Kingsgate Property Ltd. v. Vancouver School District No. 39: Issue Estoppel and Prior Arbitrations under the Same Agreement

The British Columbia Supreme Court’s decision in Kingsgate Property Ltd. v. Vancouver School District No. 39, 2023 BCSC 560 (Kingsgate v. VSD39) has implications for the application of issue estoppel to multiple arbitrations on the same subject matter under the same agreement. Below, we review the case and outline our considerations in respect of the issues reviewed by the Court.

Brief Factual Background

In 1972, Vancouver’s Board of Education of School District 39 (“VSB”), as landlord, entered into a lease with Royal Oak Holdings Ltd. (“Royal Oak”) which included several renewal periods, for a total of 99 years (the “Lease”). Section 29.09 of the Lease prescribed a formula that set the rent for each renewal term as follows:

… eight and one-quarter (8-1/4%) percent of the market value of the SAID LANDS at the date which shall be six (6) months before the expiration of the TERM or the renewal term next preceding the renewal term in respect of which the BASIC RENT has not been agreed upon, as the SAID LANDS would be valued at that time if vacant and ready for immediate development to their highest and best lawful use by a person or persons ready, willing and able to purchase and develop the SAID LANDS for that immediate use and such market value of the SAID LANDS shall be determined by arbitration as provided in Article XXIV. [emphasis added]

As noted above, the Lease expressly provided that the market value of the Property was to be determined by arbitration as described in the agreement. This form of arbitration was triggered twice, and ultimately resulted in the most recent arbitration being appealed to the BC Supreme Court (as discussed below).

1999 Market Value Arbitral Award (the “1999 Award”)

In 1999, VSB and Royal Oak engaged Section 29.09 of the Lease in order to initiate arbitration to determine the market value for the 1997-2007 term. The tribunal appointed by the parties for this arbitration was asked to interpret section 29.09 to consider the market value of the property. The majority of the tribunal interpreted s. 29.09 – and in particularly the reference to “immediate use” – as referring to “outright approval use” in order to determine the Property’s market value.

In doing so, the tribunal rejected the possibility of “discretionary conditional use” under the provision, given that discretionary conditional use would entail a lengthier approval process and therefore was inconsistent with 29.09’s express reference to “immediate use” (as emphasized above). In other words, outright approval allowed for a particular use of the property to immediately commence as of right, whereas discretionary conditional use would have required an indeterminate amount of time before that particular use could commence.

Subsequently, in 2005, Royal Oak assigned the Lease to Kingsgate Property Ltd. (“Kingsgate”), who in turn agreed – along with Beedie Development LP (“Beedie“) as a partner – to perform Royal Oak’s obligations under the Lease.

2022 Market Value Arbitral Award (the “2022 Award”)

In 2022, VSB and Kingsgate initiated arbitration to determine the market value for the 2017-2027 term. Like the 1999 arbitration, the award in the 2022 arbitration was not a unanimous decision. Unlike the 1999 arbitration, however, the majority of the tribunal in 2022 interpreted Section 29.09 of the Lease and concluded that the “immediate use” language referred to the highest and best use for which the property might lawfully be developed as of the applicable valuation date – in other words, “discretionary conditional use” governed rather than “outright approval use.” In this regard, the panel disagreed with the conclusions of the original panel in the 1999 Award.

Importantly for the purpose of this article, the 2022 tribunal considered whether it was bound to follow the 1999 majority’s interpretation of the Lease by virtue of the legal concept known as issue estoppel.

Broadly speaking, issue estoppel entails that the judgement of a court (or in this case, arbitral tribunal) is final and the same legal issues cannot be subsequently re-litigated (or arbitrated) in a separate suit commenced between the same parties (see, for example, Danyluk v. Ainsworth Technologies Inc., 2001 SCC 44 at para 54).[1]

Although the tribunal majority noted that issue estoppel would prima facie apply to certain of the 1999 majority’s findings, the majority considered whether it nevertheless should exercise its discretion not to apply the doctrine. The majority concluded that if it were to strictly apply issue estoppel and consider itself bound to follow the incorrect interpretation applied by the 1999 tribunal, that would ultimately “work an injustice” and “frustrate the contractual intentions of both parties.” Therefore, the majority declined to apply issue estoppel in the circumstances.

