ONTARIO – Arbitration – Limited scope of judicial review under s. 45(2) and 46 of the Arbitration Act, 1991, S.O. 1991, c. 17 (“AA”) – Where an Arbitrator made extensive factual findings in a complicated contract dispute arising from a construction project and made no errors on extricable questions of law, the Arbitrator’s Awards were immune from appeal. Judicial review of arbitral awards under s. 45(2) is limited to questions of law. The application judge erred by deciding that the Arbitrator made extricable errors of law in the arbitral awards.
Tall Ships Development Inc. v. Brockville (City)
2022 ONCA 861 (CanLII) (December 13, 2022)
ONCA (Doherty, Huscroft and Harvison Young JJ.A.)
The ONCA heard an appeal from the decision of the application judge, S. Gomery J. (“the application judge”) setting aside three arbitral award of Arbitrator William Neville and appointing a new arbitrator to hear the case.
In a very detailed decision, Harvison Young J.A., writing the unanimous decision of the Court, set aside the application judge’s decision and restored the Arbitrator’s awards. (paras. 1, 97) on the basis that the application judge erred in finding the that the Arbitrator made errors of law. ONCA reiterated that judicial review of arbitral awards under s. 45 (2) of the AA is limited to questions of law and that in this case, the parties had agreed that an appeal from the Arbitrator’s awards was permissible only on questions of law.
Overview and Background
The parties appointed the Arbitrator to resolve disputes arising out several interrelated municipal construction contracts between Tall Ships, a developer, and the City of Brockville. (para. 4)
Under a 2007 Public-Private Partnership Agreement (“PPPA”), the parties agreed that disputes would be resolved by arbitration by a single arbitrator, whose decision would be final, subject only to appeals on questions of law under AA. s. 45(2). (para. 2)
Under the PPPA, Tall Ships would develop the property and, when it was “substantially complete”, Tall Ships would sell the property to Brockville for a price that was set out by a formula in a further agreement dated March 9, 2011. Part of that formula included the cost of construction, the budget for which was defined in that agreement as “$7,400,000 relating to the design and construction of the approximate 27,000 square foot MDC base building and MDC Interior Fit-Ups”.
There were three questions on appeal:
- Whether Brockville was liable for the difference of about $1,800,000 between the $7,400,000 “estimate” and the actual cost of construction. ( 7-8)
- Whether Brockville was liable for $929,893 for remediation costs on the basis that they were out of time pursuant to the Brownfields Agreements (“BA”), another contract between the parties; ( 10) and
- Whether Tall Ships was entitled to claim interest one year after it was submitted. Tall Ships did not advise Brockville that it would be claiming interest on the invoice prior to the closing date but asked for prime plus five percent in interest in the arbitration. ( 11)
After a four-week hearing, the Arbitrator dismissed all of Tall Ships’ claims in three awards as follows:
- In the first award, the Arbitrator rejected Tall Ships’ claim for remediation costs under the BA,(because the claims were not brought in the timeframe set out in the PPAA). ( 18-24)
- In the second award, the Arbitrator found that Tall Ships was responsible for the cost overruns and that Tall Ships had not kept Brockville informed as to cost overruns despite knowing that the project would be much larger, and cost substantially more, than originally planned. The Arbitrator dismissed Tall Ships’ claims based on unjust enrichment because it had failed to show a lack of juristic reason for its loss and Brockville’s corresponding enrichment. ( 51-53)
- In the third award, the Arbitrator rejected Tall Ships’ claim for interest on an invoice paid a year after it was submitted because Tall Ships did not advise Brockville that it would be claiming interest on the invoice. prior to the closing date but asked for prime plus five percent in interest in its statement of claim. . ( 12, 90-91)
Application Judge’s Decision
The application judge set aside the three arbitral awards and ordered that a new arbitrator be appointed to preside over the matters upon reconsideration. (para. 13) Gomery J. held as follows:
- On the remediation Award of the BA: the Arbitrator made an error of law under s.45 of the AA by advancing a contractual interpretation that was neither advanced nor argued and was therefore, inherently unfair. On this basis, Gomery J. held that the Arbitrator erred in law and that the correctness standard under s.46(1) of the AA applied. Further, the application judge held that the Arbitrator offered only meagre reasons for his conclusion on the limitation period issues and as such violated procedural fairness, which was also an error of law. (paras. 25-29)
- On the Award as to construction costs overruns: the Arbitrator erred in law: (1) in finding that Tall Ships had breached obligations that were neither pleaded nor argued by Brockville; (2) by failing to apply the appropriate legal analysis for implying contractual terms; and (3) unreasonably misconstruing the duty of good faith. Gomery J. also held that the Arbitrator erred in relying on Tall Ships’ obligations as a construction manager because Brockville did not rely on this obligation in its submissions before the Arbitrator. According to Gomery J., Tall Ships was not on notice of the theory used to reject its claim for additional construction costs. ( 54-55)
Gomery J. further held that the arbitrator’s definition of “construction manager” was based on Brockville’s financial situation and the parties’ inequality of information, not on a term of the agreement. She therefore concluded that the Arbitrator erred in law by implying a term into the contract. Gomery J. also held that the Arbitrator’s finding that Tall Ships breached the duty of good faith could not stand because it resulted from the Arbitrator’s improper implication of a contractual term. (paras. 56-58)
- On the interest claim Award: the Arbitrator’s analysis was in error because it was based on his finding that Tall Ships, as construction manager, was required to advise Brockville of its intention to claim interest, which finding was erroneous in law. The Arbitrator also erred in finding that Brockville had pleaded sufficient material facts to put Tall Ships on notice of its estoppel argument, and that the Arbitrator’s estoppel conclusion was manifestly unfair becuase he erred in finding that Tall Ships’ silence amounted to a representation given it was under an obligation to speak. ( 92)
