Court File and Parties
COURT FILE NO.: CV-18-597022-00CL DATE: 2018/11/29 SUPERIOR COURT OF JUSTICE – ONTARIO - COMMERCIAL LIST
RE: IN THE MATTER OF an Arbitration under the Arbitration Act, 1991, S.O. 1991, C.17
BETWEEN: CHEMICAL VAPOUR METAL REFINING INC., CVD CONSOLIDATED ACOUNTS MANAGEMENT INC., CVD MANUFACTURING INC., CVMR CORPORATION, KAMRAN KHOZAN, NET PROCESS TECHNOLOGIES HOLDING INC. and REPROTECH LIMITED Applicants
AND:
DMITRI TEREKHOV Respondent
COURT FILE NO.: CV-18-597032-00CL SUPERIOR COURT OF JUSTICE – ONTARIO - COMMERCIAL LIST
RE: IN THE MATTER OF an Arbitration under the Arbitration Act, 1991, S.O. 1991, C.17
BETWEEN: DMITRI TEREKHOV Claimant (Respondent in Appeal)
AND:
CHEMICAL VAPOUR METAL REFINING INC., CVD CONSOLIDATED ACOUNTS MANAGEMENT INC., CVD MANUFACTURING INC., CVMR CORPORATION, KAMRAN KHOZAN, NET PROCESS TECHNOLOGIES HOLDING INC. and REPROTECH LIMITED Respondents (Appellants)
BEFORE: Hainey J.
COUNSEL: P. Griffin and D. Knoke for the Applicants J. G. Hodder for the Respondent
HEARD: November 20, 2018
Endorsement
Background
[1] The applicants apply pursuant to s. 46(1) (3) of the Arbitration Act, 1991, S.O. 1991, C.17 (“Arbitration Act”) to set aside the final arbitration award of Stan Fisher Q.C. (“Arbitrator”) dated April 3, 2018, granting US$995,000 in relief to the respondent against the applicants. (“Final Award”)
[2] The applicants also seek leave to appeal the Final Award and the Arbitrator’s costs award pursuant to ss. 45(1)(a) and (b) of the Arbitration Act.
[3] The respondent, Dmitri Terekhov, (“Terekhov”) brings a counter-application seeking an order enforcing the Final Award and the arbitrator’s costs award and dismissing the applicants’ appeal.
[4] The applicants submit that the Arbitrator exceeded his jurisdiction for the following reasons:
(a) The Arbitrator fixed the valuation date, share value and purchaser of Terekhov’s shares in Chemical Vapour Metal Refining Inc. (“CVMR”), when a native remedy was included within the shareholders’ agreement which was the source of his jurisdiction; and
(b) The Arbitrator made the Final Award, and an award of CAD$496,107.37 and US$245,868.57 in costs, disbursements, fees and prejudgment interest pursuant to a costs award dated June 4, 2018 (“Costs Award”) enforceable against non-parties to the arbitration agreement.
Facts
[5] CVMR, which was incorporated on December 1, 1999, carried on the business of metal refining and vapour metallurgy process development.
[6] Terekhov became an employee of CVMR in July 2000. Initially, the respondent, Kamram Khozan, (“Khozan”) the principal of CVMR, through his holding company, Net Process Technologies Holding Inc., (“Net Process”) held 80% of the common shares of CVMR and Terekhov held 20%. After Terekhov introduced an acquaintance named Vladimir Popik (“Popik”), Net Process, Terekhov and Popik signed a shareholders’ agreement that recorded that the common shareholdings in CVMR were as follows: Net Process 77.5%, Terekhov 17.5%, and Popik 5%. (“Shareholders’ Agreement”)
[7] On June 12, 2004, CVMR signed a Technology Transfer Agreement (“JJNI Agreement”), which provided that Jilin Jian Nickel Industry Co. would pay US$18 million to CVMR for the construction of a plant and an additional US$9.1 million in technology transfer fees. The JJNI Agreement concluded in 2007. It was a lucrative project for CVMR. According to Terekhov, Khozan promised him a “dividend” of US$1 million, which was his approximate share of the US$9.1 million technology transfer fee.
[8] At Khozan’s suggestion, Terekhov, Popik and Net Process signed a shareholders’ resolution dated April 11, 2005 (“2005 Resolution”), which had the purported effect of exchanging Terekhov’s common shares for preference shares. However, the terms of the preference shares as described in the 2005 Resolution made them virtually worthless.
[9] According to Terekhov, Khozan misled him as to the purpose and effect of the 2005 Resolution and he also misled him again with respect to the promised US$1 million dividend. The Arbitrator found that Khozan mispresented the state of CVMR’s affairs to Terekhov and that the 2005 Resolution was a “sham in its entirety”. He concluded that Khozan had acted oppressively and in bad faith toward Terekhov.
