British Columbia Court Stays Action in Favour of Arbitration – Even Against Non-Signatories

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Author: Anthony Pugh, Student-at-Law, Law Works P.C.
Editor: Ben Hanuka

In Northwestpharmacy.com Inc. v Yates, the Supreme Court of British Columbia released a noteworthy arbitration-related decision on September 7, 2017, about whether British Columbia had territorial jurisdiction and whether the case should be stayed in favour of arbitration based on an arbitration agreement between Northwestpharmacy and a third party.

Key Facts

Northwestpharmacy.com Inc is a Panamanian company which operates a website through which consumers in the United States can access lower cost prescription drugs. Major credit card companies did not want to process payments for the pharmacy. Therefore, Northwestpharmacy contracted with Omega Group Inc., another Panamanian company, and Epic Capital Group, LLC (“ECG”), a Nevada company, to process payments.

The dispute was over around $1.2 million held by the payment companies in rolling reserves that Northwestpharmacy alleged it was owed.

Northwestpharmacy wanted to avoid an arbitration clause that it had included its contract with Omega, so it did not name Omega as a defendant.

The Yates and Tozman defendants are principles of Omega and ECG, and their spouses.

Northwestpharmacy also elected not to plead breach of contract, instead favouring misrepresentation, unjust enrichment, breach of trust and other claims.

The only connection to British Columbia was that pre-contract meetings took place in the province on April 8 and 9, 2015, where Northwestpharmacy alleges that the defendants made fraudulent misrepresentations.

Territorial Competence: Northwestpharmacy Need Only Show Serious Issue to Be Tried

Northwestpharmacy claimed territorial competence under four conditions in British Columbia’s Court Jurisdiction and Proceedings Transfer Act [CJPTA]. Three of those conditions were quickly rejected by the presiding judge, Macintosh J.

However, the judge accepted that there was a serious question to be tried about whether mere receipt by Northwestpharmacy of a fraudulent misrepresentation in British Columbia was enough to establish territorial competence in the province.

The defendants argued that a misrepresentation occurs where it is received and acted upon, relying on Central Sun Mining Inc. v. Vector Engineering Inc., 2013 ONCA 601, and Gulevich v. Miller, 2015 ABCA 411.

Northwestpharmacy argued that the tort occurs either where the misrepresentation is made, or received, or acted upon; or where it is made, and received or acted upon, citing three different cases.

This was sufficient for Northwestpharmacy to show that there was a serious issue to be tried. Macintosh J. noted that the defendants’ argument on territorial competence may prevail at trial, or that Northwestpharmacy may fail to prove that the defendants made fraudulent misrepresentations.

Macintosh J. also determined that Northwestpharmacy would not have succeeded in proving a real and substantial connection to British Columbia under subsection 3(e) of the CJPTA. LeBel J., in the leading Supreme Court of Canada decision on territorial jurisdiction, Van Breda, rejected the idea of a court engaging in a case-by-case exercise of discretion. The framework in Van Breda is consistent with the framework under the CJPTA.

Arbitration Clause: When Will a Court Stay an Action, Who Are the Parties, and When Will Non-parties Be Bound?

The Yates and Tozman defendants argued that the action should be stayed under the International Commercial Arbitration Act, the British Columbia legislation which applies to international commercial arbitration.

Under subsection 8(1), an applicant must meet three prerequisites for an action to be stayed: (a) a party to an arbitration agreement has commenced legal proceedings against another party to the agreement; (b) the proceedings must be in respect of a matter agreed to be submitted to arbitration; and (c) the application must be timely, i.e. before the applicant has taken a step in the proceedings.

The court must order a stay if these perquisites are met or arguably met, unless it determines that the arbitration agreement is null and void. The court’s task is not to decide the scope of the arbitration agreement. That is within the jurisdiction of the arbitral tribunal.

Macintosh J. found in favour of the defendants. In application for a Mareva injunction (a special court application to freeze the assets of the defendants) and an Anton Piller order (a special court application for search and seizure of assets), Northwestpharmacy had argued that it believed that its agreement was with three of the named defendants, John Yates, Michael Yates and Michael Tozman. It claimed that Omega was merely the vehicle through which they provided payment processing services.

In this earlier application, counsel for Northwestpharmacy also noted that Omega was not named as a defendant because the arbitration agreement was an expensive obstacle.

Those arguments resulted in Northwestpharmacy being estopped from denying that Yates, Yates and Tozman were parties to the contract. A court should not permit parties to avoid arbitration agreements by naming related parties, but not the signatory of the contract, as defendants.

The arbitration agreement concerned all disputes arising out of the agreement. Even though Northwestpharmacy did not plead breach of contract, the matter at its core involved funds owed under the contract. Furthermore, it was up to the arbitrator to decide whether claims of fraud and conspiracy arising out of contractual services were within the scope of the arbitration agreement.

Most of the funds claimed by Northwestpharmacy consisted of reserves formed before the date of the written contract. Nonetheless, Macintosh J. found that the entire amount was within the scope of arbitration. The written contract overtook the previous oral contracts, through which the parties established those reserves.
Finally, Macintosh J. stayed proceedings against all the defendants who were not parties to the arbitration agreement.

Northwestpharmacy plead that the spousal defendants benefited “from monies wrongfully obtained and kept from the plaintiff.” Macintosh J. saw this claim as secondary to the main claim for $1.2 million. This is because it arose out of the written contract, or could not be considered separately from the contractual dispute.

In addition, Northwestpharmacy’s claim against the other corporate defendants was the same as its claim against the Yates and Tozman defendants. Since it did not distinguish between them, Macintosh J. stayed the claim against the other corporate defendants to avoid multiple proceedings or inconsistent decisions.

One of the defendants, Ms. LePage, who was represented by separate counsel, did not apply for a stay in favour of arbitration. However, Macintosh J. found that it would be unjust to allow the action to proceed against LePage alone and stayed the proceedings against her.

The stay of proceedings in British Columbia means that Northwestpharmacy’s claims against all the defendants are now within the jurisdiction of an arbitrator under the International Rules of the American Arbitration Association.

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