SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

COURT FILE NO.: CV-15-10896-00CL
DATE: 20150904

RE: ALLIED TRACK SERVICES INC.,
Applicant

AND:

JEFFREY SWIFT, SUZANNE SWIFT AND DEBORAH JOAN FIRMIN, TRUSTEES, for and on behalf of the Trust known as THE 2012 JEFF SWIFT FAMILY TRUST, RODNEY SWIFT, ALAINE REIDPATH AND DEBORAH JOAN FIRMIN, TRUSTEES, for and on behalf of the Trust known as THE 2012 ROD SWIFT FAMILY TRUST, JOHN SWIFT, DOREEN SWIFT, JEFFREY SWIFT, RODNEY SWIFT, and 2109123 ONTARIO INC.

Respondents

BEFORE: Newbould J.

COUNSEL: Martin J. Henderson and Brian Chung, for the Applicants

Morris Manning, Q.C. and Theresa R. Simone, for the Respondents

HEARD: September 1, 2015

ENDORSEMENT

[1] On June 1, 2015 I ordered over the objections of the respondents that BDO be appointed as arbitrator to determine three post-closing adjustments under a Share Purchase Agreement dated March 21, 2014. That agreement provided that if there was a dispute regarding the adjustments, the parties would jointly retain a Designated Accountant to settle the dispute and BDO Canada Limited was named in the agreement as the Designated Accountant. The order stated that the parties were to forthwith jointly engage BDO as the arbitrator.

[2] In spite of this order, the respondents refused to engage BDO. Mr. Manning took the position that Aird & Berlis had acted for BDO in a recent unrelated matter and that this compromised their independence. This had not been raised by the respondents on the initial application. The applicant moved to enforce the order and on June 17, 2015 an order was made on consent that the parties were to jointly retain the arbitrator forthwith and that the issue of the arbitrator’s alleged conflict was to be raised with the arbitrator who was to determine the issue.

[3] Despite this further order, Mr. Manning failed to sign an engagement letter on behalf of his clients with BDO, although changes had been made to it to accommodate his requests. Mr. Manning did submit a large brief in which he said that “There is more than a reasoned suspicion of biased appraisal and judgment by any person employed by BDO acting as an arbitrator”. In a second large brief, actual bias was asserted by Mr. Manning.

[4] On August 10, 2015 Mr. Hocking of BDO e-mailed counsel and stated that BDO would not act as arbitrator. He did not do so for the reason of any perceived conflict, and expressly disclaimed any conflict. His concern was to the delays caused to the parties and to future delays. He stated his reasons as follows:

The parties deserve to have the arbitration move forward without further delay. The continuing dispute between Counsel over the appointment of BDO has caused significant delay already and the parties will now be in a position to appoint a new arbitrator and hopefully move on with the arbitration process.

I am concerned that if I were not to find in favour of his client Mr. Manning (as Counsel who opposed BDO’s appointment) would again raise the allegation of bias and appeal the arbitration award thus further delaying the resolution of this matter.

Finally I have invested significant time to this point in reviewing materials and engaging in discussions with Counsel. At this point I am not willing to invest any further professional time in this matter without the prospect of compensation.

[5] Mr. Hocking went on to state his disappointment with Mr. Manning’s allegations of bias which he said were unfounded. He stated that Mr. Manning was well aware that he had not personally met or had any professional dealings with either counsel in this matter. He further stated:

As Counsel should know, BDO is the fifth largest accounting firm in the world with approximately 400 partners in Canada. In my view it is reasonable to expect that BDO may have dealings in the ordinary course of business with both Aird & Berlis and Agro Zaffiro. In my view Counsel are not parties to this matter and BDO has confirmed no relationship to any of the actual parties to this dispute. I note that Mr. Manning has not raised any issues with respect to a conflict between BDO and any of the parties. The tests set out on Page 14 of Mr. Manning’s brief also refer to the arbitrator being impartial and independent of “the parties”.

Finally I note that Mr. Manning states on several occasions in his brief that Aird & Berlis should have informed him of their work with BDO. I note that in late 2013 I was retained by Agro Zaffiro to act as an expert witness and provide a report on damages in a significant litigation matter. The matter concluded in late 2014. Since I do not view work with Counsel as a conflict I did not raise this issue but I do not understand why Mr. Manning would not have brought it to opposing Counsel’s attention if he thought any relationship between BDO and Counsel constituted a conflict.

