Ontario – fundamental differences between party-appointed arbitrator and court-appointed referee – #311

Despite their “superficial similarities”, Mr. Justice Ian F. Leach in Belanger v. Harwood et al., 2020 ONSC 1883 identified fundamental differences between an arbitrator and a referee.   An arbitrator, appointed by parties, engages in “an autonomous, self-contained and self-sufficient process, presumptively immune from judicial intervention … operating outside the court system” whereas a referee, appointed by the court, works “within the court system, and presumptively subject to the court’s supervision, control and substantive disagreement”.  Leach J. also determined that the parties had clearly subjected any third party decision making to a condition precedent which had not yet been realized and the undertaking to engage in that process was “neither binding nor enforceable”.

The parties, RB, JO and JH, are the three (3) siblings and children of AB who passed away in June 2007.  The principal but not exclusive asset of AB’s estate consists of shares in a corporate entity (the “Farm Corporation”) whose own assets consist of two (2) adjacent expansive lots of 52 and 100 acres.  In her will, AB appointed RB, JO and JH as estate trustees and divided the residue of her estate among RB, JO and JH in equal shares. 

Despite the 13+ years since AB’s passing, probate has not yet issued for her estate. The parties are involved in litigation which Leach J. outlined at para. 6(g) of his reasons.  In the course of their attendance at court, the parties had entered into April 25, 2016 minutes of settlement entitled “Agreement in Principle”, the terms of which are produced at para. 6(g) of Leach J.’s reasons. The eleven-point terms open and close respectively with the following statements:

Start – “On condition that “butterfly” transaction approved by Revenue Canada

Ends – “All issues not resolved will be referred on consent to Mr. [M] as contained in outstanding applications and motions. By consent order for a reference.  (The parties anticipate that an Order for Reference must be issued by the Court.)

Leach J. set out the nature and intent of a butterfly transaction at para. 6(h) of his reasons.  Following the Agreement in Principle, the parties developed further disagreements over the form and content of the submission to be made to the Canada Revenue Agency (“CRA”) for approval of the butterfly transaction, as set out at para. 6(j) of Leach J.’s reasons.

RB applied for an order referring the parties to arbitration so that the arbitrator could determine the issues surrounding the administration of the estate including the form and content of the submission to the CRA for approval of the butterfly transaction.

RB argued that the parties had entered into a binding agreement governed by the Arbitration Act, 1991, SO 1991, c 17 to resolve their disputes by arbitration.  RB relied on the competence-competence principle “reflected” in section 17(7) of the Arbitration Act and case law “emphasizing that an arbitrator, agreed upon in an enforceable arbitration agreement, can and should be permitted to determine the limits of his or her own jurisdiction as a preliminary question at the arbitration hearing”.

JO and JH resisted referral to arbitration.  They argued that the parties had not entered into an agreement to have issues determined by arbitration, referral was subject to a condition precedent that the butterfly transaction be approved by the CRA, the decision maker would not have jurisdiction to resolve disputes relating to the butterfly transaction itself.

Leach J. made two (2) observations.  First, he identified the limits to his own intervention.

[7] In the course of submissions, all concerned agreed and emphasized that I was not being asked to decide substantive disputes about the form or content of any application to the CRA in relation to the contemplated butterfly transaction, but was instead being asked to address the question of how and by whom such issues should be determined”.

Second, Leach J. agreed that the was “no question” that the parties had reached an agreement but observed that “the nature, scope and effect of that agreement is in issue”.

At para. 16, Leach J. provided an inventory of principles relating to arbitration agreements.  Despite RB’s reliance on those principles, Leach J. disagreed that they justified granting RB’s application. The detailed reasoning supporting each determination is set out in the corresponding subsections to those paras indicated below:

(i) a reference conducted by a referee is not arbitration conducted by an arbitrator – para. 20;

(ii) the Agreement in Principle reflects an agreement to request that the court direct a reference in regard to specific matters – para. 21;

(iii) the agreement to obtain a direction for a reference does not include all the issues covered by RB’s application – para. 22; and,

(iv) the court’s jurisdiction to direct a reference under section 66(2)(q) of the limits the court’s powers and those do not provide for the relief sought by RB – para. 23.

Among those above, two (2) key limitations applicable to Leach J.’s refusal involved (a) the limited role given to a referee as decision-maker vs. that given to an arbitrator and (b) the condition precedent imposed on accessing that role.

