Ontario – Arbitration procedurally unfair – arbitrator excluded material evidence despite no objection – #750

In Mattamy (Downsview) Limited v KSV Restructuring Inc. (Urbancorp), 2023 ONSC 3013, Justice Kimmel of the Ontario Superior Court of Justice (Commercial List) set aside an arbitral award for violating procedural fairness. She found the Arbitrator acted unfairly in declining to admit relevant evidence on a new issue he himself raised in the arbitration. This decision reminds us that an arbitral tribunal’s procedural discretion, though vast and powerful, is not absolute. 

Background – The arbitration in this case was one chapter in a complex dispute related to a land development project in Toronto known as the “Downsview Project”. The following facts are simplified and limited to those essential to understanding the Court’s decision. 

The Applicant (“Mattamy”) held a 49% stake in the land holding company that owned the Downsview Project lands. In the context of proceedings under the Companies’ Creditors Arrangement Act, Mattamy acquired Urbancorp’s majority 51% share in that land holding company. The Court oversaw the transaction and approved the sale process proposed by Urbancorp’s monitor.

The transaction gave rise to several disputes. One was over an entity in the Urbancorp group’s alleged entitlement to a consulting fee under a co-ownership agreement pertaining to the Downsview Project (the “COA”). The Court ordered the parties to arbitrate that and other disputes arising from the sale transaction. To that end, they appointed the Arbitrator in May 2022.

The arbitration – In the arbitration, the parties filed evidence and written submissions on Urbancorp’s entitlement to the consulting fee contemplated in the COA and the mechanics and timing of such payment. They also made oral argument in June 2022. 

One of the parties’ main disagreements was the meaning of “Gross Receipts” as defined in the COA, which was relevant to calculating the consulting fee. Specifically, they disagreed on whether Gross Receipts included the purchase price of residential condominium units that had been sold, but where the deal had not closed as of Transfer Date (another defined term). Urbancorp argued these sale proceeds were included; Mattamy argued they were not.

At the hearing, the Arbitrator raised three questions the parties did not canvass in their pre-hearing submissions or evidence. All the questions pertained to the Gross Receipts issue. One of them was: “[w]hat do the ASPE [accounting standards for private enterprises] require for the sale of residential condominium units?” It was uncontested that the Arbitrator raised these three sub-issues for the first time during the hearing; neither party raised them in their materials. The Arbitrator agreed to adjourn the hearing so the parties could lead additional evidence and submissions on these new points.

Included in the new evidence Mattamy sought to adduce was an affidavit attaching excerpts from the Real Property Association of Canada’s handbook entitled “Recommended Accounting Practices for Real Estate Investment and Development Entities Reporting in Accordance with ASPE” (the “Handbook”). Although Urbancorp objected to some of the evidence, it did not object to the Handbook excerpts. 

The Arbitrator scheduled a case conference to address the evidentiary issues. Before the case conference, Mattamy advised Urbancorp that if it maintained its objection to some of the evidence, Mattamy would bring a motion for leave to admit the contested evidence. The Arbitrator refused to hear a formal motion. Instead, he said he would decide the evidentiary issue at the case conference. He allowed the parties to make written and oral submissions.

The Arbitrator struck all references to the Handbook in the affidavit despite admitting other evidence related to the ASPE revenue recognition policy. The Arbitrator did not provide written reasons for his ruling. He nevertheless acknowledged Urbancorp’s consent to the Handbook’s inclusion. However, he apparently stated that he had a “mind of his own”.

The Arbitrator rendered an award granting Urbancorp the full amount it claimed as consulting fees ($5.9 million). 

Set-aside application – Mattamy brought an application before the Ontario Superior Court of Justice (Commercial List) to set aside the award. It argued the Arbitrator exceeded his jurisdiction and violated procedural fairness in refusing to admit the Handbook excerpts into evidence. 

Justice Kimmel granted Mattamy’s application, set aside the award and removed the Arbitrator. She disagreed with Mattamy that the Arbitrator exceeded his jurisdiction. Although the questions he raised on his own motion invoked points the parties did not, they fell within the larger rubric of the parties’ dispute over the consulting fees under the COA. However, she found that the Arbitrator’s unprompted decision to exclude the Handbook violated procedural fairness and denied Mattamy a fair opportunity to present its case.

First, Justice Kimmel found the Handbook was relevant to the new issues the Arbitrator raised. She explained this conclusion in detail (see paragraphs 61-63). In short, the Handbook explained relevant ASPE accounting principles, which the Arbitrator himself drew to the parties’ attention at the oral hearing. Those principles had a direct bearing on how Gross Receipts under the CAO ought to have been treated. In fact, one of the Handbook’s provisions “explains why, from an accounting and financial reporting perspective, revenue from the sale of residential condominium units is to be recognized at the time of interim closing and not at the time the units are contracted for sale or at the time that the sale closes”.

Second, Justice Kimmel rejected Urbancorp’s argument that the evidence from the Handbook was merely corroborative such that its exclusion did not materially impact Mattamy’s rights. She considered the Handbook relevant as it provided “additional context”.

Third, Justice Kimmel likewise rejected the argument that the Handbook’s exclusion was immaterial since the Arbitrator’s decision did not hinge on the additional evidence and submissions the parties filed. On the contrary, she found that the Arbitrator’s approach to interpreting the CAO might well have been different had he considered the Handbook’s content. 

After concluding that the Arbitrator’s refusal to admit the Handbook denied Mattamy an opportunity to present “the complete evidentiary context”, Justice Kimmel considered the Arbitrator’s choice to proceed by case conference, even though Mattamy requested a motion. She found that, absent reasons for the decision to exclude the Handbook evidence, the Arbitrator’s decision appeared “arbitrary” and “unfair to Mattamy”.

