Are Commercial Arbitration Awards Immune from Judicial Scrutiny?

Sophisticated commercial parties may arbitrate their disputes for a number of reasons.  Under Ontario’s Arbitration Act, R.S.O. 1990, c.17 (the “Act”), one of them is to protect the finality of the arbitrator’s award. This goal is achieved by agreeing to limit the parties’ right to appeal the award to the Courts. Where an appeal is available, judges respect the parties’ choice to arbitrate and show deference to the arbitral award.

But where, in the Court’s view, the arbitrator makes a fundamental legal error, is the policy of judicial deference warranted? A recent decision of the Ontario Superior Court, Tall Ships Landing Development Inc. v. Brockville (City), 2019 ONSC 6597, suggests not.

Of Waterfronts and Development

Tall Ships involved a project to develop property acquired by the appellant developer on the Brockville waterfront. The property was to be transformed into a mixed condominium tower and maritime discovery centre (“MDC”). 

In a number of agreements with the City of Brockville (the “City”), the developer agreed to remediate the property and assume a number of roles in the construction of the MDC. The City then promised that the developer would qualify for tax credits based on the costs of remediation. The City further agreed that the developer would receive compensation for its work as a construction manager.

After the MDC was constructed, the developer would sell the structure to the City. The City would also pay the equivalent of the construction budget for the MDC, as well as fit-ups and exclusions.

In the end, the MDC turned out to be a more expensive project than anticipated. 

Once the developer sold the MDC to the City, it submitted various claims for payment.  These included claims for remediation, compensation for additional construction costs, and interest.

Upon refusal or delay by the City to make certain of these payments, the developer submitted the matter to arbitration as agreed to by the parties. 

In three separate awards, the Arbitrator dismissed the developer’s claims. 

The developer appealed the arbitrator’s rulings arguing, amongst other things, that the Arbitrator based his decisions on arguments and legal theories that the City had not advanced in arbitration. The developer argued that, in so doing, the Arbitrator committed an error of law.

The parties had agreed to a right to appeal the Arbitrator’s decision on questions of law pursuant to section 45(2) of the Act, as well as pursuant to procedural fairness grounds under section 46.

On appeal, the Court agreed with the developer’s position in part.

Amongst other rulings, the Court held that the arbitrator’s finding of an implied “time is of the essence” term in the agreement between the developer and the City, in addition to the Arbitrator’s failure to provide meaningful reasons for certain decisions, amounted to errors of law justifying appellate intervention.

Errors of Law Can and Do Exist

The Court observed that arbitrator’s awards on appeal are typically entitled to deference and assessed on a reasonableness standard of review. 

However, as identified by the Supreme Court of Canada in its leading decision, Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, that deference may be supplanted in rare circumstances, where there are questions of law that would attract the less deferential correctness standard of review. These “rare” questions include constitutional matters or issues of law that are of “central importance to the legal system as a whole and outside the adjudicator’s expertise”. 

In this case, the Court noted that the Arbitrator’s introduction of a novel legal theory not pleaded or argued by the parties amounted to a clear error of law. The Arbitrator implied a “time is of the essence” term into one of the parties’ agreements even though this argument was never pleaded or argued by the City.

The Court recognized the importance of deference to the arbitrator’s decision. However, these principles must yield to basic notions of procedural fairness. In other words, where the Arbitrator has committed an error of law, the arbitral award is not immune from judicial scrutiny:

Deference to arbitral decisions is based on a desire for efficiency and finality…Courts must recognize that arbitral decisions are the product of choices that the parties have made, both in agreeing to submit a dispute to arbitration and in selecting a particular arbitrator…

The need for deference does not however displace the imperatives of fairness and reliability that underpin any legitimate dispute resolution process. By submitting their dispute to the Arbitrator, the parties granted him the discretion to exercise discretion in procedural issues. They 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.

Similarly, the Arbitrator’s failure to consider certain aspects of the City’s argument as to why the developer’s claims were statute-barred amounted to errors of law requiring the Court’s intervention. 

According to the Court, the Arbitrator’s failure to provide “any meaningful reasons for the rejection of [the developer’s] limitation argument”. The Arbitrator did not indicate that he had “turned his mind to the discoverability issue”. This undermined the fairness of the arbitral process and such an error could be set aside pursuant to the procedural fairness provisions under section 46(1)7 of the Act.

No Immunity from Judicial Review

The point of Tall Ships is clear. Ontario Courts will respect commercial arbitral awards in order to preserve the principles of finality, efficiency and the parties’ choice of arbitration.

However, where an arbitrator commits fundamental errors of law and basic notions of procedural fairness are compromised, the Courts have a duty to intervene on appeal. Deference necessarily yields to the rule of law.