SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: CV-12-469468

DATE: 20130327

RE: ZAFIR HOLDINGS INC., Applicant

A N D:

GRASSMERE CONSTRUCTION LTD., Respondent

BEFORE: MESBUR J.

COUNSEL: Patrick Summers for the applicant

Douglas E. Snider for the respondent

HEARD: March 20, 2012

E N D O R S E M E N T

The application:

[1] The applicant, Zafir Holdings Inc., seeks leave to appeal the arbitration award of arbitrator Glenn Ackerly dated September 24, 2012 and the supplementary award he made on November 9, 2012. The Arbitrator awarded the respondent, Grassmere Construction Ltd., $88,100 plus GST in relation to what the parties call the “earthworks issue”, and a further $80,226.46 in relation to the “other invoices” issue.

[2] Zafir cannot appeal the awards without leave. Section 45(1) of the Arbitration Act, 1991[^1] says that if the arbitration agreement does not deal with a question of law, a party may only appeal on a question of law, with leave. The subsection goes on to say that the court shall only grant leave if it is satisfied that:

a) The importance to the parties of the matters at stake in the arbitration justifies an appeal; and

b) Determination of the question of law at issue will significantly affect the rights of the parties.

[3] The parties acknowledge the arbitration agreement makes no reference to appeals on a question of law, or, indeed, to any other ground of appeal. The provisions of s. 45(1) are therefore engaged. The parties also agree that the two conditions set out in (a) and (b) above are met in this case. The only issue that divides them is whether the errors Zafir says the arbitrator made are pure questions of law, whether they are questions of mixed fact and law, or simply questions of fact.

[4] Simply put, Zafir says all the arbitrator’s errors arise as pure questions of law, whereas Grassmere characterizes them as questions of mixed fact and law, for which no appeal is permitted.

[5] In deciding whether to grant leave under s. 45(1) of the Arbitration Act there is no requirement for the court to doubt the correctness of the arbitrator’s award. The court need only conclude that the proposed grounds of appeal raise pure questions of law.[^2]

The legal framework:

[6] It is not always easy to differentiate between questions of law and questions of mixed fact and law. The Ontario Court of Appeal gave some helpful guidance on the issue in MacDougall v. MacDougall [^3]. There, Lang J.A. explained it in this way:

… 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 …

… in interpreting the contract, the trial judge also applies the legal principles to the language of the contract in the context of the relevant facts and inferences. This requires the application of law to fact. This has been said to be a question of mixed fact and law …

… If the question is an inextricable intertwining of both fact and law, the question can be said to one of mixed fact and law.

[7] Lang J.A. went on in her analysis to quote the decision of the Supreme Court of Canada in Housen v. Nikolaisen[^4] where the court said:

… 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 of law …

Where the principle is not readily extricable, then the matter is one of “mixed law and fact” …

[8] It is against this general framework I turn to the facts of the case, and the applicant’s grounds of appeal.

Background:

[9] The dispute between the parties arises in the context of a large industrial building project. The project was developed on property owned by the applicant, Zafir, with the work being carried out by the respondent Grassmere, as general contractor.

[10] Part of the project required having earth forming a pre-existing berm removed from the site. Grassmere hired a subcontractor, CvH to remove the soil. The Arbitrator found that CvH provided its price for the work based on a common understanding that a portion of the earth to be removed would be accepted as fill at a nearby project of EllisDon.

[11] Soon after CvH began to remove the earth, EllisDon refused to accept it. CvH continued to remove earth from the project to different locations, but had no agreement with either Grassmere of Zafir for payment for the additional cost of the work. CvH eventually abandoned the project and sued Grassmere and Zafir for the value of the work it had performed, on a time and materials basis.

[12] CvH also performed non-earthworks work on the project. This work comprises the “other invoices” the parties refer to. CvH rendered invoices for this work in 2004 and 2005. Grassmere did not pay.

[13] CvH sued Grassmere and Zafir and others. The essence of its claim against Grassmere was that it had entered into a contract with Grassmere to “supply labour, material and equipment in connection with the supply and placement of gravel together with on-site and off-site earth moving in connection with an improvement to the lands…”[^5] The claim alleges the agreed on sum for the work was $385,984.30, for which it had been paid $71,866.55, leaving a sum of $314,117.75 owing. CvH’s claim against Zafir was as owner of the property. That claim was in the nature of a construction lien.

[14] There was another lien action that was eventually settled.

