B.C. – arbitration parties cautioned to present their full case or risk post-award issue estoppel – #107

In Fortinet Technologies (Canada) ULC v. Bell Canada, 2018 BCCA 277, the B.C. Court of Appeal cautioned arbitration parties not to “hold back arguments” or change their position afterwards when challenging the resulting award in court. The Court held that “issues” can be decided either explicitly and implicitly by awards and that (a) issue estoppel prevents a party in the post-award period from raising an issue it failed to raise or overlooked during the arbitration and (b) abuse of process prevents a party from taking a position inconsistent with that taken during the arbitration.

Bound by a March 1, 2011 sublease set to term-out July 30, 2015, over several months between July 2014 and June 2015, Fortinet Technologies (Canada) ULC (“Fortinet”) and Bell Canada (“Bell”) negotiated the terms of the sublease’s extension. In their negotiations, the two exchanged offers within an unremarkable range either side of their then-existing rent of $180/sq.ft. Over the course of negotiations, Fortinet proposed rents from $186/sq.ft to $192/sq.ft while Bell’s proposals ranged from $135/sq.ft to $165/sq.ft.

In the negotiations, Bell advised that it sought a rent reduction. It pointed to lower market rental rates in the surrounding area and to the depreciation of the equipment provided by Fortinet under the sublease. Fortinet contended that any market rate decreases did not reflect the market for data centre space and that the equipment it provided was in good condition.

The reasons acknowledge and explain the premium use to which Bell had put and intended to put the leased space.

[3] Premises used as a data centre require specialized infrastructure such as redundant (or backup) power supplies, data communication connections, and environmental controls (e.g., temperature control and fire suppression), as well as security. Usually, rental rates for such premises command a premium over premises that do not meet those requirements.

The sublease set out two (2) options for renewal:

2.(b) Provided the Subtenant is not then in default of, and has not previously been in default of, any of its covenants under this Sublease and the Head Lease, the Subtenant shall have the following options to extend the term of the Sublease:

(i) Two (2) options to extend the Sublease Term for an additional five (5) years each on the same terms and conditions as this Sublease except for Gross Rent which shall be negotiated by the parties in good faith taking into account, if applicable and determinable, the then prevailing gross rent for extending tenants for comparable unimproved warehouse space in comparable buildings.

(ii) If the Tenant and the Subtenant have not mutually agreed, with or without the assistance of mediation, on the Gross Rent prior to the commencement of the renewal term, then the Gross Rent will be determined by a single arbitrator mutually acceptable to the parties and appointed under the provisions of the Commercial Arbitration Act of British Columbia with the parties sharing equally the costs of the arbitrator. Until the Gross Rent has been determined, the Subtenant will pay the monthly Gross Rent applicable at the expiration of the then current term.

The sublease provided no fixed amount of rent in the event of a lease extension and the parties were subject to either of the two (2) options set out above. By February 2015, the parties had reached a standstill. Bell advised that it would submit the renewal rent to arbitration.

In March 2015, Bell reiterated that it would not accept an increase over $180/sq.ft and insisted on a reduction. Fortinet was prepared to make concessions and on March 10, 2015 offered to accept $180/sq.ft rather than an increase. Bell mentioned recourse to arbitration in subsequent exchanges and proposed arbitrators. The reasons noted that the record before the Court omits the content of further negotiations but did confirm that, on May 21, 2015, Bell offered a renewal rate of $45/sq.ft.

Fortinet issued a June 11, 2015 Notice to Arbitrate and served a Statement of Claim July 9, 2015. Bell defended, serving its Statement of Defence July 17, 2015.

In their respective documents, each made statements key to the result of the subsequent decisions in B.C. Supreme Court and Court of Appeal. Those statements are cited in more detail at paras 11, 12 and 14. Fortinet claimed, among other things, that Bell “has the right … to extend the lease”. Bell argued that ‘comparable unimproved warehouse space in comparable buildings’ set an annual rent of $10/sq.ft.

On February 12, 2016, a few days before the arbitration hearing, Bell disclosed an October 14, 2014 document showing that it had decided at that time that it should renew the sublease at an amount up to $192/sq.ft. Fortinet referred to the document in the arbitration. It did not, at any time before the arbitration award, claim that Bell’s bad faith negotiations deprived Bell of the right to extend the sublease.