In response to Urbancorp’s submission that the “new issue” the Arbitrator raised was not critical to the award, Justice Kimmel rejected this hindsight-based approach. She relied on the Supreme Court of Canada’s decisions from the administrative law context in Université du Québec à Trois-Rivières v. Larocque, 1993 CanLII 162 (SCC), [1993] 1 S.C.R. 471 and Cardinal v. Director of Kent Institution, 1985 CanLII 23 (SCC), [1985] 2 S.C.R. 643. Those cases stand for the proposition that once there is a procedural fairness violation, the decision must be set aside. Justice Kimmel referenced arbitration case law suggesting the same [Nasjjec v. Nuyork, 2015 ONSC 4978].

Justice Kimmel neatly summarized her conclusion at paragraph 90 of her reasons: 

[90] The confluence of circumstances in this case, of:

the Arbitrator having decided at a case conference without a formal motion not to admit some of the evidence tendered by Mattamy and not objected to by the Urbancorp parties in response to the New Issue raised by the Arbitrator, despite his invitation to the parties to provide further evidence, and the absence of any principled distinction between the relevance or admissibility of the Handbook excerpts and the other evidence that was admitted about the ASPE and actual accounting treatment of revenues from the sale residential condominium units in Phase 2 of the Downsview Project,

in my view, amounts to a procedural unfairness to Mattamy and a failure of natural justice.”

In the result, Justice Kimmel granted the application to set aside the award, with costs. She also removed the Arbitrator and determined that a new arbitrator would have to hear the matter. 

Contributor’s Notes

First, this decision provides an important reminder that although arbitral tribunals enjoy broad procedural discretion, that discretion is not unfettered. All procedural rulings must obey the fair and equal treatment standard contained in section 19 of the Arbitration Act, 1991 (and similar provisions in other domestic and international arbitration legislation across Canada). 

That said, courts will generally defer to an arbitral tribunal’s discretionary procedural decisions. In addition to deciding whether to admit evidence, such decisions include: setting timelines for pre-hearing steps, determining hearing duration or a party’s time allotment at a hearing, whether to order pre-hearing document production and the extent of any production, whether to grant adjournments and whether to permit cross-examination, among many others. A court is unlikely to interfere unless the aggrieved party can show a procedural request’s denial caused material prejudice. As noted below, the arbitral tribunal’s discretion is also subject to any agreement between the parties on these points. 

Second, although the Court examined the matter through the lens of procedural fairness (which was entirely appropriate), the Arbitrator’s decision poses another fundamental concern: failing to respect the parties’ arbitration agreement. 

Arbitral tribunals enjoy broad procedural discretion. This is a useful feature of modern Canadian arbitration legislation. It allows parties to benefit from an arbitrator’s experience, which may result in a better procedural design for the dispute at hand. 

However, it is trite that an arbitral tribunal’s procedural discretion ends where the parties’ procedural agreement begins (or perhaps the tribunal’s discretion begins where the parties’ agreement ends, but no matter). The only exception is when the parties’ chosen procedure jeopardizes fair and equal treatment. In that case, the arbitral tribunal must step in and correct the unfairness/inequality. But in all other cases, the parties’ agreement governs. 

Here, the parties agreed the Handbook was admissible. Although they did not formally amend their written arbitration agreement to say so, their accord on the Handbook’s admissibility is no less an agreement between the parties on a point of procedure. One might think of it as a “micro amendment” to the arbitration agreement. There can be no doubt that if the parties wrote into their arbitration agreement that Mattamy could lead the Handbook as evidence, the Arbitrator would lack authority to exclude it. If so, and given admitting the Handbook into evidence did not jeopardize fair and equal treatment, the Arbitrator lacked discretion to disregard the parties’ agreement on its admissibility. 

Third, the Arbitrator’s choice to address the evidentiary issue at a case conference, rather than by formal motion, merits some discussion. In principle, the Arbitrator was entitled to direct that the evidentiary issue be addressed at a case conference rather than by way of formal motion. This falls squarely within an arbitrator’s procedural discretion.

Furthermore, using the vehicle of a case conference rather than a formal motion will often be appropriate. Indeed, one way in which arbitration (often) outshines the courts in efficiency is by doing away with “motion practice”. All litigators know motions, especially purely procedural motions, tend to increase cost and delay final resolution. In that regard, the Arbitrator’s inclination to deal with the matter at a case conference is commendable, again, in principle.

That said, sometimes the case conference format (i.e., no evidence or ability to cross-examine) may be inappropriate. In all cases, the procedure chosen must provide each party with a sufficient opportunity to present their cases and respond to the opposing party’s case (as well as any issues the arbitral tribunal raises of its own motion). 

Here, the Court could not satisfy itself that the procedure was appropriate. Since the Arbitrator gave no reasons, other than to say he had a “mind of his own”, the Court could not confirm Mattamy enjoyed procedural fairness. On the contrary, based on the record, the Court considered the decision arbitrary and unfair. In that connection, arbitral tribunals may take some guidance from the Court: when faced with an opaque and unreasoned decision about material procedural issues, a court might feel compelled to err on the side of caution and grant a remedy. 

Fourth, although she did not provide any reasons for removing the Arbitrator, Justice Kimmel’s decision to do so is on all fours with the case law. There is a strong line of authority stating that where an arbitral tribunal’s award is set aside on procedural fairness grounds, the same tribunal should not hear the matter anew if that tribunal made findings of fact and credibility (which is usually the case). See for example: Kainz v. Potter, 2006 CanLII 20532 (ON SC); Universal Settlements Intern’l Inc. v. Duscio, 2011 ONSC 968; Webster v. Wendt, 2001 CarswellOnt 519, [2001] O.J. No. 622.