In Kingsgate Property Ltd. v The Board of Education of School District No. 39, 2023 BCSC 1266, the Court considered the text, context and purpose of s. 31(3) of the (former) Arbitration Act R.S.B.C. 1996 c. 55 (the “Arbitration Act”). (Comparable language appears in s. 59(5) of the current B.C. domestic Act.) That section allowed a court to attach such conditions to an order granting leave to appeal an arbitration award as it considers just. The Court determined that s. 31(3) empowered the Court to impose conditions on granting leave to appeal that will prevent miscarriages of justice. Here, the Court made two such orders sought by the petitioner Kingsgate Property Ltd. (the “Tenant”). Firstly, the Court settled the terms of security with respect to the Tenant’s appeal of an award made in a rent review arbitration (the “Award”). Secondly, the Court ordered a stay of the Award and a default notice the Board of Education of School District No. 39 School Board (the “Landlord ”) had issued for arrears of rent (the “Default Notice”).
The Arbitration – The case arises from a high-stakes rent dispute between the Tenant and Landlord, parties to a 1972 shopping mall lease (the “Lease”). In the Award, the majority of the arbitral tribunal determined the market value of the subject property (the “Property”) to be $116.5 million. Because this was an input into the rent calculation formula under the Lease, the effect of the Award was that unpaid rent as of the time of the hearing was $52.4 million.
The Application for Leave to Appeal –The Court granted the Tenant leave to appeal the Award, subject to the condition pursuant to s. 31(3) of the Arbitration Act that it post security on terms to be agreed by the parties and satisfactory to the Court. The parties could not agree on the appropriate security and security terms.
Tenant’s Stay Application – Following the leave decision, the Landlord issued the Default Notice under the Lease in reliance on the Award. It claimed the right to terminate the Lease and a right of re-entry 60 days after delivery of the Default Notice.
The Tenant applied for an order to determine the security terms and for a stay of obligations under the Award and the Notice of Default, pending determination of the appeal. In both cases, the Tenant relied on s. 31(3) of the Arbitration Act, which provided that when granting leave to appeal an award, a court may “attach conditions to the order granting leave that it considers just.”
The Court found the following issues arose from the Tenant’s application:
1) What is the nature of the Court’s powers to attach conditions to an order granting leave to appeal under s. 31(3) of the Arbitration Act?
2) Does the Court have the jurisdiction to grant a stay in respect of the Award which is subject to appeal and notice of default issued in reliance on that Award?
3) Do the petitioners seek a form of mandatory injunction?
4) What security terms should be imposed as a condition pursuant to s. 31(3), and should a stay in respect of the Award and the notice of default be granted as part of the s. 31(3) condition?
5) Should the Court decline to grant any of the relief sought in virtue of s. 17 of the Court of Appeal Act, S.B.C. 2021, c. 6?
Issue 1: What is the nature of the Court’s powers to attach conditions to an order granting leave to appeal under s. 31(3) of the Arbitration Act?
The Court noted that there was no jurisprudence setting out principles courts must consider when fixing conditions under s. 31(3) of the Arbitration Act and began its analysis by summarizing the principles of statutory interpretation.
Firstly, the Interpretation Act, R.S.B.C. 1996, 238 provided: “Every enactment must be construed as being remedial and must be given such fair, large, and liberal construction and interpretation as best ensures the attainment of its objects.”
Secondly, “the words of an enactment are to be read in their entire context in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.”
The Court determined that s. 31(3) of the Arbitration Act, which was broadly drafted, was designed to work in conjunction with the leave provisions of the Arbitration Act to, “prevent a potential miscarriage of justice”, namely, the “legal and practical prejudicial consequences of an award which may turn out to be invalid from coming to fruition.”
The Court found that to prevent potential miscarriages of justice, courts should look at the legal and practical realities flowing from an arbitral award. In this case, the central dispute concerned the rent payable under the Lease. In concluding that the Court had the power to issue a stay of the Award requiring the Tenant to pay, the Court wrote:
“[27] Construing s. 31(3) in light of its text, its context and purpose, I conclude it is within the Court’s discretion to grant the relief in the nature of a stay in respect of the Award that is the subject of an appeal proceeding.”
The Landlord argued that a stay would interfere with the bargain the parties had struck under the Lease. The Court, however, disagreed, as the Lease was subject to the Arbitration Act and the Court’s powers thereunder.
Issue 2: Does the Court have the jurisdiction to grant a stay in respect of the Award which was subject to appeal and notice of default issued in reliance on that Award?
