B.C. – court reverses arbitrator, ruling arbitrator has no jurisdiction due to parties’ settlement – #032

In Lithium One Homes Ltd. v. Abakhan & Associates Inc., 2017 BCSC 2189, B.C.’s Supreme Court granted an appeal of an arbitrator’s decision by which he had decided he had jurisdiction.  Mr. Justice Ronald S. Tindale determined that the parties had signed a settlement which released each party from all disputes arising out of the contract containing their arbitration agreement.  Tindale held that the arbitrator failed to give sufficient reasons why he decided he had jurisdiction and, in reviewing the facts, Tindale J. concluded that without a dispute between the parties, the arbitrator lacked jurisdiction because of the settlement.  

Lithium One Homes Ltd. (“Lithium”), a residential home builder, contracted with two individuals (the “Buyers”) for the construction of a home in B.C. for a price of $514,500.00 (the “Contract”).  The Buyers paid Lithium $25,000.00 in July 2014 and a further $50,000.00 which the reasons for judgment identified both as being a “Deposit”.  

Prior to construction commencing, the Buyers advised Lithium that they could not proceed to the payment of the balance owing.  The Buyers and Lithium exchanged to resolve their dispute over the damages claimed by Lithium for the breach of the Contract.  On March 14, 2015, the three signed a settlement agreement by which Lithium kept the $75,000.00 in exchange for a mutual release (the “Release”).  

The recitals to the release identified the $75,000.00 as a deposit, that the Contract was “cancelled” and included the following :  

Know All Men By These Presents that for and in consideration of the sum of Zero ($0.00) Dollars and other good and valuable consideration (the receipt and sufficiency of which is hereby acknowledged) Leonard Lucien Legault and Wendy Lynn Legault Do Hereby Remise, Release And Forever Discharge Lithium One Homes Ltd. And (JR) and (TT) their executors, administrators, successors and assigns, of and from any and all actions, causes of action, claims and demands arising out of the Contract of Purchase and Sale dated July 29, 2014 between (LLL) and (WLL) as Purchaser and Lithium One Homes Ltd. as Seller of the property. 

 It is acknowledged that the consideration paid under this mutual release comes from the $75,000.00 deposit paid under the contract. 

Soon after the three signed the Release, on March 28, 2015 the Buyers made an assignment in bankruptcy.  Abakhan & Associates Inc. (“AAI”) was appointed trustee in bankruptcy for both Buyers.  AAI initiated arbitration against Lithium on June 9, 2016 alleging wrongful retention of the $75,000.00 which AAI characterized as a penalty and not a deposit.  Lithium defended.   

Both parties submitted written argument to the arbitrator as to whether the arbitrator had jurisdiction to deal with the claims made by AAI.  On March 9, 2017, the arbitrator held that he did have jurisdiction to deal with the claim of monies retained.  The arbitration clause provided that the parties would arbitrate a dispute if it dealt with “the interpretation of this Contract or the extent of the Work.”  The arbitrator determined that their dispute over whether the $75,000.00 was a “deposit” qualified as a dispute involving the interpretation of the Contract.  

Lithium applied to appeal that decision under section 31 of B.C.’s Arbitration Act, RSBC 1996, c 55 and, if leave was granted, to vary the decision under section 31(4).  Lithium argued that the arbitrator had no jurisdiction because the Release resolved any dispute under the Contract.  

Tindale J. noted that the Release predated both the bankruptcy and the notice of arbitration and, “on its face, appears to resolve all issues arising out of the Contract” and “acknowledges that the Contract was cancelled and any outstanding issues were resolved.”  That said, he observed that the arbitrator did not deal with the Release’s impact on the issues and whether it eliminated the dispute.  Referring to Ecobase Enterprises Inc. v. Mass Enterprise Inc., 2017 BCCA 29, he noted that the inadequacy of the reasons prevented the court from reviewing the decision on appeal and the inadequacy constituted an error of law.   Ecobase Enterprises itself was cited for relying on K.L.K. v. E.J.G.K., 2011 BCCA 276 which stated:  

[25] The function of reasons in the civil context is to justify and explain the result, to tell the losing party why he or she lost, to provide for informed consideration of the grounds of appeal, and to satisfy the public that justice has been done:  F.H. v. McDougall, 2008 SCC 53 (CanLII), [2008] 3 S.C.R. 41.

 The excerpt from Ecobase Enterprises Inc. limited the impact of its comments on inadequacy of reasons.  A failure to give adequate reasons created no “free-standing basis for appeal” and a court sitting in appeal cannot intervene “merely because it believes the trial judge did a poor job of expressing himself. 

[28] This issue on appeal is of importance to the parties because they need to have certainty that a contract entered into (that being the Release) is determinative of the issues that arose during the performance of the contract. The determination as to whether the Release resolved all issues in dispute is essential to prevent a miscarriage of justice. 

[29] This issue on appeal is important to those in the construction industry because they need to know that a mutually agreed upon contract, such as the Release, cannot be ignored and has legal effect. 

[30] Finally, this issue on appeal is of general or public importance because parties need to know that they can resolve disputes through agreements such as releases, and that, once resolved, these agreements will be binding and prevent the disputes from resurfacing. 

The issues raised by the Release were key and the failure to address them prompted Tindale J. to intervene.  If there had been no Release, Tindale J. wrote that he might have identified a valid dispute.  However, the Release was not challenged and the record contained no evidence that it was not binding or unenforceable.  The interpretation of the $75,000.00 became irrelevant as the parties no longer had a dispute. 

Using the discretionary jurisdiction set out in section 31(4), he granted the appeal and ordered that the decision be amended to provide that the arbitrator had no jurisdiction to deal with AAI’s issues.