Agreeing to arbitrate disputes in shareholder agreements can lead to fast, and final, decisions for the parties involved. In EDE Capital Inc. v. Guan, 2023 ONSC 3273, the Ontario Superior Court of Justice dismissed an application to set aside an arbitral award arising from a dispute under a shareholder agreement. The court underscored that it has no authority to set aside the award on the basis that the arbitrator’s decision is unreasonable or incorrect. The court’s concern, rather, is with ensuring that arbitrators act fairly in the course of making decisions.
What is emphasized by this case, however, is the speed at which arbitration can provide final relief to parties in a commercial dispute. Here, the arbitration was concluded approximately a year and a half after it was started. The court applications thereafter took approximately 15 months to resolve. While not yet equivalent to the speed of business, it is perhaps prudent for parties to agreements to consider including appropriate dispute resolution clauses and agreements to arbitrate where previously they would not.
In February 2018, the Applicant, EDE Capital Inc. (EDE), hosted a luncheon with potential investors, including most of the Respondents, regarding a possible investment in EDE. EDE’s goal was to raise funds in order to facilitate registering a “fully licensed broker.” The term sheet provided by EDE at that meeting indicated that EDE’s wholly owned subsidiary, EDE Securities Inc., would “apply for registration as an investment dealer with the Investment Regulatory Organization of Canada (IIROC),” although no assurance can be given that such registration will be granted.
The Respondents invested a total of CA$1,050,000 in the capital of EDE through a private placement offering. After the private placement closed, EDE transferred the proceeds to its trading account and bought and sold securities intended to generate short-term gains. On September 27, 2018, EDE, the Respondents and other shareholders executed a Shareholders’ Agreement.
In late 2018, instead of pursuing IIROC registration, EDE kept the proceeds of the private placement in its trading account. The Respondents were not advised of this decision, nor were they advised how the funds had been invested.
On December 4, 2019, EDE held an extraordinary meeting of shareholders who then learned that EDE did not pursue IIROC registration for EDE Securities Inc. Rather, EDE had itself traded the proceeds of the placement. A number of shareholders requested their money back and EDE declined to engage in a share buyback.
In March 2020, the Respondents demanded the return of their investment on grounds the funds were not used as had been represented and agreed. Then in May 2020, at a special shareholders’ meeting EDE noted that it considered the funds raised to become an IIROC securities dealer from 2018 to be “excess cash for investment.” EDE then passed a resolution authorizing it to subscribe for up to CA$3 million worth of units in EDE Value Fund LP despite the Respondents’ objections.
The Shareholders’ Agreement contained an arbitration agreement which provided that all disputes and questions between any of the parties shall be resolved by a single arbitrator, and the arbitration shall proceed in accordance with the provisions of the Arbitration Act, 1991. On June 8, 2020, the Respondents commenced the arbitration. The issues before the arbitrator were whether (i) EDE breached the Shareholders’ Agreement when it refused to pursue the IIROC registration, (ii) EDE made misrepresentations to the Respondents and (iii) EDE’s conduct was oppressive.
The Arbitrator bifurcated the proceedings into liability and damages phases. The arbitrator’s Liability Award was issued on June 23, 2021 (a little over one year after the arbitration started). The arbitrator found, amongst other things, that “EDE Capital Inc.’s refusal to pursue an IIROC investment dealer registration for EDE Securities Inc. was a breach of, amongst other things, the Shareholder Agreement and that EDE’s conduct was oppressive.” During the damages phase, the Respondents sought a refund of their CA$1,050,00 investment, and an order for the disgorgement of the trading profits enjoyed by EDE. They also took the position that the Arbitrator could order additional remedies such as a statutory right to damages or rescission under the Securities Act, damages for loss of chance and punitive damages.
In the Damages Award, issued on December 23, 2021 (now approximately a year and a half after the arbitration started), the Arbitrator found that it was necessary to rectify the oppressive conduct by requiring EDE to purchase the Respondents’ shares. She also found that disgorgement of the profits earned from the investment of the funds was an appropriate remedy. She accepted the Respondents’ expert’s methodology to determine the amount to be disgorged – CA$1,065,474 as of June 2021.
