Two Key Lessons When Appealing Arbitration Awards

Commercial parties choose arbitration to avoid litigating disputes.   

By design, contractual arbitration clauses set the “ground rules” by which the parties seek to divorce their claims from the civil litigation system. All things being equal, commercial arbitration promotes efficiency, confidentiality and the speedy administration of justice.

For these reasons, Canadian Courts have shown a consistent antipathy towards hearing appeals of commercial arbitration awards, particularly where such appeals are limited to questions of law.

A recent decision of the Ontario Court of Appeal, Tall Ships Development Inc. v. Brockville (City), 2022 ONCA 5516 (“Tall Ships”), illustrates the Court’s reluctance to get involved in appeals from arbitral awards where the parties codified limited appeal rights in their agreement.

 A Revitalization Project Goes to Arbitration

The facts of Tall Ships are set out in the December 2019 edition of Torkin Manes’ LegalWatch, which canvassed the original decision of the Ontario Superior Court, subsequently appealed to the Court of Appeal.

Tall Ships arose out of a series of contracts relating to the development and remediation of a waterfront property, owned by Tall Ships, in Brockville, Ontario (the “Project”).  The appellant, Tall Ships, agreed to assume aspects of the construction of a maritime discovery centre. 

Following the completion of the Project, Tall Ships would convey the property to the City of Brockville pursuant to the Public Private Partnership Agreement between the parties. The City, in turn, offered Tall Ships a series of tax credits and fees for Tall Ships’ work as a construction manager.

Following the conveyance of the property to the City in 2016, a number of disputes arose under the agreement;  these disputes related generally to the price for the property to be paid to Tall Ships by the City, the City’s refusal to pay certain remediation costs, and interest on various invoices issued.

Pursuant to their agreements, the parties submitted the disputes to arbitration. The parties had already agreed that only questions of law were appealable to the Courts following arbitration.

After a four-week hearing, the arbitrator issued three awards and dismissed Tall Ships’ claims for remediation costs, held that Tall Ships was responsible for cost overruns, and denied Tall Ships’ claim for interest.

On appeal to the Ontario Superior Court, the application judge reversed the arbitrator’s awards, set them aside and ordered that a new arbitrator be appointed for reconsideration of the decision.

On further appeal to the Court of Appeal, the Court reversed the application judge’s decision. 

The Court of Appeal held that none of the purported errors by the arbitrator amounted to questions of law or constituted breaches of procedural fairness.

In upholding the awards of the arbitrator, the Court established two important principles about the nature of appeals to the Court from commercial arbitration orders.

1. Courts Will Not Readily Identify “Questions of Law” to Allow Appeals of Arbitral Awards. 

Under subsection 45(2) of Ontario’s Arbitration Act, 1991, S.O. 1991, c.17 (the “Act”), if the arbitration agreement so provides, a party is entitled to appeal the award to the Court on a question of law.

In this case, the parties specifically agreed that only “questions of law” would be subject to an appeal to the Courts.

However, given the policy underlying the Act, which is to encourage parties who agree to arbitration to finally settle their dispute before the arbitrator, Canadian Courts have generally been reluctant to identify “questions of law” that would open the door to an appeal of an arbitral award to a judge.

This principle applied in Tall Ships.

The Court of Appeal held, among other things, that the applicant judge erred in characterizing aspects of the arbitrator’s awards, including issues such as construction cost overruns, as pure errors of law, rather than errors of mixed fact and law.

Under the parties’ arbitration agreement, questions of mixed fact and law cannot be appealed to the Courts and the arbitrator’s conclusions are final.

According to the Court of Appeal, broadening the scope of what constitutes a pure question of law would run contrary to the parties’ intentions to render the arbitrator’s awards immune from judicial scrutiny, except on pure questions of law:

… [a broad interpretation of what constitutes a question of law] would entirely undermine the intent of these parties to submit this dispute, which arose out of a complex network of agreements and relationships which developed over a decade, to arbitration, and would particularly frustrate their specific provision that only errors of law could be appealed.

2. Arbitral Awards Should Not Be Set Aside Easily on Grounds of Procedural Fairness.

Subsection 46(1) of the Act provides that an arbitral award can be set aside on a number of grounds, largely related to the invalidity of the agreement itself, whether the dispute is capable of being the subject of arbitration and legal incapacity, among other grounds. 

One of these grounds, set out under subsection 46(1)6, includes that the “applicant was not treated equally and fairly, was not given an opportunity to present a case or to respond to another party’s case, or was not given notice of the arbitration or of the appointment of an arbitrator”.

In other words, an arbitral award may be set aside where the hearing of the arbitration was itself inherently unfair.

In Tall Ships, the application judge held that the arbitrator erred by relying on implicit clauses in the agreements that were neither pleaded nor argued, thereby violating Tall Ship’s right to procedural fairness in the arbitration. The judge noted that as a result of this breach of fairness, Tall Ships lost its right to contest the City’s non-acceptance of its construction remediation claims.

The Court of Appeal reversed.

First, the Court rejected Tall Ships’ argument that the implicit clauses in the agreements were not argued or advanced before the arbitrator.

Second, the Court, citing its previous authorities, was careful to note that subsection 46 of the Act should not be used as an alternative basis to appeal an arbitral award.

In other words, the due process clause under subsection 46 only applies where there are fundamental issues of procedural fairness in the arbitration.

Subsection 46 is not, in and of itself, a basis for appeal, particularly where that appeal is limited to questions of law:

… in characterizing the same arguments as breaches of procedural fairness under s.46 of the Arbitration Act, the application judge effectively bootstrapped the substantive arguments. This court has recently emphasized the narrow basis for setting aside an arbitral award under s.46 of the Arbitration Act, which is not concerned with the substance of the parties’ dispute and is not treated as an alternate appeal route: Alectra Utilities Corporation v. Solar Power Network Inc., 2019 ONCA 254 … Mensula Bancorp Inc. v. Halton Condominium Corporation No. 137, 2022 ONCA 769 …

The Finality of Arbitration

Tall Ships is no doubt animated by the general policy of deference toward arbitral awards as an efficient means of resolving disputes.

The very purpose of having sophisticated commercial parties agree to arbitration would be defeated if, following the time and expense associated with arbitration, recourse to the Courts were readily available on appeal.

Absent a fundamental breach of fairness or an error of law, amongst other limited grounds, Canadian Courts will apply judicial scrutiny to the substance of a commercial arbitral award only in extraordinary circumstances.  

Tall Ships, then, strikes a proper balance between the Courts’ oversight role in ensuring that justice is administered fairly in an arbitration and the parties’ desire to resolve their dispute in an alternative forum.

Marco P. Falco, mfalco@torkin.com, is a partner in the Litigation Department at Torkin Manes LLP, whose practice focuses on civil appellate litigation and judicial review. Please note that a conflict check will need to be conducted prior to discussing your matter.