2012 ONSC 3741

COURT FILE NO.: CV-11-436306 DATE: 2012-06-25

SUPERIOR COURT OF JUSTICE – ONTARIO

RE: 2V Bethridge Road Investments Corp, Applicant AND: LOW RISK LOGISTICS INC., 6482406 CANADA LTD. and, 1551164 ONTARIO INC., Respondents

BEFORE: Stinson J.

COUNSEL: Alistair Riswick, for the Applicant Maureen Whelton and Ed Hiutin, for the Respondents

HEARD: June 5, 2012

ENDORSEMENT

[1] This is an application for leave to appeal and, if leave is granted, an appeal from the decision made by the Honourable Douglas Coo, attributor, on September 19, 2011. The applicant seeks leave to appeal on issues of law in pursuant to s. 45(1) of the Arbitration Act, S.O. 1991, c. 17 and asserts that the determination of those issues are of importance to the parties and affect what otherwise would be an ongoing contractual relationship.

[2] If leave is granted, the applicant asked the court to find that errors of law were made by the arbitrator and that his decision was incorrect. The applicant who seeks an order setting aside the decision of the arbitrator and dismissing the motion that was heard by him.

[3] The respondents submit that leave should be refused because the issues raised are not pure questions of law but questions of mixed fact and law for which no appeal is available. In any event, the respondent contends that the reasons of the arbitrator when read fully disclose no errors in law and should not be disturbed.

Factual Background

[4] The applicant is the owner of adjacent commercial warehouse properties known municipally as 155 and 165 Bethridge Road, Toronto. I will refer to it hereafter as the Landlord. The respondent Low Risk Logistics Inc. leased both properties under agreements to lease signed in May 2007 and November 2007 respectively. The respondent 6482406 Canada Ltd. and 1551164 Ontario Inc. are corporations related to Low Risk and they signed the agreements to lease as guarantors. I will refer to all respondents collectively as the Tenant.

[5] The agreement to lease 155 Bethridge was for a ten year term with two options to renew for a renewal term of five years each. The agreement to lease 165 Bethridge was for a five year term with an option to renew for an additional five year period. Thus the agreement relating to 165 Bethridge was due to expire in November 2012, if not renewed. As events unfolded, the Tenant vacated 165 Bethridge in April 2011 and ceased to pay rent under circumstances I will describe subsequently. Thus the Tenant has not been in occupancy of 165 Bethridge for many months.

[6] After moving into the premises, the Tenant complained about the condition of the buildings and the improvements that were supposed to have been made by the Landlord. In March 2008, the Tenant withheld its rent payment for both premises, leaving the Landlord to institute legal proceedings. The Tenant brought a motion to stay the legal proceedings due to an arbitration clause contained in the two offers to lease, which provided as follows:

Disputes between landlord and tenant that cannot be agreed to by negotiations between landlord and tenant are subject to binding arbitration in accordance with the Arbitration Act of Ontario.

The parties settled the motion and consented to an order referring the issues between the parties to arbitration. The terms of the order included a requirement that the Tenant paid the arrears of rent and continue to pay rent pending the arbitrator's decision.

[7] The parties selected the Honourable Douglas Coo to be the arbitrator. Unfortunately, Mr. Coo died shortly after releasing the decision that is the subject of this application. The parties advised me that they will be appointing a new arbitrator to address the remaining issues between them.

[8] The parties exchanged arbitration statements detailing the issues. Examinations for discovery were held, but not completed. Several hearing dates were scheduled, but adjourned. The substantive disputes that gave rise to the initial referral to arbitration have not yet been adjudicated.

[9] A prominent feature of the landlord and tenant disputes that are the subject of the arbitration is the state of repair of the premises, including which party was responsible for remedying the various alleged deficiencies. Ongoing dissatisfaction with the state of repair of the premises prompted the Tenant to have a construction expert (initially retained in connection with the arbitration) inspected the premises again in January 2011. The Tenant's counsel wrote to the Landlord's counsel on February 4, 2011 and asserted that 165 Bethridge was "completely unusable". The letter went on to state:

Further, with the accumulated snow on the roofs etc., my client is concerned about the safety of each of these buildings, particular 165 Bethridge.

