Can an arbitration agreement preclude appeals, even with errors of law?

Live by the sword, die by the sword. In Tedescon Infrastructure Ltd. v. The County of Simcoe, the Ontario Superior Court of Justice held that an arbitration agreement may preclude a party from appealing a question of law, even if the arbitrator made an error of law.

The decision highlights the importance of clear drafting in arbitration agreements. Parties should consider at the outset whether they want an arbitral award to be appealable and ensure that their arbitration agreement clearly reflects that intention.

What happened in Tedescon?

In 2020, Tedescon Infrastructure Ltd. (“Tedescon”) and The Corporation of the County of Simcoe, also known as The County of Simcoe (the “County”), entered into a contract for the reconstruction of a regional road. The County appointed a third party as the project designer and contract administrator (the “Administrator”).

In March 2022, Tedescon initiated an arbitration against the County after the Administrator rejected Tedescon’s claims for compensation and extensions of time resulting from delays and change orders. The parties appointed an arbitrator (the “Arbitrator”) in April 2022 and the project and arbitration proceeded in parallel.

In April 2023, Tedescon delivered a notice of default to the County alleging numerous breaches, together with a claim that the Administrator had failed to act impartially. Tedescon subsequently delivered a notice to both the County and the Administrator stating that it was suspending work pursuant to the contract until the County remedied its breaches.

The County responded by demanding that Tedescon withdraw its notice of suspension and remobilize by May 1, 2023, failing which the County would consider Tedescon to have abandoned the contract. Tedescon refused to withdraw its notice of suspension, and the County appointed Tedescon’s replacement.

The Arbitrator’s decision

The Arbitrator found that Tedescon was entitled to suspend work as a result of the Administrator’s preferential treatment toward the County, but that it was not entitled to abandon the contract. Tedescon’s failure to remobilize amounted to an abandonment of the contract, and the County’s appointment of Tedescon’s replacement constituted acceptance of Tedescon’s repudiation.

The County’s acceptance of Tedescon’s repudiation brought the parties’ unperformed mutual obligations to an end and entitled the County, as the non-repudiating party, to damages.

The Arbitrator credited Tedescon for the value of the work that the Administrator incorrectly disallowed but held Tedescon liable for the County’s damages for Tedescon’s failure to perform the remainder of the contract.

After numerous post-hearing submissions on damages calculations, the Arbitrator awarded the County a net amount of $511,243.13, inclusive of HST.

The applications

Tedescon brought an application to set aside the award pursuant to section 46 of the Arbitration Act, 1991 (the “Act”) and, in the alternative, sought leave to appeal pursuant to section 45.

Section 46(1) enumerates several grounds upon which a court may set aside an award, including if the “award … contains a decision on a matter that is beyond the scope of the agreement” (ground 3), and if the “applicant was not treated equally or fairly…” (ground 6).

Section 45(1) of the Act provides that “If the arbitration agreement does not deal with appeals on questions of law, a party may appeal an award to the court on a question of law with leave...”

Tedescon argued that the Arbitrator’s award violated ground 3 and ground 6 of section 46(1). More specifically, Tedescon submitted that the Arbitrator made findings that were inconsistent with the evidence and therefore acted outside the scope of the arbitration agreement.

Tedescon also argued that, by making those findings and mathematical errors, the Arbitrator breached his duty of fairness to the parties.

Alternatively, Tedescon sought leave to appeal the award pursuant to section 45(1), arguing that it was legally incompatible for the Arbitrator to hold that Tedescon repudiated the contract, and also that it was justified in stopping work for non-payment of past-due amounts.

The County brought a counterapplication, seeking leave to appeal the award on the basis that the Arbitrator committed an error of law by allowing Tedescon to recover or be credited for work if it had abandoned the contract.

The Court’s decision

The Court dismissed both applications.

The Court held that Tedescon’s section 46(1)3 argument required the Court to assess the substance of the Arbitrator’s decision, which was inconsistent with the narrow purpose of section 46(1)3: to check jurisdiction by assessing whether the Arbitrator decided the dispute that the parties submitted. Similarly, the Arbitrator’s reasons did not suggest any unfairness amounting to a deprivation of natural justice. Rather, the result may have appeared unjust because the Arbitrator committed an error of law, but that was not a lack of procedural fairness.

The Court found the arbitrator made an error of law

On the issue of whether to grant leave to appeal, the Court held that the Arbitrator committed an error of law when he found that Tedescon had repudiated the contract. However, the Court concluded that the arbitration agreement implicitly precluded appeals on questions of law. Had the arbitration agreement allowed appeals on questions of law, the Court would have granted Tedescon leave to appeal and allowed its appeal.

Did the parties preserve appeal rights?

