In Spirit Bay Developments Limited Partnership v. Scala Developments Consultants Ltd., 2022 BCCA 407 (“Spirit Bay”) the Court affirmed the principle that courts should be reluctant to intrude in arbitral proceedings – even in cases where the award contains unhelpful discursions into irrelevant legal principles and legal errors that don’t affect the outcome.
The arbitration resulted from a payment dispute relating to a real estate development project. The developer, Spirit Bay Developments Limited Partnership (“Spirit Bay”), was granted several head leases by a local First Nation and intended to develop a residential project. Sprit Bay in turn, contracted with a builder, Scala Development Consultants Ltd (“Scala”), to construct houses on a fixed cost basis for the project (the “Housing Contract”). While either party could terminate the Housing Contract on 60 days’ notice without penalty, Spirit Bay would pay “all moneys owed” to Scala at the time the Housing Contract was terminated.
In August 2018, Spirit Bay terminated the Housing Contract. The next month, however, it requested that Scala complete the houses under construction at the time it terminated the Housing Contract. Ultimately, a dispute arose regarding payment for Scala’s work, which initiated arbitration the following spring.
The arbitration was heard in fall, 2019. The arbitrator awarded Scala over $1.7 million for unpaid invoices and lost profits and dismissed Spirit Bay’s counterclaim. In finding in Scala’s favour, the arbitrator found that Spirit Bay was obligated to pay Scala based on price increases imposed by Scala in 2018. The arbitrator also accepted that the parties agreed to a further contract relating to the houses under construction after Spirit Bay terminated the Housing Contract. In dismissing Spirit Bay’s counterclaim, the arbitrator referenced unjust enrichment principles that Spirit Bay argued were inapplicable given that the parties were operating under a contract.
The BC Supreme Court granted Spirit Bay leave to appeal and ultimately allowed Spirit Bay’s appeal in part. While the arbitrator misstated the law on subsequent conduct of the parties and commercial reasonableness in interpreting a contract, these errors did not impact the award. The BC Supreme Court, however, found that the arbitrator erred by applying unjust enrichment principles where a contract subsisted and ordered that this portion of the award be set aside and re-heard before a new arbitrator. The matter then went to the BC Court of Appeal.
Issue 1: Did the two identified errors of law have any impact on the Award?
The Court of Appeal upheld the trial decision that legal errors relating to subsequent conduct and commercial reasonableness did not impact the award and emphasizing the fact that the “dispute between the parties was primarily factual” and that the “[a]ward was driven primarily by findings of fact, which are not appealable.”
The Court of Appeal was also clear that the arbitrator erred in stating that decision makers may resort to subsequent conduct of the parties as an interpretive aid without first finding ambiguity in the contract. The Court, however, went on to ask, “whether this erroneous statement of the law so undermines the Award that it must be set aside.” The Court found that it did not, writing: “there does not appear to be any instance where the Award was influenced by the arbitrator’s erroneous view of the use of subsequent conduct in interpreting a contract.”
The Court similarly declined to set aside the award because the arbitrator erred by applying a commercial reasonableness test to interpretation of the contract. Although the Court found that there was “possible overstatement” of the principle by the arbitrator, he did not treat it as a standalone requirement. Moreover, while not determinative, the Court endorsed commercial reasonableness as “an important interpretive aid” in contractual interpretation. The Court likewise reiterated the heavy burden on a party seeking to set aside an arbitral award, writing:
“ For this appeal, this analysis must be placed in the context of the requirement that parties can appeal arbitration awards on questions of law alone. The appellant has not identified an element of the Award that was affected by an erroneous application of the principle of commercial reasonableness. Accordingly, the possible overstatement of the principle by the arbitrator does not support setting aside the Award.”
Issue 2: Did the arbitrator’s erroneous use of unjust enrichment principles require that part of the Award be set aside and reconsidered by a different arbitrator?
On this issue, writing for the Court, Justice Hunter allowed Scala’s cross-appeal. Although the Court noted that the arbitrator “could have been clearer in relating his findings to a contractual framework”, it was nonetheless apparent from the award read in its entirety that his findings were grounded in contractual not equitable principles and that they were either factual matters or questions of mixed fact and law, as opposed to extricable errors of law. In allowing the cross-appeal, the Court held:
“ I do not consider the arbitrator’s several references to unjust enrichment to alter this analysis. I agree that they are unnecessary for this contractual analysis and are potentially confusing, but as I read the Award, it is based on contract principles, not principles of unjust enrichment. While the references to unjust enrichment give rise to questions of law, as the leave judge determined, they do not rise to the level of errors of law affecting the outcome when the Award is read as a whole. The arbitrator was applying contract principles to his findings of fact to determine Scala’s entitlement to be paid for its invoices. No extricable error of law arises from his analysis.”
Issue 3: Standard of Review
The Court briefly addressed the standard of review, highly confusing as a result of the Supreme Court of Canada’s decision in Vavilov that statutory appeals are subject to a correctness standard in comparison to previous Supreme Court of Canada jurisprudence, including Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 at para. 106 and Teal Cedar Products Ltd. v. British Columbia, 2017 SCC 32 at para. 1. They prescribe a reasonableness standard of review for appeals of commercial arbitral awards. Because the standard of review in this case did not affect the outcome, the Court left the determination of that question for a case where this distinction would impact its outcome, which is the approach the majority of the Supreme Court of Canada adopted in Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7.
In this case, the Court was at pains to emphasize the limited role of judicial intervention in arbitration, stating variously that “[t]his is and has always been primarily a factual appeal” and that the “dispute was primarily a factual dispute.” Even erroneous statements of law did not warrant intervention because they did not affect the “largely factual issues required to be resolved.”
Simply characterizing a dispute as purely factual, however, will not necessarily immunize an award from judicial intervention. For example, in Escape 101 Ventures Inc. v. March of Dimes Canada, 2022 BCCA 294 (“Escape 101 Ventures”), the Court held that a material misapprehension of evidence is an extricable error of law, where that misapprehension goes to the core of the outcome. The misapprehension of evidence need not be apparent on the face of the award but rather may relate to the record.
These cases, however, will be rare. In that case, it was “patent” from the record that the arbitrator had misapprehended evidence central to his interpretation of the contract, something the respondent did not dispute. More often, contractual interpretation and the concomitant fact-finding exercise could only result in a question of mixed fact and law rather than an extricable error of law. The following related Case Notes may interest Arbitration Matters readers: Portion of arbitral award set aside; re-hearing to be conducted by different arbitrator – #518, which comments on Spirit Bay Developments Limited Partnership v Scala Developments Consultants Ltd., 2021 BCSC 1415, the trial decision in Spirit Bay; and Material misapprehension of evidence is an extricable error of law – #662, commenting on 101 Escape Ventures.