Tall Ships Ontario Court of Appeal Decision – No Appeal for You!
Why this case matters
The Ontario Court of Appeal’s (the “Court of Appeal”) decision in Tall Ships Development Inc. v. Brockville (City), 2022 ONCA 861 reaffirms the very narrow basis for setting aside an arbitral award under s. 46 of the Arbitration Act. The Court of Appeal emphasized that, “[a]s a matter of policy, and as the Supreme Court of Canada has stated repeatedly, judges exercising their appellate powers under s. 45 of the Arbitration Act should be cautious about extricating questions of law from the interpretation process”.
Ultimately, the Court of Appeal found that none of the alleged errors made by the arbitrator were extricable errors of law, nor were there any breaches of procedural fairness that would attract a review pursuant to section 46 of the Arbitration Act.
The dispute between the parties arose out of a public-private partnership between the City of Brockville (“Brockville”) and Tall Ships Landing Development Ltd. (“Tall Ships”) to remediate and develop a waterfront project including a mixed residential/commercial condominium and the Maritime Discovery Centre (the “Project”). The intention was for Tall Ships to develop the Project and once “substantially complete,” Tall Ships would sell the property to Brockville as set out by a formula in the Purchase Agreement (one of several agreements made between the parties over the decade long partnership).
Upon completion of the Maritime Discovery Centre (“MDC”), which went over budget, Brockville refused to pay Tall Ships the additional construction costs for the MDC, among other costs. Three disputes arose between the parties including, whether Brockville was liable for: (1) the remediation costs which Tall Ships claimed in accordance with the procedure set out in the Brownfields Agreement (“B.A.”) (the “Remediation Costs Claim”); (2) the cost increases of the construction as a result of the Project design changes, an increase of $1,800,000 from the $7,400,000 budget (the “CostOverrun Claim”); and (3) an interest claim on one specific invoice and payment negotiated between the parties in an attempt to narrow the issues (the “Interest Claim”). The parties submitted Tall Ships’ claims to arbitration. After a four week hearing, the arbitrator dismissed the claims in three awards issued between September 5, 2018 and February 11, 2019.
Tall Ships appealed the arbitrator’s awards to the Ontario Superior Court of Justice. The application judge found in favour of Tall Ships, set aside the three arbitral awards, and ordered that a new arbitrator be appointed to deal with the reconsideration of the matters.
Ontario Court of Appeal Decision
Brockville appealed the order of the application judge, arguing that the questions before the arbitrator were questions of mixed law and fact, which did not give rise to any right to appeal pursuant to the Arbitration Act or the Arbitration Agreement. Tall Ships responded by arguing the arbitrator made errors of law and breached Tall Ships’ right to procedural fairness. As such, the decision of the application judge was correct.
The Court of Appeal, in a unanimous decision, stated “this appeal turns on whether the arbitrator fell into any errors of law in the course of determining Brockville’s liability, and in particular, whether the applications judge incorrectly categorized questions of mixed fact and law as extricable questions of law. In my view, she erred in so doing”.
The Remediation Costs Claim
Using the process set out in the B.A., Tall Ships had submitted claims for eligible remediation costs which Brockville could either accept, reject, or request additional information within 30 days. Tall Ships waived and released Brockville from any claims, unless a dispute notice was sent within 15 days of rejection. The arbitrator rejected Tall Ships’ claim for remediation costs finding that the parties had explicitly chosen to make time of the essence through their contractual language and Tall Ships had accepted Brockville’s determinations by failing to file a dispute notice within 15 days (or at all).
The application judge found the arbitrator’s reliance on an implicit “time of the essence” clause, which was neither pleaded nor argued, was fundamentally unfair to the parties. Applying the correctness standard, the application judge found that the arbitrator committed a reviewable error under s. 46(1) of the Arbitration Act.
The Court of Appeal highlighted that the arbitrator “gave detailed and extensive reasons” in the three awards, which the arbitrator emphasized were to be read as a whole. In reviewing the awards as a whole, the Court of Appeal determined that the arbitrator was not using “time of the essence” as a term of art, but simply highlighting the parties agreement within the B.A. to provide notices on a set timeline. The Court of Appeal found there was no suggestion anywhere in the awards that the arbitrator intended to imply a term, in the technical sense. Ultimately, the Court of Appeal found the interpretation of the B.A. was a question of mixed fact and law which fell squarely within the purview of the arbitrator and was not eligible for appeal, as the parties specifically agreed in the arbitration agreement to only allow appeals on questions of law alone.
