Court File and Parties

COURT FILE NO.: CV 16-17610-00 DATE: 2016 06 30 SUPERIOR COURT OF JUSTICE – ONTARIO

RE: CARL GORMAN Applicant

AND:

WADE KOSOWAN, 8108706 CANADA LTD., 7880413 CANADA INC., 929045 CANADA LTD., 9123555 CANADA INC., 1646850 ONTARIO INC. AND 1551164 ONTARIO INC. Respondents

BEFORE: Trimble, J.

COUNSEL: D. Palmer, for the Applicant D. Bains and E. Moghadamian for the Respondent Wade Kosowan

HEARD: May 25 and June 22, 2016

Endorsement

[1] This is a motion, brought by the Respondents, to stay Mr. Gorman’s Application for oppression relief under the Canada Business Corporations Act and the Ontario Business Corporations Act, as more fully set out in the Notice of Application. The Respondents say that the arbitration clause in the Unanimous Shareholders’ Agreement applies to bar this Application.

[2] The parties approached this motion to stay on the basis that the arbitration clause either applied to or did not apply to Mr. Gorman’s claims. No issue was raised that some of the Responding parties to the Application were not signatories to the Unanimous Shareholders’ Agreement, and that the arbitration provision might not apply to it or them. I requested further submissions on this and two other questions.

[3] The Respondent’s rely on the Unanimous Shareholders’ Agreement (called Memorandum of Agreement, but referred herein as “USA”) that governs the relationship between the parties. Clause 3.12 of the USA says:

DISPUTES: The parties agree that disputes other than disputes regarding the conduct of day to day business, which are not resolved at meetings, or other disputes under this Agreement shall be resolved as follows:

(b) If the parties cannot settle the issue in dispute informally with the assistance of David Fram, the parties agree to arbitrate the disagreement.

(g) there shall be no appeal from the award of the arbitrator or arbitrators.

[4] The USA also provides that each of Mr. Gorman and Mr. Kosowan are 50% shareholders (cl. 2.02), directors of the corporation (cl.3.01) and are managing directors (cl. 3.07). Clause 3.06 identifies the powers of shareholders. Decisions which require resolutions of the shareholders (Gorman and Kosowan) include any sale of or a substantial portion of assets, capital expenditure involving a liability of the Corporation of $10,000 or more, any material capital expenditure or leasing of capital equipment, borrowing or financing, and “…the hiring or dismissal by the Corporation of a manager of its business or any other senior executive or key employee of the Corporation, and the determination of, or any material alteration in, the remuneration and compensation or other terms and conditions of employment of any such manager or key employees….”

Background

[5] Messr.s Gorman and Kosowan each carried on business in the transport and warehouse business. In 2012 they formed one business together and are now joint owners of a transportation and warehouse business through their equal shareholding in 8108706 Canada Ltd. (“810 Canada”). The business is operated primarily through 7880413, a wholly owned subsidiary of 810 Canada (“788 Canada”) but other corporations are also form part of the business venture.

[6] Mr. Kosowan, Mr. Gorman, 810 Canada and 788 Canada entered into the on April 8, 2012. While the USA was amended from time to time, the amendments are not important for the purpose of this motion.

[7] Messr.s Kosowan and Gorman also entered into an Entitlement Agreement dated April 8, 2012, which provided that Mr. Gorman was not yet the beneficial owner of the 50% of the shares in the Corporation but he could or would acquire the beneficial interest to those shares in time through "sweat equity" in the business venture.

[8] The parties had a dispute which began some time in 2014. The exact date is not clear. This dispute continued for a period of time until the end of February 2016.

[9] By letter dated February 25, 2016, Mr. Kosowan terminated Mr. Gorman’s employment with the Corporation for “falsified records”, “breach of good faith and fidelity”, fraud, taking monies, paying kick-backs to clients, corruption, and mismanagement.

