In Tall Ships Landing Devt. Inc. v. City of Brockville, 2019 ONSC 6597, Madam Justice Sally Gomery held that deference for arbitrators and discretion over procedural matters do not displace the imperatives of fairness and reliability which underpin arbitration. Despite a standard of reasonableness applicable to commercial arbitration awards, reliance on a legal theory not advanced or argued by the parties is an error of law and leads to conclusions outside the arbitrator’s mandate. Errors early in the award undermined later, otherwise reasonable determinations made in the same award but which rested on those earlier determinations. Rather than vary, set aside or remit the awards with directions, Gomery J. solicited submissions to determine the appropriate remedy at a future hearing.
The disputes stemmed from a significant, mixed residential/commercial condominium tower and attraction developed on waterfront property owned by Tall Ships Landing Development Ltd. (“Tall Ships”) and later sold by it to the City of Brockville (“City”). Prior to that sale and further to a series of agreements, Tall Ships undertook to remediate the site and to perform various roles regarding construction on it. In exchange for those pre-sale remediation and construction services, the City agreed that Tall Ships would qualify for tax credits on its remediation costs and earn a fee for its services as construction manager.
By March 9, 2011 purchase agreement (“Purchase Agreement”), Tall Ships sold its interest in the site to the City. The Purchase Agreement provided that all disputes would submitted for binding arbitration before a single arbitrator and that the award would “not be subject to appeal by any party other than on a question of law in accordance with Subsection 45(2) of the Arbitration Act, 1991 [SO 1991, c 17] or pursuant to a specific ground for appeal or for setting aside the arbitrator’s award pursuant to Section 46 of the Arbitration Act, 1991”.
The project exceeded expected the scope and costs foreseen by Tall Ships and the City and, after the March 2016 sale of the site to the City, Tall Ships submitted three (3) categories of claims. The City refused those claims and Tall Ships submitted them to arbitration which resulted three (3) awards (“Awards”):
(i) September 5, 2018 award (“Award #1”) – arbitrator rejected Tall Ships’ claim for remediation costs under a brownfields agreement with the City executed in November 2007 (the “Brownfields Agreement”) – see paras 13-75 of the reasons;
(ii) December 4, 2018 award (“Award #2”) – arbitrator rejected Tall Ships’ claim for $1,839,991.08 in additional construction costs – see paras 76-138 of the reasons; and,
(iii) February 11, 2019 award (“Award #3”) – arbitrator rejected Tall Ships’ claim for interest on an invoice that the City paid a year after it was submitted – see paras 139-179 of the reasons.
Tall Ships appealed the awards, relying on sections 45(2) and 46(1) of the Arbitration Act. It appealed as of right on questions of law because the Purchase Agreement allowed it to do so and argued that the awards should be set aside under section 46. In particular, Tall Ships submitted that the Awards should be set aside under (a) section 46(1)6 because Tall Ships was not treated equally and fairly, was not given an opportunity to present a case or to respond to another party’s case and (b) section 46(1)7 because the procedures followed in the arbitration did not comply with the Arbitration Act.
Prior to considering each of the Awards in turn, Gomery J. first identified the legal framework applicable to appeals and the standard of review of commercial arbitration awards subject to provincial arbitration legislation such as the Arbitration Act.
Relying on Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 (CanLII), [2014] 2 SCR 633, Gomery J. stated that she would apply a reasonableness standard and that it is only in “rare circumstances” that a correctness standard would apply.
“[75] Assessing whether the issue raised by an application for leave to appeal has arguable merit must be done in light of the standard of review on which the merits of the appeal will be judged. This requires a preliminary assessment of the applicable standard of review. As I will later explain, reasonableness will almost always apply to commercial arbitrations conducted pursuant to the AA, except in the rare circumstances where the question is one that would attract a correctness standard, such as a constitutional question or a question of law of central importance to the legal system as a whole and outside the adjudicator’s expertise. Therefore, the leave inquiry will ordinarily ask whether there is any arguable merit to the position that the arbitrator’s decision on the question at issue is unreasonable, keeping in mind that the decision-maker is not required to refer to all the arguments, provisions or jurisprudence or to make specific findings on each constituent element, for the decision to be reasonable (Newfoundland and Labrador Nurses’ Union v. Newfoundland and Labrador (Treasury Board), 2011 SCC 62, [2011] 3 S.C.R. 708, at para. 16). Of course, the leave court’s assessment of the standard of review is only preliminary and does not bind the court which considers the merits of the appeal. As such, this should not be taken as an invitation to engage in extensive arguments or analysis about the standard of review at the leave stage.”