As a result, the property was valued at $116.5 million; by contrast, had the majority followed the interpretation described in the 1999 Award, the property would have been valued at only $20 million. Kingsgate and Beedie were therefore found liable for significant back rent amounts owing to VSB (a total that was $42 million greater than what it would have been had the 1999 Award been followed).

Unsurprisingly, Kingsgate and Beedie applied for leave to appeal on the basis that the arbitral tribunal had incorrectly refused to follow the doctrine of issue estoppel when making its decision, given that the 1999 Award had already settled the very same issue under the very same agreement.

The Decision of the British Columbia Supreme Court

The decision relevant to this article is in respect of Kingsgate and Beedie’s application for leave to appeal the 2022 Award.

Under s. 31(2) of British Columbia’s old Arbitration Act, 1996 (which applied in this case) – as well as its successor legislation (the Arbitration Act, SBC 2020, c2), for that matter – leave to appeal was available in respect of questions of law if the Court were to determine that one of three conditions was met:

1. the importance of the result of the arbitration to the parties justifies the intervention of the court and the determination of the point of law may prevent a miscarriage of justice,
2. the point of law is of importance to some class or body of persons of which the applicant is a member, or
3. the point of law is of general or public importance.

In addition, the Court noted that the language of the statute indicated that it “may grant leave”, meaning that it held the discretion to deny leave even if the statutory requirements were met.

Before considering this case, however, the Court reviewed (1) what constitutes a question of law, and (2) what the appropriate threshold was in order to assess the question of law at issue in a given case.

In relation to the first issue, questions of law are “about what the correct legal test is”, and although contractual interpretation is generally a question of mixed fact and law, an extricable question of law might be identifiable. The Court observed that, broadly speaking, the more the question can be abstracted from the particular facts of the case and understood as a question of principle, the more likely it is that the question will be characterized as a question of law with general application/precedential value. That being said, the Court also cautioned that precedential value was not a prerequisite to the existence of a legal question, and that as a general proposition, the scope of what constitutes a question of law is relatively narrow.

In relation to the second issue, the Court observed that the legislation requires that a court be satisfied that the determination of that point of law “may prevent a miscarriage of justice”. In that regard, the Court concluded that the appropriate threshold was whether the leave application has “arguable merit”, meaning the issue cannot be dismissed through a preliminary examination. The Court further noted that this assessment is done against the standard of review that would be applied to the appeal itself (if granted), in turn alluding to the uncertainty as to the standard of review applicable to arbitral awards following Vavilov. (Interestingly, we note that courts across Canada have generally appeared reluctant to address this issue, subject to certain exceptions).

Turning to the case at issue, the Court first considered whether the proposed appeal was grounded in a question of law arising out of the award. The Court identified two questions of law:

1. whether the tribunal majority erred in law in its interpretation of the 1999 Award, and the issue to which estoppel applied; and
2. whether the 2022 tribunal majority considered irrelevant factors when it decided not to apply issue estoppel.

In respect of the first question, the Court noted that prior case law supports the proposition that issue estoppel and res judicata apply to arbitration proceedings, and that whether a court has erred in applying the principles of res judicata and in purporting to overrule a previous decision have been held to be a question of law. However, the Court also observed that it had not been presented with any case law on whether an interpretation made by an arbitral tribunal in respect of a prior arbitration award for purposes of identifying the issue to which issue estoppel applies is a question of law. As a result, the Court approached this issue from a first-principles basis.

