Eyelet Investment Corp. v. Song, 2024 ONSC 2340

CITATION: Eyelet Investment Corp. v. Song, 2024 ONSC 2340

DIVISIONAL COURT FILE NO.: 455/23

DATE: 20240422

ONTARIO

SUPERIOR COURT OF JUSTICE DIVISIONAL COURT

Lococo, Myers and LeMay JJ.

BETWEEN:

EYELET INVESTMENT CORP., c.o.b. Treasure Hill Homes

Appellant

– and –

LI (LILY) SONG, BO XIAO, DONGMEI ZHAO, MESFIN YERSAW and EKATERINA AMKHA

Respondents

Stephen Brunswick and Victoria Ostrovsky, for the Appellant

Peter I. Waldmann, for the Respondents Bo Xiao, Mesfin Yersaw, Ekaterina Amkha and Dongmei Zhao

Lily Song, appearing on her own behalf in person

HEARD at Toronto, March 25, 2024

FL Myers J

REASONS FOR DECISION

[1] Domestic arbitrations in Ontario must be decided in accordance with the law. Arbitrators are accorded broad deference for matters within their jurisdiction and in defining the scope of their jurisdiction. But they are not free to ignore the law or to decide cases in accordance with their whims.

Background

[2] The appellant Eyelet Investment Corp. builds and sells new residential houses. It sold houses to the respondents pursuant to separate but virtually identical agreements of purchase and sale. When the market soured, the respondents advised the builder that they did not intend to close their purchases. The builder accepted the buyers’ repudiation of their contracts and resold the houses at a loss. It also incurred carrying costs for each house that it would not have incurred had the respondents closed their purchases as they had agreed.

[3] The builder treated the buyers’ deposits as forfeited and commenced legal proceedings against the buyers to recover the remaining losses it sustained by their alleged breaches of their agreements of purchase and sale.

The Arbitration on Liability

[4] Under the terms of the agreements of purchase and sale, the parties agreed to resolve disputes by arbitration. This is a requirement imposed by Tarion Warranty Corporation in its standard forms applicable to freehold new home purchases in accordance with a regulation under the Ontario New Home Warranties Plan Act, R.S.O. 1990, c. O.31.

[5] The arbitrations proceeded together. The buyers raised a common defence.

[6] The Arbitrator, Dr. Chaowu Jin aka Horace King, held a hearing on liability issues alone on October 1, 2, 20, and November 14, 2018. The Arbitrator deferred the assessment of damages until he decided whether the buyers were liable for breach of contract as claimed by the builder.

[7] The Arbitrator released an award on liability dated December 5, 2018. He held in favour of the buyers.

[8] The buyers said that they were entitled to refuse to complete their purchases because the builder had not checked the “yes” or “no” boxes provided in the Tarion standard terms incorporated into their agreements of purchase and sale. The tick boxes indicated whether the agreements were subject to any early termination conditions.

[9] None of the purchases involved any issues over any of the listed optional early termination clauses. No one tried to exercise any rights under any of the clauses for example. The Arbitrator held that the builder was required to tick a box in the Tarion form and its failure to do so, no matter how immaterial on the facts, amounted to a lawful basis for the buyers to walk away from their agreements.

[10] Moreover, although the purchasers had written to the builder to demand the return of their deposits, the arbitrator held that the builder was not entitled to accept their anticipatory repudiation of their agreements. Instead he ordered the builder to return the purchasers’ deposits to them.

[11] It is readily apparent that the arbitrator’s original decision did not articulate or correctly apply the applicable law of contract in Ontario.

The Appeal before O’Brien J.

[12] The appellants appealed the decision of the arbitrator to the Superior Court of Justice. I will consider below the issue of whether that was the proper forum for the appeal.

[13] In a decision dated October 18, 2019, reported as Eyelet Investment Corp. v. Song, 2019 ONSC 5910, O’Brien J. allowed the appeal. She found that when the buyers refused to close their purchases, they committed anticipatory breaches of their agreements. This entitled the builder to terminate the agreements and to seek compensation for any damages that the buyers’ breaches of contract caused it to incur.

