Tall Ships Development Inc. v. Brockville (City): The Ontario Court of Appeal Reaffirms the Court’s Narrow Basis for Setting Aside Arbitral Awards

In the recent decision of Tall Ships Inc. v. Brockville (City)[1], the Ontario Court of Appeal has again emphasized that courts will be reluctant to set aside arbitral awards under the Arbitration Act where the parties in their arbitration agreement choose only to permit appeals on questions of law.

Background

This matter arose out of a public-private partnership between the City of Brockville (the “City”) and Tall Ships Landing Development Ltd. (“Tall Ships”) with respect to the development of a waterfront property along the St. Lawrence River which included a mixed residential/commercial condominium and a Maritime Discovery Centre attraction (“the Project”). The Project was undertaken to revitalize downtown Brockville. The anticipated total capital cost of the Project was $12,000,000, and the Project had an estimated construction budget of $7,400,000 as set out in the Purchase Agreement.

Various disputes arose between the parties following the completion of the Maritime Discovery Centre which was approximately 6,000 square feet larger than originally designed and approximately $1,800,000 over budget, which included disputes relating to: (1) remediation costs, (2) construction cost overruns, and (3) interest costs (the “Tall Ships Claims”).

Pursuant to the parties’ arbitration agreement, the Tall Ships Claims were submitted to arbitration for resolution. Following a four-week hearing, the arbitrator dismissed the Tall Ships Claims through three separate arbitral awards. Tall Ships appealed the arbitral awards to the Superior Court of Justice. Notably, the arbitration agreement only provided for appeals on questions of law. On appeal, the application judge found in favour of Tall Ships and set aside all three arbitral awards.

The City appealed the application judge’s decision to the Ontario Court of Appeal and argued that the application judge erred in finding errors of law as the questions before the arbitrator were, in fact, questions of mixed fact and law which did not give right to a right of appeal in accordance with Ontario’s Arbitration Act and the parties’ arbitration agreement. Tall Ships, on the other hand, argued that the arbitrator committed extricable errors of law, breached their rights to procedural fairness, and that the application judge was correct in her determination.

Ontario Court of Appeal Decision

The Ontario Court of Appeal allowed the City’s appeal and held that the application judge erred in categorizing the matters at issue as extricable questions of law finding that the issues were questions of mixed fact and law. In reaching its decision, the Ontario Court of Appeal made a number of key observations in relation to each of the Tall Ships Claims, described briefly below.

The Court of Appeal found that judges in exercising their appellate functions “should not be too ready to characterize issues as issues of law because doing so may render the point of consensual arbitration nugatory.”[2] In this regard the Court cited the Supreme Court’s decision in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co, 2016 SCC37, [2016] 2 S.C.R. 23 at para 113 where it was noted that “the circumstances in which a question of law can be extricated from the interpretation process will be rare.”

Remediation Claims

The arbitrator rejected Tall Ships’ claim for environmental remediation costs as the process for claiming such costs were governed by the Brownfields Agreement which provided for a 15-day deadline to provide notices of dispute which was not adhered to by Tall Ships. In addition, the arbitrator held that the remediation claims were statute barred.

The application judge allowed Tall Ships’ appeal and concluded that the arbitrator erred in relying on an implied “time of the essence” clause which was not advanced or argued which violated Tall Ships’ right to procedural fairness and that the reliance on an “unargued theory” was an error of law in accordance with Section 45 of the Arbitration Act.

The Court of Appeal held that the application judge erred in finding that Tall Ship’s right to procedural fairness had been breached, as the arbitrator did not read a time of the essence clause into the contract, but rather considered the Brownfields Agreement and the factual matrix as a whole as part of the arbitrator’s detailed and extensive reasons, and that the arbitrator’s use of the term “time of the essence” was incidental in nature.

The Court of Appeal found that this issue was a question of mixed fact and law which was not subject to appeal.

Construction Cost Overruns Claims

The arbitrator concluded that Tall Ships was responsible for the construction cost overruns under the contract based on the language of the contract and the factual background as Tall Ships did not inform the City of the potential overruns despite its knowledge that the Project would be larger and substantially more expensive than originally estimated. In this regard, the arbitrator held that Tall Ships did not reasonably perform its duty as construction manager and breached its duty of good faith in arbitrarily withholding such information. The arbitrator also dismissed Tall Ships’ claims for unjust enrichment on the same basis as denying the claim in contract.

The application judge allowed Tall Ships’ appeal and held that the arbitrator, among other things, erred in law in concluding that Tall Ships breached certain obligations which were not advanced or argued, failed to apply the appropriate legal analysis for implying contract terms, and misinterpreted the duty of good faith.

The Court of Appeal held that, similar to Tall Ships’ remediation claim, the primary error committed by the application judge was in mischaracterizing the issues as errors of law rather than mixed fact and law. The Court of Appeal explained that the arbitrator’s analysis of this claim involved the interpretation of the contract as a whole within the broader context of the Project as a whole which was a matter of mixed fact and law and which was not subject to appeal.[3] The Court of Appeal also rejected Tall Ships’ unjust enrichment claim on the same basis.

Interest Claims

The arbitrator rejected Tall Ships’ claim for interest costs based on the principle of estoppel as Tall Ships did not advise the City it would be claiming interest on the invoice at the time, and only advanced such a position in its Statement of Claim.

The application judge allowed Tall Ships’ appeal and held that the arbitrator incorrectly held that Tall Ships was required to inform the City of its intent to claim interest, and that the arbitrator’s conclusion relying on the principle of estoppel was unfair.

The Court of Appeal held that the arbitrator committed no extricable error of law, and that this was a finding of mixed fact and law which are not subject to appeal.

Importance

The Court of Appeal’s decision highlights the Court’s deference to arbitrators and the arbitral process as a whole.[4] In this regard, and as explained by the Supreme Court of Canada, as a matter of public policy, judges exercising such appellate powers under Section 45 of the Arbitration Act should exercise caution when extracting questions of law from the contract interpretation process as “[f]ailure to exercise such caution will result in the very inefficiencies, delays and added expense that choosing an arbitral process seeks to avoid.”[5]

Overall, the Court of Appeal was clear that the court system should not be treated as an appeal route for parties attempting to set aside an arbitral award. The decision provides parties with increased certainty about the final and binding nature of arbitration decisions.

[1] 2022 ONCA 861.

[2] Tall Ships Development Inc. v. Brockville (City), 2022 ONCA 861 (“Tall Ships”) at para 16.

[3] Note that Tall Ships conceded that it was not able to dispute the arbitrator’s findings that it breached the duty of good faith. See Tall Ships at para 84.

[4] See, for example, Tall Ships at para 2.

[5] Tall Ships at para 3, citing Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at paras. 54-55; Teal Cedar Products Ltd. v. British Columbia, 2017 SCC 32, [2017] 1 S.C.R. 688, at paras. 45-47.

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