Court of Appeal Emphasizes Judicial Deference to Arbitration

Most people don’t realize that when they are engaged in an arbitration, their right to appeal an adverse decision is far more limited than it would have been in a court hearing. This point was emphasized in a recent decision of the Ontario Court of Appeal, Tall Ships Development Inc. v. Brockville (City) (“Tall Ships”). This decision is a reminder that that courts will be very reluctant in setting aside arbitral awards. Specifically, the Court has demonstrated that it will interpret the arbitrator’s decision in a manner that protects it from review, other than in exceptional circumstances.

Factual Overview

Tall Ships Landing Development Inc. (“Tall Ships”) and the City of Brockville (“Brockville”) entered into a public-private partnership where Tall Ships agreed to remediate and develop a waterfront condominium and a Maritime Discovery Centre on the St Lawrence River. The parties agreed that once the project was “substantially complete”, Tall Ships would sell it to Brockville under a formula set out in their contract. This formula included the cost of construction.

A dispute arose when the project’s construction costs increased significantly over budget and Brockville refused to pay these additional costs. The parties submitted their dispute to arbitration as required by the contract.

The arbitrator ruled in favour of Brockville and dismissed Tall Ships’ claims. The arbitration agreement between the parties specified that only “questions of law” (and not findings of fact) could be appealed. Tall Ships appealed the arbitral awards to the Ontario Superior Court of Justice on this basis. Tall Ships also requested that a new arbitrator to be appointed, claiming that the arbitrator had breached their right to procedural fairness.

Trial Court Decision

Tall Ships initially succeeded at the Ontario Superior Court of Justice, where the judge reversed the arbitral awards and ordered the appointment of a new arbitrator.

In making its decision, the court found that the arbitrator had made several legal errors. This finding was largely based on the arbitrator’s interpretation of a specific contractual term and Tall Ships’ duties as construction managers – neither of which had been pleaded by Brockville. The court also found that because the arbitrator had improperly implied a term into the contract, Tall Ships’ right to procedural fairness was breached. Accordingly, the arbitral awards were set aside .

Court of Appeal Decision

Brockville appealed the application judge’s decision to the Ontario Court of Appeal. In overturning the trial court’s decision, the Court found that the application judge did not use the correct analytical framework in analyzing the arbitrator’s decision as purely an error of law. Rather, the relevant findings were questions of “mixed fact and law”. For example, the Court decided that the arbitrator had not implied a term into the contract. Thus, as the arbitration agreement only allowed for an appeal route based on errors of law, the arbitral awards) were unappealable under the Arbitration Agreement or the Act.

As for the issue of procedural fairness, the Court stated that the breaches of procedural fairness “depended on the substantive questions of whether the arbitrator fell into errors of law”. Since there were no errors of law, there was no breach of Tall Ships’ right to procedural fairness.

Notably, throughout the decision, the Court of Appeal emphasized the policy reasons that shape how courts should consider appeals of arbitral awards. The very purpose of the arbitral process is to avoid “inefficiencies, delays and added expense”, and courts must be conservative in allowing arbitral awards to be appealed. The Court emphasized that “the circumstances in which a question of law can be extricated from the interpretation process will be rare”. Finally, the Court stressed that parties are not permitted to use the s. 46 of the Act to “bootstrap substantive arguments attacking an arbitrator’s findings which the parties had agreed would be immune from appeal”.[1]

Looking Ahead

Although Canadian law has long-held that arbitral awards are highly immune from challenge, Tall Ships has heightened the extraordinary degree of deference granted to arbitrators. The practical implication is that challenging arbitral awards is near-impossible, unless parties negotiate a contractual clause providing for broad appeal rights.

Parties entering into agreements that contain arbitration (or other dispute resolution) provisions should take special note of this decision. Given the Court’s narrow interpretation of when parties can bring an appeal to court, the scope of an arbitration clause and appeal routes should be carefully drafted. Perhaps most crucially, parties should take care in selecting an arbitrator to navigate the arbitration process as efficiently and fairly as possible.