[10] Nine years later, on March 14, 2004, CVMR terminated Terekhov’s employment.
[11] On June 5, 2014, Terekhov commenced an action in the Ontario Superior Court against the applicants (“CVMR Parties”). In his statement of claim, Terekhov sought damages for wrongful dismissal and compensation for oppression, pursuant to s. 241 of the Ontario Business Corporations Act, together with such ancillary orders as may be appropriate. He also pleaded fraudulent conveyance and that all the corporate defendants in that action were the alter ego of each other and that the obligations of any one of them to him were the obligations of all of them.
[12] In response, the CVMR Parties brought a motion to stay part of Terekhov’s action on the basis that the dispute was governed by an arbitration clause in the Shareholders’ Agreement.
[13] Master McAfee made an order on the consent of the CVMR Parties dated November 19, 2014 (“McAfee Order”), appointing CVMR’s nominee, Stan Fisher, as arbitrator to adjudicate the shareholder-related claims made by Terekhov against the CVMR Parties, including his claims in relation to unpaid dividends, oppression, alter ego, and fraudulent conveyance as pleaded in his statement of claim.
[14] The relief sought by Terekhov in the arbitration, was as follows:
(a) an order that CVMR be liquidated and dissolved;
(b) compensation for oppression, including an order that CVMR acquire Terekhov’s shares on terms that are just;
(c) damages for misrepresentation in the amount of $2 million;
(d) a declaration that the 2005 Resolution is void and of no effect; and
(e) an order that any award against any of the CVMR Parties, including any judgment in the wrongful dismissal action, would be enforceable against them all, including Khozan personally.
[15] The Arbitration was conducted pursuant to the arbitration clause contained in s. 4.09 of the Shareholders’ Agreement.
[16] At the arbitration Terekhov claimed that he was a common shareholder of CVMR and that he had been promised a dividend of US$995,000 by Khozan.
[17] The CVMR Parties defended his claim on the basis that:
(i) Terekhov was a preference shareholder;
(ii) No dividends were agreed or declared to be paid to him; and
(iii) The provisions of the Shareholders’ Agreement applied to any purchase of Terekhov’s common shares so that the determination of the amount to be paid for his shares was to be made by CVMR’s accountant.
[18] The Arbitrator held that there were three issues to be determined:
(a) What were Terekhov’s shareholdings in CVMR at the applicable times?
(b) Did Khozan act oppressively towards Terekhov’s interests in CVMR and if so, which parties were liable for his oppressive conduct?
(c) Assuming there was oppressive conduct, what was the appropriate remedy for Terekhov?
[19] The Arbitrator made the following determinations:
(a) Terekhov owned 17.5% of the issued and outstanding common shares of the CVMR at the relevant times;
(b) The CVMR Parties engaged in oppressive conduct towards Terekhov’s interests in CVMR. All of the applicants were liable to Terekhov on the basis that they were all alter egos of Khozan; and
(c) Terekhov was entitled to damages of US$995,000. According to the Arbitrator, this amount represented the fair value of his 17.5% interest in CVMR based upon the amount of the dividend the Arbitrator found Khozan had promised to pay to Terekhov.
Positions of the Parties
[20] The applicants submit that the Arbitrator committed the following legal errors:
(a) He exceeded his jurisdiction by ignoring the provisions of the Shareholders’ Agreement which specifically set out the timing and method of valuation for the purchase of Terekhov’s common shares;
(b) He erred in his method of calculating the relief by using an incorrect valuation date; relying on a supposed dividend to value the shares which was arbitrary and unreasonable; and in any event failed to direct that Terekhov’s shares were to be transferred upon payment of the award;
(c) He exceeded his jurisdiction by granting relief against persons and entities that were not parties to the Shareholders’ Agreement, and the referral to arbitration provisions contained in the agreement; and
(d) He erred in his calculation of pre-judgment interest by using an incorrect valuation date and applying an incorrect rate of interest.
[21] The respondent makes the following submissions in response:
(a) The Arbitrator did not exceed his jurisdiction in making an award affecting the very parties who consented to an order joining them into the arbitration;
(b) The Arbitrator did not exceed his jurisdiction in making a valuation in connection with the oppression claim referred to him by court order;
(c) The court should not entertain jurisdictional objections that were not made, or made in a timely or proper way, before the Arbitrator; and
(d) The court should defer to the Arbitrator’s exercise of discretion with respect to his calculation of pre-judgment interest.
Analysis
[22] The applicant’s position that the Arbitrator exceeded his jurisdiction is based upon the following submissions:
a) The Arbitrator ordered a buyout of Terekhov’s shares in CVMR in contravention of the buyout provisions of the Shareholders’ Agreement; and
b) He granted relief against persons and entities that were not parties to the Shareholders’ Agreement and, therefore, not bound by the arbitration.
