Zenda Mount Pearl Square Enterprises Limited Partnership applicant And: MP TEI REALTY Limited Partnership Respondent, 2023 NLSC 142

court crest IN THE SUPREME COURT OF NEWFOUNDLAND AND LABRADOR GENERAL DIVISION Citation : Zenda Mount Pearl Square Enterprises Limited Partnership v. MP TEI Realty Limited Partnership , 2023 NLSC 142 Date : October 27, 202 3 Docket : 202201G1494 IN THE MATTER OF an Arbitration proceeding pursuant to the Arbitration Act , R.S.N.L. 1990, c. A-14 Between: Zenda Mount Pearl Square Enterprises Limited Partnership applicant And: MP TEI REALTY Limited Partnership Respondent Before: Justice Vikas Khaladkar On Judicial Review From: A Decision of Sole Arbitrator Craig Garson, K.C. dated the 18th day of March, 2022.

Place of Hearing: St. John’s, Newfoundland and Labrador Date of Hearing: September 15, 2023

Summary: The decision of the Arbitrator was upheld.

Appearances: Darren D. O'Keefe Appearing on behalf of the Applicant Philip J. Buckingham Appearing on behalf of the Respondent Authorities Cited: CASES CONSIDERED: Long Harbour Employers Association Inc. v. Resource Development Trades Council of Newfoundland and Labrador , 2023 NLCA 24 ; Canada (Minister of Citizenship and Immigration) v. Vavilov , 2019 SCC 65 ; Layman v. Layman Estate , 2016 NLCA 13 ; Creston Moly Corp. v. Sattva Capital Corp. , 2014 SCC 53 ; N.L.N.U. v. Newfoundland & Labrador (Treasury Board) , 2011 SCC 62 STATUTES CONSIDERED: Arbitration Act , R.S.N.L. 1990, c.

A-14 ; Judgment Interest Act , R.S.N.L. 1990, c. J-2 ; Excise Tax Act , R.S.C. 1985, c. E-15 REASONS FOR JUDGMENT Khaladkar J. : INTRODUCTION [ 1 ] Two limited partnerships refinanced a jointly owned commercial property in Mount Pearl, Newfoundland and Labrador. From the proceeds of the refinancing the limited partnerships, each with a 50% interest, agreed to put $2,000,000.00 into a guaranteed investment certificate and divided the remaining $5,300,000.00 equally. [ 2 ] Enter the rogue – Gerald Levy (“Levy”).

Levy, being one of the principals of the Applicant, Zenda Mount Pearl Square Enterprises Limited Partnership (“Zenda”) had siphoned off, through fraudulent and deceitful means, all of the funds available from the refinancing except $2,650,000.00. [ 3 ] Levy caused $2,650,000.00 to be transferred and delivered to Zenda. The Respondent, MP TEI Realty Limited Partnership (“MP TEI”) received nothing. [ 4 ] The parties proceeded to have their dispute with respect to the unequal distribution resolved by way of binding arbitration. Craig M. Garson, K.C. (“Arbitrator”) made an award in favour of MP TEI on March 18, 2022.

He ordered that Zenda disgorge itself of one-half of the $2,650,000.00 received by it, and to pay $1,325,000.00 to MP TEI together with interest under the Judgment Interest Act , R.S.N.L. 1990, c. J-2 , from April 24, 2019. Subsequently Garson, K.C. ruled that each party should bear its own costs of the arbitration. [ 5 ] The parties entered into an Arbitration Agreement on September 2, 2021.

Clause 7 of that agreement provided: The award of the Arbitrator when given in writing and signed by him shall be final, conclusive and binding upon the parties subject to the right of appeal provided in the Act . [ 6 ] The Arbitration Act provides at

section 14 as follows: Setting aside of award 14 .

(1) Where an arbitrator or umpire has misconducted himself or herself, or an arbitration or award has been improperly procured, the court may set the award aside.