[14] Specifically, O’Brien J. held that on proper interpretation of the agreements of purchase and sale, the builder’s failure to tick “yes” or “no” in relation to a list of inapplicable early termination provisions was immaterial. The builder’s failure to tick a box had no meaningful effect on any of the buyers or their rights.

[15] In the absence of a material breach of contract by the builder, it follows that the buyers had no right to terminate the agreements of purchase and sale. When they told the builder that they were not going to close, they committed anticipatory breaches of their contracts. This gave the builder the option to insist upon performance or to accept the terminations and sue for damages. The builder chose the latter option.

[16] O’Brien J. set aside the Arbitrator’s award, held the purchasers liable for their breaches of contract, and referred the cases back to the Arbitrator to assess the builder’s damages and to assess costs.

[17] None of this is challenged in this appeal. It’s what came next that forms the issue before this court.

The Final Award

[18] When I deal with the issue of remedy below, I will consider some procedural issues that arose between the time that O’Brien J. sent the matter back to the Arbitrator and the release of his final award.

[19] The Arbitrator released his final award on damages and costs on July 5, 2023. It is an improper decision that must be quashed for a number of reasons that I will now review.

[20] The Arbitrator starts by critiquing the decision of O’Brien J., which was binding on him.

[21] He challenged the propriety of the appeal decision because he said he could not find any right of appeal of his initial award in the parties’ arbitration agreements. Yet it is right there in black and white in para. 11 of each one of the agreements of purchase and sale.

[22] The Arbitrator then decided that although he could not find a right of appeal, because none of the parties objected to the appeal, he would deem them to have amended their agreements to allow them to appeal under s. 45 of the Arbitration Act, 1991, S.O. 1991, c. 17.

[23] Then, despite deeming the agreements to allow an appeal, he went on to ignore the right of appeal and found that the only mechanism for a court to review his prior decision was under s. 46 of the Arbitration Act, 1991. That section allows a court to review arbitral decisions on limited grounds that go to the constitution of the tribunal, natural justice, and the duty of fairness.

[24] The Arbitrator then criticized O’Brien J. for failing to state any of the grounds in s. 46 that would allow the court to review his award. Reviewing the court’s involvement based on the limited terms of s. 46 is inconsistent with the Arbitrator’s decision to deem that the parties’ agreements included a right of appeal.

[25] The Arbitrator then questioned the applicability of the reasonableness standard of review applied by O’Brien J. on the appeal. He apparently does not think it appropriate to apply a reasonableness standard to commercial arbitration. The arbitrator seems to have objected to the idea that his decision was subjected to a greater level of scrutiny than was proper. In fact, on an appeal, the standard of review for errors of law is correctness: see Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65

2019 SCC 65, [2019] 4 S.C.R. 653, at para. 37. O’Brien J. adopted a more deferential reasonableness standard of review for an arbitration pending the determination by appellate courts of whether Vavilov changes the standard of review in arbitrations as it has for appeals from administrative tribunals.

[26] Having concluded his analysis of the court’s involvement, he wrote:

[19] It's more appropriate for the court to set aside the award and make a new decision instead of remitting the case back to the tribunal for determination of the arbitration costs and damages if Justice O'Brien believes that the disputes in this case should not be governed by the Arbitration Act and she has authority to do so under any other act.

[20] However, as the court has already accepted the appeal, and the claimants in the arbitration voluntarily participated in the court proceeding of appeal, the appeal has been finalized, and all parties have accepted the appeal decision, all parties in this case should be deemed to have agreed, post eventum, to amend their arbitration agreement to enable either party to appeal the arbitration award. Accordingly, the issue of legal breach of contract and the return of deposits shall be deemed to have been resolved, and will not be revisited, as insisted by Eyelet Investment.

[21] The issues that remain to be resolved in this continued arbitration are the cost of arbitration and the damages for breach of contract.

[27] All that was before O’Brien J. was an appeal on liability. The Arbitrator had not received evidence nor held a hearing on damages as yet. He also provides no explanation of how it could be appropriate institutionally for the court to take over an incomplete arbitration or how practically it could have done so.