As a closing remark on the rarity of such circumstances, Gomery J. pointed to the Ontario Court of Appeal’s recent decision in Tomec v. Economical Mutual Insurance Company, 2019 ONCA 882, which at para. 22, noted that the Supreme Court had found the correctness standard to apply in only two (2) cases: Mouvement laique Quebecois v. Saguenay (City), 2015 SCC 16, [2015] 2 S.C.R. 3; and, Alberta (Information and Privacy Commissioner) v. University of Calgary, 2016 SCC 53, [2016] 2 S.C.R. 55.
The courts consider that an award is “reasonable”, Gomery J. wrote, if “it is justified, transparent, intelligible, and figures within the range of possible, acceptable outcomes in respect of the facts and applicable law”. She referred to Teal Cedar Products Ltd. v. British Columbia, 2017 SCC 32 (CanLII), [2017] 1 SCR 688, para. 84 which relied also on the earlier Dunsmuir v. New Brunswick, 2008 SCC 9 (CanLII), [2008] 1 SCR 190.
For each of the Awards, Gomery J. applied the same structure. She identified the key underlying facts related to the ground of appeal, summarized the arbitrator’s award in that regards, the grounds for appeal, her analysis and conclusions. For each of the Awards, she looked deeper into the broader legal framework sketched at paras 6-11. In each, she reserved remedies for the close of her reasons at paras 180-189.
The issues and related facts are complex and, together, they create specific matrixes against which the reasoning in the Awards would be measured. Gomery J.’s concise analysis of each of the Awards resists unnecessary paraphrasing. Instead of addressing each of her analyses on each of the Awards, this note identifies key principles reiterated and applied across her analysis.
(A) reliance on a theory of law not advanced or argued – paras 29-50. 91-98, 148-157, 158-173
The arbitrator’s interpretation of a specific clause in the Brownsfield Agreement rested on his finding of an implied “time is of the essence” term, a theory never pleaded or argued by the City. The arbitrator stated that the parties “explicitly” chose to make time of the essence but Gomery J. determined that there was in fact no “time is of the essence” clause in the Purchase Agreement.
The arbitrator’s reliance on “time is of the essence” was critical to his conclusion that Tall Ship, by its inaction, had lost its rights to contest the City’s non-acceptance of Tall Ships’ remediation claims. His conclusion was at odds with his acknowledgement that there was no explicit time frame against which Tall Ships had to act. Gomery J. held that the arbitrator’s reasoning of the loss of rights was “problematic” because “it hinged on a contractual interpretation that was neither advanced nor argued”.
Gomery J. listed the moments in the procedure at which the issue of a “time is of the essence” argument could have been raised and noted that, at each, the issue had not been raised. In addition to not being in the City’s defense, “there is no reference to time being of the essence in the Agreement itself. The point was not raised in written or oral argument to the Arbitrator, nor did he ask the parties, before reaching his decision, for additional submissions on this point”.
Gomery J. flagged instances in which parties may omit to address an issue but distinguished between one which “uncontroversial or minor” and another which is a “lynchpin for the disposition”.
Reliance on a theory not pleaded or argued was neither reasonable nor fair. Rodaro v. Royal Bank of Canada, 2002 CanLII 41834 (ON CA) para. 61 and Moore v. Sweet, 2017 ONCA 182 para. 46. It was an error of law justifying the court’s intervention under section 45(2) of the Arbitration Act and a violation of Tall Ship’s procedural rights giving rise to the court’s intervention under section 46(1).
In addition to being unfair, Gomery J. noted the additional critique, made in Rodaro v. Royal Bank of Canada, that a decision based on a theory not advanced by the parties is also “inherently unreliable”. Citing from Rodaro v. Royal Bank of Canada, Gomery J. included this passage:
“We rely on the adversarial process to get at the truth. That process assumes that the truth best emerges after a full and vigorous competition amongst the various opposing parties. A theory of liability that emerges for the first time in the reasons for judgment is never tested in the crucible of the adversarial process.”
