Canada – Action Brought to Require Payment Ordered in Award

This article was fist published in the Arbitration Matters Blog, here.

In Tomalik v Enthink Inc., 2022 ABCA 302, the Court dismissed an appeal of the decision of Justice Gill of the Alberta Court of King’s Bench, who ordered the Appellant companies to buy out the Respondents’ shares in the companies pursuant to a Unanimous Shareholders Agreement (“USA”) and a valuation done by the second of two valuators.  The Respondents argued that the first valuation was too low and pursued arbitration, as a result of which the arbitrator found the first valuation deficient and ordered a second valuation, which was even lower.  The arbitrator ordered the Appellants to purchase the shares at the second valuation amount. When they refused to pay, the Respondents sued the Appellants for breach of contract and, in a separate action, the second valuator in negligence for failing to arrive at a fair valuation.  The two actions were permitted to proceed; by accepting the valuation as binding upon them in the first action and challenging it in the second, the Respondents were not seeking “inconsistent and mutually exclusive rights”.

The arbitration: After the event which triggered the buyout by the Appellants of the Respondent’s shares, the Respondents disagreed with the first valuation in the amount of $242,203. The Respondents argued that it was too low and pursued arbitration under the USA. The arbitrator agreed that the first valuation was deficient and ordered a second valuation, which valued the shares at the lower amount of $184,310.

Rather than challenge the second valuation in the arbitration, the Respondents elected to treat the second valuation as final and binding between themselves and the Appellants under the USA and sought payment from the Appellants in the lower amount of $184,310.

Two actions: When the Appellants did not pay, the Respondents sued them and sought an order compelling the Appellants to purchase the shares pursuant to the USA and based upon the second valuation.

The Respondents also sued the second valuator in negligence for failing to arrive at a correct fair market valuation.  The second valuator defended the action and issued a third party against Appellant Enthink.

The decision of the motion judge:  In the action brought by the Respondents against the Appellants, the Appellants argued that the doctrine of election applied and that the Respondents were asserting that the valuation was valid in one action and invalid in the other. As a result, they were seeking “inconsistent rights through their various actions”.

Justice Gill of the Alberta Court of King’s Bench found that the doctrine of election did not apply and ordered the Appellants to pay the $184,310 amount based upon the second valuation. He found that the Respondents had chosen to proceed with the share buyout process and the binding valuation, as was their right under the USA and which was conclusive and binding upon them. There was no dispute that the Appellants owed the money for the shares; they simply refused to pay.  He also found (at para. 6) that the Respondents were entitled to bring both actions:

“I also find that the [Respondents] have the right to sue the valuator for any alleged negligence arising from the valuator’s work. By doing so, they are not pursing inconsistent remedies or inconsistent rights. This action [against the Appellants] is an action in contract; that is, to enforce the terms of the unanimous shareholders agreement. The action against the valuator is a tort action for negligence. It involves different issues and a different defendant.” 

The decision of the Court of Appeal: The Court found that his conclusion was sound. It put the issue as follows (at para. 5):

“…[T] he appellants argue that the respondents by seeking payment under the Agreement are effectively conceding not only that the valuation is final and binding under the Agreement but that it correctly reflects a fair market evaluation for all purposes, including in the separate action. The appellants’ position in this regard however, is not an answer to the respondents’ seeking enforcement of their contract.

The USA provided for the manner in which the fair market value of the shares was to be determined, which determination, “shall be conclusive and binding on all interested Persons”.  There was no persuasive argument that the second valuation directed by the Arbitrator was not prepared on the basis set out in the USA.

The second valuation created an issue estoppel with respect to the fair market value of the shares, but only as it affected the parties to the arbitration, not the third party second valuator. The Court agreed with Justice Gill’s reliance upon Smeichowski v Preece 2015 ABCA 105, when he wrote that a party may sue a valuator in negligence if the party has suffered a loss as a result of a negligent valuation. But as between the parties, the negligent valuation will stand so long as it complied with the terms of the parties’ contract.

Relying upon Walsh v Mobil Oil Canada,  2013 ABCA 238 at para  79 for the requirements of the doctrine of election, the Court found that the Respondents’ actions against the Appellants in seeking enforcement of the contract and against the second valuator in negligence were not “inconsistent and mutually exclusive rights” and it was not shown that the Respondents “unequivocally chose one over the other”. In fact, they maintained throughout that they would pursue both actions to receive fair value for their shares.

Editor’s Note:

There is so much in this short, 12-paragraph decision!  From an arbitration perspective, some of the more interesting aspects of this case relate to issues that were not raised in either Justice Gill’s decision or that of the Court of Appeal.  For example, why did the Respondents sue the Appellants for breach of contract for failing to pay for the shares in accordance with the award, rather than seek to enforce the award? Did the Appellants object to the jurisdiction of the courts? What was the language in the USA’s arbitration agreement?

author

Lisa C. Munro

Lisa Munro is a partner at Lerners LLP, whose practice is limited to work as an arbitrator in domestic and international commercial arbitrations (both ad hoc and under institutional rules). She brings to this role more than 25 years of experience as counsel in commercial/business litigation and both international and…

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