[28] Recognizing that the issues remitted to him were damages and costs, the Arbitrator continued his analysis as follows:

[22] The fact that the appeal decision is binding on the parties concerned does not mean that it is binding on the tribunal. The core of the Arbitration Act is to prevent the court from unduly intervening in the matters of arbitration, as per section 6 of the Arbitration Act as discussed above regarding the limits over court intervention.

[29] The Arbitrator then notes that the parties and he must follow the law. But, he finds that he does not have to take the law as set out by the court on appeal from his decision:

[23]…There's no provision in the Arbitration Act requiring the arbitral tribunal make decision based on the directions of the court, otherwise arbitration would not have been universally regarded as an independent institution of resolving disputes but as an affiliation of the court. It appears to me that the role of court in arbitration is one of oversight based on the agreement of the parties concerned, rather than one of supervision. The court typically does not tell the arbitral tribunal how to make its decision. Even the oversight role of the court may be completely ruled out if the parties concerned agree to do so in their arbitration agreement, though extremely rare.

[24] As a commercial arbitrator, I am not in a position to comment on the appropriateness of superseding the Arbitration Act with the general principle of reasonableness. It is my understanding that in the event there're explicitly specified provisions in a statute, due respect should be given to the statute and could not be totally disregarded. My discussion about the statutory grounds for setting aside arbitration awards should not be interpreted as a disrespect for the court because it's my award that has been aside [sic] and the case has been remitted back to me to make a determination. In my opinion, the discussion is necessary. Nor should the above discussion be taken as a disobedience with the court order. On the contrary, I'll follow the directions of the Court in making a decision on the arbitration costs and the damages for breach of contract, which, in my opinion, is left to the discretion of the tribunal. [Emphasis in original.]

[27]… In the meantime, remitting the award to determine further issues based on her conclusion makes me feel that I'm given an assignment to do: substantiate her decision with merits which I don't believe exist. Without being convinced that it is not the Vendor that breached the contract, but the contrary, and without proper grounds for setting aside the award, I find it difficult to make an award to the opposite of the original one.

[30] The only correct statement in these paragraphs is the Arbitrator’s identification of the two issues that were remitted to him for decision. It is not open to the Arbitrator to choose to ignore the findings of the court on the basis that he does not like the standard of review that was applied or based on his view that the reviewing Court misinterpreted the statute. His failure to acknowledge that he was bound by the decision of O’Brien J. amounted to a fundamental error of law.

The Law Applies to Arbitrations

[31] Arbitrators, like judges, are required to follow the law of the land. Section 31 of the Arbitration Act, 1991 provides:

Application of law and equity

31 An arbitral tribunal shall decide a dispute in accordance with law, including equity, and may order specific performance, injunctions and other equitable remedies.

[32] In Omers Realty Corp. v. Sears Canada Inc. (2005), 2005 3983 (ON SC), 74 O.R. (3d) 423 (S.C.), at para. 22, aff’d (2006), 2006 16477 (ON CA), 80 O.R. (3d) 561 (C.A.), Pepall J. (as she then was) explained at para. 22:

Section 31 of the Arbitration Act, 1991 provides that an arbitral tribunal is to decide a dispute in accordance with the law. The arbitration represents a process to address a dispute; it does not confer jurisdiction to ignore or rewrite the law and established legal principles. Put differently, the arbitration provision does not confer on the arbitrators the ability to do what they please unencumbered by applicable legal principles.

[33] There are many sources of law. The courts do not have a monopoly on establishing the content of the law. But the Arbitration Act, 1991 creates a hierarchy that feeds into the judicial hierarchy and attracts the doctrine of stare decisis. Section 37 of the statute provides:

Binding nature of award

37 An award binds the parties, unless it is set aside or varied under section 45 or 46 (appeal, setting aside award).

[34] Subsection 45 (5) of the Arbitration Act, 1991 provides,

Idem

(5) The court may confirm, vary or set aside the award or may remit the award to the arbitral tribunal with the court’s opinion on the question of law, in the case of an appeal on a question of law, and give directions about the conduct of the arbitration.

[35] The effect of these provisions is that once an arbitrator’s decision is set aside, it no longer binds. The court is expressly provided with the authority to opine on questions of law and to give directions to the arbitrator in consequence. It is implicit in the section and consonant with stare decisis and common sense, that the court’s determination of the law and the court’s directions do indeed bind the arbitrator as they bind the parties.

