19 August 2022By Kyra Balogh
Arbitration clauses are a common feature in commercial contracts, but parties to contracts and their lawyers should proceed with caution when drafting such clauses to carefully consider whether the clause is an agreement to arbitrate, or an agreement to obtain a professional opinion.
This issue was considered in a recent Ontario Superior Court decision, 2832402 Ontario Inc. v. 2853463 Ontario Inc.1(283 Ontario). In that case, the Court held that a clause in a share purchase agreement requiring the parties to submit certain matters to an “independent accountant” constituted an agreement to arbitrate, thereby requiring a stay of a court proceeding commenced by one of the parties.
Background: 2832402 Ontario Inc (the “Purchaser”), acquired the shares of QBD Cooling Systems Inc. and QBD Modular Systems Inc. from 2853463 Ontario Inc. (the “Vendor”) under a share purchase agreement (the “Agreement”). The price of the shares was $126.1 million, but the Agreement contemplated that certain adjustments to the purchase price would be made at or after closing, based on changes to the working capital.
The Agreement mandated that the Purchaser provide the Vendor with an estimate of any purchase price adjustments on a “final closing statement” within 90 days of the closing date. If the Vendor did not agree with the Purchaser’s calculations, it was entitled to make a written objection to the final closing statement within a further 60 days.
Additionally, section 2.5 of the Agreement provided that all unresolved matters in respect of the final closing statement must be referred to as an “Independent Accountant,” who would then be required to make a final and binding determination of the issue based on written submissions of the parties.
At closing, the Purchaser paid the Vendor $128,550,994.59, which reflected a purchase price adjustment of $2,450,944.59 in favour of the Vendor. After closing, the Purchaser delivered a final closing statement with a further adjustment to the purchase price of $455,250 in favour of the Vendor.
The Vendor did not accept the Purchaser’s post-closing adjustments and requested back up documentation reflecting the calculations, some of which it received from the Purchaser. The Vendor also delivered a written objection under section 2.5 of the Agreement. In the objection, the Vendor alleged that the working capital adjustment was $11.7 million higher than what the Purchaser had calculated.
The Vendor also filed an application in the Ontario Superior Court of Justice, seeking, among other things, production of the information and documents it had asked for (but not received), that it said were necessary to calculate the working capital adjustments. The Purchaser moved to stay the application in favour of arbitration by the Independent Accountant under section 2.5 of the Agreement.
The Stay Motion Decision: The motion to stay the Vendor’s production application was heard by Conway J.The Court had to decide whether the production application was a proceeding “in respect of a matter to be submitted by arbitration” within the meaning of section 7(1) of the Arbitration Act2 (the “Act”). If section 2.5 of the Agreement was found to be an arbitration clause, the production application would be subject to a mandatory stay pursuant to the Act.
Conway J. found that section 2.5 of the Agreement was an agreement to arbitrate, and that the production application must be stayed.
In coming to her conclusion, Conway J. applied the framework set out by the Supreme Court of Canada in Sport Maska v Zitter (Sport Maska).3 In that case, the Court identified the following non-exhaustive indicia to determine whether an agreement is an agreement to arbitrate, or an agreement to obtain a professional opinion from a third party:
(1) There is a dispute or difference between the parties that has been formulated in some way or another;
(2) The dispute or difference has been remitted by the parties to the person to resolve in such a manner that they are required to exercise a judicial function;
(3) Where appropriate, the parties must have been provided with an opportunity to present evidence or submissions in support of their respective claims in the dispute; and
(4) The parties have agreed to accept the decision.4
Conway J. found that the Sport Maska indicia should be considered as “tools used to determine the intention disclosed by the documents and other instruments, in order to establish the function the parties actually meant to assign to the third party chosen by them,”5 concluding that a clause does not need to explicitly mention arbitration in order to be treated as an agreement to arbitrate.
Conway J. found that the Sport Maska indicia were satisfied in this case, and that the request for production of backup documentation is a matter that is to be addressed by the Independent Accountant. Her Honour interpreted the Agreement as a way of ‘[crystalizing] the matters in dispute for the Independent Accountant’ based solely on the written submissions submitted by the parties.6 The parties also agreed to accept the decision made by the Independent Accountant.