Ontario – Deferential approach on set-aside application for want of procedural fairness – #723

In Aquanta Group Inc. v. Lightbox Enterprises Ltd., 2023 ONSC 971, Justice Akbarali dismissed an application to set aside an arbitral award on procedural fairness grounds under paragraph 46(1) 6 of the Ontario Arbitration Act, 1991 [the “Act”]. This decision showcases the margin of manoeuver arbitrators enjoy on discretionary procedural decisions. 

Background – In August 2019, the Alcohol and Gaming Commission of Ontario granted the applicant a cannabis licence. The licence permitted it to operate retail cannabis stores in Ontario. Requiring assistance to operate those stores, the applicant entered into a series of licence and service agreements with the respondent under which it would operate six retail cannabis dispensaries. The agreements contained arbitration clauses that explicitly excluded appeals. 

On July 8, 2021, the respondent commenced an arbitration claiming fees allegedly owed under the agreements.

Arbitration – The arbitration proceeded on a fairly tight timeline, with a hearing scheduled for September 27, 2021. The applicant failed to serve a statement of defence on time. This resulted in the arbitrator adjourning the hearing to January 10 and 11, 2022, which dates were peremptory on the applicant. 

The applicant filed its statement of defence on October 8, 2021. It alleged the parties concluded an oral agreement alongside their written agreements. This oral agreement, it argued, changed the respondent’s compensation structure to one based on “an agreed EBITDA split”. Applying that compensation structure, the respondent was entitled to no further payment.  

The respondent brought a motion before the arbitrator on October 26, 2021 seeking an “interim award” in the amount of $271,000. The applicant’s then-counsel did not appear on the motion. He advised the respondent’s counsel his retainer had concluded. He also advised that the applicant had retained new counsel, but that new counsel was unavailable on the motion date. The arbitrator was so advised, but proceeded with the motion and granted the respondent’s requested relief. The parties then proceeded to documentary and oral discovery. 

On January 5, 2022, five days before the peremptory hearing date, the applicant sought leave to amend its pleading to advance a negligent misrepresentation plea in the alternative. The arbitrator denied that motion. He concluded it would be unfair to allow the amendment on the eve of arbitration. He also rejected the applicant’s argument that the existing defence, which alleged a collateral oral agreement, subsumed a negligent misrepresentation plea. The upshot was that the applicant was barred from advancing an argument based on negligent misrepresentation.

Ultimately, the arbitrator rendered an award in the respondent’s favour. The award did not address negligent misrepresentation, which the applicant argued over the respondent’s objection, and despite the arbitrator’s procedural order denying the pleading amendment. 

On the merits, the arbitrator found the parties did conclude an oral agreement, but that it was unenforceable. He reached that conclusion for three independent reasons, each dispositive: 

1) The respondent’s representative with whom the applicant concluded the oral agreement lacked authority to bind the respondent; 

2) The parties’ written agreements contained entire agreement clauses such that the oral agreement was inadmissible under the parol evidence rule; and

3) The oral agreement was illegal because its terms, specifically the EBITDA split compensation structure, were impermissible under the applicant’s license from the Alcohol and Gaming Commission of Ontario.

The applicant commenced an application before the Ontario Superior Court of Justice to set aside the award for violating procedural fairness under paragraph 46(1) 6 of the Act. The respondent brought a counter-application to enforce the award under section 50.

Decision on the court applications – Before the Court, the applicant argued the arbitrator breached procedural fairness by: 

1) disallowing its negligent misrepresentation pleading amendment; 

2) giving no or insufficient reasons for rejecting its submission that the negligent misrepresentation plea arose from the oral agreement already pleaded; and

3) deciding on the basis of an argument the respondent advanced in submissions but did not plead (that its representative’s lack of authority to conclude the oral contract). 

Justice Akbarali rejected all three grounds. 

