B.C. – failure to answer fundamental question not an extricable error of law – #801

In Hudson’s Bay Company ULC v. Piret (18111 Blundell Road) Holdings Inc., 2023 BCCA 428, the Court held that the failure of an arbitrator to answer a fundamental question is a matter of interpretation of the arbitral award and does not give rise to an extricable error of law. It dismissed the application for leave to appeal. This decision seems to stand in contrast to other recent decisions coming out of the same court that have held a material misapprehension of evidence going to the core of an outcome of an arbitral award can amount to an extricable legal error.

Background –The applicant/tenant and respondent/landlord were parties to a lease agreement. It contained options to extend the initial term of the lease and set out the basis for how rent in a renewal term was to be determined. If the parties could not agree on the updated market rent by a specified period of time, the issue was to be submitted to arbitration. Thus, when the initial term expired and the parties were unable to agree on the new amount of payable rent, the matter was submitted to arbitration.

In the arbitration, each party retained an expert to opine on the appropriate market rent under the lease agreement. An issue arose between the parties and their experts as to whether and how to adjust market comparable properties based on the passage of time. The landlord’s expert increased the rents of comparable properties where those leases were negotiated and executed before the commencement date of the subject lease on the theory that market rents increased in that intervening period. The tenant’s expert argued that there were serious flaws with the time adjustments, making them unreliable. 

In the award, the arbitrator acknowledged that the flaws identified by the tenant “appeared to constitute a formidable attack” on the time adjustments. However, the arbitrator concluded as follows:

 “Time Adjustment is such a significant consideration in this Arbitration that, having canvassed the aspects extensively, I will defer my final decision until the closing analysis. For now, I will give a preliminary response to “what time adjustment is appropriate?” I expect to be relying much more on [the landlord’s expert’s] detailed analysis than [the tenant’s expert’s] “overarching background.

The arbitrator ruled in favour of the landlord in establishing the market rent; however, according to the tenant, the arbitrator never came back to this issue in his closing analysis. The tenant applied to the Court of Appeal for leave to appeal that decision under Section 59 of the Arbitration Act, S.B.C. 2020, c. 2. To do so, the tenant needed to establish, among other things, that the arbitrator had committed an error of law. The tenant argued that the arbitrator erred in law by failing to consider its arguments concerning the time adjustments. It argued that the arbitrator never grappled with the flaws identified, despite finding them to be a “formidable attack,” and never returned to address the issue of whether the time adjustments should not be made at all later in the award.

In dismissing the application, the Court held that the tenant had failed to identify an error of law. Rather, “the failure to answer a fundamental question is a matter of interpretation of the arbitration award.” The Court then held that the arbitrator resolved the “fundamental question” in favour of the landlord and the arbitration award was simply too expansive on the parties’ positions, and descriptive on the alternatives for such an adjustment, to conclude that the arbitrator failed to consider the tenant’s position that there should be no assessment of rent on account of time adjustments. It therefore dismissed the application.

Contributor’s Notes:

I confess that I have mixed feelings about this decision. Given the other recent cases out of the B.C. Court of Appeal that have gone too far in broadening the test for identifying an error of law in the context of contract interpretation issues, this decision is a move in the right direction of narrowing the scope of extricable errors of law. However, the Court seems to have swung the pendulum too far in the other direction by failing to recognize that the failure of an arbitrator to consider a fundamental question (if such a failure is indeed proven on the facts of the case) can be an extricable error of law. I explain below.

On the positive side, this decision stands in contrast to the B.C. Court of Appeal’s other recent decisions that have shown a willingness to find extricable errors of law in appeals of domestic arbitration awards on contract interpretation issues where other courts would not do so. For example, in Escape 101 Ventures Inc. v. March of Dimes Canada, 2022 BCCA 294, the Court of Appeal ruled that the misapprehension of evidence by the arbitrator that goes to the core of the outcome is an extricable error of law (for more on that case, see Case Note 662: B.C. – Material misapprehension of evidence is an extricable error of law). The March of Dimes decision was followed by the B.C. Court of Appeal in some other recent decisions (see Case Note 715: B.C. – When findings of fact become errors of law, dealing with a 2022 decision, and Case Note 728: B.C. – Court of Appeal finds extricable error in contract interpretation (again), dealing with a 2023 decision). 

There has been much criticism of the March of Dimes decision and related jurisprudence. How an arbitrator assesses and weighs the evidence before them is at the core of their mandate and forms part of the contractual interpretation exercise. In the March 2023 issue of The Canadian Journal of Commercial Arbitration, Lisa Munro co-authored an article with Joshua Karton, Barry Leon, and Joel Richler, titled “Arbitration Appeals on Questions of Law in Canada: Stop Extricating the Inextricable!” In this article, the authors criticized the B.C. Court of Appeal’s expansive approach to characterizing such issues as errors of law. However, the Supreme Court of Canada denied leave to appeal the decision (2023 CanLII 28894).

This decision is therefore a move in the right direction and follows the guidance identified by Justice Gascon for the Supreme Court of Canada in Teal Cedar that “Courts should … exercise caution in identifying extricable questions of law because mixed questions, by definition, involve aspects of law” (2017 SCC 32, para. 45).

However, the B.C. Court of Appeal arguably went too far in the other direction when it found there was no extricable issue of law as “the failure to answer a fundamental question is a matter of interpretation of the arbitration award.” In Sattva, 2014 SCC 53, the Supreme Court of Canada recognized that an extricable error of law may arise from contractual interpretation by an arbitrator in three circumstances, including “the failure to consider a relevant factor” (para. 53). For example, if the arbitrator ignored a specific and relevant provision of the Agreement, the Supreme Court recognized that “is a question of law that would be extricable from a finding of mixed fact and law” (para. 64).

If an arbitrator fails to address a fundamental issue raised by the parties, then that can constitute an error of law. That issue is not about how the arbitrator weighed the evidence, but whether they considered the issue at all. Thus, the Court’s suggestion that the failure to consider a fundamental question does not constitute an error of law goes too far. Clearly, the Court was motivated by its finding of the facts of the case that the arbitrator did, in fact, consider this issue and ruled in favour of the landlord. But, in that circumstance, there is then no meritorious error of law because the arbitrator did not fail to consider a relevant factor. That is distinct from the matter of principle that had the arbitrator failed to consider the issue, that would be one of the limited circumstances where an error of law arises out of the contractual interpretation context.