(2) An application in respect of an arbitration or award referred to in subsection (1) may be made to the Trial Division within 60 days of the receipt of that arbitration or award by the parties to the application. [ 7 ] Zenda has appealed the Arbitrator’s decision on a number of grounds that it said amount to “misconduct” on the part of the

Arbitrator. The misconduct complained of consists of reviewable errors on rulings of facts and law – in Zenda’s submission. facts [ 8 ] The Arbitrator indicated that the facts were largely not in issue. [ 9 ] Zenda Realties Limited (“ZRL”), a company wholly owned and operated by Levy, entered into an arrangement with Time Equities Inc. (“TEI”) to jointly purchase the subject property known as Mount Pearl Square (“MPS”).

Over a period of four years the parties acquired two additional properties – one in Mount Pearl and the other in Bridgewater, Nova Scotia. [ 10 ] In July, 2008 TEI and ZRL purchased MPS through a nominee company, TZ Mount Pearl Square Inc. (“TZ MPS”). The shares in the nominee company were owned on a 50/50 basis by two limited partnerships – Zenda and MP TEI.

This arrangement was governed by a Nominee Agreement. [ 11 ] It is an uncontested fact that the investors in Zenda, except Levy, were not involved in any way in the fraudulent conduct of Levy. [ 12 ] At the time of the MPS acquisition the parties entered into a Co-Owners Agreement (“COA”). The arbitration in this matter was commenced pursuant to alleged breaches of the COA. [ 13 ] The COA’s terms included the following:

a) all proceeds from the property to be split 50/50 by way of special distribution or special capital event;

b) the Co-Owners are to establish a “Co-Owner’s Committee” comprised of two nominees from the Zenda group and two nominees from the MP TEI group. The Co-Owner’s Committee was to manage the affairs of the property; and

c) any payments or disbursements were to be approved by at least two members of the Co-Owner’s Committee. [ 14 ] In practice a Co-Owner’s Committee was never formed. Instead the parties each appointed two directors to the board of TZ MPS. In July, 2008 Levy, his son and two individuals from TEI constituted the board. From that point on Levy effectively controlled the property – having had ZRL appointed as the day-to-day property manager. [ 15 ] The three properties owned across Atlantic Canada had similar ownership structures.

However, separate Limited Partners, General Partners and nominee companies were set up by TEI and ZRL for each property. The identities of the limited partners varied from project to project. [ 16 ] The four persons set up to manage the initial investment at MPS also managed the other properties in Mount Pearl, NL and Bridgewater, NS. [ 17 ] In April, 2019 the Co-Owners refinanced MPS. Levy instructed TZ MPS’s counsel in relation to the refinancing. After paying the existing mortgage and legal fees and disbursements, $6,297,000.00 remained for TZ MPS.

The Co-Owners agreed to set up a reserve fund of $2,000,000.00 and the balance would be paid as a 50/50 equity distribution in accordance with the terms of the COA. [ 18 ] Levy paid $2,650,000.00 to Zenda and paid nothing to MP TEI. [ 19 ] Zenda took the position that it received the money that it was entitled to receive under the terms of the parties’ agreement. MP TEI took the position that it should have received half of the amount that was tendered to Zenda. ISSUE NO. 1 1. Is a judicial review of the arbitration award available?

If so, what is the applicable standard of review? [ 20 ] The relevant sections of the Arbitration Act state as follows; Award final 36 . The award made by arbitrators or an umpire is final and binding on the parties and persons claiming under them. Setting aside of award 14 .

(1) Where an arbitrator or umpire has misconducted himself or herself, or an arbitration or award has been improperly procured, the court may set the award aside. [ 21 ] By way of background, the parties are sophisticated investors. They agreed, in paragraph 8.2 of their COA, that any dispute

would be resolved through arbitration. Paragraph 8.2 states in part as follows: 8.2 Arbitration If there is any dispute between the parties which they are unable to resolve, any party to such dispute may, and it shall be condition precedent to commencing any action or other proceeding with respect to such dispute, require that the matter in dispute be submitted to arbitration before a single arbitrator to be agreed upon or to be appointed pursuant to the provisions of the Commercial Arbitration Act (Newfoundland and Labrador).

