Chemical Vapour Metal Refining Inc. v. Terekhov, 2016 ONSC 6845

CITATION: Chemical Vapour Metal Refining Inc. v. Terekhov, 2016 ONSC 6845
COURT FILE NO.: CV-16-544179
DATE: 20161123


BETWEEN:                                                                                )

CHEMICAL VAPOUR METAL                                            )       David E. Wires and Krista Bulmer, for the

REFINING INC., CVD                                                           )       Applicants

MANUFACTURING INC., CVMR                                       )

CORPORATION, CVD CONSOLIDATD                           )

ACCOUNTS MANAGEMENT INC., NET                          )

PROCESS TECHNOLOGIES HOLDING                           )

INC., REPROTECH LIMITED AND                                    )      J. Gardner Hodder, for the Respondent

KAMRAN KHOZAN                                                                   )

                                                                                  Applicants )

– and –                                                                                           )

DMITRI TEREKHOV                                                               )

                                                                               Respondent )

                                                                                                         ) HEARD: August 30, 2016

Nature of the Application
[1] The Applicants (“CVMR”) seek an order setting aside or varying the awards of the Arbitrator dated December 10, 2015 and July 21, 2016, an order removing the Arbitrator and replacing him with a substitute, and directions for the future conduct of the arbitration.

[2] CVMR submits that the Arbitrator stepped outside the issues raised in the pleadings and the case developed by the parties prior to the hearing. As a result, CVMR argues that the Arbitrator made findings on allegations that had not been pleaded, rendering the proceedings fundamentally unfair.

[3] The Respondent (“Terekhov”) takes the position that all of the Arbitrator’s conduct and determinations relate to issues that were squarely before him. He submits that the arbitration ought to continue before the Arbitrator as was originally agreed to by the parties. 2016 ONSC 6845 (CanLII)

[4] By consent order dated November 19, 2014, Stan Fisher was appointed as Arbitrator to determine claims made by Terekhov against CVMR. Terekhov is seeking damages for oppression, an order that CVMR acquire Terekhov’s shares on terms that are just, payment of dividends to Terekhov of US $1 million, and an order under sections 213, 214 and 241 of the Canada Business Corporations Act R.S.C., 1985, c.C-44 that CVMR be liquidated and dissolved on terms that are just.

[5] Detailed pleadings were exchanged by the parties in the arbitration proceedings.

[6] Terekhov claims that he owns common shares in CVMR. Terekhov’s claim alleges that Kamran Khozan, acting on behalf of CVMR, had told him that CVMR would pay US$1 million in dividends to him in relation to his share ownership.

[7] CVMR has defended Terekhov’s claim and alleges that Terekhov’s claims are statute-barred by the Limitations Act, 2002, S.O. 2002, c. 24, S. B. CVMR also alleges that Terekhov had given up any entitlement to common shares in CVMR in exchange for preference shares which were of only nominal value.

[8] In response, Terekhov amended his claim to assert that he had been swindled by Khozan into relinquishing his common shares.

[9] Terekhov also delivered a reply to CVMR’s defence which focuses on his claim for dividends and contains allegations relevant to the limitation period argument. In it, he states (at paras 4-6):

4. The claimant relies on the principle of discoverability set out in section 5 of the Limitations Act, 2002. He states that it was not until January 2014 that he obtained knowledge that the respondent Chemical Vapour Metal Refining Inc. (“CVMR”) would renege on its stated promise to pay $1 million USD in dividends. January 2014 was the date of the first missed payment. This would be the earliest that the claimant could know that a proceeding was an appropriate means to seek a remedy.

5. The claimant relies also on acknowledgements made by Kamran Khozan (“Khozan”) on behalf of CVMR of its liability to pay the dividend, and the claimant relies on section 13 of the Limitations Act, 2002 in that regard.

6. The claimant further relies on the doctrine of fraudulent concealment. He states that the respondents concealed from him the existence of his claim in that Khozan gave repeated assurances that the claimant’s shareholding would be honoured and that a $1 million USD dividend would be paid. Such statements, which were made repeatedly up to the time of the claimant’s dismissal on March 6, 2014, and they foreclosed any need for the claimant to take any action to protect his interests.