[15] In the context of the lawsuits, Zaifr and Grassmere came to an agreement in which Zafir agreed:

Once a settlement has been finalized in both lawsuits, Grassmere has to submit an invoice to me and I will pay Grassmere Construction Ltd. and they will pay off the sub-trade if we do in fact end up owing them money. Both liens will have to be discharged prior to any money being paid to Grassmere Construction Ltd.

[16] Grassmere and Zafir reached another agreement in which they agreed that “any issue between them in relation to the CvH litigation will be left to be determined after the trial … any issues between Grassmere and Zafir … will be determined by arbitration upon notice of either Grassmere or Zafir …”[^6]

[17] The CvH lawsuit went to trial before Wood J over four days in November 2009 and May 2010. In written reasons delivered in June, 2010 Wood J. determined that CvH was entitled to $166,099 for the work it had done. After applying amounts already paid, and various credits, the amount due was reduced to $91,538.75 plus GST. The court granted CvH judgment against Grassmere for this amount. The case against Zafir, which was essentially a claim to enforce a construction lien, was dismissed.

[18] Zafir and Grassmere were not able to agree on amounts owing between them in relation to the CvH litigation. They submitted “the issues” to arbitration. Unfortunately, in their arbitration agreement the parties did not specifically articulate the issue or issues the Arbitrator was to decide. Instead, each set out a statement of issues for the Arbitrator.

[19] Before the Arbitrator, Grassmere took the position Zafir should pay it $231,766.23. It characterized this sum as relating to “the holdback and the CvH billings which were withheld pending the trial.”[^7] These sums came to $162,016.23. To this, Grassmere added its own defence costs in the CvH litigation, totalling $54,400 and the costs it had to pay CvH of $15,750. All these amounts taken together come to the $231,766.23 Grassmere said Zafir owed it.

[20] Zafir took the position Grassmere had been negligent in its supervision of CvH. It pointed out that in its lawsuit CvH had claimed amounts in connection with the supply and placement of gravel, but had been awarded nothing for these amounts. It also took the position it had no liability for any of Grassmere’s own defence costs, or the costs it had had to pay to CvH. Zafir denied Grassmere had paid anything to CvH, and had therefore incurred no losses. Finally, Zafir took the position that any of Grassmere’s claims that did not relate directly to the CvH litigation were statute barred.

[21] The Arbitrator framed the question he had to answer in this way:

What monies, if any, does Zafir owe Grassmere in relation to the CvH work (and the judgment obtained by CvH against Grassmere) or, alternatively, what monies, if any, does Grassmere owe to Zafir, given that the total cost to complete the earthworks exceeded the approved price for the work.

[22] The Arbitrator described the key to answering this question as “a proper understanding of the nature of the contractual relationship between Grassmere and Zafir.”[^8] He went on to say that his task was “therefore to determine a fair value for that soil removal work, taking into account the reasonable expectations of Zafir and the terms of the Contract.”[^9]

The essential facts as found by the Arbitrator:

[23] The Arbitrator made various factual findings that are germane to the questions on this application.

[24] Zafir and Grassmere initially entered into a standard form CCDC construction contract for the project. Although the initial project was limited in scope, and provided for a contract price of about $437,000 both the scope and complexity increased, with the contract value rising to over $6 million. The parties contracted for the additional work using a change order process.

[25] As the Arbitrator described it, Grassmere would get quotes for an element of this additional work, and review them with Zafir. Grassmere would then prepare a quotation for change order and submit it to Zafir. It would set out the price for the subcontract, plus a 10% markup to cover Grassmere’s overhead and profit. If Zafir accepted the change order, it would be signed and dated. Once Zafir had approved the quotation, Grassmere would issue a purchase order to the subcontractor for the agreed upon amount.[^10]

[26] The Arbitrator determined that the parties effectively moved from the fixed price general contract approach to an arrangement “more like a ‘cost-plus’ contract by which the fixed costs of the various subcontracts were passed through to Zafir for payment, together with a ‘fee’ of 10% to cover Grassmere’s overhead and the profit.”[^11]

[27] The Arbitrator went on to accept Zafir’s position that the subcontractors were “Grassmere’s problem”. The Arbitrator described the new process as effectively leading to the formation of a series of discrete contracts between Grassmere and Zafir for each of the items of work covered by specific change orders, under the overarching framework of the original CCDC Contract.