Relying on the distinction between questions of law, questions of fact, and questions of mixed fact as set out in Canada (Director of Investigation and Research) v. Southam Inc., 1997 CanLII 385 (SCC) (“Southam”), the Court acknowledged that the interpretation of a prior arbitral award in a subsequent arbitration proceeding[2] was not about a legal test and therefore, at first glance, did not appear to be a legal question. However, the Court also noted that neither did it fit neatly into the category of a question of fact or a question of mixed fact and law.

Interestingly, the Court instead resolved this ambiguity by concluding that the interpretation of a prior arbitration award to apply issue estoppel resembled the interpretation of a statute, which is a question of law, more closely than it resembled the interpretation of a contract, which is a question of mixed fact and law. The Court explained:

[69]…the questions of interpreting an Award and identifying issues to which issue estoppel applies can be analogized more readily to a question of statutory interpretation—which is a question of law—being the interpretation of legal text with binding force (an Award) to determine the parties’ governing obligations under a legal doctrine (issue estoppel). [emphasis added]

As a result, the Court concluded that the interpretation of an arbitration award by a subsequent panel for purposes of identifying the issue to which issue estoppel relates was a question of law.

Regarding the second question – whether the 2022 tribunal majority considered irrelevant factors in deciding not to apply issue estoppel – the Court’s analysis was brief and straightforward. In particular, the Court determined that since consideration of an irrelevant factor when exercising a discretion conferred by law is an error of law, the second question was therefore also a question of law – such that an appeal was appropriate.

Lastly, the Court turned to the question of whether any of the criteria of s. 31(2) of Arbitration Act, 1996 had been met, and if so, whether the Court would exercise its discretion to nevertheless deny leave.

First, the Court found that the significant financial consequences of the 2022 Award (namely a $42M increase in rent owing), were sufficient to satisfy the “importance of the result to the parties” criterion. Second, the “general importance to the public” criterion applied to clarifying the application of issue estoppel in arbitration proceedings.

Finally, given the Court’s conclusion that both questions were questions of law, the Court then considered whether either or both satisfied the “arguable merit” threshold discussed above. The Court found that there was arguable merit to both proposed questions of law, as the tribunal majority had (1) arguably misinterpreted the 1999 Award for the purpose of identifying the issue to which issue estoppel applied, and (2) considered irrelevant/inappropriate factors in deciding not to apply issue estoppel.

As a result, the Court exercised its discretion to grant Kingsgate leave to appeal the arbitral award. As of the date of publication for this case comment, the appeal remains in progress.

Analysis

Given that this case involved only an application for leave to appeal, and not the appeal itself, the foregoing is certainly not the final word on the matter. In that regard, we await with interest how these issues are addressed at the actual appeal.

Nevertheless, this decision raises interesting and potentially significant questions as to the finality of arbitration in the context of long-term contractual relationships. As the Court observed, it in fact raises the issue of competing forms of finality – on the one hand, finality in the form of narrow rights of appeal of an award, and on the other hand, the finality of a prior award when there is a subsequent arbitration under the same agreement.

Broadly speaking, appellate case law across Canada has endorsed deference to the decisions of arbitrators in order to promote efficiency and finality in arbitration. Similarly, courts have cautioned against any judicial inclination to readily identifying extricable questions of law so as to situate a matter within narrow appeal routes. To that end, it is notable that British Columbia’s legislation at s. 31(2) creates an additional hurdle to any appeal, by providing the court a residual discretion to deny leave even where the statutory requirements are otherwise met.

However – and bearing in mind that Kingsgate was only required to meet the “arguable merit” threshold (as noted by the Court) rather than fully prove its case on the merits – it is nevertheless notable that British Columbia courts have seemingly demonstrated a greater willingness to push the boundaries of what might constitute an extricable question of law (see, for example, Escape 101 Ventures Inc. v March of Dimes Canada, 2022 BCCA 294, where the British Columbia Court of Appeal concluded that a material misapprehension of the evidence was an extricable error of law).

In any event, the specific questions of law at issue in Kingsgate v. VSD39 are intriguing for the impact they may have on commercial arbitration more generally.

