Ontario – court enforces award after arbitrator required to untangle a cluster of less common procedural challenges – #070

In Fuego Digital Media Inc. v. DAC Group (Holdings) Limited, 2018 ONSC 2897, Madam Justice Julianne Parfett considered and dismissed challenges to a final award based on an alleged denial of natural justice and on an alleged excess of jurisdiction.  The reasons demonstrate key procedural difficulties encountered in complex IT arbitration and the variety of solutions applied by arbitrators to resolve those difficulties and provide the parties with an enforceable final award.   The procedural history demonstrates how to deal with a bundle of less common issues such as adjournments to obtain financing and new legal counsel, non-payment of fees leading to dismissal of counterclaim, new evidence, draft awards provided by parties and injunctive relief against the officers and directors of corporate entities.

Fuego Digital Media Inc. (“Fuego”) assumed the obligations of ProtocolIS under the latter’s July 2005 software license with DAC Group (Holdings) Inc. (“DAC”).  The license provided that ProtocolIS would provide software to DAC to deploy DAC’s own applications.  DAC provided “directional marketing” services through its software.  DAC’s software better directed people to websites which offered services sought by those people and which were customized by DAC’s software.

Following a dispute between Fuego and DAC, DAC initiated arbitration against Fuego governed by ADR Institute of Canada (“ADRIC”) rules and a sole arbitrator was appointed.  The arbitration proceeded in two phases: a contract phase and a technology phase.  There appeared to be a long gap between the end of each phase. The delay appears due in large part to the work Fuego and DAC undertook in light of the guidance and criteria given to them by the arbitrator in the award issuing from the first phase.

In the award on the contract phase, the arbitrator provided Fuego and DAC with guidance on who ownership of the specific aspects of the software might be determined.  On the technology phase, the arbitrator had to determine which software belonged to Fuego and which software belonged to DAC, depending on the amount of changes made to Fuego’s or developed exclusively for DAC’s software.

Fuego applied to set aside a July 31, 2017 award or, in the alternative, an order setting aside all references to non-parties in the award.  Its arguments could be clustered into two (2) groups:

(a) denial of natural justice – the denial of an adjournment, the admission of new evidence, the use of a definition of “DAC Software” differing from that used in the award on the contract phase and the use of draft reasons provided by DAC; and,

(b) excess of jurisdiction – the grant of injunctive relief against non-parties, namely officers of Fuego.

Fuego’s application triggered sections 6 and 46(1) of the Arbitration Act, 1991, SO 1991, c 17.   In preparation for her analysis, Parfett J. identified the applicable standards.  First for the test applicable to a challenge based on procedural unfairness Parfett J. referred to Consolidated Contractors Group S.A.L. (Offshore) v. Ambatovy Minerals S.A., 2017 ONCA 939.   In that case, considering the test under article 34(2)(a)(iii) of the International Commercial Arbitration Act, 2017, SO 2017, c 2, Sch 5 at paras 63-65, the Ontario Court of Appeal expanded on the standard expressed in the legislation as “otherwise unable to present his case”.  The Court reviewed key doctrine, in particular Michael J. Mustill & Stewart C. Boyd, The Law and Practice of Commercial Arbitration in England, 2nd ed. (London: Butterworth’s, 1989), at p. 550, cited in J. Casey, Arbitration Law of Canada: Practice and Procedure, 2nd ed. (New York: Juris, 2011), at p. 420 and Corporacion Transnacional de Inversiones, S.A. de C.V. v. STET International, S.p.A., 1999 CanLII 14819.  Having done so, the Court expressed the standard as requiring “such a mishandling of the arbitration as to likely amount to some substantial miscarriage of justice”, “sufficiently serious to offend our most basic notions of morality and justice” or “conduct is so serious that it cannot be condoned under the law of the enforcing State”.

Second, for the standard applicable to jurisdiction, Parfett J. identified the standard as correctness but pointed to the caution stated in Mexico v. Cargill, Incorporated, 2011 ONCA 622 at para. 44 to temper enthusiasms:

[44] It is important, however, to remember that the fact that the standard of review on jurisdictional questions is correctness does not give the courts a broad scope for intervention in the decisions of international arbitral tribunals. To the contrary, courts are expected to intervene only in rare circumstances where there is a true question of jurisdiction.

Parfett J. noted that Fuego “conceded” that ADRIC’s rules applied.  Parfett J. referred to and cited Rules 1, 23, 24, 26, 34, 37 and 40.  Given that numbering scheme and the vintage of the claims suggested in the reasons, the ADRIC rules applicable to the parties’ application in 2018 were those in effect between October 1, 2008 and December 1, 2014.  The current rules, in effect since December 1, 2014 are available here.  (A prior set of rules, in effect between December 1, 2014 and December 1, 2016) can be sourced here.

Parfett J. dealt with each of the two groups of challenges made by Fuego, starting first with procedural fairness and then closing with excess of jurisdiction.

(a) procedural fairness – Parfett J. dealt individually with each of Fuego’s challenges to the manner in which the arbitrator conducted the technology phase.

Fuego sought an adjournment because it did not have the resources to continue to retain counsel or pay the arbitrator’s fee.  Regarding the adjournment, Parfett J. briskly discarded the first pair of DAC’s objections to Fuego’s application in which DAC argued, without authority Parfett J. noted, that:

–  the adjournment decision is not an award and cannot be reviewed under section 46 of the Arbitraton Act; and,

– the interlocutory decision had to be appealed separately from the final award.

