Ontario – Set-aside application can’t bootstrap appeal– #707

In Tall Ships Development Inc. v. Brockville (City), 2022 ONCA 861, a unanimous Ontario Court of Appeal found the Superior Court committed multiple errors in its review of three arbitral awards under s. 45 and s. 46 of the Arbitration Act, 1991, S.O. 1991, c. 17 (AA). The Court saw no extricable errors of law capable of appeal, only unreviewable findings of mixed fact and law. The Court also identified no breaches of procedural fairness justifying a set aside of the awards. The decision provides important instructions for curial review of arbitral awards, including:  

  • failure to exercise caution in extricating questions of law during contract interpretation leads to the very inefficiencies, delays and added expense that choosing an arbitral process seeks to avoid (para. 3); and 
  • a set aside application cannot be used to bootstrap substantive arguments for an appeal (para. 2). 

Background – The City of Brockville (“Brockville”) and Tall Ships Landing Development Ltd. (“Tall Ships”) entered into contracts, including a brownsfields agreement and a purchase agreement,  to remediate, develop, and sell property on the Brockville waterfront. The development included a mixed residential/commercial condominium tower and a Maritime Discovery Centre (“MDC”). Tall Ships would remediate and develop the property and receive construction manager fees and tax credits. Tall Ships would then sell the property to Brockville, receiving $7,400,000 relating to the design and construction of the approximate 27,000 square foot MDC.  

The completed MDC was approximately 6,000 square feet larger than its design. Brockville refused to pay additional costs of $1,800,000, as it was unaware of excess costs until after substantial completion. Brockville also refused to pay $930,000 for remediation costs as Tall Ships’ invoices were submitted out of time. 

Arbitration Awards: Tall Ships commenced arbitration seeking remediation costs, excess MDC completion costs, and interest. Following a four-week hearing, the arbitrator issued three awards dismissing Tall Ships’ claims. 

First Award: The arbitrator denied Tall Ships’ claims for remediation costs as a result of  its failure to send notices disputing Brockville’s rejection of such costs within a 15-day contractual deadline. The clause provided:

“[I]f [Brockville] gives notice to the Owner of its rejection or partial rejection of the Owner’s request for payment of Actual Rehabilitation Costs (the ‘Rejection Notice’), the Owner shall be conclusively deemed to have accepted the determination of [Brockville] in respect to the elements of cost detailed in the Rejection Notice and have waived and released [Brockville] from any claims in respect thereof unless within fifteen (15) days after receipt of the Rejection Notice, the Owner sends a notice in writing of dispute to [Brockville] (the ‘Dispute Notice’).” 

The arbitrator explained his denial of remediation cost claims on the basis that the dispute notices were not submitted within the requisite time, with reference to the concept of “time of the essence”.

Second Award: The arbitrator did not accept Tall Ships’ cost overrun claims, finding Tall Ships did not keep Brockville informed, despite knowing the project would be much larger and more expensive than originally planned. The arbitrator concluded Tall Ships did not carry out construction manager duties in good faith, repeatedly withheld key information, and acted unreasonably and arbitrarily. The arbitrator further determined Tall Ships had not established unjust enrichment and had failed to show a lack of juristic reason for its loss and Brockville’s enrichment because of their contract. 

Third Award: The arbitrator rejected Tall Ships’ claim for interest on an invoice paid a year after it was submitted. Tall Ships did not advise Brockville that it would be claiming interest on the invoice until it was sought in its statement of claim―the arbitrator determined that the claim for interest was estopped.

Ontario Superior Court decision: In Tall Ships Landing Devt. Inc. v. City of Brockville 2019 ONSC 6597, Justice Gomery overturned each award on the basis of multiple errors of law and violations of procedural fairness. Several of the primary errors identified by Justice Gomery are reviewed in this Case Note. For additional background, see Arbitration Matters Case Note: Ontario – reliance on theories not pleaded/argued are errors and have ripple effects throughout award – #274 – Arbitration Matters

First Award: Justice Gomery found the arbitrator erred by inferring a “time of the essence” clause in the brownfields agreement:

“[33]  The Arbitrator’s reasoning is problematic because it hinged on a contractual interpretation that was neither advanced nor argued. The City did not allege, in its statement of defence, that the parties agreed that time was of the essence in the performance of their obligations under the Brownfields Agreement or, more specifically, in Tall Ships’ response to a Rejection Notice under clause 22.3(d). As already mentioned, 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.”

To rely on a legal theory not argued was both an error of law and procedurally unfair; Justice Gomery set aside the first award.  

Second Award: Justice Gomery set aside the award concerning liability for MDC cost overruns on the basis that the arbitrator implied terms in Tall Ships’ responsibilities as construction manager, contrary to express terms of the purchase agreement. She found that this error led the arbitrator to conclude Tall Ships failed to advise Brockville on the budget implication of proposed design changes, resulting in Tall Ships’ liability for the overruns. Justice Gomery again ruled that this legal theory had not been argued, justifying correction under both the appeal and set aside provisions of the AA.

Third Award: Justice Gomery overturned the arbitrator’s ruling that Tall Ships was estopped from claiming interest on a remediation invoice:

“[160] …In my view, the Arbitrator’s rejection of the interest claim on the basis of a defence that was never raised or argued was fundamentally unfair. It is therefore another reversible error. I furthermore conclude that the Arbitrator’s decision that the City had pleaded material allegations that could support such a defence was manifestly unreasonable.