[6] The reference to Agro Zaffiro was because that firm had acted for the respondents in the sale transaction in which BDO was designated in the agreement to be the arbitrator. Aird & Berlis had acted for the applicants on the purchase and Agro Zaffiro had raised no objection to BDO being designated as arbitrator in the sales agreement.

[7] On August 12, 2015, in light of Mr. Hocking’s decision, the applicant proposed that the parties immediately agree on a substitute arbitrator and that they each name two substitute arbitrators to be considered. The applicant proposed two accounting firms Grant Thornton LLP and Duff & Phelps Canada Restructuring Inc. The respondents proposed two former judges, the Honourable Colin Campbell and the Honourable George Adams. Mr. Henderson on behalf of the applicant advised Mr. Manning on August 14, 2015, by letter, that although experienced, independent and highly regarded, neither of the respondents’ proposed arbitrators were especially qualified to make determinations of the technical accounting issues in dispute, including inventory valuation.

[8] The applicant therefore made this application to have an arbitrator appointed. In his material filed with the court, Mr. Manning took the position that as Grant Thornton LLP and Duff & Phelps had previously retained Aird & Berlis to act for them in completely different commercial matters, there was a reasonable apprehension of bias that should disqualify those firms from acting as arbitrator.

[9] At the outset of the hearing, Mr. Manning said that the parties had now agreed to appoint the Honourable Colin Campbell as the arbitrator and thus the matter could proceed on consent. Mr. Henderson said that while his client strongly disagreed with there being any grounds to assert a reasonable apprehension of bias, their client was in a complete bind and agreed to the appointment of Mr. Campbell in order to get on with the arbitration and avoid further challenges to the process. While his client has been the owner of the inventory since March, 2014, and the sale closed over a year ago, his client has not been able to finalize its financial statements because of the dispute regarding the post-closing adjustments to be made. There is a concern that if an accounting firm were now ordered to be the arbitrator, there would be further appeals and delays, and his client cannot properly run the business with further delays.

[10] I therefore appointed Mr. Campbell as arbitrator but expressed concern regarding what had happened. I heard argument from Mr. Manning regarding his allegations of bias. I have concluded for the reasons that follow that there are no grounds whatsoever to conclude that there would be a reasonable apprehension of bias if BDO, Duff & Phelps or Grant Thornton were to be the arbitrator.

Analysis

[11] An arbitration is in the nature of a judicial determination and arbitrators are to act impartially. In Szilard v. Szasz, 1954 4 (SCC), [1955] S.C.R. 3 Rand J. stated:

From its inception arbitration has been held to be of the nature of judicial determination and to entail incidents appropriate to that fact. The arbitrators are to exercise their function not as the advocates of the parties nominating them, and a fortiori of one party when they are agreed upon by all, but with as free, independent and impartial minds as the circumstances permit. In particular they must be untrammelled by such influences as to a fair minded person would raise a reasonable doubt of that impersonal attitude which each party is entitled to.

[12] The tests for considering an issue of a reasonable apprehension of bias are well known and applicable as much to an arbitration as to a judge. In Simcoe Condominium Corporation No. 78 v. Simcoe Condominim Corporation Nos. 50, 52, 53, 56, 59, 63 and 64, [2006] O.J. No. 605, Belobaba J. put it well in stating:

57 The basic legal principles relating to reasonable apprehension of bias can be summarized as follows. The test of reasonable apprehension of bias applies to arbitrators in the same manner as it applies to courts. The threshold for a finding of real or perceived bias is high because it calls into question both the personal integrity of the adjudicator and the integrity of the administration of justice. The grounds must be substantial and the onus is on the party alleging bias to bring forward the evidence. The inquiry is highly fact-specific. The test for showing reasonable apprehension of bias is an objective test. A real likelihood of bias must be demonstrated; mere suspicion is not enough. The test is "what would an informed person, viewing the matter realistically and practically, and having thought the matter through, conclude:" R. v. R.D.S., 1997 324 (SCC), [1997] 3 S.C.R. 484 at 530-32; A.T. Kearney Ltd. v. Harrison, [2003] O.J. No. 438 (S.C.J.), at para. 6-7; McQueen's Boat Works Ltd. v. Lanikai Holdings Ltd., [1996] B.C.J. No. 2063 (C.A.)

