Ontario – Court defines arbitral record where arbitration not recorded – #787

In Reed v. Cooper-Gordon Ltd. et al, 2023 ONSC 5261, the Court granted in part the plaintiff’s motion for leave to appeal an employment and shareholder related arbitral award on a question of law under s. 45 of the Arbitration Act, 1991. The plaintiff’s claims were originally raised by way of action, then proceeded by arbitration. The plaintiff/claimant in the arbitration claimed, among other things, that the arbitrator had wrongly determined the notice period for pay in lieu of notice, overlooked certain claims for unpaid bonuses and RRSP contributions, and incorrectly valued his shares in the underlying arbitration relating to his exit from the defendant. The Court held that the arbitrator’s error in computing the notice period and his lack of reasons relating to certain claims justified granting leave to appeal. The Court denied leave on the remaining issues. Because the parties had not recorded the arbitration, the record was limited to pleadings filed in the Superior Court of Justice that defined the issues for arbitration, the parties’ arbitration agreement, the Arbitration Award and Costs Award, the shareholders’ agreement and the parties’ Partial Minutes of Settlement on a particular issue.

Background The plaintiff, Mr. Reed, had worked at the defendant, Cooper-Gordon Ltd (CGL) since 1999 and had acquired a 12% interest in CGL through Creekside EAP Holdings Inc. (“Creekside”).

In September 2018, Mr. Reed notified CGL of his intention to exit the company as a shareholder. His employment with CGL was subsequently terminated, effective June 9, 2020. On May 13, 2020, Mr. Reed commenced an action for: (i) unpaid bonuses and CGL’s share of contributions to his RRSP under an employment agreement; (ii) punitive damages for oppression and unconscionable conduct; (iii) CGL’s redemption of his shares; and (iv) payment in lieu of notice for 30 months. 

These claims were subsequently arbitrated pursuant to a court order, because the parties had previously enter into an arbitration agreement. The Court did not explain whether a stay motion was brought or how this order was otherwise made.  The arbitrator’s decision was to be final, and not subject to appeal, unless permitted under the Arbitration Act, 1991. The arbitrator released his Award on March 31, 2022 and a Costs Award on July 28, 2022. 

Grounds for leave to appeal Mr. Reed brought a motion for leave to appeal on questions of law under s. 45 of the Arbitration Act, 1991 on multiple grounds:

  1. He contested the six-month pay in lieu of notice granted by the arbitrator for wrongful dismissal, asserting his original claim for a twenty-four-month notice period (issue 1). 
  2. He challenged the arbitrator’s decision on unpaid bonuses and RRSP contributions, arguing that there was an oversight relating to claims for 2016-2019 (issue 2). 
  3. He contested the valuation of his/Creekside’s shares in CGL at 12%, insisting that he held a 24% interest following the death of another shareholder in 2019 that he said ought to have impacted his shareholdings (issue 3). 
  4. He claimed punitive damages for alleged oppression and unconscionable conduct by CGL, which claim was dismissed by the Arbitrator (issue 4). 

In the alternative, Mr. Reed sought a new arbitration under s. 46 of the Arbitration Act, 1991 due to the arbitrator’s alleged unfair treatment of the parties.

Motion to define the record As a preliminary matter, the Court needed to define the record and consider what was admissible for the purpose of determining the leave application. 

The arbitration agreement prohibited evidence at the arbitration hearing from being recorded or transcribed by a court reporter. Accordingly, there was no record of the evidence adduced at the arbitration, nor were there any marked exhibits. The absence of an evidentiary record created a challenge for the Court, requiring the parties to first make submissions on which documents were admissible and relevant to the motion for leave (collectively, the “Appeal Record”).

On December 5, 2022, the Court made an order that the Appeal Record was to include pleadings filed in the Superior Court of Justice that defined the issues for arbitration, the parties’ arbitration agreement, the Arbitration Decision and Costs Decision, the shareholders’ agreement and the parties’ Partial Minutes of Settlement of November 2021 (PMOS) in which the parties confirmed Mr. Reed’s 12% ownership in CGL.

Analysis S. 45(1) of the Arbitration Act, 1991 provides:

If the arbitration agreement does not deal with appeals on questions of law, a party may appeal an award to the court on a question of law with leave, which the court shall grant only if it is satisfied that,

  1. the importance to the parties of the matters at stake in the arbitration justifies an appeal; and
  2. determination of the question of law at issue will significantly affect the rights of the parties”.

The Court emphasized that merely raising a question of law is insufficient for an appeal under s. 45(1). The legislature limited the right to appeal on a question of law to those cases where the importance of the issues justifies an appeal and the determination of the question of law significantly affects the rights of the parties. In other words, the judge must act as a gatekeeper.

The Court relied on Christie Building Holding Co. v. Shelter Canadian Properties Ltd., 2022 MBKB 239, Teal Cedar Products Ltd. v. British Columbia, 2017 SCC 32, and Tall Ships Development Inc. v. Brockville (City), 2022 ONCA 861 to guide its determination under s. 45(1) of the Arbitration Act, 1991. The Court set out the following guiding principles:

  1. Statutory limitations on the scope of appellate review of arbitral awards on questions of law is absolute; 
  2. An arbitrator’s decision must contain a legal question of sufficient arguable merit to confer appellate jurisdiction to review an award; 
  3. Judges should be wary in labelling issues as questions of law, especially when doing so might undermine the essence of consensual arbitration; and 
  4. Parties will be held to their bargain when they agree to resolve their differences through arbitration.