Most significant is the conclusion of the Court that interpretation of a prior arbitration award for purposes of identifying the issue to which issue estoppel applies is a question of law. As the Court’s analysis makes clear, this was a difficult issue to assess because it did not fit comfortably within the scope of a question of law or a question of mixed fact and law. While the Court’s analogizing to statutory interpretation is persuasive in some respects, it raises further questions in other respects. For example, as the Court itself observed, issues of statutory interpretation are not inevitably questions of law – questions about the application of a statute that are “inextricably linked to the evidentiary record at the arbitration hearing” are questions of mixed fact and law, if not questions of fact.

Arguably, then, this suggests that a preliminary battleground (as it relates to the interpretation of a prior arbitration award for purposes of issue estoppel) is the framing of the question as sufficiently abstract and general to avoid the conclusion that it is tied to the particular record of the dispute. Interestingly, this exact issue was raised by VSB in this case (i.e., that Kingsgate was attempting to disguise specific complaints about the 2022 Award as general questions of law), but appears not to have been addressed by the Court. Of note, this might be a re-occurrence of the same issue that arose following the Supreme Court of Canada’s decision in Sattva, where parties sought to re-frame issues as questions of law to fit within the scope of narrowed appeal rights.

Furthermore, it is also worth scrutinizing how similar the interpretation of a prior arbitral award (for purposes of issue estoppel) is to statutory interpretation. Statutes, on the one hand, are intended to be general in nature (i.e., not tied to a particular set of facts). By contrast, arbitral awards are inherently tied to the facts of a case, and fundamentally, originate from a contract. This latter point was perhaps understated in Kingsgate v. VSD39, given the basic proposition that contractual interpretation is generally a question of mixed fact and law.

In that regard, it was notable that the Court concluded that (1) a prior award is not interpreted by a subsequent tribunal against the factual matrix as would be a contract, and (2) nor is such a question inextricably linked to the evidentiary record from the second arbitration. Both of those propositions militated against finding a question of mixed fact and law, although upon review, it appears as though the Court was careful to frame the 2022 Award as having given limited consideration of the factual record of the 1999 arbitration.

Conversely, it seems well-established that that issue estoppel and res judicata apply to arbitration proceedings, and that whether a court has erred in applying the principles of res judicata and in purporting to overrule a previous decision is a question of law.

Read together, the application of issue estoppel (as a form of res judicata) in the arbitration context would seem to be a logical corollary of the two foregoing propositions. In the circumstances, it was perhaps unsurprising that the Court would conclude accordingly, notwithstanding that the question of issue estoppel across multiple arbitrations does not fit comfortably within the framework established by the Supreme Court of Canada in Southam (as noted above) and is arguably distinct in certain respects from an exercise in statutory interpretation.

Ultimately, we view the greatest irony of Kingsgate v. VSD39 as being that the questions at issue in this case could potentially have been avoided by virtue of the Lease clearly providing whether any findings of fact and/or law in a given arbitration under the Lease would be binding on future arbitrations under the Lease.

Parties drafting arbitration agreements that contemplate multiple arbitrations of the same issue(s) would therefore be well-advised to consider this issue carefully, consult a lawyer, and include clear language as appropriate.

Jonathon Obara, summer student, assisted with the preparation of this article.

[1] Issue estoppel (along with cause of action estoppel) is considered a species of the legal doctrine known as res judicata, which has been considered a “at the heart of the administration of justice” (Toronto (City) v. C.U.P.E., Local 79, 2003 SCC 63, at para. 1) and a “fundamental principle of our system of justice” (R. v. Van Rassel, [1990] 1 S.C.R. 225, at p. 238). In brief, res judicata is intended to prevent matters which have already been decided from being re-litigated. Issue estoppel exists to prevent the same outcome.

[2] Although not explicitly stated by, the Court’s statement on this point was presumably limited to subsequent arbitrations under the same arbitration agreement.

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