COURT FILE NO.: 26027/12

DATE: 20130220

ONTARIO
SUPERIOR COURT OF JUSTICE

B E T W E E N:

SALVATORE FOGLIA, ROSARIO MEDAGLIA and MATTHEW DUNLOP

John Paul Paciocco,

Counsel for the Applicants

Applicants

• and -

CARMEN COCCIMIGLIO

Hugh N. MacDonald,

Counsel for the Respondent

Respondent

HEARD: January 24 , 2013

ellies, j.

OVERVIEW

[1] The applicants seek a declaration that the respondent is out of time to require them to proceed to arbitration under the terms of a shareholder agreement that requires disputes amongst shareholders to be resolved in that fashion. If granted, the applicants seek a stay. If not, they seek directions concerning the appointment of an arbitrator and the conduct of the arbitration.

[2] A preliminary issue arises as to this court’s jurisdiction to grant the relief requested.

[3] For the reasons that follow, I conlcude that the limitation period issue can and should be resolved by this court and that it has not yet expired. In my view, the remaining issues should be resolved by the arbitrator, who has already been chosen.

BACKGROUND

[4] The parties are all shareholders of a company that provides computer and system technical services. The respondent became a shareholder in June of 2006. Prior to that, he was an employee of the company and he remained an employee for a period of time after becoming a shareholder. The reason for his departure as an employee is the reason for the dispute amongst the shareholders.

[5] Throughout his employment with the company, the respondent was subject to an agreement that prohibited him from working for any of the company’s customers during his employment and for one year thereafter. However, on or about January 27, 2010 the respondent notified the applicants that he would be going to work for one of the company’s major customers, commencing February 26, 2010.

[6] At the time that the respondent became a shareholder, he also entered into a shareholder agreement with the applicants personally and with companies controlled by some of the applicants. One of the terms of the shareholder agreement (clause 2 (g)) provided that, in the event that a party ceased to be an employee of the company, that party’s shares would be purchased by the remaining shareholders at a price determined in accordance with section 18 of the agreement. That section, entitled “Valuing Shares”, reads as follows:

The value of the Company for the purpose of determining value, fair value or fair market value of the shares, shall be set at SIX HUNDRED THOUSAND ($600,000.00) (sic) as of June 19, 2006. The said value shall be reviewed by the Parties every two years and the value, if changed, shall be established at that time. In the event the Parties cannot agree on the value of the Company, such value shall be calculated on a per-share basis after valuing the Company without regard to any change in value due to shares being part of a majority or minority share position.

[7] Although the clause required the parties to review the share value every two years, this was not done.

[8] In accordance with the shareholder agreement, the respondent advised that he was prepared to sell his shares to them for the sum of $100,000.00 (based on the value set out in clause 18 at the time that the shareholder agreement was drafted) or, if that was not acceptable, that the parties should arrange for an “evaluation (of the shares) as contemplated by the agreement”.

[9] The applicants were not prepared to pay $100,000.00 for the respondent’s shares. Therefore, the parties agreed to retain the services of a valuator. BDO Dunwoody was eventually retained for this purpose. On April 19, 2011 BDO provided a final report, valuing the respondent’s shares at $37,500.00. On that same date, the applicants advised counsel for the respondent that they were not prepared to pay even this amount for the respondent’s shares. The applicants advised the respondent, however, that they were attempting to sell the entire corporation to a third party which, if successful, would result in a larger payment to the respondent for his shares. Therefore, the respondent agreed to allow the negotiations to proceed.

[10] On August 10, 2011 counsel for the respondent wrote to the applicants or their counsel (some were represented and some were not), advising them that the respondent was no longer content to wait and that the respondent would accept $37,500.00 for his shares if paid within 10 days, failing which he would apply for the appointment of an arbitrator, pursuant to the terms of the shareholder agreement.

[11] Counsel for two of the applicants replied on August 24, 2011 advising that negotiations were ongoing with a potential purchaser of the entire corporation and suggesting that the respondent might wish to let that process “unfold”. Unfortunately, the negotiations did not result in the sale of the company and, thus, on July 10, 2012 counsel for the respondent wrote to the applicants or their counsel, advising that he was instructed to proceed with arbitration, that he had contacted an arbitrator, and requesting that the applicants advise him within seven days if the proposed arbitrator was acceptable.

[12] Although there is some disparity in the evidence as to what followed, it is clear that the proposed arbitrator was acceptable to the applicants at least until they became aware of his fees, which they found to be too high for the amount in dispute. The applicants were also concerned that the arbitration process being contemplated was too much like a full-fledged trial to result in any advantage in proceeding to arbitration, as opposed to litigation.