Despite having identified reasonableness as the standard of review, at para. 40 Gomery J. then introduces the standard for determining compliance with procedural fairness and stating that the standard is correctness. She refers to Mission Institution v. Khela, 2014 SCC 24 (CanLII), [2014] 1 SCR 502 but also added a mention of Eagle’s Nest Youth Ranch Inc. v. Corman Park (Rural Municipality #344), 2016 SKCA 20, citing the latter as saying that use of the term “correctness” in the context of procedural fairness was “awkward”.
Gomery J. relied on the Arbitration Act as well.
“[42] Based on the provisions of the Arbitration Act as well as fundamental principles of fairness, it was not open to the Arbitrator to determine a central issue based on an implied “time is of the essence” term, when such an interpretation was neither pleaded nor argued. Applying the correctness standard, I find that this was a reviewable error under s. 46(1) of the Act.”
She added also:
“[44] In my view, the Arbitrator’s error is a reviewable legal error, because his recourse to a legal theory that was not advanced or argued was clearly unreasonable.”
In closing, Gomery J. also held her conclusions up against the oft-cited need for deference and discretion in procedural matters given to arbitrators. Acknowledging the existence of both deference and discretion, Gomery J. held that these did not “displace the imperatives of fairness and reliability that underline any legitimate dispute resolution process”.
By concluding that such errors “fell outside the scope of this foreseeable mandate”, Gomery J. demonstrated that such errors could be seen as, if not were, jurisdictional in nature.
“[The parties] did not grant him carte blanche to make decisions grounded in legal theory or positions that they did not advance and that they never had the chance to address. Deciding otherwise would fly in the face of the imperative provisions of the Arbitration Act”.
Gomery J. applied the same reasoning to Award #2 and Award #3 and determined that those Awards also reflected similar errors when making determinations on theories not argued.
(B) failure to address discoverability and to provide reasons – paras 51-61
Tall Ships argued that the arbitrator did not address a key argument regarding a limitation period or make a finding about when a claim for remediation would have been discoverable. The City countered, submitting that the arbitrator did not need to elaborate on the issue because his conclusions on that issue “were self-evident”. Gomery J. disagreed.
She reiterated that inadequacy of reasons is not, in itself, a basis for quashing an arbitral award, citing Newfoundland and Labrador Nurses’ Union v. Newfoundland and Labrador (Treasury Board), 2011 SCC 62 (CanLII), [2011] 3 SCR 708 para. 14. See also para. 16:
“[16] Reasons may not include all the arguments, statutory provisions, jurisprudence or other details the reviewing judge would have preferred, but that does not impugn the validity of either the reasons or the result under a reasonableness analysis. A decision-maker is not required to make an explicit finding on each constituent element, however subordinate, leading to its final conclusion (Service Employees’ International Union, Local No. 333 v. Nipawin District Staff Nurses Assn., 1973 CanLII 191 (SCC), [1975] 1 S.C.R. 382, at p. 391). In other words, if the reasons allow the reviewing court to understand why the tribunal made its decision and permit it to determine whether the conclusion is within the range of acceptable outcomes, the [Dunsmuir v. New Brunswick, 2008 SCC 9 (CanLII), [2008] 1 SCR 190] criteria are met.”
Section 38(1) of the Arbitration Act had to read in light of the role of reasons, as explained in that case and ask whether “the reasons allow the reviewing court to understand why the tribunal made its decision and permit it to determine whether the conclusion is within the range of acceptable outcomes”.
Her examination of the arbitrator’s reasons lead her to determine that “[t]here is nothing in the reasons, however, that allows me to understand, or even speculate, as to why the Arbitrator concluded that the claims were discoverable at that time”.
The reasons “failed to provide any meaningful reasons for the rejection” and “there is nothing to indicate that he turned his mind to the discoverability issue”.
The silence or the omission was “not a mere technical noncompliance” with the Arbitration Act “but an error which undermines the fairness of the arbitral process and the ability of the court to ascertain whether the Arbitrator’s award falls within the range of reasonable outcomes”.