As the party seeking leave to appeal, the onus of meeting the elements under s. 45(1) rested squarely on Mr. Reed.

Issue 1: Error of law – Mr. Reed argued that the arbitrator had erred in law by not applying Bardal v. Gobe & Mail Ltd.,1960 CanLII 294 to determine the accurate notice period for payment in lieu of notice. The Court emphasized that in a motion for leave to appeal, an appeal is from the order made, and not the reasons for arriving at the order. 

Leave was, however, granted to allow the appellate Court to correct a mathematical error made by the arbitrator. Allowing this error to persist would have been unreasonable. 

Issue 2: Insufficient reasons –The Court found that it was unclear whether the arbitrator had decided the claims for bonuses and other contributions for the years 2016-2019, although they were pleaded in the amended statement of claim. The arbitrator gave no reasons as to why he did not deal with the claims – despite being asked by Mr. Reed’s counsel to address these claims in the Costs Award. 

The Court held that this omission raised a question of law and was of considerable importance to the parties because it was the “wedge issue” that led to the litigation. The Court did not have a sufficient record to make a ruling on the defendant’s submissions regarding bars to this claim and the discretionary nature of the bonuses. The Court granted leave to appeal, rather than send this back to the arbitrator.  

Issue 3: Findings of Fact/Mixed Fact and Law  –The Court did not grant leave to appeal relating to Mr. Reed’s claim that he held a 24% interest in the CLG because: (i) the parties’ shareholder agreement provided that CGL’s value would not be determined by the death of a principal; (ii) Mr. Reed/Creekside in their own amended statement of claim claimed a right for their 12% shares to be purchased by CGL; (ii) the PMOS signed by Mr. Reed more than two years after the passing of the other shareholder stated that Mr. Reed/Creekside had a 12% interest in CGL.

These were findings of fact and the arbitrator’s interpretation of the shareholders’ agreement and rights was a question of mixed fact and law. It was difficult, if not impossible, to extricate a relevant legal question from the factual matrix in this issue. The court concluded that Issue 3 involved questions of mixed fact and law that the parties removed from any right of appeal by their agreement.

Issue 4: Findings of Fact -The claim relating to punitive damages was dismissed as the court found no evidence of highhanded or malicious conduct by CGL. The court also upheld the arbitrator’s conclusion on the absence of oppressive conduct. There were no questions of law arising from Issue 4.

Given the findings under s. 45(1) set out above, the Court did not address the arguments under s. 46 relating to unfair treatment. However, the Court held that the arbitrator’s approach did not suggest that he had treated the parties unfairly. The Court reiterated the principle articulated in Tall Ships that s. 46 “cannot be used as a broad appeal route to ‘bootstrap’ substantive arguments used to attack an arbitrator’s findings.

The Court granted leave to appeal for the one-month notice period mathematical discrepancy in wrongful dismissal (Issue 1) and on the decision regarding unpaid RRSP and bonus claims for the 2016-2019 (Issue 2). The balance of the motion was dismissed.

Case Commentary

First, the Court reaffirmed the narrow appeal rights on questions of law where parties provide for the application of the Arbitration Act, 1991 – namely only where there are important legal questions that affect the parties’ rights. 

Although this sets a high bar for parties seeking leave, the Court’s acknowledgment that the arbitrator’s mathematical error warranted granting leave to appeal, even when his decision-making process was deemed reasonable, demonstrates that the Court’s gatekeeping role is not aimed at excluding well-founded claims. It is not clear why Mr. Reed did not ask the arbitrator to correct the error under s. 44 of the Arbitration Act, 1991 or whether submissions were made at the leave motion in this regard. Under that section, an arbitral tribunal may, on its own initiative or at a party’s request, correct errors of calculation or similar errors in the award. 

Secondly, it is worth highlighting the procedural inefficiencies and additional time and effort expended by the parties due to the provision in the arbitration agreement that restricted the recording or reporting of their arbitration proceedings. Parties enjoy the freedom to incorporate terms of their choice into their agreements. However, the lack of evidence on the record required the parties to preliminarily make submissions on a motion to define the record and limited the court’s ability to understand what was considered by the arbitrator. The Court expressly pointed out that this was a challenge. A failure to record the arbitration and resulting problems in defining the record for a proposed appeal were also recently addressed in Christie Building Holding Company, Limited v Shelter Canadian Properties Limited, 2023 MBCA 76, where the Court similarly limited the record to the decision, the pleadings and five marked exhibits. For further analysis, see case note 783 by Jim McLandress: Manitoba – Procedural choices made for efficiency bind losing parties.

These complications raise doubts about the wisdom of parties including this kind of clause in an arbitration agreement. Such a clause may perhaps be more suitable for arbitration agreements that expressly do not allow for appeals, but even then could create risk in the event of some other type of review. Cutting corners and costs in the short term can create risks and greater costs later, as this case shows. Not only did the parties incur times and costs arguing about the issue, but one must wonder whether the outcome of the motion might have been different had the full record been available. 

The author thanks Eniola Akinoso, an articling student at Dentons Canada LLP, for her assistance with this case note.