In Escape 101 Ventures Inc. v March of Dimes Canada, 2021 BCCA 313 Justice DeWitt-Van Oosten granted, in part, the Plaintiff’s application for leave to appeal the arbitrator’s award dismissing the Plaintiff’s claims brought pursuant to an asset purchase agreement. The Plaintiff argued that the arbitrator committed errors of law in interpreting the terms of the agreement. Justice DeWitt-Van Oosten found that the arbitrator had misapprehended the evidence, which underlay his conclusions and “laid the foundation for an extricable error of law”. Further, even where an applicant demonstrates that there is an extricable question of law, a court should consider the reasons of the arbitrator as a whole in assessing that error and deny leave unless satisfied that the error was material to the result and the appeal has arguable merit. Justice DeWitt-Van Oosten was satisfied that both these criteria were met. Further, the amount of money at issue met the requirement for leave to appeal in s. 59(4) of the B.C. Arbitration Act, S.B.C. 2020, c. 2, that, “the importance of the result of the arbitration to the parties justifies the intervention of the court”.
The purpose of the asset purchase agreement was to facilitate the sale of the Plaintiff’s business to the Defendant. The purchase price was comprised of a cash payment (not in dispute), a maximum amount of “Earnout” payments, and a “Contingent Payment”.
Among the disputes between the parties was the total amount of the Earnout payments. The Earnout provision required the Defendant to pay to the Plaintiff, on a quarterly basis, 10% of the gross revenue earned through the provision of defined services over a five-year period running from the date of the agreement. The Defendant excluded from its Earnout calculations any gross revenue generated under contracts it entered into after it assumed operational responsibility for the business. The Plaintiff objected to that approach and contended that it was entitled to 10% of all revenue generated for the defined services over the five-year period, including revenue from new contracts entered into after the asset purchase agreement was executed.
The parties agreed to arbitrate their disputes. The arbitrator rendered his award on April 27, 2021, dismissing all the Plaintiff’s claims. He concluded that the Earnout provision was ambiguous and he looked to the parties’ post-contractual conduct to interpret it. He relied upon the conduct of one of the principals of the Plaintiff, who he found was aware that the Defendant had obtained a new contract, and failed to object to three quarterly Earnout payments in 2018 that did not include revenue from the new contract.
The Plaintiff sought leave to appeal this finding on the basis of an extricable error of law. In particular, the arbitrator had made findings that were not argued or pleaded by the parties, or supported by the evidence, including the finding of an “informed acceptance” by the Plaintiff with respect the Earnout payments. The Defendant’s position was that this was a matter of contract interpretation and therefore the proposed appeal raised questions of mixed fact and law, which were not appealable under s. 59 of the B.C. Arbitration Act, S.B.C. 2020, c. 2.
The relevant portions of section 59 read as follows:
(3) A party to an arbitration may seek leave to appeal to the Court of Appeal on any question of law arising out of an arbitral award unless the arbitration agreement expressly states that the parties to the agreement may not appeal any question of law arising out of an arbitral award.
(4) On an application for leave under subsection (3), a justice of the Court of Appeal may grant leave if the justice determines that
(a) the importance of the result of the arbitration to the parties justifies the intervention of the court and the determination of the point of law may prevent a miscarriage of justice,
(b) the point of law is of importance to some class or body of persons of which the applicant is a member, or
(c) the point of law is of general or public importance.
Justice DeWitt-Van Oosten agreed that the proposed appeal on the Earnout payments issue involved a matter of contract interpretation and considered whether it raised an extricable question of law:
“[21] The application of an incorrect legal principle by an arbitrator, a failure to consider an element of a legal test, or a failure to consider a relevant factor will generally meet the test for an extricable question of law: Sattva at paras. 53. A question of law may also arise where an arbitrator has forgotten, ignored or misconceived evidence and that error is shown to have affected the result of the arbitration: Sharbern Holding Inc. v. Vancouver Airport Centre Ltd., 2011 SCC 23 at para. 71. See also Armstrong v. Armstrong, 2012 BCCA 166 at paras. 65–67. There may be additional errors that engender questions of law in the arbitration context. However, for the purpose of these reasons, it is not necessary to set them all out.
