Ontario – non-parties’ cannot resile from consent to earlier court order joining them to arbitration – #141

In Chemical Vapour Metal Refining Inc., et al v. Terekhov, 2018 ONSC 7037, Mr. Justice Glenn A. Hainey denied a post-award challenge by non-parties to an arbitration agreement to revisit their earlier consent to a court order joining them to arbitration. Hainey J. determined that the non-parties had consented to be joined to an arbitration that would determine a range of claims including oppression, fraudulent conveyance and alter ego liability. Having consented to that order, they could not later, on a leave to appeal application, argue that the award should be set aside due to an excess of jurisdiction. Their consent also enlarged the scope of the issues initially submitted to arbitration by the parties to the contract.

The litigants’ relationship stemmed from Respondent’s July 2000 employment with and shareholding in Chemical Vapour Metal Refining Inc. (“CVMR”). Respondent and two (2) other shareholders – Net Process Technologies Holding Inc. (“Net Process”) and another individual – were parties to a shareholders agreement which contained an arbitration clause.

Hainey J. was asked to deal with an application by CVMR, Net Process, CVD Consolidated Accounts Management Inc., CVD Manufacturing Inc., CVMR Corporation, Mr. Kamran Khozan and Reprotech Limited (“Applicants” or “CVMR Parties”) for leave under sections 45(1)(a) and (b) of Ontario’s Arbitration Act, 1991, SO 1991, c 17 to set aside an arbitral award. Not all the Applicants were party to that shareholders agreement. Applicants claimed that the award should be set sider under section 46(1)(3) because, in granting Respondent’s claims, the award dealt with a dispute that the arbitration agreement does not cover or contained a decision on a matter that is beyond the scope of the agreement. Respondent applied for an order enforcing the award.

The dispute leading to the arbitral award reached back to an April 11, 2005 transaction. At that time, Respondent was persuaded to exchange his common shares for preference shares. In doing so, Respondent lost all the value of his shareholding because of a shareholders resolution signed the same day. Only later did Respondent learn and successfully claim in arbitration that the state of CVMR’s affairs had been misrepresented to him. In his April 3, 2018 award, the arbitrator wrote that the 2005 shareholders resolution was a “sham in its entirety” and that one of the other Applicants “had acted oppressively and in bad faith toward” Respondents.

The parties did not go straight into arbitration. The arbitration was preceded first by CVMR terminating Respondent’s employment on March 14, 2014 and then by Respondent instituting litigation in the Ontario Superior Court on June 5, 2014 against all CVMR Parties. In his litigation, Respondent sought damages for wrongful dismissal and compensation for oppression under section 241 of Ontario’s Business Corporations Act, RSO 1990, c B.16.  He included additional claims of fraudulent conveyance and that all corporate Respondents were alter egos of each other.

The CVMR Parties responded by applying in 2014 to the court to stay part of Respondent’s action on the basis that his claims were covered by the arbitration agreement in the shareholders agreement. A Master issued a November 14, 2014 order on consent of the CVMR Parties by which he appointed CVMR’s choice as the arbitrator to adjudicate all the claims made by Respondent including his shareholder claims, unpaid dividends, oppression, alter ego and fraudulent conveyance as pleaded in Respondent’s court litigation. His order read in part:

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.

The arbitration proceeded in accordance with the terms of the arbitration agreement contained in the shareholders agreement and resulted in the April 3, 2018 award in which Respondent prevailed. The arbitrator determined that: (i) Respondent owned 17.5% of the common shares in CVMR at all relevant times; (ii) the CVMR Parties had engaged in oppressive conduct towards Respondent and were liable as alter egos of one of the Applicants; and, (iii) Respondent was entitled to US$995,000.00 in damages representing the fair value of his 17.5% shareholding.

In support of their application for leave to appeal, Applicants asserted four (4) legal errors, the third being that the arbitrator had exceeded his jurisdiction by granting relief against non-parties to the shareholders agreement and the arbitration agreement.

Respondent contested all alleged legal errors stating, among other things, that: (i) the arbitrator did not exceed his jurisdiction in making an award affecting parties who consented to an order joining them to the arbitration; and, (ii) the court should not entertain jurisdictional objections that were not made in a timely or proper way before the arbitrator.

Hainey J.’s dismissal of the CVMR Parties’ jurisdictional argument was terse.  He pointed to their consent to the Master’s November 19, 2014 order. “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.

Hainey J. also reiterated the arbitrator’s own mention in the award of his jurisdiction on consent.

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.

Hainey J. also dismissed the balance of Applicants’ grounds for leave to appeal and granted Respondent’s application, incorporating the arbitrator’s award and costs award into a judgment of the court.

The scope of the issues and causes of action listed in the Master’s November 2014 order appear to be beyond the scope of those which could arise in a shareholders agreement including, for example, the arguments based on alter ego liability. By consenting after the disputes arose, the non-parties not only submitted to arbitration but also agreed to enlarge the scope of the arbitration already agreed to in the shareholders agreement.