B.C. – Danger of Bifurcated Proceedings – #846

In G & T Martini Holdings Ltd. v. Desert Properties Inc., 2024 BCSC 828, the Court dismissed a petition under s. 58(1)(c) of the Arbitration Act, S.B.C. 2020, c. 2 (“Arbitration Act”) to set aside an arbitral award after a bifurcated arbitration.  The Petitioner claimed that the Arbitrator had changed the rationale of the earlier liability award and was precluded from calculating damages in the manner it did at the damages stage after the Arbitrator’s earlier award on liability.  The Court found that the Arbitrator did not improperly change his decision on liability in the damages award, but instead merely elucidated upon his rationale for the decision he made in the liability award.

Background to the Dispute – The dispute related to a real estate transaction pursuant to which G & T Martini Holdings Ltd. (“the Purchaser”)was to purchase land in the Town of Langley from Desert Properties Inc. (“the Seller”).  Under a Restated Subdivision and Servicing Agreement (“the Service Agreement”) dated November 14, 2019, the Seller was required to pursue the subdivision and rezoning of the land, as well as perform certain work on the property.  The Town required that a bond be posted to provide security for any environmental damage before work could start.

A dispute arose between the parties with respect to posting the bond.  The Seller took the position that the bond was required to be posted only when the rezoning bylaw reached the fourth stage of reading.  The Purchaser took the position that the obligation arose earlier, and elected to post the bond itself to avoid what could have otherwise been a one-year delay to the work. 

After posting the bond, the Purchaser demanded that the Seller reimburse it under the Service Agreement, s. 25 of which provided:

“In the event any party (the “Non-Contributing Party”) fails to pay a cost it is responsible for pursuant to this Agreement within 15 days of receipt of a request from another party, acting reasonably, the other (the “Contributing Party”) may pay such cost on behalf of the Non-Contributing Party in which case the Non-Contributing Party shall pay interest to the Contributing Party on the amount so paid at a rate of two prevent [sic] per month (twenty four percent per annum) and the Contributing Party shall be deemed to have an equitable interest in the Non-Contributing Party’s lands to the extent such contribution and interest remains unpaid.”

The Arbitration – The dispute proceeded to arbitration, which was bifurcated into two stages, one addressing liability and the other addressing damages.  

(1) The liability stage – When the Arbitrator issued his award on the liability issue, he held that the Seller was to replace the bond (if it was still required) and that it was just and convenient for the Seller to pay interest on the amounts posted until the bonding was repaid to the Purchaser.  The Arbitrator decided that the amount of interest was to be determined at the damages hearing.  In the liability award, the Arbitrator stated:

“Since it was a legitimate concern that this work be done in order to avoid unnecessary delays in getting rezoning… and since [the Seller] was not prepared to do the work itself or post the bonding, I find it just and convenient that [the Seller] pay interest on the amounts posted until the bonding is repaid to [the Purchaser]. The amount of interest will be determined at the damages hearing unless agreed upon by the parties. To the extent the bonding is still required [the Seller] must replace it so that the amounts posted by [the Purchaser] can be returned to it.”  (at para 14, quoting the liability award at para 250; emphasis added.)

With respect to specific questions that had been presented to the Arbitrator at the liability stage, the Arbitrator answered:

Question 12 – “Is [the Seller] required to replace the environmental security bonding now?”

Answer: “Yes if it is still required and has not been repaid to [the Purchaser]”.

Question 15 – “Is [the Seller] required pursuant to s. 25 of the [Service Agreement] to pay contractual interest of 2% per month (24% per annum) to [the Purchaser] in respect of the Project Costs paid by [the Purchaser][…]?”

Answer: “[the Seller] is only obligated to pay interest with respect to environmental… security bonding. The amount of interest remains to be determined as part of the damages hearing if necessary.”

Question 17 – “Is [the Purchaser] entitled to an equitable interest in the […] Lands?”

Answer: “No”.

Question 18 – “Is [the Purchaser] entitled to an equitable lien on the […] Lands?”

Answer: “No”.

(Decision at paras 16-19)

The Arbitrator’s Questions 17 and 18 appeared to be inconsistent with the Service Agreement, as s. 25 provided that “the Contributing Party shall be deemed to have an equitable interest in the Non-Contributing Party’s lands to the extent such contribution and interest remains unpaid.”.  

Consequently, after the issuance of the liability award, counsel for the Purchaser wrote to the Arbitrator to inquire if the Arbitrator’s answers to Questions 17 and 18 were typographical errors.  In a subsequent email exchange, the Arbitrator stated that these answers were not made in error and further stated that the Seller was liable for interest on the bond as a matter of equity, rather than under the Service Agreement.

(2)  The damages stage – The arbitration then proceeded to the damages stage.  At this stage, the Purchaser took the position that the only coherent way to interpret the liability award was to conclude that the Arbitrator had determined that the Seller was liable under the Service Agreement and, as a result, s. 25 of the Service Agreement applied.  The Purchaser argued that, due to the finding of liability for interest in the liability award, the Arbitrator was compelled to calculate interest at the damages stage as set out in the Service Agreement. 