[10] By letter dated February 25, 2016, Mr. Kosowan unilaterally provided a Notice of Default to Mr. Gorman alleging a variety of very significant breaches but, surprisingly, still permitted Mr. Gorman, if he wished, to pay Mr. Kosowan $4,000,000 to acquire Mr. Gorman’s beneficial interest in the 50% of the shares in the Corporation.

[11] On March 1, 2016 Mr. Kosowan issued a Notice that said that if Mr. Gorman entered the property of the Corporation, such actions would constitute trespassing.

[12] Attempts to resolve the dispute in March 2016 were unsuccessful. As a result, Mr. Gorman brought this Application. In response to the Application, Mr. Kosowan moved to stay the Application.

The Position of the Parties

[13] Mr. Kosowan says that because of the arbitration clause in the unanimous shareholder agreement, this court has no jurisdiction to grant the relief sought in the Application and the Application should be stayed. All of the issues raised in Mr. Gorman’s Application arise “under this Agreement”. He relies, predominantly, on Woolcock v. Bushert, 2004 CarswellOnt 4517, [2004] O.J. No. 4498 (C.A.).

[14] Mr. Gorman says that the stay should be denied for the following reasons:

a. Mr. Kosovan breached the unanimous shareholders’ agreement by acting unilaterally, and, having breached the agreement, cannot rely on the arbitration provision;

b. Mr. Kosowan is using the arbitration provision as a tool of oppression. He relies on Deluce Holdings Inc. v. Air Canada (1992), 12 O.R. (3d) 131 (Gen. Div.); 829194 Ontario Inc. v. Garibotti, 2003 ONSC 5857, and Kassem v. Secure Distribution Services Inc.;

c. The hiring and dismissal of employees is a “day to day” activity of the corporation, and under the introductory words to the arbitration provision, excepted from arbitration.

Decision

[15] Mr. Kosowan’s motion to stay is allowed. Costs and terms of the stay are addressed at the end of these reasons.

Analysis

[16] Section 17(1) of the Arbitration Act, 1991 says that where a party to an arbitration agreement commences a proceeding on an issue that is required to be arbitrated, the Court hearing the matter “…shall … stay the proceeding.” subject to exceptions in s. 7(2) which do not apply. Section 106 of the Courts of Justice Act empowers the Court to make the order.

Interpreting the Arbitration Provision

[17] In an Application to stay a proceeding because of an arbitration provision, the Court must first interpret the arbitration provision, then analyse the claims made to determine whether they must be decided by an arbitrator under the terms of the agreement as interpreted. If the answer to the second question is “yes” then the proceeding should be stayed and the claims referred to arbitration subject to the exceptions in s. 7(2) of the Arbitration Act, 1991 (see MDG Kingston Inc. v. MDG Computers Canada Inc., 2008 ONCA 656, para. 14; Mantini v. Smith Lyons LLP (2003), 64 O.R. (3d) 505 (C.A.) at para. 17).

[18] Mr. Kosowan says that the arbitration provision is quite broad, covering every aspect of Mr. Gorman’s claim.

[19] Mr. Gorman says that the arbitration provision is narrow; for example, it excepts “day to day” decisions from its ambit.

What does the arbitration clause say?

[20] The arbitration provision in this case is not as long and detailed as that in MDG. It simply says that “…disputes other than those regarding day to day business, which are not resolved at meetings, or other disputes under this Agreement shall be resolved as follows:…. (b) if the parties cannot settle the issue in dispute informally with the assistance of David Fram, the parties agree to arbitrate the disagreement.”

[21] The parties did not refer me to case law regarding the interpretation of this arbitration clause. Therefore, I approach it on its plain meaning. If the dispute is “under this Agreement” and not “regarding day to day business”, a dispute must be arbitrated. Why do I say this?

[22] The word “under” is defined by GOOGLE as “controlled, managed, or governed by”, during (a specified time period, reign, or administration)”, “as a reaction to or undergoing the pressure of (something)”, and “as provided for by the rules of; in accordance with.” The Pocket Oxford Dictionary defines “under” as including “in position or act of supporting or sustaining, liable to, on condition of, controlled or bound or commanded or ruled by, in accordance with…” Merriam Webster defines it (as a preposition) as “guided or managed by (a person or group), controlled or affected by (something)”.

