Not an April Fool’s Joke: Bogus Court Order Enforcing Arbitrator’s Mareva Injunction Overturned

The Ontario court decision in Farah v. Sauvageau Holdings Inc., 2011 ONSC 1819 (CanLII) per Perell, J. has the makings of a great April Fool’s Day joke. The lesson is don’t believe everything you read,  including what appears to be a court order.

The motion involved an application to set aside a Mareva injunction granted by an arbitrator in arbitral proceedings. The respondents brought a motion to recuse the arbitrator and to set aside a Mareva injunction granted purportedly pursuant to the Arbitration Act, 1991, S.O. 1991, c. A.17.

The problem? Arbitrators do not have the power to grant injunctive relief against non-signatories to the arbitration agreement. As Perell, J. observes

[63]   In my opinion, there is nothing in the Arbitration Act, 1991 that empowers arbitrators to grant Mareva injunctions or for that matter to appoint receivers, grant Anton Pillar orders, or grant Norwich orders. Granting an interlocutory injunction that requires financial institutions to prevent the removal of monies and assets and to disclose and deliver up records and report to a litigant, is not an order in which the arbitrator is ruling on the scope of the arbitration agreement or on the scope of his or her jurisdiction; it is an order in which the arbitrator purports to enjoin or direct the conduct of strangers to the agreement to arbitrate who are not bound by the jurisdiction of the arbitral tribunal.

[73]   None of Sauvageau Holdings’ arguments are adequate to prove that arbitrators have the same jurisdiction as judges of the Superior Court. I conclude that while Mr. Montgomery had the jurisdiction to make an injunctive order or arbitral award against Mr. Farah and Ms. Mosharbash as parties to the agreement to arbitrate, he did not have the jurisdiction to grant a Mareva injunction effecting persons who did not sign the agreement to arbitrate.

Apparently, Sauvageau Holdings filed the interim Mareva injunction in the Superior Court in Newmarket without notice to either Farah and third party affected by the arbitrator’s order and had the court staff issue and enter the order. Justice Perell held that this was “improper” and noted that to enforce an arbitral award (including an interim order), a party must make an application under s. 50 of the Arbitrations Act, 1991 on notice to all affected parties.

On December 5, 2010, Sauvageau Holdings served new statements of claim (alleging fraudulent conspiracy and fraudulent conveyances between Farah and Mosharabash) and a copy of the arbitral-Mareva injunction order.

On December 15, 2010, Farah and Mosharbash brought a motion to have the arbitrator, The Honorable Mr. Montgomery recuse himself and for an order setting aside the Mareva injunction. At the hearing on December 15, 2010, they presented very little evidence to rebut the material filed by Sauvageau Holdings and rather relied on a short affidavit from a law clerk employed by their lawyer. The arbitrator dismissed the motion and continued the Mareva injunction. Sauvageau Holdings then sent copies of what Justice Perell describes as a “bogus Order of the Superior Court” to major banks, other financial institutions, Farah’s employer and his real estate agent, and Mosharbash’s father, further noting:

[43]  For present purposes, I need not go into the details, but the recipients responded to the bogus Mareva injunction order as if the order was a lawful order of the Superior Court. Mr. Farah and Ms. Mosharbash have been unable to deposit cheques, including Mr. Farah’s paycheck and the family’s child tax benefit cheques. Mr. Farah was temporarily dismissed from his employment as a restaurant cook because his employer was disturbed by having to deal with the bogus order.

In the end, the court dismissed the motion to disqualify the arbitrator without costs and the applicant’s motion to enforce the Mareva injunction pursuant to s. 50 of the Arbitrations Act, 1991 without costs. Perell, J. did grant judgment to Sauvageau Holdings in the fraudulent conveyance action without costs and granted a Mareva injunction against Farah without costs, but dismissed the motion for a Mareva injunction Mosharbash with the matter of costs to be determined.

Does any one else think that an arbitrator exceeding his or her jurisdiction should have been argued as an alternative ground for recusal? (h/t Igor Ellyn, Q.C. via Twitter: @EllenLawLLP )

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