[36] It was not open to the Arbitrator to ignore the findings of the court on appeal regardless of whether he believes that he is correct in his view of the merits. Nor is he entitled to impose a burden on a court to convince him of the existence of breaches of contract even if they are the opposite of the findings he made. His findings were wrong in law and O’Brien J. was empowered, entitled, and duty-bound to say so. He, on the other hand, was bound to implement the findings of the court regardless of whether he accepts the applicable principles.

[37] It is not a question of the status of individuals binding or trumping others. Rather, as stated by Pepall J., all decision-makers under the Arbitration Act, 1991, whether arbitrators or judges on appeal, are governed by applicable legal principles. Just as my assessment of applicable principles yields to courts of appeal with statutory jurisdiction to correct my mistakes, so too do the decisions of arbitrators yield to correction on appeal.

[38] If a party believes that the appeal court has erred, she can always appeal (or seek leave to appeal) from that decision. That was not done in this case and the parties and the Arbitrator are all bound by O’Brien J.’s decision.

The Damages Award

[39] Instead of following the directions provided by O’Brien J. to assess the builder’s damages caused by the buyers’ breaches of their contracts, the Arbitrator revisited whether, in his view, the buyers should be responsible for the builder’s damages:

[29] To determine whether purchasers should be held responsible for the damages of the developer, the fault of the parties concerned in the occurrence of disputes and failure to close the deal should be considered. Through the oral hearing, I found that ineffective communication between the parties and the developer's failure to check the "yes" or "no" boxes in the Agreements of Purchase and Sale were the primary causes. These primary causes cannot be attributed to the purchasers only. There was no evidence proving the developers' failure to fulfill its mandatory obligation of checking the "yes" or "no" boxes was because of the purchasers' requesting it not do it or any other conduct of theirs that prevented the developer from fulfilling its legal obligation as required by the regulatory body.

[30] Accordingly, each part shall be held responsible for its own fair share of the damages that Eyelet Investment claims to have suffered. In consideration that forfeiture of deposits has already been mitigated the damages of the developer, it'll be evidently unfair to order the purchasers to pay for any other damages caused not exclusively by the purchasers. A real estate dispute of a similar time and similar nature in Ontario may illustrate the apportionment of liabilities for damages:

[1] The appellant was the purchaser under an agreement of purchase and sale of a residence in Mississauga. He failed to close on the date set for closing, received a number of extensions, but failed to close on any of the extended dates. The respondent vendors relisted the property and ultimately sold it for less than the price that the appellant had agreed to pay. In the action by the respondents for damages for breach of the agreement, the summary judgment motion judge awarded the difference in price to the respondent vendors, together with a number of consequential loss items. She also ordered that the deposit of $75,000 paid by the appellant purchaser be forfeited and not credited toward the damage award.

[2] On this appeal, the appellant's position is that the motion judge erred by failing to find that the respondents are not entitled to any damages because they failed to tender properly and were not ready, willing and able to close, and by finding that the respondents reasonably mitigated their damages. He also says that the motion judge erred by failing to credit the forfeited deposit toward the damages.

[3] For the reasons that follow, I would allow the appeal on the deposit issue only. The amount of the forfeited deposit must be credited toward the damage award. Azzarello v. Shawqi, 2019 ONCA 820.

[31] Unlike in the present case, which is in nature a contributory breach of contract, in Azzarello v. Shawqi, there's no dispute over who was in breach of contract and which party should be responsible for the failure to close the deal, the court endorsed the appellant and treated the forfeited deposit as mitigated damages. [Emphasis in original.]

[40] As best as I can tell, the Arbitrator found that the builder committed a “contributory breach of contract” by being primarily at fault for failing to tick the correct box in the agreements of purchase and sale. On that basis he determined that the parties should each bear their own “fair share” of damages. He determined that it would be unfair to award any damages to the builder caused “not exclusively by the purchasers” and therefore the builder’s damages were limited to the forfeiture of the buyers’ deposits.[^1]

[41] There is no such thing as a “contributory breach of contract” to determine a fair sharing of contractual damages. For the past 170 years, the law of contract has provided that a party who breaches a contract is required to pay money damages to put the other party in the position he or she would have occupied but for the breach. Hadley et al. v. Baxendale et al., [1854] EWHC J70 (Ex. Ct.).

