Executive Summary: Key Legal and Evidentiary Issues

• The Court set aside the arbitration agreement with KPMG as part of the ongoing oppression remedy, making it unenforceable so that the LKDFN Companies’ claims against KPMG may proceed in the Supreme Court of the Northwest Territories rather than in British Columbia arbitration.

• The “Barlas Advice Claim” – based on KPMG’s direct engagements with Barlas and his companies – was held to fall outside the scope of the LKDFN–KPMG arbitration agreement and is allowed to proceed in court.

• KPMG’s application to stay the derivative action in favour of arbitration would have been granted in part, but for the Court’s decision to set aside the arbitration agreement; all technical prerequisites under the Arbitration Act were otherwise met, except for the Barlas Advice Claim.

• The separate KPMG Oppression Application brought by LKDFN members was stayed under the Judicature Act because it was duplicative, in pith and substance an attempt to “end-run” the arbitration agreement, and asserted oppression claims that properly belong to the companies by derivative action.

• The Court refused the Receiver’s broad request for production of all of KPMG’s “working papers”, finding they are KPMG’s property, but directed that KPMG must provide any records that the successor accountants (BDO) confirm they require to rebuild the LKDFN Companies’ books and respond to tax inquiries.

• In assessing whether to set aside the arbitration agreement, the Court relied on the oppression and receivership powers, drew on the Peace River framework by analogy, and expressly considered the special context of a small First Nation whose economic self-determination had been undermined, including UNDRIP and the Truth and Reconciliation Commission’s Call to Action 92.

Facts of the case

Structure and role of the LKDFN Companies

Tsa Corporation is the LKDFN’s master holding company, incorporated under the Canada Not-for-Profit Corporations Act. Every LKDFN member living in Lutsël K’é is a member of Tsa. Tsa has two subsidiaries, Denesoline Corporation and Ta’egera Company, both incorporated under the Northwest Territories Business Corporations Act. Denesoline is the principal economic development arm and is party to numerous Participation or Impact Benefit Agreements that provide the lion’s share of its income. Ta’egera is the real estate holding company.

The LKDFN community is remote, accessible only by plane or boat, with just over 300 residents in Lutsël K’é and some 500 further members with other primary residences.

Barlas’ control and misappropriation

In 2014, LKDFN entrusted the companies to a new CEO, Ron Barlas. The Court describes that instead of nurturing the companies, Barlas “pillaged them for his family’s enrichment,” ruled with an “iron fist,” intimidated community and board members, and by the time of his removal had bylaws and employment contracts that gave him total control.

Beginning in 2016, Barlas misappropriated funds by diverting income from the LKDFN Companies to Northern Consulting Group Inc. and Equipment North Inc. (the “Barlas Companies”). His wife was initially the sole shareholder and director of the Barlas Companies; in 2018 the shares were moved to Barlas as trustee of the Barlas Family Trust, with Barlas, his wife, and their two adult children as beneficiaries; his wife remained sole director.

The most egregious device was a joint venture agreement (JVA) effective 16 September 2016 between Denesoline and Northern Consulting. Under it, Northern Consulting became entitled to 49% of Denesoline’s gross revenues from new sources, despite Barlas already being fiduciary to maximize Denesoline’s income. Amendments in 2017 expanded the JVA to Denesoline’s mine-related contracts, effectively diverting half its main revenue source. The Court notes the LKDFN Companies derived no benefit and that the arrangements effectively gave Barlas fifty cents on the dollar of the companies’ income.

In late 2018, the JVA was amended to add a $4.25 million termination fee in favour of Northern Consulting, secured by a general security agreement over all of Denesoline’s assets. In May 2020, Barlas compelled Denesoline to pay approximately $2.2 million to buy back Northern Consulting’s interest under an Assignment and Assumption Agreement, meaning Denesoline paid to reacquire its own misappropriated income stream.

Barlas also caused other self-dealing transactions with the Barlas Companies, increased his salary from $170,000 to $221,000 per year, added a guaranteed 46% annual bonus, and used company assets for personal benefit in other ways. The Court records that the funds misappropriated are “said to exceed $11 million,” and earlier notes evidence suggesting the LKDFN has suffered upwards of $10 million in damages, though a trial to quantify losses has not yet been held.

Governance changes and community intimidation

In parallel, Barlas overhauled corporate governance to obtain near-total unilateral control. Tsa adopted new conflict-of-interest policies and bylaw amendments in 2017 that allowed the board to remove members on the recommendation of the President or CEO and required members to be “persons of good repute” and support Tsa’s objectives. At the same meeting he announced $1,000 cheques per household, distributed after approval of the changes; these $1,000 payments continued at the 2018 and 2019 annual general meetings. At no point at those AGMs was the JVA mentioned.