During the arbitration, Bell increased the amount it proposed for rent to $27/sq.ft to comply with an expert opinion on which it relied. Fortinet sought a gross rental rate of $198/sq.ft. The parties maintained those positions throughout the arbitration. In his July 27, 2016 award, the arbitrator accepted Bell’s position and set the rent for the renewal period at $27/sq.ft.

Fortinet’s response was two-fold. First, Fortinet applied September 22, 2016 to the B.C. Supreme Court to set aside the award for alleged arbitral error pursuant to section 30 of B.C.’s Arbitration Act, RSBC 1996, c 55 or, in the alternative, to set it aside on an issue of law pursuant to section 31. That application was set down for hearing but adjourned pending the result in Fortinet’s parallel court file.

Second, Fortinet delivered a Notice of Civil Claim December 22, 2016 seeking compensatory damages for what it alleged was Bell’s breach of its duty to negotiate in good faith, under the sublease and at common law. Fortinet’s fuller claims appear at paras 16-17 of the reasons. A key statement made by Fortinet in its civil action is that “because good faith negotiations are required by the extension clause of the sublease, Bell lost its right to extend the sublease.

Bell objected. It argued that Fortinet could not proceed with arbitration to determine the rent for the renewal term and now argue, after the arbitration, that Bell had no right to renew the sublease. “If Fortinet wished to argue that Bell’s conduct during negotiations deprived it of the right to renew, Bell says, it should not have filed a notice to arbitrate.”

Bell applied to strike the claim on the basis that it was res judicata or otherwise an abuse of process. In Fortinet Technologies (Canada) ULC v. Bell Canada Inc., 2017 BCSC 1066, the chambers judge dismissed Bell’s application, holding that the validity of the sublease was not a matter which the arbitrator had jurisdiction to decide. The chambers judge’s reasons are excerpted in part at para. 19.

Bell appealed, arguing that the chambers judge erred in not concluding that Fortinet’s claim was barred either by issue estoppel or as an abuse of process. It submitted that the validity of the sublease was a precondition to the arbitrator determining the rent for the renewal term. Having initiated and pursued the arbitration on the basis that the sublease and extension were valid, Bell argued that Fortinet could not now argue the opposite.

Fortinet claimed that its approach was not an abuse because it only learned, during the arbitration, that Bell had breached its obligation of good faith in the negotiations. The Court of Appeal dismissed this claim. The only evidence relied on by Fortinet in support of its allegation of bad faith related to facts known to Fortinet before it filed its notice to arbitrate. “Fortinet had plenty of time to adjust its submissions in the arbitration if it genuinely considered that new evidence had revealed that Bell had no right to renew the sublease.

The Court of Appeal reasons address two (2) issues:

(a) whether issue estoppel bars Fortinet’s claim that the sublease extension is invalid. The Court of Appeal’s reasons address this issue at paras 21-36; and,

(b) is Fortinet’s civil action for damages also barred by res judicata? The Court of Appeal briefly addresses and decides ‘no’ at paras 37-38.

For commercial arbitration counsel, paras 21-36 deliver several insights useful to addressing post-award challenges. The reasons identify differing ways in which to look at the same “issue” if not just to express what exactly qualifies as an “issue” for the purposes of res judicata’s issue estoppel.

Applying issue estoppel to the case before it, the Court offered various ways to anticipate saying “issue”. The Court sampled variations which include “assertion”, “premise”, “position”, “argument”, “claim” and even “shared acknowledgement” and “necessarily bound up”. Each term has its own specific meaning but were used to explain an overlap between Fortinet’s approach during the arbitration and in its post-award challenge.

The Court provided advocacy advice, cautioning arbitration parties against the “taking of inconsistent positions in legal proceedings” at the risk of constituting an abuse of process. In support, the Court referred to Pepper’s Produce Ltd. v. Medallion Realty Ltd., 2012 BCCA 247; First Majestic Silver Corp. v. Davila Santos, 2012 BCCA 5; Chapman v. Canada (Minister of Indian and Northern Affairs), 2003 BCCA 665; and, Glover v. Leakey, 2018 BCCA 56.

