



COURT OF APPEAL FOR ONTARIO

CITATION:
Universal Settlements International
    Inc. v. Duscio, 2012 ONCA 215

DATE: 20120404

DOCKET: C54454

OConnor A.C.J.O., Simmons J.A., and Perell J. (
ad
    hoc
)


BETWEEN

Universal Settlements International Inc., The
    Brokerwise Group Inc. and 1508211 Ontario Inc.

Respondents (Appellants)

and

Antonio Duscio and Martina Capital Corporation

Applicants (Respondents)

William W. McNamara and Nicholas D.W. Daube, for the
    appellants

Kevin D. Sherkin, for the respondents

Heard: March 13, 2012

On appeal from the order of Justice T.R. Lederer of the Superior
    Court of Justice, dated May 16, 2011, with reasons reported at 2011 ONSC 968.

Perell, J. (ad hoc):

A.

INTRODUCTION

[1]

In the decision below, relying on sections 17 and 46 of the
Arbitration
    Act, 1991
, S.O. 1991, c. 17, Justice Lederer allowed an application to set
    aside the award of an arbitrator. In so doing he set aside three interlocutory
    orders, an order striking out statements of defence, and the arbitrators final
    award. Justice Lederers order also removed the arbitrator.

[2]

For the reasons that follow, I conclude that the application
    judge erred in setting aside the arbitrators interlocutory orders; however, I agree
    with his decisions to set aside the arbitrators order striking the pleadings and
    the arbitrators final award. I also agree that the arbitrator should be
    removed.

[3]

In the result, I would allow the appeal, in part.

B.

FACTUAL BACKGROUND

[4]

The ill-starred history of the arbitration involving Universal
    Settlements International Inc. (Universal), The Brokerwise Group Inc. (Brokerwise),
    Geoffrey Panos, 1508211 Ontario Inc. ("1508211"), Christopher Halas, Martina
    Capital Corporation ("Martina Capital"), and Antonio Duscio, is set
    out in the application judges reasons. To explain my reasons, it is sufficient
    to summarize that history and to focus on the circumstances around the time of the
    various arbitral orders and awards that were challenged.

[5]

Universal is a financial services company. Before January 2007, it
    was owned by: (1) Martina Capital, whose principal is Mr. Duscio; (2) Brokerwise,
    whose principal is Mr. Panos; and (3) 1508211, whose principal is Mr. Halas.
    The individuals and the corporations were parties to a shareholders' agreement.

[6]

In November 2006, Messrs. Panos and Halas accused Mr. Duscio of
    misappropriating Universals funds, and he responded by triggering the
    shotgun-provision in the shareholders' agreement. They countered by commencing
    an action seeking, among other things, relief from oppression.

[7]

On December 19, 2006, Justice Thorburn stayed the action, and, pursuant
    to the shareholders agreement, the dispute was submitted to arbitration. E.
    Lorne Morphy was appointed arbitrator. In the arbitration, Universal,
    Brokerwise, and 1508211 were the claimants and Mr. Duscio and Martina Capital
    were the respondents.

[8]

The parties signed an arbitration agreement. The subject matter
    of the arbitration was: the disputes between the parties concerning the
    holdings of, operations of, breach of duties to and relationship between the
    shareholders of Universal. The arbitration agreement provided that the arbitrator
    had the authority to make any and all interim, interlocutory, and final orders
    as if he were a judge of the Superior Court.

[9]

On January 16, 2007, the arbitrator made an interim award that
    permitted Brokerwise and 1508211 to be the purchasers of Mr. Duscios and Martina
    Capitals interest in Universal, and on January 25, 2007, the parties entered
    into an escrow agreement that required Brokerwise and 1508211 to pay the $1
    million (USD) purchase price into an escrow account pending the disposition of
    the arbitration.