[42] Only the buyers breached their agreements. The builder’s failure to tick the boxes was held by O’Brien J. to be immaterial and did not provide the buyers a basis to avoid their obligations to close their purchases despite the decline in the market price of the houses they purchased. The arbitrator erred in law therefore in considering the cause of the builder’s failure to check boxes as the measure of the builder’s damages. It is not even a relevant consideration.

[43] The breaches for which damages were to be assessed were the buyers’ refusals to close their transactions and to pay the agreed prices for their newly built houses.

[44] The proper measure of damages was actually recited by the Arbitrator in his quotation from the Court of Appeal’s decision in Azzarello v. Shawqi. As he quoted above, when a buyer breaches a contract to buy a house and the vendor re-sells at a loss, the correct measure of damages is “the difference in price to the respondent vendors, together with a number of consequential loss items.” In most cases, as in Azzarello, the vendor must account for or give credit for the deposits already held.

[45] The straightforward task remitted to the Arbitrator by O’Brien J. was to determine the builder’s damages under each agreement of purchase and sale as follows:

(a) identify the contract price that the relevant buyer agreed to pay;

(b) deduct the amounts received by the builder on re-sale of each house;

(c) add the consequential carrying costs incurred by the builder having to maintain each house until the subsequent sale closed; and

(d) deduct the deposits already paid in escrow by each buyer that must be released to the builder if not yet done.

[46] Unfortunately, in view of the procedural status of the arbitration, these straightforward calculations cannot be determined definitively on the record before us.

Process Issues

[47] Upon the release of the decision by O’Brien J., the parties launched into an uncontrolled debate as to the scope of the evidence to be heard by the Arbitrator in the damages phase of the arbitration.

[48] It is hard to understand the litigation by correspondence over the three-year time period. Nothing is served by going through painstaking details only to conclude that there is no clarity as to what evidence was in the record on damages and that there was never a hearing held to take evidence on the damages issues.

[49] In essence, to respond to the builder’s claim for damages, the buyers purported to deliver pleadings raising the same liability issues that had already been determined against them. They raised the liability issues ostensibly to claim that the builder’s bad behaviour amounted to a failure to mitigate its damages. The builder sought to have the pleading struck out or a preliminary finding made that the law of res judicata prevented the buyers from relitigating, in the guise of a damages assessment, issues that were already resolved on liability.

[50] For reason that are less than clear, the parties were unable to have the matter heard efficiently by the Arbitrator. Instead, the builder tried three times to have the court order that the scope of the further damages hearing was limited to damages as directed by O’Brien J.

[51] I do not know why the builder thought it appropriate to try again after one judge gave the obvious answer that the court does not determine the process for an arbitration. By try again it did – twice – to the same result.

[52] In an unreported decision dated February 23, 2023, Dineen J. explained that the arbitration had run aground over the question of whether the buyers’ pleadings exceeded the scope of the hearing directed by O’Brien J. He explained:

[6] A supplemental affidavit says that the arbitrator was "confused as to the scope of his jurisdiction." Some of the respondents have filed notes from the hearing that offer a very tendentious account of what took place peppered with personal criticisms directed at counsel for the appellants. In oral argument before me, the parties fundamentally disagreed on what took place and why the arbitrator did not make a ruling. The appellants say the arbitrator agreed that this motion to this Court was appropriate, while the respondents say the appellants in effect unilaterally withdrew from the arbitration.

[7] I am not prepared to make what amounts to a procedural ruling to micromanage the conduct of the arbitration, nor do I believe that the judgment of O'Brien J. and the endorsement of Chalmers J. on the issues to be determined at the arbitration require further clarification.

[8] It is the arbitrator's task to determine how the arbitration should proceed and to ensure that it proceeds in an efficient fashion, and he can determine which pleadings, arguments, and evidence are relevant. It is for him to decide both procedurally and substantively how to resolve the objection of the appellants to the respondents' submissions.

[9] I would direct that the arbitrator resume and conclude the proceeding as soon as possible, including deciding what ruling to make on the appellants' procedural motion. Any party dissatisfied with the final outcome can then consider their remedies.

[53] On May 21, 2023, the arbitrator finally made a procedural ruling for the completion of the arbitration on damages and costs as directed by O’Brien J. He held:

The present motion is to decide the procedure for a decision on the legal costs and damages for breach of contract, as ordered by Justice O'Brien dated October 18, 2019. According to Section 43 of the Arbitration Act, 1991, c.17, s.43, an arbitration may be revived for the purpose of appeal. As Justice O'Brien remanded the case to the arbitration tribunal to determine the arbitration costs and damages, the arbitration has to be revived. Further, Section 19 of the Arbitration Act requires that each party shall be given an opportunity to present a case and to respond to the other parties cases, it'll be evidently unfair if the moving party is allowed to produce new case material while the respondents are not given the same opportunity.

As the initial arbitration had been terminated in 2018, neither party should be allowed to present new evidence or material under the doctrine of res judicata and issue estoppel. Therefore, the moving party's motion is partially allowed. At the same time no new arbitral proceeding will be held; alternatively, an additional final award will be made under Section 42 of the Arbitration Act, 1991, c.17, s. 42. The substantive contents of the award will be made under section 31 of the Arbitration Act, 1991, c.17, s. 31. based on the claims of the Claimant and the evidence that had been submitted by all parties in the initial arbitration in 2018

[54] That is, although the arbitration was revived and the statute requires the parties be given an opportunity to present their cases, there would be no further evidence and no further opportunity to present a case provided. With the issue of damages deferred previously, there would be no opportunity to the builder to deliver damages evidence and no opportunity to the buyers to raise the issue of mitigation of damages if so advised.

[55] In a letter dated May 25, 2023, counsel for the builder suggested that the builder would deliver written submissions by June 30, 2023 and that the buyers would respond by August 8, 2023. Reply submissions, if any, would follow on August 29, 2023.

[56] The builder delivered a 25-page submission on damages and costs on June 30, 2023. It included in an unsworn submission charts listing contract and re-sale prices for each lot and a chronology for each lot. It made reference to numerous other charts including some back-up material for carrying costs. The charts in the June 30, 2023 submission were evidence and not submissions. There are references to a compendium to support references to oral evidence and documents. Not only are the origins of this material opaque, but there are also no findings on any of it by the Arbitrator. We do not know what was actually before him in evidence and whether he accepted or rejected any or all of it.

[57] The Arbitrator released his final award on damages and costs on July 25, 2023. That was two weeks prior to the date that had been suggested for the buyers to deliver their responding submissions. The Arbitrator had no submissions from the buyers before releasing his final decision.

[58] The final award makes no reference to the calculation of damages according to the legal formula for doing so set out above. He did not address the financial calculations claimed by the builder. Neither did the Arbitrator mention the issue of mitigation. He just expressed his disagreement with the findings of O’Brien J. and created a legal fiction of contributory breach of contract to avoid assessing the builder’s damages as he was required to do.

[59] The buyers submit that the decision should stand although they did not succeed on their claims of mitigation. They submit that the Arbitrator ruled that there would be no further evidence and therefore the builder did not prove its damages.

[60] In my view, the decision cannot stand because the Arbitrator did not assess damages in accordance with the applicable legal principles. Moreover, he denied both parties the right to adduce evidence on the issue that had been deferred previously. As a result, we have an insufficient record to even attempt to assess damages.

[61] A new hearing is required on damages and costs as already ordered by O’Brien J.

Jurisdiction

[62] An astute reader might have wondered why the first appeal from the Arbitrator went before O’Brien J. as a single judge of the Superior Court of Justice while this appeal came before a panel of the Divisional Court.

[63] Under s. 45 of the Arbitration Act, 1991, and the definitions in s. 1 of that statute, an appeal from a domestic arbitration is taken to the Superior Court of Justice. But s. 17(4) of the Ontario New Home Warranties Plan Act provides:

Arbitration

(4) Every agreement between a vendor and prospective owner shall be deemed to contain a written agreement to submit present or future differences to arbitration, subject to appeal to the Divisional Court, and the Arbitration Act, 1991 applies.