[28] The Arbitrator determined that Grassmere was committing to Zafir to have the work performed at the agreed upon price, subject to any terms and conditions either expressed by the parties or as may be reasonably implied.”[^12] The Arbitrator went on to say that in the absence of express language to the contrary, it would be reasonable to imply that the value of a subcontract for excavation would be adjusted if unanticipated soil conditions were discovered. In support of this conclusion, he referred to General Condition 6.4.1 of the CCDC Contract, which provides for a contractor to claim an adjustment to the contract price if conditions are discovered that increase the contractor’s cost.

[29] CvH was awarded the contract to do the earthworks work. Although CvH originally submitted a much higher quote, Grassmere obtained a contract price of $120,000. It told Zafir, however, that the quoted price was $160,000. Grassmere explained this figure as covering its additional costs of soil testing and equipment. Grassmere’s notes show the $160,000 price as subject to EllisDon receiving the fill. The Arbitrator concluded Zafir had reviewed these notes as well, and “understood the price he was being asked to approve was conditioned upon CvH being able to deliver the soil to the EllisDon site”.[^13]

[30] The Arbitrator determined that even though the change order for the $160,000 contract between Zafir and Grassmere did not contain the same caveat regarding the conditional nature of the acceptance of soil on the EllisDon site as the note had, “the parties certainly understood at the time that it was expected that the earth was to be hauled to the nearby EllisDon site. It follows that if the site were not available the haulage costs for the soil removal would have been higher.”

[31] When EllisDon refused to take the fill, CvH announced it would proceed with its work on a “time and materials contract” basis. Grassmere approached Zafir for approval of an additional $128,000 to cover the additional haulage costs. Further negotiations ensued among CvH, Grassmere and Zafir. Zafir refused to approve any increase in the subcontract price. Even though there was no agreement, CvH continued with some work, until it finally left the site, whereupon it demanded an additional $200,000 over and above the original price. Of the original contract price, CvH only received $78,000 less the holdback. CvH then sued, and the court found CvH was entitled to an additional $91,538.75 from Grassmere for the work it had done.

[32] The Arbitrator found that Grassmere had committed to Zafir to have the earthworks performed for $160,000 according to the approved change order. He went on to find, however, that Zafir was told, and therefore understood that the CvH contract price was conditional upon the fill being accepted at the nearby EllisDon site.

[33] The Arbitrator noted that if Zafir had not been advised, and had not understood about the condition, then Grassmere would have had to have the work completed at the stipulated price.

[34] The Arbitrator concluded in relation to the CvH litigation that Zafir’s liability to Grassmere was independent of the liability Wood J had determined was Grassmere’s liability to CvH. The Arbitrator decided on what he described as a “fair amount, being one which could reasonably expected to have been agreed to and paid by Zafir for the removal of the soil from the site once the EllisDon site had proven not to be available.”[^14]

[35] The Arbitrator went on to decide Zafir owed Grassmere $88,810 plus GST on account of the “additional costs incurred for the earthmoving” and $80,226.48 on account of “the balance of the contract price in relation to the work performed by CvH.”[^15]

[36] The applicant now seeks leave to appeal the Arbitrator’s award. He asserts the Arbitrator made numerous errors in law, and that leave should be granted to appeal on these issues.

Grounds for appeal:

[37] The applicant outlines what he characterizes as the “errors in law” in the arbitration award in the following way:[^16]

a) The Arbitrator “erred in respect of his interpretation of the contracts between Zafir and Grassmere in that he failed to interpret them correctly or apply the proper contractual principles in doing so;

b) The Arbitrator erred in applying non-legal principles to determine the accounts between the parties, in part basing his decision on what was “fair”;

c) After finding there was a “condition” to the contracts between Zafir and Grassmere concerning the earthworks issue, the Arbitrator failed to apply the proper legal principles regarding whether the condition was waived, or whether Grassmere was estopped by its subsequent conduct from relying on the condition. The Arbitrator failed to consider these legal principles at all;

d) The Arbitrator made a fundamental legal error in his calculation of damages on the earthworks issue, one that was contradictory to his factual findings;

e) In relation to the “other invoices” issue, the arbitrator failed to apply basic legal concepts to his calculation of damages by finding that despite the contract between Zafir and Grassmere being a “costs plus” one, that Grassmere was entitled to payment on an invoice given to Zafir even though Grassmere had incurred no “cost”.

Discussion:

[38] Zafir essentially frames its complaints about the arbitral award in terms of the Arbitrator’s failure to apply proper contractual legal principles to the facts as he found them. it characterizes these failures as being errors in law.

