Court File and Parties

COURT FILE NO.: CV-15-123156 DATE: 2016-06-02 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

ALTUS GROUP LIMITED Applicant – and – 3GS INCORPORATED Respondent

Counsel: Howard A. Levitt for the Applicant Kevin L. MacDonald and Jamie M. Sanderson for the Respondent

HEARD: May 30, 2016

Ruling on Application to Set Aside Arbitration Award

Boswell J.

I. Introduction

[1] The parties had a dispute. It went to arbitration. An award was made in favour of the Respondent. The Applicant subsequently discovered that one of the Respondent’s witnesses lied under oath in giving evidence at the arbitration. The Applicant asks that the award be set aside and that the matter be remitted to be re-arbitrated. For the reasons that follow, I have determined that the arbitral award should not be set aside.

II. The Arbitration

[2] The principals of 3GS Incorporated (“3GS”) are Alan and Ann Gordon. Their company was previously known as “Capital Planning Solutions Inc.” In November 2008 they sold all of the assets of Capital Planning, including the business name, to Altus Group Limited Partnership (now Altus Group Limited, which I will refer to as “Altus”). Part of the sale price included the transfer to 3GS of 144,512 Altus Group Investor Management Partnership share units (“AIMP units”).

[3] Alan and Ann Gordon entered into employment contracts with Altus after the asset purchase agreement was closed, as did one of their 3GS employees, Lisa Robbins. Ms. Robbins’ employment was terminated about four weeks later, based on an anonymous tip that Altus received about Ms. Robbins having a criminal record which she had not disclosed.

[4] The employment of both Ann and Alan Gordon was subsequently terminated by Altus on March 30, 2010.

[5] As a holder of AIMP units, 3GS became a party to the Altus Investors’ Management Partnership Agreement (the “AIMP Agreement”). The AIMP Agreement specified, amongst other things, that upon termination of Mr. Gordon’s employment, 3GS was required to make an election to either (1) sell its AIMP units immediately and have the sale proceeds held in escrow for two years, or (2) have the AIMP units held in escrow to be sold either during the two year period or thereafter.

[6] On May 12, 2010, 3GS advised Altus of its intention to immediately sell its AIMP units, with the effective date of sale being the date of termination, namely March 30, 2010.

[7] On May 18, 2010, Altus’ corporate counsel, Rose Oushalkus, wrote to counsel for 3GS and advised that: Altus had received the election of 3GS; the units were sold, effective March 30, 2010 at a per-unit price of $13.1836; and that the net sum of $1,905,188.40 was being held in escrow in accordance with the terms of the AIMP Agreement.

[8] In reality, the AIMP units of 3GS had not been sold.

[9] As at March 30, 2010, the AIMP units held by 3GS were actually worth $2,093,978.80. When there were eventually sold in 2012 they netted just $935,032.32.

[10] 3GS claimed against Altus the difference between the ultimate sale price and the price as at March 30, 2010.

[11] The parties agreed that the terms of the asset purchase agreement required them to arbitrate any disagreements between them. They referred the dispute to Mr. Allan J. Stitt of ADR Chambers for a binding and final arbitration. Mr. Stitt conducted the arbitration on May 5-6, 2015.

[12] Altus admitted that it breached the AIMP Agreement by failing to sell the 3GS AIMP units when it received their election on May 12, 2010. They argued, however, that any damages flowing from that breach should be reduced because 3GS knew or ought to have known that the AIMP units had not been sold and 3GS failed to take steps to mitigate its damages by compelling their sale.

[13] Prior to the May 12, 2010 election, 3GS had been receiving quarterly capital distributions of $43,353.00 (analogous to dividends) with respect to their AIMP units. Once their units were sold they should no longer have been receiving the capital distributions. But those quarterly payments continued to flow because, of course, the units had not been sold. Altus asserted that 3GS knew, or ought to have known, that the sale of their AIMP units had not gone through because they continued to receive their quarterly capital distribution payments.

[14] Both Ann and Alan Gordon testified that they did not know the AIMP units had not been sold, and that they concluded that the continued quarterly payments had something to do with the fact that their sale proceeds were held in escrow. They did not make inquiries of Altus for clarification.

