COURT FILE NO.: FS-20-19798
DATE: 20210806
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Elma Pezo
Applicant
– and –
Kabir Pezo
Respondent
– and –
Hadis Kozo
Respondent
– and –
Sarajevo Grill & Meat Inc.
Respondent
David Seed for the Applicant
Self - Represented
Salma Kebeich for the Respondent
Narinder Sidhu, for the Respondent corporation
HEARD: June 24, 2021
M. kraft, J.
REASONS FOR Order
Nature of the Motions before the Court
[1] There are two related disputes in these proceedings: 1) the family law proceeding arising out of the breakdown of the marriage between the applicant, Elma Pezo (“Elma”) and the respondent, Kabir Pezo (“Pezo’); and 2) an oppression remedy claim in which Elma claims the respondent’s, Hadis Kozo (“Kozo”), conduct as a majority shareholder in relation to the purchase of her shares in the respondent, Sarajevo Grill & Meat Inc. (“Sarajevo”), the alleged wrongful termination and removal of her as a director of Sarajevo and his actions and omissions were oppressive toward her, as a minority shareholder of Sarajevo.
[2] Kozo seeks an Order directing that all issues and claims related to him proceed by way of arbitration in accordance with the Shareholder’s Agreement between him, the applicant, Elma, and the respondent, Kabir. Alternatively, he seeks an order that all issues and claims related to him be temporarily stayed until a final arbitral award is rendered in accordance with the Shareholder’s Agreement, pursuant to the Arbitration Act, 1991, S.O. 191, c.17, and the Family Law Rules (“FLRs”). Elma asks the court to dismiss Kozo’s motion and to award her costs on a partial indemnity basis.
[3] Elma brought a separate motion seeking production of financial, business and corporate records from the respondent, Sarajevo, for the period 2017 to 2020, inclusive; an order requiring Sarajevo to pay Elma’s legal fees and investigative accounting costs in connection with her oppression application, pursuant to ss. 237 and 238 of the Business Corporations Act, Ontario (“OBCA”); an order that Kabir pay her interim disbursements pursuant to the FLRs, and an order permitting Elma’s forensic accountants to have access to the records of Sarajevo, including its electronic devices, pursuant to the OBCA.
[4] Elma has not brought any claims against Kozo in relation to the family law issues.
[5] Kozo asserts that all claims against him should not to be before the Ontario Superior Court of Justice since he, Elma and Kabir entered into a Shareholder’s Agreement, dated January 26, 2017, which includes a mandatory arbitration clause requiring that any dispute associated with their Shareholder’s Agreement be resolved by arbitration. Elma disputes this and seeks an order dismissing the stay motion.
[6] Kozo’s stay motion was heard first[^1], followed by Elma’s motion for financial production, interim disbursements and costs.[^2]
[7] Elma asserts that after 15 months of trying to obtain the business records from Sarajevo and Kozo and having only received minimum disclosure, she brought a motion for a) the production of financial, business and corporate records for Sarajevo in paper and in electronic form and/or in native format for 2017 to 2020, as particularized in her Request for Information (“RFI”); b) an order permitting forensic accountants retained by her to have access to all of the electronic devices of Sarajevo to obtain digital copies of information stored on them; c) payment of interest disbursements by Kabir in the sum of $20,000; and d) an order for payment of interim disbursements by Sarajevo for the preparation of a forensic accounting report, regarding the finances of the business.
[8] Specifically, Elma seeks the following orders:
i. Production of the financial records for Sarajevo from 2017 to 2020 in electronic and paper form including 8 categories of documents listed in her Request for Information (“RFI”) attached to her notice of motion;
ii. Production of the business records for Sarajevo from 2017 to 2020 including 11 categories of documents listed in her RFI attached to her notice of motion;
iii. Production of the corporate records for Sarajevo from 2017 to 2020 in their native form, or electronic and paper form including 7 categories of documents listed in her RFI, attached to her notice of motion;
iv. An order requiring Sarajevo to pay reasonable legal fees and investigative accounting costs and for the forensic review of the books and records and electronic equipment in connection with her oppression Application, pursuant to the s.247 of the OBCA;
v. An order that Kabir advance her $20,000 as interim disbursements toward part of her legal expenses within 20 days;
vi. An order permitting the accounting firm, Forensic Restitution, to have access to the business records of Sarajevo identified in its engagement letter, dated December 4, 2020, including electronic devices on which these records are stored to obtain digital copies of same;
vii. An order requiring all respondents to cooperate with the forensic investigation and permit access to the books and records and electronic devices and equipment of Sarajevo;
viii. An order prohibiting any of the respondents from depleting electronic files from the electronic devices and equipment of Sarajevo;
ix. An order requiring the respondents to execute such documents or authorizations as may be required from third parties to release information regarding the finances and business of Sarajevo; and
x. Costs.
[9] Kozo resists the relief being sought by Elma for financial production from Sarajevo on the basis that a) such financial production is one of the issues to be addressed in arbitration of the Shareholder’s Agreement; b) notwithstanding his position, he has produced significant disclosure from Sarajevo for 2017-2020, inclusive; c) Elma has not met the test for disclosure by proving on a balance of probabilities that such financial disclosure is relevant or necessary to her claims against Kozo; and d) the requests for electronic imaging and access to all electronic devices, along with a contribution to her costs, amount to a fishing expedition and are disproportionate.
Litigation History
[10] Elma started this Application on November 3, 2020. In addition to naming Kabir as a respondent, she named Kozo and Sarajevo (which corporation was owned by Elma and Kabir (50% shareholders) and Kozo (50% shareholder).
[11] Kabir filed an Answer on February 4, 2021. Kozo filed an Answer on February 11, 2021.
[12] On April 28, 2011, the parties had a case conference before Kimmel, J., at which she scheduled Kozo’s stay motion to be returnable on June 24, 2021, at 10:00 a.m. and Elma’s disclosure and disbursements motion to be returnable the same day, at 2:00 p.m. Additionally, both parties consented to an Order requesting the involvement of the Office of the Children’s Lawyer (“OCL”) with respect to their son.
[13] I heard both motions on June 24, 2021. I reserved my decision. These are my reasons and my decision.
Background Facts
[14] Elma and Kabir were married on September 9, 2006 in Sarajevo. They are both Muslim and grew up in Bosnia during the civil war.
[15] They have one child, Nidal Pezo, born June 15, 2007. He is currently 14 years of age.
[16] The parties came to Canada in 2010 with their son, without savings or family members in Canada.
[17] Elma and Kabir worked in local Bosnian restaurants until 2017 in various capacities. In 2017, they opened their own Bosnian restaurant called Sarajevo Grill & Meat (“Sarajevo”) with Kabir’s friend, Hadis Kozo (“Kozo”). Sarajevo is located in the west end of Toronto.
[18] The parties retained Keyser Mason Ball LLP (“KMB”) to assist them in incorporating the business and to prepare a shareholder’s agreement. On January 26, 2017, Elma, Kabir and Kozo entered into a Shareholder’s Agreement, which established the rights and obligations of the shareholders and the duties and powers of the Board of Directors and detailed the management of Sarajevo. All parties were provided with a copy of the Shareholder’s Agreement before execution and had an opportunity to obtain independent legal advice as provided for in Section 22.25 of the Shareholder’s Agreement. The Shareholder’s Agreement contains a mandatory arbitration clause which provides that any dispute associated with the Shareholder’s Agreement must be resolved by Arbitration.
[19] Elma and Kabir contributed 50% of the original investment in Sarajevo and, together, owned 50% of its common shares. Kozo contributed the other 50% of the investment and he owned 50% of Sarajevo’s common shares.
[20] According to Elma, there was no independent legal advice provided to any shareholder prior to signing the Shareholder’s Agreement and, the instructions relating to the business and the terms and conditions of the Shareholder’s Agreement were communicated to KMB by Kozo alone. Elma was appointed the secretary and treasurer.
[21] At Sarajevo, Kabir was the butcher and Elma managed the day-to-day operations of the restaurant and kitchen. Kozo was not involved in the ongoing, day-to-day operation of the restaurant. Kozo met Elma once a week to sign cheques that she issued. According to Elma, Kozo’s role was to collect, count, deposit and report revenue; instruct the bookkeeper; and to be responsible for maintaining the books and records of Sarajevo. According to Kozo, Elma handled all financial aspects of Sarajevo, including bookkeeping and had access to all accounting and financial records of the business.