[22] Even where an applicant for leave is able to identify an error of law, a court should consider the reasons of the arbitrator as a whole in assessing that error and deny leave to appeal unless satisfied that the error was material to the result and has arguable merit: Urban Communications Inc. v. BCNET Networking Society, 2015 BCCA 297 at para. 64, aff’d 2016 SCC 45.
[23] Finally, courts are generally reluctant to grant leave on an issue that was not before the arbitrator: On Call Internet at para. 34, citing VIH Aviation Group Ltd. v. CHC Helicopter LLC, 2012 BCCA 125 at para. 45.”
Justice DeWitt-Van Oosten concluded that one of the Plaintiff’s arguments about the arbitrator’s interpretation of the Earnout provisions raised an extricable question of law. Specifically, the arbitrator found that there was no evidence to explain why the Plaintiff’s principal failed to object to the quarterly Earnout payments which did not include revenue from the new contract. In fact, there was evidence of an explanation and that the principal noticed the omission of new contract revenue in the quarterly payments but did not accept it. The arbitrator simply rejected that evidence and therefore, “fail[ed] to appreciate, overlook[ed] or ignore[d] the explanation provided.” and “wrongly pre-suppose[d], contrary to the evidence, that the 2018 quarterly reports issued at a time when the [Defendant] was generating revenue under the [new] contract”.
She found that a meritorious argument could be made that the conclusions the arbitrator drew from the Plaintiff’s post-contractual conduct played an integral role in his interpretation of the agreement with respect to the Earnout obligation and dismissal of the claims. Therefore, the arbitrator’s alleged misapprehension of the evidence underlying those conclusions affected the result of the arbitration and laid the foundation for an extricable error of law.
Further, the importance of the result of the arbitration to the Plaintiff justified the intervention of the court and the determination of the point of law might prevent a miscarriage of justice. The interpretation of the Earnout provision carried significant financial implications, potentially over $1 million: “Given the amount of money involved, the proper interpretation of that aspect of the agreement is of sufficient importance to justify the expense and time of court proceedings”.
Editor’s Notes:
First, the Plaintiff also argued that the arbitrator had erred in misapprehending its “position” (as opposed to the evidence) on the Contingent Payment, wrongly assuming that there was no dispute between the parties on a central issue. Justice DeWitt-Van Oosten left open the possibility that this could give rise to an extricable question of law: “Assuming without deciding that misapprehending an argument or wrongly assuming a concession gives rise to an extricable question of law… ” She was satisfied, reading the reasons as a whole, that the arbitrator outlined the arguments put forward by the Plaintiff and was alive to the issue.
Second, the Defendant relied upon Ecoasis Resort and Golf LLP v. Bear Mountain Resort & Spa Ltd., 2021 BCCA 285, in support of its argument about the need for a cautious approach to granting leave from arbitral awards: the Defendant “highlights the importance of ensuring that the legislative restraints governing leave to appeal in the commercial arbitration context receive meaningful effect. Those restraints are critical to preserving the “integrity of the arbitration system as a forum for speedy and final adjudication”: Ecoasis at para. 30, citing On Call Internet Services Ltd. v. Telus Communications Company, 2013 BCCA 366 at para. 35.” For a recent Case Note on the Ecoasis Resort and Golf LLP case, please see B.C. – Leave to appeal denied where alleged legal errors did not reflect arbitrator’s reasoning – #530.
Third, for previous Case Notes which grapple with what constitutes an extricable error of law, see Case Notes: B.C. – Challenge of arbitrator’s interpretation of restrictive covenant in shareholders agreement, relying upon employment contract analysis, not appealable “extricable error of law” – #509, Ontario – findings of fact which established legal obligations also prevent raising question of law – #439, B.C. – expert determination not conducted in accordance with dispute resolution process may be error in law – #435, Ontario – arbitrator’s interpretation of settlement raises extricable question of law and jurisdictional issue – #370, and Alberta – legislative rule “unique” to Alberta applied to refuse leave to appeal extricable question of law in multimillion dollar dispute – #058.