(a) limited role – Leach J. at para. 20 details what a referee does in contrast to what an arbitrator provides as a service.  Among the distinctions, only a judge has the power to direct a reference and the referee operates within the court system.  The full passage bears excerpting in full:

[20] First, although Mr [B]’s application clearly equates a “reference” to an “arbitration” and a “referee” to an “arbitrator”, (as highlighted by the request in Mr [B]’s notice of application for the court’s guidance as to what issues “will be before the referee at the arbitration”), and the two processes have some superficial similarities, (e.g., insofar as initial substantive determinations are made by someone other than a master or judge of the court, with further court steps then being required if a party seeks to enforce those substantive determinations), a reference is something fundamentally different from an arbitration.  Without limiting the generality of the foregoing:

a. As noted above, our appellate courts have emphasized that an arbitration is an autonomous, self-contained and self-sufficient process, presumptively immune from judicial intervention.  In effect, parties who agree to have certain disputes addressed by arbitration essentially decide to remove certain disputes from the court’s adjudicative jurisdiction, entrusting them instead to an agreed alternative dispute resolution mechanism generally operating outside the court’s process, in a manner presumptively free from court supervision, intervention and disagreement.

b. When the court directs a reference in relation to a whole proceeding, or to determine an issue in a proceeding, the court retains its adjudicative jurisdiction but delegates the exercise of that jurisdiction to a referee working within the court system, and presumptively subject to the court’s supervision, control and substantive disagreement.  For example:

 i. Whereas parties decide whether and when matters will be arbitrated, only a judge has the power to direct a reference, (subject to other constraints indicated by the Rules of Civil Procedure), and the exercise of that power is discretionary, even where affected parties are consenting to the direction of a reference.

ii. Whereas parties decide what matters will be arbitrated, how they will be arbitrated and by whom, the judge directing a reference has the power to specify the nature and subject matter of the reference, and who is to conduct it, including:

1. the ability to provide general directions regarding inquiries to be made, accounts to be taken and costs to be assessed;

2. the ability to provide directions of any kind, (general or specific), for the conduct of the reference; and

3. the ability to designate which party is to have carriage of the reference.

iii. Whereas an arbitrator selected by parties operates outside the court system, any designated referee to whom a judge directs a reference, (including a person agreed upon by the parties), remains an officer of the court directing the reference.

iv. Moreover, whereas parties deciding to proceed by arbitration have the power to determine how much the chosen arbitrator will be paid and by whom, a judge directing a reference to a person agreed upon by the parties retains control over that referee’s remuneration and the liability of parties for its payment.

v. Whereas motions relating to the conduct of an arbitration generally are determined by the arbitrator, (subject to certain limited exceptions and restricted rights of appeal to the court), motions made in connection with a reference may be heard and disposed of by a judge or master, with the consent of the referee or even in the absence of such consent.

vi. Whereas substantive determinations of an arbitrator generally are final, binding and amenable to court enforcement, (subject to limited rights of appeal to the court), the findings and conclusions of a referee have “no effect” unless and until the referee makes a required report setting out his or her findings and conclusions, and that report has been confirmed pursuant to further court procedures; procedures which not only enable the court to require further substantive reasons from the referee for his or her findings and conclusions, but also give the court a wide discretion to “confirm the report in whole or in part, or make such other order as is just”.  In other words, the court always retains its jurisdiction to make final determinations in relation to any matter that is the subject of a reference, regardless of the preliminary findings or conclusions of a referee.

c. In my view, given the fundamentally different nature of arbitrations and references, the legislation and principles developed in relation to arbitration and arbitration agreements, (designed to promote the autonomy of arbitrators exercising jurisdiction outside the court process by party agreement), cannot and should not be extended to references and agreements to request a court directed reference, which are designed to ensure supervision and control over the exercise of court-ordered delegations of jurisdiction within the court process.  The approach of the Legislature and courts to arbitrations and the approach of the Legislature and courts to references have quite different underlying goals and objectives, and work in opposite directions”.  

(b) condition precedent – Leach J. pointed out how the terms of the parties’ Agreement in Principle limited access to the referee.  The entire contents of the Agreement in Principle were contingent upon the realization of the CRA’s approval of the butterfly transaction as a “true” condition precedent.  See para. 22(c)(i) to (iv) for his analysis and application of Turney v. Zhilka, 1959 CanLII 12 (SCC), [1959] SCR 578.  Until that condition was realized, all the terms were “neither binding nor enforceable”.

urbitral note – First, the reasons underline the importance of marrying the title of the decision-maker to the function or task assigned.  Despite the absence of a formal title of “referee” for the decision-maker identified in the Agreement in Principle, the parties’ use of the term “reference” coupled with the need for an Order for Reference, supported Leach J.’s determination that the parties had opted for a referee and not an arbitrator.   

Second, the lead phrase introducing the terms of the parties’ Agreement in Principle imposed a condition precedent across execution of all the subsequent terms.  Parties drafting agreements to arbitrate may or may not want to condition their dispute resolution process in such a manner but, when they do so, will be held to their bargain.