[10]

In November 2007 and March 2008, Mr. Duscio and Martina Capital
    brought motions seeking the release of a portion of the escrow funds in order
    to pay their lawyers and to provide Mr. Duscio with funds for living expenses. The
    motions were granted, and the arbitrator released $290,000 to Mr. Duscio and
    Martina Capital.

[11]

However, in March 2008, Brokerwise and 1508211 brought a motion (the
    repayment motion) seeking an order requiring the funds to be repaid. They alleged
    that Mr. Duscio had provided false evidence to support the request for the
    release of the money held in escrow.

[12]

Following a series of delays, the repayment motion was argued in November
    2008. At this time, both Mr. Duscio and his corporation, Martina Capital, were
    in bankruptcy; however, orders had been made in both bankruptcy proceedings
    lifting the automatic stays of the arbitration.

[13]

During the repayment motion, Brokerwise and 1508211 asked the arbitrator
    to find that Mr. Duscio and Martina Capital had obtained the funds
    fraudulently. If such a finding was made, the repayment order would survive a
    discharge of the bankruptcies pursuant to s. 178(1) of the
Bankruptcy and
    Insolvency Act
,
R.S.C. 1985, c. B-3.

[14]

On December 16, 2008, the arbitrator released his decision on the
    repayment motion. He directed that the $290,000 be repaid, together with
    interest. In making his order, the arbitrator declined Brokerwise and 1508211s
    request that he make findings of fraud, and he concluded that such findings
    were not necessary for the repayment order.

[15]

On January 7, 2009, Brokerwise and 1508211 submitted claims for
    costs for the repayment motion, and in their submissions, they, once again,
    asked that the arbitrator make findings of fraud with respect to the repayment.

[16]

On December 1, 2009, the arbitrator made his decision as to costs.
    He awarded Brokerwise and 1508211 costs of $275,000 for fees and $24,989.96 for
    disbursements. He made no findings of fraud against Mr. Duscio or Martina
    Capital.

[17]

On December 17, 2009, counsel for Mr. Duscio and Martina Capital
    wrote to the arbitrator. In the letter he asserted that, absent a finding of
    fraud, any obligation to return the money to escrow was subject to the
    bankruptcy of Mr. Duscio.

[18]

On December 31, 2009, Mr. Duscio and Martina Capital commenced an
    application in the Superior Court to have the arbitrator removed and to set
    aside the repayment order and the associated costs order. The notice of
    application was subsequently amended twice, as discussed further below, and
    eventually led to the present appeal.

[19]

On January 28, 2010, Brokerwise and 1508211 delivered a notice of
    motion in the arbitration for an order striking Mr. Duscios and Martina
    Capitals statements of defence and noting them in default. The motion to
    strike the pleadings was argued on February 12, 2010.

[20]

It is important to note that the grounds for the motion to strike
    the statements of defence were that Mr. Duscio and Martina Capital had not
    complied with the repayment order and the associated costs orders.

[21]

Mr. Duscio and Martina Capital delivered written submissions on
    the motion to strike. They argued the arbitrator did not have jurisdiction to
    enforce repayment because that was a matter for the trustees in bankruptcy and
    the Bankruptcy Court.

[22]

On March 16, 2010, the arbitrator released his decision on the
    motion to strike the statements of defence. In his decision, he observed that:
    rule 60.12 of the
Rules of Civil Procedure

provides that a
    statement of defence may be struck out when a party fails to comply with an
    interlocutory order; and, rule 19.01(2) provides that a party may be noted in
    default when its defence has been struck. At paras. 5, 6 and 13 of his reasons,
    he stated that in order to grant the rule 60.12 order, he had to find that Brokerwise
    and 1508211 had been prejudiced by the non-compliance and that Mr. Duscio and
    Martina Capital had acted in a way so as to cause or bring the arbitral process
    into disrepute. He concluded that these criteria had been satisfied, and he
    struck the statements of defence and noted Mr. Duscio and Martina Capital in
    default.

