B.C. – Arbitrator’s Analysis Must not let Factual Matrix Overwhelm Text of Contract – #588

In Grewal v. Mann, 2022 BCCA 30, the British Columbia Court of Appeal dismissed an appeal of an order granting leave to appeal an arbitral award. In doing so, the Court of Appeal confirmed the bounds of contractual interpretation, including the principle that the analysis must remain grounded in the text of the contract. 

The parties, Mann and Bains (Appellants) and Grewal (Respondent), were former business partners whose business interests consisted of real estate and other enterprises, including a property in Gibsons, British Columbia. The Gibsons property was purchased in 2008 and co-owned by the parties and several other individuals.

Irreconcilable differences developed between the parties. In May 2014, they entered into an agreement that outlined a process for the parties to separate all of their business and financial affairs through mediation and, if necessary, arbitration. After a series of unsuccessful meetings, the parties entered into a settlement agreement on October 30, 2015, which was recorded in an email exchange between counsel (the “Settlement Agreement”). The parties intended to execute a more detailed agreement, but that did not happen.

The Settlement Agreement provided that Mann and Bains were to pay Grewal $20.6 million in cash and assets for Grewal’s interest in the partnership, consisting of $18.6 million and the interests of Mann and Bains’ in the Gibsons property. The final amount of the cash payment was to be adjusted based upon the appraised value of the Gibsons property. There was to be an appraisal of the value of the parties’ interests in the Gibsons property conducted within 30 days by an appraiser appointed by the mediator/arbitrator The Settlement Agreement also provided that the appointed mediator/arbitrator was to resolve any disputes relating to the Settlement Agreement itself.

The Gibsons property was not appraised within 30 days in accordance with the terms of the Settlement Agreement. The valuator was appointed in March 2016, and the property was subsequently sold.

Disagreements arose regarding the terms of the Settlement Agreement. A one-day hearing was held before the arbitrator on December 2, 2019, to determine the allocation of the proceeds of sale of the Gibsons property. The arbitrator issued a decision on May 15, 2020. His “Analysis and Conclusion” was as follows:

11. The starting point in any discussion on this point is that Mann and Bains were to pay Grewal a total sum of $20.6 million in property and cash. Of that sum, $18.6 million was to be paid in 3 installments. The remaining $2.0 million was to come from the sale of the Gibsons Property. That much is clear from the wording of paragraph 4. The $2.0 million was clearly a part of the $20.6 million. It was never the intention of the parties to transfer the property to Grewal unconditionally. The Gibsons transfer to Grewal was not a stand-alone transaction. In fact the parties carefully considering [sic] the wording that went into paragraph 4. The formula is not complicated. If the value was less than $2.0 million then Mann and Bains would be required to make up the shortfall through an additional payment. However, if it was in excess of $2.0 million it would be deducted from the total purchase price stated in paragraph 2. If I were to accede to Grewal’s argument, the total purchase price would exceed $20.6 million. That clearly was not the intention of the parties.

12. I pause here to note that much has been said about the value of the property. With respect, [the] appraisal seems to be somewhat suspect in light of the questions raised by [the opposing expert] and of course the eventual sale price. In any event as stated above, the intentions of the parties was to pay Grewal $20.6 million. Of that amount, $18.6 billion [sic] was to be paid in installments, the remaining $2.0 million was to come from the sale of the Gibsons Property.

13. In reaching my decision the overall consideration must be the intent of the parties which is embodied in paragraph 4 of the settlement agreement. In summary it is not in dispute that the total purchase price was $20.6 million. As well there is no dispute that $18.6 million was to be paid in installments. Accordingly there will be an order that of the monies that are held in trust with McQuarrie Hunter, $2.0 million ought to be paid to Grewal while her [sic] remaining funds will be paid to Mann and Bains”.

