Québec – arbitration not appropriate to conduct business or resolve daily business disagreements – #146

In Naimer v. Naimer, 2018 QCCS 5210, Mr. Justice Stephen W. Hamilton rejected a post-trial solution by some of the litigants to impose arbitration as a way to avoid future deadlock in the operation of the litigants’ business. Though proposed in answer to his invitation to provide a lasting solution once the safeguard orders expired after the trial decision issued, Hamilton J. readily held that arbitration was not appropriate to resolve conflicts regarding day-to-day business decisions. The lack of any basis for arbitrators to decide on business initiatives, the non-arbitrable nature of business decisions and the anticipated delay in instituting arbitration for each disputed business decision lead Hamilton J. to dismiss the proposal.

The dispute involved three (3) brothers, Darren Naimer, Clifford Naimer and Bram Naimer, who held shares and executive and/or director positions in La Compagnie d’Éclairage Union Ltée (“Union Lighting”), a business operating since 1914 in the retail and commercial distribution of lighting, home décor and architectural hardware and employing over 60 employees.

(In similar fashion as advised by Hamilton J. at footnote 1 to his decision, “For simplicity and because many of the parties share the same last name, the Court will refer to people by their first names. No disrespect is intended.”)

Sparked by Bram’s notice in November 2012 that he wanted “out” of Union Lighting and would exchange his shares for shares in Union Properties Ltd., the corporation owing the real estate on which Union Lighting operated, Fred Naimer and Andree Naimer, brother and sister to Darren, Clifford and Bram, responded with a shot-gun offer to buy Bram’s shares. After discussion with family members and with Darren and Clifford, Bram countered with his own shot-gun offer. The transaction for Bram to acquire Fred’s and Andree’s shares closed May 10, 2013. The nature of the funding to finance Bram’s offer gave rise to dispute. Darren and Clifford claimed that the sources of the purchase price were equity investments and Bram claims the sources are a set of loans.

The financial resolution of repaying the sources of the acquisition price lead to a deterioration of the relationship between Darren and Clifford on the one hand and Bram on the other. The dispute also included disagreement over Joanna Naimer’s, Bram’s wife’s, shareholding in Union Lighting after the May 10, 2013 acquisition.

Darren and Clifford filed a court action on July 15, 2015 alleging oppression by Bram and Joanna on the basis that the transformation of the equity investment into a loan to Union Lighting was unfair to them. They sought cancellation of Joanna’s shares and cancellation/redistribution of Bram’s shares so that the three brothers would have equal shareholdings. Hamilton J. described the atmosphere of the operations.

[24] Since that date, Bram, Darren and Clifford remain in Union Lighting. They are the three directors of the company but Bram on the one hand and Darren and Clifford on the other seem to be unable to work together. Bram cannot conduct a board meeting without Darren and Clifford, and Bram has not attended board meetings called by Darren and Clifford. The administration of the company has become contentious, and safeguard orders, which expire when this judgment is issued, have been necessary to maintain the status quo.

The parties amended their proceedings to add other causes of action, both as principal claims and as cross-claims. For example, Bram and Joanna applied to amend their defence and to add a counter-claim.

[29] On September 19, 2016, when the file was almost ready for hearing, Bram and Joanna sought to amend their defence to add a counter-claim alleging ingratitude by Darren and Clifford, a failure to cooperate in the management of Union Lighting and defamation of Bram and seeking the cancellation of Darren and Clifford’s shares as well as $850,000 damages from Darren, Clifford and their attorneys.

The amendments were allowed only in part, the court refusing to authorize the claim against the attorneys.

The trial began November 27, 2017 but was suspended November 28, 2017 in order to allow the parties to explore settlement but discussions produced no results. The first trial judge issued a safeguard order to preserve the status quo pending completion of the trial and named Hamilton J. as the new trial judge. The trial eventually proceeded before Hamilton J. who renewed the safeguard order until his judgment issued.

During the trial, Darren and Clifford amended their proceedings to add a subsidiary conclusion. They asked that, if the court maintained the current share structure, the court should order a threshold of 76% of the voting shares be required to effect all “major decisions”.

At the end of the trial, Hamilton J. also invited the parties to provide comments as to “whether there was a risk that its judgment would create a situation of deadlock within the Company and whether it should address that potential deadlock in its judgment.” (In his judgment, at the close, he turned back to this invitation.)

Hamilton J.’s decision considers the evidence of the parties and the issues raised by their dispute, devoting paras 42-144 to addressing the dispute. He concludes, among other things, to dismiss the claim for oppression and confirm that the brothers had a deal that 76% was a requirement for key decisions stated at section 3.04 of the shareholders agreement and reproduced at para. 142 of Hamilton J.’s decision.