The decision of the arbitrator shall be final and binding except to the minimum extent an appeal is permitted pursuant to said act or the laws of Newfoundland and Labrador. … [ 22 ] According to the legislation, it is incumbent upon an applicant wishing to set aside the award of an arbitrator to show either that the arbitrator misconducted himself or, alternatively, that the arbitration award was improperly procured. [ 23 ] I take the term “misconduct” to mean some action by the Arbitrator that would offend the rules of natural justice – the right to an impartial decision that is free from bias, is within the jurisdiction of the Arbitrator or other, potential, wrongdoing.

I do not agree with the Respondent’s characterization that “misconduct” includes errors on rulings of fact and law. The words “improperly procured” in the statute would cover those kinds of errors. [ 24 ] There is no evidence before me that would justify setting aside the Arbitrator’s award on the basis of misconduct – meaning a breach of the rules of natural justice. [ 25 ] The question, then, becomes whether, under section 14(1) of the Arbitration Act , the decision or award was “improperly procured”.

In that regard, the Newfoundland and Labrador Court of Appeal ruled, in Long Harbour Employers Association Inc. v. Resource Development Trades Council of Newfoundland and Labrador , 2023 NLCA 24 , that arbitral awards are subject, in this jurisdiction, to review. The standard to be applied in determining whether an award is appropriate is reasonableness unless the matter falls into one of the exceptional categories outlined in Canada (Minister of Citizenship and Immigration) v. Vavilov , 2019 SCC 65 . Those exceptional cases do not apply to the facts of the case before me.

I must determine, therefore, whether the Arbitrator’s decision was reasonable under the circumstances. [ 26 ] I find that the Arbitrator’s award is, under the Arbitration Act , subject to review if it can be shown that the award was improperly secured. The standard I must utilize in determining whether this is so is reasonableness.

The burden of proof is upon the Applicant, Zenda, to show that the award is improper as a matter of fact, law or mixed law and fact and that the award falls outside of any potential reasonable outcome. [ 27 ] I accept that the Newfoundland and Labrador Court of Appeal set out the appropriate test relating to the application of the reasonableness standard when it said, at paragraph 20 of its decision in Layman v.

Layman Estate , 2016 NLCA 13 , that reasonableness requires the court to consider whether the decision is justified, transparent and intelligible – and whether it is a decision that a reasonable decision maker could have made. the Arbitrator’s award THE FACTS FOUND BY THE ARBITRATOR [ 28 ] The Arbitrator’s decision carefully articulates the relationship between Zenda and MP TEI from its inception.

It details the various steps taken by the parties to acquire their investment, the agreements that were entered into as a consequence thereof and how, eventually, Levy committed fraud and theft by helping himself to funds that belonged to the venture created by the limited partnerships. [ 29 ] I see no fault in his analysis of the facts, and I find that the Arbitrator did not make any error insofar as the facts are concerned.

THE LEGAL EFFECT OF ENTERING INTO A JOINT VENTURE AGREEMENT [ 30 ] The Arbitrator found that a joint venture agreement (“JVA”) that was entered into by the parties did not supplant the COA that they had earlier entered into. The Arbitrator reviewed the agreements and, as well, the evidence led in relation to the intention of the parties. He ruled that he would disregard the viva voce evidence of intention and, rather, rely upon an

interpretation of the agreements based upon the guidelines set out by the Supreme Court of Canada in Creston Moly Corp. v. Sattva Capital Corp. , 2014 SCC 53 . [ 31 ] In Creston the Supreme Court of Canada instructed that the contract must be read as a whole, giving the words used their ordinary and grammatical meaning consistent with the surrounding circumstances known to the parties at the time of the formation of the contract. [ 32 ] The COA contained a binding arbitration clause. The JVA contained no such provision. The COA applied the laws of Newfoundland and Labrador to any

