Ontario – Best practices: pre-appointment communications and application to appoint arbitrator – #607

In Magna International Inc. v Granite Real Estate Inc., 2022 ONSC 2200, Justice Myers granted the application of Magna, the tenant in a lease agreement, for an order appointing an arbitrator to fix the rent for a renewal term of the lease. The parties agreed that the tenant had validly renewed the lease, but could not agree on the rent for the renewal period. Respondent Granite, the landlord, opposed the appointment of the arbitrator for two reasons: (1) the evidence in support of the application was insufficient; and (2) the arbitration clause in the lease was invalid because it contained permissive, rather than mandatory, language and was too vague because it did not specify either the seat or the applicable rules of the arbitration. Justice Myers set out the preferred approach for both communicating with the proposed arbitrator in circumstances in which the parties are not cooperating and the kind of evidence that should be adduced on an application for a court order appointing the proposed arbitrator, using the analogy of the process for the court appointment of a receiver/trustee in bankruptcy. Also, he found that the issues relating to the validity of the arbitration clause were to be referred to the arbitrator under the competence-competence principle.

The arbitrator appointment issue – On the first issue raised by the Respondent, Justice Myers agreed that the Applicant’s evidence was “plainly deficient”, but that was not fatal to the appointment application.

The supporting affidavit was sworn by a legal assistant on information and belief, based upon the evidence of counsel who appeared on the application. Therefore, Applicant’s counsel were making submissions on their own evidence.

While the bulk of the documents attached as exhibits to the affidavit were not contentious, there was one email exchange between Applicant’s counsel and the proposed arbitrator to which the Respondent objected. Justice Myers found that this, “left the applicant’s counsel in a difficult position of trying to explain and justify their own acts but without giving evidence.”

Further, there was no evidence that the proposed arbitrator was available to do the arbitration within the short timelines provided for in the lease. In fact, the proposed arbitrator had not even seen the lease. The proposed arbitrator, a professional property appraiser and mediator/arbitrator,  advised that he had no conflict of interest, although he disclosed that he was acting for a landlord in a similar type of arbitration proceeding. However, Justice Myers found that there had not yet been “formal compliance withs. 11(2) of the Ontario Arbitration Act, 1991, SO 1991, c. 17 (which provides that before accepting an appointment as arbitrator, a person shall disclose to all parties to the arbitration any circumstances of which he or she is aware that may give rise to a reasonable apprehension of bias).

Justice Myers set out the preferred approach both for communicating with the proposed arbitrator in circumstances in which the parties are not cooperating and for the kind of evidence that should be adduced on an application for a court order appointing the proposed arbitrator:

“[8] I understand that where the parties are not cooperating, communication with the arbitrator prior to appointment can be challenging. Counsel straddles a line of not saying too much to potentially taint the process. The simple answer however, where the parties cannot cooperate, is to copy the other side on all preliminary communication including first contact with the potential arbitrator. In that way counsel could have sent the lease, asked the arbitrator to confirm his expertise, willingness, and availability to participate. The arbitrator could, in response, fulfill s. 11 (2) by communicating with both sides.

[9] While I am not suggesting that an affidavit from a potential arbitrator is required to prove his or her qualifications, something more than very preliminary emails from one counsel appended to a legal assistant’s affidavit is required.

[10] In bankruptcy and receivership cases, by analogy, where someone is proposed for appointment to a court-appointed office, counsel submit a consent form signed by the person indicating his or her willingness to serve. Had counsel in this case written to the proposed arbitrator as suggested above, with a copy to the other side, the arbitrator’s response to both, containing the arbitrator’s own representation of his qualifications, his consent, and his availability for the foreshortened timeline, could have been appended to a consent form or perhaps even to a legal assistant’s affidavit.

[11] The difference in that case would be that there would be no controversy about the content and completeness of the communications because they were transparent to all. In addition, the legal assistant would also not be reciting information and belief from counsel or the internet.”

Justice Myers did not dismiss the application despite these deficiencies. He said that the proposed arbitrator was clearly qualified, but his availability and consent to serve must be obtained after he is provided with a copy of the relevant arbitration clause.

The arbitration clause validity issue – On the second issue raised the Respondent, Justice Myers held that the alleged invalidity of the arbitration clause was a jurisdiction issue which, under the competence-competence principle, was to be decided by the arbitrator. He relied upon Trade Finance Solutions Inc. v Equinox Global Limited, 2018 ONCA 12, which cited Dalimplex Ltd. v Janicki, 2003 CanLii 34234 ONCA at paras. 21-22.

Justice Myers acknowledged the circular problem he faced: the issue of the validity of the arbitration clause was to be determined by the arbitrator, whom the Applicant was asking him to appoint and whom the Respondent argued he should not appoint because the lease did not contain a valid arbitration clause.