[22] Elma asserts that despite multiple requests by her for financials, Kozo never permitted her an opportunity to examine complete financials of the business; he never paid her profits or dividends on her shares; and he refused to engage her about the non-financial issues of the restaurant which included serious problems. Elma submits that the only compensation she received from Sarajevo was her salary, which she reported on her T4 slips. She denies receiving any profits from the restaurant.
Kozo’s Buy/Sell Agreement - Fall of 2019
[23] In the summer of 2019, Elma, Kabir and their son travelled to Bosnia for a family vacation. At some point during the trip, Kabir left Elma and the son in the Balkans and returned to Canada. According to Elma, once back in Canada, Kabir moved in with a new romantic partner and continued to work at Sarajevo.
[24] After Kabir abandoned Elma in Bosnia, she received an email from KMB serving her with a Notice of Exercise of the Buy/Sell provisions of the Shareholder’s Agreement on behalf of Kozo. The Notice was written in English and confirmed that Elma had 30 days to respond. According to Elma, she did not have access to a lawyer or funds to retain a lawyer to assist her when she received the Notice. Further, Elma asserts she was not provided access to the financial statements or business records of Sarajevo when she attempted to respond to the Buy/Sell offer.
[25] According to Kozo, on October 23, 2019, he provided Elma and Kabir with a Buy/Sell Notice offering to purchase all of their shares in Sarajevo and acquire their shareholder debt on a dollar-for-dollar basis, pursuant to Article 5 – the Buy/Sell Provisions of the Shareholder’s Agreement –.
[26] On December 20, 2019, Kabir accepted Kozo’s offer to purchase all of his shares, being 25% of the common shares in Sarajevo, for the sum of $65,000. Elma did not accept Kozo’s offer to purchase her shares, but she also did not pay the purchase price of Kabir’s shares. Consequently, Elma was deemed to have accepted Kozo’s offer to purchase the shares as set out in the Buy/Sell Notice in accordance with article 5.2(d) of the Shareholders’ Agreement.
[27] As a result, according to Kozo, on December 20, 2019, Kozo became the sole owner of 100% of the common shares in Sarajevo because he fulfilled all of his obligation set out in 5.2 of the Shareholder’s Agreement. Elma refused to complete the transaction or accept payment of her shares. As a result, the purchase price of $65,000 remains held in trust for Elma by KMB.
[28] Elma submits that concurrent with the execution of the Buy/Sell offer to purchase her and Kabir’s shares in Sarajevo, Kozo was opening a second restaurant with the same name, Sarajevo Grill & Meat II (“Sarajevo II”), in Stoney Creek and he incorporated a wholesale meat business, Sarajevo Find Foods Inc. Both companies were incorporated by Kozo on January 10, 2020. The corporate address used for these two businesses is Kozo’s home address. Elma submits that these corporate opportunities belong to Sarajevo and not Kozo or his circle of acquaintances.
[29] In the family law context, the Sarajevo shares are an asset that belonged to both Elma and Kabir and, as such, the value of their shares and any associated shareholder’s loans or debts in Sarajevo form part of both parties’ net family property. Since they both owned 25% of Sarajevo, the value of their respective shares and/or any related debt would affect them equally in terms of the calculation of their respective net family properties. According to Elma, Sarajevo was the only source of income for the spouses prior to separation.
[30] In the corporate context, Elma alleges that both Kabir and Kozo operated the business in a manner that misstated the financials and did not disclose that a) they were running a wholesale business-to-business operation; b) keeping two sets of books for the business; c) skimming cash from the point of sale system; and d) using an unrecorded cash register/point of sale system.
Elma’s Claims Against Kozo re: The Shareholder’s Agreement
[31] Elma has made the following claims against Kozo, which are associated with the Shareholder’s Agreement:
i. Allegations of Kozo’s misconduct as a director, officer and shareholder of Sarajevo, which are governed by the duties and responsibilities of the parties prescribed by the Shareholder’s Agreement and the By-Law;
ii. Allegations regarding Kozo’s execution of the Buy/Sell Provisions, which are set out in Article 5 of the Shareholder’s Agreement; and
iii. Allegations regarding Kozo’s termination of Elma’s employment, which is set out in Section 4.10(q) of the Shareholder’s Agreement.
[32] With respect to the Buy/Sell provisions in the Shareholder’s Agreement, Elma submits that Kozo and Kabir took actions against her contemporaneously with Kabir’s decision to separate when she was outside of Canada visiting family. In terms of the execution of the Buy/Sell Notice, Elma asserts that:
i. As a shareholder and officer, she had a reasonable expectation that her interests in Sarajevo would not be treated in an unfairly prejudicial or oppressive manner and has standing to seek relief under the OBCA;
ii. The Buy/Sell Notice was served on Elma while she was outside of Canada, and had no access to her personal records including the Shareholder’s Agreement; no access to a Canadian-trained lawyer who could communicate with her directly or through a translator; and while she had no access to business records;
iii. The Buy/Sell Notice was served on Elma while she had limited access to funds from a Canadian bank and while her salary had been stopped by Kozo, who had triggered the Buy/Sell Notice;
iv. The Buy/Sell Notice did not include the share price that represented the fair market value for the business. Schedule C to the Shareholder’s Agreement stipulated a method of determining the value of each of the issued and outstanding shares of Sarajevo if the shareholders did not agree in writing as to a per-share value within the 15-month period immediately preceding an event or notice for which share value is needed;
v. Sarajevo did not deliver any copies of financial statements within 90 days of the fiscal year end as required by Article 13.2 of the Shareholder’s Agreement;
vi. When Elma did not agree on the share price, the offering shareholder, Kozo, did not pay the purchase price “into a special account at a branch of the Corporation’s Bankers in the name of the vendor” as required by article 5.7 of the Shareholder’s Agreement; and
vii. The lawyers acting for Kozo against Kabir and Elma in the Buy/Sell execution had previously represented all three shareholders in drafting the Shareholder’s Agreement, which is a serious and clear conflict of interest.
[33] Elma’s claims set out in this Application provide that:
i. Kozo did not properly report all of the income of Sarajevo and used assets from the operation of Sarajevo to open two new, related companies;
ii. According to the corporate income tax filings, the operation of Sarajevo resulted in $32,354 profit in the first two years and there is no explanation for the expansion of the business. Neither Kozo nor Sarajevo have provided any documentation about the business plans prepared with the opening of the second restaurant;
iii. There is evidence from Kozo that he maintained a second set of books, which was found by Elma in a document she claims he prepared to keep track of unrecorded income and expenses of Sarajevo. Elma submits that Kozo emailed a spreadsheet to her on January 18, 2019, that disclosed hundreds of thousands of dollars of cash arising from wholesale purchases and sales from “druga kasa”, translated from Bosnian into English which means “a second cash register”;
iv. The profits recorded in the email attachment Elma received on January 18, 2019, are not found in the income tax filings for Sarajevo and she asserts that this is prima facie evidence of concealment of sales from Sarajevo not entered into the official financial statements of the business;
v. The respondents have refused to provide company financials or business records based on the rights of the shareholders set out in the Shareholder’s Agreement without the intervention of the court, which Elma submits supports her allegations of irregularities and financial misstatement. Further, the respondent’s refusal to provide access to source documents in original format underscores the respondent’s attempts to deliver corporate and financial records when the origins, accuracy and authenticity cannot be validated or corroborated.
vi. Sarajevo uses current point of sale systems to record transactions and electronic payments. To understand the extent of the cash skimming which Elma asserts took place, she wishes to retain a forensic accountant to complete an investigation with data analytic and computer forensic abilities to access all the data on the point of sale systems used at Sarajevo as well as other electronic equipment and produce a report. She seeks that the cost of this investigation along with her legal costs for this exercise be borne by Sarajevo.
vii. Kozo unilaterally terminated Elma’s salary in 2019, leaving her with no income. According to Elma, she sought assistance from Ontario Works, The Child Tax Benefit and CERB benefits until October 2020 when she began to work as a waitress. Elma submits that her present financial difficulty is a direct result of oppressive conduct by the majority shareholder, Kozo.
