In Tehama Group Inc. v. Pythian Services Inc, 2025 ONSC 4134, the Court denied an application to set aside an international award on the basis of alleged procedural flaws in an accounting arbitration to resolve a dispute about whether a purchase price adjustment payment was owing to the seller of a business. The Court reviewed the terms of the parties’ bespoke arbitration agreement and the arbitral award and concluded that the specialist arbitrator, an accounting firm, had followed the summary dispute resolution process to which the parties had agreed. The Court ruled there was no breach of natural justice. Instead, the parties got the process they bargained for: “determinations strictly from a financial accounting perspective” and not “legal guidance or opinion [or] legal interpretation.”
Background – Pythian Services Inc. and Pythian Services USA Inc. (“Pythian”) acquired the service business of Ontario-based Tehama Group Inc. (“Tehama”). The parties’ asset purchase agreement (“APA”) provided that if the business achieved earnings of US$11 million in the year after closing, Pythian would be required to pay Tehama an earnout sum of US$10 million. Pythian subsequently determined that the earnings in the subject year were US$10.72 million. Therefore, no purchase price adjustment payment was owing.
Tehama disputed the earnings total and earnout entitlement on several grounds.
The APA provided for highly accelerated final and binding resolution of purchase price adjustment disputes by an accounting firm. The parties engaged a major accounting firm to arbitrate. The accounting firm (“the Arbitrator”) confirmed Pythian’s calculations.
Tehama applied to the Ontario Superior Court of Justice to set aside the Arbitrator’s award under Article 34 of the International Commercial Arbitration Act, 2017, S.O. 2017, c. 2, Sched. 5. Tehama maintained that the process followed by the Arbitrator was contrary to the parties’ agreement or violated the principles of natural justice.
Key Dispute Resolution Terms – Pythian and Tehama agreed on the following process:
“…the Accounting Firm (i) shall make its final determination on all matters within thirty (30) days of its appointment, (ii) shall not hold any hearings, (iii) shall not have any ex parte communications with Purchasers or any of the Seller Parties, (iv) shall not be entitled to take or order the taking of depositions or other testimony under oath […].
The final determination by the Accounting Firm of the matters submitted to it[…]shall: (i) be in writing; (ii) include the Accounting Firm’s calculation of the Adjustment Amount; (iii) include the Accounting Firm’s determination of each matter submitted to it […]; (iv) include the fees and expenses allocation[…]; and (v) include a brief summary of the Accounting Firm’s reasons for its determination of each issue.
[…]The determinations of the Accounting Firm shall be final and binding, absent fraud, bad faith or manifest error.”
The Arbitrator’s engagement letter included the following:
“The Arbitrator’s role is to make a final and binding determination as to the appropriate accounting treatment for each of the Disputed Items under the terms of the APA.
The Arbitrator may ask further questions or seek further clarification of the parties to the APA with respect to the determination of the Disputed Items…
[The Arbitrator] will provide its determinations strictly from a financial accounting perspective. It does not purport to offer legal guidance or opinion, including as to the legal interpretation of any contract.”
The arbitration was conducted in writing pursuant to a “shotgun process”: initial submissions provided by both parties on the same day with replies exchanged twenty days later. The Arbitrator was allowed to ask questions, which it did.
Tehama disputed three primary items: interest, rent expenses, and several charges and costs. Resolution of any of the disputed items in Tehama’s favour would result in the purchase price adjustment being payable.
The Arbitrator ruled against Tehama on each disputed item.
Tehama applied to set aside the Award, alleging breaches of the parties’ agreement and violations of the principles of natural justice.
Superior Court decision – The Court directed itself to key principles in set aside cases where process failures are alleged:
- “The onus on a party seeking to set aside an arbitral award on the basis of a failure of due process, is high.” All Communications Network of Canada v. Planet Energy Corp., 2023 ONCA 319, at para. 42.
- “To justify setting aside an award under that provision for reasons of fairness or natural justice, the conduct of the Tribunal must be sufficiently serious to offend our most basic notions of morality and justice.” Vento Motorcycles, Inc. v. United Mexican States, 2023 ONSC 5964, at para. 61.