[10] The parties agreed to bifurcate the arbitration to permit CVMR to bring a summary judgment motion.

[11] In its motion for summary judgment, CVMR requested the following relief:

(a) an Award dismissing the claims set out in the Statement of Claim that are statute-barred under the Limitations Act, 2002, S.O. 2002, c. 24, Scb. B., sections 4 and 5;

(b) a declaration that Terekhov owns no shares of Chemical Vapour Metal Refining Inc.;

(c) in the alternative, a declaration that Terekhov is the owner of 175,000 Preference Shares of the Respondent, CVMR having the terms and conditions described in a Special Resolution of shareholders and Directors dated April 11, 2005;

(d) an Award striking those claims of the Claimant in the Amended Statement of Claim on the basis that they are not arbitral under section 4.09 of the Shareholders Agreement dated January 1, 2000 or the parties’ agreement to arbitrate the Claimant’s oppression remedy claims as a creditor.

[12] The parties agreed on the procedure by which CVMR’s motion would be heard. Any affidavits of the parties would constitute their evidence in chief, the affiants would be cross-examined before the Arbitrator, “will say” statements for any additional witnesses would be exchanged, and such witnesses as determined by the parties would be called to give evidence. The motion then would be argued before the Arbitrator.

[13] In Terekhov’s affidavit sworn July 7, 2015 for the purposes of the motion, Terekhov addresses his claim to dividends as follows:

42. In 2004, CVMR entered into a contract with a Chinese business interest by the name of Jilin Jien Nickel Industry Co., Ltd. (“Jilin”). The contract price was approximately $27 million USD, if which $9.1 million USD represented the transfer of technology. Within a short time after the signing of the Technology Transfer Agreement dated June 12, 2004 with Jilin, Khozan promised me, for the first time, that I would be entitled to a dividend of $1 million USD following the payment of $9.1 million due from Jilin.
…. 2016 ONSC 6845 (CanLII)

45. After Khozan announced to me that the company would be paying me $1 million USD in exchange for my services, I was very happy. I felt that my services had been recognized, and while I was not aware of all of the particulars, I knew that Jilin contract had been singularly lucrative for the corporation.

46. Khozan told me he would not pay me the $1 million all at once, but he stated that this was for tax purposes, and he recommended that I keep my money with his financial advisor in Switzerland, because this would give me much better return.

47. Khozan also made it clear to me that the payment to me of the $1 million USD dividend would depend upon when CVMR received payment from Jilin for the technology transfer. I was never aware, prior to this litigation, when Jilin may have completed this payment.

48. In the approximate time frame of the end of 2005 to the beginning of 2006, Khozan discussed further the payment of dividends of $9.1 million, of which CVMR would pay $1 million USD to me, being part of my proportionate share. Khozan told me that he would assist me in protecting these payments from excessive tax, and he introduced me to Florian Schefer (“Schefer”) of Credit Suisse. Annexed hereto as Exhibit “G” is communication from Schefer to me dated July 25, 2006, concerning the anticipated investment of $2 million. I assumed the other $1 million belonged to Khozan.

49. I am not aware that there was any written record made of the promise to pay this dividend. I saw no need for that. I trusted Khozan completely.

50. I met with Schefer several times. Once, Schefer traveled to Toronto specifically to meet with me to discuss the investment of my anticipated dividend. Khozan participated in that meeting. Khozan confirmed at that time that I would be receiving a dividend of $1 million USD. Subsequently, Khozan and I met with Schefer in Geneva, again to discuss the investment of our anticipated dividends.

80. I met with Khozan every four months or so, either because he was visiting Toronto or, on other occasions, he brought me to Dubai to meet with him. I met with him in other places as well. Every time I met with him I raised this issue of the payment of $1 million. He repeatedly assured me that the money was “safe and secure, “and he said that the money was growing as well. I believed him. I trusted him completely, and at that point I had no reason to doubt his word.

