Alberta – Court reviews preliminary jurisdictional award for correctness de novo – #663

In Ong v Fedoruk, 2022 ABQB 557, Justice Bourque confirmed that under subsection 17(9) of the Alberta Arbitration Act(“the Act“), the court reviews preliminary jurisdictional awards in domestic arbitrations for correctness on a de novo basis. In doing so, Ong aligned the standard of review and procedure in Alberta with the decision of the Ontario Divisional Court in The Russian Federation v. Luxtona Limited, 2021 ONSC 4604 (“Luxtona”), a case decided under the comparable provision of Ontario’s International Commercial Arbitration Act, 2017, SO 2017, c 2, Sch 5 (“ICAA”), which implements the UNCITRAL Model Law on International Commercial Arbitration (“Model Law”). However, it diverged from Ace Bermuda Insurance Ltd. v Allianz Insurance Company of Canada, 2005 ABQB 975 (“Ace Bermuda”), an international case which applied a review standard of “reasonableness, deference & respect” under Alberta’s International Commercial Arbitration Act, RSA 2000, c I-5, which also implements the Model Law. That case as a precedent may now be in doubt, considering the trend in Canadian and other Model Law jurisdictions in favor of non-deferential review of preliminary jurisdictional decisions of arbitral tribunals.

The dispute: This case arose out of a dispute between the shareholders of a landscaping company, Rainmakers: Dwayne Sung, Massena Fedoruk, and Ken Ong. Contemplating the retirement of the Applicant, Ong, he and the other shareholders entered into a buy-out agreement pursuant to which Respondent Fedoruk would purchase the Applicant’s shares by a certain date at a price to be determined in accordance with the parties’ agreement. The agreement contemplated that if Fedoruk did not have sufficient funds to purchase all of Ong’s shares, Respondent Sung would purchase the balance. Fedoruk attempted to purchase the shares for $471,462.25 in February, 2017; Ong rejected the offer, claiming that his shares were worth $833,750.

The arbitration: The parties appointed a sole arbitrator in July, 2017, to determine the value of the shares in accordance with the buy-out agreement. In pleadings, the parties’ claims expanded. Ong alleged he was owed for unpaid salary, holdbacks, and consulting work, that the termination of his employment in June, 2018, was wrongful, and he advanced shareholder oppression claims. For their part, the Respondents alleged that Ong had breached obligations as an employee, director, or officer of Rainmakers, asserted claims relating to interest paid on a loan to Fedoruk, and sought repayment of certain amounts paid to Ong.

The arbitrator ruled in February, 2021 (the “February Award”) that Fedoruk had properly exercised his right to purchase Ong’s shares, and that the share value was $419,155 – less than the sum Fedoruk had offered four years earlier. The award ordered Ong’s shares to be transferred to Fedoruk upon payment of that amount and any interest which had accrued in accordance with the Judgment Interest Act, RSA 2000, c J-2. The February Award dealt with some of the parties’ other claims, but did not decide the quantum of: (1) unpaid salary owed to Ong; (2) interest on amounts to be paid (including the quantum of Ong’s shares and unpaid salary); or (3) costs of the arbitration. The February Award expressly reserved jurisdiction to decide those issues (the “Reserved Matters”) and invited the parties to resolve the Reserved Matters by agreement.

On April 12, 2021, the Respondents applied to have the arbitrator rule on his jurisdiction to determine the Reserved Matters, and to award interest and costs. After receiving submissions from all parties, the arbitrator issued an award on June 14, 2021 (“Jurisdiction Award”) finding, as a preliminary issue, that he had jurisdiction to decide the Reserved Matters.

On July 13, 2021, Ong filed an Originating Application, asking the Alberta Court of Queen’s Bench to “decide the matter“of the arbitrator’s jurisdiction. This case note focuses on two matters of particular importance to practitioners: the court’s legal analysis under subsection 17(9) of the Act with respect to: (1) the standard of review; and (2) procedure.

Standard of review: The Applicant, Ong, argued that the non-deferential correctness standard of review applies in this circumstance. The Respondents argued for the application of the more deferential reasonableness standard, reasoning by analogy from the Supreme Court of Canada decision of Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65. Vavilov overhauled the standard of review analysis in administrative law in Canada, ruling that the reasonableness standard applies to all judicial reviews of administrative decisions unless a statute supplies a different standard.

Justice Bourque first analysed Kitt v. Voco Developments, 2005 ABQB 743(“Kitt”),a decisionin which Justice Gallant scrutinized a preliminary jurisdictional award under subsection 17(9) of the Act for correctness. Justice Gallantreasoned that the direction in subsection 17(9) that requires the court to “decide the matter”, and the fundamental legal nature of the question of jurisdiction, mitigate against deference to arbitrators’ decisions. Justice Gallant reached this conclusion by applying, at para. 32, the “functional and pragmatic” test used to determine the standard of review in Canadian administrative law at the time. Justice Bourque also found support for a correctness standard in Urban E. Homes Ltd. v. Condominium Corporation No. 0313563, 2013 ABQB 109, but identified no other Alberta precedents on point.