Grewal brought an application for leave to appeal the arbitrator’s decision pursuant to s. 31 of the domestic arbitration act applicable at the time in B.C: Arbitration Act, R.S.B.C. 1996, c. 55 (B.C. enacted a new domestic arbitration act in 2020: Arbitration Act, S.B.C. 2020, c. 2.).

Justice Edelman of the B.C. Supreme Court granted leave to appeal. He found that there was an arguable case with respect to two issues: (1) that the arbitrator had disregarded the valuation process provided for in the Settlement Agreement and effectively created a new agreement between the parties; and (2) that the arbitrator had failed to apply the correct legal test with respect to the challenges to the valuation.

Specifically, Justice Edelman found as follows:

“[19] I am satisfied the petitioner has raised an arguable case that the Arbitrator allowed the factual matrix to overwhelm the text of the contract and has therefore raised an extricable question of law for the purposes of leave. In particular, I note that clause 4 of the contract on its face appears to require the transfer of the Gibsons property to the petitioner, and not simply the transfer of $2 million. Not only does the Arbitrator’s decision fail to engage with this aspect of the contractual text, but selects a valuation method directly at odds with the Petitioner’s ownership of the property. I am unable to discern any engagement or justification in the decision for a valuation date of July 2017, if the Petitioner was to be the owner of the property as of October 2015. I note that my comments are based on a preliminary review of the materials before me at the leave stage and should not be taken as binding on a judge ultimately hearing the case”

The Appellants then appealed Justice Edelman’s order granting leave to appeal to the B.C. Court of Appeal, which was the subject matter of this decision. The Appellants had also unsuccessfully sought to stay Justice Edelman’s order in the B.C. Supreme Court. As a result, the petition appealing the award was heard on the merits in the Supreme Court, with the presiding judge reserving judgement until the Court of Appeal issued its reasons on the appeal of the leave order.

The Appellant argued that Justice Edelman did not identify a legal error in the arbitrator’s contractual analysis, but rather, launched into the merits of the arbitrator’s contractual analysis and effectively “put the cart before the horse”.

The Court of Appeal affirmed Justice Edelman’s order granting Grewal leave to appeal the arbitrator’s decision and dismissed the appeal.

It confirmed that there is narrow jurisdiction when a court considers an appeal from a commercial arbitration and that leave should only be granted where questions of law can be clearly identified. However, the Court of Appeal also stated that the use of the factual matrix in contractual interpretation is limited by the legal principle that contractual interpretation must remain grounded in the text of the contract so as to avoid effectively creating a new agreement between the parties.

The Court of Appeal found that Justice Edelman was correct in finding that it was arguable that the arbitrator had erred in law by letting the factual matrix overwhelm the words of the contract. Justice Edelman correctly identified that the arbitrator’s decision failed to engage with the specific provisions of the contractual text and that there was no justification for the valuation date of July 2017, which was at odds with the date of the Respondent’s ownership of the property. Having identified the correct legal framework, the judge was correct in reaching his conclusion. He was careful not to engage in the merits of the appeal itself.

As a result, the appeal was dismissed.

Contributor’s Notes:

First, for a more detailed discussion of Justice Edelman’s order see Case Note #435 B.C. – expert determination not conducted in accordance with dispute resolution process may be error in law. For a discussion of the other applications made with respect to the arbitral award see Case Note #549 B.C. – Parties’ “expeditious” settlement process led to 2 arbitrations and multiple court proceedings over 7 years.

Second, the case is an important reminder for arbitrators that there are circumstances in which the application of an incorrect principle or the failure to apply a principle when interpreting a contract may give rise to an extricable question of law that is subject to appeal.

Third, the case also raises a practice point for counsel seeking leave to appeal in B.C. As can be seen from the complicated procedural history of this case, the prior Act required the parties to seek leave to appeal from the BC Supreme Court; the leave application was then subject to a potential appeal to the Court of Appeal. In the interim, unless a stay was obtained, the appeal itself could proceed in the Supreme Court, which decision could then also be appealed. Under the new Act, the application for leave to appeal is made directly to the Court of Appeal, streamlining the process.