[10] On February 10, 2011, counsel for the Landlord responded, stating in part as follows:

We had asked for the opportunity to inspect the buildings in my letter of September 23. Subsequently, we discussed dates in October. When we last spoke on November 11 you were to get back to me with respect to a date for a walkthrough and the other information that we were seeking pertaining to your clients' expert's report. I did not hear from you thereafter until receiving the letter of February 4.

At this point, we must insist on the opportunity to inspect the buildings, not just for the purpose of preparing a reply expert report but also for the purpose of determining what repairs and maintenance are required.

[11] Counsel for the Tenant responded by e-mail on February 15, 2011 stating, among other things, "[t]he roof at 165 leaks. The building is also freezing. The building is unusable."

[12] Thereafter, the Landlord conducted an inspection of the premises on February 25, 2011. During the course of that inspection, the Landlord found that 165 Bethridge was being used as a storage warehouse. With respect to the allegations of roof leaks, the Landlord sent its roofing contractor out and received a report dated March 2, 2012 which stated "[t]here is standing water on the roof surface that does not have any impact whatsoever on the structural integrity of the building."

[13] Neither the Tenant nor the Landlord provided the other party with the report each had received, in January and March 2011 respectively.

[14] In April 2011, the Tenant vacated 165 Bethridge. It did not inform the Landlord. Instead, it stopped payment on its rent cheque, leading the Landlord to initiate court proceedings. Once again, the Tenant took issue with the tact taken by the Landlord, insisting that the proper course of action relating to their disputes was to proceed by way of arbitration. The Tenant delivered a motion returnable before the arbitrator seeking a stay of the legal proceeding. Ultimately the parties resolved that issue themselves by, in effect, agreeing to fold in that rental dispute into the existing arbitration.

[15] On August 8, 2011, the Tenant delivered an amended notice of motion seeking as new relief – in addition to the stay of the court proceeding – a declaration that the Landlord had fundamentally breached the agreement to lease for 165 Bethridge and an order that the agreement to lease was terminated. The parties agreed to an inspection by the Landlord's engineer and the delivery of a report to respond to the reports contained in the Tenant's motion record. The Tenant's expert then had the opportunity to further inspect and to reply. It was only in the context of the exchange of materials relating to the motion before the arbitrator that the parties disclosed the reports each had obtained in January and March 2011 respectively.

[16] The arbitrator heard the Tenant's motion on September 13, 2011. In addition to the motion records filed by the parties, including the expert reports resulting from the inspection of the premises in late August to early September 2011, the experts themselves were present at the hearing and were cross-examined. There was no transcript kept of the oral evidence given at the hearing and thus the evidentiary record before me is incomplete.

[17] The issue to be determined on the motion before the arbitrator was noted in the arbitrator's reasons as being whether the Tenant had "the right to treat its rent obligations under the lease agreement of 165 Bethridge Road as at an end by reason of what amounted to a fundamental breach on the part of the landlord of its obligations having the effect of depriving the tenant for the future of substantially the whole benefit which it was the intention of the parties that it should obtain from the contract." The breach which was alleged by the Tenant for purposes of the motion before the arbitrator was:

The continuing and unrelieved failure on the part of the landlord to remedy deterioration of a wooden ceiling affixed beneath the steel roof of the warehouse building, in consequence of which it became unacceptably dangerous and unsafe, as presenting a hazard to the occupants of the building floor below.

[18] In the arbitrator's decision rendered September 19, 2011 he concluded that:

The tenant had the right to decline to pay rent from the date upon which its most recently stopped, that is for the months of April, May and June 2011 and that its rental obligations then ceased with respect to the building that has presented a contest between the parties.