[13] In R. v. R.D.S., 1997 324 (SCC), [1997] 3 S.C.R. 484, Cory J. stated that the test contains a two-fold objective element. The person considering the alleged bias must be reasonable and the apprehension of bias itself must also be reasonable in the circumstances of the case. Further the reasonable person must be an informed person, with knowledge of all the relevant circumstances.

[14] In this case, Mr. Manning relied on the fact when dealing with BDO that Air & Berlis had been retained by BDO on two matters unrelated to this case in which BDO had been appointed a monitor in CCAA proceedings. On this motion, he relied on the fact that Duff & Phelps had retained Aird & Berlis in 2012 to act for it after Duff & Phelps had been appointed by the court as a receiver of a debtor. He also relied on the fact that Grant Thornton had retained Air & Berlis to act for it in two matters in which Grant Thornton had been appointed, in once case as a court appointed monitor in a CCAA case and in the other as a court appointed receiver. None of these cases had anything to do with the parties or issues involved in this case. Mr. Manning asserted that these firms acting as arbitrator might show favour to the applicant as a client of Aird & Berlis in light of these firms’ relationship with Aird & Berlis.

[15] There are cases in which it has been held that there is a reasonable apprehension of bias in circumstances in which the judicial officer had a personal relationship with one of the parties. See for example Rothesay Residents Assn. Inc. v. Rothesay Heritage Preservation & Review Board, 2006 NBCA 61 in which reasonable apprehension of bias was found on the part of two members of an administrative board that had approved a development by a church. The two members were active members of the church congregation and in the case of one had also acted for the church. In Sumner v. Barnhill (1879), 12 N.S.R. 501 an arbitrator was disqualified for having regularly been retained as a solicitor for one of the parties. In Fowler v. 1752476 Ontario Ltd., [2009] O.J. No. 4369 a reasonable apprehension of bias was found on the part of an accounting firm named to be an arbitrator as the accounting firm acted for one of the principles of a party and had also corresponded with counsel for that party with respect to the procedure for the proposed arbitration. In all such cases, a case by case enquiry was made of the nature and strength of the relationship.

[16] In this case, BDO had no professional relationship to the parties to the arbitration. There is no evidence that Duff & Phelps or Grant Thornton had either. It is said that the apprehension of bias arises from the relationship of those firms with Aird & Berlis, the solicitors to one of the parties. The relationship is said to arise merely from the fact that those accounting firms have retained Aird & Berlis in unrelated commercial matters involving insolvency proceedings.

[17] If the position of the respondents that a reasonable apprehension of bias existed in these circumstances, there would be great difficulty for most of the major commercial law firms in Toronto in ever being able to represent clients in front of such accounting firms who were chosen as arbitrators in a commercial dispute as these law firms all are routinely retained by the large accounting firms to act in commercial insolvency matters such as receiverships and CCAA matters[^1]. BDO, Duff & Phelps and Grant Thornton are just three of such firms. They too would be precluded from acting as arbitrators in any case in which one of the law firms acting for one of the parties to the arbitration had been retained by them in unrelated matters. The result would be that in commercial arbitrations calling for accounting expertise, all of the large accounting firms and all of the firms experienced in commercial disputes would invariably be unable to act. This should obviously be avoided if at all possible.

[18] The difficulty would not be limited to arbitrations involving an impartial exercise of jurisdiction. The large accounting firms such as BDO, Duff & Phelps and Grant Thornton routinely are appointed by a court as receivers or monitors in CCAA proceedings[^2]. In that role they have fiduciary duties to all stakeholders and are required to act in an impartial way. If they could not act in such a capacity because a law firm they had retained in unrelated matters was acting for a stakeholder, all of these accounting firms and the law firms experienced in commercial disputes would invariably be unable to act. This too should be avoided if at all possible.

[19] The answer of course is to consider each case on a fact specific basis to consider if a reasonable apprehension of bias can be said to arise.

