COURT OF APPEAL FOR ONTARIO
CITATION: Universal Settlements International Inc. v. Duscio, 2012 ONCA 215
DATE: 20120404
DOCKET: C54454
O’Connor A.C.J.O., Simmons J.A., and Perell J. (ad hoc)
BETWEEN
Universal Settlements International Inc., The Brokerwise Group Inc. and 1508211 Ontario Inc.
Respondents (Appellants)
and
Antonio Duscio and Martina Capital Corporation
Applicants (Respondents)
William W. McNamara and Nicholas D.W. Daube, for the appellants
Kevin D. Sherkin, for the respondents
Heard: March 13, 2012
On appeal from the order of Justice T.R. Lederer of the Superior Court of Justice, dated May 16, 2011, with reasons reported at 2011 ONSC 968.
Perell, J. (ad hoc):
A. INTRODUCTION
[1] In the decision below, relying on sections 17 and 46 of the Arbitration Act, 1991, S.O. 1991, c. 17, Justice Lederer allowed an application to set aside the award of an arbitrator. In so doing he set aside three interlocutory orders, an order striking out statements of defence, and the arbitrator’s final award. Justice Lederer’s order also removed the arbitrator.
[2] For the reasons that follow, I conclude that the application judge erred in setting aside the arbitrator’s interlocutory orders; however, I agree with his decisions to set aside the arbitrator’s order striking the pleadings and the arbitrator’s final award. I also agree that the arbitrator should be removed.
[3] In the result, I would allow the appeal, in part.
B. FACTUAL BACKGROUND
[4] The ill-starred history of the arbitration involving Universal Settlements International Inc. (“Universal”), The Brokerwise Group Inc. (“Brokerwise”), Geoffrey Panos, 1508211 Ontario Inc. ("1508211"), Christopher Halas, Martina Capital Corporation ("Martina Capital"), and Antonio Duscio, is set out in the application judge’s reasons. To explain my reasons, it is sufficient to summarize that history and to focus on the circumstances around the time of the various arbitral orders and awards that were challenged.
[5] Universal is a financial services company. Before January 2007, it was owned by: (1) Martina Capital, whose principal is Mr. Duscio; (2) Brokerwise, whose principal is Mr. Panos; and (3) 1508211, whose principal is Mr. Halas. The individuals and the corporations were parties to a shareholders' agreement.
[6] In November 2006, Messrs. Panos and Halas accused Mr. Duscio of misappropriating Universal’s funds, and he responded by triggering the shotgun-provision in the shareholders' agreement. They countered by commencing an action seeking, among other things, relief from oppression.
[7] On December 19, 2006, Justice Thorburn stayed the action, and, pursuant to the shareholders’ agreement, the dispute was submitted to arbitration. E. Lorne Morphy was appointed arbitrator. In the arbitration, Universal, Brokerwise, and 1508211 were the claimants and Mr. Duscio and Martina Capital were the respondents.
[8] The parties signed an arbitration agreement. The subject matter of the arbitration was: “the disputes between the parties concerning the holdings of, operations of, breach of duties to and relationship between the shareholders of Universal.” The arbitration agreement provided that the arbitrator had the authority to make any and all interim, interlocutory, and final orders as if he were a judge of the Superior Court.
[9] On January 16, 2007, the arbitrator made an interim award that permitted Brokerwise and 1508211 to be the purchasers of Mr. Duscio’s and Martina Capital’s interest in Universal, and on January 25, 2007, the parties entered into an escrow agreement that required Brokerwise and 1508211 to pay the $1 million (USD) purchase price into an escrow account pending the disposition of the arbitration.
[10] In November 2007 and March 2008, Mr. Duscio and Martina Capital brought motions seeking the release of a portion of the escrow funds in order to pay their lawyers and to provide Mr. Duscio with funds for living expenses. The motions were granted, and the arbitrator released $290,000 to Mr. Duscio and Martina Capital.
[11] However, in March 2008, Brokerwise and 1508211 brought a motion (“the repayment motion”) seeking an order requiring the funds to be repaid. They alleged that Mr. Duscio had provided false evidence to support the request for the release of the money held in escrow.
[12] Following a series of delays, the repayment motion was argued in November 2008. At this time, both Mr. Duscio and his corporation, Martina Capital, were in bankruptcy; however, orders had been made in both bankruptcy proceedings lifting the automatic stays of the arbitration.
[13] During the repayment motion, Brokerwise and 1508211 asked the arbitrator to find that Mr. Duscio and Martina Capital had obtained the funds fraudulently. If such a finding was made, the repayment order would survive a discharge of the bankruptcies pursuant to s. 178(1) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3.
