New Brunswick – Arbitrator reading professional standards into valuation clause not extricable error of law – #573

In 619818 N.B. Inc. v. 656991 N.B. Inc., 2021 NBQB 269, Justice Ferguson of the New Brunswick Court of Queen’s Bench denied an application for leave to appeal an arbitral award. In so doing, he distinguished questions of mixed fact and law from pure questions of law arising from an arbitrator’s contract interpretation exercise.

The underlying dispute turned on the buy-out value of a building and property. The applicant tenant and respondent owner entered into a lease agreement that gave the tenant an option to purchase the building and property at the lease term’s conclusion. The “very loosely worded clause” called for the parties each to exchange appraisals by a “qualified commercial appraiser”, which would then be averaged out to determine the sale price. The clause was silent on valuation method or further procedure.

The applicant furnished an initial appraisal of $950,000, which indicated it was subject to revision. The respondent tendered an appraisal of $1,535,000. Shortly afterwards, the applicant notified its appraiser that the building required various repairs. It detailed the specific repairs and attached estimates for their completion, which the applicant obtained from service providers. This caused the applicant’s appraiser to revise his appraisal from $950,000 down to $621,000.

The applicant communicated the revised appraisal to the respondent. It demanded the respondent have its appraisal reduced proportionately, and that failing to do so would constitute “bad faith”. The respondent refused, triggering arbitration pursuant to a clause in the lease agreement.

Following a two-day hearing, the arbitrator rendered an award rejecting the applicant’s appraiser’s revised appraisal on the basis that it did not conform with the Canadian Uniform Standards of Professional Appraisal Practices (CUSPAP). This meant that the two appraisal values for determining the sale price were $950,000 (the applicant’s original appraisal value) and $1,535,000 (the respondent’s appraisal value). Applying the averaging formula in the buy-out clause, the arbitrator concluded the sale price should be $1,242,000. This was $134,401.07 more than the value would have been had the arbitrator accepted the applicant’s revised appraisal. The arbitrator also rejected the applicant’s allegation that the respondent had acted in bad faith, finding it did not knowingly conceal from its appraiser the repair items the applicant identified.

Under the parties’ arbitration agreement, the applicant required the Court’s leave to appeal the arbitrator’s award. Justice Ferguson observed that the New Brunswick Arbitration Act (the “Act”) imposes two conjunctive criteria on an applicant, namely that: “(a) the importance to the parties of the matters at stake in the arbitration justifies an appeal, and (b) determination of the question of law at issue will significantly affect the rights of the parties”. However, there was also the threshold matter of whether the applicant’s appeal raised a question of law, or whether it raised only questions of mixed fact/law. Since the parties’ arbitration agreement did not permit appeals on mixed fact/law, this point was crucial.

In arguing for leave, the applicant stated the arbitrator erred in imposing the CUSPAP standard. The buy-out clause in the lease agreement did not require appraisals pursuant to that standard; it only required each party to engage a “qualified commercial appraiser”. The respondent argued the Court should deny leave to appeal since the applicant raised a question of mixed fact/law, not a pure question of law subject to appeal under subsection 45(1) of the Act.

Justice Ferguson started his analysis with Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 [Sattva]. He listed what he described as 12 “legal admonitions to motion judges” found in Sattva (para. 32). Among them were the rationale for characterizing most contract interpretation questions on appeal as mixed fact/law: “ensuring consistency of the law, rather than providing a new forum for parties to continue their private litigation”. He also noted that extricable questions of law include “the application of an incorrect principle, the failure to consider a required element of a legal test, or the failure to consider a relevant factor”.

Turning to the arbitrator’s award, Justice Ferguson observed that the only language from which the arbitrator could conclude CUSPAP standards applied were the words “a qualified commercial appraiser” in the buy-out clause. He also noted the applicant’s own expert acknowledged that, as a licensed commercial appraiser, he had to apply CUSPAP standards. Upon canvassing the case law on what qualifies an expert to give opinion evidence, Justice Ferguson concluded that a “qualified commercial appraiser” within the meaning of the buy-out clause meant someone who is either licensed in the field or possesses sufficient experience in the field (or both).

Justice Ferguson accepted the arbitrator’s conclusion based on reasoning, albeit implied, that in requiring a qualified commercial appraiser, the parties’ objective intent was to assure those appraisers would apply professional standards. He characterized this aspect of the arbitrator’s contract interpretation exercise as mixed fact/law. 

For Justice Ferguson, the factual matrix further reinforced the arbitrator’s conclusion. The lease agreement provided for the purchase and sale of a building and property worth approximately one million dollars. Given the buy-out clause required the parties to live with the average of the two appraisals, “[s]uch mandatory compliance surely required some expert analytic process…”. But, in fashioning his revised appraisal, the applicant’s expert uncritically accepted the repair estimates the applicant furnished. The arbitrator evidently found this was out of step with CUSPAP standards.

Justice Ferguson went so far as to say that had the arbitrator accepted the applicant’s appraiser’s revised appraisal, he might have committed an extricable legal error “given the absence of any apparent expert analysis of the validity of the deferred repair data submitted to him”. Expanding on this point, he concluded with the following comment:

“[54] It may be that the arbitrator applied a factually more rigorous standard in evaluating the [applicant’s appraiser’s] “revised conclusion” than ought to have been used. However, when the factual matrix of this contract is infused into the term “appraisal value”, the conclusion is inescapable that what that term means is a mixed question of fact and law. No question of law is extricable that would allow a reasonable inference to be drawn that a question of law is readily discernable. Any other conclusion, with respect, invites the sale of a million dollar piece of property to be guided by a formula that belies any definition of ‘formula’.”

In light of the foregoing, Justice Ferguson dismissed the application for leave to appeal.

Contributor’s Notes:

First, Justice Ferguson’s approach exemplifies the sort of gatekeeping role Sattva encourages courts to take on appeals flowing from contract interpretation.

In appeals from first-instance courts, characterizing a question as mixed fact/law invokes the more deferential palpable and overriding error standard of review. This makes it harder to challenge a lower court judge’s contract interpretation exercise on appeal since the appeal court owes the first instance judge deference.

In appeals from arbitral awards, Sattva’s treatment of contract interpretation-related appeals as a (usually) mixed fact/law issue generates a different and more powerful gatekeeping function. Where appeals from arbitral awards are only available on pure questions of law (either by dint of the applicable arbitration legislation or the parties’ agreement), a question of mixed fact/law is a non-starter; the reviewing court has no jurisdiction to entertain the appeal in the first place.

Second, Justice Ferguson’s reasons do not reveal how much of the analysis he derived from the arbitrator’s award versus analysis he undertook in the first instance. When an arbitral tribunal proposes factual matrix elements to colour the contract’s terms—something well within its authority—it is sound practice to connect the factual dots to the contract’s terms in the award. This demonstrates to the parties and the reviewing court that the arbitral tribunal used the factual matrix appropriately: to interpret existing contract terms rather than create new ones. Implying terms invokes a different analysis. Doing so without undertaking that analysis invites scrutiny on appeal the arbitral tribunal might otherwise avoid.