The Court warned that arbitration parties cannot advance in court a position inconsistent with the position taken in the arbitration. Doing so “would undermine the finality and integrity of the arbitration process” and constitute “an abuse of process”. See VIH Aviation Group Ltd. v. CHC Helicopter LLC, 2012 BCCA 125 at para. 5.

Adhering to the Supreme Court of Canada’s determination in Danyluk v. Ainsworth Technologies Inc., [2001] 2 SCR 460, 2001 SCC 44, the Court identified three (3) prerequisites to establishing issue estoppel and underlined that they apply equally to tribunals as to courts:

(1) the question that is being addressed in the new proceeding must be one that was determined in the earlier proceeding;
(2) the earlier decision must be a final one; and,
(3) the parties to the proceedings must be the same, or their privies.

The Court readily held that (2) and (3) were met and considered whether (1) had been established.

The Court disagreed with the chambers judge that the “issue” of Bell’s right to extend the sublease was not a “question” referred to the arbitrator and therefore beyond the arbitrator’s jurisdiction. Rather, the Court identified a “dispute” over Bell’s right to extend as an “issue” that went to the jurisdiction of the arbitrator, something which ought to have been raised before the arbitrator.

[30] If there had been a dispute between the parties concerning Bell’s right to extend the sublease, that issue would have gone to the jurisdiction of the arbitrator. In Seidel v. TELUS Communications Inc., 2011 SCC 15 (CanLII) at paras. 28-29, 114, both the majority and minority of the Court agreed that, where the jurisdiction of an arbitrator is challenged, the arbitrator has, at first instance, jurisdiction to determine whether the challenge is valid. Contrary to the chambers judge’s reasoning, Fortinet could have challenged the jurisdiction of the arbitrator within the arbitration proceeding. It simply failed to do so.

In three (3) consecutive paragraphs, the Court wound up its analysis and (a) applied issue estoppel to the particular facts between Bell and Fortinet, (b) explained when an “issue” was “determined” – either explicitly or implicitly – and (c) cautioned that it was “too late” for Fortinet to take a position contrary to its earlier one, the validity of the sublease being res judicata.

[31] In filing a notice to arbitrate, Fortinet asserted that Bell had the right to renew the sublease, and had exercised that right. Bell, of course, accepted those premises. The shared acknowledgment by the parties that the sublease was validly renewed was the foundation for the arbitration. As neither party contended that the sublease extension was invalid, the arbitrator was spared the necessity of addressing the issue in his award. The fact that the issue was not expressly considered in the award, however, does not mean that it was not “determined” for the purposes of issue estoppel.

[32] An issue will, of course, be “determined” by a tribunal when that tribunal expressly reaches a conclusion on it. An issue may also be determined implicitly, however. Where a factual or legal issue is “necessarily bound up” with the determination of the tribunal, the issue itself will be characterized as having been determined: see Cliffs Over Maple Bay (Re), 2011 BCCA 180 (CanLII) at para. 32.

[33] The arbitrator made his award relying on the common position of the parties that the sublease was validly extended. The validity of the sublease was “necessarily bound up” with the determination of the rent to be paid on the renewal. It was, therefore, a matter “determined” in the arbitration. It is now too late for Fortinet to take a contrary position. The matter is res judicata.

The Court resisted Fortinet’s alternative argument, namely that the Court should exercise its discretion and not apply issue estoppel because it would be unjust to do so. Fortinet claimed that it would undermine the efficiency of arbitration and be “inappropriate to require parties to arbitrations on discrete issues to be alert to all other potential issues in order to raise them in the arbitration and not be subjected to issue estoppel.

Where a party believes the arbitrator does not have jurisdiction to resolve the issue, they should not wait until the arbitration has concluded to raise the concern. Issue estoppel simply requires parties to raise issues before the arbitrator that the arbitrator has jurisdiction to decide and which are necessarily bound up with the resolution sought. It will not preclude other matters. This does not perpetuate unfairness.

The Court agreed to strike Fortinet’s allegation that the Bell’s “purported exercise of the option under s.2(b) of the Sublease is invalid and the Sublease terminated on July 30, 2015” and allowed the balance of the civil claim to continue, without comment on the strength of the claim.