B.C. – Court of Appeal provides summary of principles applicable in appeals of arbitration awards – #248

In MSI Methylation Sciences, Inc. v. Quark Venture Inc., 2019 BCCA 448, B.C.’s Court of Appeal upheld an award, agreeing with the chambers judge that the arbitrator had not breached natural justice by allegedly failing to give the losing party an opportunity to address a theory of damages used in the award.  The Court held that the alleged error did not raise a distinction of sufficient substance to render the arbitration process unfair.  The Court also provided a summary of principles applicable in appeals of arbitration awards. For more on the issues in first instance, see the earlier Arbitration Matters note “B.C. – no arbitral error where arbitrator seeks assistance on legal principles raised in, but beyond, parties’ authorities.

Following an eight (8) day hearing in April 2018 during which Quark Venture Inc. (“Quark”) and MSI Methylation Sciences, Inc. (“MSI”) arbitrated their differences under a September 30, 2016 agreement (“Investment Agreement”), the arbitrator issued a June 21, 2018 award (“Award”).  In his Award, the arbitrator dismissed Quark’s counterclaim and granted MSI’s claim, ordering Quark to pay US $20 million to MSI.  See paras 8-15 on the contents of the Investment Agreement and paras 23-29 for an overview of the reasons and results in the Award.

MSI applied to the B.C. Supreme Court to recognize and enforce the Award while Quark applied for leave to appeal under section 29 of the Arbitration Act, RSBC 1996, c 55 to set it aside.  The applications were heard together over two (2) days in November 2018. 

By a March 27, 2019 decision in MSI Methylation Sciences, Inc. v Quark Ventures Inc., 2019 BCSC 440, the chambers judge dismissed Quark’s application and allowed MSI’s application. The chambers judge held that (i) the arbitrator committed no arbitral error by failing to observe the rules of natural justice and (ii) Quark’s allegations of error raised questions of mixed fact and law and not questions of law.

Quark appealed the chambers judge’s decision. The Court of Appeal identified two (2) grounds of appeal raised by Quark: (i) did the arbitrator commit arbitral error – paras 32-51; and, (ii) did the chambers judge err in refusing leave to appeal – 52-56 and 74-94.

(i) arbitral error – Quark argued that the arbitrator failed to observe the rules of natural justice by awarding damages on a theory which Quark claimed had not been specifically advanced and, as such, denied Quark the opportunity to address it. Quark relied on Hawkeye Power Corporation v. Sigma Engineering Ltd., 2012 BCCA 414 para. 57, 0927613 B.C. Ltd. v. 0941187 B.C. Ltd., 2015 BCCA 457 para. 57, Rodaro v. Royal Bank of Canada, 2002 CanLII 41834 (ON CA) paras 61 and 66, as well as Zermalt Holdings S.A. v. Nu-Life Upholstery Repairs Ltd., [1985] 2 E.G.L.R. 14 at p. 15 and Reliance Industries Ltd v. Union of India, [2018] EWHC 822 (Comm) para. 32.

The Court reviewed the cases and observed that their application is case-specific:

[37] The principle of knowing the case a party has to meet is basic to the concept of natural justice, but as D. Smith J.A. [in 927613 B.C. Ltd. v. 0941187 B.C. Ltd., 2015 BCCA 457] points out, the application of that principle is highly case-specific. Here, Quark says that MSI advanced a theory of lost opportunity to complete the clinical trial, but not a lost opportunity to obtain the funds to complete the trial. The submission of arbitral error depends largely on whether this is a distinction of sufficient substance to render the proceedings unfair.

The Court held that, while the pleadings were “sparse” and “not very specific”, the central claim was adequately pleaded and disclosed to Quark in a sufficient manner.  There was no arbitral error because there was no denial of natural justice.

(ii) error in refusing leave to appeal – In its analysis of the chambers judge’s decision, the Court applied the standard of correctness confirmed in Greata Ranch Holding Corp. v. Concord Okanagan Developments Ltd., 2019 BCCA 304 para. 45 as applicable to dismissing leave to appeal on a question of law. The Court analysed the three (3) questions raised by Quark as questions of law.  Agreeing with the chambers judge, the Court determined that none of the questions qualified for leave to appeal: 

(1)  question #1 was a question of mixed fact and law and no appeal was available.  See paras 76-80.

(2) question #2 did not arise out of the Award and there was no jurisdiction to grant leave.  See paras 81-88.