[14] On December 16, 2008, the arbitrator released his decision on the repayment motion. He directed that the $290,000 be repaid, together with interest. In making his order, the arbitrator declined Brokerwise and 1508211s’ request that he make findings of fraud, and he concluded that such findings were not necessary for the repayment order.
[15] On January 7, 2009, Brokerwise and 1508211 submitted claims for costs for the repayment motion, and in their submissions, they, once again, asked that the arbitrator make findings of fraud with respect to the repayment.
[16] On December 1, 2009, the arbitrator made his decision as to costs. He awarded Brokerwise and 1508211 costs of $275,000 for fees and $24,989.96 for disbursements. He made no findings of fraud against Mr. Duscio or Martina Capital.
[17] On December 17, 2009, counsel for Mr. Duscio and Martina Capital wrote to the arbitrator. In the letter he asserted that, absent a finding of fraud, any obligation to return the money to escrow was subject to the bankruptcy of Mr. Duscio.
[18] On December 31, 2009, Mr. Duscio and Martina Capital commenced an application in the Superior Court to have the arbitrator removed and to set aside the repayment order and the associated costs order. The notice of application was subsequently amended twice, as discussed further below, and eventually led to the present appeal.
[19] On January 28, 2010, Brokerwise and 1508211 delivered a notice of motion in the arbitration for an order striking Mr. Duscio’s and Martina Capital’s statements of defence and noting them in default. The motion to strike the pleadings was argued on February 12, 2010.
[20] It is important to note that the grounds for the motion to strike the statements of defence were that Mr. Duscio and Martina Capital had not complied with the repayment order and the associated costs orders.
[21] Mr. Duscio and Martina Capital delivered written submissions on the motion to strike. They argued the arbitrator did not have jurisdiction to enforce repayment because that was a matter for the trustees in bankruptcy and the Bankruptcy Court.
[22] On March 16, 2010, the arbitrator released his decision on the motion to strike the statements of defence. In his decision, he observed that: rule 60.12 of the Rules of Civil Procedure provides that a statement of defence may be struck out when a party fails to comply with an interlocutory order; and, rule 19.01(2) provides that a party may be noted in default when its defence has been struck. At paras. 5, 6 and 13 of his reasons, he stated that in order to grant the rule 60.12 order, he had to find that Brokerwise and 1508211 had been prejudiced by the non-compliance and that Mr. Duscio and Martina Capital had acted in a way so as to cause or bring the arbitral process into disrepute. He concluded that these criteria had been satisfied, and he struck the statements of defence and noted Mr. Duscio and Martina Capital in default.
[23] On April 14, 2010, Mr. Duscio and Martina Capital filed an amended notice of application in the Superior Court. They added a request that the order striking their statements of defence be set aside. In May 2010, this application was scheduled to be heard in November, 2010.
[24] In the meantime, relying on rule 19.02 (1) of the Rules of Civil Procedure and without notice to Mr. Duscio and Martina Capital, Brokerwise and 1508211 moved for a default award in the arbitration. The arbitrator proceeded in the absence of Mr. Duscio and Martina Capital. He heard viva voce evidence from Mr. Panos and Mr. Halas and from the Trustee in Bankruptcy of Martina Capital.
[25] On August 23, 2010, the arbitrator released his final award. Relying on the evidence on the default award motion and on the allegations of fact in the statement of claim deemed to have been admitted as true, the Arbitrator found that Mr. Duscio, together with Martina Capital, had abused his fiduciary duty and fraudulently converted money from Universal to his own use. The arbitrator awarded damages of $5,511,160.85. He added pre-judgment interest of $673,343.06, for a total award of $6,184,503.91. Finally, he ordered that the money that was being held in escrow be paid to Universal.
[26] On September 15, 2010, Mr. Duscio and Martina Capital further amended their previous notice of application, adding a plea requesting that the arbitrator’s final award be set aside.
[27] The enforcement of the arbitral award was stayed by the order of Justice Stinson dated October 1, 2010: Universal Settlements International Inc. v. Duscio, 2010 ONSC 5438.
[28] On January 18-20, 2011, Justice Lederer heard Mr. Duscio and Martina Capital’s amended application, which had originally been scheduled for November, 2010.
[29] The application judge released his decision on May 16, 2011. As noted above, he allowed the application. He set aside the repayment order, the associated costs orders, the order striking out the statements of defence, and the final arbitral award. He also ordered that the arbitrator be removed.