81. After a time, I began to ask Khozan when this money would begin to be paid. In my recollection, I began to ask him this in or around 2009, some three years after the meetings with Schefer.

82. Khozan told me that he would begin to make payments. However, he did not make any payments at all until December of 2012. He suggested that he make payments to my wife, given that she was in a lower income tax bracket.

83. He made one payment, in December of 2012, in the sum of $5,000.

86. The first time that I had occasion to suspect that something was amiss was in the beginning of 2013 when the second monthly $5,000 payment failed to materialize. After that, our relationship began to decline. Ultimately, on March 6, 2014, Khozan met with me and told me that I would be laid off, commencing March 14, 2014 for 34 weeks. However, even then, he repeated his promise to pay the $1 million USD dividend. I asked him at that point why it was he had stopped making payments, and he told me that it was because I had asked him to. This was not true, and I began to suspect that he was resiling from his oft-repeated promise.

[14] In addition to Terekhov’s affidavit evidence, witness statements were provided by him that set out the evidence of Vladimir Popik and of Sandra Kuula, an employee of Falconbridge. These witnesses testified at the motion hearing via Skype.

[15] CVMR delivered affidavits sworn by Khozan on July 10 and 15, 2015. Khozan denies Terekhov’s version of events or that any obligation is owing to him. He confirms that he had introduced Terekhov to Schefer in Geneva, but did not produce any direct evidence from Schefer by way of a “will say” statement or otherwise.

[16] At the request of CVMR, Terekhov produced approximately 500 documents prior to the summary judgment motion. All questions raised in advance of the hearing were fully answered. Relevant e-mail correspondence was included in the documents provided to CVMR. Counsel for CVMR required inspection of the full email trail, all of which was provided by Terekhov.

[17] The summary judgment motion hearing took place before the Arbitrator on November 10 and 11, 2015. 2016

[18] In the context of its argument on the limitation period issue, CVMR argued before the Arbitrator that Terekhov owns no shares in CVMR or, in the alternative, owns only preference shares in the company which are of nominal value.

[19] From an early stage in the proceedings, Terekhov’s position has been that Khozan had deceived him (and another shareholder, Popik) into converting common shares in CVMR into preference shares of nominal value by falsely assuring them that converting their shares in this way would shield them from litigation by Falconbridge, a company with which CVMR was doing business.

[20] During the motion, Terekhov testified as he had done in his affidavit: that Khozan had repeatedly assured him that his dividends had been declared and the resulting $1 million to be paid to him had been put in a Swiss bank account and was safe and secure.

[21] Terekhov never advanced a claim for any actual money said by Khozan to have been paid by CVMR into a Swiss bank account. Rather, his references to Khozan’s statements regarding the purported declaration and whereabouts of the dividend were mentioned only to the extent that they are relevant to the discoverability of his claim for payment of the dividend and to explain why legal action was not initiated by him earlier.

[22] Although the issue of Terekhov’s share ownership thus had been squarely placed before the Arbitrator on CVMR’s summary judgment motion, counsel for CVMR characterizes Terekhov’s position on the motion as advancing a “new claim” and amounting to “trial by ambush”.

The Arbitrator’s Decisions

[23] A few weeks after the hearing, the Arbitrator released his Interim Award in which he dismissed CVMR’s summary judgment motion. The Arbitrator summarized his findings:

68. I make no findings with respect to the relief claimed by the Claimant, save that I declare him to be the owner of common shares and that his claims are not defeated by the Limitations Act.

[24] In so doing, the Arbitrator addressed CVMR’s limitation defence:

64. If no dividend was paid out of CVMR and no investment was made for the Claimant, as claimed by Khozan, then Khozan deceived the Claimant and cannot rely on the limitation period to defeat the claim. He has misrepresented the state of CVMR’s affairs to his minority shareholders and employee intending it to be relied upon. It was relied upon by that Claimant.