Cost Overrun Claim
Tall Ships had claimed approximately $1,800,000 in additional construction costs after the project was built roughly 6,000 square feet larger than originally designed. Tall Ships claimed that Brockville was aware the Project was over budget and that the Steering Committee (appointed by Brockville) had approved design changes that led to cost increases. Brockville refused to pay, arguing that it was unaware of the cost increases and never consented to any increases.
Going to the core of the agreement between the parties, the arbitrator found that Tall Ships had an obligation as construction manager to manage Brockville’s expectations so it could make fully informed decisions with an appreciation of cost consequences. The arbitrator found that Tall Ships did not disclose or arbitrarily withhold information from Brockville and rejected Tall Ships’ claim for unjust enrichment.
The application judge found the arbitrator had breached the obligation of procedural fairness by relying on Tall Ships’ obligations as construction manager, when Brockville did not rely on the obligation and did not argue the theory at the hearing of the arbitration. The application judge found that Tall Ships did not have notice of this argument, nor did it have an opportunity to address it. The application judge also determined that the creation of Tall Ships’ construction manager duties implied a term into the contract for which the arbitrator failed to use the correct test. Finally, the application judge could find no explicit obligations in the agreements that required Tall Ships to keep Brockville informed of any budget changes.
The Court of Appeal found no merit to Tall Ships’ submission that Brockville should be forced to pay for the Cost Overrun Claim on the basis of unjust enrichment. The Court of Appeal also found that the contract between the parties, as interpreted by the arbitrator, precluded recovery for the Cost Overrun Claim. The Court of Appeal disagreed that the obligation to keep the Steering Committee apprised of the financial situation did not arise out of an implied term, neither pleaded nor argued, but rather the obligation arose out of the interpretation of the contract as a whole in the context of the Project and was therefore a question of mixed fact and law that was not subject to appeal.
Brockville agreed to pay Tall Ships for construction work for fit-ups and exhibits (known as “MDC Exclusions”). Following a dispute between the parties over MDC Exclusions, in an effort to narrow the issues, the parties agreed in April 2015 that Brockville would pay $315,000 to Tall Ships. After payment, Tall Ships brought a claim for contractual interest on the $315,000. The arbitrator found that the agreement to pay made no mention of interest, and that the parties were no longer contemplating interest, thereby making Tall Ships estopped from claiming interest.
The application judge found the arbitrator’s estoppel conclusion to be manifestly unfair and in error because, in her view, the arbitrator was suggesting that Tall Ships’ silence amounted to a representation contrary to its obligation to speak according to the arbitrator’s erroneous interpretation of Tall Ships’ construction manager role. Thus, the finding stemmed from the arbitrator’s error in interpreting the original agreement and finding Tall Ships to have additional positive obligations as a construction manager.
The Court of Appeal found no extricable or reversible error of law in the arbitrator’s conclusion on the Interest Claim. Specifically, there was no error in the arbitrator’s analysis that despite estoppel not being specifically pleaded, Tall Ships resiled from an oral agreement and the facts pleaded were sufficient to support the finding of estoppel. The arbitrator clearly considered the contract as a whole in the context of the negotiations and found the parties did not contemplate the payment of interest. The Court of Appeal determined that the arbitrator’s findings with respect to the Interest Claim was a question of mixed fact and law and therefore not subject to appeal.
The Court of Appeal has reconfirmed the very narrow basis for setting aside an arbitral award under s. 45 or 46 of the Arbitration Act.
s.46 of the Arbitration Act cannot be used as a broad appeal route to attack the determinations of arbitrators, specifically where the parties have agreed to be bound by those decisions. This decision strongly emphasizes the Court’s deference for arbitrators and their decisions, which will not be displaced where there is no error of law.
The Court of Appeal also cautioned against characterizing questions of mixed fact and law as extricable questions of law, and reiterated the principle that a lack of caution will result in the “very inefficiencies, delays and added expenses that using an arbitral process seeks to avoid”.
 1991, S.O. 1991, c. 17 (“Arbitration Act”).
Tall Ships Development Inc. v. Brockville (City), 2022 ONCA 861 at para. 3.
Ibid at para. 41.
Ibid at para 3.
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