[13] Before these concerns arose, however, the parties canvassed dates for the arbitration. Eventually, the dates of December 18 and 19 were selected, but the arbitration did not proceed on those dates. Instead, the applicants brought this application, returnable for the first time on December 13, 2012.

ISSUES

[14] The following issues must be addressed in this application:

a) Should the application be stayed pursuant to section 7 of the Arbitration Act, 1991?

b) If not, has the limitation period for bringing the arbitration expired?

c) If not:

i) Who should be the arbitrator; and

ii) What procedure should be followed at the arbitration?

[15] One further issue has arisen. The applicants have moved to strike a paragraph in a responding affidavit of the respondent in which he deposes to certain information his lawyer gave him. I will deal with this issue first.

ANALYSIS

Motion to Strike

[16] Counsel for the applicants objects to paragraph 9 of Mr. Coccimiglio’s affidavit, sworn on January 15, 2003, which reads:

I am informed by (my lawyer) and do verily believe on September 10, 2012 he received a phone call from (the applicants’ lawyer) on behalf of the applicants advising that they had instructed him to agree to the appointment of (the proposed arbitrator)….

[17] The applicants argue that this paragraph violates Rule 39.01(5), which provides:

An affidavit for use on an application may contain statements of the deponent’s information and belief with respect to facts that are not contentious, if the source of the information and the fact of the belief are specified in the affidavit.

[18] The applicants argue that the evidence contained in the impugned paragraph is contentious and, therefore, ought not to have been given as hearsay.

[19] The applicants also argue that the impugned paragraph violates the well-established principle that a lawyer should not appear on his own affidavit, which principle also applies where counsel is the source of the information, even though the affidavit is sworn by someone else.

[20] I agree with both of these submissions. In Manraj v. Bour, [1995] O.J. No. 3008 (Gen. Div.), Kiteley J. refused to allow a lawyer to make submissions in a case where that lawyer was the source of information and belief on a significant issue. Her decision has been relied upon by subsequent courts. In Weber v. Erb & Erb Insurance Brokers Ltd., [2006] O.J. 1279 (S.C.), for example, D. J. Gordon J. relied upon Manraj to strike certain affidavits in a similar situation. In the course of doing so, he wrote (at para. 39):

Far too often, affidavits from solicitors, or other persons in the employ of the law firm, are tendered in contentious proceedings. This is an unacceptable practice. The best evidence is from a deponent with actual knowledge, usually the client.

[21] For these reasons, I would strike paragraph 9 of Mr. Coccimiglio’s January 15, 2013 affidavit.

Whether the Application Should Be Stayed

[22] The parties agree that the arbitrator has jurisdiction to determine the limitation period issue. Although counsel for the respondent conceded that there might be at least some time saved by having this court deal with the issue now that the issue is before it, he argued that this application ought to be stayed pursuant to the Arbitration Act, 1991 (the “Act”).

[23] The Act protects agreements to arbitrate from court interference. Section 6 of the Act provides:

6. No court shall intervene in matters governed by this Act, except for the following purposes, in accordance with this Act:

7. To assist the conducting of arbitrations.

8. To ensure that arbitrations are conducted in accordance with arbitration agreements.

9. To prevent unequal or unfair treatment of parties to arbitration agreements.

10. To enforce awards.

[24] Section 7 of the Act provides for a mandatory stay of any proceeding commenced in court in respect of a matter that should be submitted to arbitration, with a few narrow exceptions. The relevant parts of subsections 7(1) and (2) are the following:

7. (1) If a party to an arbitration agreement commences a proceeding in respect of a matter to be submitted to arbitration under the agreement, the court in which the proceeding is commenced shall, on the motion of another party to the arbitration agreement, stay the proceeding.

(2) However, the court may refuse to stay the proceeding in any of the following cases:

5. The matter is a proper one for default or summary judgment.

[25] Although a stay is automatic under s.7(1), the section requires that the party seeking the stay bring a motion for that purpose. In this case, the respondent brought no such motion. However, that procedural issue was never raised by the applicants. Indeed, the applicants argued the matter as though such a motion had been brought. Both in oral argument and in their reply factum, the applicants argued that the exemption set out in paragraph 5 of s.7(2) applies in this case. In the circumstances, therefore, pursuant to the provisions of Rules 1.04 and 2.01, I would dispense with the requirement in Rule 37 that a notice of motion be served,. The applicants will suffer no prejudice from this ruling, given that they were prepared for and did argue the issues surrounding section 7 of the Act, and given my conclusion on this issue.

[26] In my view, the limitation period issue is one which can, and should, be resolved by this court. I hold that view for two reasons.

