On December 13, 2022, the Court of Appeal for Ontario released a very important decision affecting the scope of statutory appeals on “questions of law”, as provided in s. 45(2) of Ontario’s Arbitration Act, 1991, SO 1991, c 17 (Domestic Act), which the parties had agreed was to be the only appeal remedy in this case. Other provinces have similar provisions, and so this decision will undoubtedly transcend Ontario. The Court held that “questions of law” means only “extricable questions of law” and not “questions of mixed fact and law”. The Court found that the judge hearing the appeal had erred in characterizing as questions of law matters that, correctly understood, were really questions of mixed fact and law. The Court thus reinstated the arbitrator’s decision. Referring to several authorities, including Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, the Court again reiterated that judges hearing appeals on questions of law should be cautious about extricating questions of law from the contractual interpretation process. The Court also reminded appellate judges that they are not to consider the substance of the dispute when considering statutory procedural fairness set aside provisions, such as s. 46 of the Domestic Act.
The appellant, City of Brockville (Brockville), and the respondent, Tall Ships Landing Development Inc. (Tall Ships), were partners in a public-private project to develop waterfront property on the St. Lawrence River. There were a number of interrelated contracts, but central to the issues on appeal was a construction budget “estimate” of $7.4 million set out in the “Purchase Agreement” to build an approximately 27,000 square foot attraction known as the Maritime Discovery Centre (MDC). The completed MDC was about 6,000 square feet larger, and Tall Ships claimed an additional $1.8 million on account of incremental costs. A second major issue related to Brockville’s refusal to pay just under $1 million for remediation costs pursuant to so-called “Brownfields Agreements”. The third and final issue concerned Tall Ships’ claim for interest (prime plus 5%) that was not asserted until it delivered its statement of claim.
In three awards delivered between September 2018 and February 2019, following a four-week hearing, the arbitrator dismissed each of Tall Ships’ claims. First, he found that because Tall Ships had not sent the contractually mandated dispute notice to Brockville within 15 days of its determinations, it was deemed to have accepted them, and so was out of time. The arbitrator also found the same claim to be statute barred. In the second award, the arbitrator found that Tall Ships was responsible for the $1.8 million cost overrun, having failed to keep Brockville informed despite knowing that the project would be much bigger. The arbitrator also dismissed Tall Ships’ quantum meruit submission on this point because it had failed to establish a lack of juristic reason for its loss and a corresponding enrichment on the part of Brockville. In his final award the arbitrator dismissed the interest claim on estoppel grounds. The single appeals judge set aside all three awards and remitted the matters back to a new arbitrator.
(i) Remediation and limitation issues
On the first award, the appellate judge criticized the arbitrator for having relied on an implicit “time of the essence” clause that had not been pleaded or argued, violating Tall Ships’ right to procedural fairness. Applying the correctness standard, the judge found that the arbitrator had committed a reviewable error under s. 46(1) of the Domestic Act. Further, the appeals judge found that relying on an unargued theory was also an error of law because it was clearly unreasonable and so reversible under s. 45 of the Domestic Act. Regarding the limitations issue, the judge found that the arbitrator’s reasons had been meager, for example failing to make determinations about discoverability, thus leading her to conclude that nothing in the arbitrator’s reasons allowed her to “even speculate…why the Arbitrator concluded that the claims were discoverable” at the relevant time.
The Court of Appeal disagreed. It reasoned that while the arbitrator’s use of the phrase “time of the essence” had been “less than ideal”, it was neither a fair nor reasonable interpretation of his reasons to say that he thus had implied such a term into the Brownfields Agreements. Rather, he was simply expressing his view that Tall Ships had not disputed Brockville’s finding within 15 days as required under the contract and so had lost its right to do so. Having made this determination, the Court of Appeal then also held that there had been no procedural unfairness to Tall Ships, because the arbitrator had not relied on any unargued theory of liability. Finally, because the arbitrator’s determinations engaged questions of mixed fact and law, namely his interpretation of the contract in the light of the parties’ respective actions and non-actions, no appeal right existed under s. 45 of the Domestic Act (this rendered the limitations issue moot, in the Court’s view).
(ii) Construction cost overruns
The arbitrator made a number of factual determinations to the effect that Tall Ships had failed to perform one of its core functions as construction manager – it had failed to advise Brockville when it knew that the project would be larger and cost more. This amounted to a breach of the duty of good faith. The appeals judge held that the arbitrator had erred for three reasons: (i) he had erred in relying on Tall Ships’ obligations as a construction manager because Brockville had not argued this; (ii) he had erred in implying a contractual term that Tall Ships had been obliged to keep Brockville apprised of budget or size/design changes; and (iii) without such an implied reporting obligation, there could not have been a breach of the duty of good faith.
The Court of Appeal disagreed again, holding that what the appeals judge had characterized as errors of law in reality engaged mixed fact and law issues. Whether Tall Ships had been responsible for reporting any budgetary or design changes to Brockville was a question that could be answered only by interpretating the Purchase Agreement which provided that Tall Ships “shall operate as construction manager”, albeit “without risk”. Understanding what the parties intended required an interpretation of the contract as a whole and factual context. The Court noted that the arbitrator carefully described what the term “construction manager” meant, in his view. He also considered the “without risk” provision, concluding that the parties had intended for the $7.4 million budget to mean something, and that Tall Ships had not been given “carte blanche” to build the MDC at any cost, at least not without keeping Brockville informed about the financial risks. Based on the evidence, the arbitrator found that Tall Ships had “repeatedly withheld critical information”, thus supporting his finding of breach of duty of good faith (this finding also disposed of the unjust enrichment argument since there was a juristic reason precluding recovery by Tall Ships of any overruns – the contract precluded it). As the Court stated:
…[T]he arbitrator did precisely what he was asked to do: he interpreted the contract as a whole, within its relatively complex factual matrix of the agreements and relationships in play. Characterizing the obligation to keep [Brockville] informed as an “implied term”, such that it attracts a right to appeal in these circumstances, would entirely undermine the intent of these parties to submit this dispute, which arose out of a complex network of agreements and relationships which developed over a decade, to arbitration, and would particularly frustrate their specific provision that only errors of law could be appealed. [para 81]
The arbitrator disallowed the claim for interest because it failed to comply with the contractual requirements. The appeals judge reversed this determination, in part because she found the arbitrator to have erred in concluding (in connection with his conclusions regarding the meaning of “construction manager”) that Tall Ships was contractually obliged to warn Brockville that it would be claiming interest.
The Court of Appeal reversed this decision too. In large part, its conclusion was driven by the same root error – in that the appeals judge had erred in characterizing the arbitrator’s findings on this point as amounting to a “question of law,” when instead “questions of mixed fact and law” were engaged.
This is a key decision of the Court in the often murky area of appeals of commercial arbitration awards. Parties drafting their arbitration agreements and potential appeal routes should pay close attention. Only extricable questions of law (that is to say, questions that are capable of resolution without regard to findings of fact) are appealable as “questions of law”. Parties appealing should also take careful note of the Court’s warning that “s. 46 [set aside] of the [Domestic Act] cannot be used as a broad appeal route to bootstrap substantive arguments attacking an arbitrators’ findings which the parties had agreed would be immune from appeal”.
For more information, please reach out to the authors Michael Schafler and Rachel Howie.