interpretation, the JVA applied the laws of the Province of Quebec. Zenda argued before the Arbitrator that the JVA supplanted the COA and governed the relationship between the parties. Zenda submitted that MP TEI ought to have sued in Quebec for a remedy. [ 33 ] The Arbitrator found that the subject-matter of the COA defined the relationship between the parties. The Arbitrator found that the JVA was entered into some six and a half years later and, on his

interpretation of the language found in the JVA, he found that it was entered into for the purpose of addressing an issue under the Excise Tax Act , R.S.C. 1985, c. E-15 . The Arbitrator found that in order for the JVA to replace the COA, both must have the same subject matter. He found that they do not have the same subject matter. In the Arbitrator’s estimation the COA dealt with the relationship between the Co-Owners whereas the JVA dealt with an issue that needed to be addressed under the Excise Tax Act .

[ 34 ] I have reviewed both agreements and find that the Arbitrator’s characterization of the two agreements is justified, transparent and intelligible. The parties to the JVA are not one and the same as the parties to the COA. The JVA is more concerned with articulating the responsibilities of the Agent-Operator and ensuring that its role as a bare trustee is appropriately documented for Excise Tax Act purposes. [ 35 ] At the arbitration hearing Zenda argued that the JVA had supplanted the COA and, therefore, there was no right to an arbitration since the JVA was silent about dispute resolution mechanisms.

Zenda argued that since the JVA required the laws of Quebec to apply to the agreement, that any action contemplated by MP TEI should be commenced in the Province of Quebec. [ 36 ] The Arbitrator had misgivings about allowing Zenda to make the argument – given that it had replied to the request for arbitration some months after it had been made.

However, in the Arbitrator’s analysis the JVA did not supplant the COA and, he found, the arbitration was properly commenced and conducted. [ 37 ] Where it is sought to impugn the jurisdiction of a decision-maker, such as an arbitrator, the better course is to enter a conditional appearance at the outset with a view to determining the jurisdictional question.

When a party enters an unconditional appearance, it is fair on the part of all other parties to infer that the party is attorning to the jurisdiction of the decision-maker. [ 38 ] I find that the Arbitrator’s decision concerning the legal impact, or lack thereof, of the JVA is within the range of acceptable, reasonable outcomes. I am not prepared to set aside his ruling on that basis. ISSUE NO. 2 2. Did the Arbitrator incorrectly apply the equitable principle of “clean hands” to the facts of this case? [ 39 ] The Applicant argued that the investors in Zenda were not complicit in Levy’s fraud.

It said that the capacity in which Levy was acting has a bearing upon the ultimate liability of the limited partners. It said that the Arbitrator failed to address the issue of whether Zenda can be held accountable for the wrongful acts of Levy. This issue was argued before the Arbitrator. [ 40 ] The Arbitrator found that Levy knew that he had improperly diverted $2,000,000.00 of the refinancing funds. He found that Levy knew, prior to proposing to distribute the $5,3000,000.00, that there would be insufficient funds to pay each Co-Owner $2,650,000.00.

The Arbitrator found, at page 21 of his decision, that: … TZ-MPS LP (through Recny) was induced to enter into an “agreement” with Zenda MPS LP (through Levy) as a direct result of Levy’s fraudulent misrepresentations. [ 41 ] And later on the same page, the Arbitrator outlined Zenda’s arguments, and dispatched them, as follows: Zenda MPS LP raised many arguments, and pointed to many circumstances, in support of its position that TZ-MPS LP either knew, or ought to have known, that Levy should not have been delegated to deal with the proceeds of the refinancing.