The False Evidence

[15] Lisa Robbins was the chief financial officer of 3GS leading up to and after the asset sale to Altus. She testified at the arbitration that following the sale to Altus, she became an Altus employee. She was asked to resign after four weeks. When asked why, she answered as follows:

Because previous back in 2001 I was going through a legal battle with my parents, and I told Alan and Ann at the time when I started at Capital Planning Solution all about my charges, etc., but I guess after Altus bought the company, to my recognition, my mother called the marketing lady, I think her name was Sayla at the time, and said that I was an embezzler and I was this and I was all of these things, and so then Altus Capital Planning came over to Ann and Alan and said why didn’t you tell us this before, and they said, well, she’s been with us for years, we believe her, we know her background, we know the story, we have checked it out, so I didn’t think it was a big deal. But Rose said - - so Rose called me in on November 26 to Altus Capital Planning, and said that it was too risky to have me working for the company because of the investors, and she wanted me to resign immediately, so I did.

[16] She went on to testify that she returned to 3GS after she resigned from Altus. She continued to work in a financial-related position, recording receipts, payables and share dividend transactions, as well as conducting the day-to-day banking.

[17] Ms. Robbins said that she alerted Ann and Alan Gordon that 3GS was continuing to receive quarterly payments from Altus, apparently in relation to the AIMP units. The three of them met and discussed the issue and collectively concluded that the payments related to the fact that the sale proceeds from the AIMP units were being held in escrow and that these payments related to the escrow funds.

[18] She was cross-examined by Altus’ counsel, Mr. Sachdeva, about her criminal antecedents. The cross-examination can be repeated in full here because it is brief:

Q: Ms. Robbins, you mentioned you were incarcerated? A. Yes. Q. What were you convicted of? A. I was convicted of two counts of fraud and theft over - - one count of theft over $5,000 I believe. Q. Was this a plea bargain or after a trial? A. No, it was after the third - - there was two mistrials and then the third trial, so it was after that. I was originally charged with 12 counts, but ten of them were thrown out.

[19] Mr. Sachdeva did not probe further about the circumstances of the convictions. That said, it is clear that Ms. Robbins did not give a truthful account of her prior convictions. In the fall of 2011 she was convicted of one count of fraud over $5,000 and 11 counts of uttering a forged document. She was sentenced to 30 months in prison and served 17.

[20] Ms. Robbins had been employed by a leasing company. The company used investors’ money to purchase equipment, which it leased out. Ms. Robbins created false equipment leases, together with invoices and other documentation designed to have the appearance of bona fide lease transactions. She diverted in excess of $1 million in the result and some $440,000 went to her personal use. The actual offences bear no resemblance to her earlier testimony that she had been going through a legal battle with her parents.

[21] Ms. Robbins also testified that she had a B.Sc. in business administration. She does not.

The Award

[22] Arbitrator Stitt ultimately found in favour of 3GS. He concluded that had the 3GS AIMP units been sold effective March 30, 2010, they would have generated proceeds of sale of $2,093,978.08. Interest of $85,365.48 would have accrued on those funds had they been held in escrow for two years as required. He deducted the proceeds actually received from the sale of the units ($935,032.32), as well as the total sum of quarterly capital distribution payments made in the two year period, with interest. Those amounts totalled $303,475.20 and $7,659.14 respectively. The net award was $933,177.56.

[23] The arbitration decision was, at 10 pages, relatively brief. The following were some of the significant findings made by the arbitrator:

(a) Rose Oushalkus advised counsel to 3GS on May 18, 2010 that their AIMP units had been sold and that the proceeds would be held in escrow. In fact, the units had not been sold; (b) Altus had actual knowledge that the AIMP units had not been sold; (c) Barry Eisen was, and perhaps still is, the Executive Vice-President of Altus. He knew that the 3GS AIMP units had not been sold. He found out about the May 18, 2010 letter written by Ms. Oushalkas in November 2010. He then met with the Chief Financial Officer of Altus and their new corporate counsel (who had replaced Ms. Oushalkas) and they collectively decided not to inform 3GS of the error Altus made regarding the sale of the AIMP units; and (d) The arbitrator found Alan and Ann Gordon and Lisa Robbins to be credible witnesses. He did not mention Ms. Robbins’ prior convictions for fraud. He accepted that they did not know, nor ought they to have known, that the AIMP units had not been sold in May 2010. He concluded that they did not find out about the non-sale until early in 2012. The units were sold immediately after they found out, in mitigation of their damages.

III. The Legal Framework

[24] The asset purchase agreement contained an arbitration clause. There is no dispute about the presence of the clause or its interpretation. It provided that any disputes arising out of or relating to the agreement would be arbitrated and that the arbitrator’s decision would be final and binding. There would be no right of appeal.

[25] Notwithstanding the parties’ expressed desire for finality, s. 46(1) of the Arbitration Act, 1991, S.O. 1991, c. 17 provides that, on application, the court may set aside an arbitration award on any of a numbered list of grounds. One of those grounds arises where the award was obtained by fraud. There is no dispute that the court has jurisdiction to hear this application.