[64] As this is an appeal from an arbitration provision in an agreement referred to in s. 17(4), an appeal lies to this court. As the appeal is subject to the Arbitration Act, 1991 and that statute provides for appeals to the Superior Court of Justice, it is not clear to me that the Superior Court is necessarily deprived of its jurisdiction to hear an appeal under s. 45 of that statute.

[65] Even if one accepts that the appeal before O’Brien J was taken to the wrong court and that the Superior Court of Justice had no jurisdiction to hear the appeal, it does not change the outcome. Despite the Arbitrator deeming of agreement by the parties, it seems to me that a court generally cannot obtain jurisdiction by consent. That would mean that O’Brien J. lacked jurisdiction to hear the appeal before her.

[66] If the appeal before O’Brien J. is a nullity, then so too is the subsequent award by the Arbitrator taken pursuant to the referral back to him under s. 37 of the Arbitration Act, 1991. In that case, the final award by the Arbitrator must be set aside in any event.

[67] But that result would leave the initial award on liability extant pending an appeal in this court. No one suggested that the initial award should be revived. The contract analysis by the Arbitrator cannot stand on any standard of review. It was wrong, unreasonable, legally unintelligible, and palpably so. If O’Brien J. lacked jurisdiction to hear the appeal before her, I would transfer it to this proceeding and allow the appeal as she did.

[68] Mr. Waldmann brought a motion to quash the appeal on this basis that the court has no jurisdiction to hear an appeal limited solely to challenging the factual findings of the Arbitrator. Mr. Brunswick did not make submissions on this issue. As I have found that the Arbitrator made numerous, serious errors of law in both of his awards, this motion is not well-founded.

Costs Below

[69] The Arbitrator purported to make a costs decision under the arbitration agreements. But he gave no consideration to the outcome and considerations under Rule 57.01 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 by analogy to practice under the Arbitration Act, 1991.

[70] The costs award flows from the damages award. Until an arbitrator decides damages and considers the full scope of the proceeding through a corrected legal lens, the costs award cannot stand.

The Required Damages Hearing

[71] The Arbitrator held that forfeiture of the buyers’ deposits mitigated the builder’s damages. As a matter of law, this conclusion is wrong.

[72] The Court of Appeal has been clear with its approach to assessing damages in a failed real estate transaction. In Arista Homes (Richmond Hill) Inc. v. Rahnama, 2022 ONCA 759, at para. 9, the Court of Appeal held:

[9] Where a purchaser fails to close a real estate transaction and the vendor takes reasonable steps to sell the property in an arm’s length sale to a third party in mitigation of damages, and there is nothing improvident about the sale, the difference between the two sale prices will be used to calculate the damages: 642947 Ontario Ltd. v. Fleischer (2001), 2001 8623 (ON CA), 56 O.R. (3d) 417 (C.A.) at para. 41; 100 Main Street Ltd. v. W.B. Sullivan Construction Ltd. (1978), 1978 1630 (ON CA), 20 O.R. (2d) 401 (C.A.), at para. 55. In such circumstances, there will be no need for expert evidence: Marshall v. Meirik, 2021 ONSC 1687, at para. 30, aff’d 2022 ONCA 275.

[73] The Court of Appeal has also been clear about the issue of mitigation in a real estate context. In Tribute (Springwater) Limited v. Atif, 2021 ONCA 463, at para. 14, the Court of Appeal held that where a buyer alleges that the vendor failed to mitigate its damages, the buyer bears the onus to prove on a balance of probabilities, “both that the plaintiff failed to make a reasonable efforts to mitigate, and that mitigation was possible: Southcott Estates Inc. v. Toronto Catholic District School Board, 2012 SCC 51, [2012] 2 S.C.R. 675, at paras. 24, 45.”

[74] A buyer’s deposit is held as an earnest to bind the buyer to her bargain. It is applied in reduction of the vendor’s damages in most cases to avoid double-recovery. But it is not relevant to mitigation of damages in this context.

