In Sound Contracting Ltd. v Campbell River (City), 2024 BCSC 933, the court allowed the set- aside challenge of an arbitral award and remitted the matter to the arbitrator on the basis that the arbitrator had failed in his duty under natural justice to provide adequate reasons. The arbitrator concluded that the arbitration was time-barred but did not explain why he had reached that conclusion. In so doing, the court treated the set-aside challenge as akin to an appeal, where insufficient reasons amount to an error of law. In so doing, the court applied principles in the civil (appeal) and administrative (judicial review) contexts to the set aside of an arbitral award. This stands in contrast to how this issue has been treated internationally, where the matter of whether insufficiency of reasons is a breach of procedural fairness is not well-settled.
Background – The underlying dispute arose in the late 1990s, when the Claimant performed sewer construction work for the Respondent, the City of Campbell River. The Claimant commenced an arbitration in 2001 regarding the amounts owed for this work. An award was issued in that arbitration that same year but was set aside by the court in 2002. The court ordered that the dispute be “remitted back to arbitration before a new arbitration panel to be appointed by the petitioner and the respondent in the usual way”. An appeal of that court order was dismissed by the British Columbia Court of Appeal in February 2004.
The Claimant did not submit a new Notice to Arbitrate until December 2014. The Notice stated that the Claimant sought a “new Arbitration of a dispute which has arisen” between it and the Respondent. A new arbitrator was appointed in 2017. The Respondent argued, among other things, that the relevant limitation period had expired. This issue turned on whether the “clock” was reset by the 2014 filing (the Respondent’s position) or whether the arbitrator’s jurisdiction continued to derive from the original 2001 dispute (the Claimant’s position).
The arbitrator ultimately ruled in favour of the Respondent on this issue and dismissed the arbitration without considering its merits. A total of eight paragraphs of his award addressed this issue. He summarized the parties’ positions on the issue and set out his conclusion that the Claimant had, “commenced this proceeding as a new arbitration proceeding in December 2014 when it filed the Notice to Arbitrate.” He did not provide any further explanation as to why he accepted the Respondent’s position that the claim was limitation-barred or what principle of law he was relying upon for his conclusion.
Set-Aside Application – The Claimant applied to set aside the award under s. 30 of the old B.C. Arbitration Act. This allowed a court to set aside or remit an award for “arbitral error”, including the failure to observe the rules of natural justice. The Claimant argued that the arbitrator had failed to observe the rules of natural justice because he had failed to provide adequate reasons.
The court first set out the limits of its jurisdiction and the applicable legal principles. The court recognized that, “in the past, there was some doubt as to whether a failure to provide sufficient reasons amounts to an ‘arbitral error’ under the Old Arbitration Act.” However, it relied on two recent B.C. lower court decisions as “persuasive authority that insufficiency of reasons is contrary to natural justice and therefore arbitral error.”
The court then set out the general principles for determining when arbitral reasons are “sufficient” to meet the rules of natural justice. It held that natural justice requires an adjudicator to provide sufficient reasons so that the losing party knows why it lost and so that an appellate or reviewing court can meaningfully conduct its review. For reasons to be “sufficient” to meet the rules of natural justice, they must, among other things, set out what was decided (the result) and why (the basis for the result). This requires the adjudicator to do more than relay the parties’ submissions and then announce a result. The adjudicator must also identify the premises they are relying upon to come to that conclusion. The court held that while, “full syllogistic reasoning is not necessary, there should be some reference to a rule or principle of law and to a decisive factual finding, unless these are obvious from the context.”
The court then went on to assess whether the reasons provided in this case were sufficient. The court found that the arbitrator concluded that the filing of a Notice to Arbitrate in 2014 created a new proceeding, not a continuation of the prior proceeding, but did not explain why he reached that conclusion when this was a central issue between the parties. The court noted that in civil, criminal and administrative proceedings, remitting a matter back does not reset the clock relating to the initiation of proceedings and while it was open to the arbitrator to conclude otherwise in the arbitral context, “he had to explain why.” However, his reasons provided no principle of law, whether founded in the arbitration rules, the common law or a statutory provision or any other basis to explain his conclusion and so, “[t]he parties and the court on appeal are left to speculate on why the rule should be different for arbitration.”
The court rejected the Claimant’s second argument that the reasons were insufficient because, in a single sentence, the arbitrator dismissed its argument that a longer limitation period applied because this was an action on a local judgment for the payment of money. He held that “[a] local judgment that is not for the payment of money or for the return of personal property is not specifically contemplated by the limitation period in s. 3(5) of the Former Limitation Act.” The court found that sentence to be sufficient because it implied that the court’s 2002 order was not for the payment of money or the return of personal property. Whether that premise was right or wrong, it was clearly identified so the parties were able to understand it and the court could review it.
In the result, the court remitted the dispute back to the arbitrator for reconsideration in light of these reasons.
Contributor’s Notes:
The domestic arbitration legislation in many provinces requires that an arbitral award must state the reasons on which it is based [see s. 38(1) of the Ontario Act; s. 38(1) of the Alberta Act; s. 38(1) of the Manitoba Act; s. 39(1) of the Saskatchewan Act; s. 38(1) of the New Brunswick Act]. Article 31(2) of the UNCITRAL Model Law, which applies in many provinces in respect of international commercial arbitrations, contains a similar requirement.