[26] Usually applications to set aside an award must be made within 30 days of the release of the decision: see s. 47(1). This application was commenced 37 days after the arbitrator’s decision was released. Section 47(2) of the Arbitration Act, 1991 provides, however, that the 30 day time limit does not apply if the applicant alleges corruption or fraud. I am satisfied that the application is not out of time.

[27] The assertion of Altus is that the arbitration award was fraudulently obtained, given Ms. Robbins’ lies. Altus asks that it be set aside on that basis.

[28] Undoubtedly, parties to court orders, or arbitration awards, should not be permitted to benefit by fraudulent conduct: see International Corona Resources Ltd. v. LAC Minerals Ltd. (1988), 54 D.L.R. (4th) 647, 66 O.R. (2d) 610 (H.C.), para. 51.

[29] Perpetrating a fraud on the court goes to the very integrity of the administration of justice and such malfeasance must be dealt with in a clear, firm and unequivocal manner.

[30] Having said all of that, the desire for finality is a strong one. Courts in our country have emphasized the importance of finality time and again. Here, there is not only a public interest in finality, but a clear expression of a private interest as well. Altus and 3GS expressly signalled their desire for relatively swift and final decisions on disputes between them when they agreed to a mandatory arbitration provision that did not allow for appeals.

[31] This is not the first case where the desirable objective of finality has butted up against the need to protect the integrity of the administration of justice. Lord Justice Holroyd Pearce observed in Meek v. Fleming, [1961] 3 All E.R. 148, at p. 154, cited with approval by Estey J.A. in 100 Main Street East Ltd. v. Sakas (1975), 58 D.L.R. (3d) 161, 8 O.R. (2d) 385, at para. 18:

Where a party deliberately misleads the court in a material matter, and that deception has probably tipped the scale in his favour (or even, as I think, where it may reasonably have done so) it would be wrong to allow him to retain the judgment thus unfairly procured. Finis litium is a desirable object, but it must not be sought by so great a sacrifice of justice which is and must remain the supreme object. Moreover, to allow the victor to keep the spoils so unworthily obtained would be an encouragement to such behaviour, and do even greater harm than the multiplication of trials. In every case it must be a question of degree, weighing one principle against the other.

[32] To be clear, the law of Ontario does not require the moving party to demonstrate that a witness’s malfeasance has “probably tipped the scale”. In Ontario the law is that the evidence of fraud must be material to the claim or defence. It need not be a determinative factor: 100 Main Street, as above, at para. 16.

[33] Relevant factors for the court to assess when considering the impact of identified fraud were discussed in some detail by Osborne J., as he then was, in the LAC Minerals case, as above, at paras. 54 to 63. These factors were distilled somewhat further by Lederer J. in Canada v. Granitile Inc. (2008), 302 D.L.R. (4th) 40, [2008] O.J. No. 4934 (S.C.J.). Justice Lederer listed four factors to be considered when assessing whether a decision of a court should be set aside where fraud is present. They are:

(a) The moving party must established that fraud is present, to the balance of probabilities standard; (b) The moving party must not have had knowledge of the fraud and the evidence to prove it, at the time of the original trial; (c) The moving party must demonstrate that the fraud affected the result in the judgment, though it need not be a determinative factor; and (d) The moving party must demonstrate that it did not act with undue delay after the fraud was discovered.

[34] I will consider and apply these four factors in greater detail below. For now, I will identify the parties’ respective positions.

The Positions of the Parties

[35] Arbitrator Stitt found that Ms. Robbins was a credible witness. But the reality is that she was not truthful about her prior convictions for fraud and uttering forged documents. Altus asserts that her lies were material to the outcome of the arbitration and that the award ought to be set aside because it was based on fraud.

[36] Arbitrator Stitt also concluded that Ms. Robbins, and the Gordons, were unsophisticated financially. Altus submits that he would not have made such a finding had he been aware of the complexity and scope of the financial fraud she was convicted of committing. Again, this different perspective on Ms. Robbins’ sophistication may have materially affected the outcome of the arbitration, in the submission of Altus’ counsel.

[37] Ultimately, the position of Altus is that this case is an instance where the need to protect the integrity of the process from the taint of fraud trumps the objective of finality.

[38] 3GS concedes that Ms. Robbins was not entirely honest, but argues that the dishonest evidence of a secondary witness should not be sufficient to overturn the final ruling of the arbitrator. Moreover, the arbitrator was aware that Ms. Robbins had convictions for offences of dishonesty, yet still found her to be a credible witness. Ultimately, his decision was based largely on factors unrelated to Ms. Robbins’ evidence and, in the result, the alleged fraud was not material to the outcome.