After 2019 no further AGMs were held, but Barlas continued distributing $1,000 cheques, sometimes through staff obtaining member signatures on resolutions saying they had had a chance to review financial statements. In 2022, at a community meeting and feast, cheques and financial statements were distributed; again there was no mention of the Northern Consulting payments.

Community members who raised concerns or requested greater accountability were met with threats that Barlas would sue them or have them removed from Tsa under the amended bylaws, creating what the Court describes as an “atmosphere of fear” discouraging legitimate questions. An example was given of a board member who sought to add an agenda item about meeting the LKDFN Chief and Council; Barlas accused her of misconduct and told her she was no longer a director before her term expired.

Further changes in 2020 included a unanimous shareholder agreement between Denesoline, Tsa, Ta’egera and Northern Consulting, reducing each board to two seats, one to be held by Barlas or a Northern Consulting nominee, and giving that nominee a tie-breaking vote. At one point, Barlas even rejected a proposed meeting between himself and the LKDFN Chief and Council partly on the basis that “Denesoline as part of Tsa is a sovereign entity.”

Whistleblower, injunctions, and oppression decision

In 2023, Barlas’ right-hand man came forward as a whistle-blower. LKDFN obtained legal assistance and in April 2023 Chief Marlowe, on behalf of the community and Tsa members, secured a Mareva injunction freezing worldwide assets of Barlas and his companies and a Receivership Order vesting control of the companies in a professional manager.

LKDFN then pursued an oppression action against Barlas and his wife. After an extensive evidentiary process, Justice Shaner ruled entirely in LKDFN’s favour, finding Barlas’ conduct oppressive “in the extreme”; that result has been upheld on appeal and is now final. The Mareva captured approximately $5.5 million; just over $1 million has been released to Barlas and his family for living expenses and legal fees, including funding for their appeal. The Receiver reports that the LKDFN Companies are roughly at break-even when comparing what has been recouped against the cost of doing so, and that the LKDFN remains in a significant loss position.

KPMG’s role and alleged wrongful assistance

In 2016, the same year misappropriation began, Barlas replaced local accountants with KPMG, choosing a partner in KPMG’s Langley, B.C. office with whom he had a prior relationship. The Court finds as a fact that retaining KPMG was an instrument of Barlas’ oppression and part of his overall scheme, although it expressly notes this does not in itself entail any finding of wrongdoing by KPMG.

The LKDFN Companies brought derivative actions against KPMG and RMRF. Against KPMG, they allege negligence, breach of contract, breach of fiduciary duty, and knowing assistance in Barlas’ breach of fiduciary duty. Specifically, they claim KPMG prepared inaccurate and misleading financial statements that covered up self-dealing transactions with the Barlas Companies, including payments under the JVA and the Assignment and Assumption Agreement, and that, at Barlas’ direction, payments to Northern Consulting (about $1.3 million in a draft 2019 financial statement) were omitted from the final statements. They also allege KPMG used intentionally vague language to conceal the nature of the $2.2 million payment under the Assignment and Assumption Agreement and gave misleading presentations to LKDFN members at the 2017–2019 AGMs, thereby lending legitimacy to Barlas’ governance and the companies’ apparent financial health.

Separately, the “Barlas Advice Claim” alleges KPMG knowingly assisted Barlas’ breach of fiduciary duty through direct engagements with Barlas and the Barlas Companies, including advice on structuring the Assignment and Assumption Agreement, creation of the Barlas Family Trust, and acting as accountants for the Barlas Companies, all under separate engagement agreements. The same KPMG partners are alleged to have worked both for the LKDFN Companies and for Barlas and his companies.

KPMG’s applications and parallel proceedings

KPMG applied under s. 8 of the new Arbitration Act (in force April 1, 2024) to stay the derivative action in favour of arbitration seated in Langley, B.C., relying on arbitration clauses in engagement letters dated June 1, 2016 and June 1, 2018. Each clause applies to “any dispute arising out of or relating to this Engagement Letter or the services provided under [it]”, seats the arbitration in the office city (Langley), applies the ADR Institute of Canada rules, and removes rights of appeal and judicial review.

KPMG also commenced a B.C. arbitration by Notice to Arbitrate, described as seeking declarations that its work met professional standards and that limitation of liability clauses were enforceable. The arbitration has been held in abeyance pending these motions.