The ONCA set aside the application judge’s decision and restored all three arbitral awards for the following reasons:
- On the appeal from the remediation Award, Gomery J. erred in finding that Tall Ships’ procedural fairness rights under s. 46(1) of the AA had been breached. The application judge’s conclusion rested on her finding that the Arbitrator implied a term into the contract that had neither been advanced nor argued. To find that the Arbitrator fell into error with respect to a contractual interpretation, the application judge was required to find that the question of whether Tall Ships could submit its claims after 15 days had passed from its receipt of the determination or request for information from Brockville was an extricable question of law. ( 37)
Relying on Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, paras. 54-55; and Teal Cedar Products Ltd. v. British Columbia, 2017 SCC 32, paras. 45-47, the ONCA reiterated that “as a matter of policy, judges exercising their appellate powers under s. 45 AA should be cautious about extricating questions of law from the interpretation process.” The Court also held that “failing to exercise such caution will result in the very inefficiencies, delays and added expense that choosing an arbitral process seeks to avoid.” (para. 3)
Harvison Young JA noted that a fair reading of the Arbitrator’s conclusion that Tall Ships was not entitled to claim the remediation costs led to the conclusion that he was not using the term “time of the essence” as a term of art. Read in context, the Arbitrator was simply saying that the contract required that Tall Ships submit notice of a dispute of a determination or rejection within 15 days. In his detailed reasons, the Arbitrator found as fact that Tall Ships had failed to establish that it had ever objected to Brockville determining any of those claims in more than 30 days and that he was not satisfied that Tall Ships had ever provided Brockville with any of the additional information it had requested in its response to the impugned claims. (para. 43)
After extensively reviewing the Arbitrator’s use of the term “time is of the essence”, the ONCA concluded that “this was a question of mixed fact and law which fell squarely within the purview of the Arbitrator” and was therefore immune from appeal. (paras. 44-50)
- On the construction cost overrun Award, the application judge again erred by characterizing aspects of the Arbitrator addressing the construction cost overruns as errors of law rather than errors of mixed fact and law. ( 65)
After extensively reviewing the factual findings and contract analysis in the Arbitrator’s Award, (paras. 66-71) the Court concluded that he application judge erred by focussing on a “legal error” by the Arbitrator in imputing duties to a construction manager. The Arbitrator did not find that Tall Ships was not just a construction manager but he also “considered the contract as a whole within the context of the project as a whole.” The ONCA held that this was not a question of law, but a question of mixed fact and law, which according to the Arbitration Agreement, was not subject to appeal. (para. 72)
After further reviewing the Arbitrator’s analysis of the evidence and of “who knew what and when” (paras. 73-80), the Court concluded that Gomery J. erred in holding that the obligations found by the Arbitrator arose out of “implied terms” which were neither pleaded nor argued and were thus unfair to Tall Ships. Rather, the Arbitrator held that the obligation arose from the interpretation of the contract as a whole and that was a determination of mixed fact and law. The ONCA thus concluded that the Arbitrator did precisely what he was asked to do, namely, “he interpreted the contract as a whole, within the relatively complex factual matrix of the agreements and relationships in play” (para. 81), and that there was no denial of procedural fairness. (para. 82)
The Court also concluded that there was no basis for an appeal on the Arbitrator’s denial of the Tall Ships’ unjust enrichment claim on cost overruns because the Arbitrator’s interpretation of the contract was a question of mixed fact and law, which precluded recovery for these overruns. (paras. 86-89)
- As to the Arbitrator’s Award denying interest, the ONCA held that the application judge was wrong to treat the Arbitrator’s finding about Tall Ships’ duties as a legal question. It was a question of mixed fact and law, which was immune from appeal. ( 93)
The Court noted that the fact that the word “estoppel” did not appear in Brockville’s pleading was not material because the substance of Brockville’s pleading was that Tall Ships “resiled from an oral agreement that it would abandon its claims in exchange for $315,000.” The Arbitrator made specific findings of fact that supported his determination that Brockville had pled sufficient material facts in support of estoppel and made other factual findings that supported his conclusions. As a result, the ONCA held that there was no extricable error of law in the Arbitrator’s conclusions on the interest issue and the determination was immune from appeal. (paras. 94-96)
The important take away from this decision is that the basis for judicial review and appeal of arbitral awards is very narrow under s.45(2) of the AA and under s.46, where the parties have specified the scope of appeal to questions of law alone. Unless the arbitrator makes glaring extricable errors of law, the Court should not interfere.
The Court of Appeal is not only emphasizing the principles in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, paras. 54-55, and Teal Cedar Products Ltd. v. British Columbia, 2017 SCC 32, paras. 45-47 but also emphasizing the importance of maintaining the arbitral forum selected by parties as an efficient, desirable way to adjudicate the dispute.
The ONCA referred to the fact that the Arbitrator heard evidence for four weeks (para. 12). By referring to passages of the Awards, it is clear that the Arbitrator delivered detailed reasons, which were longer than 235 paragraphs (para. 78). It appears that the message here is that if the Arbitrator did a thorough evidentiary and legal analysis to do justice between parties, the Court should not interfere. The tenor of the ONCA’s decision is to minimize small but not overriding issues in an Arbitrator’s awards.