[75] As a result, in the next phase of the arbitration, the parties’ evidence will be limited to proof of damages and then submissions as to costs. Damages are limited to the comparison of contract sale prices with re-sale prices of each property, any special damages by way of carrying costs, and application of the deposits. Mitigation, if raised, relates solely to efforts by the builder to re-sell the houses after it had terminated each agreement of purchase and sale. None of the issues raised at the first hearing concerning the builder’s behaviour while the agreements were on foot is relevant. Without limiting the generality of the foregoing sentence, the buyers’ allegations that the builder acted in bad faith in its imposition of closing dates is not relevant to mitigation or damages. Similarly, buyers cannot raise as mitigation allegations that the vendor ought to have negotiated with them or sold to them for less than the agreed contract prices. See Azzarello, at paras. 39 and 40.

[76] The final award of the Arbitrator dated July 25, 2023 is set aside. The issues of damages and costs as set out by O’Brien J. are referred back to a different arbitrator for early resolution. The arbitrator shall be determined by the parties' agreement, failing which by the Superior Court of Justice upon application under the Arbitration Act, 1991.

[77] The damages hearing is to be limited to issues set out in paragraphs 45 and 72-75 above plus oral or written costs submissions as the arbitrator may determine after consultation with the parties.

Costs

[78] The builder succeeded on this appeal and is presumptively entitled to partial indemnity for its costs. Costs must be fair and reasonable. To protect against unanticipated high costs awards that could undermine access to justice, the amount of costs to be paid should be within a range that the paying party ought reasonably to have anticipated being at risk of paying.

[79] The builder incurred total legal fees, including disbursements and taxes, of almost $140,000 on this appeal. To claim partial indemnity, it reduced its fee claim to eliminate some duplication among senior counsel and then it seeks 60% of the reduced amount of fees in accordance with the prevailing rule of thumb. In all, it claims costs of $60,000 from the buyers.

[80] The buyers represented by Mr. Waldmann submit that they incurred legal costs of almost $30,000. They would seek partial indemnity of approximately $20,000 if successful in the appeal.

[81] It is not at all surprising or unusual that the appellant’s costs were substantially higher than those of the respondent. The appellant bore the burden of putting the entire arbitration process before the court and explaining the morass in which they had been entangled. The respondents, by contrast, could rest on their laurels and simply support the decision fo the Arbitrator.

[82] In fact, the respondents represented by Mr. Waldmann did not just respond. They brought a motion to quash the appeal that had no merit. But it did require the appellant to prepare additional materials and to attend court.

[83] I have reviewed the appellant’s Bill of Costs. The rates claimed are well within market. The hours claimed are reasonable. In all, it is fair and reasonable for the respondents represented by Mr. Waldmann to be jointly and severally liable to pay the appellant it costs on a partial indemnity basis fixed at $60,000 all-inclusive.

[84] Ms. Song represented herself on the appeal. She says she made offers to settle that could bear upon a costs assessment. Therefore, I am unable to determine costs in relation to Ms. Song without hearing from her.

[85] Ms. Song may deliver to the Divisional Court office no more than three pages of costs submissions by May 3, 2024. Counsel for the appellant may respond with no more than three pages of submissions by May 10, 2024.

[86] Submissions may also include copies of any offers to settle on which the parties rely for costs purposes. These are not included in the page limits above.

Myers J.

I agree _______________________________

Lococo J.

I agree _______________________________

LeMay J.

Released: April 22, 2024

Eyelet Investment Corp v. Song, 2024 ONSC 2340

DIVISIONAL COURT FILE NO.: 455/23

DATE: 20240422

ONTARIO

SUPERIOR COURT OF JUSTICE DIVISIONAL COURT

Lococo, Myers, and LeMay JJ.

BETWEEN:

EYELET INVESTMENT CORP., c.o.b. Treasure Hill Homes

Appellant

– and –

LI (LILY) SONG, BO XIAO, DONGMEI ZHAO, MESFIN YERSAW and EKATERINA AMKHA

Respondents

REASONS FOR DECISION

FL Myers J

Released: April 22, 2024

[^1]: I note that the Arbitrator does not explain why it is fair, in his conception of the law, to make the buyers lose their deposits.