In Universal Settlements Inc. v. Duscio, Justice Lederer heard an application to set aside a number of arbitral orders and to replace an arbitrator on grounds of bias.
The underlying proceeding was a shareholder’s dispute and oppression application made pursuant to a shareholders agreement containing an arbitration clause. During the currency of the arbitration, one of the respondents to the arbitration was assigned into bankruptcy. The claimants moved in the arbitration proceeding for an order requiring the immediate return of monies allegedly taken by the respondents. The arbitrator granted the claimants’ motion, and ordered the return of the monies forthwith despite the fact that the respondents had been assigned into bankruptcy and the monies formed part of the bankrupt’s estate.
The respondents could not and did not comply with the order and the claimants moved successfully before the arbitrator to have the respondents’ defence struck out of the arbitral proceedings. Once the defence was struck out, the respondents were noted in default and a final award was ultimately issued without the participation of the respondents at the final hearing. In the course of the final hearing, the arbitrator heard from a number of witnesses who were not subject to cross-examination.
The Court held that the arbitrator did not have jurisdiction to make the order requiring payment of monies out of the bankrupt’s estate. This was because the arbitration agreement confined the jurisdiction of the arbitrator to disputes between the shareholders arising under the shareholder agreement. An order requiring payment of monies out of the bankrupt’s estate affected the bankruptcy proceedings which were under the jurisdiction of the Superior Court.
Because the arbitrator lacked jurisdiction to make the order requiring payment of monies out of the bankrupt’s estate, that order was set aside. According to the Court, the consequence of this was that the order striking out the respondents’ defence, and noting them in default, also needed to be set aside. This in turn meant that the final arbitral award “having been issued after a hearing that lacked the participation of the respondent” was in breach of the respondents’ procedural rights. The final arbitral award was set aside.
The Court also reluctantly ordered that the arbitrator be replaced when the arbitration hearing was reheard. The Court noted that the arbitrator’s decision granting payment of monies out of the bankrupt’s estate was simply an error of law and that, in the normal course, the same arbitrator could rehear a case with directions from the Court regarding that error. What was fundamentally different in this case, according to the Court, was the fact that the arbitrator had heard viva voce evidence from key witnesses not subject to cross-examination. The arbitrator had therefore formed impressions from these witnesses regarding their creditability and reliability which, according to the Court, the arbitrator could not be expected to ignore.
This case will provide the Ontario Court of Appeal with an opportunity to clarify the applicable principles regarding the removal of an arbitrator under the Arbitration Act, 1991. The Court will need to consider the effect of errors of law which lead to procedural rulings that ultimately affect the fairness of the hearing itself. The Court of Appeal will also likely decide whether Justice Lederer was correct in emphasizing the arbitrator’s receipt of viva voce evidence not subject to cross examination.
Universal Settlements Inc. v. Duscio
The Court of Appeal recently granted leave to hear this case. It has not yet been assigned a docket number or hearing date by the Court of Appeal. .