Opening of the New Restaurant – Sarajevo II
[34] Elma’s oppression remedy action contained in her Application, is based on a misappropriation of a corporate opportunity, arising from Kozo opening a second restaurant. Specifically, Elma submits that Kozo acquired all of the shares of Sarajevo in late December 2019, and opened a new restaurant, Sarajevo II, in early February 2021, giving him only two months to accomplish this. Elma asserts that this would not have been possible and, as such, she believes that Kozo was taking steps to open Sarajevo II in Stoney Creek while she was still a bona fide shareholder of Sarajevo. To determine whether or not the assets of Sarajevo were used to expand the business with the two newly incorporated businesses by Kozo in February 2020, Elma seeks to have her investigative accountant report on this once financial production is produced as she requests.
Parties’ Positions on the Stay Motion
a. Elma’s position
[35] Elma’s position is that she has the right to pursue Kozo in the family law proceeding, as an added party and that article 21 of the Shareholder’s Agreement does not oust the jurisdiction of this court.
[36] Elma submits that Kozo acted in concert with Kabir to dispossess her of her interest in the business, Sarajevo, which was a valuable family asset. According to Elma, Kozo prepared financial statements for the Sarajevo business which she maintains significant understated the assets and income of the business. As such, Kozo ought not to be able to rely on any authority within the Shareholder’s Agreement to justify his actions. Further, Elma submits that Kozo cannot compel her, as a family law litigant, to forgo financial fact-finding and disclosure in a family law proceeding without an arbitration agreement that she claims complies with legislation in this province.
[37] Elma asserts that Article 12 of the Shareholder’s Agreement is an agreement to arbitrate matters properly within the ambit of the Shareholder’s Agreement, which is limited to “any matter associated with this agreement which cannot be settled which arises among the parties hereto”. Elma submits that the arbitration clause contains no reference to family law matters; or to rules, procedures or codes of conduct to be followed, rules of evidence, jurisdiction or to appeals; and by its own language, does not “preclude recourse to the courts”.
[38] According to Elma, the arbitration clause in the Shareholder’s Agreement is narrowly drafted to deal only with matters associated with the agreement and does not identify the family law issues that could arise from the operation of a family-owned business. Further, the Shareholder’s Agreement does not address shareholder oppression applications; or tortious behaviour of one or more shareholders, such as keeping multiple sets of books of cash skimming, both of which Elma claims Kozo has done.
[39] Elma’s position is that her Application is a case where the law of private corporations and the rights of a minority shareholder intersects with family law, particularly, property division in Ontario. As a result, Elma submits that this court has jurisdiction to deal with her claims against Kozo. Article 21 of the Shareholder’s Agreement is an arbitration clause relating to a commercial dispute and not the arbitration of a family dispute.
[40] Finally, Elma submits that pursuant to the Ontario Regulation 134/07, enacted under the Arbitration Act, every family arbitration agreement made on or after September 1, 2007, shall contain standard provisions that identifies the law to be applied, rights of appeal, a certificate of independent legal advice and screening for power imbalances and domestic violence by someone other than the arbitrator. It is Elma’s position that Section 21.1 of the parties’ Shareholder’s Agreement does not meet the requirements set out in Ontario Regulation 134/07, making it an invalid arbitration agreement. Specifically, Elma submits that,
i. The formalities specified in the Ontario Regulation 134/07 are absolute and essential requirements for all arbitration agreements that deal with matters relating to the division of family property under the Family Law Act. The absence of these requirements renders the arbitration provisions of the Shareholder’s Agreement unenforceable and invalid.
ii. The issues between the parties is not just compliance with or the operation of the Buy/Sell provisions in the Shareholder’s Agreement, but that Kabir, Kozo and Sarajevo excluded Elma and her lawyers from gaining access to the evidence of the operations and finances of the business and the withholding of that information regarding the operation, profitability and assets of Sarajevo which was critical to her ability to assess the value of her interest in Sarajevo and to evaluate the offer presented to her by Kozo. Further, Elma submits that this disclosure is relevant to the determination and division of net family property as between Elma and Kabir, as well as to support.
iii. Third parties, such as Sarajevo II and Sarajevo Fine Foods Inc., have relevant information necessary to a final resolution of issues in the family law proceedings, and given Kozo’s position taken to date, the Court is the proper forum within which to seek disclosure from the third party who may resist disclosure of the relevant information and not an arbitrator;
iv. There is an absence of authority on the party of an arbitrator addressing issue arising from the parties’ Shareholder’s Agreement to compel disclosure by third parties, requiring the court to exercise its supervisory jurisdiction over the disclosure process; and
v. The Court should be vigilant in avoiding the possibility that aspects of Elma’s oppression claim involving Sarajevo is not subject to conflicting determinations in two different forums. The jurisdictional differences and adjudicative powers as between a family court process and a private arbitration could yield inconsistent findings on the same issue. Finally, Elma submits that she does not have the resources to litigate a portion of her case in family court and a portion by way of private arbitration.
b. Kozo’ Position on the Stay Motion
[41] Kozo’s position is that any and all of Elma’s claims against him ought to be stayed in favour of arbitration on the following grounds:
i. Article 21 of the Shareholder’s Agreement sets out a mandatory arbitration agreement which clearly provides that “any disagreement as to any matter associated with this Agreement shall be referred to arbitration”, if it cannot be settled within 3 months of notice of such disagreement having been given to all parties by other party. The Agreement specifically refers that the arbitration shall be conducted by a single arbitrator and that any determination of the single arbitrator shall be final and binding, with no right of appeal and the said determination is to be enforced in the same manner as a judgment or order. The parties have the option to resort to the Court only for an interim or interlocutory order, as provided for in Article 21.2.
ii. The nature of Elma’s claims against Kozo all stem from his performance of the terms of the Shareholder’s Agreement and as such, a final order not an interlocutory order, needs to be made by a single arbitrator without recourse to the Court.
iii. Section 6 of the Arbitration Act 1991, S.O. 1991, c.17 (“Arbitration Act”), provides that no court shall intervene in matters governed by this Act, except, a) to assist the conducting of arbitrations; b) to ensure that arbitrations are conducted in accordance with arbitration agreements; c) to prevent unequal and unfair treatment of parties to arbitration agreements; and d) to enforce awards.
iv. Section 7(1) of the Arbitration Act directs the Court to give effect to arbitration agreements and provides that a Court shall stay a proceeding covered by the arbitration agreement;
v. Section 17(1) of the Arbitration Act reinforces the legislations clear intents to promote and support arbitration clauses and specifically bestows upon arbitral tribunals the power to determine any questions as to the existence and validity of the arbitration agreement, also known as the principle of competence-competence;
vi. The Courts have consistently recognized that arbitration takes precedence over court proceedings and favour the enforceability of arbitration agreements within contracts; and
viii. Finally, Kozo submits that the claims set out against him in Elma’s Application do not fall any of the five exceptions that are enumerated in s.7(2) of the Arbitration Act, which permit a Court to refuse a stay of proceedings.
Analysis of Stay Motion
[42] The Arbitration Act entrenches the primacy of arbitration proceedings over judicial proceedings once the parties have entered into an arbitration agreement.[^3] Arbitration clauses are to be given a large, liberal and remedial interpretation to effectuate the dispute resolution goals of the parties.[^4]
[43] The courts have limited ability to intervene in disputes that fall under the Arbitration Act, as provided for in Section 6 of the Act which states that:
No Court shall intervene in matters governed by this Act, except for the following purposes, in accordance with this Act:
To assist the conducting of arbitrations;
To ensure that arbitrations are conducted in accordance with arbitration agreements;
To prevent unequal and unfair treatment of parties to arbitration agreements; and
To enforce awards.[^5]
[44] As held by Trafford, J. in Cityscape,
“this legislation provides a forceful statement signalling a shift in public policy and attitude towards the resolution of disputes in civil matters through consensual dispute resolution mechanisms. See Ontario Hydro v. Dennison Mines Limited, [1992] O.J. No. 2948 (Blair, J.). The Act is designed to encourage parties to resort to arbitration as a method of resolving their disputes in commercial and other matters and to required them to hold to that course once they have agreed to do so….
Section 8(2) of the Act empowers the arbitral tribunal to determine any questions of law that arise during the arbitration. Section 17(1) of the Act empowers the tribunal to decide questions of its own jurisdiction including questions respective the existence or validity of the arbitration agreement itself. Section 31gives the tribunal broad powers to decide disputes in accordance with the law and equity and makes reference to the power to order specific performance, injunctions and other equitable remedies.