[23]

On April 14, 2010, Mr. Duscio and Martina Capital filed an amended
    notice of application in the Superior Court. They added a request that the
    order striking their statements of defence be set aside. In May 2010, this application
    was scheduled to be heard in November, 2010.

[24]

In the meantime, relying on rule 19.02 (1) of the
Rules of
    Civil Procedure

and without notice to Mr. Duscio and Martina
    Capital, Brokerwise and 1508211 moved for a default award in the arbitration.
    The arbitrator proceeded in the absence of Mr. Duscio and Martina Capital. He heard
viva voce
evidence from Mr. Panos and Mr. Halas and from the Trustee in
    Bankruptcy of Martina Capital.

[25]

On August 23, 2010, the arbitrator released his final award. Relying
    on the evidence on the default award motion and on the allegations of fact in
    the statement of claim deemed to have been admitted as true, the Arbitrator found
    that Mr. Duscio, together with Martina Capital, had abused his fiduciary duty
    and fraudulently converted money from Universal to his own use. The arbitrator awarded
    damages of $5,511,160.85. He added pre-judgment interest of $673,343.06, for a
    total award of $6,184,503.91. Finally, he ordered that the money that was being
    held in escrow be paid to Universal.

[26]

On September 15, 2010, Mr. Duscio and Martina Capital further
    amended their previous notice of application, adding a plea requesting that the
    arbitrators final award be set aside.

[27]

The enforcement of the arbitral award was stayed by the order of
    Justice Stinson dated October 1, 2010:
Universal Settlements International
    Inc. v. Duscio
, 2010 ONSC 5438.

[28]

On January 18-20, 2011, Justice Lederer heard Mr. Duscio and
    Martina Capitals amended application, which had originally been scheduled for November,
    2010.

[29]

The application judge released his decision on May 16, 2011. As
    noted above, he allowed the application. He set aside the repayment order, the
    associated costs orders, the order striking out the statements of defence, and
    the final arbitral award. He also ordered that the arbitrator be removed.

[30]

Leave to appeal having been granted, Brokerwise and 1508211
    appeal to this Court.

C.

DISCUSSION

[31]

In

Inforica
    Inc. v. CGI Information Systems and Management Consultants Inc.
, 2009
    ONCA 642, 97 O.R. (3d) 161, this Court held that judicial intervention in
    arbitration is to be strictly limited to those few circumstances identified
    by the
Arbitrations Act
. At paragraph 14 of his judgment, Sharpe J.A.,
    writing for the court, stated:


It is clear from the structure and purpose of the Act in
      general, and from the wording of s. 6 in particular, that judicial intervention
      in the arbitral process is to be strictly limited to those situations
      contemplated by the Act. This is in keeping with the modern approach that sees
      arbitration as an autonomous, self-contained, self-sufficient process pursuant
      to which the parties agree to have their disputes resolved by an arbitrator,
      not by the courts. As Inforica states in its factum, "arbitral proceedings
      are presumptively immune from judicial review and oversight." The Act
      encourages parties to resort to arbitration, "require[s] them to hold to
      that course once they have agreed to do so", and "entrenches the
      primacy of arbitration over judicial proceedings ... by directing the court,
      generally, not to intervene":
Ontario Hydro v. Denison Mines
        Ltd
.,
[1992]
          O.J. No. 2948
(Gen. Div.), Blair J.


[32]

The
Inforica

decision also provides that the
    court does not have jurisdiction to overturn interlocutory decisions of an
    arbitrator. Sharpe J.A. stated at para. 18:


A significant feature of the modern approach limiting access to
      the courts to review decisions of arbitrators is that there are no appeals from
      procedural or interlocutory orders. In
Environmental Export International
        of Canada Inc. v. Success International Inc.
, [1995] O.J. No. 453 (Gen.
      Div.), at para. 14, MacPherson J. held: "There is nothing in the
Arbitration
        Act
providing for appeals from, or applications to set aside, decisions of
      arbitrators on procedural points. It would be wrong ... for the courts to
      invent such a remedy and inject it into the arbitration process". This
      principle is reiterated in
Tescor Energy Services Inc. v. Toronto District
        School Board
, [2002] O.J. No. 74 (S.C.), at para. 30, where Lane J. held:
      "there is nothing in the Act to permit appeals from or the setting aside
      of decisions of arbitrators on procedural points". This is a deliberate
      policy, "not a lacuna in our law", to protect the autonomy of the
      arbitral process. The creation of a power by the courts to intervene on interlocutory
      rulings by arbitrators "would constitute a most serious reproach to the
      ability of our system of arbitration to serve the needs of users of the
      arbitral process":
K/S A/S Biakh v. Hyundai Corp
.
, [1988]
      1 Lloyd's Rep. 187 (Q.B. Com. Ct.) at p. 189, Steyn J.


[33]

The arbitrators order on the repayment motion and the associated
    costs orders were interlocutory or procedural orders, and in my opinion, it was
    an error to set those orders aside.

[34]

The situation, however, is different with respect to the application
    judges decision to set aside the arbitrators order striking out the
    statements of defence and the final arbitration award, which was made without
    notice and without the participation of Mr. Duscio and Martina Corporation.

[35]

An order striking a statement of defence is a final, not an
    interlocutory, order: see
Four Seasons Travel Ltd. v. Laker Airways Ltd.
(1974), 6 O.R. (2d) 453 (Div. Ct.); also see
Canadian Imperial Bank of
    Commerce v. Lido Drywall Inc
.
(1995), 87 O.A.C. 197 (Div. Ct.). The
    final arbitration award is obviously a final determination of the dispute
    between the parties.

[36]

In the circumstances of the case at bar, the application judge
    had the jurisdiction to set aside the order striking the statements of defence
    and the final arbitral award pursuant to s. 46 (1)  of the
Arbitration Act
.
Section 46(1)

states:


Setting aside award

46. (1) On a partys application, the court may set aside an
      award on any of the following grounds:






6. The applicant was not treated equally and fairly, was not
        given an opportunity to present a case or to respond to another partys case,
        or was not given proper notice of the arbitration or of the appointment of an
        arbitrator.



[37]

In the case at bar, I see no error in the exercise of the courts
    jurisdiction under s. 46 of the
Arbitration Act
. In other words, there
    were circumstances where judicial intervention was permitted by the
Arbitrations
    Act
.

[38]

In this regard, I agree with the application judges finding at
    para. 134 of his reasons that the arbitrators decision to strike the pleading
    was based on Mr. Duscios and Martina Capitals non-compliance with the
    repayment order and the associated costs orders. I also agree with his conclusion
    at para. 113 of his reasons, that because of the respective bankruptcies, there
    was a legal impediment to Mr. Duscio and Martina Capital complying with the
    repayment order and the associated costs orders. As the application judge
    stated at para. 113:


If the money ordered paid was in the estate of a bankrupt, it
      would not be available to be used to comply with the order. If it was not in
      the estate, but was in the hands of the bankrupts, they would, pursuant to the
BIA
,
be obliged to deliver it to the trustees. It would not be that they did not
      comply with the order, but that, under the law, they could not. The orders that
      were made after the order to re-pay all relied on the order to re-pay and the
      failure to comply that followed was a result that, pursuant to the law, the
      respondents could not avoid.


[39]

In the result, I agree with the application judge that the impact
    of the arbitrators order striking the statement of defence and the default
    award was unfair. Mr. Duscio and Martina Capital were denied an opportunity to respond
    to Universal, Brokerwise and 1508211s case because of their failure to comply
    with orders when compliance was neither possible nor lawful.

[40]

I disagree with Universal, Brokerwise, and 1508211s argument
    that because of the orders lifting the automatic stays of the arbitration
    imposed by the
Bankruptcy and Insolvency Act
and an order made in
    April 2009 permitting Mr. Duscio to assume Martina Capitals defence at
    his own expense that it would have been lawful to use funds that either were or
    ought to have been in the hands of the trustee in bankruptcy to comply with the
    repayment order and the associated costs orders.

[41]

The orders lifting the stay only meant that if Universal,
    Brokerwise, and 1508211 were successful in the arbitration, then they would
    become unsecured judgment creditors with a claim that might survive a discharge
    from bankruptcy if fraud by the bankrupt had also been established. The orders
    lifting the stay did not authorize payments to Universal, Brokerwise, and
    1508211 that would be preferences over other creditors.

[42]

To be clear, I do not see the arbitrator as having made a
    jurisdictional error in striking out the statements of defence or in proceeding
    with the arbitration. Rather, I regard his order and his final award as
    reversible under s. 46(1)(6) of the
Arbitration Act
on the grounds of
    unfairness. In the circumstances, it was not fair to strike the statements of
    defence, nor was it fair to proceed to make a final award.

[43]

Unlike the application judge, however, I do not see the order
    striking out the statements of defence and the final arbitration award as
    tainting the repayment order and the costs orders. As I stated above, these
    orders were interlocutory and ought not to have been set aside. They should remain
    in place and their enforceability will depend on the bankruptcy proceedings and
    possibly upon the outcome of the arbitration.

[44]

This brings me to the issue of the removal of the arbitrator. Section
    15(1) of the
Arbitration Act
authorizes the court to remove an
    arbitrator if, among other reasons, he or she does not conduct the arbitration
    in accordance with s. 19. Section 19 of the Act states:


19.  (1) In an arbitration, the parties shall be treated
      equally and fairly.

(2)  Each party shall be given an opportunity to present a case
      and to respond to the other parties cases.


[45]

I see no error in the application judges decision under s. 19.

[46]

It is, nevertheless, regrettable that the arbitrator must be
    removed, because, but for the order striking out the statements of the defence
    and the aftermath of that order, the arbitrators conduct of the arbitration
    was laudatory. This was a difficult case. Throughout, the arbitrator showed
    extraordinary patience and judiciousness. He is to be commended for his
    efforts, but in the circumstances, like the situation when a new trial is
    ordered, it is appropriate that the issues of the arbitration be decided by
    another arbitrator.

[47]

If the parties cannot agree on the appointment of a new arbitrator,
    an application for a court appointed arbitrator may be made pursuant to s. 16
    of the
Arbitration Act
.

[48]

Before concluding, there is one last matter that requires
    comment. In his reasons, the application judge expressed the opinion that Universal,
    Brokerwise, 1508211, their counsel, and (by inference) the arbitrator had been
    disrespectful to the court by continuing with the arbitration once the court
    had scheduled dates for Mr. Duscios and Martina Capitals application pursuant
    to s. 17 and s. 46 of the
Arbitration Act
.

[49]

I note that this opinion was not necessary for the decision
    below, and it plays no part in this courts decision. I add, moreover, that
    while there is a convention that once a notice of motion or notice of
    application is served, a party ought not to take steps that prejudicially
    affect the rights of the other parties to the motion or application and the
    parties should maintain the
status quo
at the time of the service of
    the notice, this convention does not apply to stop an ongoing arbitration
    proceeding. That the convention does not apply is made clear by s. 17(10) of
    the
Arbitration Act
, which provides that [w]hile an application is
    pending, the arbitral tribunal may continue the arbitration and make an award.

D.

CONCLUSION

[50]

I would allow the appeal, in part. I would revise the application
    judges order in accordance with these Reasons for Decision.

[51]

As success on the appeal was divided, I would make no order as to
    costs of the appeal. I would not disturb the costs order of the application
    judge, which remains appropriate.

Released: April 4, 2012 (D.OC.)

Perell J. (
ad hoc
)

I
    agree D. OConnor A.C.J.O.

I
    agree Janet Simmons J.A.


