Ontario –“Fraud” does not include “constructive fraud” for set-aside application deadline – #829

Campbell v Toronto Standard Condominium Corporation No. 2600, 2024 ONCA 218, considered the meaning of “fraud” under section 46(1)9 of the Ontario Arbitration Act, 1991, SO 1991, c, 17. It provides that a court may set aside an award on the ground that, “the award was obtained by fraud.”  The first issue before the Court was whether “fraud” includes “constructive fraud.”  The main issue, however, was the interpretation to be given to sections 47(1) and (2), which provide that an application to set aside an award shall be commenced within 30 days after the applicant has received the award – except if the applicant alleges corruption or “fraud”.  The Court found that “fraud” does not include “constructive fraud, which means that the Respondents were out of time to bring their set-aside application. It found that a broadening of the definition of fraud is not consistent with the statutory objectives to narrow the grounds for court interference in arbitrations. The Court expressed the view that the allegation of constructive fraud was made for the purpose of circumventing the statutory time limit for bringing a set-aside application. (This case is also useful for its summary of basic arbitration law principles. If you need a quick update or refresher of these, see my Editor’s Notes below for a “cheat sheet”.)

Background to the dispute – The Respondents purchased a unit in the condominium in 2017. During the period December, 2018, to February, 2021, various disputes arose between the parties relating to noise complaints and the use of the unit as a short-term rental, which was prohibited. 

In mid-July, 2019, the Applicant condo corporation sent a notice of mediation and alleged that the Respondents were in breach of the declaration, by-laws, and rules of the corporation and that pursuant to s. 132(4) of the Condominium Act, 1998, SO 1998, c. 19 the dispute would be submitted to mediation. The Respondents did not agree upon the condo corporation’s proposed mediator and did not propose any alternative. The condo corporation stated that if arbitration was necessary, it would be seeking reimbursement of its costs. 

The arbitration – In November, 2020, the condo corporation delivered a notice of arbitration, in which it stated that it would be seeking its costs incurred and going forward on a full indemnity basis in accordance with section 12 of the condominium’s declaration. The parties agreed upon an arbitrator. 

In March, 2021, the Respondents signed a conditional agreement for the sale of their unit, which the condo corporation thought would resolve the substantive issues if the sale was completed, but not costs. The parties signed an arbitration agreement, which identified the issues in dispute as: (a) the alleged contravention of the short-term rental rules; and (b) costs. The arbitration agreement also provided that the Arbitrator was to make a “final and binding decision” and that the parties “irrevocably agree not to appeal or attempt to set aside any aspect of the Arbitration Award”. The condo unit sold in May, 2021.

The Arbitration was completed in August, 2021, and the Arbitrator issued his Award in September, 2021. He found that the evidence showed that the Respondents had violated the rules against short-term rentals and awarded the condo corporation its costs on a partial indemnity basis.

Application to set aside Award – In November, 2021, two months after the release of the Award, the Respondents applied to set it aside. They alleged fraud and “constructive fraud”.  The application judge expressly stated that there was no actual fraud or moral turpitude on the part of the condo corporation and none was required for constructive fraud.

However, he set aside the Award on the basis that the Respondents were victims of constructive fraud and that section 46(1)9 allowed a court to set aside an award on the basis that it was obtained by fraud, which he found included “constructive fraud”.  He found that it was “unconscionable and unfair” that the condo corporation had, “lured the [Respondents], their legal counsel, and the Arbitrator” into adjudicating substantive issues beyond those of costs. The Award also included the noise disputes, which were not included in the Notice of Arbitration.   See Campbell v. Toronto Standard Condominium Corp. No. 2600, 2022 ONSC 2805 for the decision of the application judge.    

(The issue of whether the Respondents could seek to set-aside the Award even though the parties’ arbitration agreement stated that they would not do so did not arise.  Section 3 of the Ontario Arbitration Act, 1991, provides that the parties cannot contract out of the right to seek to set aside an award.)

Appeal – The condominium corporation appealed on the basis that the application judge had erred in reading “constructive fraud” into section 46(1) and 47(2) of the Arbitration Act, 1991, and in setting aside the Award. 

The Respondents argued that the application judge was correct.  Their position was that Ontario statutes should be given a “fair, large, and liberal interpretation” and the application judge’s interpretation of the Arbitration Act, 1991, was consistent with its objectives in promoting access to justice and maintenance of public confidence in the justice system.

The Court granted the appeal.