ADRIC’s rule 26(2)(a) gives an arbitrator authority to grant an adjournment.  The arbitrator gave detailed reasons for denying an adjournment which, based on those reasons, allowed Parfett J. to conclude that Fuego was not treated unfairly or inequitably.

ADRIC’s rule 40 also provides for a termination of the proceeding for failure to pay the required fee.  In this case, Fuego was put on notice to pay the fees related to Fuego’s own counterclaim but did not do so.  Fuego was allowed to defend against DAC’s claim but not to push forward without financing the fee for Fuego’s own counterclaim.  Again, Parfett J. held that the arbitrator had not breached natural justice in dismissing Fuego’s counterclaim.

With regard to the new expert evidence adduced by DAC, Fuego raised several arguments, each of which Parfett J. held were mitigated by the manner in which the hearing proceeded.  The additional witness, Mr. Tenby, was not an expert, his testimony providing only factual evidence available to Fuego and that his presentation, reduced to slides, merely summarized the evidence given at the hearing.   Parfett J. rested her key reasoning on her conclusion that the arbitrator did grant Fuego an adjournment during which Fuego’s own expert could review the new testimony.

[39] The Applicant’s expert did in fact deal with this new evidence and the Applicant has not, in the present case, demonstrated what it would have or could have done differently if it had been given a longer adjournment.  The fact the evidence presented by Mr. Tenby and the expert ultimately proved to be devastating to the Applicant’s position on the hearing is not a reason to find the arbitrator acted inappropriately.

Regarding Fuego’s claim that the arbitrator in his technology phase award had strayed from the definition he gave to the parties in his contract phase award, Parfett J. determined that the actual sense and context of the wording given was a guidelines or criteria.   In doing so, she held that the earlier award did not constrain or decide substantive issues, effectively endorsing the flexibility adopted by the parties in creating two phases.

[46] As noted earlier, the Applicant contends that the definition of ‘DAC Software’ provided in the contract award was determinative of the entire issue of what constituted software owned by DAC.  I cannot agree.  It is apparent from the decision that the arbitrator intended to provide guidelines or criteria that the parties could use to determine for themselves what software was owned by DAC.  However, the parties were not able to agree.  Furthermore, the arbitrator indicated that he had insufficient information to be able to make any final determination of this issue.  Consequently, the issue of the definition of ‘DAC Software’ was not finalized and in my view, both parties were free to advocate for a different definition of ‘DAC Software’ at the time of the second hearing.

Parfett J. next turned to the role the draft award might have played in the procedural fairness given to Fuego.  ADRIC’s Rule 42 allows the arbitrator discretion as to when the hearing is closed.  Receiving the draft order before declaring the hearing closed was not improper.  Fuego’s more serious allegation was that the arbitrator had abdicated his responsibility by accepting a draft award.  DAC argued that the document was more of an order than an award, including technical information and that providing draft orders to arbitrators is not unusual.

[55] In my view, it would have been improper for the Respondent to provide the arbitrator with draft reasons.  However, that is not what occurred in this case. It is apparent from a comparison of the document sent by the Respondent and the document produced by the arbitrator that he made very significant changes.  In addition, what the arbitrator used was indeed in the nature of an order, whereas what he added were his reasons.

b) excess of jurisdiction – In his award, the arbitrator granted injunctive relief in the following terms:

34. This Tribunal orders that the Respondents [Applicant in the present matter], and all of their current, former and future directors, officers, agents employees, contractors, subcontractors, servants, affiliates, joint venturers, successors, assigns, subsidiaries or Related Parties (including Higgins, Gretton and Fuego Qatar), and all those over whom they or any of them exercise control, directly or indirectly, are hereby permanently restrained from any or all of the following activities …

Fuego claimed that the arbitrator had exceeded his jurisdiction by submitting third parties to his award.  Parfett J. agreed that an arbitrator has no jurisdiction over entities who are not parties to the arbitration.  That said, she dismissed Fuego’s objection on two (2) grounds.

First, the three (3) named parties were related parties, either as current or former officers or as directors, shareholders or primary managers at the relevant times.  While it was not necessary to name them, the arbitrator did not exceed his jurisdiction in doing so.

Second, Parfett J. relied on MacMillan Bloedel Ltd. v. Simpson, [1996] 2 SCR 1048, 1996 CanLII 165 as a well-known authority to name the individuals so that “if they are third parties, they are being notified of the existence of the injunction and, therefore, also being warned not to implicate themselves in a breach of the order.”  She included the following excerpt, condensed from the original 1996 reasons:

25. The argument that the jurisdiction of the courts is confined to parties named and served in the action rests on the notion that the courts can act only in personam; that is, against named individuals.  (…)

 The traditional English rule thus appears to be that only named parties can be bound by a court order.  While general terminology referring to others may be included in the order, this is done only to capture the idea that the named party – often a corporation – is enjoined from committing the specified act both directly and through the actions of others, such as servants and agents, whom it may direct.  The general terminology also serves to provide a warning to third parties who might otherwise implicate themselves in a breach of the order.   (…)

 Only parties are “bound” by the injunction. But anyone who disobeys the order or interferes with its purpose may be found to have obstructed the course of justice and hence be found guilty of contempt of court.

Based on her review of the award and the process adopted by the arbitrator, and in light of the applicable legislation and standard of review for a denial of natural justice and for excess of jurisdiction, Parfett J. dismissed Fuego’s application and granted further orders at the request of DAC to recognize and enforce the July 31, 2017 award including a September 29, 2017 award on costs.