At para. 145, Hamilton J. questioned the efficacy of his decision to effect real change for the litigants. The result of the trial lead him to conclude that the following “will create a situation of deadlock”:

(i) voting “B” shares are held 52% by Bram, 24% by Darren and 24% by Clifford;
(ii) Bram, Darren and Clifford are each directors; and,
(iii) despite his voting control, Bram cannot change the directors or increase or decrease the number of directors without the assent of Darren or Clifford.

Hamilton J. at para. 147 lists eight (8) categories of issues which demonstrate that the status quois not working” and was quick to also mention that the court’s own orders prohibited the parties from changing the status quo.

[149] Meanwhile, the business appears to be suffering from this situation of conflict and paralysis at the top.  Bram complains that Darren and Clifford are preventing him from taking steps that he claims are in the interests of the company.  Darren and Clifford complain that Bram is managing the company without regard to their rights.

[150] Is this sufficient to give the Court jurisdiction to intervene?

[151] The Court believes that it is. Both sides have alleged improper conduct by the other amounting to oppression. There is a real disfunction among the shareholders which has a serious impact on the management of the company and the rights of the shareholders. The safeguard orders issued by the Court have prevented certain conduct, but those safeguard orders will terminate when this judgment is rendered.

[152] What should the Court do?

In response to Hamilton J.’s invitation to suggest what the court should do if (a) the shares holdings were confirmed as 54-24-24 and (b) section 3.04 key decisions required 76% threshold, each party submitted a proposal which Hamilton J. reproduced, along with the other parties’ rebuttal, at paras 154-157.

Darren and Clifford proposed the Hamilton J. impose “binding arbitration as a condition precedent to any future litigation”. Hamilton J. reproduced their proposal in full at para. 154:

In the event that the Board of Mise-en-Cause Union Lighting becomes deadlocked such that its business and affairs can no longer be conducted to the advantage of its shareholders generally, or its assets are being misapplied or wasted (each such circumstances being herein referred to as a “Deadlock”), then any of Darren Naimer, Clifford Naimer and Bram Naimer may, and it shall be a condition precedent to commencing any action or other proceeding with respect to a Deadlock, require that the matter be submitted to arbitration before a single arbitrator to be agreed upon or to be appointed pursuant to the provisions of the Quebec Code of Civil Procedure, the whole to the exclusion of the courts of civil jurisdiction. For the purposes hereof, Darren Naimer and Clifford Naimer shall be deemed to be one party, and Bram Naimer shall be deemed to be the other party. If the parties are unable to agree on one arbitrator, then each party shall choose an arbitrator within ten (10) days of written notice (the “Arbitration Notice”) by either of the parties to the other, after failure to agree on a single arbitrator and the two (2) arbitrators so chosen shall choose a third (3rd) arbitrator within ten (10) days thereafter. A failure by either of the parties to choose its arbitrator within ten (10) days after the receipt of the Arbitration Notice shall be deemed an irrevocable election to appoint the arbitrator chosen by the other party who has so appointed an arbitrator and such arbitrator shall act as a single arbitrator. The decision of the arbitrator or arbitrators shall be final and binding. To the extent the parties are unable to agree upon the place where the arbitration will be held and the rules for conduct of the arbitration, such rules shall be determined by the arbitrator(s) and the parties agree to act in a reasonable manner to have the matter in dispute determined by arbitration expeditiously. The cost of the arbitration shall be in the discretion of the arbitrator(s) but, if the position of each of the parties in the dispute is not clearly unreasonable it is anticipated that the cost of the arbitrator(s) shall be borne equally between the two (2) parties and each of the parties shall bear its own costs of the arbitration. If the decision of the arbitrator(s) produces a finding that money is payable by one of the parties to the other, the arbitrator shall have power to award interest at such rate and to be calculated in such manner as the arbitrator(s) determine(s).

It is unclear how the proposed arbitration could be “final and binding” but be “a condition precedent to commencing any action or other proceeding”.

Bram objected, stating that arbitration is “not a viable solution”. He stated that “arbitration only imposes a cumbersome, inappropriate and inefficient mechanism for resolving the business or personal disputes that will certainly arise.

Hamilton J. rejected arbitration as a solution to operating Union Lighting. Though he did not endorse Bram’s proposal set out at para. 156, he did explain why he would not impose arbitration as a way to operate a business.

[160] Arbitration is not an appropriate way to resolve conflicts as to business decisions. On what basis is an arbitrator to decide whether the company should expand into the U.S. market, whether it should do business with one supplier rather than another, or whether it should fire an employee? These issues by their nature are not arbitrable. Moreover, the delay involved in instituting the arbitration process each time there is a dispute at the level of the board is not appropriate.

Instead, Hamilton J. granted Bram a majority on the board of directors by authorizing Bram to appoint an additional two (2) directors. “The new directors will make decisions as directors not as arbitrators and will decide at the meetings, not after an arbitration process.” He also imposed a shot-gun clause but one which only Darren and Clifford could trigger.