She began by noting an application under section 46 of the Act is not an appeal on the merits. As such, she concluded that no standard of review applied; the only question was “whether the arbitrator acted within the bounds of authority granted by the arbitration agreement pursuant to which they were appointed” [para. 17]. She found the arbitrator did not exceed those bounds. 

First, Justice Akbarali found no unfairness in the arbitrator’s procedural decision to deny the pleading amendment. In reaching his conclusion, the arbitrator accepted the respondent’s position that there was no time to adequately address the negligent misrepresentation argument, which would have required further discovery and evidence. Justice Akbarali found no fault with the arbitrator’s analysis on this point. 

Second, Justice Akbarali rejected the applicant’s sufficiency of reasons argument. On reading the procedural order, she was able to discern the arbitrator’s chain of analysis regarding the amendment motion from his reasons. 

Finally, Justice Akbarali rejected the applicant’s argument that the arbitrator decided based on an unpleaded position for two reasons. First, she found that the question of the respondent’s representative’s authority to conclude the oral agreement was subsumed within the inquiry into the oral agreement’s existence. That issue was pleaded. Second, assuming arguendo that the arbitrator violated procedural fairness, his conclusion would have been the same even if he did not. This is because the arbitrator’s reasons disclosed three discrete and dispositive bases for refusing to enforce the oral agreement. There was no question that the respondent pleaded the other two defences.

In the result, Justice Akbarali dismissed the applicant’s set-aside application and granted the respondent’s enforcement counter-application. 

Contributor’s Notes:

First, Justice Akbarali’s decision not to frame the court’s role on a section 46 application in terms of “correctness” or “reasonableness” review is noteworthy. It reflects a broader trend away from applying the administrative law standard of review to procedural fairness issues. Rather, the inquiry is binary: either the arbitral tribunal fell short of its duty to treat the parties fairly and equally, or it did not. 

At the same time, Justice Akbarali accorded a fair degree of deference to the arbitrator’s procedural decisions—declining the applicant’s proposed pleading amendment and maintaining the peremptory hearing dates and procedural timetable. This is consistent with the approach courts take in reviewing judicial and administrative procedural decisions, particularly where facts are in play. An appeal court usually will not set aside a lower court’s discretionary decision absent “an error in law or principle, a palpable and overriding error of fact, or unless the decision is so clearly wrong as to amount to an injustice” [e.g., 992548 Ontario Inc. v. 8657181 Canada Inc., 2018 ONCA 416, para. 12]. Likewise, on judicial review, an administrative decision-maker’s discretionary procedural decisions benefit from a “margin of deference” [Mission Institution v. Khela, 2014 SCC 24, para. 89]. 

Second, the way Justice Akbarali formulated her task is interesting. She wrote that she was to assess “whether the arbitrator acted within the bounds of authority granted by the arbitration agreement pursuant to which they were appointed”. She cited for this proposition the Court of Appeal’s decisions in Alectra Utilities Corporation v. Solar Power Network, 2019 ONCA 254 and Mensula Bancorp Inc. v. Halton Condominium Corporation No. 137, 2022 ONCA 769. Both of those cases arose from attempted challenges to the arbitral tribunal’s jurisdiction (paragraph 46(1) 3) rather than procedural fairness. However, Justice Akbarali’s formulation remains valid. Indeed, it elegantly identifies the common thread running through nearly all of the section 46 set-aside grounds, including procedural fairness under paragraph 46(1) 6: whether the arbitral tribunal acted with authority.

Section 19 is the Act’s key procedural fairness provision. It entrenches the parties’ right to equal and fair treatment and the right to present their case and respond to the opposing case. Since section 19 figures among the few provisions in the Act the parties may not exclude or vary, any arbitration agreement falling under the Act contains an implied term that the arbitral tribunal shall accord procedural fairness and meet bedrock standards of natural justice. In that way, when an arbitral tribunal falls short of the section 19 standard, it acts outside the “authority” the arbitration agreement confers. The same is arguably true of other grounds, like paragraph 46(1) 1 (“A party entered into the arbitration agreement while under a legal incapacity”) or paragraph 46(1) 2 (“The arbitration agreement is invalid or has ceased to exist”). In those cases, the arbitration agreement either never validly existed or did not exist at the time the arbitral tribunal acted. Accordingly, one could say the arbitral tribunal is absent “authority” under the arbitration agreement. On this view “jurisdiction” (i.e., “authority” to decide the subject-matter of the dispute) is but one aspect of the arbitral tribunal’s authority. Of course, reasonable minds can disagree on this framing.