[27] Firstly, this is a case where the court can easily get a full appreciation of the issue and the evidence (: see Combined Air Mechanical Services Inc.v. Flesch, 2011 ONCA 764, 108 O.R. (3d) 1 (Ont. C.A.)). With one exception, the relevant facts are uncontested. The evidence consists almost entirely of documents, the authenticity of which is unchallenged. Although the court is now empowered under Rule 20 to make findings of credibility in summary judgment motions, it is not necessary to exercise that authority with respect to most of the evidence in this case.

[28] The one exception relates to the provisions of clause 21 of the shareholders agreement, the arbitration clause, which reads:

21. ARBITRATION

All matters in difference in relation to this Agreement shall be referred to under the Arbitration Act of Ontario, R.S.O. 1990, Chapter A.24, and amendments thereto.

[29] The respondent deposes that the clause is missing the word “arbitration” after the words “referred to”. He swears that the agreement was prepared based on an earlier shareholder agreement and that it was the intention of the parties to submit all differences under the shareholder agreement to arbitration.

[30] Mr. Foglia, however, denies this in an affidavit sworn on January 7, 2013. I find his evidence in this regard to be incapable of belief for the following reasons:

a) Firstly, the reference to the Arbitration Act in clause 21 would make no sense if Mr. Foglia was correct.

b) Secondly, the clause is entitled “Arbitration”.

c) Thirdly, the clause refers to “all matters in difference”.

d) Lastly, Mr. Foglia’s January 7th evidence is contradicted by his actions and those of the other applicants prior to that date. The issue was never raised by any applicant or by counsel for any applicant at any time leading up to this application. In fact, in a letter dated November 14, 2012 counsel for the applicants argued that the Limitations Act, 2002 applied to arbitration without making any reference to whether arbitration was required at all.

[31] Thus, if there is any ambiguity in clause 21, I would hold that it was intended to and does apply to require that all disputes between the parties be referred to arbitration.

[32] Convenience is the other reason why I believe that this issue should be resolved by this court. I agree with counsel for the respondent that, although the matter could have been dealt with by the arbitrator, and probably should have been, it would be helpful to deal with the issue now, so as to avoid the duplication of effort involved in later bringing it before the arbitrator. I do not agree, however, with the submission that there is a risk of inconsistent verdicts, should this court decide the issue, because of the concurrent jurisdiction of the court and the arbitrator.

[33] In my view, once decided by this court, the limitation period issue is res judicata. It is irrelevant that the issue might later be raised in an arbitration, as opposed to a trial, as concerns about abuse of process underlie the rationale for the doctrine and apply to both types of proceeding (: Toronto (City) v. Canadian Union of Public Employees (C.U.P.E.), Local 79, 2003 SCC 63, [2003] 3 S.C.R. 77). In CUPE, the Supreme Court held that such concerns applied at an arbitration to prevent re-opening the issue of a party’s liability for an act that was previously the subject of a criminal conviction.

Whether the Limitation Period Has Expired

[34] The applicants argue that the respondent’s cause of action commenced when he ceased to be an employee of the company (in which he was also a shareholder), being February 26, 2010. Therefore, they argue that the limitation period for commencing the arbitration expired on February 26, 2012. I am unable to agree.

[35] Pursuant to s.52 of the Act, the law with respect to limitation periods applies to an arbitration as if the arbitration were an action and the claim made in the arbitration were a cause of action. The Limitations Act, 2002 provides for a general limitation period of two years from the date on which the claim was discovered. Subsections 5(1) and (2) of the Act provide:

Discovery

5. (1) A claim is discovered on the earlier of,

(a) the day on which the person with the claim first knew,

(i) that the injury, loss or damage had occurred,

(ii) that the injury, loss or damage was caused by or contributed to by an act or omission,

(iii) that the act or omission was that of the person against whom the claim is made, and

(iv) that, having regard to the nature of the injury, loss or damage, a proceeding would be an appropriate means to seek to remedy it; and

(b) the day on which a reasonable person with the abilities and in the circumstances of the person with the claim first ought to have known of the matters referred to in clause (a).

Presumption

(2) A person with a claim shall be presumed to have known of the matters referred to in clause (1) (a) on the day the act or omission on which the claim is based took place, unless the contrary is proved.

[36] The applicants’ argument is based on their own failure or refusal to purchase the respondent’s shares on February 26, 2010 or at any time during the following two years. However, the contract did not require that they purchase the shares in that time period.