Zenda MPS LP says that this should disentitle TZ-MPS LP to a remedy, both in contract and in equity. As a matter of law, even if proven (which it has not), the negligence of a contracting party does [not] bar recovery in a breach of contract claim where, as here, the contracting party is the victim of a willful fraud. [The word “not” is added. Its absence appears to be an inadvertent omission]. [ 42 ] The Arbitrator rejected Zenda’s arguments relating to negligence and equity. He based his analysis upon MP TEI’s breach of contract claim.

He outlined that the parties had agreed, at the inception of their relationship, in

Article 6.02 of the COA that each partner would receive its “proportion” of all financing arising from the property. What was proposed by Levy, and accepted by Recny, was a 50/50 division of the amounts that Levy said were available to be distributed. The Arbitrator found, under the circumstances, that $2,650,000.00 ought not to have been paid to Zenda – since this was in breach of the agreement made by the parties. [ 43 ] The Arbitrator was not wrong in electing to base his decision upon a breach of contract.

It is within one of a range of acceptable, reasonable outcomes and, for that reason, I cannot find fault with it. [ 44 ] The Applicant argued that MP TEI should have taken action against the other limited partnerships to whom Levy had directed funds that they were not entitled to. It can be similarly said Zenda could take the same action – but has not done so. [ 45 ] In N.L.N.U. v.

Newfoundland & Labrador (Treasury Board) , 2011 SCC 62 , the Supreme Court of Canada said at paragraph 16: Reasons may not include all the arguments, statutory provisions, jurisprudence or other details the reviewing judge would have preferred, but that does not impugn the validity of either the reasons or the result under a reasonableness analysis.

A decision-maker is not required to make an explicit finding on each constituent element, however subordinate, leading to its final conclusion. … In other words, if the reasons allow the reviewing court to understand why the tribunal made its decision and permit it to determine whether the conclusion is within the range of acceptable outcomes, the Dunsmuir criteria are met. [ 46 ] The negligence of one of the contracting parties, even if proved, does not trump a claim for a breach of contract.

The Arbitrator was entitled to base his decision upon the footing of a contractual breach and, in doing so, his decision was not unreasonable. issue no. 3 3. Did the Arbitrator incorrectly interpret and apply the equitable remedy of disgorgement on a breach of contract claim? [ 47 ] The Arbitrator considered two alternatives at page 22 of his decision: firstly, to have Zenda return the entire $2,650,000.00 that it had received or, secondly, to have Zenda pay one-half, or $1,325,000.00 to its Co-Owner. [ 48 ] The Arbitrator’s award is more akin to an order that monies be returned that had been paid under mistake.

The breach of contract consisted of not paying the monies that were available out to the Co-Owners in equal shares. The characterization of the remedy

as “disgorgement”, “repayment”, “damages” or something else is quite superfluous. The Arbitrator’s intention was to ensure that each party received what it was entitled to receive under the terms of the agreement that they had made. The Arbitrator’s award is a form of restitution in integrum . There is nothing unreasonable in the Arbitrator having so ordered, or in the use of the term “disgorgement”. issue no. 4 4. Did the Arbitrator impugn the limited partners of Zenda with the fraudulent conduct of Levy? [ 49 ] The Arbitrator’s award is solely against Zenda – the limited partnership.

In no way does the award reach into the pockets of the limited partners. The property owned by the Co-Owners is an ongoing enterprise. The real estate has value. It earns income. I am certain that if the Arbitrator’s award is registered as a judgment in the Supreme Court, there will be opportunity to determine how, exactly, MP TEI will receive its payment – that might be through unequal distributions of profit for a time, it may be as a result of the judicial sale of the property.

What is clear, though, is that each of the limited partners is only affected, at most, to the value of their investment. conclusion [ 50 ] In view of the foregoing I decline the Applicant’s invitation to set aside the Arbitrator’s award. I find that the Arbitrator’s award was justified, transparent and intelligible. It is a decision that a reasonable Arbitrator could have made. [ 51 ] The Respondent shall have its costs of the Application calculated under Column III of the

Schedule of Costs. _____________________________ Vikas Khaladkar Justice