[45] Similarly, the Supreme Court of Canada in TELUS Communications Inc. v. Wellman, noted that s. 6 of the Arbitration Act, “signals that courts are generally to take a “hands off” approach to matters governed by the Arbitration Act.”[^6]
[46] Section 7(1) of the Arbitration Act directs courts to give effect to arbitration agreements. This section of the Act sets the general rues that the court “shall” stay a proceeding covered by an arbitration agreement. Section 7(1) provides:
“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”. [emphasis added][^7]
[47] Subsection 17(1) of the Arbitration Act bestows upon arbitral tribunals the power to determine any questions as to the existence and validity of the arbitration agreement, also known as the principle of competence-competence.[^8] This section of the Act reinforces the legislation’s clear intent to promote and support arbitration clauses.
[48] As set out in Haas, the analytical framework following by courts in determining whether a stay under Section 7 of the Arbitration Act ought to be ordered, is as follows:
Is there an Arbitration Agreement?
What is the subject matter of the dispute?
What is the scope of the arbitration agreement?
Does the dispute arguable fall within the scope of the arbitration agreement?
Are there grounds on which the court should refuse to stay the action?[^9]
[49] In applying the Haas analysis to the facts of this case, I find as follows:
i. There is no dispute between the parties that the Shareholder’s Agreement contains an arbitration agreement.
ii. The subject matter of the dispute between Elma and Kozo and/or Sarajevo arises from the commercial contractual relationship between the parties set out in the Shareholder’s Agreement. All of Elma’s claims against Kozo are connected to his conduct as a director, officer and shareholder of Sarajevo and his execution of the Buy/Sell provisions. Elma made no family law related claims against Kozo or Sarajevo. In fact, the dispute between the shareholders has little bearing on the family law issues, and certainly no bearing on equalization given their equal shareholdings.
iii. In terms of the scope of the arbitration agreement, article 21.1 of the Shareholder’s Agreement provides as follows:
21.1 Arbitration
In the event that there is any disagreement as to any matter associated with this Agreement which cannot be settled which arises among the parties hereto, within three (3) months of notice of such disagreement having been given to all parties by any other party, event such disagreement shall be referred to arbitration pursuant to the provisions of the Arbitration Act, 1991, S.O. 1991, c.17, as amended, and in accordance with the following:
a. Reference to arbitration shall be to a single arbitrator who shall be selected by agreement of all of the parties to the arbitration and failing such agreement shall be selected by agreement among or between counsel for each of the parties to the arbitration;
b. Any determination of the single arbitrator shall be final and finding upon each of the parties hereto and their heirs, executors, assigns and successors and there shall be no appeal therefrom and said determination may eb enforced in the same manner as a judgement or order;
c. Unless the parties to the arbitration agreement state otherwise in writing, the arbitrator shall make its determination in writing within two calendar months after entered on the reference; and
d. The costs of the arbitration shall be paid by the parties to the arbitration in equal shares.
21.2 Interim Relief
The procedure for the resolution of disputes set out in this article does not preclude recourse to the courts for interim or interlocutory, equitable or legal relief.
iv. In answer to whether the dispute falls within the scope of the arbitration agreement, the following questions needs to be answered:
What is the proper interpretation of the arbitration clause under this Shareholder’s Agreement?
Is it properly characterized as one of limited arbitration? Or is it best characterized as a universal arbitration clause?
a. Applying the approach taken by Trafford, J. in Cityscape, it is first necessary to determine the precise nature of dispute and then to determine whether this dispute falls within the arbitration clause. The dispute in the case between Elma and Kozo/Sarajevo are all corporate in nature, relating to their ownership of Sarajevo. As described by Kozo in his factum, Elma’s claims against him do not include any family law claims but, rather include clams against him as follows:
i. Allegations of Kozo’s misconduct as a director, officer and shareholder of Sarajevo, which are governed by the duties and responsibilities of the parties prescribed by the Shareholder’s Agreement and the By-Law;
ii. Allegations regarding Kozo’s execution of the Buy/Sell Provisions, which are set out in Article 5 of the Shareholder’s Agreement; and
iii. Allegations regarding Kozo’s termination of Elma’s employment, which is set out in Section 4.10(q) of the Shareholder’s Agreement.
b. The reference in Article 21.1 of the Shareholder’s Agreement (“the Arbitration Agreement”) to “any disagreement as to any matter associated with Agreement” is sufficiently broad to include all of the claims Elma has made against Kozo and Sarajevo. The clause is clear, that a single arbitrator is to make the determination, whose determination shall be final and binding on the parties, with no appeal rights. The fact that the parties are not precluded from having recourse to the courts for interim, interlocutory, equitable or legal relief, does not equate to the court having the power to oust the terms of the Arbitration Agreement set out in the Shareholder’s Agreement.
c. The nature of Elma’s claims against Kozo and Sarajevo all stem from the performance of the Shareholder’s Agreement. As such, Article 21.2 of the Arbitration Agreement does not apply to these claims, as they are not interim or interlocutory, nor are they related to equitable or legal relief.
v. Finally, is there an exception to the Mandatory Stay? Section 7(2) of the Arbitration Act enumerates 5 exceptions where a Court can refuse a stay of proceedings as follows:
A party entered into the arbitration agreement while under a legal incapacity;
The arbitration agreement is invalid;
The subject-matter of the dispute is not capable of being the subject of arbitration under Ontario law;
The motion was brought with undie delay; and
The matter is a proper one for default or summary judgment.[^10]
[50] I find that there is no applicable exception in the case at bar, as set out in Section 7(2) of the Arbitration Act, for the following reasons:
i. In the case at bar, none of the parties were under legal incapacity at the time they entered into the arbitration agreement;.
ii. The subject-matter of the claims Elma has made against Kozo and Sarajevo arise from a breach of the terms of the Shareholder’s Agreement and thus, are properly the subject of arbitration under Ontario law. Oppression remedy applications have consistently been stayed by Ontario courts in favour of arbitration based on arbitration clauses in shareholder’s agreements. The Courts have also ruled that issues related to the termination of the employment of a party to a shareholder’s agreement is arbitrable.[^11] Accordingly, Elma’s oppression claims and the claim arising from the termination of her salary are clearly arbitral. Further, Elma’s oppression claims are irrelevant to the family law issues since she and Kabir have equal shareholdings in Sarajevo and, therefore, the value of each of their interests in Sarajevo will have no impact on an equalization payment owing by one party to another.
iii. Kozo brought his motion for a stay in a timely manner.
iv. The determination of the allegations Elma has made arising from Kozo’s performance of the Shareholder’s Agreement are triable issues and not properly dealt with in default or by way of summary judgment.
v. Elma has raised the issue that the arbitration agreement is not valid because it does not comply with Ontario Regulation 134, which refers to agreements to arbitrate family law disputes. This arbitration agreement is not an agreement to arbitrate a family law issue. Again, Elma has brought no family law claims against Kozo or Sarajevo. If Sarajevo were owned only by Elma and Kabir, then it is possible that the Court would intervene. However, Sarajevo was owned by three parties, one of whom is Kozo. Furthermore, the general rule of “competence-competence” prescribes that an arbitrator shall decide on his or her jurisdiction, not the court. The Supreme Court of Canada confirmed that “in any case involving an arbitration clause, a challenge to the arbitrator’s jurisdiction must be resolved first by the arbitrator.”[^12]
vi. The court is only entitled to depart from the general rule of “competence-competence” where the issue in dispute is a pure question of law. Where there are questions of mixed law and fact in dispute, as is the case with this matter, the court must refer the case to arbitration unless the relevant questions of fact require only superficial consideration of the documentary evidence in the record. In such a case, the court must refer the parties to arbitration unless the arbitration agreement is manifestly tainted by a defect rendering it invalid or inapplicable. For an arbitration agreement to be considered manifestly tainted it must be “incontestable” such that no serious debate can arise about the validity.[^13]
vii. Elma deposed in her affidavit, sworn on May 31, 2021, that she did not understand the arbitration agreement when she signed the Shareholder’s Agreement. However, Elma did not plead in her Application that the Arbitration Agreement was invalid or that the Shareholder’s Agreement was unconscionable. In fact, Elma has asked the court to consider the Shareholder’s Agreement in support of her argument that Kozo did not comply with its terms in relation to the Buy/Sell provisions set out in Article 21 of the Agreement.
viii. If Elma now believes that the Shareholder’s Agreement is unconscionable, she would be required to prove both elements of unconscionability which are 1) proof of inequality in the position of the parties; and 2) proof of an improvident bargain.[^14] I agree with Kozo, that in the case at bar, a finding of unconscionability cannot be satisfied based on the documentary evidence in the record. As a result, if there is a dispute about the validity of the arbitration agreement, which again, has not be pleaded by Elma, I find that it be resolved by an arbitrator.
