In Eisler v. Connor Clark & Lunn Financial Group Ltd., 2021 BCSC 1280, Justice N. Smith granted, in part, the petitioners’ application for leave to appeal an arbitral award arising out of a dispute with their former employer, CCL. During their employment, the petitioners were paid income from certain funds owned by CCL that had investments in a variety of companies. After the petitioners’ employment was terminated, CCL re-organized the funds and acquired new investments in the fund. It stopped paying income from the fund to the petitioners, as a result of which they commenced an arbitration. The arbitrator found for CCL and the petitioners sought leave to appeal the award. One of the issues before Justice Smith was whether the duty of good faith first recognized in Bhasin v. Hrynew, 2014 SCC 71 was before the arbitrator. The argument that CCL had breached the contractual duty of good faith, through an improper use of its discretion to re-organize the fund and terminate the petitioners’ income entitlement, was contained in the petitioners’ written argument. But when the arbitrator asserted during the arbitration that it was his understanding that the petitioners were not advancing this position, petitioners’ counsel failed to correct him. Nonetheless, Justice Smith found that the issue was properly before the arbitrator.
The petitioners were employed by the respondent CCL as investment consultants. At that time CCL’s business consisted of large investment funds that acquired interests in a variety of companies. Investors bought limited partnership units in a fund managed by a general partner, of which CCL was a partial owner. The petitioners also held shares in the general partner and received income from the companies in the fund as part of their compensation at CCL.
In 2010, the CCL investment model changed so that it began to create small single-purpose funds, each of which would make investments in a specific business or industry. The petitioners entered into new employment agreements with CCL, which provided that if they were terminated without cause, 50% of the income “in respect of investments closed during the time of their employment…will vest immediately”. In 2012, CCL created a limited partnership (Fund IV) to hold an interest in two companies in the business of distributing commercial turf care equipment and irrigation systems, from which the petitioners received income.
In 2014, CCL terminated the petitioners’ employment without cause. The parties entered into settlement agreements that provided the petitioners with the same investment income from Fund IV as they had received while employed. In 2017, in order to take advantage of an opportunity to acquire a new corporation (Simpson Norton), which conducted the same business, CCL transferred interests in Simpson Norton and the companies in Fund IV to a new limited partnership (New Fund). The petitioners consented to this re-organization and reserved their rights under the previous agreements. Thereafter, the petitioners were paid income from the Fund IV investments, but not the Simpson Norton investment.
The petitioners objected and the parties agreed to submit this issue to arbitration. The primary issue before the arbitrator was the meaning of the words, “investments closed” in the settlement agreements. CCL argued that “investments” referred to the particular businesses acquired by Fund IV during their employment and that the petitioners could not benefit from any additions to the fund’s holdings made after termination. The petitioners argued that Fund IV was created with a view to acquiring further related investments, so they were entitled to any income generated by the fund as a whole, not only from the individual corporations that formed part of the fund while they were employees.
Further, the petitioners argued that CCL’s unilateral action of re-organizing Fund IV constituted a breach of its contractual duty of good faith, although they did not allege dishonesty or bad faith.
The arbitrator found that the petitioners’ contractual entitlement to continuing income from Simpson Norton ended when CCL reorganized Fund IV.
The issue before Justice Smith on the leave application was whether the arbitrator “erred in failing to apply the correct legal test for breach of the duty of good faith where one party has eviscerated the benefit of the contract for the other” or whether the arbitrator failed to “apply the correct legal test for the breach of the duty of good faith by requiring, as a prerequisite, dishonesty or mala fides”.
Justice Smith summarized the leading case of Bhasin v. Hrynew, 2014 SCC 71 and noted that the decision of Wastech Services Ltd. v Greater Vancouver Sewerage and Drainage District, 2021 SCC 7 was released after the arbitral award. He held that the combined effect of these cases is that there is a duty of honesty and also a duty to exercise discretion under a contract in a manner connected to the purpose for which the contract was given.
The question was whether the issue of the duty of good faith was properly before the arbitrator. It was clear from the parties’ written arguments and from the arbitrator’s reasons that the principal focus of the arbitration was on the proper interpretation of the various agreements concerning the petitioner’s income entitlement. However, as Justice Smith noted:
 The alternative argument—that there was no longer a fund contemplated by the settlement agreements—was clearly treated as a secondary issue. However, the petitioners’ written submissions to the arbitrator included the following:
 CC&L was, at a minimum, under a contractual duty of good faith not to rely on its ability, fully at its own discretionary control, to use a non-arms’ length reorganization in a way that extinguishes or limits [the Petitioners’ income entitlement]. Any such reliance has the effect of depriving the [Petitioners] of the benefit they bargained for – i.e. all growth of the Fund by way of add-on acquisition to…the Investment held by Fund IV. As CC&L’s alternative argument relies on the Reorganization for that purpose and so is premised on a breach of CC&L’s duty of good faith, it must be rejected.
 That paragraph cited Mesa, basing the argument on the “nullification” or “evisceration” approach that the Court of Appeal had, at the time of the arbitration, recognized in Wastech. While CC&L points out that this was only one paragraph of a 268-paragraph submission, in my view nothing turns on this given the secondary nature of CC&L’s alternative argument, in addition to the good faith issue itself being a secondary defence to the alternative argument.
THE ARBITRATOR: I’d just like to say in this area I do not understand Mr. Mickelson [counsel for the petitioners] to be arguing, or I understand him to be saying now that CC&L’s discretion about whether to use a new fund or an old fund or some sort of combination thereof is not fettered by any contractual obligation or good faith obligation owed to your clients, and that the expectation was that rational business judgement and self-interest would prevail, and the submission is that’s what happened in this case.
 Counsel for CC&L argues that if the arbitrator’s understanding of the petitioners’ position was incorrect, their counsel was obliged to intervene at that point or, at least deal with matter in reply, but failed to do so. I agree that would have been preferable, but I do not find that counsel’s silence alone can be taken as an abandonment of the issue in the face of the clear statement of it contained in the written argument.
Justice Smith found that the issue of good faith was before the arbitrator and that the petitioners did not abandon it. However, the arbitrator did not have the benefit of the Wastech decision, which meant that he did not apply the correct legal test for the breach of the duty of good faith. He granted leave to appeal on the question of whether the arbitrator failed to apply the correct legal test for the breach of the duty of good faith by requiring dishonesty or mala fides because that had the potential to change the outcome of the arbitration – there had to be a determination, using the correct legal test, as to whether CCL breached its contractual duty of good faith by re-organizing Fund IV.
For previous Case Notes dealing with waiver of rights and failure to object, see Ontario – jurisdiction challenge must be raised early as preliminary objection, not as defence at merits stage – #154 and Ontario – raising arbitration in defence helps demonstrate defendant did not waive arbitration – #414.