IV. Discussion

[39] I intend to examine the Respondent’s request to set aside the ruling of Arbitrator Stitt in accordance with the factors identified by Lederer J. in the Granitile decision. I begin with the issue of whether fraud has been made out.

(i) Is fraud present?

[40] The short answer to this question is yes. Ms. Robbins gave evidence that was dishonest. She testified that the underlying facts of her criminal convictions had to do with a family dispute. That was not true. Instead, they had to do with a complex scheme she developed and carried out to defraud investors (and her employer) of hundreds of thousands of dollars. Ms. Robbins participated in a large-scale fraud. She got caught. She had no prior criminal record. She went through two mistrials and one complete trial before a judge and jury. She was convicted on twelve counts. She was sentenced to imprisonment in a federal penitentiary.

[41] Ms. Robbins also said that there were initially twelve charges against her, but ten were “thrown out”. That was not true. She said the convictions were for two counts of fraud and one for theft over $5,000. That was untrue. She was convicted of one count of fraud over $5,000 and eleven counts of uttering forged documents.

[42] I have no doubt that Ms. Robbins knew, when she made the false statements about her criminal convictions, that they were false. She knowingly misrepresented the facts.

(ii) Did Altus have knowledge of the fraud?

[43] Altus was well aware, at the time of the original trial, that Ms. Robbins had criminal convictions. They had terminated her employment for not disclosing them.

[44] I am not satisfied, however, that Altus, or its counsel, was aware of the full scope of the convictions, nor of the underlying facts. They certainly could have, with the exercise of reasonable diligence, determined those particulars prior to the arbitration proceeding, had they been keen to do so. They were able to obtain a transcript of her sentencing proceedings in short order after the arbitration ruling came out.

[45] On the other hand, as Mr. Levitt submitted, they had no reason to suspect that she would lie about the number of prior convictions or their particulars. I accept that they did not appreciate at the time of the arbitration that she was lying about the particulars of her criminal antecedents, nor did they, at the time, have the evidence to prove that her testimony was dishonest.

[46] Altus’ lawyer at the arbitration, Mr. Sachdeva, conducted a very brief cross-examination of Ms. Robbins on her prior convictions. I accept Mr. Levitt’s submission that he may have been satisfied with the answers given – that the witness had at least three convictions for offences of dishonesty and had served some 16 or 17 months in prison in respect of those convictions.

[47] It is possible that counsel could have done more to pursue that aspect of Ms. Robbins’ background. But it is important to remember that Ms. Robbins is the rogue in this instance, not counsel. They are not to blame for her dishonesty, nor am I prepared to attribute fault to them for failing to uncover it at the arbitration hearing.

[48] I will move on to the next question, which is central to the determination of this application.

(iii) Did the fraud affect the result?

[49] This third factor is, for me, the dispositive one.

[50] It is important to be clear that Altus does not need to establish that the dishonest (i.e. fraudulent) evidence given by Ms. Robbins was determinative, or even that it “tipped the scale”.

[51] As Wakeling J.A., of the Saskatchewan Court of Appeal held in Vagi v. Peters, [1990] 2 W.W.R. 170:

This Court has consistently indicated its concerns for the maintenance of respect for the administration of justice. To that end, I do not consider it appropriate to permit a judgment which is to at least some degree based upon evidence which is untruthful or conceals relevant information to be upheld. This is so even though every aspect of that evidence cannot be said to clearly bear on the judgment rendered. It is enough if the evidence is of some consequence and therefore might have some bearing upon the result of the trial. (See Meek v. Fleming, [1961] 3 All E.R. 148 (C.A.) )

[52] Said another way, it is enough if the impugned evidence was material to the outcome.

[53] In assessing materiality, the court must have regard to the pleadings, the evidence, the positions taken by the parties and, ultimately the ruling of the adjudicator.

[54] In this case, Altus accepted that it had breached contractual terms it was obligated to observe. It failed to sell the AIMP units of 3GS when required to do so. When they were ultimately sold some two years later, they had dropped substantially in value. 3GS had undeniably suffered damages. The issue for determination at the arbitration, however, was whether those damages should be reduced on the basis of some legal principle such as failure to mitigate, contributory negligence, or estoppel – all based on the notion that the principals of 3GS failed to alert Altus that the AIMP units had not been sold.

[55] Having read the arbitrator’s brief reasons, it is apparent that he found this to be an overwhelming case in favour of 3GS. I would have as well.

[56] The main thrust of the decision, as I read it, is that it does not lie in the mouth of Altus to complain about the failure of 3GS to alert it to a fact that it was already well aware of, and indeed had tried to suppress.