[51] Section 7(5) of the Arbitration Act allows the court to partially stay proceedings where some of the matters in dispute are not covered by the arbitration agreement. Specifically, Section 7(5) provides as follows:
(5) The court may stay the proceeding with respect to the matters dealt with in the arbitration agreement and allow it to continue with respect to other matters if it finds that,
a. The agreement deals with only some of the matters in respect of which the proceeding was commenced;
b. It is reasonable to separate the matters dealt with in the agreement from other matters.[^15]
[52] Section 7(5) of the Arbitration Act, therefore, confirms that it two preconditions are met, the court “may” allow the matters not dealt with in the arbitration agreement to proceed in court instead of ordering a full stay. However, the court “shall” and therefore “must” stay the court proceeding in respect of the matters covered by the arbitration agreement.[^16]
[53] In Wellman, the Supreme Court of Canada granted a stay of business customers’ claims under a mandatory arbitration provision and allowed claims alleging breach of the Consumer Protection Act to proceed in court. The Supreme Court of Canada interpreted Section 7(5) to confer a discretionary power on the court that is only triggered if the above preconditions are met. If the preconditions are not met, then the general rule under Section 7(1) applies and the proceeding mut be stayed unless one of the five exceptions under section 7(2) applies.[^17]
[54] Elma has raised the concern that there is a risk of multiplicity of proceedings in this matter if the corporate issues were determined by arbitration and the family law issues were determined by the court. However, in Wellman, the risk of a multiplicity of proceedings did not trump the language of the statute which expressly contemplates a “bifurcation of proceedings, as it permits the court to order a partial stay, thereby potentially resulting in concurrent arbitration and court adjudication, where the two preconditions outlined in s.7(5)(a) and (b) are met.”[^18] In the case at bar, there is no risk of a multiplicity of proceedings. The issues as between the parties as shareholders of Sarajevo are irrelevant to the calculation of both Elma’s and Kabir’s net family property in the family law proceeding, as Elam and Kabir have the same number on his/her NFP statement for his/her interest in Sarajevo.
[55] The two preconditions set out in s.7(5) of the Arbitration Act are met in the case at bar. The arbitration agreement found in the Shareholder’s Agreement deals with the corporate issues, and all claims against Kozo. It is on this basis that Kozo asks the court to stay the corporate claims and separate these claims from the family law claims Elma makes against Kabir. Kozo submits that denying the stay of the corporate matters would require Kozo’s business dispute to be part of the family dispute which would create further complexity and delays.
[56] In all of these circumstances, I find that there are no circumstances in which the Court can exercise its discretion to refuse the stay of Elma’s claims against Kozo in favour of arbitration. In dealing with this case justly as required by Rule 2(2) and 2(3) of the Family Law Rules (“FLRs”), I find that all disputes between Elma, Kozo and Sarajevo arising as a result of the Shareholder’s Agreement shall be arbitrated before a single arbitrator, at such times as the parties agree, once they consent to the selection of the arbitrator. If the parties cannot agree on a single arbitrator within 14 days, they shall each submit one name of an arbitrator to the court, and an order will be made selecting the arbitrator. The arbitration will include all disputes raised in Elma’s Application as against Kozo and Sarajevo and all issues raised in Kozo’s and/or Sarajevo’s Answer and Claim in that application.
[57] The family law issues as between Elma and Kabir shall be determined after the corporate arbitration is complete and a decision has been rendered by the arbitrator. The findings of the arbitrator in relation to Kozo and Sarajevo and whether or not Elma was oppressed as a minority shareholder and/or whether the price put forward by Kozo in he Buy/Sell notice was in compliance with the Shareholder’s Agreement, will impact the value of both Elma’s and Kabir’s share of the Sarajevo, and thereby impact the calculation of net family property. Further, if the arbitrator finds that Kozo misappropriate corporate opportunities from Sarajevo and/or paid himself and Kabir bonuses from a second ash register then these findings may impact the calculation of Kabir’s income for support purposes. As a result, the corporate arbitration has to be fully completed before the family law claims can proceed in this Honourable Court.
Elma’s Financial Disclosure Motion
[58] Again, Elma has brought a motion seeking disclosure of financial documentation from Sarajevo for the period 2017 to 2019, inclusive. Elma claims that Kozo has misstated Sarajevo’s finances, based on an excel spreadsheet entitled “druga kasa” which means “second cash register” in English, which was sent to her from Sarajevo’s email address. Based on the information found in this spreadsheet, which Elma attaches as Exhibit “O” to her affidavit, sworn on May 26, 2021, it appears that both Kabir and Kozo received $5,000 cash bonuses bi-weekly from Sarajevo; recorded sales of $481,987.20 by the “druga kasa”; $260,000 listed in Column 9 cannot be reconciled with the income statements Sarajevo filed with CRA; and there are recorded salaries paid to named employees in monthly amounts that are much higher than the reported employee salaries of the income statement filed by the business.
[59] Kozo’s position is that Elma had access to the financial documents she now seeks, at all material times as a shareholder and officer of Sarajevo. Further, Elma had access to Sarajevo’s email account, as Treasurer and Secretary of Sarajevo.
[60] Elma relies on the FLRs to obtain financial disclosure and production from Sarajevo for 2017, 2018 and 2019. Kozo acknowledges that Rule 19 is relevant to the claims against him, as a third party. Kozo, however, submits that he has provided Elma with substantial financial production as follows:
i. Upon receipt of Elma’s Request for Information (“RFI”), he provided a list of the documents he was prepared to disclose.
ii. He responded to Elma’s RFI within the timeline and format agreed to pay the parties and approved by Kimmel, J.;
iii. Thereafter, Kozo took the steps to gather the documents detailed in the list of production he agreed to produce. About a month after receiving the RFI, he produced the corporation records, business records and financial records of Sarajevo for the years 2017, 2018 and 2019, in his possession, power or control;
iv. He produced the financial records for the years 2017, 2018 and 2019 in the same form as received from the accountant of Sarajevo;
v. He provided a detailed explanation of the documents not available for production. By way of example, Kozo explained that the security video records for the years 2017, 2018, 2019 and 2020 do not exist because the security camera hardware does not save footage for more than three days;
[61] Elma is also seeking the business records for Sarajevo for 2020. Kozo submits that both Elma and Kabir ceased to be shareholders of Sarajevo on December 20, 2020, and accordingly, the records of Sarajevo after that date are not relevant to the issues in this case.
[62] In addition, Elma seeks documents related to the second restaurant he opened in Stoney Creek, after he acquired 100% of the common shares of Sarajevo, namely, Sarajevo Grill & Meat II (“Sarajevo II”). Kozo submits that these are not relevant to this case because he personally funded Sarajevo II, which evidence has not been contradicted.
[63] Finally, Elma seeks access to the electronic devices of Sarajevo. Kozo submits that Elma has not proven on a balance of probabilities that having access to these devices is necessary or relevant. Even if the Court finds that access to Sarajevo’s electronic devise is relevant and necessary, Kozo submits that it is disproportionate and unjust that Elma or her forensic investigator have such access for the following reasons:
i. Elma has failed to provide any reasons as to why access to the electronic devices of Sarajevo is necessary notwithstanding the productions provided by Kozo;
ii. Elma’s allegations of misappropriation of a corporate opportunity and misstatement of finances are based on speculation and not corroborated by any evidence;
iii. Kozo’s evidence is that he personally funded Sarajevo II and Elma has failed to adduce evidence to the contrary;
iv. Kabir is not a shareholder of Sarajevo II or Sarajevo and has no interest in either company;
v. Elma is seeking to have a forensic accountant image the computers of Sarajevo and the mobile phone of the owners, company books and records, supplier’s invoices, bank statements and tax records from 2017 to present. The access she seeks is too broad, extensive, intrusive and not proportionate to the issues at hand;
vi. Elma has failed to address how the confidentiality and privacy of Sarajevo and its shareholder will be protected if she is granted the disclosure sought;
vii. The cost of the disclosure sought by Elma is unreasonable. The forensic accountant proposed by Elma indicated that he would require 60 hours to review the records of the business which is estimated to cost $613,000 a year. Further, the legal costs Elma seeks for the cost of her lawyer to review the forensic accountant and investigative findings are estimated to be $25,000. Neither Kozo nor Sarajevo have the financial means to pay these costs. Kozo submits that an order requiring him or Sarajevo to pay the combined costs of Elma’s proposed investigation would force them into bankruptcy.
viii. The driving reason behind Elma’s investigation is to support her oppression claim against Kozo, which is subject to an arbitration agreement.