The Arbitrator disagreed.  He stated that he did not find that the bond was a cost that the Seller was responsible for under to the Service Agreement.  Instead, the Arbitrator stated:

In my reference to [the bond] in the Award I did not find that s. 25 of the [Service Agreement] applied. I agree with [the Seller] that it was not required to post [the bond] pursuant to s. 26 at the time it was posted. Thus it was not at that time a cost it is responsible for “pursuant to this Agreement” as required by s, 25 in order to generate interest at the contractual rate. However as stated in paragraph 250 of the Award I did find there was a legitimate interest of [the Purchaser] to avoid the 1 year delay […], and because [the Seller] was refusing to post the security, it was just and equitable that [the Seller] pay interest on the amounts posted.” (at para 22, quoting damages award; emphasis added)

Ultimately, in the damages award, the Arbitrator awarded interest to the Purchaser, but not pursuant to s. 25 of the Service Agreement.  Instead, it was only at the standard prejudgment rates, which were significantly less.

The Set-Aside Application – The Purchaser petitioned the British Columbia Supreme Court pursuant to s. 58(1)(c) of the Arbitration Act to set aside the Arbitrator’s award with respect to interest.  As well, the Purchaser applied for leave to appeal both the liability award and the damages award to the Court of Appeal pursuant to s. 59 of the Arbitration Act.  The Court of Appeal directed that the leave application be stayed pending the outcome of the set-aside application.

In the set-aside application, the Purchaser argued that by calculating damages as he did, the Arbitrator improperly revisited and revised his earlier award on liability, in respect of which he was functus officio after making the finding that interest was owed.  In doing so, the Purchaser submitted that the Arbitrator addressed, at the damages stage, a different question than what was put to him by the parties.  The Purchaser argued that the Arbitrator improperly attempted to rationalize the earlier liability decision in the second stage by addressing the underlying liability issue. 

The Seller disagreed and submitted that the question of interest was a live issue that flowed from the decision on liability. 

The Court dismissed the Purchaser’s application to set aside the award based upon s. 58(1)(c) of the Arbitration Act.   

To start, the Court examined the Arbitrator’s liability award and indicated that the Arbitrator’s explanations in the subsequent email exchange and in the damages award suggested that he did not change what had been decided at the earlier liability stage, but had instead elucidated upon the earlier rationale which had not been set out in clear terms. 

Section 58(1)(c) of the Arbitration Act states:

“58(1)A party may apply to the Supreme Court to set aside an arbitral award only on one or more of the following grounds: […]

  • the arbitral award deals with a dispute not falling within the terms of the arbitration agreement or contains a decision on a matter that is beyond the scope of the arbitration agreement…”

The key question before the Court under the s. 58(1)(c) application was whether the Arbitrator had addressed a different question than was put to him.  The Court took a broad approach to the Arbitrator’s jurisdiction and stated that the question of interest payable was put to the Arbitrator and this is what he addressed.  Therefore, there was no basis under s. 58(1)(c) of the Arbitration Act to set aside the award. 

Contributor’s Notes:

As a preliminary point, this case illustrates the inherent dangers that can arise in bifurcated proceedings.  Given their nature, there is a heightened risk of challenge by any of the parties if there appears to be inconsistency in the approaches taken by the arbitrator between the first and second stages. 

Consequently, arbitrators must take care not to make statements or determinations in the liability stage that may be seen as limiting (even inadvertently) their decision-making power in the second stage.  Equally, at the second stage, arbitrators must be alive to this issue and must take care not to undercut the logic of an earlier liability award or make inconsistent conclusions in the damages stage.  Especially in bifurcated proceedings, it is important to clearly set out exactly what is being decided, and why, as well as the limits of any decision. 

While the Court in this case ultimately concluded that in the second stage the Arbitrator was simply elucidating upon the earlier rationale that was set out in the liability award, it highlights that bifurcated proceedings are still fraught with risk. 

Second, this case further highlights that s. 58(1)(c) of the BC Arbitration Act (the set-aside provision) is primarily about jurisdiction.  The statutory basis to set aside an arbitral award under s. 58(1)(c) is linked to the scope of the arbitrator’s jurisdiction and not whether the underlying decision is logical or correct.  Other routes are potentially available to address these challenges.  The grounds to set aside an award are narrow.  This is illustrated in this case, in which the Court framed the issue as being whether the Arbitrator addressed a question that was submitted by the parties.  That question was the amount of interest payable, and the Arbitrator addressed this question.  Therefore, the set-aside application was dismissed on this basis.

The Court pointed out that the Purchaser had also applied for leave to the Court of Appeal of both the liability and damages awards.  The Court stated that other aspects of the challenge to the award, such as the issue of whether the decision on liability was properly made, were matters that could be raised before the Court of Appeal. 

Consequently, the sequel to this case will likely give guidance on these important areas of law and will be an upcoming one to watch for at the British Columbia Court of Appeal.