To begin its analysis, the Court noted that the first sentence of section 45(1) of the Act has been interpreted as requiring an express or implied exclusion of appeals. The statutory authority permitting parties to exclude appeal rights is grounded in section 3 of the Act, which provides that parties may agree to exclude any provision of the Act expressly or by implication.

Why "final and binding" mattered

The contract did not expressly or implicitly exclude the availability of appeals. However, it provided that the parties would be bound by the arbitrator’s decision, and that the rules and procedures of the Act applied except to the extent the parties agreed to modify the procedures.

The contract also contemplated that the parties would enter into a separate arbitration agreement. That agreement was based on the Arbitrator’s standard form and included the following language: “A dispute has arisen between the Claimant and Respondent in relation to or arising from the Contract which the parties have agreed to resolve by final and binding ad hoc arbitration (‘Dispute’),” and “The Claimant and the Respondent hereby affirm their submission of their Dispute to final and binding arbitration pursuant to the Contract and the Arbitration Act, 1991, S.O. 1991, c. 17.”

The Court recognized that, although cases have interpreted arbitration agreements containing the word “final” and similar or derivative phrases as implicitly excluding rights of appeal, each case remains a matter of contractual interpretation requiring the Court to determine the parties’ intention. Here, the phrase “final and binding” would oust the parties’ appeal rights unless the contract and arbitration agreement, read together, supported a different meaning.

How the Court interpreted the arbitration agreement

When the parties executed the arbitration agreement, the arbitration concerned construction disputes over change orders, quantities, and payment delays.

A standard arbitration agreement in that context would ordinarily contemplate limited court intervention because those disputes typically involve factual or discretionary decision-making in an ongoing project. The parties continued under the 2022 form of agreement and did not renegotiate the “final and binding” language even after issues of fundamental breach arose in 2023.

Had section 3 of the Act provided for only express exclusion of appeal rights, the phrase “final and binding” would have been insufficient to preclude appeals on questions of law. However, the weight of authority interpreting that phrase as an implied exclusion of appeal rights, considered together with the surrounding circumstances of the arbitration agreement, made barring appeals appropriate for the disputes at issue.

Tedescon’s work stoppage did not justify giving “final and binding” a different meaning. The parties implicitly agreed to continue arbitrating under the 2022 procedure, which meant they had covenanted to exclude appeals on questions of law. They were free to reconsider the adequacy of the arbitration agreement once the contract was terminated, or to insist that the arbitration agreement did not apply to the fundamental breach issue. Instead, they agreed to exchange fresh pleadings and incorporated that issue into the existing arbitration, implicitly restricting any appeals, including for fundamental breach.

What would have happened if appeals were permitted?

The Court found that the arbitrator committed an error of law by holding that Tedescon was justified in stopping work because of the County’s non-payment and that Tedescon had repudiated the contract by abandoning it.

Tedescon was under no legal obligation to continue performing under the contract once it was justified in stopping work, and the Arbitrator was not entitled to find repudiation absent a demand for payment for work not yet performed.

The Court noted that, had the arbitration agreement not implicitly excluded appeal rights, it would have granted both parties leave to appeal, allowed Tedescon’s appeal, and dismissed the County’s appeal. The Court would have awarded Tedescon damages for unreleased holdback and the wrongly disallowed value of extras, and disallowed the County’s claim for damages.

For Tedescon, that meant a more than $3M swing. Instead of an award against it of $511,243.13, the Court would have granted Tedescon damages of $2,598,518.75.

Key takeaways for parties drafting arbitration agreements

Tedescon highlights the importance of precision when drafting arbitration agreements. Once a court determines that the parties intended to preclude appeals, whether expressly or implicitly, the parties will be bound by the arbitrator’s award, even if the arbitrator committed an error of law.

• Decide whether appeals will be permitted: Parties should decide at the outset whether they want arbitral awards to be appealable on questions of law. If they intend to preserve appeal rights, the arbitration agreement should say so expressly and identify the scope of appeal.
• Use clear language: If parties intend the arbitral award to be immune from appeal, they should not rely solely on general finality language. Although phrases such as “final and binding” may be effective, clear drafting means less risk; parties should expressly exclude any right of appeal.
• Revisit arbitration provisions when disputes evolve: Parties should ensure that the arbitration agreement remains appropriate if the nature of the dispute changes. An agreement drafted for factual disputes may not reflect the parties’ intentions if the dispute later expands to include legal issues such as termination, repudiation, or fundamental breach. Where the scope of the arbitration changes materially, parties should consider confirming whether the original appeal provisions still apply or whether they should try to negotiate new ones.
• Carefully review all arbitration-related agreements: Many parties may carefully draft the dispute resolution clause in their underlying agreement and then pay less attention to the arbitrator’s standard form agreement. This case is a reminder that parties should carefully consider that all agreements affecting the conduct of the arbitration reflect their intentions.