Analysis of Financial Disclosure Sought
[64] Kozo’s initial position is that the financial disclosure sought by Elma relates to the claims she has brought against him in relation to the parties’ Shareholder’s Agreement. Accordingly, Kozo seeks to have an arbitrator deal with the financial production requested by Elma.
[65] Nonetheless, Kobo deposes that he responded to Elma’s demand for documentary disclosure because she would have been entitled to this information, in any event, as a shareholder of Sarajevo during 2017, 2018 and 2019.
[66] Kozo maintained that Elma has made bald speculations that he used revenues from Sarajevo to incorporate and open Sarajevo II but has provided no evidence to substantiate this. Elma did, however, provide an excel spreadsheet that is entitled “second cash register” in Bosnian. Kozo, in contrast, denies Elma’s assertions and deposes that he personally funded the new restaurant.
[67] In any event, Kozo’s position is that he ought not to be held to the strict financial disclosure obligations set out in Rule 13 of the FLRs, since he is not a family law litigant but, rather a third party. Kozo does acknowledge that he ought to be subject to Rule 19 of the FLRs as a third party and that he met his duty to disclose the records of Sarajevo for 2017, 2018 and 2019.
[68] The evidence on the record indicates that Elma has tried repeatedly to obtain fulsome disclosure from both Kozo and Kabir regarding Sarajevo and that Kozo has only complied with her requests in this regard, once this court applicant was commenced.
[69] The disclosure Elma requires from Kozo is relevant to the family law claims she has made against Kabir. If, for example, the “druga kasa” spreadsheet turns out to be legitimate, proving that Kabir received bi-weekly bonuses of $5,000 over the 2-3 years that Sarajevo operated, to the exclusion of Elma, this could potentially impact Kabir’s net family property or a claim under s.5(6) of the Family Law Act Elma may make for a variation of the equalization payment to which she is entitled. Further, if during the arbitration, it is found that Kabir and/or Kozo used revenues from Sarajevo to start Sarajevo II and that Kabir is somehow involved in this new business as a “silent partner”, this would definitely have the potential to impact the calculation of Kabir’s income for support purposes. Accordingly, the financial disclosure that Elma seeks from Kozo in relation to Sarajevo and Sarajevo II is highly relevant in both the corporate claims and the family claims. In these circumstances it would make no sense to have different disclosure requirements in the corporate arbitration to be conducted under the Shareholder’s Agreement and in the family law proceeding in this Honourable Court.
[70] Pursuant to Section 6(1) of the Arbitration Act, the Court is permitted to intervene in matters governed by the Act to assist the conducting of arbitration. I find my authority to order financial production pursuant to subsection 6(1) of the Arbitration Act and to ensure that this financial production is made in advance of the arbitration.
[71] The fundamental question is whether the various items of information sought by Elma from Kozo and Sarajevo are relevant or whether they have a semblance of relevance having regard to the material issues raised by Elma in both the corporate claims and the family law claims.[^19]
[72] Full and frank disclosure is a fundamental tenet of the FLRs. However, as P.M. Perell, J. set out in Boyd v. Fields, [2006] OJ No. 5762:
“there is also an element of proportionality, common sense, and fairness built into these rules. A party’s understandable aspiration for the outmost disclosure is not the standard. Fairness and some degree of genuine relevance, which is the ability of the evidence to contribute to the fact finding process are factors. I also observe that just as non-disclosure can be harmful to a fair trial, so can excessive disclosure be harmful because it can confuse, mislead or distract the trier of fact’s attention from the main issues and unduly occupy the trier of fact’s time and ultimately impair a fair trial”. At para. [12].
[73] In Duleba v. Sorge, the court set out that the test for disclosure set out in the FLRs requires the requesting party to demonstrate on a balance of probabilities that the disclosure requested is relevant and necessary, such that it would be unfair for the requesting party to have to proceed with the application in the absence of the information sought.[^20] In my view, the production of the financial and corporate records requested by Elma is relevant and necessary because without these documents, she is unable to proceed with her claims that there was a misappropriation of corporation opportunity, a second set of books, and that revenues from Sarajevo were used to create Sarajevo II.
[74] Accordingly, I find that the financial production documents requested by Elma from Kozo, Kabir and Sarajevo as set out in her amended Notice of Motion, dated June 22, 2021, are relevant and fair and must be disclosed. The request for documents in electronic form and for the applicant’s forensic accountant to have access to Sarajevo’s electronic devices for digital imaging is highly relevant given the claims or misappropriation of corporate opportunity, as well as the allegations of Kozo and Kabir having a second set of books. Furthermore, Elma’s requests for production of corporate and financial records of Sarajevo II is relevant, necessary and fair, given her claims of misappropriated corporate opportunity.
[75] I do not find that the following requests for production, set out in Elma’s amended notice of motion, are disproportionate or that they amount to a fishing expedition:
i. Production of the financial records for Sarajevo from 2017 to 2020, in electronic form, including 8 categories of documents listed in Elma’s RFI appended to the notice of motion are relevant and ought to be produced;
ii. Production of the business records of Sarajevo from 2017 to 2020 including the 11 categories of documents listed in Elma’s RFI appended to the notice of motion are relevant and ought to be produced;
iii. Production of the corporate records for Sarajevo from 2017 to 2020 in their electronic format including 7 categories of documents listed in Elma’s RFI appended to the notice of motion are relevant and ought to be produced;
iv. An order permitting the accounting firm, Forensic Restitution to have access to the business records of Sarajevo identified in its December 4, 2020 engagement letter, including electronic devices on which these records are stored to obtain digital copies of same, is reasonable, relevant and fair and ought to be permitted;
v. An order requiring Kozo, Sarajevo and Kabir to cooperate with the forensic investigation and permit access to the books and records and electronic devices and equipment of Sarajevo is reasonable and fair.
vi. An order prohibiting any of the respondents from deleting electronic files from the electronic devices or equipment of Sarajevo until further order of this court is reasonable and fair;
vii. An order requiring the respondents to execute any documents or authorizations as may be required by third parties to release information regarding the finances and business of Sarajevo is reasonable and fair.
Interim Disbursement Claim by Elma
[76] Elma seeks interim disbursements from Kabir in the sum of $20,000 pursuant to Rule 24(18) of the FLRs.
[77] In addition, she seeks interim costs from Sarajevo in connection with the accounting and legal costs reasonably incurred by her to connection with her oppression claim.
[78] Attached as Exhibit “V” to Elma’s affidavit, sworn on May 26, 2021, is an engagement letter from Forensic Restitution outlining the extent of the investigation they intend to undertake to establish if the books and records of Sarajevo accurately reflect the state of affairs of the company. The letter indicates that the work would take three weeks to complete and that the total cost would be $25,180.00. In addition, David Seed, counsel for Elma prepared a draft Bill of Costs to identify his anticipated legal fees associated with his review of the forensic accounting and investigative findings. His estimated fees, inclusive of H.S.T., total $28,815. Accordingly, Elma seeks an order that Sarajevo pay a total of $53,995, in costs pursuant to s.249 of the BCA.
[79] Kozo submits that Elma does not meet the test for an order for interim disbursements and/or costs based on the following:
i. She has not established that she has a meritorious claim;
ii. She has not adduced evidence that Kozo has the resources to fund the litigation;
iii. She has not established that she has an interest in Sarajevo;
iv. She has not established that she has financial difficulty;
v. She has not established that her financial difficulty is connected to the alleged oppressive conduct or that her difficulties arise from the pursuit of the lawsuit; and
vi. She did not demonstrate that the fees and disbursements are necessary or reasonable to pursue her claim notwithstanding the disclosure already made by Kozo.