Third, although Justice Akbarali accorded the arbitrator deference, she did not merely rubber stamp him. Instead, she appears to have considered the facts on the ground at the time the arbitrator rendered his decision [paras. 22 and 23]. In so doing, she was able to satisfy herself that the arbitrator operated within his “margin of deference” and had not erred in principle or worked an injustice.

Fourth, and with respect to the applicant’s argument about the right to be heard, Justice Akbarali was careful to note that even if there were a denial of natural justice, it extended to only one of three independent reasons the arbitrator gave for rejecting the applicant’s position on the oral agreement. In other words, even taking the applicant’s case at its highest, the arbitrator would have reached the same outcome, assuming perfect fairness.

In that regard, it is important to remember that review under section 46 is discretionary. Subsection 46(1)’s chapeau says: “[o]n a party’s application, the court may set aside an award on any of the following grounds” (emphasis added). This means that absent a procedural fairness defect that could reasonably affect the outcome, the Court may deny a remedy. 

It is hard to imagine the court exercising its discretion against setting aside an award where certain other grounds are concerned—e.g., where an applicant was legally incapable at the arbitration agreement’s formation. In contrast, procedural fairness violations are the sort of defect that lend themselves to remedial discretion. Others might include paragraph 46(1) 4 (“The composition of the arbitral tribunal was not in accordance with the arbitration agreement or, if the agreement did not deal with that matter, was not in accordance with this Act”) or paragraph 46(1) 7 (“The procedures followed in the arbitration did not comply with this Act”). This discretion is in line with the practice in judicial review of administrative action [see: Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65, para. 142; Mobil Oil Canada Ltd. v. Canada-Newfoundland Offshore Petroleum Board, 1994 CanLII 114 (SCC)].

Fifth, the question of whether sufficiency of reasons is properly characterized as a procedural fairness issue is hotly contested in the administrative law world. The details of that debate lie beyond the scope of this case note. However, that debate is moot under the Act and its counterparts in Alberta, Saskatchewan, Manitoba, New Brunswick and Nova Scotia, all based on the Uniform Law Conference of Canada’s Uniform Arbitration Act (1990).

Subsection 38(1) of the Act requires the arbitral tribunal to provide a reasoned award. The parties are free to vary or exclude subsection 38(1). But where they do not, an award must come with adequate reasons. A failure to comply with the Act’s procedures falls within paragraph 46(1) 7. This means there is no need to fit adequacy of reasons within the confines of procedural fairness and paragraph 46(1) 6.

However, given the “reasons” at issue were not those for the award, but a procedural order, query whether subsection 38(1) applies. The Court of Appeal for Ontario has distinguished procedural rulings from awards on the merits [Inforica Inc. v. CGI Information Systems and Management Consultants Inc, 2009 ONCA 642]. Since subsection 38(1) applies to awards, it is unclear whether it extends to procedural rulings, or whether there is another basis for requiring the arbitral tribunal to reason procedural rulings in writing (or some other durable form, like a video recording or transcript).As a practical matter, and given how important procedural rulings can be, it is good practice for the arbitral tribunal to justify them in writing. This is so even if the Act and its counterparts elsewhere do not strictly require it, which is an open question. Absent reasons, the arbitral tribunal might invite a greater level of scrutiny on a review application. After all, if the reviewing court lacks the benefit of the arbitral tribunal’s rationale, there may be little or nothing upon which to accord deference.