[19] This decision was based on a determination that a sub-ceiling installed in a portion of the premises "presently represents a real danger to those who have or had responsibilities to function beneath that part of the structure." The Landlord asserts that the issue with respect to the sub-ceiling had only been brought to its attention when the Tenant's first expert's report was provided as part of the motion records in late July 2011. The fact that the sagging of the sub-ceiling had only been investigated by the engineers during the two weeks immediately prior to the hearing of the motion was dealt with by the arbitrator in his reasons as follows:

Fortuitous discovery by the tenant of the relevant facts supportive of its position, during efforts made to find support for ceasing to pay rent, does not add weight to the landlord's position.

Positions of the Parties

[20] There was no dispute raised with respect to the arbitrator's finding that the sub-ceiling had fallen into disrepair and constituted a danger. The experts on both sides recommended its removal. The position of the Landlord, however, is that the arbitrator erred in law by failing to construe the agreement to lease and by failing to give any consideration to the question of which party had the duty to repair. Even proceeding on the assumption that the Landlord had the duty to repair, the Landlord argues that it was still necessary for the arbitrator to determine whether the Landlord had breached that duty, in light of the evidence that the fortuitous discovery of the cause of the problem only happened within weeks before the hearing of the motion. The Landlord argues that it could not have been in breach of the obligation to repair in the circumstances. The Landlord argues that the arbitrator failed to interpret the agreement to lease between the parties and in so doing committed an error of law. The Landlord further argues that the arbitrator failed to apply the test for fundamental breach and thus committed a legal error.

[21] For its part, the Tenant argues that the issues raised by the Landlord on this application are questions of mixed fact and law, for which there is no right of appeal. In the alternative and in any event, the Tenant argues that there was no legal error made by the arbitrator and thus there is no basis upon which to interfere with his determination.

Analysis

[22] The relationship between the parties is subject to s. 45 of the Arbitration Act, 1991. Although they agreed in the agreement to lease that their disputes were subject to resolution by way of arbitration, their agreement did not address the question of appeals on questions of law, questions of fact or questions of mixed fact and law. As a consequence, an appeal to the court is permitted only on a question of law with leave. Leave is to be granted only if the court is satisfied that the importance to the parties of the matter at stake justifies an appeal and the determination of the questions of law will significantly affect the rights of the parties. Leaving aside questions of law, the parties agreed to a regime by which there was no appeal available on questions of fact or questions of mixed fact and law: see National Ballet of Canada v. Glasco (2000), 2000 CanLII 22385 (ON SC), 49 O.R. (3d) 230 at para. 55 (S.C.J.).

[23] The starting the position of the Tenant is that the issues sought to be raised by the Landlord on this appeal are mixed questions of fact and law. As such, no appeal is available. The Tenant relies on Shelanu Inc. v. Print Three Franchising Corporation (2003), 2003 CanLII 52151 (ON CA), 64 O.R. (3d) 533 at para. 110 (C.A.) where the following statement appears:

A trial judge's finding of fundamental breach is a matter of mixed fact and law. This is because it is a question "about whether the facts satisfy the legal tests" [authorities omitted]. The appropriate standard of review is dependent on where the error lies. As stated by Iacobucci and Major JJ. at para. 36 [of Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235]:

Matters of mixed fact and law lie along a spectrum. Where, for instance, an error with respect to a finding of negligence can be attributed to the application of an incorrect standard, a failure to consider a required element of a legal test, or similar error in principle, such an error can be characterized as an error in law, subject to a standard of correctness. Appellate courts must be cautious, however, in finding that a trial judge erred in law in his or her determination of negligence, as it is often difficult to extricate the legal questions from the factual. It is for this reason that these matters are referred to as questions of "mixed law and fact". Where the legal principle is not readily extricable, then the matter is one of "mixed law and fact" and is subject to a more stringent standard. The general rule, as stated in Jaegli Enterprises, supra, is that, where the issue on appeal involves the trial judge's interpretation of the evidence as a whole, it should not be overturned absent palpable and overriding error.

