Ontario – interpreting agreement to allow appeal of procedural orders is commercially unreasonable – #395

In Converaidem, Inc. v. Mulcahy, 2020 ONSC 6747, Madam Justice Breese Davies dismissed an attempt to appeal interim procedural orders.  One section of the parties’ agreement to arbitrate described rulings on procedural matters as “awards” and a later section allowed the parties to appeal “awards” on a question of law. Davies J. held that, as a general rule, the same word will be presumed to bear the same meaning throughout a contract but that the presumption of consistent expression may not apply if the resulting meaning is absurd or commercially unreasonable. Her reading of the various sections, individually and together, supported her conclusion that allowing appeals of the challenged procedural orders, despite being termed “awards”, would be commercially unreasonable.

Converaidem, Inc. (“Converaidem”) and Big Kids Little Kids Inc. (“BKLK”) entered into a 2017 Joint Venture Agreement (“JVA”) which provided that dispute arising out of the JVA be settled by arbitration.  Disputes did arise and Converaidem (“Applicant”), BKLK and BKLK’s principal (“Respondents”) engaged in arbitration appointing an arbitrator in December 2017. 

The arbitrator issued a number of pre-hearing rulings including orders which obliged Applicant to provide security for costs and denied Applicant’s request to amend that order as well as dismissing Applicant’s motion to amend its claim and its request for an adjournment so that it could retain an expert valuator.  The arbitrator resigned before completing the arbitration and without deciding a request by Applicant to recuse himself on the basis of alleged bias.

Applicant applied for set aside the pre-hearing orders and sought appointment of a new arbitrator. It argued that the JVA’s agreement to arbitrate qualified pre-hearing orders as “awards” and provided for aa right of appeal from any award on a question of law.  Respondents disputed Applicant’s approach, arguing that the arbitrator’s orders did not qualify as “awards”  under the JVA’s agreement to arbitrate or under Ontario’s Arbitration Act, 1991, SO 1991, c 17.

Davies J. identified three (3) issues: (a) are the rulings “awards” that can be appealed or set aside under the JVA agreement to arbitrate or the Arbitration Act; (b) if the rulings are awards for the purpose of an appeal or request to set aside, what is the applicable standard of review; and, (c) If the rulings are “awards”, should they be set aside?

Davies J.’s analysis lead her to conclude that the pre-hearing rulings were not awards subject to appeal or set aside under either of the JVA agreement to arbitrate or the Arbitration Act.

Applicant did not question whether the arbitrator had jurisdiction to rule on the security for costs motion or the requests for adjournment or to amend.  The JVA agreement to arbitrate expressly mentioned the arbitrator’s authority to rule on procedural matters.

Davies J. considered both of the sources relied on by Applicant for its appeal: Arbitration Act and the JVA agreement to arbitrate.

Arbitration Act – Davies J. acknowledged that sections 45(2) and 46 of the Arbitration Act do mention appeals from “awards” but considered that each of the challenged orders dealt with procedural matters dealing with the conduct of the arbitration.  Because the orders do not resolve any part of the dispute between the parties, they do not constitute awards for the purpose of the Arbitration Act.

[28] The term “award” is not defined in the Arbitration Act. However, that term has been interpreted to mean a judgment or order from an arbitrator that disposes of “all or part of the dispute between the parties.”: Inforica Inc. v. CGI Information Systems, 2009 ONCA 642, at para. 29. Awards are decisions that resolve the substantive issues between the parties. Decisions relating to the conduct of the arbitration are procedural order, not awards: Inforica Inc. v. CGI Information Systems, at para. 29. This understanding of the term “award” is consistent with the goals of promoting the efficiency and finality of commercial arbitrations. As the Court of Appeal noted in Inforica Inc. v. CGI Information Systems, at para. 18, “a significant feature of the modern approach to limiting access to the courts to review decisions of arbitrators is that there are no appeals from procedural or interlocutory orders.”

JVA agreement to arbitrate – Davies J. then turned to consider whether, under the parties’ own agreement to arbitrate, the orders qualified as “awards”.  At para. 31, she reproduced sections of the agreement to arbitrate which spoke to the role of orders and awards.

Motions and Interim Matters

8. The parties agree that the Arbitrator shall rule on all procedural matters arising before the first hearing date. All such matters shall be submitted to the Arbitrator in writing, who shall provide a brief written award within 10 business days of the receipt of the parties’ submissions. No oral hearing shall be permitted, unless specifically requested by the Arbitrator.

9. The Arbitrator shall have authority to give such directions and to issue such orders as to procedural matters as may be fair, just and convenient, including but not limited to directions with respect to adjournments, exclusion of witnesses, disclosure of documents from parties, amendments to claims and defences, and admissibility of evidence.

