ONTARIO – Arbitration – Set aside application pursuant to s. 46 of the Arbitration Act, 1991. Arbitrator had jurisdiction to raise the new issue. However, the Arbitrator’s refusal to allow a party to present evidence in respect of the new issue and their exclusion of certain evidence amounted to procedural unfairness that offended the principles of natural justice. An arbitrator does not have inherent jurisdiction.
Mattamy (Downsview) Limited v. KSV Restructuring Inc. (Urbancorp)
2023 ONSC 3013 (May 5, 2023)
Ontario Superior Court of Justice – Commercial List (Kimmel J.)
Mattamy sought to set aside an arbitral award pursuant to section 46 of the Arbitration Act, 1991 (“Act”) on the basis that the Arbitrator exceeded his jurisdiction by raising and deciding a new issue and based on unfairness by refusing to allow Mattamy to present certain evidence it considered relevant to the new issue or to bring a motion for leave to file the new evidence.
The new issue related to the determination of Urbancorp Toronto Management Inc.’s (“UMTI”) entitlement to the Urbancorp Consulting Fees as set out in the Co-ownership Agreement. (paras. 37 and 38) The set aside application had to do with the manner in which the new issue arose and the submissions and evidence received.
Background
This case arose from a sale process in a CCAA proceeding that commenced in May 2016 in respect of Urbancorp Downsview Park Development (“UDPDI”).
The Sale Process Order did not result in any other potential purchasers expressing interest in purchasing UDPDI’s interest in the Property and the court approved the sale of UDPDI’s interest in the Property to Mattamy in consideration, inter alia, of the extinguishment of the DIP Facility (paras. 8–9)
The Sale Process Order directed the Monitor to arbitrate various issues, including the determination of the Urbancorp Consulting Fees payable to UTMI. The parties had also agreed to arbitrate any disputes under the Co-ownership Agreement. (para. 8)
The Monitor sought a determination in its Notice to Arbitrate that UTMI was entitled to the Urbancorp Consulting Fee as of the Transfer Date in the amount of $5.9 M, based upon a calculation of Gross Receipts as defined in the Co-ownership Agreement. The issues were if and when UTMI became entitled to the Consulting Fees and the mechanics and timing of payment. (paras. 13 and 14)
The parties disagreed whether Gross Receipts included the purchase price from the sale of residential condominium units that had been sold but not transferred as of the Transfer Date. (para. 18)
New Issue
During the hearing the Arbitrator asked about points not covered in the evidence or submissions about accounting standards as set out in ASPE (accounting standards for private enterprises) and requirements for sale of residential condominium units, how auditors on the project accounted for the sale of residential condominium units, and the status of actual and anticipated closings. (para.19)
Mattamy’s position was that the Arbitrator’s questions were directed to the “new issue” of whether the purchase price for the residential units that had been sold but not finally closed be treated as “received” for the Gross Receipts calculation. Mattamy’s evidence was that before the Arbitrator raised the new issue there was no dispute between the parties on the issue and no parties took the position that Gross Receipts had been received prior to the Transfer Date. Further Mattamy argued that if the new issue had been raised before the hearing they would have made different arguments, presented different evidence, conducted the cross-examinations differently, and considered filing expert evidence from an accountant. (paras. 21–22)
The Arbitrator adjourned the hearing and directed the parties to file supplementary materials. Mattamy filed an affidavit which attached portions of the ASPE and a handbook (“Handbook”) from the Real Property Association of Canada about recommended accounting practices for real estate investment and development entities in accordance with ASPE. The Handbook provided specific guidance on the sales of condominium units, namely, the sale is recorded once the purchaser has paid all amounts due on the interim closing, has undertaken to pay the balance with mortgage financing, has the right to occupy and the developer has undertaken to transfer title in due course. (para. 23)
At a case conference, the Arbitrator struck all references to the Handbook that elaborated on the ASPE policy but admitted financial statements from DHI, which indicated they adopted a revenue recognition policy for pre-sold condominiums that recognized sales as of the date of interim occupancy pursuant to the Condominium Act. The Arbitrator did not provide reasons. The Arbitrator stated that even though Urbancorp did not oppose the inclusion of the Handbook attached to the Mattamy revised affidavit, he had a “mind of his own”. (para. 28)