The Court confirmed it did have this power, which flowed from its determination on Issue 1. The Award was directly connected to the Lease’s rent calculation. In the circumstances, this required a stay of the Award to do justice between the parties and prevent a potential miscarriage of justice.
Issue 3: Did the petitioners seek a form of mandatory injunction?
The Court found that the Tenant sought a suspension of legal rights and obligations, namely, to prevent the Landlord from terminating the Lease pending determination of any indebtedness. This, the Court determined, was a prohibitory not mandatory injunction.
Issue 4: What security terms should be imposed as a condition pursuant to s. 31(3), and should a stay in respect of the Award and the notice of default be granted as part of the s. 31(3) condition?
The parent company of the Tenant held substantial real estate assets. As security for the disputed amounts under the Award, it proposed to undertake not to sell or further encumber real property with equity of approximately $88 million and to pay the Award within 60 days if the Tenant’s appeal was unsuccessful. While the Landlord argued that only full payment of the Award could constitute proper security, taking account of the equity in the properties and the potential harm to the Tenant if it had to pay the full sum, the Court found this security was just in the circumstances.
Next, the Court considered whether to stay the Award and the Default Notice. The Court applied the well-known injunction test from RJR-MacDonald Inc. v. Canada (Attorney General), 1994 CanLII 117 (SCC), which requires a preliminary consideration of the merits of the claim, whether there is irreparable harm if the stay is not granted, and the balance of convenience.
As the Court had already granted leave to appeal the Award, the first branch of the test was easily satisfied. As to irreparable harm, the Court accepted the Tenant’s evidence that if it had to pay the Award now, it would materially affect its business due to diversion of capital needed to fund the business, and the potential need to sell assets and to restructure existing debts. This business disruption, the Court found, amounted to irreparable harm.
Finally, the Court found that the balance of convenience favoured granting the stay. Most significantly, the Tenant’s parent company had posted security in respect of the Award and provided an undertaking as to damages.
Issue 5: Should the Court decline to grant any of the relief sought in virtue of s. 17 of the Court of Appeal Act, S.B.C. 2021, c. 6?
Section 17 requires that all matters relating to the appeal be before the Court of Appeal. The Landlord argued that the relief sought extended beyond the order made in the leave decision, which created a “s. 17 problem.” That is, relief that extends beyond the order made in the Leave Decision ought to have been brought before the Court of Appeal, not the Supreme Court. The Court rejected this argument, holding that the stay and security orders both fell within the ambit of the order made in the leave decision.
Contributor’s Notes:
This case was decided under the 1996 Arbitration Act, which was supplanted by the Arbitration Act, SBC 2020, c 2 (the “2020 Act”). The 2020 Act includes conditions that may provide a party faced with circumstances similar to the Tenant with further avenues. For example, s. 61 of the 2020 Act addresses the enforcement and recognition of arbitral awards and codifies the right of the Court to stay the enforcement of an award and post security where the award is under appeal. Section 61(5), the material section, provides that where there is an application to set aside or appeal an award before the Court that “the Supreme Court may order that recognition and enforcement of the arbitral award is stayed for a time and on conditions, including conditions as to the deposit of security.”
The Court’s analysis will be particularly helpful in future cases where parties purport to take steps that are not strictly enforcing an award. Here the Landlord insisted that it was merely seeking to collect rent, not enforce the Award, as the Award merely calculated the market value of the Property. If the Court had accepted this argument, the Landlord would have likely evaded the Court’s powers to order a stay. The Court, however, rejected this argument and found that the correct approach in these circumstances is to look at the substance, not the form of the award. As the Court wrote:
“[22] In seeking to do justice between the parties and to prevent a miscarriage of justice, in the context of s. 31(3), the Court should look to the practical and legal realities which relate to an award, and look to substance not simply form. Here, although strictly speaking the Award determined market value and did not decide the amount of rent, the Award’s market value determination is a driver for the calculation of rent under the Lease formula. The Award is at the heart of the parties’ rent dispute. The Award is the main premise for the [Landlord’s] claim that the petitioners now owe it in excess of $52 million, and for [the Landlord’s] assertion that the petitioners are in breach of the Lease for non‑payment and for the issuance of the notice of default. Faced with an analogous situation now, in addition to s. 59(5) of the 2020 Act, parties in the position of the petitioners may also consider seeking relief pursuant to s. 61(5) of the 2020 Act.