In Creative Energy Vancouver Platforms Inc. v. Concord Pacific Developments Ltd., 2024 BCCA 128, the Court granted leave to appeal an award on the basis that there was arguable merit to the position that a panel of arbitrators had erred in law by allowing the factual matrix and post-contractual conduct to overwhelm a contract—effectively creating a new agreement. A vendor and purchaser arbitrated the application of a zoning by-law to a land purchase agreement: higher density under the by-law equated to higher compensation owing to the vendor. The arbitral tribunal ruled in the vendor’s favour. On preliminary review at the leave to appeal stage, the Court found it arguable that the tribunal had erred in law by interpreting the factual matrix in a manner that was isolated from the words of the purchase agreement. The Court said that resolution on appeal would require careful consideration of the tribunal’s reasoning and the evidentiary record. Arguments on the merits of the appeal have recently taken place and a decision from a division of the Court is pending.
Background to the dispute – Creative Energy Vancouver Platforms Inc. (“purchaser”) owned property in downtown Vancouver (“720 Beatty”). Concord Pacific Developments Limited (“vendor”) owned adjacent, unzoned land (“the Triangle”). In the 1980’s, the vendor agreed to sell the Triangleto the purchaser. A few years later, the parties entered into an amended purchase agreement (the “APA”), which addressed the impact of density when the Triangle was eventually zoned.
The APA stated the purchase price for the Triangle was based on the assumption that “consequent upon the first zoning thereof the floor space ratio applicable to the Triangle under the City of Vancouver zoning therefore will be one (1)…”. The parties agreed, however, that if the floor space ratio (“FSR”) for the Triangle was higher than “1” as a result of the first zoning, the purchaser would have the option to either transfer the excess density to the vendor for nominal consideration or to purchase the density from the vendor at fair market value. In brief, this provision (“the APA Option”) recognized that excess density would be potentially valuable and exchangeable.
In recent years, the purchaser began a lengthy process to redevelop both 720 Beatty and the Triangle and submitted rezoning applications. The city advised that the two properties would have to be consolidated, and zoning would be assigned to the consolidated property.
The purchaser exercised the APA Option to purchase excess density and it consolidated 720 Beatty and the Triangle.
The city thereafter enacted a rezoning by-law for the consolidated site. While the by-law established different building heights and floor areas for 720 Beatty and the Triangle, it established a single FSR density value applicable to the consolidated site.
The purchaser and vendor arbitrated the application of the city’s FSR determination with respect to the Triangle. The parties agreed to bifurcate the dispute and have liability decided before damages. The tribunal ruled in the vendor’s favour and found that the FSR for the Triangle was more than twenty times higher than proposed by the purchaser.
The Arbitral Award – In the liability hearing, the tribunal posed the following question: “What is the FSR ‘applicable to the Triangle’ for the purpose of calculating the Excess Density under the [APA]”? The tribunal asked the parties to identify the factual matrix that the Tribunal should consider, its relevance to the terms of the APA, and to make submissions on whether post-contractual events and post-contractual conduct could be relied upon to interpret the APA Option.
A key question was the extent to which the tribunal could consider the circumstances leading to the rezoning of the Triangle as part of the factual matrix. The tribunal stated as follows:
“[77] …the Tribunal notes that it has considered evidence of the genesis of the Rezoning By-law not as evidence of subsequent conduct for the purpose of determining the intention of the parties to the Amended Purchase Agreement at the time of contract formation, but rather as an aid to understanding the Rezoning By-law and how it must be treated under the bargain struck by the Parties when they entered into the APA.”
The tribunal rejected the purchaser’s contention that the term FSR “applicable to” the Triangle in the APA was equivalent to the FSR “of” the Triangle.
The tribunal concluded as follows:
“[25] …When read in the context of the Amended Purchase Agreement considered as a whole, and in light of surrounding circumstances, the tribunal finds that the provisions of the Amended Purchase Agreement are unambiguous. The words ‘applicable floor space ratio consequent upon the first zoning’ in s. 5.1 of the Amended Purchase Agreement were intended by the parties to refer to the FSR of the site of which the Triangle would form part consequent upon the first zoning thereof.” [emphasis in original]
…
[29] …The Tribunal having found that, read as a whole and in light of the surrounding circumstances, the terms of s. 5.1 of the Amended Purchase Agreement are unambiguous, the Tribunal did not consider it necessary, in reaching its conclusion as to the proper interpretation of s. 5.1 of the APA, to rely upon evidence of the Parties’ post-contractual conduct.”