[173] …The material facts giving rise to an estoppel claim were not alleged, and in fact a finding of estoppel was incompatible with the facts as alleged. Tall Ships accordingly was deprived on knowing the case it had to meet. As I have already found, such an error amounts to an error of law and ground for intervention under ss. 45 and 46 of the Arbitration Act.”

Ontario Court of Appeal decision: Justice Harvison Young (Doherty and Huscroft JJ.A concurring) restored the arbitral awards and provided reminders on the limits of court review of arbitral awards on appeal and set aside applications:

“[16]  … judges should not be too ready to characterize particular issues as issues of law because doing so may render the point of consensual arbitration nugatory is of particular importance when, as here, the impugned terms form a relatively small part of a large and complex arbitration decision ….”

First Award: The Court of Appeal denied that the arbitrator implied “time of the essence” as a term of contract:

“[44]  … it is in my view neither a fair, nor reasonable interpretation of his reasons in rejecting the claim to say that it was based on implying a ‘time is of the essence’ clause into the contract. … The application judge’s error in interpretation arose largely out of a failure to consider the arbitrator’s reasons as a whole and failing to consider the factual matrix.

[48]  …The term ‘time of the essence’ does not form an essential aspect of the arbitrator’s interpretation of the contract and means no more than that Tall Ships was obliged to dispute the determinations refusals within 15 days. The parties made full arguments on the point.

[49]  This was a question of mixed fact and law which fell squarely within the purview of the arbitrator, by which process the parties had chosen to resolve this dispute, with appeals on questions of law only.” [emphasis in original]

Second Award: The Court of Appeal identified a similar mistake in Justice Gomery’s consideration of Tall Ships’ responsibilities as construction manager and liability for cost overruns:

“[72] …It is clear in his reasons that he found that Tall Ships was not simply a construction manager. In reaching his conclusions, he considered the contract as a whole within the context of the project as a whole. This was not a question of law, but a question of mixed fact and law, which according to the parties’ Arbitration Agreement, was not subject to appeal.

[81]  With respect to the application judge, I do not agree that these obligations arose out of ‘implied terms’ which were neither pleaded nor argued and were thus unfair to Tall Ships. Rather, it arose from the interpretation of the contract as a whole and was a matter of mixed fact and law. As I stated above with respect to the claim for remediation expenses, the arbitrator did precisely what he was asked to do: he interpreted the contract as a whole, within its relatively complex factual matrix of the agreements and relationships in play….

[82]  In addition, I see no basis for any argument of procedural unfairness to Tall Ships….He found the facts largely in favour of Brockville and interpreted the [purchase agreement] as the parties agreed he should do. The conclusion that the procedural rights of Tall Ships were violated because the ‘implied terms’ were neither pleaded nor argued is bootstrapped by the erroneous finding that these were ‘implied terms’ that the arbitrator had erred in interpreting to be part of the contract.”

Third Award: On similar reasoning, the Court of Appeal confirmed the arbitrator’s rejection of the interest claim and related estoppel conclusion: 

“[94] … despite the fact that the word ‘estoppel’ did not appear in its pleading, the substance of Brockville’s pleading was that Tall Ships resiled from an oral agreement that it would abandon its claims in exchange for $315,000, an amount which Brockville paid. The arbitrator made specific findings of fact that supported his determination that Brockville had pled sufficient material facts in support of estoppel….

[95]  It is again worth repeating, that this was a question of mixed fact and law, not subject to appeal under s. 45. It also bears repeating that s. 46 of the Arbitration Act cannot be used as a broad appeal route to bootstrap substantive arguments attacking an arbitrator’s findings which the parties had agreed would be immune from appeal. Here, the parties agreed to settle the claim for the MDC Exclusions with the payment of $315,000. There was no material surprise or unfairness to Tall Ships and the applications judge’s conclusion that the arbitrator’s decision was manifestly unfair cannot stand.”

Contributor’s Note: 

This case has similarities to the landmark decision Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 , where the Supreme Court of Canada had a markedly different view than two separate panels of the British Columbia Court of Appeal as to whether an arbitrator had carried out their mandate properly. Like Sattva, the subject decision turns on jurisdiction: the court could only review narrowly for extricable questions of law. Tall Ships and Brockville could have agreed to appeal questions of mixed fact and law, which would have given the court appeal jurisdiction. This is unlike Sattva: British Columbia’s arbitration legislation, previous and current, does not permit any appeal of questions of mixed fact and law other than in the family law context. 

Here, the parties agreed to appeals on questions of law only. This avoided the delay and expense of the leave stage. Arguably however, this removed the filtering quality of the leave to appeal requirements, explained in detail by the Supreme Court of Canada in Teal Cedar Products Ltd. v. British Columbia, 2017 SCC 32. Without the rigorous focus that ought to be applied at the leave stage―establishing whether an extricable question of law has even been raised―there is a risk that a reviewing court may engage in a detailed evaluation of the merits, without jurisdiction.

This danger can be enhanced by “bootstrapping” procedural fairness complaints in a set aside application to support an appeal on questions of law, as the Court of Appeal recognized. The “bootstrapping” problem identified by the Court of Appeal was addressed in s. 58 and s. 59 of British Columbia’s current Arbitration Act, SBC, 2020, c 2. Appeals are now directly sent to the BC Court of Appeal, whereas set aside applications commence at the BC Supreme Court.