B.C. –Issue estoppel may bind tribunal to prior arbitration award – #741

In Kingsgate Property Ltd. v Vancouver School District No. 39, 2023 BCSC 560, Justice Stephens granted leave to appeal from an arbitral award in a rent renewal dispute, in which the Arbitral Tribunal elected not to follow the interpretation of a key contractual provision from an arbitral award rendered decades earlier.  In both rental renewal disputes, a key issue was a market value provision in a long-term lease of property.   Justice Stephens found that the proper interpretation of  a previous arbitral award and whether the Arbitral Tribunal properly applied the doctrine of issue estoppel raised questions of law. The leave grant decision will permit further court consideration of interesting and novel questions concerning the application of the doctrine of issue estoppel in an arbitration context.  

Background – In 1972, the Vancouver School Board (“VSB”) entered into a lease (“Lease”) of property (“Lands”) to Royal Oak Holdings Ltd. (“Royal Oak”). The Lease provided for seven 10-year renewal options and a final four-year renewal option, for a total of 99 years. 

Section 29.09 of the Lease provided that rent for each renewal term would be based on the market value of the Lands, calculated as follows:

“… eight and one-quarter (8-1/4%) percent of the market value of the SAID LANDS at the date which shall be six (6) months before the expiration of the TERM or the renewal term next preceding the renewal term in respect of which the BASIC RENT has not been agreed upon, as the SAID LANDS would be valued at that time if vacant and ready for immediate development to their highest and best lawful use by a person or persons ready, willing and able to purchase and develop the SAID LANDS for that immediate use and such market value of the SAID LANDS shall be determined by arbitration….”

The initial Lease term expired in 1997.  

1999 Award – VSB and Royal Oak arbitrated a dispute about the market value of the Lands for the 1997 – 2007 term.  In a 2-1 decision (the “1999 Award”), an arbitral tribunal interpreted s. 29.09 and accepted Royal Oak’s contention that market value required application of a 1.0 floor space ratio (“FSR”)  on the basis of Vancouver bylaws which would “immediately apply”.  The dissenting arbitrator viewed s. 29.09 as allowing consideration of “discretionary conditional use”, leading to a higher FSR and substantially greater market value and rent owing. VSB’s application for leave to appeal questions of law arising from the 1999  Award was denied: Vancouver District No. 39 v. Royal Oak Holdings Ltd., 1999 CanLII 5699 (BCSC).

In 2005, Royal Oak assigned the lease to Kingsgate Property Ltd.  (“Kingsgate”).

2022 Award – In 2020, VSB commenced an arbitration to determine the market value of the Lands for the 2017-2027 term. The Arbitral Tribunal was comprised of three members, none of whom had arbitrated the 1999 dispute.  Again, there was a split decision (the “2022 Award”). This time, however, the 2022 majority interpreted “immediate use” in s. 29.09 as the highest and best use for which the Lands might lawfully be developed as of the Valuation Date. The highest and best value was conditional use permitted under zoning bylaws with a 3.0 FSR, resulting in a market value of $116.5 million.

The majority found the 1999 Award interpretation of the Lease was a question of mixed fact and law.   The majority accepted that issue estoppel would bind the parties to the 1999 tribunal’s findings. However, the 2022 majority exercised discretion not to follow the interpretation of the 1999 majority: 

“[171] Applying the 1999’s Award’s definition of ‘immediate’ to the evidence [before the 2022 tribunal on matters of timing] … none of the three alternative uses proposed by the parties is an ‘immediate use’. As regards the outright uses, six to eight months is not ‘present’ or ‘next adjacent’ or ‘taking effect without delay or lapse of time’.”

The 2022 majority identified factors militating in favour of exercising discretion to not apply the Lease interpretation from the 1999 Award: the interpretation was not workable, would create an injustice, and would frustrate the parties’ contractual intentions.

The 2022 majority further found: 

“[176] We do not consider that the public interest in the finality of litigation would be materially undermined by declining to apply the doctrine of issue estoppel in this instance. The Lease represents a private commercial relationship. It provides for serial ‘litigation’ of the question of ‘market value’ at various points in time. The agreed process is private arbitration, not court litigation. Although this award may possibly be challenged on the grounds that the Tribunal has made an error of law, and although – if leave to appeal were granted – a court decision might establish a legal precedent with broader public implications, the award itself does not establish a legal precedent that might impact persons other than the parties to the Lease. There is also a public interest in enforcing private contracts to reflect the true intentions of the parties. This is why, as stated in Sattva, the interpretation of contracts ‘has evolved towards a practical, common-sense approach not dominated by technical rules of construction’.”

