In Northwestpharmacy.com Inc. v. Yates, the B.C. Supreme Court upheld an application by the defendants to stay legal proceedings in favour of arbitration, despite the fact that the defendants themselves were not signatories to the arbitration agreement. The decision demonstrates the generous approach taken by the courts to granting a stay in favour of arbitration, and confirms that although a litigant may not be a signatory to an arbitration agreement, that does not determine whether it is a party to the arbitration agreement.
The defendants’ application related to an arbitration clause contained in a services contract between two Panamanian companies: Northwestpharmacy.com (Plaintiff) and Omega Group Inc. (Omega). The arbitration clause, which had been specifically negotiated by the Plaintiff, provided for the arbitration of “all disputes arising out of or relating to the contract” (Arbitration Agreement).
The Plaintiff brought a claim in British Columbia for, among other things, the tort of fraudulent misrepresentation, conspiracy and unjust enrichment, claiming that it was owed US$1,244,263.08 that the defendants had allegedly collected from the Plaintiff’s customers and then refused to pay. However, the Plaintiff did not sue Omega itself. Instead, it sued the principals of Omega (Yates and Tozman Defendants), as well as a number of natural and legal persons including, the spouses of the Yates and Tozman Defendants (Spousal Defendants), three third-party companies that had business relationships with Omega (Unrelated Corporate Defendants), and a family business trust (Trust). None of the defendants were signatories to the written contract with the Plaintiff. The court surmised that the Plaintiffs had elected not to sue Omega itself in an effort to avoid the Arbitration Agreement.
The defendants sought to dismiss or stay the action in favour of binding arbitration pursuant to section 8 of the International Commercial Arbitration Act (ICAA). Section 8 of the ICAA provides that in order for a stay to be granted:
- Both parties in the legal proceedings must be “parties” to an arbitration agreement
- The legal proceedings must be in respect of a matter that is within the scope of the arbitration clause or the matters agreed to be submitted to arbitration
- The application must be timely, that is, before the applicant has taken a step in the proceedings.
The court’s task is not to make a final determination as to the scope of the arbitration agreement or whether a party to the legal proceedings is a party to the arbitration agreement; those are matters that fall within the jurisdiction of the arbitral tribunal under the principle of competence-competence. All the applicant for a stay must show is that it is arguable that: the dispute falls within the terms of the arbitration agreement; and a party to the litigation is a party to the arbitration agreement. If those criteria have been met, the court must stay the proceedings unless the application has not been made in a timely way or the arbitration agreement is null and void, inoperative, or incapable of being performed.
NON-SIGNATORIES CAN BE PARTIES TO AN ARBITRATION AGREEMENT
The court held that the fact that the defendants were not signatories to the Arbitration Agreement did not mean that they were not parties to it.
With regard to the Yates and Tozman Defendants, the court held that a party to legal proceedings may be granted a stay in favour of arbitration proceedings where the defendants are treated as the nominees of a signatory to the contract, or as the true parties to the contract. In this case, the Plaintiff itself had taken the position that the “true” contract was with the Yates and Tozman Defendants, and that “any corporate entity that would become involved, would merely be the vehicle” through which they provided their services. In the alternative, the court found that the Yates and Tozman Defendants were acting as agents for Omega, and were therefore entitled to assert the Arbitration Agreement as parties claiming under or through Omega.
With regard to the Spousal Defendants, the Unrelated Corporate Defendants and the Trust, the court explained that a stay may be issued in respect of persons who are not parties to an arbitration agreement, so long as the claims against those persons involve substantially the same issues or are otherwise intertwined with the matter for arbitration. The court held that in this case, the proceedings against the Spousal Defendants, the Unrelated Corporate Defendants and the Trust were inextricably intertwined with the issues that are subject to the Arbitration Agreement.
The court in this case expressed a desire to prohibit parties from avoiding arbitration clauses based on technical grounds or artful pleading. In particular, at the stage where a party is seeking a stay from the courts and must only demonstrate that it is arguable that the parties are both parties to the arbitration agreement and that the dispute falls within the agreement’s terms, party status should not be construed narrowly.
Further, the court in this case stated that having sought the benefits of the arbitration clause, the Plaintiff should not be able to escape the burdens. Here, the Plaintiff specifically negotiated the arbitration clause on the basis that it would facilitate a quicker resolution and preserve confidentiality. It then elected not to sue the obvious primary defendant in order to avoid arbitration. While this particular fact scenario clearly motivated the court, the court’s statements regarding the generous approach to be taken in applying the test for a stay provide guidance for future cases and in drafting arbitration clauses that are intended to be narrowly construed.