[24] I acknowledge that the ultimate decision by the arbitrator involved a conclusion by him that the conduct of the Landlord amounted to a fundamental breach sufficient to excuse the Tenant from further obligations under the agreement to lease. I have concerns, however, that in reaching that conclusion the arbitrator committed errors of law in failing to consider and address relevant legal principles and required elements of the legal test for a finding of fundamental breach. I therefore do not consider the above-quoted passage from the Court of Appeal in Shelanu to operate as a bar to the Landlord's appeal. Rather, I consider that the appeal has raised questions of law.

[25] While not conceding that the application raises questions of law, the Tenant does not argue strongly that the prerequisites of s. 45(1)(a) and (b) of the Arbitration Act, 1991 are not met in the present case. In my view, the quantum of unpaid rent during the balance of the term from April 2011 to November 2012 (in the order of $600,000) signifies the importance of the matter at stake. As well, the determination of the questions of law has the potential to significantly affect the rights of the parties given the collateral impact of the arbitrator's decision of September 19, 2011 on the ongoing landlord tenant disputes that remain the subject of the balance of the unresolved arbitration. In view of the foregoing, I conclude that the Tenant has satisfied s. 45(1). I therefore grant leave to appeal.

[26] In the reasons of the arbitrator he concluded that "the tenant had the right to decline to pay rent from the date upon which most recently stopped [April 2011] … and that its rental obligations then ceased …." It is implicit that he accepted the Tenant's argument that there had been a fundamental breach on the part of the Landlord. According to the Tenant, the breach was the "continuing and unrelieved failure on the part of the landlord to remedy deterioration of a wooden ceiling … in consequence of which it became unacceptably dangerous and unsafe …." It is further implicit in the conclusion of the arbitrator that he considered that the obligation to repair or remedy the ceiling problem was that of the Landlord.

[27] There is no discussion in the reasons of the arbitrator of the respective obligations of Landlord and Tenant under the agreement to lease. The arbitrator does note (in para. 17) that "[t]here is a continuing dispute between the parties as to what were the binding terms of lease agreements governing their conduct."

[28] In MacDougall v. MacDougall (2005), 2005 CanLII 44676 (ON CA), 262 D.L.R. (4th) 120 (Ont. C.A.), the Court of Appeal said as follows (at para. 30):

To begin with, the trial judge must apply the proper principles of contract interpretation, including consideration of the clause in the context of the entirety of the contract. A failure to follow the proper principles, including a failure to apply a fundamental principle of interpretation, would be an error of law attracting review on the standard of correctness.

In the present case, the arbitrator did not go through any analysis of the contract between the parties as a pre-condition to his conclusion that there had been a fundamental breach by the Landlord of its obligations. There is no sign that he grappled with the question of whose responsibility the ceiling removal might be. There is also no discussion in his reasons of the question whether a notice to the Landlord of the ceiling problem or an opportunity to remedy the alleged structural problem were prerequisites to the obligation arising on the part of the Landlord to carry out the ceiling removal.

[29] I acknowledge that an arbitrator's reasons need not be perfect or lengthy nor necessarily eloquent and they need not refer to all aspects of the evidence or every point raised in the case: see Crudo Creative Inc. v. Marin (2007), 2007 CanLII 60834 (ON SCDC), 90 O.R. (3d) 213 at para. 22 (Div. Ct.). Nevertheless, the reasons must be sufficient to enable a reviewing court to know whether the applicable legal principles and evidence were properly considered: see op. cit. In the present case, the reasons of the arbitrator do not satisfy me that he properly considered the issue of the allocation of responsibility for the repair or deficiency in question. In my view, his failure to do so amounts to an error of law.

[30] Turning to the elements of the principles of fundamental breach, both sides accept the appropriate legal principles are accurately recited in Place Concorde East Limited Partnership v. Shelter Corp. of Canada Ltd. (2006), 2006 CanLII 16346 (ON CA), 270 D.L.R. (4th) 181 (Ont. C.A.). That case reviews the basis for a finding of fundamental breach, as established by the Supreme Court of Canada in Hunter Engineering Co. v. Syncrude Canada Ltd., 1989 CanLII 129 (SCC), [1989] 1 S.C.R. 426. The Court of Appeal noted at para. 51 that "[a] breach that allows the non-repudiating party to elect to put an end to all unperformed obligations of the parties is an exceptional remedy that is available only in circumstances where the entire foundation of the contract has been undermined, that is, where the very thing bargained for has not been provided …." The court went on to recite the five factors outlined by Weiler J.A. in 968703 Ontario Ltd. v. Vernon (2002), 2002 CanLII 35158 (ON CA), 58 O.R. (3d) 215 at para. 16 (C.A.), "that provide guidance for the court's determination of whether or not a breach is a substantial breach such as would justify future non-performance of the innocent party's obligations." Those factors provide measuring posts by which the defrauding party's conduct may be assessed so as to determine whether this exceptional remedy is available.

[31] In the submission of the Tenant, although the arbitrator's reasons do not make express reference to these factors, read as a whole the reasons both indicated that the arbitrator was alive to the irrelevant legal principles and that he took them into account in reaching his decision. With respect, I am unable to accept that submission.

[32] Since I have concluded that the appropriate remedy is to set aside the decision of the arbitrator and to remit the matter back for reconsideration by the new arbitrator, the following should not be taken as prejudging any of the issues. One factor to be considered is the ratio of the parties' obligation not performed to the obligation as a whole. In my view, the arbitrator did not clearly grapple with the issue of the degree to which the Landlord performed its remaining obligations. The arbitrator did not address the question of the likelihood of repetition of the breach. This is particularly germane in light of the lack of timely disclosure by the Tenant of the engineering information as well as the late discovery by the experts of the true nature of the problem. By the time this information came to light, the Tenant had vacated. Further, the arbitrator made no determination regarding the relationship between the part of the obligation performed to the whole obligation. Given the exceptional nature of the remedy of fundamental breach, the parties and the reviewing court were entitled to know that these factors were considered. With the greatest of respect, the reasons of the arbitrator do not permit me to make that determination.

[33] I am alive to the principle that "the task taken by the tribunal to reach its decision must be clear from the reasons read in the context of the proceeding, but it is not necessary that the tribunal describe every landmark along the way.": see Clifford v. Ontario (2009), 2009 ONCA 670, 98 O.R. (3d) 210 at para. 29 (C.A.) citing R. v. R.E.M., 2008 SCC 51, [2008] 3 S.C.R. 3. In the present case, I am unable to say that the arbitrator grappled with the necessary issues. I am also of the view that the arbitrator erred in law by failing to address and apply the principles of contract interpretation as a preliminary step to reach his conclusion that there had been a fundamental breach. I therefore conclude that the decision of the arbitrator must be set aside.

Disposition

[34] With respect to the appropriate remedy, as I have noted, I do not have before me the complete record that was before me the arbitrator. I am therefore not in a position to substitute my decision for his. As I have further noted, the parties continue to be engaged in an arbitration process in relation to the other issues that brought them in conflict in the first place. The appropriate disposition of this appeal, therefore, is to set aside the decision of the arbitrator dated September 19, 2011 and direct that the issues raised by the Tenant's notice of motion be remitted to the new arbitrator selected by them for a rehearing in such fashion as the parties may agree or the arbitrator may direct, and I so order.

[35] The parties have agreed that the costs of the application should be fixed at $15,000 payable to the successful party. I therefore award that the sum to the Landlord, payable by all respondents, jointly and severally, within 30 days.

Stinson J.

Date: June 25, 2012