(3) question #3 involved no suggestion that a principle of law had been altered but, rather, a challenge by Quark to a finding of fact.  The application of a principle of law to a fact involved a question of mixed fact and law and therefore section 31 of the Arbitration Act provided no appeal.  See paras 89-94.

urbitral note – The reasons at paras 57-73 include a review of the legislative evolution of the appeal provisions in B.C.’s Arbitration Act, RSBC 1996, c 55, and provided the basis for the following summary of principles :

[72] From these authorities, and having in mind the legislative evolution of s. 31 of the Arbitration Act, I draw the following principles in relation to appeals from arbitration awards:

(a) Appeals are limited to questions of law arising out of the award. If the proposed question is not a question of law arising out of the award, there is no jurisdiction to grant leave to appeal.

(b) A question of law may be explicit or implicit in the award. If the question of law is explicit in the award, the statutory precondition is met. If the asserted question of law is implicit in the award, in the sense that it must be extricated from the application of the law to the facts, care must be taken to distinguish between an argument that a legal test has been altered in the course of its application (a question of law) and an argument that application of the legal test should have resulted in a different outcome (a question of mixed fact and law).

(c) One means of determining whether the challenged proposition is a question of law or part of a question of mixed fact and law is to consider the level of generality of the question. If the answer to the proposed question can be expected to have precedential value beyond the parties to the particular dispute, the question is more likely to be characterized as a question of law. On the other hand, if the answer to the proposed question is so tied to the particular circumstances of the parties to the arbitration that its resolution is unlikely to be useful for other litigants, the question will likely be considered a question of mixed fact and law. I would add to this that when the “question” is stated as a ground of appeal that is integrally tied to the facts of the case, it will more likely be characterized as a question of mixed fact and law, the answer to which cannot be of general application because of the integration of the particular facts of the case to the question. The more the question can be abstracted from the particular facts to a question of principle, the more likely it is that the challenged proposition will be characterized as a question of law with potential precedential value.

(d) A narrow scope for what constitutes extricable questions of law is consistent with finality in commercial arbitration.

The reasons also excerpt passages from the case law which identify thresholds at which the arbitrator ought to alert the parties to address an argument or issue.

(i) Hawkeye Power Corporation v. Sigma Engineering Ltd., 2012 BCCA 414

[57] Natural justice requires that parties have notice of the case they are required to meet and the opportunity to adduce evidence and make submissions on that case.

(ii) 0927613 B.C. Ltd. v. 0941187 B.C. Ltd., 2015 BCCA 457

[60] Natural justice will require an arbitrator to act with procedural fairness, the requirements of which will depend on the subject-matter of the dispute, the circumstances of each case, the nature of the inquiry, and the rules under which the parties have agreed to arbitrate their dispute. [citations omitted] The duty of fairness is not a “one size fits all” requirement but is molded by the circumstances of each case. Its most basic requirement is “simple fairness” or “fair play in action”.

(iii) Rodaro v. Royal Bank of Canada (2002), 2002 CanLII 41834 (ON CA)

[61] By stepping outside of the pleadings and the case as developed by the parties to find liability, Spence J. denied RBC and Barbican the right to know the case they had to meet and the right to a fair opportunity to meet that case. The injection of a novel theory of liability into the case via the reasons for judgment was fundamentally unfair to RBC and Barbican.

[66] Had Mr. Rodaro chosen to advance the lost opportunity theory eventually devised by Spence J., he would have had to lead evidence to show that the opportunity existed and that he would have taken advantage of that opportunity. The first inquiry is objective, but the second is directed to what Mr. Rodaro would have done. Had Mr. Rodaro led such evidence, Spence J. would have had to evaluate it and determine the likelihood of Mr. Rodaro taking the opportunity to negotiate had RBC not improperly disclosed the confidential information.

(iv) Zermalt Holdings S.A. v. Nu-Life Upholstery Repairs Ltd., [1985] 2 E.G.L.R. 14

Nevertheless, the rules of natural justice do require, even in an arbitration conducted by an expert, that matters which are likely to form the subject of decision, in so far as they are specific matters, should be exposed for the comments and submissions of the parties. If an arbitrator is impressed by a point that has never been raised by either side then it is his duty to put it to them so that they have an opportunity to comment. If he feels that the proper approach is one that has not been explored or advanced in evidence or submission then again it is his duty to give the parties a chance to comment. … It is not right that a decision should be based on specific matters which the parties have never had the chance to deal with, nor is it right that a party should first learn of adverse points in the decision against him. That is contrary both to the substance of justice and to its appearance, and on the facts of this case I think that the landlords’ case is made out.