B.C. – Material misapprehension of evidence is an extricable error of law – #662

In Escape 101 Ventures Inc. v March of Dimes Canada, 2022 BCCA 294, Justice Voith (for the Court) allowed an appeal of a commercial arbitral award on two grounds of significance: (1) the arbitrator demonstrated a material misapprehension of evidence going to the core of the outcome – this constituted an extricable error of law subject to appeal; and (2) an appeal is allowed with respect to “any question of law arising out of an arbitral award”, but this is not limited to errors arising from the formal award of the arbitrator. Here, the error was patent from the record, but was not apparent in the arbitrator’s reasons. The Court remitted the issue back to the arbitrator for reconsideration rather than substitute its own decision because there was no record of the proceedings, so it lacked the necessary evidentiary foundation to do so. (This was also the first appeal under the new B.C. Arbitration Act, S.B.C. 2020, c. 2.)

The dispute between the parties arose out of the sale by the Appellant Escape 101 Ventures Inc. to the Respondent the March of Dimes Canada of substantially all of the assets used by the Appellant to carry on its business. The parties entered into an Asset Purchase Agreement, which contained a formula that determined an Earnout amount to be paid to the Appellant based upon the business’s Gross Revenue during a 5-year Earnout Term. The Appellant disputed the Earnout amount paid to it and the parties arbitrated the dispute. The Arbitrator dismissed the Appellant’s claim in an award dated April 27, 2021.

The Appellant filed a notice of application for leave to appeal the award on May 26, 2021. Leave to appeal was granted by British Columbia Court of Appeal Justice DeWitt-Van Oosten on the Earnout payment issue. (See earlier Case Note that discusses the decision: B.C.- Leave to appeal on question of law; arbitrator’s error must be “material to result” and appeal must have “arguable merit” – #533.

The Appellant argued that the arbitrator had misapprehended the evidence of its post-contractual conduct. Under the terms of the Asset Purchase Agreement, the Respondent was required to provide Quarterly Gross Revenue Reports. If the Appellant failed to object to anything in the Reports by a specified date, it was deemed to accept them and they would be considered final for the purpose of the quarterly Earnout payment. The Appellant objected to the Quarterly Report dated March 31, 2020, covering the period from April 1 to June 30, 2019, on the basis that it did not include Gross Revenue from new business within a particular geographical area. The arbitrator found that he could not determine, by interpreting the language of the Asset Purchase in light of the factual matrix, whether the parties had agreed to include in the Earnout calculation Gross Revenue from new business within this geographical area. Therefore, he considered the parties’ post-contractual conduct as an aid to interpretation. He found that the Appellant had failed to object in time to the absence of Gross Revenue from new business within the specified geographical area, and concluded that the parties’ agreement did not include it for the purpose of calculating the Earnout payment.

The Respondent agreed that the arbitrator erred in concluding that the Appellant was out of time to object, that this error was central to the Arbitrator’s reasoning and conclusions, and that this was an error of law (which Justice Voith stated was a significant change in its position). However, the Respondent argued that it was not an error of law “for the purposes of” an appeal on a question of law under s. 59(2) of the Arbitration Act, S.B.C. 2020, c. 2 (“the Act”). Justice Voith noted that this error was not apparent from the Arbitrator’s award, but it was clear from the record.

Justice Voith described the issues to be determined on the appeal: The first was whether a material misapprehension of the evidence is an extricable legal error for the purposes of s. 59(2) of the Act. If so, the second issue was whether that misapprehension has to be apparent “on the face” of the arbitral award.

Issue 1: Is a material misapprehension of the evidence an error of law for the purposes of” s. 59(2) of the Act 

Justice Voith referred to a series of cases (both pre-and-post-Sattva Capital Corp. v. Creston Moly Corp.2014 SCC 53): Sharbern Holding Inc. v. Vancouver Airport Centre Ltd., 2011 SCC 23 at para. 71; Armstrong v. Armstrong, 2012 BCCA 166 at paras. 65–67; Bayford v. Boese, 2021 ONCA 442 at para. 28and Carmichael v. GlaxoSmithKline Inc.2020 ONCA 447 at para. 125, leave to appeal to SCC refused, 39437 (1 April 2021). They state that a misapprehension of evidence that goes to the core of the outcome is an extricable error of law. At para. 43, Justice Voith quoted from the Bayford case (para. 28):

 “A misapprehension of evidence may refer to a failure to consider evidence relevant to a material issue, a mistake as to the substance of the evidence, or a failure to give proper effect to the evidence: R. v. Morrissey (1995)1995 CanLII 3498 (ON CA), 97 C.C.C. (3d) 193 (Ont. C.A.), at p. 218. Doherty J.A. noted, at p. 218, that most errors that constitute a misapprehension of evidence will not be regarded as involving a question of law. However, appellate intervention is warranted where the misapprehension of evidence is palpable and overriding, such that it is plain to see or obvious and goes to the very core of the outcome of the case: see Waxman v. Waxman,  2004 CanLII 39040(Ont. C.A.), at paras. 296-97, leave to appeal refused, [2004] S.C.C.A. No. 291; Carmichael v. GlaxoSmithKline Inc., 2020 ONCA 447, 151 O.R. (3d) 609, at para. 125, leave to appeal refused, [2020] S.C.C.A. No. 409.

However, the Respondent argued that the error of law at issue was not an error of law “for the purposes of” s. 59(2) of the Act.

