In Zenda Mount Pearl Square Enterprises Limited Partnership v MP TEI Realty Limited Partnership, 2023 NLSC 142, the Applicant/Respondent in the arbitration applied to set aside an arbitral award arising from a dispute involving the contractual entitlement to refinancing proceeds that the Applicant/Respondent received as a result of a rogue transfer of funds. Section 14 of the Newfoundland and Labrador Arbitration Act, RSNL 1990, c A-14 (the “Arbitration Act”) gives the Court the authority to set aside an arbitral award if it finds that there was Arbitrator misconduct or the award was improperly procured. The Court held that the burden is on the applicant to show that the award is improper as a matter of fact, law, or mixed fact and law, and that the award falls outside out any potential reasonable outcome. The Court’s analysis and reasons looked at whether the decision of the Arbitrator was reasonable, applying Layman v Layman Estate, 2016 NLCA 13 (“Layman”). Focusing, in part, on the Arbitrator’s application of the principles of contract interpretation set out in Creston Moly Corp. v Sattva Capital Corp., 2014 SCC 53 (“Sattva”), the Court concluded that the Arbitrator’s decision to divide the proceeds equally between the parties was reasonable based on the terms of the parties’ agreements. The Court dismissed the set-aside application on the basis that the decision of the Arbitrator, in respect of all of the grounds reviewed by the Court, was reasonable. This case has application to the review (including on set-asides) of arbitration decisions on the basis of reasonableness and the contractual interpretation of commercial agreements.
Factual Background – The Applicant/Respondent in the arbitration, Zenda Mount Pearl Square Enterprises Limited Partnership (“Zenda”), and Respondent/Claimant in the arbitration, MP TEI Reality Limited Partnership (“TEI”), jointly purchased a property. In April 2019, Zenda and TEI refinanced the property. The proceeds of the refinancing were approximately $7,300,000. The parties agreed to transfer $2,000,0000 of these proceeds into a guaranteed investment certificate and divide the remaining $5,300,000 equally pursuant to a Co-Owners Agreement (the “COA”). However, this transfer did not happen. A rogue siphoned off all of the proceeds from the refinancing, except $2,650,000, and transferred those funds to third parties. The rogue transferred the remaining $2,650,000 to Zenda. TEI received nothing.
Arbitration – TEI commenced an arbitration against Zenda for breach of contract. TEI argued that it should have received half of the $2,650,000 that Zenda received, based on the term of the COA that required that any proceeds from the refinancing of the Mount Pearl Square property be divided 50/50 as between Zenda and TEI.
The COA contained a binding arbitration clause that said:
“If there is any dispute between the parties which they are unable to resolve, any party to such dispute may, and it shall be a condition precedent to commencing any action or other proceeding with respect to such dispute, require that the matter in dispute be submitted to arbitration before a single arbitrator to be agreed upon or to be appointed […]. The decision of the arbitrator shall be final and binding except to the minimum extent an appeal is permitted pursuant to said act or the laws of Newfoundland and Labrador.”
The Arbitrator issued an Award directing that Zenda pay TEI half of the $2,650,000 ($1,325,000) in refinancing proceeds that Zenda received, pursuant to the terms of the COA.
Set-Aside Application – Zenda applied to the Supreme Court of Newfoundland and Labrador to set aside the Arbitrator’s Award on jurisdiction grounds and on the basis of section 14(1) of the Arbitration Act, which provides that, “[w]here an arbitrator or umpire has misconducted himself or herself, or an arbitration or award has been improperly procured, the court may set the award aside” [emphasis added].
Standard of Review – Citing Long Harbour Employers Association Inc. v Resource Development Trades Council of Newfoundland and Labrador, 2023 NLCA 24, the Court said that arbitral awards are subject to court review. Referring to Canada (Minister of Citizenship and Immigration) v Vavilov, 2019 SCC 65, the Court held that the standard of review to be applied is reasonableness. The test for reasonableness, as applied by the Newfoundland and Labrador Court of Appeal, “requires the court to consider whether the decision is justified, transparent and intelligible – and whether it is a decision that a reasonable decision maker could have made” (para 27, citing Layman).
Misconduct – The Court held that setting aside the Award on the basis of “misconduct” of the Arbitrator would require a breach of the rules of natural justice by the Arbitrator. The Court held that there was no evidence of Arbitrator misconduct before the Court. Accordingly, the Award could not be set aside on this basis.
Improperly Procured – The Court held that the burden of proof was on the Applicant, Zenda, “to show that the award is improper as a matter of fact, law, or mixed fact and law and that the award falls outside of any potential reasonable outcome” (para 27). The Court’s reasons focused entirely on whether the arbitrator’s decision in respect of those grounds was reasonable.
(a) Contract Interpretation Ground – The most substantial discussion in the decision related to the Court’s consideration of the Arbitrator’s decision as to whether a joint venture agreement (“JVA”) between the parties supplanted the COA. Zenda argued that the JVA, and not the COA, governed the relationship between the parties and that, as a result, TEI ought to have commenced a lawsuit in Quebec instead of commencing an arbitration in Newfoundland.