[80] Kozo denies that Elma was not involved in the financial aspects of Sarajevo. Kozo submits that Elma failed to meet her obligation to keep proper accounting records pursuant to Section 4.5 of the By-Law of the Shareholder’s Agreement and that she failed to meet the standard of care required for an officer of the corporation.
Analysis on Interim Disbursements/Costs
Is Elma entitled to an order for interim costs from Sarajevo in the context of her oppression action, pursuant to s.249(4) of the OBCA?
[81] Section 249(4) of the OBCA[^21] states as follows:
In an application made or an action brought or intervened in under this Part, the court may at any time order the corporation or its affiliate to pay to the complainant interim costs, including reasonable legal fees and disbursements, for which interim costs the complainant may be held accountable to the corporation or its affiliate upon final disposition of the application or action.
[82] In Alles v. Maurice[^22], Blair, J., as he then was, articulated the test a shareholder must meet in order to obtain an interim costs order:
i. There is a case of sufficient merit to warrant pursuit; and
ii. The complainant shareholder is genuinely in financial circumstances which, but for an order under s.249(4), would preclude the claim from being pursued.[^23]
[83] As set out in Hames v. Greenberg[^24], the Alles test is a low bar to meet and does not require the complainant shareholder to make out a prima facie case of oppression. Rather, a judge must be “satisfied that the claims advanced are well over the “frivolous and vexatious” marker – after all, money is being asked for – but without the need of establishing a claim on a balance of probabilities.[^25]
[84] The first stage of the test may be satisfied even where the parties have put forward conflicting evidence on the merits of the oppression claim. The question is simply whether the complainant shareholder has established a case of sufficient merit to warrant pursuit.[^26]
[85] The complainant shareholder must lack the financial resources to fund the litigation in order for interim costs to be awarded. However, impecuniosity is not a pre-condition to obtaining an order. A complainant shareholder is not required to sell his/her home, de-register RRSPs, or unreasonably reduce his/her standard of living in order to fund the litigation. Further, a complainant shareholder may qualify for interim costs because he/she is unable to fund litigation for the reason that his/her financial resources are tied up in the company that is the subject of the litigation.[^27]
[86] In Hames, the court awarded interim costs to a complainant even though he had approximately $300,000 in assets, some of which were RRIFs. The complainant had not made any efforts to borrow money or mortgage his property to fund the litigation, but the court concluded that it was doubtful that he had the ability to raise the funds being requested on the motion. The applicant was elderly, did not have employment income, and had previously drawn down a line of credit. His legal fees were an obstacle to him bringing forward his meritorious oppression claim, so an award of interim costs was warranted.[^28]
[87] When granting an order for interim costs, the Court is to consider the value of the complainant shareholder’s shares. In other words, the Court may consider the fact that, should the complainant shareholder fail to make out his/her case, the amount of interim costs awarded could be applied against the value of the complainant shareholder’s shareholdings.[^29]
[88] Elma has advanced a claim in the oppression action. Specifically, she seeks relief under section 248(1) of the OBCA, which states as follows:
i. (1) A complainant... may apply to the court for an order under this section.
ii. (2) Where, upon an application under subsection (1), the court is satisfied that in respect of a corporation or any of its affiliates,
a. any act or omission of the corporation or any of its affiliates, effects or threatens to affect a result;
b. the business or affairs of the corporation or any of its affiliates are, have been or are threatened to be carried on or conducted in a manner; or
c. the powers of the directors of the corporation or any of its affiliates are, have been or are threatened to be exercised in a manner,
that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer of the corporation, the court may make an order to rectify the matters complained of[^30].
[89] Conduct will be in breach of s. 248 if: (a) that conduct breaches the reasonable expectations of the complainant shareholder; and (b) this breach amounts to oppression, unfair prejudice, or an unfair disregard of a relevant interest.
[90] The determination of whether an expectation is reasonable is a fact-specific, contextual inquiry, based on the facts of the case, the relationships at issue, and the entire context. Some of the factors that are useful in determining whether a reasonable expectation exists include: the nature of the corporation; relationships; past practice; preventative steps; representations and agreements; and fair resolution of conflicting interests.
[91] Where closely-held corporations are set up to manage the wealth of a family business, shareholders have a reasonable expectation that their shares will ultimately allow them to benefit from family wealth and provide them with financial security, even when they are not actively involved in the business[^31].
[92] Generally, where the reasonable expectations of shareholders in a closely-held family corporation are breached and the non-controlling shareholders no longer trust the controlling shareholder to manage their interest in the corporation, it is equitable to allow the minority shareholders to extricate themselves.[^32]
[93] Further, in any context, there is an assumption that shareholders reasonably expect an equal share in the profits of the corporation and certain minimum standards of corporate governance.
At a minimum, reasonable expectations must be presumed to include expectations that directors and officers will fulfill their statutory duties of good faith and loyalty to the corporation, that shareholders will share the profits of the company in proportion to their ownership of a given class of shares, and that distributions of equity of the company will only be made to shareholders.[^33]
[94] In Caughlin v. Canadian Payroll Systems Inc. (Caughlin),[^34] the Manitoba Court of Appeal held that a shareholder was entitled to relief under the oppression remedy where a controlling shareholder had, among other things, 1) diverted a corporation’s income and profits into another entity in which the non-controlling shareholder had no interest; and 2) used the corporation to pay for its legal expenses in the oppression proceedings.
[95] In Caughlin, the court also found that the unfair conduct was exacerbated by the defendant’s failure to adhere with corporate governance requirements. The court reasoned as follows:
“Small, closely held companies are often less than formal in adherence to requirements of the Act. However, when problems started to arise, Caughlin had a reasonable expectation that there would be compliance with the Act with respect to financial and corporate records, shareholders' meetings and shareholders' approval of the decision to waive audited financial statements. Caughlin had to use this court process to obtain financial records of CPS to obtain a clearer understanding of the improper conduct of Lyle. The fact that the financial statements that he did obtain were not-audited left Caughlin to rely on statements which were based solely on information which Lyle provided to the accountant. Caughlin has been unable to inspect any of the records of CPS upon which the financial statements are based to determine the extent of Lyle's conduct and how it affected his interests. The only shareholders' meeting that was held occurred during the litigation and was improperly called. Moreover, all of the decisions to divert income and profits to Canpay from CPS were made without directors' resolutions. Not only were these decisions prejudicial and in disregard of Caughlin's interests, they were contrary to the Act.[^35]
[96] Elma submits that Kozo has shown a total disregard for her legal rights and corporate interests, as follows:
i. He never produced the financial records she requested of him, to determine the value he attributed to her shares in the Buy/Sell Notice;
ii. He never produced any of the financial or corporate statements or records to Elma from 2017 onward;
iii. He paid himself and Kabir bonuses bi-weekly in the sum of $5,500 without her consent and did not share any of Sarajevo’s profits with her; and
iv. He diverted funds from Sarajevo into two new entities of which she is now not a shareholder.
[97] Elma believes that there were two cash registers and that Kozo and Kabir both received substantial sums of money as bonuses or other payouts from Sarajevo which were not disclosed to her and which she did not receive, despite her equal shareholdings to Kabir.
[98] Based on the above, I find that Elma has more than met the threshold test under s.249(4) of the OBCA and is entitled to interim costs as a complainant shareholder. On the evidence before this Court on this motion, Elma’s oppression claim is far from frivolous or vexatious and it has sufficient merit to warrant pursuit.
[99] I find Kozo’s position respecting Elma’s request for interim costs, namely, that it is disproportionate for her to be seeking a contribution to her accounting and legal fees, to be disingenuous. Kozo submits that neither he nor Sarajevo has the financial means to cover the cost of the investigation sought by Elma and that an order that requires him and Sarajevo to pay the cost of this investigation would force them into bankruptcy. This cannot be the case. Kozo has incurred legal fees to defend Elma’s claims and to bring his own motion to stay the claims against him in favour of an arbitration. Both Kozo, Sarajevo and Elma have retained senior family and corporate counsel. Kozo has found the requisite funds for his own legal fees without having to go bankrupt. Kozo undoubtedly is aware of the costs that Elma will have to incur to proceed to trial.