[30] Leave to appeal having been granted, Brokerwise and 1508211 appeal to this Court.
C. DISCUSSION
[31] In Inforica Inc. v. CGI Information Systems and Management Consultants Inc., 2009 ONCA 642, 97 O.R. (3d) 161, this Court held that judicial intervention in arbitration is to be “strictly limited” to those few circumstances identified by the Arbitrations Act. At paragraph 14 of his judgment, Sharpe J.A., writing for the court, stated:
It is clear from the structure and purpose of the Act in general, and from the wording of s. 6 in particular, that judicial intervention in the arbitral process is to be strictly limited to those situations contemplated by the Act. This is in keeping with the modern approach that sees arbitration as an autonomous, self-contained, self-sufficient process pursuant to which the parties agree to have their disputes resolved by an arbitrator, not by the courts. As Inforica states in its factum, "arbitral proceedings are presumptively immune from judicial review and oversight." The Act encourages parties to resort to arbitration, "require[s] them to hold to that course once they have agreed to do so", and "entrenches the primacy of arbitration over judicial proceedings ... by directing the court, generally, not to intervene": Ontario Hydro v. Denison Mines Ltd., [1992] O.J. No. 2948 (Gen. Div.), Blair J.
[32] The Inforica decision also provides that the court does not have jurisdiction to overturn interlocutory decisions of an arbitrator. Sharpe J.A. stated at para. 18:
A significant feature of the modern approach limiting access to the courts to review decisions of arbitrators is that there are no appeals from procedural or interlocutory orders. In Environmental Export International of Canada Inc. v. Success International Inc., [1995] O.J. No. 453 (Gen. Div.), at para. 14, MacPherson J. held: "There is nothing in the Arbitration Act providing for appeals from, or applications to set aside, decisions of arbitrators on procedural points. It would be wrong ... for the courts to invent such a remedy and inject it into the arbitration process". This principle is reiterated in Tescor Energy Services Inc. v. Toronto District School Board, [2002] O.J. No. 74 (S.C.), at para. 30, where Lane J. held: "there is nothing in the Act to permit appeals from or the setting aside of decisions of arbitrators on procedural points". This is a deliberate policy, "not a lacuna in our law", to protect the autonomy of the arbitral process. The creation of a power by the courts to intervene on interlocutory rulings by arbitrators "would constitute a most serious reproach to the ability of our system of arbitration to serve the needs of users of the arbitral process": K/S A/S Biakh v. Hyundai Corp., [1988] 1 Lloyd's Rep. 187 (Q.B. Com. Ct.) at p. 189, Steyn J.
[33] The arbitrator’s order on the repayment motion and the associated costs orders were interlocutory or procedural orders, and in my opinion, it was an error to set those orders aside.
[34] The situation, however, is different with respect to the application judge’s decision to set aside the arbitrator’s order striking out the statements of defence and the final arbitration award, which was made without notice and without the participation of Mr. Duscio and Martina Corporation.
[35] An order striking a statement of defence is a final, not an interlocutory, order: see Four Seasons Travel Ltd. v. Laker Airways Ltd. (1974), 1974 881 (ON SC), 6 O.R. (2d) 453 (Div. Ct.); also see Canadian Imperial Bank of Commerce v. Lido Drywall Inc. (1995), 87 O.A.C. 197 (Div. Ct.). The final arbitration award is obviously a final determination of the dispute between the parties.
[36] In the circumstances of the case at bar, the application judge had the jurisdiction to set aside the order striking the statements of defence and the final arbitral award pursuant to s. 46 (1) of the Arbitration Act. Section 46(1) states:
Setting aside award
(1) On a party’s application, the court may set aside an award on any of the following grounds:
The applicant was not treated equally and fairly, was not given an opportunity to present a case or to respond to another party’s case, or was not given proper notice of the arbitration or of the appointment of an arbitrator.
[37] In the case at bar, I see no error in the exercise of the court’s jurisdiction under s. 46 of the Arbitration Act. In other words, there were circumstances where judicial intervention was permitted by the Arbitrations Act.
[38] In this regard, I agree with the application judge’s finding at para. 134 of his reasons that the arbitrator’s decision to strike the pleading was based on Mr. Duscio’s and Martina Capital’s non-compliance with the repayment order and the associated costs orders. I also agree with his conclusion at para. 113 of his reasons, that because of the respective bankruptcies, there was a legal impediment to Mr. Duscio and Martina Capital complying with the repayment order and the associated costs orders. As the application judge stated at para. 113:
If the money ordered paid was in the estate of a bankrupt, it would not be available to be used to comply with the order. If it was not in the estate, but was in the hands of the bankrupts, they would, pursuant to the BIA, be obliged to deliver it to the trustees. It would not be that they did not comply with the order, but that, under the law, they could not. The orders that were made after the order to re-pay all relied on the order to re-pay and the failure to comply that followed was a result that, pursuant to the law, the respondents could not avoid.
