In Spirit Bay Developments v. Scala Developments, 2020 BCSC 1839, Mr. Justice Robert Johnston granted leave to appeal for three (3) questions of law which he determined had arguable merit but dismissed the application to set aside the award. A pair of questions involved misinterpretation and application of applicable case precedents and a third arose from the “arguably defective” pleading made by the party resisting appeal of the award. Refusing to set aside the award on the basis of legal error, Johnston J. noted that the alleged error of law would be determined on appeal. “Additionally, the parties clothed the arbitrator with the power to decide their dispute, and that includes the power to be wrong in interpreting and applying the law”.
Spirit Bay Developments Limited Partnership (“Spirit Bay”) and Scala Development Consultants Ltd. (“Scala”) signed a November 20, 2015 contract by which Scala agreed to build houses and Spirit Bay agreed to pay Scala for them (“Contract”).
Spirit Bay gave notice to terminate the contract on August 27, 2018 and immediately contracted with another builder to carry on building houses for Spirit Bay. Scala continued to work on those houses which it was building and stopped work, leaving the work site, on December 6, 2018. Scala claimed that Spirit Bay owned it money as of the termination plus additional sums for the work performed between the August and December 2018.
In April 2019, Scala initiated arbitration. It alleged Spirit Bay’s failure to pay sums following the termination of the Contract and claimed arrears under the Contract due as of the termination plus amounts owing under a separate work in progress completion contract, repayment of a loan, lost profits, general damages and interest. It amended to claim restitution on a quantum meruit basis, in the nature of an unjust enrichment claim, for services it had provided to Spirit Bay.
Spirit Bay defended the claims, alleging breach of the Contract by Scala, admitted some sums owing to Scala but claimed sums due to it because of overpayments, denied the work in progress completion contract and asserted that the Contract was void because Scala had not made a particular loan stipulated in the Contract.
A ten (10) day hearing was held in October, November and December 2019 with evidence through witness statements, cross-examination of certain witnesses and documents. An award issued (“Award”) ordering Spirit Bay to pay Scala $1,769,787.16 and dismissed Spirt Bay’s counterclaim of $1,491,074.15.
Spirit Bay applied to set aside the Award and for leave to appeal it respectively under sections 30 and 31 of the former Arbitration Act, RSBC 1996, c 55 in effect at the time of the arbitration. That legislation has now been replaced, effective September 1, 2020, by B.C.’s Arbitration Act, SBC 2020, c 2. Johnston J. noted both of B.C.’s domestic arbitration statutes but, applying section 70 of the new legislation, commented that the newer version did not apply to Spirit Bay’s and Scala’s arbitration as theirs had commenced before the new legislation had come into force.
Scala also applied to recognize and enforce the Award but, due to time constraints, Scala’s application was adjourned.
Section 31 – leave to appeal – Under section 31(1), Spirit Bay was required to obtain leave to appeal on a question of law. Provided the question qualified as a question of law, the court might grant leave if, under section 31(2)(a), it also determined that “the importance of the result of the arbitration to the parties justifies the intervention of the court and the determination of the point of law may prevent a miscarriage of justice”.
Johnston J. referred to Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 (CanLII),  2 SCR 633 para. 41 which described the “threshold requirement” of qualifying an appeal as involving a question of law. He also acknowledged the difficulty and the possibility of identifying questions of law stemming from contractual interpretation, referring to Canada (Director of Investigation and Research) v. Southam Inc., 1997 CanLII 385 (SCC),  1 SCR 748 para. 35 and Sattva Capital Corp. v. Creston Moly Corp. para. 53. Johnston J. completed his statement of the appropriate standard by stating that he need not decide the merits of the challenge. He adopted the statement made in MSI Methylation Sciences, Inc. v Quark Ventures Inc., 2019 BCSC 440 para. 62 that “[t]he appropriate threshold for assessing the legal question at issue under s. 31(2) is whether it has arguable merit or a reasonable prospect of success”.
Alleged errors of law – Spirit Bay identified six (6) alleged errors of law. Over paras 20-47 Johnston J. reviewed each in turn and determined that three (3) had “arguable merit”.
(i) The arbitrator had cited Wade v. Duck, 2018 BCCA 176 for the proposition that he could consider the parties’ subsequent conduct to assist him in interpreting their Contract without first finding that the Contract was ambiguous. Johnston J. observed that the case did not support that statement and, because interpretation was a “major issue”, determined that the question qualified. “There is an argument to be made that the arbitrator’s misinterpretation of Wade – an error of law – has a reasonable prospect of success on appeal if leave is granted”.
(ii) The arbitrator had asserted that “a contract must be interpreted objectively, in a commercially reasonable manner, with a consideration of the factual matrix”. In doing so, Spirit Bay asserted that the arbitrator has misinterpreted Toronto (City) v. W.H. Hotel Ltd., 1966 CanLII 8 (SCC),  SCR 434 para. 13 which had formulated the test differently. “I agree that this transaction being an ordinary commercial transaction it is the duty of the Court in interpreting that document to avoid such an interpretation as would result in commercial absurdity”.
“Spirit Bay argues that there is a fundamental difference between interpreting to avoid commercial absurdity and interpreting in a commercially reasonable manner; the second approach can be an invitation for the arbitrator to insert his own views of commercial reasonableness on the parties rather than seeking the intention of the parties from the language of their agreement considered in light of the circumstances in which they reached their agreement”.
Johnston J. found “arguable merit” in Spirit Bay’s argument that the arbitrator had erred in law in his interpretation and application of Toronto (City) v. W.H. Hotel Ltd.