Court of Appeal decision – The Court granted the purchaser’s leave to appeal application.
After setting out the appeal provisions of s. 59 of the Arbitration Act, S.B.C. 2020, c. 2 (the “Act”) and leading authorities, the Court noted that appellate intervention in commercial arbitration in B.C. is narrow.
The Court considered and rejected several alleged questions proposed by the purchaser in the leave application as raising matters of mixed fact and law in respect of which appeal could not be granted under the Act. However, the Court found that the purchaser had also posed questions of law of arguable merit, which the Court collectively summarized as follows:
“Did the tribunal err in allowing evidence of the factual matrix — including evidence of post-contracting conduct of the parties and the city — to overwhelm the text of the Amended Purchase Agreement, thereby creating a new agreement for the parties?”
The Court directed itself to Supreme Court of Canada case law considering the “overwhelming principle”:
“[73] … the factual matrix overwhelms the words of a contract when it is interpreted in isolation from the words of the contract, effectively creating a new agreement between the parties” – [this] raises a legal question. This is a question of law because contractual interpretation must be grounded in the text of the contract: Teal Cedar at paras. 62-63.”
The Court was satisfied that the requirements of this formulation of the “overwhelming principle” were met, as follows:
“[74] …[The purchaser] argues that consideration of the factual matrix, including the Zoning & Development By-law and the steps required to achieve the first zoning of the Triangle, caused the tribunal to inject terms or concepts into the Amended Purchase Agreement that are inconsistent or incompatible with those actually used by the parties. In particular, it says that the tribunal imported into the agreement the concept that the floor space ratio of the Triangle could be the same as that of a larger “site” in which it was located at the time of the first zoning. The term “site” does not appear in the Amended Purchase Agreement for the purpose of identifying the area to be used as the denominator for the floor space ratio, so the idea that the floor space ratio of the much larger Lot 1 could be used to determine the Excess Density for the Triangle amounts to a new agreement. Significantly, from the perspective of [the purchaser], the finding that the floor space ratio attributable to the Triangle is that of the “site”, meant that the Excess Density attributed to the Triangle is much greater than the actual permitted density for the Triangle….
[75] [The purchaser] alleges that the tribunal erred in relying on evidence of the subsequent conduct of the parties and the city to interpret the contract having concluded that the Amended Purchase Agreement was unambiguous. There is no question that doing so would amount to an error in principle….
[78] ….The steps taken by the parties and the city that led to the enactment of the Rezoning By-law are described in detail at paras. 71-112 of the Award. Much of the evidence about the events that occurred and the actions of the parties that resulted in those steps being taken is, without question, evidence of subsequent conduct. [The purchaser] challenges the tribunal’s assertion that it used that evidence merely as an aid to understanding how the Rezoning By-law must be treated under the bargain struck by the parties. It argues that the tribunal’s conclusions about the Excess Density could only be explained by improper reliance on the subsequent conduct evidence. I am satisfied that this argument raises an extricable question of law.”
The Court accepted that the case was of importance to the parties and that an appeal may prevent a miscarriage of justice.
With reference to the directives of Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 and Teal Cedar Products Ltd. v. British Columbia, 2017 SCC 32, the Court considered the arguable merit of the purchaser’s alleged question of law, found it could not be dismissed through a preliminary examination, and granted leave to appeal.
This decision from the temperate days of last spring should not be overlooked and discarded when the holiday accoutrements and snow are cleared away. By the time this Case Comment is posted, an early December merits appeal will have already been argued—the decision that follows is certain to be the subject of a further Case Comment.
Here are some initial reflections—and questions—following the leave to appeal decision.
First, the issue of when the factual matrix may “overwhelm” a contract to create a new contract—as opposed to the factual matrix properly being “considered” in the interpretation of a contract— has been vexing in B.C. Look no further than Teal Cedar, which required two trips to the Supreme Court of Canada to rule that two BCCA divisions (one a majority, the other unanimous) erred in their application of the “overwhelming principle”.