As a result of the decision, Mattamy delivered a revised affidavit, without reference to the Handbook and the other evidence the Arbitrator struck from the initial affidavit.(para. 30)
The Arbitrator awarded the Monitor the full amount of $5.9 Million for Urbancorp Consulting Fees on the basis that the Co-ownership Agreement entitled Urbancorp to receive the Consulting Fees as long as it carried out its duties. The Arbitrator concluded that Urbancorp’s entitlement to the Urbancorp Consulting Fees was absolute until UDPDI ceased to be a co-owner on the Transfer Date. (paras. 31–33)
Later in the award, the Arbitrator stated that “I interpret the definition of Gross Receipts to not require that cash has actually been received before being included in Gross Receipts.” (paras. 33–35)
Analysis
Pursuant to s. 46(1)3 of the Act, a court can set aside an arbitral award if the award deals with a dispute that the arbitration agreement does not cover or contains a decision on a matter that is beyond the scope of the agreement. (para. 39)
An arbitrator does not have inherent jurisdiction. An arbitrator’s jurisdiction is derived exclusively from the authority conferred by the parties in their arbitration agreement and the terms of appointment of the arbitrator. Lack of inherent jurisdiction is not changed by the parties’ agreement in the terms of appointment giving the arbitrator all the powers of a SCJ judge. (para. 40)
Even judges with inherent jurisdiction do not have the jurisdiction to decide matters that fall outside of what the parties have claimed. (para. 41)
Did the Arbitrator exceed his jurisdiction?
Relying on Mexico v Cargill Incorporated, 2011 ONCA 622, Kimmel J. held that the arbitrator did not exceed his jurisdiction. (paras. 46–50)
Was there procedural unfairness as a result of the new issue raised by the Arbitrator?
Kimmel J. referred to Baffinland v Tower-EBC, 2022 ONSC 1900 in which the court held that the factors considered when assessing procedural fairness in respect of ss. 19 and 46(1) of the Act, are sufficiency of opportunity granted to parties’ counsel to present their case and the thoroughness of the procedure engaged by the parties. (para. 54).
The Arbitrator declined Mattamy’s request to schedule a motion to determine the admissibility of its proposed evidence on the Arbitrator’s three questions. Instead, at a June 27, 2022 case conference, the Arbitrator refused to admit certain of Mattamy’s proposed new evidence, including the Handbook, and admitted some of its other proposed evidence. (para. 57)
Kimmel J. held that pursuant to s. 20(1) of the Act, the Arbitrator was entitled to determine the procedure and make rulings about proposed evidence. However, Kimmel J. held that the Arbitrator denied Mattamy the opportunity to present its case without having engaged in a thorough procedure for the determination of the admissibility of that evidence and the appropriate way for it to be received. (paras. 59–60)
Kimmel J. held that the Arbitrator’s refusal to allow Mattamy to submit the Handbook excerpts into evidence deprived Mattamy the opportunity to present the complete evidentiary context and rationale for the accounting treatment before the Arbitrator dismissed it in favour of another approach. Kimmel J. held that Mattamy was not afforded a sufficient opportunity to present its case on the new issue. (paras. 62–74)
Did the Arbitrator engage in a thorough procedure to determine whether to admit the Handbook into Evidence?
The Arbitrator’s procedural decision to strike portions of the Mattamy affidavit and submissions was made despite:
- No objection from the other side as to this evidence;
- Mattamy’s request for an opportunity to bring a motion for leave to file its affidavit if there was any question about the admissibility of any of the evidence in it; and
- The admission of other evidence about the application of the ASPE principles and how sales were accounted for in the financial statements.
Kimmel J. held that the above factors deprived Mattamy of its right to procedural fairness and seemed arbitrary and unfair and that the Arbitrator did not engage in a thorough procedure to determine whether the Handbook should be admitted. (paras. 75–77)
A finding of procedural unfairness and a failure of natural justice results in the arbitral award being set aside, as set out by the SCC in Université du Québec a Trois-Rivières v Laroque 1993 CanLII (paras. 80–81)
Kimmel J. also held that there is a distinction between procedural decisions and a consideration of whether a procedure was thorough, which is a ground for a finding of procedural unfairness. Kimmel J. held that the issues in this case did not fall within any blanket category of procedural decisions that are immune from review. (paras. 86–89)