[20] In considering whether it can reasonably be said that a reasonable apprehension of bias has been established, it is well to consider what bias means. In R. v. R.D.S., supra, Cory J. stated that impartiality can be described, perhaps somewhat inexactly, as a state of mind in which the adjudicator is disinterested in the outcome, and is open to persuasion by the evidence and submissions. In contrast, bias denotes a state of mind that is in some way predisposed to a particular result, or that is closed with regard to particular issues. Cory J. adopted a statement of Watt J. (as he then was) in R. v. Bertram, [1989] O.J. No. 2123 in which Watt J. stated:

In common usage bias describes a leaning, inclination, bent or predisposition towards one side or another or a particular result. In its application to legal proceedings, it represents a predisposition to decide an issue or cause in a certain way which does not leave the judicial mind perfectly open to conviction. Bias is a condition or state of mind which sways judgment and renders a judicial officer unable to exercise his or her functions impartially in a particular case.

[21] Is it reasonable to conclude that BDO would have a bent or disposition towards Aird & Berlis’ client, or have a predisposition to decide in favour of that client, because it had retained Aird & Berlis on unrelated matters. Without more, I cannot see any basis whatsoever for a reasonable and informed person, viewing the matter realistically and practically, and having thought the matter through, concluding that there was a reasonable apprehension of bias. In the case of Mr. Hocking of BDO, he had never met or had any professional dealings with counsel in this case. What reason would there be for him to decide in favour of the applicant because someone in his firm of 400 partners had retained Aird & Berlis in other unrelated insolvency matters? There is no evidence whatsoever that Mr. Hocking or BDO was in any way beholden to Aird & Berlis, or perhaps more importantly that a reasonable and informed person viewing the matter realistically and practically, would come to any other conclusion. There is also no evidence that the situation would be any different if Duff & Phelps or Grant Thornton were to be the arbitrators.

[22] The respondents rely on Strata Plan VR2733 v. Jenson, 2000 BCSC 1489. In that case the arbitrator nominated by the applicant and accepted by the respondent was a lawyer who had retained the firm acting for the respondent to act for her in a real estate transaction and also to advise her on a contract and draft a demand letter on her behalf. She was also scheduled to participate in a continuing education program with that lawyer. It was held that the relationship between the arbitrator and counsel for the respondent that was not disclosed to the applicant would induce a perception of bias on the part of the arbitrator. Exactly why that was the conclusion was not expressed in the decision, but it clearly involved personal business being done for the arbitrator by a firm acting for one of the parties. This is a far cry from the situation with BDO, Duff & Phelps or Grant Thornton in which personal work of this nature was never involved. Those firms were acting as court appointed officers with fiduciary duties to the stakeholders in the various insolvency proceedings and retained counsel to act for them.

[23] The irony in this case is that while the respondents complain of the retainer of Aird & Berlis by BDO, Duff & Phelps and Grant Thornton in unrelated matters, they and their solicitors appeared not to be concerned with the retainer by their solicitors of Mr. Hocking personally one year before the Share Purchase Agreement dated March 21, 2014 was made in which BDO was designated as the arbitrator. In late 2013 Mr. Hocking of BDO was retained by Agro Zaffiro to act as an expert witness and provide a report on damages in a significant litigation matter that concluded in late 2014, well after the Share Purchase Agreement was made. Agro Zaffiro acted for the respondents on the Share Purchase Agreement and Aird & Berlis acted for the applicant. If there had been a reasonable apprehension of bias on the part of BDO because someone other than Mr. Hocking at BDO retained Aird & Berlis on other matters, there certainly would have been a reasonable apprehension of bias on the part of BDO due to Mr. Hocking of BDO having been retained by Agro Zaffiro as an expert witness. If anything, the shoe was on the opposite foot. Yet Mr. Manning did not raise that as a concern.

[24] As said by Cory J. in R.D.S., supra, the inquiry in each case must be highly fact-specific. I do not suggest that there could never be a case of a reasonable apprehension of bias involving an arbitrator from a large accounting firm or a lawyer from an experienced commercial law firm. It would depend on the facts of the case at the time. But without more than unreasonable suspicions, as in this case, arising from the retainer of a large law firm by a large accounting firm in other unrelated cases, it would be contrary to principles to find a reasonable apprehension of bias. In this case the applicant had a contractual right to have BDO as the arbitrator, and in the end it lost that right by actions of the respondents that were completely unjustified[^3].