Looking outside the province, Justice Bourque next considered the judgment of the Ontario Divisional Court in The Russian Federation v. Luxtona Limited, 2021 ONSC 4604 (“Luxtona”). Both subsection 17(9) of the Act and the provisions at issue in Luxtona under the Model Law direct the court to “decide the matter” of a preliminary award on jurisdiction. The Luxtona court ruled, in para. 22, that the direction to “decide the matter” was “clear language conferring original jurisdiction on the court to adjudicate the question of the tribunal’s jurisdiction. This language is not qualified by a privative clause or terms of reference for the application. The court’s task is entirely described by the phrase ‘decide the matter.’”

Justice Bourque rejected the Respondents’ argument that a reasonableness standard applies for two reasons. First, he observed that the Supreme Court of Canada’s majority decision in Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7, declined to decide whether Vavilov altered the standard of review in appeals of commercial arbitration awards. Second, proceedings under subsection 17(9) of the Act, as in Ong, are neither appeals nor (as explained further below) judicial reviews of administrative decisions. After canvassing these precedents, Justice Bourque concluded that the standard of review under subsection 17(9) of the Act is correctness. In explaining his decision, Justice Bourque quoted from Sattva Capital Corp. v Creston Moly Corp., 2014 SCC 53, which had considered administrative law concepts to decide the standard of review in an appeal of a commercial arbitration award:

[31]….[S]ubsection 17(9) of the [Act] directs me to ‘decide the [jurisdictional] matter’. Therefore, I am satisfied that this type of question ‘is one that would attract the correctness standard’ because it involves ‘questions of law of central importance to the legal system as a whole and outside the arbitrator’s expertise’.”

Procedure under subsection 17(9) of the Act: In Kitt, decided in 2005, Justice Gallant found, in para. 31, that subsection 17(9) of the Act “contemplates a judicial review process.”Henoted that there was limited authority on the point, and no prior cases from Alberta. There is limited subsequent treatment of Kitt on this point too, although it was followed in Saskatchewan v. Capitol Steel Corporation, 2021 SKQB 224.

However, in Ontario, the Divisional Court squarely addressed in Luxtona which procedural vehicle was appropriate in challenges to preliminary jurisdictional awards under the comparable provision of the Model Law, Article 16(3). That case concerned Russia’s application to adduce fresh evidence it considered relevant to the tribunal’s jurisdiction. The outcome depended on whether the proceeding was a judicial review (no fresh evidence) or a de novo hearing (fresh evidence as of right). The Divisional Court held that under Ontario’s ICAA, a challenge to a tribunal’s preliminary jurisdiction award under Article 16(3) of the Model Law is a de novo proceeding. Luxtona extensively reviewed jurisprudence on this point, and devoted particular attention to the “leading international authority” of Dallah Real Estate and Tourism Holding Co. v. Ministry of Religious Affairs of the Government of Pakistan, [2010] UKSC 46. While the U.K. is not a Model Law jurisdiction, the Divisional Court found no persuasive foundation for distinguishing the approach to be taken under Ontario’s ICAA. The reasoning and holding of Luxtona have been extended to challenges to preliminary jurisdictional awards under Ontario’s domestic arbitration legislation See Hornepayne First Nation v. Ontario First Nations (2008) Ltd., 2021 ONSC 5534 (“Hornepayne”) and Electek Power Services Inc. v. Greenfield Energy Centre Limited Partnership, 2022 ONSC 894 (“Electek”).

On this basis, Justice Bourque declined to follow Kitt and concluded that applications under subsection 17(9) of the Act should, “proceed de novo, as this better accords with the legislative direction that courts are to ‘decide the matter’.” Against the backdrop of the holding in Luxtona, an international case, Justice Bourque identified “no principled reason why a court deciding the matter of an arbitrator’s jurisdiction in the domestic arbitration context should proceed any differently, particularly when the words of the statute are the same or similar in both contexts.”

Contributor’s Notes:

This case harmonizes Alberta law on the standard of review and procedure to apply in challenges to domestic preliminary jurisdictional awards with the position in Ontario in both domestic (Hornepayne, Electek) and international (Luxtona) preliminary jurisdictional awards.

The holding in Ong, though, contrasts with the 2005 application of a deferential review standard (“reasonableness, deference & respect”) in Ace Bermuda, a Model Law Article 16(3) challenge to a preliminary jurisdictional award. Strikingly, although Ong considered foreign authorities decided under Model Law Article 16(3), the judgment did not refer to the Alberta judgment in Ace Bermuda. Considering the trend in Canadian and Model Law authorities away from deference to preliminary jurisdictional awards, Ace Bermuda may be in doubt.

For earlier Case Notes on cases referred to above, see: