What happens when a plaintiff brings an action where some of the relief sought falls within the scope of an arbitration clause, but the principal claim is unrelated? Does a judge let the action proceed in court on the basis that the essential character of the matter is non-arbitrable? Do they grant a stay in favour of arbitration because there is a sliver of matter that is subject to arbitration? Or, can the court grant a partial stay: can it stay those matters (and the relief sought) that are arguably subject to arbitration and let the rest go to court?
In Davidson v. Lyra Growth Partners Inc., 2024 BCCA 133, the Court of Appeal confirmed that the latter approach can be taken, and that stays are mandatory for the aspects of a claim covered by an arbitration clause.
Background
The underlying action arose out of the appellant's employment with the respondent, Lyra Growth Partners ("Lyra"). The appellant worked as Lyra's Director of Human Resources and Business Administration from 2015 to 2021. In 2017, the appellant (and a related trust) entered into an incentive stock program with Lyra (and a related entity). The applicable shareholder agreements each included an arbitration clause applying to any disagreement or dispute with respect to the agreement or its interpretation (the "Arbitration Clause").
In 2021, the appellant was terminated with cause. Lyra subsequently brought an action against her for misappropriation of funds, alleging that she had:
- breached an express or implied term of her employment agreement;
- breached an express or implied term of the shareholder agreements;
- breached her common law duties as an employee; and
- breached her fiduciary duties.
The relief sought included disgorgement of the shares held by the appellant's trust and an order she relinquish all shares held pursuant to the shareholder agreements. The Court referred to these two items as the 'Share-Based Remedies'.
Supreme Court of British Columbia: No Stay
The appellant brought an application to have the action stayed pending the outcome of an arbitration in light of the Arbitration Clause. The BC Supreme Court found that Lyra's claim was fundamentally for the alleged torts of conversion and fraud, as well as alleged breaches of an employment contract and fiduciary duty. The Court found it was not a "disagreement or dispute between the parties with respect to the shareholder's agreement or the interpretation thereof" and thus not something which the parties intended to fall under the scope of the Arbitration Clause. He reached a similar conclusion with respect to the Share-Based Remedies. The judge dismissed the application to stay the action on this basis.
The appellant appealed the denial of the stay.
Court of Appeal: Complete or Partial Stays
On appeal, the Court of Appeal (per Hunter J.A.) agreed with the BC Supreme Court that the fraud and conversation claims were not related to arbitrable matters. But that was not the end of the matter. The Court found that the Share-Based Remedies (and whether they should be granted) were arguably caught by the Arbitration Clause. It noted that the Arbitration Clause was intended to cover "any disagreement or dispute with respect to the [Shareholder Agreements]," and that the Shareholder Agreements included procedure for redeeming shares on termination of employment. On this basis, the Court found that the Arbitration Clause intended to include disputes concerning the disposition and valuation of shares when a shareholder is terminated for cause – which of course is what happened in this case.
The Court was thus faced with claims for fraud and conversion, which were not arbitrable, and a few matters which were arbitrable.
The Court ruled that, where a court is faced with a claim raising multiple issues, some arbitrable and some not, the court cannot dismiss the stay application in its entirety (unless there is a statutory exclusion). Rather, arbitrable claims must be stayed; the question is whether it will be a complete or partial stay. The Court found that this latter question is within the discretion of the applications judge. In such cases, judges could consider non-exhaustive factors such as (a) whether the arbitrable and non-arbitrable issues are so intertwined that they must be heard together, in which case a complete stay of the action will be appropriate; and (b) whether the core of the claim concerns non-arbitrable matters, in which case a partial stay may be more appropriate.
In this case, the latter factor was at play. The Court ordered a partial stay: the share-based claims were ordered stayed, but the claims based on fraud and conversion were permitted to proceed.
Key Takeaways
The Court of Appeal's confirmation of the availability of partial stays in favour of arbitration in multi-issue proceedings reaffirms that BC is an arbitration-friendly jurisdiction where the parties can control what disputes go to court and what disputes go to arbitration. With this in mind, parties should consider these key takeaways:
Drafting and Responding to Pleadings: Plaintiffs bringing court actions should be mindful that even minor references to matters that could be caught by an arbitration clause may attract a stay application. On the other hand, defendants seeking a stay will need to ensure that they bring their application in a timely manner and before filing their response to civil claim, in order to avoid attorning to the court's jurisdiction.
Drafting Arbitration Clauses in Contracts: It is important that dispute resolutions clauses be drafted with a clear intent of what is arbitrable and what is not. Where there are multiple contracts, the dispute resolution clauses should be drafted consistently and compatibly.
Strategy for Parallel Proceedings: Parties should be mindful that in situations involving multiple contracts, third parties, or issues, the same factual matrix may give rise to several separate proceedings in different forums. Parallel proceedings produce potential risks in terms of conflicting decisions, duplication of work, increased costs and delays. Accordingly, parties should consider whether consolidation is appropriate. While consolidation is often the most efficient and cost-effective outcome, there are situations in which consolidation of arbitrations does not make commercial sense. The parties subject to the arbitration agreement should also consider whether it is more economical and efficient to waive their right to arbitrate and to participate in the court proceedings. If this is impossible, a party should consider whether it wishes to apply for a temporary stay of one of the parallel proceedings until a final award or order has been issued in the other proceeding. This is particularly advisable if the outcome of one proceeding depends in whole or in part on the outcome of the other.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
