Ontario – Arbitrators can decide non-legal business disputes, but not in this case – #608

The case 1107051 Ontario Ltd. v. GG Kingspa Enterprises Limited Partnership, 2022 ONSC 1847 concerned the jurisdiction of an arbitrator to decide a business dispute that was not legal in nature. The Applicant, 1107051 Ontario Ltd. (“110”), applied to “set aside” a decision of an arbitrator to assume jurisdiction over a dispute about whether a major real estate development project at King Street West and Spadina Avenue in Toronto (the “Project”) should include a hotel component when the parties were deadlocked on the issue. Section 17(8) of the Ontario Arbitration Act allows a party to apply to the Court to “decide” a jurisdictional issue if, as here, an arbitrator decides it as a preliminary question, as opposed to with the merits. Justice McEwen granted the “set aside”. He agreed with the arbitrator that the dispute was of a business nature and not legal and, further, that parties could arbitrate such non-justiciable disputes if they clearly and specifically intended to do so. In this case, although the arbitration clause was described as broad, the dispute was beyond its scope because the dispute was required by the clause to arise “under this Agreement”. That meant the dispute had to be about more than just anything to do with the Project. It had to concern the rights and obligations of the parties under the Agreement. Although a hotel was contemplated as part of the Project, it was not a required component. Further, express authorization to determine a business issue would have been necessary.

Briefly, the facts were as follows. 110 and the Respondent entered into a Co-Tenancy Agreement concerning the Project.  Each party had a 50% interest.  The structure of the Co-Tenancy Agreement was described as being “divorce proof”, with the purpose of promoting unanimous decision-making.  Among other things, the management of the Co-Tenancy was delegated to a Management Committee required to make unanimous decisions. The Management Committee consisted of four members, with each party appointing two. Although a hotel component was originally contemplated as part of the Project, the Management Committee became deadlocked on the issue of whether it still should.  The Co-Tenancy Agreement included a broad arbitration clause.  It provided: “Whenever and wherever a dispute arises under this Agreement including, without limitation, whether an Event of Default as defined in this Agreements exists…it shall be resolved by arbitration”.  “Dispute” was not further defined.   

The Respondent commenced this arbitration to have the issue of whether the Project should include a hotel decided by the arbitrator.   110 objected to the arbitration on the basis that the dispute was not justiciable or arbitrable, as the parties did not agree to have an arbitrator break deadlocks among the Management Committee or make business decisions on their behalf. 

The arbitrator decided to assume jurisdiction.  Although accepting that the dispute was not a legal dispute, he concluded it clearly arose “under this Agreement”.  Since nothing in the arbitration clause limited arbitrations to legal disputes, he found non-legal disputes, such as this, could be arbitrated. 

Justice McEwen “set aside” the arbitrator’s decision.   He agreed that the dispute was not legal but, rather, business in nature and that the parties could arbitrate non-justiciable disputes if they clearly and specifically intended to do so. Given the broad wording of the arbitration clause, the parties could even arbitrate a non-legal dispute in this case.  However, he concluded the arbitration clause provided that the dispute must arise “under this Agreement” and this dispute did not.  This was because the parties did not agree to arbitrate all disputes with respect to the Project.  It was only disputes about the rights and obligations contained in the Co-Tenancy Agreement that were subject to arbitration. For example, the arbitration clause could apply to disputes that arose concerning the financing or the transfer of interests that was provided for under the Agreement.   Although the wording of the Co-Tenancy Agreement contemplated a hotel being part of the Project, it was not a required component.

Justice McEwen noted that the arbitrator was trying to avoid a situation where the Project would remain in limbo and so create an absurdity.  Although he agreed that limbo would be problematic, he concluded that this was exactly what the parties had bargained for.  He found, instead, that an absurdity would result from interpreting the arbitration clause such that, despite the Co-Tenancy Agreement’s divorce-proof nature requiring unanimity of decision making, any party could simply arbitrate a deadlock.  That would cast the arbitrator and ultimately the Court in the role of overall operation and project manager. 

Justice McEwen further noted that inherent in any arbitration is an arbitrator having a clear “standard of review”, presumably in this case for reviewing Management Committee decisions, contained in the agreement and there was none here.  Although the arbitrator had found that the standard could be a provision that required decisions to be made in “the best interest of the Project”, Justice McEwen concluded this standard did not apply because it only dealt with the overarching principle that the parties must make decisions in good faith and it was not linked to the current issue in dispute.

Finally, Justice  McEwen found support for his conclusion that the arbitrator had no jurisdiction in this case in a statement from Arbitration Law of Canada, 3rd ed (New York: Juris, 2017), at pp. 7-8, that an arbitral tribunal may settle a dispute by “amiable composition” or “equity and good conscience” but in doing so it cannot ignore the contract between the parties.  Further, the text states an arbitral tribunal can decide on that basis only if the parties have expressly authorized the tribunal to do so.   

Contributor’s Note:

Justice McEwen also concluded he had no jurisdiction to remit the issue back to the arbitrator under section 46(8) of the Ontario Arbitration Act (“Instead of setting aside an award, the court may remit it to the arbitral tribunal”) as the jurisdictional decision was not an “award” and there was also nothing in section 17 of the Ontario Arbitration Act that allowed him to do so.  Instead, he purported to set aside the decision.  

Let’s “set aside” the issue of whether a review by the Court of a preliminary determination of jurisdiction, such as this, is a de novo hearing (because section 17 states the matter is to be decided by the Court) and not a review and set aside (see The Russian Federation v. Luxtona Limited, 2021 ONSC 4604 Case Note #513  and Hornepayne First Nation v. Ontario First Nations (2008) Ltd., 2021 ONSC 5534 Case Note #532 applying it in the Ontario domestic context). If it is a de novo hearing, it is arguable that for that reason there was no jurisdiction for the Court to remit the matter back to the arbitrator.  Instead, we will focus on what this case says about what constitutes an award. 

Justice McEwan accepted the submission by the Respondent that the use of the word “award “ in section 46(8)  of the Ontario Arbitration Act, 1991  does not refer to all decisions of an arbitrator, but only to an arbitrator’s ultimate decision “on the merits” citing:  Inforica Inc. v. CGI Information Systems and Management Consultants Inc., 2009 ONCA 642, 97 O.R. (3d) 161, at para. 29; Universal Settlements Intern’l Inc. v. Duscio, 2011 ONSC 968, at para. 125.   He concluded, as this was a jurisdictional decision and not a decision on the merits, the decision in this case was not an award and so section 46(8) did not apply.  However, the cases he referenced in support of this conclusion do not speak to whether a decision on the “merits” is required when determining if a decision is an award, only whether the decision “disposes of part or all of the dispute between the parties” or whether the decision concerns substance versus process.   Arguably, those cases can support the conclusion that a jurisdictional issue considered and finally decided as a preliminary question is an award if only a “partial final award” no matter what the arbitrator calls it.