Gomery J.’s determination on challenges made against the above noted errors had a knock-on effect on other issues later considered. For example, an error in applying the theory of the implied term of “time is of the essence” later impacted on the determination of Tall Ships’ duty to inform the City of design changes (paras 121, 136-137) and duty to disclose (see para. 156) and an error in interpreting the contract affected a later estoppel argument (see para. 177).
In the balance of her reasons, Gomery J. addressed further arguments raised by Tall Ships, granting most but denying some. For example, she held that two (2) alleged errors were not errors meriting review because they fell within the range of possible outcomes. See paras 70 and 72-73. Despite these findings in regarding to Award #1, the appeal was granted in regard to Award #1 for the errors already identified.
In the balance of her reasons, Gomery J. also considered : (C) extricable error of law – paras 99-121; (D) applying doctrine of good faith to a contractual obligation which should not have been implied – paras 123-137; (E) reasonable interpretation of contracts and legal theories – paras 62-74; and (F) error in law in interpreting contract taints conclusion based on that interpretation – paras 175-177
Remedies – Gomery J. consolidated consideration of remedies for all the Awards into a single approach addressed at paras 180-189. She was alert to the arguments for and against different interventions. Tall Ships sought an order varying them or setting them aside or, in the alternative, to remit them to the arbitrator for reconsideration on directions given. The City submitted that the court should not vary or reverse them but remit them with directions to the same arbitrator so that he could clarify his reasons and, if necessary, revise the conclusions.
Gomery J. disagreed with the City that the arbitrator would have reached the same conclusions in the absence of the errors she held had been committed.
“[186] I do not accept the City’s argument that, given his findings of fact, the Arbitrator would have reached the same result in the Awards in the absence of the errors that have been identified in this decision. In all three Awards, the outcome turned on theories of the case that had not been pleaded or argued. The Arbitrator also misdirected himself with respect to legal principles integral to his conclusions.”
Having said that, Gomery J. also did not accept that she could vary the Awards. “The Arbitrator’s errors were not trivial. They had a clear impact on the outcome of the arbitration. The Awards therefore cannot stand. I am not however in a position to vary the Awards.”
Counsel agreed that, if she were to determine that the arbitrator had made serious, reversible errors, she should and did solicit further submissions on the appropriate remedy. The reasons close with a confirmation that such submissions were to be filed and a hearing on the remedy would be held at a later date.
urbitral note – First, the reasons assert that in general the standard of review will be reasonableness but, on fairness, the standard applied is correctness. The appeal is subject to reasonableness standard provided that the errors are not fairness. Gomery J. does note at para. 49 that reliance on theories not argued is an error of law. As such, it is subject to a correctness standard. Sometimes, there is overlap, if only in phrasing a determination. For example, Gomery J. does say, at para. 49 regarding the interpretation of the Brownsfields Agreement, that some errors are “neither reasonable nor fair”.
Second, the reasons demonstrate that an award can resist exacting challenges on some grounds but still fall due to other, serious grounds.
Third, the Awards were detailed and extensive but Gomery J. held that a weakness early in part of the reasons rippled into other conclusions which rested on that earlier weakness. Though the latter/later determinations may have been “reasonable” on their face, they were not “correct” due to their reliance on earlier breaches of fairness such as relying on theories not pleaded.
Fourth, while the court has options to remedy awards which contain errors, Gomery J. was careful not to undermine the entire arbitral process without hearing the parties on the appropriate remedy in light of her released reasons. Despite having the options, Gomery J. demonstrated care to the arbitral process and to the parties to see what could be done in the circumstances. She expressly noted at para. 185 that, in her choice of remedies, “I must therefore consider the principles of efficiency, cost-effectiveness and fairness to the parties in determining the appropriate remedy”. Her restraint underlines the courts’ support of arbitration and the need to think of the parties’ interests before applying a remedy in blunt fashion.
Fifth, Gomery J. carefully reviewed the rules applicable to an arbitrator relying on theories not pleaded or argued and held at para. 44 that such errors are errors of law. Her review suggested that the errors resembled or amounted to errors of jurisdictions when she wrote that such errors “fell outside the scope of this foreseeable mandate”. This phrasing introduced an analysis based on jurisdiction and not just fairness.