Other issues

[25] In my endorsement of June 1, 2015 I referred to the undertaking of the applicant not to sell the inventory or equipment pending a determination of the post-closing inventory adjustment without consent or a further court order. That undertaking was given in the context of what was expected to be a quick process to settle the post-closing adjustments. After the undertaking was given, I held that the applicant owned the inventory and equipment. I see no reason to require the applicant to continue to hold that equipment. Due to the seasonal nature of the business, it will be prejudicial to Allied to be unable to sell redundant inventory or equipment during the operating season. In its factum, the respondents opposed the request by the applicant to be relieved of its undertaking, but during argument Mr. Manning said that the respondents no longer require the undertaking. Allied are entitled to sell their inventory and equipment prior to the post-filing adjustment being made and are relieved of its undertaking in that regard.

Costs

[26] It is clear based on the history of this case that the respondents have in bad faith done their best to upset the arbitration process that was to take place quickly after the sale of the business. They refused to engage BDO in the face of the orders of June 1 and 17, 2015 requiring them to do so. The positions taken by them regarding the arbitrator have been completely without merit and part of their bad faith attempts to derail the process. In the circumstances while the respondents have now obtained a consent order regarding the arbitration, it was in no way obtained because of their co-operation or good faith bargaining. It was caused by the capitulation by the applicant borne out of practical necessity to the unreasonable positions taken by the respondents. Normally consent matters are accompanied by an agreement to no costs or a no cost order. But each case has its own peculiarities, and in this case the history of how the respondents have dealt with this arbitration issues leads in my view to a significant cost order against the respondents.

[27] For this motion, the applicant requested costs of $12,000, being on a substantial indemnity basis. Mr. Manning filed a cost request of $9,317 on a partial indemnity basis, although stated that there should be no costs as the order was on consent. For the wasted costs involving the retainer of BDO that failed, the applicant requested costs on a substantial indemnity basis of $17,000. Mr. Manning for the respondents opposed any costs of that matter.

[28] In my view, the applicant is entitled to its costs on a substantial indemnity basis. The actions of the respondents taken in bad faith and in breach of court orders justify it. So far as the costs of the failed attempt to engage BDO, a result of the bad faith activity of the respondents in breach of court orders, the applicant is entitled to those costs thrown away. At the hearing I ordered costs of $25,000 to be paid by the respondents to the applicant in 10 days.

[29] Regarding the original application to require the respondents to engage BDO pursuant to the Share Purchase Agreement, I ordered costs to be paid and if not agreed for cost submissions to be made. I have received the cost submissions.

[30] The applicant requests those costs on a substantial indemnity basis. I decline to do so. At that stage no court orders had been breached. The fact by itself that an argument lacked merit is normally no reason to order costs on the higher scale. On a partial indemnity basis, the applicant requested fees of $29,405 plus disbursements and HST, totalling $34,617.28. The respondents say that the costs all in on a partial indemnity basis should be $25,000. No reason is given why that amount is appropriate.

[31] It must be recognized that the respondents raised many points in opposition to the relief sought by the applicant and sought to raise claims never asserted in the litigation and other matters that were not properly before the court. What should have been a straightforward application was as a result anything but. A great deal of work was required. The hourly rates claimed by the applicant are based on the old suggested scale that is woefully out of date. See Stetson Oil & Gas Ltd v. Stifel Nicolaus Canada Inc. 2013 ONSC 5213 and Inter-Leasing Inc. v. Ontario (Minister of Revenue) 2014 ONCA 683. The hours claimed appear reasonable. The respondents did not provide any information of the time spent by Mr. Manning and his firm, which should be done if a complaint is made about time claimed by an opposite party. See Risorto v. State Farm Mutual Automobile Insurance Company (2003), 2003 43566 (ON SC), 64 O.R. (3rd) 135 and Frazer v. Haukioja, 2010 ONCA 249.

[32] Taking into account the factors in rule 57.1 and what a reasonable losing party could expect to pay in costs, I fix the costs of the application decided on June 1, 2015 at $34,617.28 inclusive of disbursements and HST. These costs are to be paid by the respondents to the applicant within 10 days.

Newbould J.

Date: September 4, 2015

[^1]: In Canada, accounting firms have organized separate corporate entities to act in insolvency matters. For the purposes of this endorsement I assume that they are related entities.

[^2]: See footnote 1.

[^3]: This is not to suggest that the Honourable Colin Campbell is not a superb arbitrator and well qualified in commercial matters. He is all of that.