In Ballantry Construction Management Inc. v GR (CAN) Investment Co. Ltd., 2024 ONSC 2129 (“Ballantry”), the applicant, Ballantry Construction Management Inc. (“Applicant”), brought a motion for (among other things) an interlocutory injunction to restrain the Respondent from transferring or encumbering its assets pending the hearing of: (1) the Applicant’s application to enforce two arbitral awards; and (2) the Respondent’s application to set aside the awards on the grounds of a reasonable apprehension of bias on the part of the Arbitrator. On the second issue, the Court concluded that while a “business relationship” between a party and the Arbitrator may create a reasonable apprehension of bias, here, the fact that the Arbitrator was a director and shareholder of the parent of a company that had provided a loan to the Respondent did not support a finding of bias. This case considers how close a relationship between an arbitrator and a party is “too close” if a party seeks to set aside an award based on alleged arbitrator bias.
Background – The Respondent acquired property in Niagara Falls, Ontario (“Property”), which was intended to be developed for a mixed-use urban complex (“Project”). The Respondent engaged the Applicant to be the Project manager. The parties entered into three agreements: (1) a project management agreement (“PMA”); (2) a profit-sharing agreement (“PSA”); and (3) a construction management agreement (“CMA”).
In March 2022, the Respondent delivered a Notice of Termination to the Applicant to terminate the CMA and PSA. In August 2022, the Applicant terminated its engagement as Project manager under the PMA, after the Respondent refused to pay the Applicant its project management fees.
The Arbitration – The PSA required the parties to arbitrate disputes. After receiving the Notice of Termination, the Applicant delivered a Notice of Arbitration to the Respondent and proposed three arbitrators. The Respondent selected one of those arbitrators. The parties and the Arbitrator signed Terms of Appointment in June 2022. This agreement was amended in January 2023 to incorporate the Applicant’s claim for payment of its property management fees under the PMA in its Notice of Arbitration (“Amended Terms of Reference”). Therefore, the parties agreed that both disputes would be arbitrated.
In November 2023, following the arbitration hearing in May 2023, the Arbitrator granted judgment to the Applicant (“Liability Award”). In December 2023, the Applicant demanded payment of the Liability Award. The Respondent did not respond. Instead, the Respondent issued its Notice of Application to set aside the Liability Award pursuant to section 46(1)8 of the Ontario Arbitration Act, 1991, SO 1991, C 17 (“Arbitration Act”) on the basis of a reasonable apprehension of bias on the part of the Arbitrator. In January 2024, the Arbitrator released a costs award (“Costs Award”). The Liability Award and Costs Award are together referred to as the “Award”. The Court in Ballantry did not discuss the substantive findings in the Award.
The ONSC Applications – In January 2024, the Applicant commenced an application to the ONSC for recognition and enforcement of the Award. The Respondent’s set-aside application was heard at the same time.
Before those applications were heard, the Applicant brought a motion to the Court for an order under section 45.01 of the Rules of Civil Procedure, RRO 1990, Reg 194 for preservation of the Respondent’s assets, or in the alternative, injunctive relief to restrain the Respondent from transferring or encumbering certain assets related to the Property. The Applicant was not successful in obtaining the relief sought.
This case summary discusses the Applicant’s motion for injunctive relief as it relates to the Respondent’s application to set-aside the Award on the grounds of arbitrator bias.
Motion for an Interlocutory Injunction – The Court held that injunctive relief was only available if the Applicant could satisfy the requirements for a Mareva injunction, as set out in SFC Litigation Trust (trustee of) v Chan, 2017 ONSC 1815, which are:
1. A strong prima facie case on the merits;
2. The defendant has assets in the jurisdiction;
3. There is a real risk that the defendant will remove its assets from the jurisdiction or dissipate those assets to avoid judgment;
4. The moving party will suffer irreparable harm if the injunction is not granted;
5. The balance of convenience favours granting the injunction; and
6. The moving party must give an undertaking as to the responding party’s damages.
The Court considered whether the Applicant had met the test for a strong prima facie case: “if the court had to decide the matter on the merits of the basis of the materials before it, would the applicant succeed?” (at para 25, citing Petro-Diamond Incorporated v Verdeo Inc, 2014 ONSC 2917).
In this case, the question of whether there was a strong prima facie case for enforcement of the Award turned on the merits of the Respondent’s application to set aside the Award on the basis of a reasonable apprehension of bias. The Court commented that the burden was on the Respondent to demonstrate that its claim of arbitrator bias had at least an “air of reality” based on the evidence before the Court.
The Respondent based its assertion of a reasonable apprehension of bias on the following facts:
1. The Arbitrator was a shareholder and director of Firm Capital Mortgage Investment Company (“Firm Capital”) at the time of the hearing of the arbitration;
2. Firm Capital Mortgage Fund Inc. (“Firm Fund”) was a wholly owned subsidiary of Firm Capital. Together, Firm Fund and Marshall Zehr (the “Lenders”) made a $62.5 million loan to the Respondent to allow it to develop the Property; and
3. The loan was outstanding at the time that the Applicant, Respondent, and Arbitrator executed the Terms of Appointment in June 2022. It was not outstanding at the time that the Amended Terms of Appointment document was executed in January 2023 or at the time of the hearing of the arbitration in May 2023.