[23] Using these definitions of “under”, the phrase “disputes….under the Agreement” is a broad phrase encompassing all disputes controlled by, in accordance with, provided for by and governed by the Agreement. The exception to this is “regarding the conduct of the day to day business”.

[24] The Pocket Oxford Dictionary defines “regarding” as “…about, concerning, in respect of, so far as it concerns” and equates it to “in respect of”. GOOGLE lists synonyms to “regarding” as “concerning, as regards, with/in regard to, with respect to, with reference to, relating to, respecting, re, about, apropos [of], on the subject of, in connection with, vis-à-vis…”. Merriam Webster defines “regarding” simply as “relating to (something)”, and lists similar synonyms as Google.

[25] From these definitions, the arbitration provision is quite broad, as is the exception from it.

Are Mr. Gorman’s claims “disputes under this Agreement” or are they covered by the exception of “regarding … day to day business”?

[26] Mr. Gorman’s claims are covered by the arbitration clause.

[27] Mr. Gorman says that the genesis of Kosowan’s actions lies in Kosowan’s intimate liaison in 2014 with Mr. Gorman’s now sister-in-law. Mr. Gorman took offence to this relationship and expressed his views to Mr. Kosowan. Mr. Kosowan, says Mr. Gorman, took revenge by forcing Mr. Gorman from the company. Mr. Gorman says that since the genesis of the dispute lies outside the USA, the whole of the dispute is not covered by the arbitration provision.

[28] I disagree. Whatever the genesis of the dispute might be, the claims made by Mr. Gorman all related to Mr. Kosowan’s actions affecting Mr. Gorman’s position with the business. The acts Mr. Gorman complains of include that Mr. Kosowan terminated Mr. Gorman’s employment, barred him from the business premises, stopped paying him, cut off access to information, and cancelled his credit cards and phone. In essence, Mr. Kosowan severed all connection between Mr. Gorman and the business, taking away his shares.

[29] Clause 3.06(u) of the USA addresses how decisions are to be made about how key people and managers (such as Mr. Gorman) are to be hired and dismissed. Mr. Kosowan did not follow that process. He did not obtain a resolution of all the shareholders. He did not follow the arbitration provision. He may have violated other clauses such as clauses 3.14, 4.04 and 4.08.

[30] Mr. Kosowan’s actions also all relate to or arise out of the USA. He justifies his failure to follow the dispute resolution provisions in the USA as necessary under the circumstances. He served a Notice of Default alleging that Mr. Gorman was in default or breach of many sections of the unanimous shareholder’s agreement. He terminated Mr. Gorman, accusing him of dishonesty, transferring corporate assets to other corporations, taking excess compensation, and paying bribes to clients.

[31] The reasons Mr. Kosowan gave for acting as he did all relate to the business of the company.

[32] Mr. Gorman says that the hiring and firing of people is a “day to day activity” and therefore exempt from the arbitration. It is not. I say this for two reasons. First, it is not logical. Hiring and firing of key people and management is not a day to day matter for a business. Second, how managers and key people are to be hired and fired is specifically provided for in the Agreement. Therefore, the parties must have intended that the hiring and firing of key people and managers as other than “day to day” business’ of the company.

[33] The breach of a shareholder’s agreement is arbitrable (see MDG, supra at para. 24), as is the issue of the arbitrator’s jurisdiction (see Seidel v. Telus Communications Inc., 2011 SCC 15, paras. 29 and 114).

[34] Mr. Kosowan terminated Mr. Gorman’s employment with the Corporation without regard to or employing the arbitration provision. There does not appear to have been any settlement discussion or resolution attempt under the arbitration clause.

[35] Despite submissions to the contrary by Mr. Kosowan's counsel, when Mr. Kosowan decided to terminate Mr. Gorman and ban him from the premises, there was no question there existed a dispute amongst the shareholders and Mr. Gorman's termination without utilizing the arbitration process appears to be contrary to the express arbitration provisions in the Memorandum of Agreement.