The COA applied the laws of Newfoundland and Labrador and contained a mandatory arbitration clause. By contrast, the JVA applied the laws of Quebec and did not contain any dispute resolution mechanism.
The Arbitrator reviewed the COA and the JVA by applying the principles of contract interpretation set out in Sattva: “the contract must be read as a whole, giving the words used their ordinary and grammatical meaning consistent with the surrounding circumstances known to the parties at the time of the formation of the contract” (para 31).
The Arbitrator held that in order for the JVA to supplant the COA, the agreements would need to deal with the same subject matter. They did not. The parties entered into the JVA six-and-a-half years after the COA, for the purpose of addressing an issue under the Excise Tax Act, RSC 1985, c E-15. By contrast, the COA dealt with the relationship between the co-owners. The Arbitrator concluded that, as a matter of contractual interpretation, the JVA did not deal with the same subject matter as the COA and, accordingly, the JVA did not supplant the COA. The arbitration was properly commenced pursuant to the binding arbitration clause in the COA.
The Court concluded that the Arbitrator’s interpretation of the JVA and COA was within the range of acceptable, reasonable outcomes.
(b) Application of Equitable Principles Ground – The Court considered whether the Arbitrator had properly considered the equitable principle of “clean hands” in his decision to require Zenda to pay half of the $2,650,000 in refinancing proceeds to TEI. The Court’s reasons suggest that Zenda argued before the Arbitrator that it received the $2,650,000 with “clean hands” and, as a result, should not be required to pay half of those funds to TEI. The Arbitrator rejected that argument on the basis that the terms of the COA required that Zenda and TEI divide any refinancing proceeds equally. Zenda was not entitled to the entire $2,650,000 in financing proceeds because this was a breach of the COA. The Court held that the Arbitrator’s decision, based on a breach of contract, was within the range of acceptable, reasonable outcomes.
Conclusion – The Court briefly considered two other grounds and held, for each, that the decision of the Arbitrator was reasonable. The Court concluded that, with respect to each of the four grounds before the Court, the decision of the Arbitrator was “justified, transparent and intelligible” (para 13). Accordingly, the Award was a decision that a reasonable Arbitrator could have made. The Court dismissed the application to set aside the Award on that basis.
The Court did not comment in its conclusion about whether the Award was “improperly procured”. However, the Court’s finding that the Award was reasonable suggests that the Applicant, Zenda, did not meet the burden of proof required to show that the Award was “improper as a matter of fact, law or mixed law and fact and that the award falls outside of any potential reasonable outcome” as discussed in paragraph 8 of the Court’s decision.
In addition, the Court commented that, for some reason, neither TEI nor Zenda had brought a claim against the third parties that received proceeds from the Mount Pearl Square from the rogue.
Contributor’s Notes:
First, Zenda is a good example of an arbitrator’s application of the principles of contract interpretation, as set out in Sattva, to determine which of two agreements – one with a mandatory arbitration clause and one with no dispute resolution mechanism – applied to the parties’ dispute. The arbitrator considered the purpose of each of the two agreements, in the context of what the parties knew at the time of contracting, and concluded that the agreement that applied to the parties’ dispute was the agreement that dealt with the subject matter of the dispute. Given that this agreement included a mandatory arbitration clause, the parties were required to arbitrate their dispute instead of litigate it.
Second, the dispute resolution clause in Zenda is an example of a rare Scott v Avery clause. This type of clause requires that parties arbitrate a dispute as a condition precedent to a party seeking assistance from the court (Seidel v Telus Communications Inc., 2011 SCC 15 at para 90). We rarely see Scott v Avery clauses discussed in Canadian court decisions. However, in practice, this type of clause operates in the same way as a mandatory arbitration clause. It is an agreement that requires parties to arbitrate. In certain Canadian jurisdictions, an agreement that requires that a matter be adjudicated by arbitration, before it may be dealt with by the court, is expressly deemed to have the same effect as an agreement to arbitrate. See, for example, section 5(4) of the Ontario Arbitration Act, 1991, SO 1991, c 17 and section 5(2) of the Alberta Arbitration Act, RSA 2000, c A-43.
Third, Zenda is an example of a decision that applies the reasonableness standard of review to a set-aside application. The Court’s reasonableness review of the contractual interpretation issues discussed in this Case Note is consistent with the approach taken by the Court of Appeal of Newfound and Labrador in Layman, citing Sattva. For related discussion about the standard of review in the context of arbitral awards see: Christie Building Holding Company, Limited v Shelter Canadian Properties Limited, 2022 MBKB 239 (Manitoba – Vavilov inapplicable to arbitration appeals – #709) and Buffalo Point First Nation and Buffalo Point Development Corp Ltd v Buffalo Point Cottage Owners Association, Inc, 2023 MBKB 141 (Manitoba – Awards set aside after arbitrator re-wrote parties’ bargain – #790.)
Thank you to MaryJane Ogbomo for her assistance with this case note.