[23] The applicants also submit that the Arbitrator erred in law by ordering pre-judgment interest in a manner inconsistent with the Shareholders’ Agreement and by using an incorrect rate of pre-judgment interest.
[24] I do not accept these submissions for the following reasons.
[25] Master McAfee’s order, that was consented to by all of the CVMR Parties, referred the determination of Terekhov’s oppression claim and the damages that flowed from any oppression to the Arbitrator. It specified as follows:
The Court Orders that the issues of oppression, alter-ego and fraudulent conveyance, as pleaded, shall be determined by the arbitrator and shall be binding on the parties both in respect to the subject matter of the arbitration and in respect to those claims which are not, by this order, referred to arbitration.
[26] By consenting to Master McAfee’s order, the CVMR parties became parties to the arbitration and submitted to the jurisdiction of the Arbitrator with respect to these issues. The Arbitrator correctly noted this at para. 15 of his Final Award as follows:
My jurisdiction is not in dispute. The Order of Master McAfee dated November 19, 2014, which was made on consent of the parties, directed that the ‘issues of oppression, alter-ego, and fraudulent conveyance, as pleaded, shall be determined by the arbitrator and shall be binding on the parties.’ As noted above, the pleadings in this matter have since been amended, on consent of the parties, and the full scope of the dispute is therefore within my jurisdiction in this arbitration.
[27] The Arbitrator properly described the issues that he had to determine with respect to the oppression claim as follows:
- Did Khozan act oppressively towards Terekhov’s interests in CVMR and if so, which parties were liable for his oppressive conduct?
- Assuming there was oppressive conduct, what was the appropriate remedy for Terekhov?
[28] With respect to the first issue the Arbitrator concluded in his Final Award as follows:
For the reasons set out above, Terekhov’s expectations were indeed breached oppressively, both in a manner that is unfairly prejudicial and unfairly disregarded Terekhov’s interests. …
Khozan’s conduct was ‘unfairly prejudicial’ to Terekhov within the meaning of how that phrase has been defined by the courts. …
Having made the above findings of oppression, I would pause here to address the issue of liability as between Khozan and the corporate Respondents. There are two parts to this issue, in my view: first, whether all of the corporate Respondents are Khozan’s alter ego … and second, whether Khozan should also attract officer’s and director’s liability for his role in the oppression.
For the first part, on the basis of the full record now before me, I have no trouble concluding that all of the corporate Respondents are indeed Khozan’s alter ego. …
Based on my findings above, it is clear that Khozan did act in bad faith and he obtained some personal benefit from his conduct; as a result, I conclude that he is personally liable as a director for the oppression suffered by Terekhov.
[29] With respect to the issue of the appropriate remedy for Terekhov the Arbitrator concluded as follows in a section of his Final Award entitled “Quantum of Compensation Owed to Terekhov”:
… Terekhov’s relative shareholdings of CVMR did not change from the time of the 2000USA through to his termination: he continues to own 17.5% of the common shares of the company. …
In light of Khozan’s conduct, it would of course not be a fair result to leave Terekhov with 17.5% of CVMRI, particularly given more recent actions taken by Khozan to remove assets from CVRMI and to transfer those assets to his other corporate entities. Fairness dictates that Terekhov should receive damages for the oppression he suffered equal to the fair value of his shares as of April 2005. In the result, for the foregoing reasons, I find that Terekhov was entitled to USD$995,000 (taking into account the single $5000 payment previously made by Khozian to Terekhov’s wife) for his shares in CVMRI as of April 2005. …
Despite my findings of oppression, I am also not inclined to award Terekhov additional damages in respect of the CVMRI Dividends.
[30] In my view, these issues were all within the Arbitrator’s jurisdiction pursuant to Master McAfee’s order. The Arbitrator did not exceed his jurisdiction in arriving at these conclusions.
[31] The applicants require leave to appeal the Arbitrator’s decision with respect to his calculation of pre-judgment interest. The Arbitrator concluded that pre-judgment interest ran from April 11, 2005 at the rate of 1.9%. The applicants submit that he should have awarded pre-judgment interest from March 31, 2014 at the rate of 1.3%. In my view this alleged error of law in his calculation of pre-judgment interest does not meet the test for leave to appeal pursuant to s. 45(1)(a) or (b) of the Arbitration Act. I am not satisfied that the importance of this relatively minor issue justifies an appeal or that it will significantly affect the rights of the parties. Leave to appeal is therefore denied.
Conclusion
[32] The applicants’ application and appeal are dismissed.
[33] Terekhov’s counter-application is granted. The Final Award and the Costs Award shall be incorporated into a judgment of this court.
[34] If the parties cannot agree on costs they may schedule a 9:30 a.m. attendance with me to settle costs.
[35] I thank counsel for their helpful submissions.
Hainey J. Date: November 29, 2018