First, it argued that the current Act narrows the grounds for appeal that were available under the old B.C. domestic legislation because it draws on the limited appeal rights under the English Arbitration Act 1979 (U.K.) and the Model Law and that a review of the legislative debates that led to the current Act supports that position. Justice Voith found that these propositions were inaccurate or so general as to be irrelevant. After reviewing the history and evolution of the domestic arbitration legislation in B.C., Justice Voith disagreed with the Respondent’s position that the new Act narrowed rights of appeal. He found that historically, a party to an arbitration may appeal to the court “on any question of law arising out of the award”. Also, he found that the both the earlier Acts and the current Act limited the jurisdiction of appellate review of commercial arbitration awards to extricable questions of law, citing MSI Methylation Sciences, Inc. v. Quark Venture Inc., 2019 BCCA 448.

Second, the Respondent argued that Sattva and Teal Cedar Products Ltd. v. British Columbia, 2017 SCC 32 narrowed the range of questions that can be raised on appeal of an arbitral award. Justice Void disagreed. He found that these decisions concerned the analytical framework for drawing distinctions between questions of fact, mixed fact, and law and law alone. Neither decision suggested that a misapprehension of the evidence cannot be raised on appeal.

Third, the Respondent argued that English authorities suggest that a misapprehension of evidence is not an extricable error of law. Justice Voith found that those authorities were never adopted in Canada.

Issue 2: Must the error of law be apparent on the face of the award?

Justice Voith found that once the appellant has raised a clear question of law there is no basis to further limit the right of appeal. In fact, the legislation provides that an appeal may be brought on “any question of law arising out of an arbitral award.”  The Respondent argued that this requires the error to be clear from the arbitrator’s reasons. Here, the error of law was only apparent upon looking at the evidentiary record. Justice Voith disagreed as a matter of statutory interpretation:

[82]    … This is not consistent with the Current Act or the relevant authorities. The Current Act distinguishes between an “arbitral award” (in s. 59) and “reasons for an arbitral award” (in s. 48(3)), suggesting that a question arising out of an arbitral award need not be based on the arbitrator’s written reasons alone.”

Therefore, Justice Voith concluded that the court may look beyond an arbitrator’s reasons  to determine whether the arbitrator misapprehended the evidence before him, and cited Grewal v. Mann, 2022 BCCA 30 (decided under the former Act).

Justice Voith allowed the appeal, whether the standard of review was reasonableness or correctness, but he was unable to substitute his decision for that of the arbitrator because there was an insufficient evidentiary foundation. The arbitrator had agreed to record the hearing, but realized that he later forgot to do so and there was no transcript. Justice Voith remitted the issue back to the arbitrator for reconsideration.

Update April 14, 2023: Application for leave to appeal to SCC refused.

Editor’s Note:

Query whether characterizing a material misapprehension of the evidence as an extricable question of law can be reconciled with Sattva and the policy objectives of finality and deference to factual findings in arbitration that were espoused in that case. It very narrowly construed an extricable error of law that may be appealed. As readers of Arbitration Matters well know, like this case, Sattva involved the exercise of interpretation of a commercial contract, which the Supreme Court of Canada found was a question of mixed fact and law:

“[53] Nonetheless, it may be possible to identify an extricable question of law from within what was initially characterized as a question of mixed fact and law (Housen, at paras. 31 and 34-35). Legal errors made in the course of contractual interpretation include “the application of an incorrect principle, the failure to consider a required element of a legal test, or the failure to consider a relevant factor” [King v. Operating Engineers Training Institute of Manitoba Inc., 2011 MBCA 80, at para. 21]. Moreover, there is no question that many other issues in contract law do engage substantive rules of law: the requirements for the formation of the contract, the capacity of the parties, the requirement that certain contracts be evidenced in writing, and so on.

[54] However, courts should be cautious in identifying extricable questions of law in disputes over contractual interpretation. Given the statutory requirement to identify a question of law in a leave application pursuant to s. 31(2) of the [British Columbia Arbitration Act, RSBC 1996, c. 55], the applicant for leave and its counsel will seek to frame any alleged errors as questions of law. The legislature has sought to restrict such appeals, however, and courts must be careful to ensure that the proposed ground of appeal has been properly characterized. The warning expressed in Housen to exercise caution in attempting to extricate a question of law is relevant here…

[55] … As mentioned above, the goal of contractual interpretation, to ascertain the objective intentions of the parties, is inherently fact specific. The close relationship between the selection and application of principles of contractual interpretation and the construction ultimately given to the instrument means that the circumstances in which a question of law can be extricated from the interpretation process will be rare. In the absence of a legal error of the type described above, no appeal lies under the [British Columbia Arbitration Act, RSBC 1996, c. 55] from an arbitrator’s interpretation of a contract.

The King case cited in Sattva at para. 53 above stated: “A trial judge’s determination of the factual matrix, consideration of extrinsic evidence and consideration of the evidence as a whole is a question of fact”. Here the question on appeal was not whether the arbitrator was correct in using evidence of the parties’ post-contract conduct to interpret their Asset Purchase Agreement, it was whether having considered that evidence to interpret the contract, he misconstrued it. In essence, this was not a question about whether the arbitrator applied the proper principle, but rather, whether he applied it properly. See Teal Cedar, para. 65.

(Thanks to Les Honywill of BLG Vancouver, who sent me his thoughts about this decision!)