[37] The shareholder agreement contained a section entitled “Transfer of Shares”. Clauses 7 (a) ii and iii provide:

ii A person proposing to sell or transfer any share or shares (hereinafter called the “selling shareholder”), which expression includes the legal personal representative or representatives of a deceased shareholder, the trustee of a bankrupt shareholder, the assignee of a shareholder who has become mentally incompetent or incapable of managing his affairs, shall give notice (hereinafter called the “transfer notice”) in writing to the Company and to the other Parties holding shares that he/it desires to transfer or dispose of the same and such transfer notice shall extend to the other shareholders as an option to purchase the shares of the selling shareholder at the value thereof determined herein; a transfer notice shall not be revocable except with the consent of the other directors.

iii Such option as aforesaid may be exercised in whole (but not in part) by the other Parties within a period of sixty (60) days after the fixing of the fair value thereof by delivery to the Company and to the other party of written notice of the exercise of the option, which notice may be delivered by prepaid registered post. (Emphasis added.)

[38] Therefore, pursuant to the contract itself, the applicants’ obligation to purchase the respondent’s shares did not arise until after the fair value of the shares had been fixed, something which did not occur until much later. The limitation period could not have commenced to run until the applicants’ obligation arose and they then failed or refused to fulfill it.

[39] In considering when the “limitation clock” begins to run, I find it helpful to bear in mind the words of Dubin, J. A. in Consumers Glass Co. Ltd. v. Foundation Co. of Canada Ltd. (1985), 1985 159 (ON CA), 51 O.R. (2d) 385, at pgs. 398-399, where he wrote:

... the cause of action does not arise, in my opinion, until the plaintiff could first have brought an action and proved sufficient facts to sustain it.

Without a figure for the value of the shares and a failure or refusal to pay that amount, the respondent could not have succeeded in proving sufficient facts to sustain a cause of action against the applicants on February 26, 2010, or for a long time thereafter.

[40] In my view, the limitation period did not begin to run in this case until April 19, 2011. That is the date upon which both the value of the shares, as established by BDO Dunwoody, became known and the date upon which the applicants communicated their refusal to pay that price. It follows that the limitation period will not expire until April 19, 2013.

[41] In my further opinion, the limitation period in this case has ceased to run, because the arbitration has commenced. Section 23(1) of the Act provides that an arbitration may be commenced in any way recognized in law, including service by a party on the other parties of a notice demanding arbitration under the agreement. It is my view that Mr. MacDonald’s letter of July 10, 2012 constituted such a notice. In it, he revoked all previous offers, advised that he was instructed to proceed with arbitration, and that he had contacted an arbitrator. There was nothing equivocal about the letter and nothing more was required to give the applicants notice.

[42] In summary, then, the limitation clock began to run on April 19, 2011 and was stopped upon receipt by the applicants of Mr. MacDonald’s letter of July 10, 2012, well within the two year limitation period.

Selection of the Arbitrator and the Procedure to be followed at the Arbitration

[43] The applicants seek directions from the court with respect to both the selection of the arbitrator and the procedure to be followed at the arbitration. They argue that the fees charged by the arbitrator over the course of the process presently being contemplated will be so high as to outweigh any advantage that arbitration might have over litigation. They seek an order that the parties be required to submit to a more summary process, before a different arbitrator.

[44] In his affidavit sworn December 4, 2012 Mr. Foglia deposes (at para. 47) that:

…at the present time, we are not able to agree that ... be the arbitrator in this matter given the level of remuneration required by him to conduct this matter when compared to the amount in dispute and the length of time a hearing of the issues will take as a result of the procedure suggested.

[45] In my view, based on the evidence, the arbitrator has already been chosen.

[46] The shareholder agreement is silent as to the procedure for selecting an arbitrator. However, as I mentioned earlier, on July 10, 2012 respondent’s counsel wrote to counsel for the applicants and advised him that he had contacted a particular arbitrator who appeared to have no connection to any of the parties. He also requested that applicants’ counsel advise him within seven days if the applicants were agreeable to the appointment of this particular arbitrator.

[47] On August 2, 2012 counsel for the applicants responded by e-mail. He wrote:

On a without prejudice basis, and subject to my client’s (sic) instructions, I think your choice is a good one provided he has no prior connection to any of the parties. I cannot commit yet until I hear back from my clients but I do not foresee an issue. There is no need for a motion at this point.

[48] On October 4, 2012 respondent’s counsel wrote by e-mail, asking applicants’ counsel to provide him with potential dates for the arbitration and suggesting that they arrange a conference call with the arbitrator to deal with preliminary matters. Counsel for the applicants responded electronically by providing dates and asking whether the arbitrator had any standard form of arbitration agreement. No mention was made by applicants’ counsel at that time to any concerns with respect to the choice of arbitrator.