[36] I make no comment here on whether Mr. Kosowan had a legitimate basis for his concerns regarding Mr. Gorman or that he felt justified in terminating Mr. Gorman. That will be decided at a later date. The important fact, and it is not disputed, is that Mr. Kosowan did not trigger the arbitration provision. Instead, he chose to take unilateral steps to end the dispute by the termination of Mr. Gorman and the exclusion of Mr. Gorman from the Corporation and the business venture.

[37] In making this order, I do not condone or reward Mr. Kosowan's unilateral actions and his disregarding the arbitration provisions. I am aware that by staying the Application, Mr. Kosowan may delay agreeing on the appointment of an arbitrator.

[38] As indicated, above, I disagree with Mr. Gorman’s analysis.

What Effect Does the Presence in the Application of Non-Parties to the Shareholders Agreement Have on the Stay Application?

[39] The presence in the Application of non-parties to the SDA does not affect my decisions to stay the Application.

[40] The USA names as parties to the Agreement Messrs. Gorman and Kosowan, 8108706 Canada Ltd., and 7880413 Canada Inc. They are also respondents to the Application.

[41] The Application also names as respondents four non-parties to the USA: 9290415 Canada Ltd., 9123555 Canada Inc., 1646850 Ontario Inc. and 1551164 Ontario Inc.

[42] Mr. Kosowan, as the officer and director of each of them, says that they all “consent” to the jurisdiction of the arbitrator. By this I infer that they attorn to the arbitrator’s jurisdiction. Therefore, says Mr. Kosowan, their presence in the application should not alter the effect of the arbitration provision or prevent the stay of Mr. Gorman’s Application.

[43] Mr. Gorman says two things about the non-signatory corporate respondents. First, he says that they are strangers to the USA who cannot obtain the benefits of the USA without the consent of all parties to the agreement. Mr. Gorman does not consent. Second, and contrarily, Mr. Gorman says that these corporations are related to the signatory parties in that Mr. Kosowan created them to manage or perform various functions for the signatory companies (ie to take over payroll because of a WSIB investigation).

[44] There is no doubt that the court has a residual jurisdiction to stay an application where a party to the application is not a party to the arbitration agreement (see Prince George (City) v. A.L. Sims & Sons Ltd. para 53). In Dalimpex Ltd. v. Janmicki, 2003 CarswellOnt 1998 (Ont. C.A.), on which Mr. Gorman relies, the Court of Appeal found, on the evidence before it, that the non-parties were privies of the Applicant. Therefore, it stayed the application pending the decision of the arbitrator.

[45] It is not for the Court, however, to make a final determination or interpretation of the arbitration agreement or whether a particular party to the proceedings is a party to the arbitration agreement. Those issues are within the jurisdiction of the arbitrator. Only where it is clear that the dispute is outside the terms of the arbitration agreement should a court reach any final determination in respect of the reach of the arbitration agreement (see Gulf Canada Resources Ltd. v. Arochem International Ltd. (1992), 43 C.P.R. (3d) 390 (B.C.C.A., per Hinkson, J.A., p. 397; and Aubrey Falls Investments Ltd. v. Kozak, 2012 ONSC 5667 per Koke, J. at para. 34).

[46] To state it differently, the competence-competence principle applies. Notwithstanding that the court has jurisdiction to stay an application when there is an arbitration clause, precedence is given to the arbitration process since that is what the parties agreed to. Arbitrators should be allowed to exercise their power to rule first on their own jurisdiction (see: Ontario Medical Association v. Willis Canada Inc., 2013 ONCA 745, per Sharpe J.A., at para 19 to 22, 26 to 37). In my view, the “jurisdiction” of the arbitrator includes the power to decide over whom s/he has jurisdiction.

[47] There are two contradictory theories about the connectedness of the non-party corporations to the parties to the shareholders’ agreement. Messrs. Kosowan and Gorman were not cross examined on their affidavits. I cannot determine whether the non-parties are privies of any of the parties to the shareholders’ agreement. In any event, this too is a matter for the arbitrator to decide.