[100] Elma’s financial statement sworn on October 28, 2020, provides that other than her 25% interest in Sarajevo, she had savings of $10,000 on the date of separation, which she has now depleted to meet her living expenses. Her affidavit material indicates that she has had no alternative but to rely on Ontario Works, the Child Tax Benefit and CERB to be able to meet her expenses and that of the child. She does not have the resources she needs to prove these claims. Kozo, on the other hand, is now running two new businesses and therefore has additional sources of money. Kozo was able to purchase both Kabir’s and Elma’s shares in Sarajevo in late 2019 and then personally fund Sarajevo II and his wholesale meat business in February 2020 without difficulty. Without the $53,995, Elma will not be in a position to fund her future costs to pursue her oppression claims. Accordingly, I order Sarajevo to pay Elma’s costs in the sum of $53,995, to fund both her forensic accounting and legal fees associated with this investigation.
[101] Elma also seeks interim disbursements from Kabir in the sum of $20,000 under the FLRs. I am not prepared to order interim disbursements at this time. Kabir did not file any motion material in response to either Kozo’s stay motion or Elma’s motion for financial production and disbursements. I do not have an up-to-date financial statement from Kabir and cannot currently assess his financial means. If Elma requires interim disbursements to fund her family law claims after the corporate arbitration is completed, she may return her motion at that time and Kabir will respond accordingly.
Order:
[102] Accordingly, this Court orders as follows:
i. The claims Elma Pezo has against Hadis Kozo and Sarajevo Grill & Meat Inc. shall be stayed in this proceeding and shall proceed by way of arbitration in accordance with the parties’ Shareholder Agreement;
ii. If Elma Pezo, Kabir Pezo and Hadis Kozo cannot agree on a single arbitrator to conduct the arbitration, each party shall submit two names of qualified mediators to the Court in writing by no later than August 30, 2021 and the Court shall choose the arbitrator.
iii. The family law claims between Elma Pezo and Kabir Pezo shall be stayed until the completion of the corporate arbitration and the arbitrator renders a written arbitral award, without prejudice to either Elma Pezo or Kabir Pezo bringing interim motions as may be needed, provided a case conference has been held first.
iv. Within 15 days, Hadis Kozo shall prepare a confidentiality agreement for signature by Elma Pezo, her counsel and forensic accountant to address the confidentiality of the financial production in relation to Sarajevo Grill and Meat Inc. and Sarajevo Grill and Meat Inc. II.
v. Within 30 days, Hadis Kozo, shall produce all of the documentation and financial production set out in the amended notice of motion filed by Elma Pezo, dated June 22, 2021. Within 30 days, Hadis Kozo, shall cause all electronic devices owned by Sarajevo Grill and Meat Inc. to be made available to Elma Pezo’s forensic accountant for review and/or duplicative digital imaging.
vi. Hadis Kozo shall immediately take all reasonable steps to cause Sarajevo Grill & Meat Inc. to pay Elma Pezo interim costs in the amount of $53,995, pursuant to s. 249(4) of the OBCA as follows:
Within 30 days, Sarajevo shall advance $26,000 to Elma, the amount of the Advance to be credited against the total value of Elma’s shareholdings in Sarajevo, for the purpose of contributing to her accounting costs and disbursements in relation the claims she has brought under the OBCA; and $27,995 shall be advanced when Elma’s counsel renders invoices for the legal work associated with the review of the forensic accounting report; and
The Advance shall be made “without prejudice” to any interim or final costs award that Elma Pezo may seek and be awarded at trial.
vii. If the parties cannot agree on costs on each motion, a party seeking costs shall provide written submissions of no more than three pages, exclusive of any offers to settle, dockets and bill of costs by August 20, 2021. The party responding to a request for costs shall do so in similar form within 7 days of receipt of costs submissions. Reply, if any, to responding costs submissions shall be no more 1 page and provided within 5 days of receipt of responding submissions.
Kraft, J.
Released: August 6, 2021
COURT FILE NO.: FS-20-19798
DATE: 20210806
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Elma Pezo
Applicant
– and –
Kabir Pezo
Respondent
– and –
Hadis Kozo
Respondent
– and –
Sarajevo Grill & Meat Inc.
Respondent
REASONS FOR ORDER
Kraft, J.
Released: August 6, 2021
[^1]: In support of the stay motion, Kozo relies on his Notice of Motion, dated May 21, 2021; his Amended Notice of Motion, dated June 18, 2021; his affidavit, sworn on May 21, 2021; and his Factum, dated June 18, 2021. In response, Elma relies on her Notice of Motion, dated May 26, 2021; her affidavit, sworn May 26, 2021; her affidavit, sworn May 31, 2021; and her Factum, dated June 22, 2021. [^2]: In support of her motion for financial production and interim costs, Elma relies on her Notice of Motion, dated June 21, 2021; her affidavit, sworn June 22, 2021; and her Factum, dated June 17, 2021. In respondent to Elma’s motion, Kozo relies on the following material: his affidavit, sworn on June 9, 2021; his affidavit, sworn on June 11, 2021; and his Factum, dated June 20, 2021. [^3]: Cityscape Richmond Corp. v. Vanbots Construction Corp. 2001 CanLII 24155 (ON CA), [2001] O.J. No. 648, at para 19 (“Cityscape”); Haas v. Gunasekaram, 2017 ONCA 744, at para 12 (“Haas”); and TELUS Communications Inc. v. Wellman, 2019 SCC 19, at 63. [^4]: Ibid, at para [19]. [^5]: Arbitration Act, 1991, S.O. 1991, c.17, s.6 (“Arbitration Act”), s.6. [^6]: TELUS Communications Inc. v. Wellman, 2019 SCC 19, at 56 (“Wellman”). [^7]: Arbitration Act, s.7. [^8]: Section 17(1) of the Arbitration Act states, (1) “An arbitral tribunal may rule on its own jurisdiction to conduct the arbitration and may in that connection rule on objections with respect to the existence or validity of the arbitration agreement; (2) if the arbitration agreement forms part of another agreement, it shall, for the purposes of a ruling on jurisdiction, be treated as an independent agreement that may survive even if the main agreement is found to be valid.” [^9]: Haas, at 17. [^10]: Arbitration Act, s.7(2). [^11]: U v. Walters Environmental Group Inc. [2012] O.J. No. 5883, at paras. 17-19. [^12]: Dell Computer Corp. v. Union des Consommateurs, 2007 SCC 34, at 84. [^13]: Uber Technologies Inc. v. Heller, 2020 SCC 16, at paras 31-33 (“Heller”). [^14]: Heller, at paras 64-66. [^15]: Arbitration Act, s.7(5). [^16]: Wellman, at para. 69. [^17]: Wellman, at para. 70. [^18]: Wellman, at para. 90. [^19]: Boyd v. Fields, [2006] OJ No. 5762, at 11. [^20]: Dulebe v. Sorge, [2018] O.J. No. 5273, at para 11. [^21]: Business Corporations Act, R.S.O. 1990, c.B.16, s.249(4). [^22]: Alles v. Maurice, 1992 CarswellOnt 132 (Ont. Gen. Div.)[“Alles”]. [^23]: Alles, at para. 19. [^24]: Hames v. Greenberg, 2014 ONSC 245 (S.C.J.) [“Hames”]. [^25]: Hames, at paragraph 22. [^26]: Alles, at para. 19; Hames, at paras 37-38 and 43; Giffin v. Sootiens, 2010 NSSC 438 [Giffin] at paras 44-45; [^27]: Alles, at para. 19, Giffin, at paras. 31, 34-37, 58 and 63. [^28]: Hames, para 62-85. [^29]: Hames, at para. 77. [^30]: OBCA, s. 248. [^31]: Runnalls v. Regent Holdings Ltd., 2008 BCSC 1073 [Runnalls], at para 31; Pavone Estate v. 603631 Ontario Ltd., 2013 ONSC 5172 [Pavone] at paras 27 and 30; Baxter v. Baxter, 2000 CanLII 22511 (ON SC) at para. 23. [^32]: Runnalls, at para. 31. [^33]: Waxman v. Waxman, 2002 CarswellOnt 2308 (S.C.J.), at para. 1412, aff’d 2002 CanLII 45101 (ONCA). [^34]: Caughlin v. Canadian Payroll Systems Inc., 2020 MBCA 25 at paras 3, and 7-8. [^35]: Caughlin v. Canadian Payroll Systems Inc., 2019 MBQB, 6, at paras. 61-62, aff’d 2020 MBCA 25.