Appealing an Arbitral Award? The BC Court of Appeal sheds light on what constitutes a question of law and a breach of natural justice

Why this decision is important

In MSI Methylation Sciences, Inc. v Quark Venture Inc, 2019 BCCA 448, the Court of Appeal for British Columbia recently clarified the Court’s approach to appeals from an arbitral award.

Justice Hunter, writing for the Court, addressed an appeal on the grounds of a breach of natural justice, finding that there was no error if the arbitral tribunal determines an issue that is within the parameters of the pleadings. In addition, the Court of Appeal created a helpful framework for determining when appeals may be made from arbitral awards, and, in doing so, refined the test for determining what constitutes a question of law.

Overview of Proceedings

The respondent MSI Methylation Sciences, Inc. (“MSI”) developed a drug to treat major depressive disorder which was unsuccessful in its first clinical trial. MSI continued the drug’s development in an additional trial for which the appellant Quark Venture (“Quark”), a venture capital firm, entered into a financing agreement (the “Investment Agreement”) with MSI in September of 2016. Quark agreed to subscribe for units of MSI comprised of preferred shares in four separate tranches totalling US$30 million. Quark made the first tranche in the amount of US$1 million. Quark then informed MSI shortly before the second tranche was due that it would not be making further payments.

On March 16, 2017, MSI commenced arbitral proceedings against Quark, pursuant to the Investment Agreement’s arbitration clause for damages in lieu of specific performance in the amount of US$29 million for Quark’s failure to pay the remaining tranches. Quark counter-claimed for the return of the US$1M that it had already paid. The Arbitrator dismissed Quark’s counterclaim and allowed MSI’s claim in the amount of US$20 million. In calculating the basis for damages, the Arbitrator determined that MSI was entitled to the opportunity to receive the value of the promise of US$30 million in exchange for an issuance of shares from treasury.

MSI brought an application at the Supreme Court of British Columbia (“BCSC”) to enforce the arbitral award.[1] Quark brought an application to set aside the award on the grounds that the Arbitrator failed to observe the rules of natural justice, and sought leave to appeal the award based on various errors of law. The chambers judge dismissed Quark’s application, and allowed MSI’s application for leave to enforce the arbitral award. Quark appealed the decisions.

The Court of Appeal’s Analysis

There were two issues on appeal: first, whether the Arbitrator failed to observe the rules of natural justice; and second, whether the BCSC incorrectly characterized the errors of mixed fact and law, versus pure errors of law.

Was There an Error of Natural Justice?

Quark’s argument on appeal was that the Arbitrator failed to observe the rules of natural justice by awarding damages based on loss of opportunity to receive the third and fourth tranches when that theory of damages had not been specifically advanced by MSI.

The Court held that although the principle of ‘knowing the case to be met’ is a basic concept of natural justice, the application of that principle is highly case-specific. In this case, the Court held that the approach taken by the Arbitrator to the assessment of damages was within the parameters of the pleadings. Although the pleadings were not specific, they identified the central claim that the breach of contract resulted from MSI not receiving the financing it bargained for, and provided sufficient indication that MSI was identifying its loss from the breach as the loss of the US$29 Million:

“Quark should have reasonably concluded that if it failed on the misrepresentation defence, damages might be awarded based on the US$29 Million lost.”

While Quark argued that it had no opportunity to address the specific approach to quantifying damages that the Arbitrator took, the Court relied on the decision of Reliance Industries Ltd. V. Union of India, [2018] EWHC 822 (Comm), quoting the principle that:

“…It is commonplace in judicial decisions on points of construction that a judge may fashion his or her reasoning and analysis from the material upon which argument has been addressed without it necessarily being in terms which reflect those fully expressed by the winning party. There is not perceived to be, and is not, anything which is unfair in taking such a course. It is enough if the point is “in play” or “in the arena” in the proceedings, even if it is not precisely articulated…”

The Court found that damages were always “in play” if the breach were established. Accordingly, there was no violation of the rules of natural justice.

What Constitutes a Question of Law?

Quark sought leave to appeal the Arbitrator’s decision, arguing that the Arbitrator committed a series of errors of laws. Only errors in law are appealable to the Court, as per s. 31 of the BC Arbitration Act. Quark argued that: (1) the Arbitrator applied the incorrect test for assessing damages; (2) the Arbitrator incorrectly assessed damages as if there had been an accepted repudiation; and (3) the Arbitrator incorrectly held that treasury shares were valueless.

The Court assessed the evolution of how questions on appeal ought to be characterized on appeals from arbitral awards, drawing on four principles:

1. Appeals are limited to questions of law arising out of the award;

2. A question of law may be implicit or explicit in the award. If explicit, the statutory precondition is met. If implicit, care must be taken to distinguish between an      argument that a legal test has been altered (an error in law) and an argument that application of the legal test should have resulted in a different outcome (a question of mixed fact and law);

3. A means of determining whether the challenged proposition is a question of law or part of a question of mixed fact and law is to consider the level of generality of the question. If the question is of sufficient generality that, if answered, is to have precedential value beyond the parties to the particular dispute, it is more likely to be characterized as a question of law; and

4. A narrow scope for what constitutes an extricable question of law is consistent with finality in commercial arbitration.

In this case, the Court held that the chambers judge was correct in declining to grant leave on all three of Quark’s questions. The questions raised by Quark on appeal were based on the particular facts of the case, related to the application of legal tests to the facts of the case, and had little precedential value. 

Significance

The BC Court of Appeal has carefully framed the principles surrounding appeals of arbitral awards on both issues of natural justice and on questions of law. Further, this case demonstrates the Courts’ continued reluctance to retry arbitral decisions, supporting the principle of finality in commercial arbitrations. 

[1]MSI Methylation Sciences, Inc. v. Quark Venture Inc., 2019 BCSC 440.

arbitration international arbitration commercial arbitration

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