ONTARIO – Arbitration – Meaning of “fraud” in ss. 46(1)9 and 47(2) of Arbitration Act 1991, S.O. 1991, c. 17 (“the Act”) – Application to set aside an arbitral award on the basis that it was obtained by “fraud” must show evidence of actual fraud not “constructive fraud”. The 30 day time limit for an appeal or an application to set aside an arbitral award under s. 47(2) is not extended by evidence of “constructive fraud”.

Campbell v. Toronto Standard Condominium Corporation No. 2600
2024 ONCA 218 (March 25, 2024)
Ontario Court of Appeal (Simmons, Harvison Young and George JJ.A.)

In this appeal, ONCA set aside the Order of Perell J., which set aside an arbitral award on the basis of “constructive fraud”. (paras. 5, 63)

Background and Facts

An arbitrator awarded $30,641.72 to the appellant Condominium Corporation (“the Condo Corp”) for costs against the respondents, who were former unit owners. The award was based on a breach of the condominium rule against short term rentals. (para. 2) The respondents applied to the Court to set aside the award more than 30-days after it was granted on the basis, inter alia, that it was obtained by fraud. (para. 3)

The application judge set aside the arbitral award on the basis the Condo Corp committed “constructive fraud” by agreeing to proceed with the arbitration to determine the issue of costs but then expanding the issues to address the entire history of the dispute between the parties. Perell J. held that the word “fraud” as it appears in s. 46(1)9 and s. 47(2) of the Act includes constructive fraud. (para. 4)

There is a three-year history of disputes between the Condo Corp and the respondents, ranging from excessive noise to prohibited short term rentals. The respondents disregarded “cease and desist” demands as to short term rentals. The Condo Corp’s legal expenses mounted. (paras. 6-13)

In November 2020, the Condo Corp served a Notice of Arbitration claiming its costs, which then stood at $24,003.00. The parties agreed to an arbitrator but the process toward the hearing was complicated by the respondents’ decision to list the condo for sale, which might leave the Condo Corp’s costs unpaid. (paras. 14-15)

At the arbitration, which proceeded in writing, the Condo Corp raised additional issues on the arbitration and sought to recover the Condo Corp’s expenses on a substantial indemnity basis. The arbitrator awarded costs of $30,641.72 on a partial indemnity basis, after rejecting the respondents’ claims that they abided by the condo rule as to short term rentals. The respondents applied to set aside the arbitrator’s award more than 30 days after it was made (paras. 16-19)

The Application Judge’s Decision

Perell J. held that there was no right of appeal as the parties agreed that arbitrator’s award would be final. The application judge further held that there was no actual fraud on the part of the Condo Corp. However, Perell J. held that the appellants were “victims of constructive fraud”, which “does not necessarily involve dishonesty or moral fraud in the ordinary sense, but a breach of [the] sort that would be enforced by a court of conscience” because the Condo Corp lured the respondents, their counsel and the arbitrator to adjudicate issues beyond the issue costs. (paras. 21-23)

Perell J. held that the actions of the Condo Corp were unconscionable and unfair and constituted constructive fraud, which justified setting aside the arbitral award under s. 46(1)9 of the Act and waiving the 30-day time limit under s. 47(2). (para. 24)

Court of Appeal Decision

The ONCA set aside Perell J.’s order for the following reasons:

1. The scheme of the Act is that “appeals from private arbitration decisions are neither required nor routine” and courts are warned to guard against strategic attempts to enlarge the scope of appeal beyond what the parties have agreed to, referring to Alectra Utilities Corporation v. Solar Power Network Inc., 2019 ONCA 254, at para. 20 (“Alectra”) ( 36-41)
2. Section 46(1)9 of the Act, which refers to fraud as basis for setting aside an arbitral award, is to be interpreted narrowly, again referring to Alectra, supra. ( 43-44)
3. Referring to Mensula Bancorp Inc. v. Halton Condominium Corporation No. 137, 2022 ONCA 769, leave to appeal refused, [2023] S.C.C.A. No. 120, ONCA pointed out that 46(1)3 of the Act“provides a narrow basis upon which, a court may interfere with an arbitration award”, “does not create a right of appeal”, and “allows only for limited review for jurisdictional error”. (para. 45)
4. Referring to Tall ShipsDevelopment Inc. v. Brockville (City), 2022 ONCA 861, leave to appeal refused, [2023] S.C.C.A. No. 29, paras. 2 and 95, the ONCA noted that the basis for setting aside an arbitral award under s. 46 of the Act is narrow, is not concerned with the substance of the parties’ dispute and is not to be treated as an alternate appeal route. ( 46)
5. The word “fraud” is not defined in the Act and is only referred to in the two sections under consideration in this case. There is a presumption that words used in a statute mean the same thing each time they are used. “Fraud” has an established legal meaning. If the Act had intended a broader meaning to include “constructive fraud”, it would say so. ( 53-56)
6. Expanding the meaning of “fraud” in the Act to include “constructive fraud” risks significantly undermining the principles of efficiency and finality, because the nature of constructive fraud is much broader than that of fraud itself. Expanding the meaning of “fraud’ also risks inviting strategic enlargement of the grounds for setting aside an arbitral award. Unlike civil fraud, actual dishonesty or intent to deceive is not required to establish constructive fraud. ( 57-58)
7. The respondents filed their application after the 30-day time limit in s. 47(2) of the Act expired. The allegations of fraud and constructive fraud were an attempt to circumvent the time limit. The arbitrator’s determination in the narrowest sense of matters that were not strictly “costs” did not amount to constructive fraud in the circumstances of this case. ( 59-61)