Waiver

[48] I asked counsel to make submission on the issue of whether waiver made any difference to the stay analysis. Mr. Kosowan’s actions might be seen as waiver of the shareholders’ agreement. If his actions constitute waiver, then Mr. Gorman’s Application might be seen as acceptance of the waiver. Therefore the arbitration clause does not apply. If Mr. Kosowan’s actions are NOT waiver, then Mr. Gorman’s Application itself might be seen as an act of waiver of the arbitration clause, which Mr. Kosowan, by his Motion to Stay the Application, has not accepted.

[49] Ultimately, Woolcock, supra at paragraph 31 and 32 appears to say that breach of an arbitration clause in an agreement is a matter for the arbitrator to decide.

Does the Claim for Oppression Remedy Mean that the Arbitration Clause does not Apply?

[50] Based on Mr. Kosowan’s oppressive conduct Mr. Gorman alleges, the oppression claim does not take the claim outside the ambit of the arbitration clause.

[51] Mr. Gorman relies on 829194 Ontario Inc., supra, which stands for the proposition that where the business is operated in a manner that is oppressive, such a dispute is not arbitrable. Mr. Gorman says that his termination and the way Mr. Kosowan handled it constitute oppression. Mr. Gorman also relies on Dulce Holdigns Inc., supra.

[52] Mr. Kosowan, relying on U. v. Watters Environmental Group Inc., 2012 ONSC 7019, says that a broadly worded arbitration clause can cover termination of employment.

[53] I have already held that the USA dealt specifically with decisions to terminate senior managers and key employees, both of which Mr. Gorman was. Therefore, his employment issues arise out of the USA. Therefore, Mr. Gorman’s dismissal is arbitrable.

[54] In any event, Deluce does not apply. I accept the distinction drawn by Stinson, J. in U v. Watters, supra, at paragraph 14. In Deluce, the Defendant triggered a shotgun share purchase clause in the shareholders’ agreement. The arbitration clause was triggered when value of the shares could not be agreed upon. The oppressive behaviour was triggering the shotgun share purchase clause. The arbitration clause was a tool in the oppressive behaviour.

[55] In the instant case, the arbitration clause imposes the dispute mechanism that the parties contemplated. To the extent that Mr. Kosowan’s actions are inconsistent with the arbitration clause or may be oppressive, as they flow from the way Mr. Kosowan dismissed Mr. Gorman, they are aribtrable. Any effect of Mr. Kosowan’s allegedly oppressive conduct in terminating Mr. Gorman have been addressed, in the interim, by Ricchetti, J.’s interim order.

Conclusion

[56] The Motion to Stay is granted. The date for hearing the Application of July 18 is vacated.

[57] The interim relief granted by the court in this matter remains in place subject to any decision of the arbitrator.

[58] The parties have 30 days to appoint an arbitrator under the USA or the Arbitration Act, 1991.

[59] The parties may address any procedural or compliance issue arising from this or any other order of this Court, by conference call at 9 a.m. any convenient morning. In that/those conference calls, I will deal with procedural matters, only. I am not seized of this matter.

[60] Costs shall be addressed in writing, limited to 5 written pages, excluding bills of costs or attachments. Mr. Kosowan’s costs submissions are to served and filed by 4 p.m., July 22, 2016, and Mr. Gorman’s by 4 p.m., August 5.

Trimble, J. Date: June 30, 2016

COURT FILE NO.: CV 16-17610-00 DATE: 2016 06 30 ONTARIO SUPERIOR COURT OF JUSTICE RE: CARL GORMAN v. WADE KOSOWAN, 8108706 CANADA LTD., 7880413 CANADA INC., 929045 CANADA LTD., 9123555 CANADA INC., 1646850 ONTARIO INC. AND 1551164 ONTARIO INC BEFORE: TRIMBLE, J. ENDORSEMENT TRIMBLE J. Released: June 30, 2016