[57] Corporate counsel to Altus advised the Gordons, by letter dated May 18, 2010, that the 3GS AIMP units had been sold and the escrow established. Those representations were not true. Altus knew the units had not been sold. Several months later, a conscious decision was made by executives of Altus to not sell the units and to not tell the Gordons. The reasons for that decision are best known to them. But in view of that decision, it is pretty weak to complain that 3GS should have done something to bring to the attention of Altus that the units had not been sold.

[58] The arbitrator said, in the final paragraph on page 7 of his decision:

Since Altus had actual knowledge that 3GS had requested in May, 2010 that the AIMP units be sold, had actual knowledge that 3GS had been informed that AIMP units had been sold, and had actual knowledge that the AIMP units in fact had not been sold, it does not make sense to impose an obligation on 3GS to inform Altus of these facts and attach legal consequences to 3GS’ inaction, when Altus already knew all of the facts that it is now suggesting 3GS should have told it.

[59] The arbitrator went on to examine if he was satisfied, in any event, that 3GS knew, or ought to have known that the AIMP units had not been sold. To make that determination, he had both direct and circumstantial evidence to consider.

[60] The circumstantial evidence essentially consisted of the fact that the quarterly capital distribution payments continued to be made. Altus urged the arbitrator to conclude that this circumstantial evidence – even in the face of their counsel’s representation that the units had been sold – should be sufficient for him to draw the inference that Ann and Alan Gordon knew that the 3GS AIMP units had not been sold. He found otherwise, preferring the direct evidence of the Respondent’s witnesses.

[61] The direct evidence consisted of the testimony of Ann Gordon, Alan Gordon and Lisa Robbins, all of whom testified that they did not appreciate that the continued quarterly payments meant that the AIMP units had not been sold. They each gave explanations, reasonably consistent with one another, as to why they thought the payments were continuing to be made. Ann Gordon further reasonably indicated that she did not believe Altus would make payments to them that were not deserved, considering they were in litigation with Altus at the time.

[62] The arbitrator found the Gordons and Ms. Robbins to be credible witnesses. He was aware that Ms. Robbins had criminal convictions for offences of dishonesty. He did not appear troubled by that fact.

[63] It is important to appreciate that prior convictions – even for offences of dishonesty - are just one piece of evidence for a trier of fact to consider when deciding how much to believe and rely upon a witness’s testimony. It remains up to the trier of fact to decide how much or how little to believe and rely upon the testimony of any witness. In other words, the prior convictions were only one of a constellation of factors likely considered by the arbitrator when assessing what reliance to place on Ms. Robbins’ evidence.

[64] I accept that the arbitrator may have put less reliance on Ms. Robbins’ evidence had he known the full and true story about her prior convictions. Indeed he may have rejected her evidence entirely. But even if he did so reject her evidence, he still had the evidence of Ann and Alan Gordon to consider, which he found credible and reliable. No issue is taken with his findings about their evidence. Each testified that s/he did not know the AIMP units had not been sold. He accepted that evidence. Both said they found out in 2012 and immediately demanded the sale of the units.

[65] There is no evidence that either of the Gordons knew of Ms. Robbins’ dishonesty or that they were complicit in it. In other words, there is no basis on which to believe that their testimony would have been tainted by her dishonesty.

[66] In my view, the result would have been the same had the arbitrator found Ms. Robbins to be an utterly incredible and unreliable witness. He still found the principals of 3GS to have had no knowledge of Altus’s breach, while at the same time concluding that Altus not only knew of the breach but actively concealed it from 3GS.

[67] Lying under oath is always a serious matter. Ms. Robbins gave dishonest testimony and misrepresented her criminal antecedents knowing that the arbitrator was relying on her evidence. That is a serious issue and I am certainly not considering it any less than a very troubling circumstance. But that said, in my view her evidence – fraudulent as it may have been – was not material to the outcome of the case. The outcome would have been the same without any of her testimony.

[68] In light of my conclusions with respect to this factor, it is unnecessary for me to address the fourth factor – whether there was any undue delay on the part of the moving party. Had I gone on to address it, I would have found that there was not.

Conclusion

[69] In the result, the application is dismissed. The arbitration decision will stand.

[70] The parties may address the issue of costs in writing on a 14 day turnaround. The Respondent shall serve and file its costs submissions within 14 days of the date of this ruling, the Applicant 14 days thereafter. Submissions should not exceed 2 pages in length, not including any Costs Outline. Submissions should be forwarded to the judicial secretaries’ office in Newmarket.

Boswell J.

Released: June 2, 2016