[49] On October 24, 2012 counsel for the respondent sent an e-mail to applicants’ counsel, confirming the dates set of December 18 and 19, 2012 and advising that he would ask the arbitrator whether he had a standard agreement. Four days later, respondent’s counsel wrote to the arbitrator by ordinary mail, confirming the dates for the arbitration and inquiring about a form of agreement for the parties to sign. A copy of the letter was sent to applicants’ counsel. In it, respondent’s counsel wrote:

The parties have agreed to your appointment as a single arbitrator.

[50] Counsel for the applicants wrote to respondent’s counsel on November 14, 2012. He did not take issue with the statement set out immediately above, nor did he raise any concerns regarding the procedure to be followed or the fees proposed. In fact, applicants’ suggested at the time that the issue of the limitation period should proceed by way of a motion before the arbitrator, if necessary. It was not until applicants’ counsel wrote to counsel for the respondent on November 28, 2012 that applicants’ counsel raised for the first time the issue of the potential expense involved.

[51] In my view, the arbitrator has been selected. It is now too late for the applicants to revoke their consent. Section 12 of the Act provides:

A party may not revoke the appointment of an arbitrator.

[52] Nor is it open to the applicants to challenge the appointment of the arbitrator on the basis of his fees or the procedure to be followed at the arbitration. The Act provides very limited grounds upon which to challenge the appointment of an arbitrator. Sections 13(1) and (2) read:

13(1) A party may challenge an arbitrator only on one of the following grounds:

1. Circumstances exist that may give rise to a reasonable apprehension of bias.
2. The arbitrator does not possess qualifications that the parties have agreed are necessary.

(2) A party who appointed an arbitrator or participated in his or her appointment may challenge the arbitrator only for grounds of which the party was unaware at the time of the appointment.

[53] The applicants have no concerns about bias on the part of the arbitrator or about his qualifications. Their concern is with fees and procedures. However, these are not grounds upon which a party may challenge the arbitrator. Even if they were, the Act further provides that such issues are to be resolved by the arbitrator himself. Section 13(3) of the Act provides:

A party who wishes to challenge an arbitrator shall send the arbitral tribunal a statement of the grounds for the challenge, within 15 days of becoming aware of them.

[54] Although the Act does not allow issues about fees or procedure to provide a basis for the removal of an arbitrator, once chosen, it does contain provisions to deal with the resolution of those issues. Section 20(1) of the Act requires that the procedure to be followed at the arbitration be determined by the arbitrator. It reads:

The arbitral tribunal may determine the procedure to be followed in the arbitration, in accordance with this Act.

[55] I wish also to point out the provisions of s.26(1) of the Act which provides:

The arbitral tribunal may conduct the arbitration on the basis of documents or may hold hearings for the presentation of evidence and oral arguments; however, the tribunal must hold a hearing if a party requests it.

[56] Concerning the arbitrator’s fees, s.55 provides that those fees shall not exceed the fair value of the services performed and the necessary and reasonable expenses actually incurred. It further provides that the arbitrator’s account for fees and disbursements may be assessed in the same way that a solicitor’s bill is assessed under the Solicitors Act.

[57] For these reasons, no order should be made by this court dealing with the issues of the appointment of the arbitrator or the conduct of the arbitration, in my view.

CONCLUSION

[58] The relief requested in the applicants’ notice of motion, in which they requested that paragraph 9 of the affidavit of Mr. Coccimiglio sworn January 15, 2013 be struck, is granted.

[59] The application, however, is dismissed.

COSTS

[60] The applicants shall have their costs of the motion to strike. They shall have 20 days from the date of these reasons to make written submissions, limited to 5 pages, excluding attachments, concerning the amount of those costs, failing which they will be fixed in the amount of $500.00, payable forthwith. Should such submissions by made, the respondent shall have 10 days in which to make a written reply, similarly limited in length.

[61] Concerning the issue of the costs of the application, I requested and received submissions from both counsel at the conclusion of argument. Their submissions were that costs in the range of $8,000 to $10,000 should be awarded to the successful party or parties, depending upon who won. In my view, both figures are somewhat high, given the relatively straightforward nature of the issues, the length of time it took to argue them, and the amount at stake. Therefore, I order that the respondent shall have his partial indemnity costs fixed in the amount of $7,500, also payable forthwith.

Ellies, J.

Released: 20130220

ONTARIO
SUPERIOR COURT OF JUSTICE

SALVATORE FOGLIA, ROSARIO MEDAGLIA and MATTHEW DUNLOP
Applicants

– and –

CARMEN COCCIMIGLIO
Respondent

REASONS FOR DECISION

Ellies, J.

Released: 20130220