[39] In the result, I agree with the application judge that the impact of the arbitrator’s order striking the statement of defence and the default award was unfair. Mr. Duscio and Martina Capital were denied an opportunity to respond to Universal, Brokerwise and 1508211s’ case because of their failure to comply with orders when compliance was neither possible nor lawful.
[40] I disagree with Universal, Brokerwise, and 1508211s’ argument that because of the orders lifting the automatic stays of the arbitration imposed by the Bankruptcy and Insolvency Act and an order made in April 2009 permitting Mr. Duscio to assume Martina Capital’s defence at his own expense that it would have been lawful to use funds that either were or ought to have been in the hands of the trustee in bankruptcy to comply with the repayment order and the associated costs orders.
[41] The orders lifting the stay only meant that if Universal, Brokerwise, and 1508211 were successful in the arbitration, then they would become unsecured judgment creditors with a claim that might survive a discharge from bankruptcy if fraud by the bankrupt had also been established. The orders lifting the stay did not authorize payments to Universal, Brokerwise, and 1508211 that would be preferences over other creditors.
[42] To be clear, I do not see the arbitrator as having made a jurisdictional error in striking out the statements of defence or in proceeding with the arbitration. Rather, I regard his order and his final award as reversible under s. 46(1)(6) of the Arbitration Act on the grounds of unfairness. In the circumstances, it was not fair to strike the statements of defence, nor was it fair to proceed to make a final award.
[43] Unlike the application judge, however, I do not see the order striking out the statements of defence and the final arbitration award as tainting the repayment order and the costs orders. As I stated above, these orders were interlocutory and ought not to have been set aside. They should remain in place and their enforceability will depend on the bankruptcy proceedings and possibly upon the outcome of the arbitration.
[44] This brings me to the issue of the removal of the arbitrator. Section 15(1) of the Arbitration Act authorizes the court to remove an arbitrator if, among other reasons, he or she does not conduct the arbitration in accordance with s. 19. Section 19 of the Act states:
- (1) In an arbitration, the parties shall be treated equally and fairly.
(2) Each party shall be given an opportunity to present a case and to respond to the other parties’ cases.
[45] I see no error in the application judge’s decision under s. 19.
[46] It is, nevertheless, regrettable that the arbitrator must be removed, because, but for the order striking out the statements of the defence and the aftermath of that order, the arbitrator’s conduct of the arbitration was laudatory. This was a difficult case. Throughout, the arbitrator showed extraordinary patience and judiciousness. He is to be commended for his efforts, but in the circumstances, like the situation when a new trial is ordered, it is appropriate that the issues of the arbitration be decided by another arbitrator.
[47] If the parties cannot agree on the appointment of a new arbitrator, an application for a court appointed arbitrator may be made pursuant to s. 16 of the Arbitration Act.
[48] Before concluding, there is one last matter that requires comment. In his reasons, the application judge expressed the opinion that Universal, Brokerwise, 1508211, their counsel, and (by inference) the arbitrator had been disrespectful to the court by continuing with the arbitration once the court had scheduled dates for Mr. Duscio’s and Martina Capital’s application pursuant to s. 17 and s. 46 of the Arbitration Act.
[49] I note that this opinion was not necessary for the decision below, and it plays no part in this court’s decision. I add, moreover, that while there is a convention that once a notice of motion or notice of application is served, a party ought not to take steps that prejudicially affect the rights of the other parties to the motion or application and the parties should maintain the status quo at the time of the service of the notice, this convention does not apply to stop an ongoing arbitration proceeding. That the convention does not apply is made clear by s. 17(10) of the Arbitration Act, which provides that “[w]hile an application is pending, the arbitral tribunal may continue the arbitration and make an award.”
D. CONCLUSION
[50] I would allow the appeal, in part. I would revise the application judge’s order in accordance with these Reasons for Decision.
[51] As success on the appeal was divided, I would make no order as to costs of the appeal. I would not disturb the costs order of the application judge, which remains appropriate.
Released: April 4, 2012 (“D.O’C.”)
“Perell J. (ad hoc)”
“I agree D. O’Connor A.C.J.O.”
“I agree Janet Simmons J.A.”