Second, the Court noted at para 86:“[t]he Award is comprehensive and engages with the language of the contract.”
This observation sits uneasily with the cautionary language from Teal Cedar, at para 65:
“To extricate a question of law based on the alleged error of having overwhelmed the contract, a reviewing court must be satisfied that the decision-maker interpreted the factual matrix isolated from the words of the contract; an approach which could effectively create a new agreement.”
It is uncertain how an award might be comprehensive and engage with the language of the contract and nevertheless have interpreted the factual matrix isolated from the words of the contract. The treatment of extricable errors of law in the arbitration context in B.C. has not been smooth or without controversy. See, Arbitration Appeals on Questions of Law in Canada: Stop Extricating the Inextricable! (2023) 3 Canadian Journal of Commercial Arbitration No. 2, 138-166.
Third, the Court was careful not to prejudge the issue of whether the tribunal allowed the factual matrix and post-contractual conduct to overwhelm the APA, correctly recognizing that this was a matter for a merits appeal. Similarly, this Case Comment offers no view whether such an error occurred.
That said, there are unanswered questions as to whether leave to appeal should have been granted.
The agreement to arbitrate was not in the APA. Instead, after the dispute arose, the parties agreed to arbitrate. Should this have been a factor to consider in exercising discretion to grant leave to appeal? If this point was argued, it does not appear in the leave decision.
What of the fact that the arbitration proceeded before a three-person tribunal, which ought to provide additional built-in checks against errors. Presumably this is why the parties, represented by leading arbitration counsel, agreed to select and pay for three arbitrators not one, the default under the Act. Each of the arbitrators is highly regarded domestically and abroad. And importantly, there was no dissent.
Framed another way, did three arbitrators get it wrong? Did arbitrators who stated that they did not rely upon evidence of post-contractual conduct do so in any event? Should a tribunal of three arbitrators be treated with more deference than a single-member tribunal?
Further, what is the scope of review on the appeal for which leave has been granted?
The Court explained as follows:
“[86]…there is no question that the tribunal heard a significant amount of evidence covering many years of events leading to the enactment of the Rezoning By-law, some of which is properly characterized as post-contractual conduct. In my view, to resolve the question raised, I would have to delve more deeply into the legal question than is appropriate at this stage. That is particularly the case here as the legal question involves careful consideration of the tribunal’s reasoning, but also of the evidentiary record.” [emphasis added]
The Court is right to point out the need for careful consideration of the tribunal’s reasoning. But the evidentiary record? In Teal Cedar, the Supreme Court accepted that whether the factual matrix overwhelmed the words of a contract could raise a legal question. However, Teal Cedar did not suggest the need (or the ability) to address the evidentiary record undergirding the factual matrix. To the contrary, the Supreme Court was able to dismiss the contention that the factual matrix had overwhelmed the contract in issue by reviewing the arbitral award.
Since Teal Cedar was decided, B.C. has repealed and replaced its domestic arbitration legislation. The new Act further bolsters arbitral authority including with respect to evidence. Under s. 28(1), it is the tribunal who “decide[s] all evidentiary matters, including the admissibility, relevance, materiality and weight of any evidence, and draw such inferences as the circumstances justify”. The tribunal asked the parties to identify the factual matrix the tribunal should consider, and the tribunal then determined and set out the factual matrix in the Award.
At the merits stage, the Court of Appeal will have to review the Award to see if the tribunal interpreted the factual matrix in a manner that overwhelmed the APA. It is within the Award that the error of law is to be found, not the broader evidentiary record. Such a record would certainly contain evidence the tribunal did not consider admissible, relevant, material, or to which it attributed limited if any weight, in short, evidence that does not form part of the factual matrix.
Further, there is an additional, B.C.-specific obstacle in reviewing the evidentiary record rather than the factual matrix in the Award. S. 28(1) of the Act uniquely expands the Model Law evidentiary provision to permit the tribunal to “draw such inferences as the circumstances justify”. The tribunal was entitled to make factual findings that form part of the factual matrix, including inferences having seen and heard witnesses and weighed multiple sources of evidence. The sources of such inferences may not be apparent on review of the evidentiary record.
Stay tuned. A further gift will be coming from the BCCA as it grapples with these and other issues in this fascinating dispute.