The Respondent argued that because the Arbitrator owned shares in and sat on the board of a company that had provided a loan to the Respondent, through its subsidiary, this created a reasonable apprehension of bias on the part of the Arbitrator.
The Court held that while a “business relationship” can create a reasonable apprehension of bias, it was necessary for the Respondent to demonstrate a “more concrete basis” for this allegation (at para 83).
The Court distinguished the facts of Ballantry from those in Szilard v Szasz, 1954 CanLII 4(SCC), [1955] SCR 3 (“Szilard”). Szilard involved a joint investment made by the arbitrator and one of the parties to the arbitration, as tenants in common. The arbitral award was set aside based on a reasonable apprehension of arbitrator bias. However, the Court in Ballantry emphasized that these facts were significantly different from the “very general allegations” made by the Respondent (at para 83).
The Court set out the following reasons for its conclusion that Respondent had not met the “air of reality” test or set out a sufficient basis for a finding of bias:
1. There was nothing in the facts relating to the loan that could give rise to a reasonable apprehension of bias. All dealings with the Respondent about the negotiation, administration and repayment of the loan were conducted by Marshall Zehr and not Firm Capital. In addition, and in any event, the loan was repaid ten months prior to the arbitration hearing.
2. There was no basis for a reasonable apprehension of bias based on any relationship between Firm Capital and the Applicant. The Respondent acknowledged that it was not aware of any such relationship. The Applicant said that there was no prior relationship between the Applicant and Firm Capital, except for one relationship between senior executives fifteen years earlier.
The Court concluded that the record did not support any basis for the Respondent’s application to set aside the Award on the grounds of a reasonable apprehension of basis on the part of the Arbitrator. Accordingly, the Court held that the Applicant established a strong prima facie case for the recognition and enforcement of the Award under section 50(1) of the Arbitration Act.
While the Applicant was successful in establishing a strong prima facie case on the merits of its enforcement application, it did not meet other parts of the test for a Mareva injunction. This included, for example, the requirement that the Applicant prove that it would suffer irreparable harm if the interlocutory injunction was not granted. Accordingly, the Court dismissed the Applicant’s motion for injunctive relief.
Contributor’s Notes:
Key takeaways from this case are as follows:
1. Based on Ballantry, a relationship between an arbitrator who is a shareholder and director of the parent of a lender that provides a loan to a party to the arbitration is not, on its own, a “close enough” relationship establish a reasonable apprehension of bias on the part of the arbitrator.
2. The management and timing of the loan were important factors that the Court considered in its analysis about why there was no reasonable apprehension of bias. The company of which the Arbitrator was a shareholder and board member was not involved in the negotiation, administration, or repayment of the loan to the Respondent. In addition, the loan was repaid ten months prior to the hearing. These factors suggest that there was sufficient “distance” between the Arbitrator and the Respondent and that the critical period of time to evaluate that relationship was at the time of the hearing, not the six-month period between the execution of the Terms of Appointment and the Amended Terms of Appointment to add the Applicant’s claims.
3. Litigants should keep in mind that even if a party establishes an evidentiary basis for a reasonable apprehension of bias, recent Canadian Court decisions suggest that there is uncertainty about whether the Court will set aside the award. See, for example, Vento Motorcycles, Inc. v United Mexican States, 2023 ONSC 5964 (“Vento”). In that case, the award issued by the Tribunal was unanimous. The Court found that a reasonable apprehension of bias on the part of one Tribunal member did not “taint” the Award or the two other Tribunal members. The Court found that it had discretion to decline to set aside the Award under section 46 of the Arbitration Act and exercised that discretion. This decision, together with other recent arbitrator bias decisions, suggest that the outcome of a set-aside application on the basis of arbitrator bias is often difficult to predict.
4. The IBA Guidelines on Conflicts of Interest in International Arbitration (“IBA Guidelines”) are recognized as an authoritative source for how the international arbitration community (and even in domestic arbitrations) may consider particular fact scenarios in reasonable apprehension of bias cases (Vento at para 107). The IBA Guidelines were not considered in Ballantry. However, if they had been applied to the facts of Ballantry, the outcome would likely have been the same. For example, the IBA Guidelines say that if the arbitrator holds shares in one of the parties, or the arbitrator is a member of a board that has a direct economic interest in the award, these facts could give rise to justifiable doubts about the arbitrator’s impartiality (p 16). As mentioned, the Arbitrator in Ballantry held shares in and sat on the board of the parent a lender to the Respondent. However, the Arbitrator did not directly hold shares in the Respondent’s company. In addition, the fact that the loan was repaid a number of months before the hearing suggests that there was no reason that the Arbitrator, as board member of a lender to the Respondent, would have a direct economic interest in the Award. Based on the IBA Guidelines, these are not circumstances that would likely give rise to justifiable doubts about the Arbitrator’s impartiality.