65. In those circumstances, the limitation period defence is not available and does not afford the Respondents with any defence. Equity will not permit a statute to be used as an instrument of fraud. See Giroux Estate v. Trillium Health Centre, 2005 CarswellOnt 241 (Ont. Court of Appeal) at para. 28 and following.

[25] Following its release, CVMR requested another hearing to change, correct or explain the Interim Award.

[26] The parties tendered written submissions. In addition, on June 21, 2016 the parties attended before the Arbitrator to make oral submissions in respect of CVMR’s objections to the Interim Award.

[27] On July 21, 2016, the Arbitrator issued a Procedural Order. The Arbitrator did not vary his dismissal of the limitation defence and all his findings of fact, but retracted his finding that Terekhov owned shares in CVMR. He determined that the parties ought to be given the opportunity to make submissions on this specific issue before any finding is made.

[28] The Arbitrator expressly rejected the contention of CVMR that it was the victim of a “trial by ambush”, stating:

44. Once again, the parties told conflicting narratives regarding the representation by Khozan that a dividend would be paid and at some point that a dividend had been paid and the Claimant’s share was safely invested in Switzerland. Again, in my respectful opinion, the parties were alive to the conflict in their narratives, prepared their witnesses accordingly, led their evidence, cross examined and had every reason to expect that as part of my mandate, I would make findings of credibility in reaching my decision on the evidence.

47. The Claimant was vigorously cross examined on his evidence of the representation by Khozan that his money was safely invested. He was cross examined on the 2 emails sent to Khozan dated Dec 12/07 and Jan 17/08 purporting to authorize the transfer of the invested funds. No adjournment was sought to call additional evidence. Khozan was asked about the investment and the emails in cross examination, and the matter was fully argued.

50. I did not find that the misrepresentation was actionable. The Claimant does not advance the misrepresentation as a cause of action, at least, not on this motion. Rather, my finding is that the misrepresentation led the Claimant to believe that his shareholdings would be honoured and that no action was necessary to protect his interest. 2016

[29] In respect of the share ownership allegation, the arbitrator found that no surprises had been sprung on CVMR, and stated:

43. That there would be a conflict in the testimony of the parties on the Respondents’ motion was flagged in the affidavits served well in advance of the hearing. In my respectful view that Parties had every reason to anticipate the conflicting narratives; they had every opportunity to prepare for it; they called their evidence and expected me to make findings of credibility.

Law and Discussion
[30] The court should not exercise its jurisdiction to reverse an interlocutory decision of an arbitrator or to deal piecemeal with a series of decisions by an arbitrator. To do so would constitute a serious reproach to the ability of our system of arbitration to serve the needs of users of the arbitral process (see: Inforica Inc. v. CGI Information Systems & Management Consultants Inc., 2009 ONCA 642).

[31] CVMR has attempted to skirt this principle by styling its application as one which seeks relief purportedly because (it argues) the Arbitrator acted in such a way as to render the proceedings fundamentally unfair. Although I consider this application as one which at its core seeks to appeal an interlocutory decision of the Arbitrator and therefore should not be entertained at this stage, I will say now that I do not agree that any unfairness has been demonstrated here.

[32] Nothing in the record suggests that CVMR was treated unequally or unfairly in the arbitration. All of what CVMR says was “sprung” on them at the hearing appeared in Terekhov’s pleadings and in his affidavits well before the hearing. No new material facts were asserted at the hearing.

[33] Further, at the hearing CVMR declined to call any reply evidence, despite being given an express opportunity to do so. At no time during the hearing did CVMR ever request an adjournment.

[34] In my view there has been no procedural unfairness or apprehension of bias. The Arbitrator shows no indication of having closed his mind with respect to all issues that properly remain to be determined by him.

[35] For these same reasons, I see no basis upon which giving directions for the completion of the arbitration would be appropriate. That process remains within the purview of the arbitrator, with input from the parties.

[36] As a result of these reasons, this application is dismissed.

[37] If the issue of costs cannot be agreed upon, written submissions may be delivered by Terekhov within 15 days of the date of release of this decision and by CVMR within 10 days thereafter.

Stewart J.

Released: November 23, 2016