EDE requested a reconsideration of the Damages Award under the Arbitration Act on January 7, 2022, arguing that the Damages Award conflicted with the Liability Award because the nature of the co-mingled funds made it unjust to sue a first-in, last-out methodology of disgorgement. Following submissions from the parties, on March 9, 2022, the Arbitrator denied the request stating that she considered the co-mingled funds issue in her award. Thus by March 9, 2022, not even two years after the arbitration started, it was over.
Application to the Court
While the reconsideration was outstanding, on February 2, 2022, EDE applied to the court to set aside the awards. EDE’s main arguments were that EDE was not treated equally and fairly by the Arbitrator, that the Arbitrator reopened issues in the damages phase that were finally determined at the liability phase thus exceeding her jurisdiction, and rendered an award affecting non-parties to the arbitration. The Respondents took the position that the setting aside application was nothing more than an attempt to overturn the just result of the arbitration through trumped up fairness and jurisdictional arguments.
One of the main legal points discussed before the court – that is outside the scope of this post but extremely important for those looking to include arbitration agreements in their contracts – related to the applicability of the International Commercial Arbitration Act, 2017, S.O. 2017, c.2 Sched. 5 (ICAA), and whether parties whose dispute nonetheless meets the requirements of an “international dispute” subject to the ICAA may contract out of the ICAA to be governed by the Arbitration Act, 1991, SO 1991, c 17. On this, the court stated that if the ICAA governs an agreement, the Arbitration Act does not. Parties to an arbitration cannot oust the applicability of the ICAA by agreeing to arbitrate under the Arbitration Act. Thus, the Model Law as scheduled to the ICAA governed the application to set aside.
Setting aside an arbitral award under the Model Law
The court found that all of EDE’s allegations fell under Article 34(2)(a)(ii) and (iii) of the Model Law. These provisions allow a party to an arbitration to apply to set aside an award if, respectively, it “was no given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case” or if “the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the award which contains decisions on matters not submitted to arbitration may be set aside.”
The court found that for judicial intervention on reasons of fairness or natural justice, the conduct of the arbitral tribunal must be sufficiently serious. It must offend “basic notions of morality and justice.” Intervention will therefore be warranted only when the tribunal’s conduct is so serious that it cannot be condoned under Ontario law. Relying on Nelson v. The Government of the United Mexican States, 2022 ONSC 1193, the court reiterated that a party may be said to have been “unable to present their case” when:
- Either or both of the parties were not given an opportunity to address;
- A party was not given an opportunity to respond to arguments made by an opposing party; or
- The tribunal ignored or failed to take the evidence or submissions of the parties into account.
The court stated that where a party merely disagrees with the outcome, the court should not permit re-argument of the merits in the guise of a claim for breach of procedural fairness.
The court found that most of EDE’s arguments regarding procedural fairness were based on the premise that the methodology for disgorgement of profits was wrong because the funds have been co-mingled. The court found that this question relates to the merits of the Arbitrator’s decision and not its procedural fairness. Also, EDE had an opportunity to put forward a different methodology, adduce expert evidence in response to the Respondents’ expert evidence, cross-examine the Respondents’ expert and make submission on the appropriate methodology
In terms of the EDE’s arguments about the arbitrator’s jurisdiction, the court stated that the standard of review that applies to questions of a tribunal’s jurisdiction under Article 34(2)(a)(iii) of the Model Law is one of correctness. Courts are expected to intervene only in rare circumstances where there is a true question of jurisdiction.
The court rejected EDE’s argument that the Arbitrator reopened issues that were finally determined at the liability stage and/or made new findings of fact in the Damages Award. She also did not exceed her jurisdiction under the arbitration agreement, since she did not reopen the liability issue at the damages stage. There was also no order made against non-parties to the arbitration.
The parties’ agreement to arbitrate saw them with an arbitration award approximately a year and a half after proceedings commenced, and the court challenge to the award resolved a year and a half after that. Given the well-established case law for court challenges to arbitration awards under the ICAA and the Model Law, the procedure was known. The court also had the benefit of that case law to follow which, for an application to set aside an arbitral award for a lack of procedural fairness, sets a very high bar.