Decisions Regarding Procedure

10. The Arbitrator shall determine the procedure to be followed in the arbitration in consultation with the parties and their counsel provided that the decision of the Arbitrator in respect of any aspect of the conduct of the arbitration will be final and binding

Rights of Appeal

39. The parties agree that the decision of the Arbitrator is final and binding upon the parties subject to the rights of appeal set out in paragraph 40 below.

40. A party may appeal an award to the Court on a question of law”.

Applicant argued that use of the term “award” at section 8 in reference to motions and interim matters meant that such rulings are awards for the purpose of appeals at section 40.

Davies J. acknowledged that the same word use throughout a contract is, as a general rule, presumed to have the same meaning throughout the contact.  She observed also that “the rule is not absolute” and “the presumption of consistent expression may not apply if the resulting meaning is absurd or commercially unreasonable”.  She turned to Consolidated-Bathurst v. Mutual Boiler, 1979 CanLII 10 (SCC), [1980] 1 SCR 888 pp. 901-902 (a longer excerpt is included here than in the reasons)”

Even apart from the doctrine of contra proferentem as it may be applied in the construction of contracts, the normal rules of construction lead a court to search for an interpretation which, from the whole of the contract, would appear to promote or advance the true intent of the parties at the time of entry into the contract. Consequently, literal meaning should not be applied where to do so would bring about an unrealistic result or a result which would not be contemplated in the commercial atmosphere in which the insurance was contracted. Where words may bear two con­structions, the more reasonable one, that which produces a fair result, must certainly be taken as the interpretation which would promote the inten­tion of the parties. Similarly, an interpretation which defeats the intentions of the parties and their objective in entering into the commercial transaction in the first place should be discarded in favour of an interpretation of the policy which promotes a sensible commercial result. It is trite to observe that an interpretation of an ambiguous contractual provision which would render the endeavour on the part of the insured to obtain insurance protection nugatory, should be avoided. Said another way, the courts should be loath to support a construction which would either enable the insurer to pocket the premium without risk or the insured to achieve a recovery which could neither be sensibly sought nor anticipated at the time of the contract”.

At paras 36-40, Davies J. analysed each of the sections in the JVA agreement to arbitrate, considering not only what each stated on its own but also how each read against the other sections.

“[41] When the agreement is read as a whole, I find that only the final decision of the Arbitrator is subject to a right of appeal and interlocutory, procedural decisions made under paragraphs 8, 9 and 10 are final and binding with no right of appeal. The fact that paragraph 8 says that the arbitrator must provide “a brief written award” in relation to pre-hearing procedural motions does not, in my view, create a right of appeal from those decisions. Notwithstanding the presumption of consistent expression, the term “award” in paragraph 8 should be understood to create an obligation on the Arbitrator to provide written reasons and should not be interpreted in a way that creates a right of appeal from all pre-hearing procedural or interlocutory orders. In my view, such an interpretation would be inconsistent with the overall structure and context of the Arbitration Agreement.

[42] In light of the intentions of the parties, I find that it would also be commercially unreasonable to interpret the Arbitration Agreement in a way that would allow either party to appeal procedural or interlocutory orders, even if those appeals are limited to questions of law. That would allow either party to repeatedly interrupt and delay the arbitration to appeal a procedural decision that did not go in their favour. Having given the Arbitrator authority to decide procedural issues before and during the hearing and having agreed that procedural decisions are final and binding, it would frustrate the parties’ goal of having the Arbitrator finally resolve the dispute in an expeditious and cost-effective manner to allow for interlocutory appeals of procedural decisions”.

Due to her conclusion on the first issue, Davies J. held there was no need to consider the second and third issues.

Davies J. declined to appoint an arbitrator. She indicated that instead she was prepared to issue directions, upon application, if the parties failed to agree on the appointment of an arbitrator.

urbitral notes – First, the reasons appear to entertain the possibility that arbitral parties could grant jurisdiction to a court to hear appeals of interim orders under the Arbitration Act provided that (i) evidence demonstrated the parties’ agreement to such a result and (ii) the parties identified such orders as “awards” eligible for appeal. 

Second, Davies J. wrote that her reasoning rested on the “commercially unreasonable” interpretation given by Applicant to the agreement to arbitrate.  Davies J. did not expressly rule that appeals of interim orders (qualifying as “awards” consistent with (i) and (ii) above) are per se commercially unreasonable or against the Arbitration Act.  Davies J. did not have to address this result since she held that neither (i) or (ii) was present. Despite not addressing the issue directly, her additional comments at para. 42 do tend to favour avoiding similar mischiefs of interruptions and delays.