Justice Myers found that Trade Finance Solutions Inc. v Equinox Global Limited, 2018 ONCA 12 provided the answer on how to resolve this. If the jurisdiction issue was clear, he could decide the issue to save the parties time and effort. If the issue was not clear, however, it should be deferred to the arbitrator to demonstrate respect for the arbitral process chosen by the parties. He found support for this conclusion from the decision of Justice Perell in Electek Power Services Inc. v Greenfield Energy Centre Limited Partnership, 2022 ONSC 894, who articulated the test used to determine whether a stay of proceedings in favour of arbitration is warranted as follows (in obiter):

“[111] In the context of deciding the stay application, the court may decide that the arbitrator has or may have jurisdiction to decide the parties’ dispute, in which case, the court will grant a stay of the civil action, and it will remit the case to the arbitrator. Pursuant to the competence-competence principle on the stay motion, the court may decide to let the arbitrator rule on his or her own jurisdiction to decide the dispute.”

(For a previous Case Note on the Electek case see Case Note: Ontario – Court overturns decision, “deciding the matter” of jurisdiction de novo – #586)

Justice Myers then turned to the interpretation of the impugned arbitration clause, which read:

“If the parties cannot agree on the fair market rent at least six (6) months prior to the commencement date of the applicable renewal term, such rent may be referred to arbitration pursuant to the applicable AAA (as defined herein) rules for arbitrations in force at the time of such reference, by written notice by either the Landlord or the Tenant, to a single accredited property appraiser agreed by the Landlord and the Tenant. If the Landlord and the Tenant fail to agree on such property appraiser within ten (10) days of such written notice, then either the Landlord or the Tenant may apply to a single judge in the jurisdiction in which the Leased Premises are situated to appoint such arbitrator. Such arbitrator shall hold a hearing within ten (10) days of his/her appointment to determine the fair market rent, shall determine the fair market rent within thirty (30) days of such hearing, and shall apportion the costs of the arbitration in his/her sole and unfettered discretion. The decision of the arbitrator shall be final and binding on the Landlord and the Tenant, without appeal on a question of law, fact or otherwise.” [Emphasis in original]

Justice Myers found that the arbitration clause provided for arbitration by an appraiser, likely because the arbitrator’s specialized expertise would allow for a determination of fair market rent for the lease renewal term within the very short time lines set out in the lease. He dismissed the Respondent’s argument that the language that, in the event of a dispute over fair market rent, “such rent may be referred to arbitration” meant that the Respondent was not required to participate because arbitration was not mandatory; the “modern view” is to interpret arbitration clauses to require arbitration where the words can reasonably support that intention. Therefore, Justice Myers interpreted this language to mean that in the event of a dispute over fair market rent, either party had the option to initiate arbitration, and having done so, arbitration was mandatory. Otherwise, the language in the arbitration clause that provided for a process to appoint the arbitrator in the event the parties could not agree would make no sense.

Finally, Justice Myers found that the lack of clarity on which AAA Rules were to apply and the failure to identify the seat of the arbitration in the arbitration clause did not render it invalid. These were matters to be determined by the arbitrator.

Therefore, he granted Magna’s application to appoint the arbitrator, subject to the arbitrator consenting to the appointment within 30 days, and ordered costs in the amount of $20,000 in favour of the Applicant, payable forthwith.

Editor’s Notes:

This case is a gem; it is very short, but it raises lots of interesting issues.

First, it is interesting that Justice Myers adopted the approach in the recent decision of Electek Power Services Inc. v Greenfield Energy Centre Limited Partnership, 2022 ONSC 894, in which Justice Perrell said (in obiter):

“[121] On an application for the appointment of an arbitrator, the Court must ascertain the nature of the dispute and whether it falls within the scope of the relevant arbitration agreement… Once again, the jurisdictional analysis is similar to the analysis used for a stay motion, and if an arbitrator is appointed, once again, the court may decide to allow the arbitrator to determine his or her jurisdiction to decide the dispute between the parties.”

Therefore, because of the challenge to the validity of the arbitration clause, he applied the stay test on the application to appoint the arbitrator found in Trade Finance Solutions Inc. v Equinox Global Limited, 2018 ONCA 12, which cited Dalimpex Ltd. v Janicki, 2003 CanLii 34234 ONCA at paras. 21-22. The test is whether it is “arguable” that the dispute falls within the terms of the arbitration agreement.

Second, the Respondent does not seem to have objected to the Applicant’s choice of arbitrator, but focussed its challenge on the arbitration clause. As a practise point, where the parties cannot agree upon the arbitrator, each of them can put forward a list of candidates to assist the court, each of whom is available and willing to serve.

Third, the very short timelines provided for in the arbitration clause made expert determination the more logical procedure to resolve the parties’ dispute, but it was not the one they chose. Justice Myers pointed out (at para. 24) that the parties’ decision to appoint an appraiser, not a lawyer, caused him to “hesitate to defer legal contractual analysis to someone whose business does not necessarily equip him with background in the principles of contract interpretation” and who might not have the time, but that is what the parties wanted. Section 8(2) of the Act, allows for the tribunal to apply to the court for the determination of any question of law, but this probably could not be done in the timelines in this arbitration clause.

Fourth, the parties may have benefitted from the use of the American Arbitration Association’s choice of standard clauses or the ClauseBuilder online tool, which would have ensured clarity of meaning of the clause and perhaps avoided the challenge on the basis that the arbitration clause was not mandatory or was vague for not having identified the applicable AAA rules or the seat. In any event, s. 22.(1) of the Act allows the arbitrator to determine the seat if the parties have not agreed.