It found that the appeal turned on a question of statutory interpretation and there was no appellate case law interpreting these provisions. The Arbitration Act, 1991, was to be interpreted in a manner that it is purposive and in keeping with its objects. The central purpose of the Arbitration Act, 1991, is to provide contracting parties with access to a method of dispute resolution that, “can be more expedient and less costly than going to court”, “entrenches the primacy of arbitration proceedings over judicial proceedings”, and that “efficiency and finality are therefore central objectives which underpin the Act”. Further, “[t]he Act itself clearly manifests legislative intent to limit court intervention in arbitral matters.”

The Court’s analysis was, in summary:

(a) The interpretation of s. 46 regarding the scope of a court’s authority to set aside an award –  The Court found that the grounds are narrow and that s. 46  is not an alternative appeal route, relying upon the Court’s recent “trilogy” of cases: Alectra Utilities Corporation v Solar Power Network Inc, 2019 ONCA 254 at paras 23-24, 27-34, and 43, leave to appeal refused, [2019] SCCA No. 202; Mensula Bancorp Inc. v Halton Condominium Corporation No. 137, 2022 ONCA 769, paras. 5, 40, leave to appeal refused, [2023] SCCA No. 120; and Tall Ships Development Inc. v Brockville (City), 2022 ONCA 861; leave to appeal refused, [2023] SCC No. 29, paras. 2 and 95.

(b) The interpretation of s. 47 regarding the time for bringing appeals and applications – The Court has no discretion to extend the 30-day period. This is consistent with the wording of the statute and principles of efficiency and finality. However, this limit does not apply where the appellant or applicant alleges corruption or fraud.

(c) Fraud v constructive fraud – The Court noted that constructive fraud is an equitable concept and is broader than fraud. It does not require knowledge and intent to deceive. It focuses on the concept of unfairness. “Fraud” under the Act does not mean “constructive fraud” because:

  • “fraud” has an established meaning at common law that does not mean “constructive fraud”;
  • interpreting “fraud” broadly for the purpose of s. 46 is not consistent with appellate case law narrowing the basis upon which a court may interfere with an arbitral award and is not consistent with the arbitration principles of  efficiency and finality; 
  • Case law has repeatedly emphasized the exceptional nature of applications to appeal or set aside awards; and
  • Courts are cautioned to beware of strategic attempts by losing parties to expand the scope of review beyond what they had agreed to under their arbitration agreement.

The Court expressed the view that the Respondents sought to circumvent the time limit by alleging fraud and constructive fraud, which does not require actual dishonesty or intent to deceive. 

It also found that the application judge went beyond his role. He delved into the merits, which is not permitted in a set-aside application. In essence, the parties disagreed on what “costs” meant. The Court found that it was not open to the Respondents to argue that the Arbitrator had erred or wrongly or unfairly interpreted the terms of the agreement on a set-aside application. The application judge erred in interpreting “fraud” to include “constructive fraud”.

In any event, the Court found that even if the Arbitrator did determine substantive issues that were not simply “costs”, it did not amount to constructive fraud. It was appropriate and necessary for him to consider those issues to determine costs.

Editor’s Notes:

First, the Court commented, several times, upon the Respondents’ choice to allege fraud to avoid the consequences of failing to file the application for setting aside the Award within the 30-day period required under s. 47(2) of the Arbitration Act, 1991. The Court called the Respondents’ position an invitation to, “strategic enlargement of the grounds for setting aside an arbitral award, as illustrated by this case.” But in so doing, they attacked both the opposing party and the Arbitrator, all while arguing that constructive fraud did not suggest any moral turpitude.  At the end of the decision, the Court asked for written submissions as to costs. There is authority (at least in Ontario) that an allegation of fraud which is not proven may attract a higher adverse costs award.  It remains to be seen whether an allegation of constructive fraud has the same consequences.

Second, this decision provides a principled analysis, well supported by the case law – including that of the Supreme Court of Canada – and provides a roadmap to many of the common arbitration law issues that regularly come before the courts, so it is an excellent primer.

1.  The central objectives of arbitration are expedience, lower cost, finality, and efficiency: 

2.  Arbitration legislation entrenches the primacy of arbitration proceedings over judicial proceedings, once the parties have entered into an arbitration agreement, by directing the court, generally, not to intervene:

3.  If an arbitration agreement is silent on whether an appeal right is established or precluded, an appeal to the court on a question of law lies only with leave:

4.  If parties have agreed to a question of law alone, courts are admonished to avoid strategic attempts to broaden the appeal by turning questions of mixed facts and law into questions of law:

5. Courts are warned to guard against strategic attempts to enlarge the scope of appeal beyond what the parties have agreed to:

6.  Courts are authorized to set aside an arbitral award on “limited and specific grounds” which are “not concerned with the substance of the parties’ dispute”:

7. Arbitrators must act within the bounds of the authority granted to them by their arbitration agreement  – no less, but no more: