswellAlta 2979 (ABQB) noted above. The Alberta Court of Appeal in UCANU Manufacturing Corp v Calgary (City), 2015 ABCA 22 at para. 7 upheld a similar stay of the litigation pending the outcome of a related arbitration. The motivation in doing so was to favour the efficient resolution of disputes and management of the court’s and the parties’ resources provided: (a) the issues in the arbitration are substantially the same as the issues in the action; (b) the continuance of the action would work an injustice; and, (c) the stay will not cause injustice to plaintiff.

Given the overlapping facts and overlapping issue, Tilleman J. determined that, similar to UCANU Manufacturing Crop v Calgary (City), 2015 ABCA 22, the arbitration would not only resolve the dispute involving the parties to the arbitration but shed light on issues applicable to other parties and reduce risk of inconsistent findings and the duplication of findings. As a result, he ordered that the arbitration be allowed to proceed first in New Brunswick so that the parties in the Alberta court litigation could, afterwards, take “appropriate further steps based on the outcome of the arbitration”.

Based on the above, he stayed the action against the TransCanada Defendants pending the arbitration and declined to consider the alternative issues regarding the court’s jurisdiction.