Ontario – Arbitrators cannot ignore the law or defy the Court – #836

In Eyelet Investment Corp. v. Song, 2024 ONSC 2340, the Divisional Court’s decision starts with: “Domestic arbitrations in Ontario must be decided in accordance with the law. Arbitrators are accorded broad deference for matters within their jurisdiction and in defining the scope of their jurisdiction. But they are not free to ignore the law or to decide cases in accordance with their whims”. In Eyelet, the Court set aside the damages award from an arbitration concerning repudiated real estate transactions. The Court identified multiple instances where the arbitrator defied directions from the Supreme Court to determine the claims and remedies on remittal. Rather than following the law, the arbitrator addressed damages in accordance with his sense of fairness. The Court directed the damages and cost determinations to a new arbitrator.

Background –The Respondents, Song, and other new home purchasers (the “buyers”), repudiated residential real estate sale agreements. The Appellant, Eyelet Investment Corp., (the “builder”), accepted the repudiations, resold the houses at a loss, and incurred costs.

The buyers sought return of their deposits in arbitration. The builder commenced court proceedings seeking declarations that the sales agreements were terminated due to the buyers’ anticipatory breaches of contract.

Following appearances before the arbitrator and two Superior Court judges to determine the proper forum, the liability portion of the buyers’ return of deposit claim proceeded before the arbitrator. 

The Liability Award – In December 2018, the arbitrator issued an award in favour of the buyers (the Liability Award”). He found that the builder had failed to check standard form early termination conditions, described as “tick boxes”. Given this failure, the arbitrator decided that it was not fair to hold the buyers to the sales agreements and found in favour of the buyers.

The builder appealed to the Superior Court.

The First Appeal – A single judge of the Superior Court set aside the Liability Award (the “First Appeal”). The judge ruled that the builder’s failure to check mark the early termination provisions tick boxes was immaterial—such termination provisions were not applicable. Further, the arbitrator’s assertion of a lack of fairness was insufficient to meet the requirements of transparency and intelligibility. The Superior Court remitted the case to the arbitrator to assess the builder’s damages and costs flowing from repudiation of the sales agreements.

The buyers did not appeal the First Appeal decision.

The Damages Award – In July 2023—after procedural wrangling and substantial delay—the arbitrator released an award on damages and costs (the “Damages Award”). 

The arbitrator raised several objections to court rulings in the First Appeal, including: 

  • The parties’ arbitration agreement did not allow for an appeal—the only mechanism to review the liability award was through the limited grounds of a set aside application.
  • Reasonableness was the wrong standard of review. 
  • The court should have determined damages instead of remitting the case to the arbitrator.

Most fundamentally, the arbitrator maintained that the Superior Court had misunderstood the relationship between the court and arbitration:

“[23]…There’s no provision in the Arbitration Act requiring the arbitral tribunal make decision [sic] based on the directions of the court, otherwise arbitration would not have been universally regarded as an independent institution of resolving disputes but as an affiliation of the court. It appears to me that the role of court in arbitration is one of oversight based on the agreement of the parties concerned, rather than one of supervision. The court typically does not tell the arbitral tribunal how to make its decision. Even the oversight role of the court may be completely ruled out if the parties concerned agree to do so in their arbitration agreement, though extremely rare. [Emphasis in original]

. . .

[27]…In the meantime, remitting the award to determine further issues based on her conclusion makes me feel that I’m given an assignment to do: substantiate her decision with merits which I don’t believe exist. Without being convinced that it is not the Vendor that breached the contract, but the contrary, and without proper grounds for setting aside the award, I find it difficult to make an award to the opposite of the original one.”

With these objections noted, the arbitrator determined damages on the basis “of a contributory breach of contract” by the builder. The outcome of this approach was as follows:

“[30] Accordingly, each part [sic] shall be held responsible for its own fair share of the damages that Eyelet Investment claims to have suffered. In consideration that forfeiture of deposits has already been mitigated the damages of the developer, it’ll be evidently unfair to order the purchasers to pay for any other damages caused not exclusively by the purchasers.” 

The builder appealed to the Divisional Court.

The Second Appeal – A three-member panel of the Divisional Court unanimously quashed the Damages Award (the “Second Appeal”). The panel identified multiple errors:

  • Contrary to the arbitrator’s finding, there was a contractual right of appeal “right there in black and white…”. (para. 21)
  • The arbitrator seems to have objected to the idea that his decision was subjected to a greater level of scrutiny than was proper. In fact, on an appeal, the standard of review for errors of law is correctness… O’Brien J. adopted a more deferential reasonableness standard of review…”. (para. 25)
  • The arbitrator’s suggestion that the Superior Court should have determined arbitration costs and damages was not appropriate or practical as “[t]he Arbitrator had not received evidence nor held a hearing on damages…”. (para. 27)
  • The arbitrator erred in “find[ing] that he does not have to take the law as set out by the court on appeal from his decision”. (para. 29)
  • It is not open to the Arbitrator to choose to ignore the findings of the court on the basis that he does not like the standard of review that was applied or based on his view that the reviewing Court misinterpreted the statute. His failure to acknowledge that he was bound by the decision of O’Brien J. amounted to a fundamental error of law.” (para. 30)
  • Instead of following the directions provided by O’Brien J. to assess the builder’s damages caused by the buyers’ breaches of their contracts, the Arbitrator revisited whether, in his view, the buyers should be responsible for the builder’s damages…”. (para. 39)
  • There is no such thing as a ‘contributory breach of contract’ to determine a fair sharing of contractual damages. For the past 170 years, the law of contract has provided that a party who breaches a contract is required to pay money damages to put the other party in the position he or she would have occupied but for the breach.”  (para. 41)”

