B.C. – Portion of arbitral award set aside; re-hearing to be conducted by different arbitrator – #518

In Spirit Bay Developments Limited Partnership v Scala Developments Consultants Ltd., 2021 BCSC 1415, Justice Davies set aside a portion of an arbitral award and ordered a re-hearing on the basis that the arbitrator had erred in his application of the law of unjust enrichment to a construction contract.  However, he found that it was necessary to have a different arbitrator conduct the re-hearing because the arbitrator had made findings of credibility adverse to Petitioner (Spirit Bay) representatives and also made several determinations of credibility that were critical of Spirit Bay’s evidence as well as its motivation in advancing some arguments.  The arbitrator had “harshly criticized” Spirit Bay’s conduct not only in relation to the disputes in issue, but also within the arbitration, referring to “accounting tactics or tricks” and “tricks by Spirit Bay [which] continued into the hearing”, and characterizing Spirit Bay’s position in respect of one issue as a “ruse or a fiction”. 

Spirit Bay was a limited partnership that operated a residential construction development on the reserve lands of the Beecher Bay (Sc’ianew) First Nation on Vancouver Island, in respect of which it held several head leases.  It developed these lands by the sale of sub-lease interests as fully serviced residential lots together with either pre-built homes or custom designed homes. On November 20, 2015, Spirit Bay and Respondent Scala entered into a written contract (“Housing Contract”) for the construction of homes in the development.

On August 27, 2018, Spirit Bay notified Scala that it was terminating the Housing Contract and, in September, 2018, hired another contractor to complete the work. Between September and December, 2018, Scala continued to work on the houses it had started before the termination.  Scala claimed that its work after termination of the the Housing Contract was done pursuant a subsequent oral agreement between the parties (“WIP Completion Contract”). Spirit Bay denied the existence of the oral WIP Completion Contract and asserted that Scala was required to finish what it had contracted to do pursuant to the Housing Contract.  When Scala left the work site it delivered “Handover Invoices” related to all work done by it. However, as of that date, it had not completed all work on all of the houses and not had not completed all “milestones” that could trigger payment for work done under the Housing Contract. Spirit therefore disputed its obligation to pay for work on houses that had not reached the specific “milestones” requiring payment under the Housing Contract.

Scala commenced an arbitration for payment and, in an award dated February 11, 2020 (amended on March 9, 2020), the arbitrator appointed under the (former) British Columbia Arbitration Act, R.S.B.C. 1996, c. 55, found that Spirit Bay was indebted to Scala in the amount of $1.7 million for the construction work it had done. The arbitrator found that, pursuant to the oral WIP Completion Contract, Scala had agreed to finish the houses it was working on at the time of termination of the Housing Contract, provided that Spirit Bay agreed to pay for the work.  The arbitrator found that Spirit Bay had breached both the Housing Contract and the oral WIP Completion Contract, then awarded Scala all of the monies it invoiced for its work under both the Housing Contract and the oral WIP Completion Contract, whether or not a specific milestone had been reached because when the arbitration was heard, all construction on all houses had been completed by the other contractor.

On November 26, 2020, Justice Johnson of the Supreme Court of British Columbia granted leave to appeal the award in respect of “three points of law that might effect (sic) the result [of the arbitration]”:  (a) Did the arbitrator err by resorting to subsequent conduct without first finding ambiguity in the Housing Contract? (b) Did the arbitrator err in law by applying the commercial reasonableness test to interpretation of the contract?  (c)  Did the arbitrator err in his application of unjust enrichment?

Justice Davies, who heard the appeal, reviewed the applicable principles of contract interpretation found in Sattva Capital Corp. v Creston Moly Corp., 2014 SCC 53, and concluded that, with respect to the first two issues raised on the appeal, the arbitrator had erred in law in enunciating the relevant contract interpretation principles, but in fact had applied the correct principles.  Further, his conclusions were based upon the documentary evidence and the credibility of witnesses, which conclusions were not reviewable on appeal as findings of fact or as findings of mixed law and fact. Therefore, Justice Davies concluded that the award should not be set aside or varied on these two issues.