Two weeks after KPMG’s stay application, LKDFN brought a new oppression application directly against KPMG (the “KPMG Oppression Application”), alleging that KPMG knowingly assisted Barlas’ oppressive conduct and seeking, among other relief, an order setting aside the arbitration agreements. KPMG responded with its own stay application to halt this oppression proceeding, arguing that the LKDFN, though not a signatory, was bound to arbitrate by various doctrines, or alternatively that it should be stayed under the Judicature Act to avoid multiplicity.

The Receiver, drawing an analogy to Peace River Hydro Partners v Petrowest Corp, sought to have the arbitration agreements set aside and declared unenforceable as part of the ongoing oppression-driven receivership, arguing that parallel arbitration would impose significant duplicative costs, risk conflicting outcomes, and compromise recovery. The Receiver also sought an order under the Receivership Order for KPMG to produce its working papers.

KPMG opposed the Receiver’s motions, arguing that Peace River is confined to insolvency, that set-aside is unavailable as an oppression remedy, that any prejudice from arbitration was unproven, and that production of working papers would be an improper pre-discovery use of receivership powers.

Ruling and overall outcome (including successful parties and monetary aspects)

Governing legislation and stay framework

Justice Devlin held that the current Arbitration Act, including s. 8, governs the applications, and that the transitional provision in s. 71(1) does not apply because the B.C. arbitration is not governed by NWT law and the clause deals with arbitral proceedings, not court proceedings.

The Court adopted the competence-competence principle and the two-stage framework from Peace River, harmonized with s. 8 of the Act: KPMG had to show an arguable case for the technical prerequisites (existence of an arbitration agreement, party status, scope, and no attornment), after which the LKDFN parties could rebut or establish exceptions on a balance of probabilities, based on a superficial review of the record.

The Court found:

• An arbitration agreement exists in the 2016 and 2018 engagement letters.

• All three LKDFN Companies (Tsa, Denesoline, Ta’egera) are parties, based on the text of the letters referring to “TSA Corporation and its subsidiaries” and the “TSA Group” and listing services for all.

• All claims in the derivative action, other than the Barlas Advice Claim, are at least arguably within the scope of the arbitration agreement.

• KPMG has not taken a substantive step in the NWT proceedings and therefore has not attorned.

Exceptions: Barlas Advice Claim and validity of arbitration agreement

On the exceptions, the Court held:

• The Barlas Advice Claim falls outside the arbitration agreement because it is based on separate, uncontested engagement agreements with Barlas and Northern Consulting, concerns services rendered to Barlas, and can be established without any contractual relationship between KPMG and the LKDFN Companies. The elements of the tort of knowing assistance in breach of fiduciary duty, as pleaded, can be made out solely on KPMG’s work for Barlas. The Court therefore concluded, definitively, that this claim is “not in respect of any matter that is the subject of an arbitration agreement” and may proceed in court.

• The arbitration agreement is not void for illegality. The clause that attempts to preclude any court review whatsoever conflicts with both the NWT and B.C. Arbitration Acts, but the Court treats this as a narrow inconsistency: the offending language is severed, aided by the engagement letters’ severability provisions; the remainder of the arbitration agreement stands.

• The arbitration agreement is not void for unconscionability on a superficial review. Although Barlas was not acting in the LKDFN Companies’ interests, the Court holds that arbitration clauses and liability limits are common contractual provisions and this record does not establish the necessary inequality of bargaining power plus improvident bargain. The final question of unconscionability, if arbitration were to proceed, would be for the arbitrator or trial judge.

The Court declined to grant a temporary stay of the Barlas Advice Claim under the Judicature Act. While s. 29(2) allows just stays and s. 27 addresses multiplicity, s. 8(5) of the Arbitration Act mandates that non-arbitrable claims “continue” in court. Justice Devlin held that temporary stays remain theoretically available but should be rare, and that here efficiency, fairness, and the special public interest in prompt, open adjudication of alleged deliberate harm to a NWT First Nation all weighed strongly against staying the Barlas Advice Claim.

KPMG Oppression Application stayed

Justice Devlin stayed the KPMG Oppression Application under the Judicature Act, without needing to apply the Arbitration Act to it. Key findings include:

• In pith and substance, the KPMG Oppression Application is an attempt to “end-run” the arbitration agreement and is duplicative of existing proceedings (the derivative action and the Receiver’s motion).

• KPMG, as an outside accounting firm, falls outside the “corporate circle” of the LKDFN Companies’ internal affairs, and cannot be a primary respondent to an oppression claim.