The Divisional Court summarized the damages determinations the arbitrator ought to have made:


(a) identify the contract price that the relevant buyer agreed to pay;
(b) deduct the amounts received by the builder on re-sale of each house;
(c) add the consequential carrying costs incurred by the builder having to maintain each house until the subsequent sale closed; and
(d) deduct the deposits already paid in escrow by each buyer that must be released to the builder if not yet done.

[46] Unfortunately, in view of the procedural status of the arbitration, these straightforward calculations cannot be determined definitively on the record before us.”

The Divisional Court then addressed process issues in the Damages Award:  

“[54]…[Although the arbitration was revived and the statute requires the parties be given an opportunity to present their cases, there would be no further evidence and no further opportunity to present a case provided. With the issue of damages deferred previously, there would be no opportunity to the builder to deliver damages evidence and no opportunity to the buyers to raise the issue of mitigation of damages if so advised.

[57] The Arbitrator released his final award on damages and costs on July 25, 2023. That was two weeks prior to the date that had been suggested for the buyers to deliver their responding submissions. The Arbitrator had no submissions from the buyers before releasing his final decision.

[58] The final award makes no reference to the calculation of damages according to the legal formula for doing so set out above. He did not address the financial calculations claimed by the builder. Neither did the Arbitrator mention the issue of mitigation. He just expressed his disagreement with the findings of O’Brien J. and created a legal fiction of contributory breach of contract to avoid assessing the builder’s damages as he was required to do.” [emphasis in original]

The Divisional Court directed a damages and costs hearing before a new arbitrator. Given the problematic history of this case, the panel provided direction for the hearing, including an explanation of the role of the buyer’s deposit in assessing damages:

“[74] A buyer’s deposit is held as an earnest to bind the buyer to her bargain. It is applied in reduction of the vendor’s damages in most cases to avoid double-recovery. But it is not relevant to mitigation of damages in this context.”

Contributor’s Notes: 

There is much that could be written about how this arbitration went wrong. Only select, high-level points follow.

First, the arbitrator viewed the relationship of the court to arbitration as being one of oversight rather than supervision. It is not clear what differences the arbitrator had in mind using these similar terms. Regardless of terminology, the arbitrator was incorrect that parties may fully rule out curial review. The parties cannot exclude the basic guardrails of procedural fairness found in the set aside provisions of modern arbitration legislation, such as s. 46, Arbitration Act, 1991, SO 1991, c 17

Second, it is true, in some Canadian jurisdictions, that parties are permitted to exclude appeals. But here, the parties’ arbitration agreement allowed for appeals. Absent such agreement, leave to appeal on questions of law in the Liability Award could have still been sought to the Superior Court.  

Parties can also agree their disputes should be resolved, not by law, but by other standards such as fairness. These parties did not do so, and the arbitrator erred in making decisions based on his sense of fairness. 

Why did the Divisional Court devote little attention to the delineation of errors of law from other errors?  The answer is found in the First Appeal reasons: the parties’ arbitration agreement in the contracts of purchase and sale allowed for appeals on errors of law and errors of fact and law. This is permissible is some Canadian jurisdictions, including Ontario. 

Third, the Divisional Court identified a procedural oddity:  the appeal of the Liability Award was brought to a single judge of the Superior Court, while the appeal of the Damages Award came to a Divisional Court panel.  

Sections 1 and 45 of the Arbitration Act, 1991 direct arbitration appeals to the Superior Court. But s. 17(4) of the Ontario New Home Warranties Plan Act, RSO 1990 c 0.31 deems that every agreement between a vendor and a prospective owner contain an arbitration agreement, “subject to appeal to the Divisional Court, and the Arbitration Act, 1991 applies.” The Divisional Court considered it “not clear the Superior Court is necessarily deprived of its jurisdiction to hear an appeal under s. 45…”. (para. 64)

Nevertheless, even if the First Appeal was brought to the wrong court, the Divisional Court made it clear the result would be no different: 

The contract analysis by the Arbitrator cannot stand on any standard of review. It was wrong, unreasonable, legally unintelligible, and palpably so. If O’Brien J. lacked jurisdiction to hear the appeal before her, I would transfer it to this proceeding and allow the appeal as she did.” (para. 67)

In summary, it was the arbitrator, not the court, who misunderstood his role. The arbitrator chafed at the idea that the court had given him an “assignment,” which he incorrectly viewed as an overstep into his independence.