However, he found that the arbitrator had erred with respect to the application of the law of unjust enrichment and that the award with respect to the “Handover Invoices” must be set aside and submitted to a re-hearing.  The arbitrator had awarded Scala all amounts invoiced by it in the “Handover Invoices”, whether or not a specific “milestone” had been reached, because he found that the parties’ relationship after the termination of the Housing Contract was governed by the oral WIP Completion Contract. The arbitrator found that Spirit Bay had breached the parties’ oral WIP Completion Contract when it “appropriated money which should have been paid to Scala”.

In essence, Justice Davies found that the arbitrator had erred in that he made “inconsistent” conclusions as to which contract and what terms governed the relationship between the parties and Spirt Bay’s payment obligations after termination of the Housing Contract. 

In particular, he:  failed to make any findings on the terms of the oral WIP Completion Contract and the extent, if any, to which it modified or supplanted the Housing Agreement, in particular with respect to milestones, if any, that governed Spirit Bay’s payment obligations; drew conclusions which were inconsistent with the terms of the Housing Agreement as to amounts to be paid to Scala; and failed to make any findings that Spirit Bay had repudiated the oral WIP Completion Contract or that Scala had accepted that repudiation, which would have brought that contract to an end.  Nor did he address whether the termination provisions of the Housing Contract with respect to payment applied. Justice Davies also found that the arbitrator had erred in his application of unjust enrichment principles to award money to Scala in circumstances in which he found that there was a contract that applied to the post-termination payment obligations, the WIP Completion Contract – because the equitable principles of unjust enrichment do not apply where there is a contract.   Further, Justice Davies found that the arbitrator’s application of the unjust enrichment principles amounted to the “re-writing” of the termination and payment provisions of the Housing Agreement to avoid what he considered to be an unfair result.

Justice Davies found that the arbitrator had erred to such an extent in his application of the unjust enrichment principles on issues related to the Handover Invoices that those aspects of the award were unreasonable and must be set aside. He said he would have come to the same conclusion had he applied a correctness standard of review.

As to remedy, Justice Davies found that he had the power to confirm, amend, or set aside the award under the provisions of s. 31(4)(a) of the former B.C. Act and that the complexity of the legal and factual complexities of the award as it related to the Handover Invoices “compounded” the arbitrator’s failure to make necessary findings of fact.  He determined that a re-hearing was necessary only with respect to those aspects of the award relating to the Handover Invoices, except with respect to the arbitrator’s findings of fact concerning the status of work done by Scala on each house when it left the worksite, since those factual findings were binding upon the parties.

Justice Davies then accepted Spirit Bay’s submissions, relying upon Mayer v. Mayer2012 BCCA 77 at paras. 134-136, that the re-hearing must be conducted by a different arbitrator because of the arbitrator’s findings of credibility against it. 

Mayer v Mayer quoted from British Columbia Nurses’ Union v. British Columbia (Labour Relations Board) (1995), 1995 CanLII 2051 (BC SC), 14 B.C.L.R. (3d) 363 at para. 20, [1996] 3 W.W.R. 113 (S.C.), aff’d 33 B.C.L.R. (3d), 1997 CanLII 4025 (BC CA), [1997] 6 W.W.R. 81 (C.A.), in which that Court concluded that the Labour Relations Board had erred in ordering that a grievance be remitted to the original arbitrator where the award involved findings on credibility:

“ … In my judgment, when a decision turns, as the case at bar does, on a disputed issue of credibility, it is approaching the impossible to ask the tribunal of first instance to revisit the matter with a view to possibly reversing those findings and making new findings. To my mind, it is making a demand upon the original hearing tribunal that verges on the superhuman. Where decisions on credibility have been reached after due consideration and reflection, I should think it could scarcely ever be appropriate that the matter be remitted”.