• The allegations against KPMG are derivative in nature, concerning wrongs to the companies as a whole, and are properly brought by derivative action (as already done), not by direct oppression claims on behalf of individual members.

• The proper place to seek contract set-aside is within the existing oppression proceeding and receivership, via the Receiver’s motion, not through a new oppression claim against KPMG.

Arbitration agreement set aside as part of the oppression remedy

On the Receiver’s application, the Court concluded that:

• Both the CNFPCA and NWTBCA expressly authorize varying, setting aside, or annulling contracts to which the subject corporations are parties and compensating affected parties.

• The Receivership Order in this case closely tracks the wording of the receivership order in Peace River and authorizes the Receiver to “cease to perform any contracts” of the LKDFN Companies and to initiate and prosecute proceedings on their behalf, subject to Court approval.

• The arbitration agreement in the engagement letters was an “instrumentality” of Barlas’ oppression. Barlas chose distant accountants with whom he had a prior relationship, reduced the risk of local scrutiny, leveraged KPMG’s perceived prestige at community meetings, and subjected the companies to out-of-jurisdiction arbitration that made no sense for them. The Court finds that Barlas did not turn his mind to the arbitration clauses, nor did KPMG specifically focus on them; they were standard-form terms not consciously bargained.

• Multiple parallel proceedings (arbitration plus court actions against KPMG, RMRF, and others) would impose significant additional cost and delay, risk inconsistent outcomes, and strain a small First Nation that is already in a precarious financial position. The Court finds as a fact that compelling arbitration would compromise the process of rectifying the oppression.

The Court draws on the Peace River approach by analogy but emphasizes that, unlike in insolvency law, the authority to set aside contracts in oppression is explicit in the governing statutes and in the Receivership Order. Justice Devlin sets out factors that can justify this exceptional remedy, including: nexus between arbitration agreement and oppression; minimal benefit to the company from the broader contract; absence of conscious negotiation; compromised governance when the agreement was made; and material interference with efficient, fair resolution of the oppression. All of these are found to be present here.

The Court also gives significant weight to the broader context: the exploitation of a small First Nation whose lands are rich, whose companies are its main economic vehicle, and whose members’ economic self-determination was undermined by Barlas’ conduct. Justice Devlin refers to the Truth and Reconciliation Commission’s Call to Action 92, the Northwest Territories’ United Nations Declaration on the Rights of Indigenous Peoples Implementation Act (including s. 6(2)), and the federal UNDRIP Act, underscoring the importance of Indigenous participation in economic development, protection of their resources, and interpretation of NWT laws consistent with UNDRIP.

Having balanced these considerations against the policy of party autonomy and respect for arbitration, the Court holds that, in this special factual context, setting aside the arbitration agreement is a justified and necessary part of the oppression remedy. The derivative action against KPMG may therefore proceed entirely in the Supreme Court of the Northwest Territories.

The Court notes that while no immediate monetary compensation is payable to KPMG for loss of arbitration rights, if KPMG ultimately succeeds in the litigation it may be compensated through enhanced costs to the extent it can show that litigating in court was more expensive than arbitration would have been.

Working papers application outcome

On the Receiver’s request for KPMG’s “working papers”, the Court holds:

• KPMG’s working papers are not “property” of the LKDFN Companies for purposes of the Receivership Order; they belong to KPMG and its partners.

• Those working papers fall within the broad definition of “Records” in the Order, but the Court reads down the production powers so they are not used as an improper pre-discovery litigation tool once a claim has been identified.

• The Receiver’s broad request for all working papers is dismissed. However, KPMG must provide any records that the successor firm BDO confirms it requires for legitimate accounting purposes (reconstructing the LKDFN Companies’ books and responding to Canada Revenue Agency inquiries).

Overall successful party and monetary note

In this decision, the LKDFN Companies and the Receiver are successful in preventing their claims against KPMG from being diverted into arbitration and in keeping the core litigation (including the derivative action and Barlas Advice Claim) in the Supreme Court of the Northwest Territories. KPMG is successful in obtaining a stay of the separate KPMG Oppression Application and in resisting the Receiver’s broad working-papers request. No specific damages or monetary award are determined in this judgment; the Court notes that LKDFN’s losses are said to exceed $11 million, that approximately $5.5 million in assets were frozen with just over $1 million released to Barlas and his family, and that the companies are roughly at break-even when legal recovery costs are netted against recovered assets. No monetary damages, compensation, or costs are awarded or fixed.