The 2022 dissenting arbitrator decided that the Lands should be valued on the basis of their current zoning without reference to uses not permitted outright under that zoning.  He viewed that the 1999 Award created an issue estoppel and saw no basis to exercise the limited discretion to not apply that doctrine. He determined that the market value of the Lands was $20 million.

BC Supreme Court decision:  Justice Stephens acknowledged the established question of law / mixed fact and law framework did not apply easily to the interpretation of a previous arbitration award.  He noted:

“[64]  …no case was brought to my attention that squarely considers whether the interpretation by an arbitration tribunal of a prior arbitration award for purposes of identifying the issue to which issue estoppel applies is a pure question of law.”   

On a first principles basis, Justice Stephens reasoned as follows:

“[69]  Instead, the questions of interpreting an award and identifying issues to which issue estoppel applies can be analogized more readily to a question of statutory interpretation — which is a question of law — being the interpretation of legal text with binding force (an award) to determine the parties’ governing obligations under a legal doctrine (issue estoppel).”

He granted leave to appeal to two errors regarding the application of issue estoppel:

“[104]  There is arguable merit to the proposed first ground of appeal that the 2022 majority erred by interpreting the 1999 Award, in terms of inquiring whether a use was ‘present’, ‘next adjacent’, or ‘taking effect without delay or lapse of time’: 2022 Majority at paras. 127(a), 171. The 2022 majority found this to be unworkable on the evidence before it since the outright uses would take six to eight months, leading the 2022 majority to not apply issue estoppel: paras. 169-172, 174. Whereas, it is arguable that the 2022 majority should have interpreted the 1999 majority as holding that s. 29.09 on its proper interpretation called for an outright (not conditional or discretionary) use of the lands under the Zoning By-Law leading to 1.0 FSR use, and applied that use. The zoning for the subject lands did not change from 1999 to 2022.”

Justice Stephens also saw arguable merit that the 2022 Award majority may have considered irrelevant factors in deciding not to apply issue estoppel. He ruled it arguable that the 2022 majority considered factors contrary to the principle of finality of arbitration:

“[106] …That principle of finality could arguably apply not simply when considering if a party should be permitted to appeal an award to the court (as it presented in Teal), but also as to whether a previous award between parties should be binding on those parties or their contractual successors in future arbitration proceedings under the same contract by way of issue estoppel.”

Contributor’s Notes: 

First, this arbitration was commenced weeks before the repeal and replacement of Arbitration Act, RSBC 1996, c 55. Accordingly, the leave to appeal application was heard by the BCSC rather than the BCCA, as is now the case under Arbitration Act, SBC 2020 , c 2.

Second, some context is important. While the Lands have not changed greatly in recent decades, the surrounding area―adjacent to downtown Vancouver―has changed dramatically and will continue to do so: Vancouver is building a new subway line with a station in immediate proximity to the Lands.  

Therefore, the stakes are high for the parties―more than $20M is at issue in rental payments for the 2017-2027 term.  Further, the application of issue estoppel to the determinations of the 1999 Award may have ramifications for another half century; the Lease may be renewed until the 2070’s.  Given this potential impact on serial arbitrations going forward, it is not surprising that Justice Stephens’ leave grant decision is being appealed.  

Third, Justice Stephens acknowledged it was not easy to apply  issue estoppel and a prior arbitration award in the standard question of law /  mixed fact and law framework.   Issue estoppel of course is a flexible doctrine that permits a decision-maker to respond to the equities of the particular case.  Justice Stephens confined his review to whether  an arguable case that questions of law had been raised and took care to explain that his task was not to decide the merits.   

Beyond points concerning questions of law and issue estoppel, there are multiple, interesting questions arising from Justice Stephens’ decision.  The court process may answer some of those questions, but perhaps not all.  

It is important when reviewing court cases addressing arbitration awards to keep in mind what is not known.  In this matter, we do not know what is in the arbitration record, nor do we have the full terms of any of the following: the  Lease;  the Arbitration Agreement; the 1999 Award; or the 2022 Award.   

Would leave to appeal have been available in this case had the Arbitral Tribunal simply interpreted s. 29.09 of the Lease?  Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, would say “no”.  Should this be different because the Arbitral Tribunal interpreted the Lease and also a prior interpretation of the Lease?

The leave to appeal test in this case considers questions of law arising from the arbitral award.  By statutory design, there is not an appeal of the arbitral proceeding and record at large.  However, other Arbitration Matters Case Comments have considered the willingness of some B.C. courts to unpack the arbitration record to extricate questions of law, notwithstanding restrictive statutory language, and notwithstanding directives from the SCC to be cautious in doing so.  See, for instance, Material misapprehension of evidence is an extricable error of law – #662

With this novel decision now headed to the Court of Appeal for review of whether leave to appeal should be granted, this will not be the final Case Comment in this matter.