- “Even where there has been a ‘significant’ procedural breach, the court may still exercise its discretion not to set aside the award”: Popack v. Lipszyc, 2015 ONSC 3460, paras. 63 and 73, aff’d 2016 ONCA 135.
The Court considered four breaches of procedural fairness and natural justice alleged by Tehama:
Alleged breach # 1: Permitting the filing of sworn testimony on issues not included in Pythian’s initial submissions, without allowing Tehama to respond.
Court ruling: The sworn testimony was permissible reply evidence, which addressed allegations Tehama made in its initial submissions.
Alleged breach # 2: Not giving Tehama an opportunity to respond to disputed items.
Court ruling: The agreed-to process was followed: simultaneous exchanges of initial submissions, followed by reply and responses to questions from the Arbitrator. There was no provision for a further response, i.e. a sur-reply.
Alleged breach #3: Failing to provide reasons.
Court ruling: The parties specified that the Arbitrator was to provide “a brief summary of the Accounting Firms’ determination of each issue.” The Arbitrator delivered a lengthy set of reasons (56 pages) that was more than ‘brief’ addressing the issues as required in the APA and the Engagement Letter.
Alleged breach # 4: Relying on a new theory and a contractual provision not argued to amortize rather than deduct rent expenses.
Court ruling: The Arbitrator made its amortization determination based on the submissions of the parties and provisions of the APA. The contractual provision in question was not a new theory and was referenced in another section of the APA referred to by Tehama in its submissions.
The Court concluded:
“[74] For each of the above alleged breaches, I have determined that there was no breach of natural justice. Had I found that any of the above had been breaches of natural justice, I would have exercised my discretion not to set aside the award. In this case, the language in the APA, the expertise of the Arbitrator, and the summary procedure chosen by the parties are relevant considerations that would sway my decision to not set aside the award.
[75] The parties in this case chose final and binding arbitration by a technical, non-lawyer, subject matter expert. The Arbitrator they selected had specific accounting expertise, which was necessary for the task. The Arbitrator is entitled to considerable deference…”.
First, this decision followed Pythian’s unsuccessful attempt to stay the Ontario set-aside application on the basis that New York courts had jurisdiction. In Tehama Group Inc. v. Pythian Services Inc., 2024 ONSC 1819, the Court ruled that disputes arising out of purchase price adjustments and contingent payments were excepted from the general choice of forum provisions in the APA. See Arbitration Matters Case Note: Ontario – Court can hear set aside despite NY forum selection clause – #837.
Second, the Court queried whether the matter was, indeed, an arbitration rather than an expert determination, given that an accounting firm acted as arbitrator. The parties agreed that the dispute was an accounting arbitration. In contrast, in Elad Canada Operations Inc. v. Rester Ontario Investments Inc., 2022 ONSC 2327, the parties expressly agreed that an independent accountant was “acting as an expert and not an arbitrator”. See Arbitration Matters Case Note: Ontario- Powers of Independent Accountant – #622.
Third, Model Law legislation like Ontario’s International Commercial Arbitration Act, afford parties wide latitude in their process decisions. For instance, as here, they can agree to dispense with oral hearings: Article 24. There is no requirement that arbitrators be lawyers. Parties are not obliged to resolve disputes by law: Article 28.
This case confirms existing Ontario jurisprudence, consistent with other Model Law jurisdictions: it is hard to succeed in set-aside applications for process flaws. Further, given that parties are allowed procedural flexibility, expect a reviewing court to closely scrutinize procedural choices the parties made and hold them to their agreement. The Court did so:
“[72]…the parties decided to retain an accounting firm to determine these disputes. The fact that the accounting firm determined that it did not need to go back to the parties to decide these issues does not result in a breach of natural justice. The parties retained an accounting firm with expertise in accounting, and that is what they got. If they had wanted a legally trained arbitrator, well versed in every aspect of legal procedure, they could have bargained instead for that. But they did not.”