(iii) Spirit Bay asserted that the arbitrator had erred in deciding that Scala was entitled to be paid for work it had done because to order otherwise would result in Spirit Bay’s unjust enrichment. Johnston J. noted that the confusion arose from Scala’s own drafting when it amended its claims in the arbitration. He held that the plea was “arguably defective in that it omits any reference to the third prong of unjust enrichment”. Johnston J. added that “[i]t does not appear that the arbitrator considered whether there was a juristic reason disclosed by the evidence; perhaps he was misled by Scala’s pleading”.
Having identified Scala’s pleading as the “arguably defective” source of the alleged error and that the arbitrator was perhaps “misled by Scala’s pleading”, Johnston J. determined that this question qualified. “There is arguable merit in Spirit Bay’s submission that the arbitrator erred in law in his consideration of Scala’s imperfect plea of unjust enrichment”.
Dismissed questions – Regarding the other three (3) questions, Johnston’s analysis highlighted the factual basis of Spirit Bay’s challenges.
For the first, Johnston J. disagreed that the arbitrator had relied on a “so-called admission” to justify a conclusion to determine the meaning of a clause in the Contract.
For the second, Johnston J. determined that, despite time and effort, the record did not support the challenge made.
“ This argument was not well developed in the petition or in argument, in spite of a considerable amount of time being spent by both parties on evidence of different witnesses. Spirit Bay has not persuaded me that a fact found by the arbitrator had no evidentiary foundation, or that a fact found by the arbitrator was contrary to all of the evidence on that point, which would be required to elevate the matter above a question of fact or mixed fact and law. Spirit Bay has not pointed to an instance where the arbitrator found a critical fact directly contrary to another critical fact found”.
For the third, Johnston J. disagreed that the arbitrator had erred in his consideration of the counterclaim.
“ The findings of fact relating to Scala’s proof of its claims were based on evidence the arbitrator found to be credible and reliable, putting those beyond the reach of any appeal. Spirit Bay’s complaint that the arbitrator required expert opinion evidence to support its deficiencies counterclaim is misguided. The arbitrator merely observed that Spirit Bay had not had its personnel inspect Scala’s work to assess state of completion or quality of work, that Spirit Bay’s evidence of what it had been told by the replacement builder was hearsay, and that Spirit Bay could have led opinions from qualified witnesses like quantity surveyors, but had not done so”.
Importance/Miscarriage of Justice – Having accepted those grounds as viable questions of law eligible for leave to appeal, Johnston J. then turned to deciding whether each met the test under section 31(2)(a), namely importance to the parties and prevent miscarriage of justice.
With Scala’s concession, Johnston J. agreed with Spirit Bay that the monetary sums ordered against Spirit Bay and the dismissal of its counterclaim qualified the Award as important.
Turning to whether the appeal might prevent a miscarriage of justice, Johnston J. returned again to Sattva Capital Corp. v. Creston Moly Corp. para. 70 as guidance:
“ Having regard to [BCIT (Student Association) v. BCIT, 2000 BCCA 496] and [Quan v. Cusson, 2009 SCC 62 (CanLII),  3 SCR 712], I am of the opinion that in order to rise to the level of a miscarriage of justice for the purposes of s. 31(2)(a) of the AA, an alleged legal error must pertain to a material issue in the dispute which, if decided differently, would affect the result of the case”.
Johnston J. stated that the errors which he had identified as arguable questions of law involved at least one (1) issue which he characterized as “a major, and material, issue” as well as another which was a subsidiary one and another which involved the existence and terms of the disputed work in progress completion contract.
His reading of the record and the Award led him to conclude that Spirit Bay met the standard in section 31(2)(a). “There is arguable merit in Spirit Bay’s claim that application of the correct principles of contract interpretation could lead to a different result affecting the outcome of the above material issues”.
Set aside under section 30 – Spirit Bay argued that the Award should be set aside and remitted to a new arbitrator on the basis of arbitral error, defined at section 1 of the Arbitration Act, by exceeding his powers and failing to observe natural justice.
Spirit Bay reiterated the grounds set out above for leave to appeal and argued that the Award breached the requirement that an arbitrator adjudicate by reference to the law. Spirit Bay argued that, by making the alleged errors, the arbitrator had failed to decide according to the law and, instead, did so according to what the arbitrator thought was fair or commercially reasonable. Johnston J. disagreed with Spirit Bay, determining that the grounds alleged fell short of the standard.
“ Whether or not the arbitrator erred in law will be determined on the appeal. Additionally, the parties clothed the arbitrator with the power to decide their dispute, and that includes the power to be wrong in interpreting and applying the law. I do not accept this argument from Spirit Bay.
 The natural justice argument is founded on Spirit Bay’s assertion that the reasons for the award are “so legally and factually incomprehensible as to be insufficient” and thus in breach of the principles of natural justice.
 The award, while lengthy, and at times confusing, is comprehensible, at least sufficiently so that I do not give effect to this argument by Spirit Bay”.
urbitral notes – First, Johnston J. distinguished the remedies provided by the Arbitration Act. While section 31 permitted the court to authorize appeals on those questions of law which were important to the parties and which might prevent a miscarriage of justice, those errors were not appropriate for a set aside under section 30.
Second, section 70 of the Arbitration Act provides the following transition provisions and deems that it will apply for arbitration agreements which stipulate earlier iterations of B.C.’s domestic arbitration legislation.
“70(1) This Act applies to an arbitral proceeding if the arbitral proceeding is commenced on or after the date this section comes into force.
(2) For the purposes of an arbitral proceeding to which this Act applies, a reference in the arbitration agreement to any of the following Acts is deemed to be a reference to this Act:
(a) the Arbitration Act, R.S.B.C. 1979, c. 18;
(b) the Commercial Arbitration Act, R.S.B.C. 1996, c. 55;
(c) the Arbitration Act, R.S.B.C. 1996, c. 55”.