While an arbitrator has a duty to give reasons, in most cases, the issue is not the failure to provide reasons but the question of whether the reasons provided are adequate. Unlike Article 52 of the ICSID Convention, adequacy of reasons is not an independent set-aside ground under the Model Law. In such circumstances, the question that follows is whether the provision of inadequate reasons can fit within one of the other enumerated set-aside grounds, most commonly the failure to provide procedural fairness.
It is important to distinguish this issue where it arises in an appeal of an arbitral award. Where there is a right of appeal, the failure to provide adequate reasons is an error of law and thus a ground of appeal. This is to enable the reviewing court to complete its task (see, for example, 2V Bethridge Road Investments Corp. v. Low Risk Logistics Inc., 2012 ONSC 3741 at para. 29). But in arbitrations with no right of appeal and no ability to review the merits of the arbitration, only a set-aside application, the same considerations do not necessarily follow.
In the present case, in only two sentences on the matter, the B.C. court concluded that inadequate reasons can be a ground to set aside an arbitral award on the basis of a breach of natural justice. Putting aside the somewhat ironic question of whether those sentences were sufficient to address the issue, the B.C. court reached the conclusion that this matter was now settled by relying on two recent B.C. court precedents. However, those cases assessed the issue of breach of natural justice on the basis of Canadian administrative law and judicial review principles, which allow for a more detailed review of the merits than is permissible in a set aside challenge of an arbitral award (see Case Note #740 addressing one of those precedents, Bromley v Getzie, 2023 BCSC 446).
However, procedural fairness has been given a fairly narrow definition in the set-aside context. For example, in Schreter v. Gasmac Inc., 1992 CanLII 7671 (ON SC), the Court rejected the argument in an enforcement application under the Model Law that the failure to provide reasons violated due process, finding the components of natural justice are notice and the ability to present one’s case, and those were provided. In Corporacion Transnacional de Inversiones, S.A. de C.V. v. STET International, S.p.A., 1999 CanLII 14819 (ON SC), the Court held that to set aside an award for lack of due process requires conduct by the arbitrator that is sufficiently serious to offend our basic notions of morality and justice.
In light of these definitions, it should not lightly be assumed that the provision of inadequate reasons is a breach of natural justice, particularly where the arbitrator turned their mind to an issue and addressed it in their reasons. Perhaps they addressed it poorly or inadequately, but the resulting frustration by the losing party does not necessarily equate to a failure to provide due process in an arbitral context. The principles that underlie the provision of adequate reasons in the civil or the administrative context explain why it is an error of law to provide inadequate reasons, but those principles do not easily apply to the set aside context where there is no merits-based challenges for errors of fact and law.
Notably, the issue of whether sufficiency of reasons is a ground for set aside of an arbitral award is not well-settled internationally. For example, recently in CVV and others v CWB, [2023] SGCA(I) 9, the Singapore Court of Appeal made two relevant observations. First, with respect to Article 31 of the Model Law, the court held that even in the face of the duty to provide reasons, “it is not settled in the case law whether a tribunal’s failure to give adequate reasons is itself a reason to set aside an award.” A failure to give adequate reasons has not been expressly recognized in the case law as a breach of the rules of natural justice or named as a ground for set aside under Article 34 of the Model Law. Second, the court observed that it is also not entirely settled what is the scope of a tribunal’s duty to give reasons is. In that case, the parties relied on the standards applicable to judges in court cases, but the court recognized that “different considerations are at play in a court case as opposed to an arbitration.” For example, in court cases, there is the need to ensure appellate review and to ensure open justice, but those principles do not follow in a confidential arbitration proceeding without a right of review of the merits. The court concluded that ,“[i]t follows that the scope of a tribunal’s duty to give reasons would differ from that of a judge’s, and it is therefore inappropriate to apply standards applicable to judges in the context of arbitration proceedings.” The court in that case did not ultimately decide these issues because it was not necessary to resolve the appeal.
In the United Kingdom, which is not a Model Law jurisdiction, the courts have held that inadequate reasons is not a “serious irregularity” that would justify the setting aside of an arbitral award, unless this constitutes a failure to deal an issue altogether (see Islamic Republic of Pakistan & Anor v Broadsheet LLC, [2019] EWHC 1832 (Comm)).
In the present case, there was no argument raised that the arbitrator failed to deal with the issue in front of him: he did so and he provided reasons that concluded that the Claimant had commenced a new arbitration outside the limitation period. What he failed to provide was an explanation for why he reached that conclusion: he laid out each party’s arguments but did not explain why he preferred the Respondent’s position over the Claimant’s. While there are good reasons that type of explanation should be provided, and as a result, the award may be unsatisfactory to the losing party, it is not the role of the reviewing court on a set-aside application to tell the arbitrator how to set out the award. This is not to say that inadequate reasons cannot or should not ever ground a set-aside challenge. In some cases, it may be entirely appropriate, for example, if the inadequacy of the reasons makes it impossible to assess whether the arbitrator exceeded their jurisdiction or to determine if an arbitrator addressed or turned their mind to an important issue in dispute.
But, in this case, the arbitrator turned his mind to and determined an issue squarely within his jurisdiction. Perhaps he made his conclusion based on wrong facts or law, and without the explanation for the basis of his conclusion that cannot be assessed, but in contexts where there is no right of appeal, such errors are not relevant. Procedural fairness does not give the court to power to address such issues. In this case, the court went beyond it role on a set-aside application and intervened based on principles applicable in the appeal and administrative context and thus essentially allowed an appeal of an error of law under the guise of procedural fairness.