In Campbell v. Toronto Standard Condominium Corp. No. 2600, 2022 ONSC 2805, Justice Perell of the Ontario Super Court of Justice set aside an arbitral award for “constructive fraud” pursuant to s. 46(1), para. 9 of the Ontario Arbitration Act, 1991. The arbitral award ordered the Campbells, who were condominium owners (the “Owners”), to pay $30,641.72 to the Toronto Standard Condominium Corporation No. 2600 (the “Condo Corp.”), which represented the costs of their arbitration. The matter began as a dispute regarding the Owners’ alleged non-compliance with the rules of the Condo Corp, including noise complaints and short-term rentals. However, the Owners were led to believe that the arbitration would be limited to the reasonableness of Condo Corp.’s legal costs in enforcing compliance up to and including the arbitration. Justice Perell held that the Owners were “tricked” intothe arbitration because it was actually an arbitration on the non-compliance issues.While Justice Perell found that the Condo Corp. was not deceitful, he found that “[2]… it misled, outmanoeuvred, and outsmarted the [Owners]” such that “[t]he court should not countenance the trickery and the injustice.” As a result, the arbitral award was set aside.
The dispute began in December 2018 with a noise complaint by another unit owner (“the complainant”) against the Owners. In the following months, the Condo Corp. and its legal counsel wrote to the Owners about more noise complaints from the complainant and about alleged violations of the Condo Corp.’s new rule prohibiting short-term rentals. At the time, the Owners occupied their unit with their young child. They denied that they broke any of the Condo Corp.’s rules and made their own complaints that the complainant was harassing them. In July 2019, the Condo Corp. sent the Owners a Notice of Mediation to include the Condo Corp., the complainant, and the Owners. However, the mediation did not proceed.
In November 2020, over a year after the Notice of Mediation, the Condo Corp. delivered a Notice of Arbitration to the Owners. The Notice of Arbitration did not name the complainant, who had sold her unit in the interim, and focused on the alleged contraventions of the short-term rental rules.
In early 2021, the Condo Corp. brought an application to appoint an arbitrator. The Owners retained legal counsel and the parties agreed on an arbitrator.
In February 2021, the Condo Corp. learned that the Owners were looking to sell their unit. The Condo Corp.’s lawyer thus notified the Owners that if they sold their unit, then the arbitration would be limited to the issue of costs and not the compliance issues.
The Owners’ sale of their unit closed in May 2021, and between June and September 2021, the arbitration was completed. Justice Perell found as fact that it was the Owners’ “genuine understanding” and the Condo Corp.’s “disingenuous understanding” that the only issue for the Arbitrator was the matter of costs. It was the Condo Corp. “disingenuous understanding” as it vigorously pursued proving all substantive underlying issues, including the matter of short-term rentals and the entirety of its enforcement history and quest for full indemnification against the Owners.
The Arbitrator’s award determined all of the substantive issues as defined in the 2019 Notice of Mediation and not the 2020 Notice of Arbitration. As Justice Perell stated: “[78] … Whether by design or whether it was unavoidable, the [Owners] have been outfoxed and lured into an adjudicative trap.”
Justice Perell concluded that :
“[90] … the critical matter that justifies setting aside his arbitral award on the grounds of constructive fraud is that it was unconscionable and unfair that an arbitration notionally or purportedly about costs became something much different. The substantive issues intended by both parties to be removed from the dispute were not removed; they were adjudicated.”
Justice Perell also stated that the Arbitrator:
“[93] … was given an impossible task of deciding only the matter of costs” and “like the [Owners, the Arbitrator] was lured into an adjudication of all of the substantive issues that had troubled the relationship between the [Owners] and the Condominium Corp. What occurred in the immediate case was simply unconscionable and unfair.”
As a result, Justice Perell granted the [Owners’] application and set aside the arbitral award.
Contributor’s Notes:
Section 46(1) para 9 of the Arbitration Act, 1991 (the “Act”), provides:
“Setting aside award
46 (1) On a party’s application, the court may set aside an award on any of the following grounds:
…
9. The award was obtained by fraud”.
Pursuant to s. 47(2) of the Act, there is no time limit to bring an application to set aside an arbitral award where fraud is alleged:
“Time limit
47 (1) An appeal of an award or an application to set aside an award shall be commenced within thirty days after the appellant or applicant receives the award, correction, explanation, change or statement of reasons on which the appeal or application is based. 1991, c. 17, s. 47 (1).
Exception
(2) Subsection (1) does not apply if the appellant or applicant alleges corruption or fraud. 1991, c. 17, s. 47 (2).”
Justice Perell’s reliance on unconscionability as an element of constructive fraud is noteworthy in light of the Supreme Court of Canada’s decision in Uber Technologies Inc. v Heller, 2020 SCC 16. Justice Perell was mindful of the apparent connection and noted:
“[94] In a totally different context, the Supreme Court of Canada in Uber Technologies Inc. v. Heller [footnote omitted] has introduced an expanded notion of unconscionability between contracting parties, and in the immediate case, I would, if necessary, apply that expanded view of unconscionability. However, it is not necessary to do so in the circumstances of the constructive fraud in the immediate case.”
Justice Perell also went to great lengths to make it clear that he was not attributing any actual fraud to the Condo Corp:
“[2] … In my opinion, the [Owners] were tricked into this arbitration, which was notionally or purportedly about costs but actually was an arbitration of substantive issues. In my opinion, the [Owners] are the victims of constructive fraud, which focuses on unfairness more than it does on deceit. Although the Condominium Corp. was not deceitful, it misled, outmanoeuvred, and outsmarted the [Owners]. The court should not countenance the trickery and the injustice, and I, therefore, set aside the arbitral award.
…
[95] I wish to be clear, that this decision should not be read as attributing any actual fraud or moral turpitude on the Condominium Corp., the [Owners, and their respective lawyers]. The fraud in the immediate case was constructive fraud, which as Lord Haldane noted in Nocton v. Lord Ashburton,[footnote omitted] means “not moral fraud in the ordinary sense, but a breach of the sort of obligation which is enforced by a Court that from the beginning regarded itself as a Court of conscience.” That is what occurred in the immediate case.
[96] Without attributing any moral turpitude to the inducement, the Condominium Corp. led the [Owners] to believe that the only outstanding issue was the matter of costs, but in a sort of procedural sleight of hand, the [Owners] were deceived, and the Arbitration was not limited to the matter of costs. The letter and the spirit of the agreement between the parties about the scope of the dispute to be resolved by [the Arbitrator] was not unconscionable; what was unconscionable and unfair is that the Condominium Corp. did not eliminate the substantive issues; rather, it prosecuted them and lured the [Owners], their legal counsel, and the Arbitrator to adjudicate the whole history of the relationship between the Condominium Corp. and the [Owners], much of which was not properly before the Arbitrator.“