In Mayer v Mayer, the British Columbia Court of Appeal (per Justice Lambert) agreed:

“ … It is, in my opinion, completely unrealistic to expect a decision maker to free his or her mind from a previous conclusion that someone is in essence, lying, and to reach a new and entirely balanced conclusion completely free from that previous settled decision on the basis of new evidence which may do nothing more than add another piece to the total puzzle of credibility and fact finding.”

Justice Davies concluded that, “In this case the Arbitrator not only made findings of credibility adverse to Spirit Bay’s representatives but also harshly characterized Spirit Bay’s conduct in relation not only to the disputes in issue but also within the arbitration”.

He noted the following at paragraph 132 of his reasons:

1)            At para. 98 of the Award the Arbitrator wrote:

[98]      In my view, during the course of the relationship, after the decease of Mr. Butterfield, Spirit Bay used a number of accounting tactics or tricks to deal with its financial problems, resulting in a slowing of cash flow to Scala.

2)            At paras. 104 and 105 of the Award he wrote:

[104]   Spirit Bay did not reject or question any of Scala’s invoices, based on its non-acceptance of price increases or its milestone theory until it terminated the Housing Contract; and the majority of these issues appear to have been first raised in December of 2018, after Scala notified Spirit Bay that it was downing tools.

[105]   In my view these tricks by Spirit Bay continued into the hearing of this matter with a substantial shifting of its position about the amount of money owing to Scala – from no money and an overpayment owing to Spirit Bay, to a concession at the hearing that $403,863.35 was owed.

3)            As I have previously noted, at para. 191 of the Award the Arbitrator characterized Spirit Bay’s position in respect of bank milestones as a “ruse or a fiction” to deny timely payment to Scala for work done.

Therefore, Justice Davies found that, in those circumstances and notwithstanding the relatively narrow ambit of the re-hearing, it was necessary to address Scala’s Handover invoice claims and that the re-hearing must be conducted by a different arbitrator.

Editor’s Notes:

Justice Davies also weighed in on the appropriate standard of review of the arbitral award (at paragraphs 42 to 58) and acknowledged that this issue has been the subject of a number of conflicting decisions by Canadian courts since the Supreme Court of Canada decision of Canada  (Minister of Citizenship and Immigration) v Vavilov, 2019 SCC 65.

Spirit Bay argued that the minority view in the most recent Supreme Court of Canada decision on the issue of standard of review, Wastech Services Ltd. v Greater Vancouver Sewerage and Drainage District, 2012 SCC 7, was not binding upon Justice Davies, but had persuasive value and should be applied. The minority found at paragraphs 120 and 121 of Wastech that where a statute provides for an “appeal” from an arbitration award, the standard of review to be applied is correctness and that the reasoning in Sattva Capital Corp. v Creston Moly Corp., 2014 SCC 53, Teal Cedar Products Ltd. v British Columbia, 2017 SCC 32 has been “displaced”. Spirit Bay’s position was that, although the award should be set aside whether reviewed on a reasonableness or a correctness standard, Vavilov “impliedly” overruled Sattva and Teal Cedar so that as a statutory appeal, the arbitrator’s award was reviewable on the correctness standard.

Scala’s position was that because Vavilov was an appeal from an administrative tribunal rather than from a private arbitrator and because the Court did not consider either Sattva or Teal Cedar, the standard of review was reasonableness, as established by those cases.

Justice Davies decided:

[58]      I have concluded that the majority decision of the Court in Wastech precludes the conclusion that either Sattva or Teal Cedar has been impliedly over-ruled by Vavilov.

[59]      Although by leaving open the question of the standard of review to be applied in reviewing arbitral decisions under s. 31 of Act the majority in Wastech has allowed some uncertainty in administrative law to continue, I am satisfied that stare decisis requires that the reasonableness standard enunciated in Sattva and Teal Cedar must still be applied in determining the issues raised on this appeal.