Difficult to Escape: British Columbia Court of Appeal Reiterates Narrow Grounds of Appeal for Arbitral Awards

The British Columbia Court of Appeal (the “Court”) has provided further guidance on the sometimes tall task faced by parties seeking leave from the courts to appeal an arbitral award.

In Escape 101 Ventures Inc. v. March of Dimes Canada, 2021 BCCA 313, the Court dealt with an application by Escape 101 Ventures (the “Appellant”) for leave to appeal an arbitrator’s dismissal of claims related to an asset purchase agreement (the “Agreement”) entered into with March of Dimes Canada (the “Respondent”). In considering the three claims of extricable errors of law asserted by the Appellant, the Court found that leave to appeal was warranted on only one ground.

Background

The Appellant and the Respondent entered into the Agreement to facilitate the sale of the Appellant’s business, an employment assistance and counselling service, to the Respondent, including all assets and goodwill. Under the Agreement, the parties agreed to a purchase price of up to $2.2 million, which included: (i) a cash payment of $550,000.00; (ii) a maximum $1.1 million in “Earnout” payments (as defined under the Agreement); and (iii) a “Contingent Payment” of $550,000.00.

The Earnout provision of the Agreement required the Respondent to pay to the Appellant 10% of gross revenue earned through the provision of certain defined services over a five-year period. Earnout payments were due quarterly. However, after the Agreement was executed, the Appellant took issue with the Respondent’s calculation of Earnout amounts, from which the Respondent excluded revenue generated from contracts that were entered into after the Agreement and outside of a certain catchment area.

The Contingent Payment was to be made based upon the Respondent’s renewal or replacement of a particular subcontract “on substantially similar and no less favorable terms” than those which existed at the time of the Agreement. When the time came, the Respondent viewed the terms of the new subcontract as substantially different and less favorable than previously, and therefore declined to make the Contingent Payment.

The parties agreed to resolve the disputes through arbitration. A third issue arose when the Appellant requested documents from the Respondent regarding the Earnout and Contingent payments, which the Respondent objected to producing on the basis of relevance. Following a hearing, the arbitrator rendered its award, dismissing all of the Appellant’s claims.

The Court’s Decision

The Appellant argued that the arbitrator committed three pure errors of law:

  1. The arbitrator made findings that were not argued or pleaded by the parties, or supported by the evidence;
  2. The arbitrator misapprehended the Appellant’s argument regarding the Contingent Payment, failing to apply established principles of contractual interpretation, and failing to assess the reasonableness of the Respondent’s discretion not to make that payment; and
  3. The arbitrator failed to rule on the Appellant’s request for document production.

As the dispute required the arbitrator to address questions of mixed fact and law, the Court reiterated that leave to appeal is not available without the Appellant showing that the award contained errors of an extricable question of law.[1]

The Court noted two types of errors which amount to questions of law in the arbitration context:

  1. The application of an incorrect legal principle by an arbitrator, a failure to consider an element of a legal test, or a failure to consider a relevant factor will generally meet the test for an extricable question of law; and
  2. Where an arbitrator has forgotten, ignored or misconceived evidence and that error is shown to have affected the result of the arbitration.

In short, the Court reiterated a general deference to arbitral awards. Even where a party is able to show an error of law, the Court confirmed that a court “should consider the reasons of the arbitrator as a whole in assessing that error and deny leave to appeal unless satisfied that the error was material to the result and has arguable merit.” The Court also noted that courts are generally reluctant to grant leave to appeal on an issue that was not actually before the arbitrator.

In applying the test outlined above to the three claims brought by the Appellant, the Court was satisfied that leave to appeal was warranted on only one ground, regarding the Earnout payments, on the grounds that the arbitrator had made findings that were not supported by the evidence.

First, on the errors alleged in relation to the Earnout payments, the Court concluded that the arbitrator committed an error in finding that it was more probable than not that the parties intended the Earnout obligation be limited to certain catchment areas on the basis of the Appellant’s post-contractual conduct.[2] The arbitrator concluded that the Appellant had provided “informed acceptance” through the approval of three quarterly reports in the fiscal year 2018. On review, the Court found that there was merit to the Appellant’s argument that the arbitrator had failed to appreciate the fact that the Appellant’s knowledge of a certain contract in the fall of 2018 was irrelevant to the extent that that contract did not take effect until April 2019, at which point the Appellant did take issue. The Court found that based on the arbitrator’s reasons, “a meritorious argument can also be made that the conclusions he drew from the appellant’s post-contractual conduct played an integral role in his interpretation of the agreement specific to the Earnout obligation and dismissal of the related claim”, and that such conclusions laid the foundation for an extricable error of law.[3]

Second, on the errors alleged in relation to the arbitrator’s assessment of the refusal by the Respondent to pay the Contingent Payment, the Court was not persuaded that that aspect of the award gave rise to an extricable question of law. The Court held that in deciding this issue, “the arbitrator examined the wording of the relevant provisions and discerned the intention of the parties, as informed by the circumstances in existence at the time they entered into the agreement”, in accordance with generally accepted principles of contractual interpretation.[4] Under the relevant subcontract, the provincial government had moved from a fee for service model to an outcomes-based model. The arbitrator found that this change met the threshold for withholding the Contingent Payment, within the terms of the Agreement. The Court agreed, finding that the arbitrator’s reasons “focused on the existence of reasonable basis for the respondent’s exercise of discretion, with reference to the specific terms of the agreement and the circumstances surrounding its execution.”[5]

Third, the Court was not satisfied that the arbitrator’s alleged failure to adjudicate the Appellant’s request for documents constituted an error of law, and that even if it did, such an error would warrant leave to appeal. The Court found that when the Respondent rejected the initial request for certain documents prior to the arbitration, the Appellant did not take any formal steps to compel their production, including by failing to reiterate the request in the Appellant’s reply filed in the arbitration, and because the Appellant actually advised the arbitrator that “he had everything he needed to make a fully informed determination on the proper interpretation of the Earnout and the Contingent Payment provisions.”[6] As such, the Court held that “it is not surprising that the arbitrator did not address the issue in his reasons or make any orders in that regard.”[7]

Concluding Comments

On the whole, this decision represents yet another judicial endorsement of arbitration as a final and binding alternative to litigation, with only narrow and limited grounds for appeal. Such guidance provides continued and further comfort to parties who look to arbitration to provide clear and binding decisions in a generally expeditious manner. Further, this decision reiterates the importance of parties reviewing the wording of all contractual provisions, including in light of applicable arbitration clauses, or carefully considering the terms and consequences of any post-facto arbitration agreement, given the narrow scope of arbitral appeal rights in Canada.

For further reading on another recent decision from British Columbia on this topic, please see our blog post here regarding Gormac Developments Ltd. v Teal Cedar Products Ltd., 2020 BCSC 712.

[1] Escape 101 Ventures Inc. v. March of Dimes Canada, 2021 BCCA 313 at para. 20 (citing Sattva Capital Corp. v Creston Moly Corp., 2014 SCC 53 at paras. 50, 53-55).

[2] Ibid at paras. 27-32.

[3] Ibid at para. 33.

[4] Ibid at para. 41.

[5] Ibid at para. 43.

[6] Ibid at para. 49.

[7] Ibid.

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