[39] Grassmere complains that since Zafir has had to “peel away” all the facts in order to get to what Zafir calls pure legal issues, the grounds for appeal here must be questions of mixed fact and law. I disagree. The “peeling away” is the process that is necessary in order to determine whether the issues here are questions of law, or questions of mixed fact and law.

[40] Perell J of this court set out a very helpful statement of the relevant law in Aronowicz[^17] when he said “A judge or arbitrator interpreting a contract must make findings of fact as a prequel to making the legal decision that is the interpretation of the contract. However, there comes a point when the judge or arbitrator makes a decision that is a pure question of law.”[^18] He described the process as a progression, where “construing” a contract involves two processes: first, determining the meaning of the words, and second their legal effect. Quoting from Chitty on Contracts[^19]:

Construction becomes a question of law as soon as the true meaning of the words in which an instrument has been expressed and the surrounding circumstances, if any, have been ascertained as facts.

[41] Therefore, once all the necessary factual findings are made, applying the law to those facts becomes a question of law. Here, the fundamental finding the Arbitrator made was first, the parties’ relationship was governed by a series of discreet contracts, under the overarching framework of the original CCDC contract. It is against his important finding that I consider the grounds of appeal.

[42] Ground 1: This ground involves the correct legal interpretation of contracts. Zafir essentially says the Arbitrator improperly applied the parole evidence rule to alter the clear contract between the parties, without addressing the fundamental legal requirements for doing so. As part of this ground of appeal, Zafir also suggests the Arbitrator erred in law when he failed to consider all the relevant provisions of the CCDC contract, particularly all of GC 6.4. If the Arbitrator did so, I would characterize these as errors in law. An arbitrator must apply proper principles of contract interpretation, including considering the terms in the context of the entire contract. Failing to follow proper principles, including a failure to apply a fundamental principle of interpretation is an error in law.[^20]

[43] Ground 2 : This ground complains about the arbitrator applying non-legal principles to his calculation of damages. Another way of putting this is to say the arbitrator failed to apply the correct legal principles to his calculation of damages. Failing to apply correct legal principles is an error in law.

[44] Ground 3 : This ground alleges the Arbitrator failed to consider waiver of condition or issue estoppel. Zafir says that since the Arbitrator found the change order was conditional upon the EllisDon site being available for fill, he was bound to consider whether there had been a waiver of condition, or whether issue estoppel applied. The principles of waiver of condition and issue estoppel are legal principles. As the court said in MacDougall, it is an error in law to fail to apply a fundamental legal principle. I therefore conclude this ground of appeal concerns a question of law.

[45] Ground 4: legal error in calculation of damages of the earthworks issue. Here Zafir says a fundamental legal principle in calculating damages is the concept that the injured party must have suffered a loss, and that loss gives rise to the measure of damages. It says that in coming to the calculation of damages, the Arbitrator failed to address this fundamental principle. It says it is an error of law to do so. I agree.

[46] Ground 5: failing to apply proper legal concepts to calculation of the other invoices issue. As I understand this ground of appeal, Zafir is saying the Arbitrator failed to consider that Grassmere had incurred no cost in relation to the additional invoices, but still included those “costs” in quantifying damages. Zafir says that having determined the original contract became a a “costs plus” agreement, the Arbitrator erred in law in failing to apply the proper principles of calculating damages, in face of these factual findings. I agree that such a failure would be an error in law: failing to apply proper legal principles is an error in law.

[47] The appeal will really be about whether the Arbitrator applied the correct legal principles to the facts as he found them in coming to his decision. I therefore conclude all five grounds of appeal reflect errors in law. Whether Zafir will succeed on the appeal remains to be seen. It has, however, persuaded me that its complaints about the arbitration award deal with questions of law.

Disposition:

[48] For these reasons leave to appeal is granted. The applicant will have its costs of the application, as agreed, fixed at $7,000 all inclusive.

MESBUR J.

Released: 20130327

[^1]: S.O. 1991, c.17

[^2]: Aronowicz et al. v. Aronowicz et al. 2007 ON SC

[^3]: (2005), 2005 ON CA, 262 D.L.R. (4th) 120 (O.C.A.)

[^4]: [2002] S.C.R. 235 (S.C.C.)

[^5]: Paragraph 7 of CvH statement of claim in Court file No. 75245/05 commenced in Newmarket, Ontario

[^6]: Grassmere’s “Statement of Issues for Arbitration, paragraph 8

[^7]: Grassmere’s “Statement of Issues for Arbitration” paragraph 7

[^8]: First arbitral award at paragraph 38

[^9]: Ibid, paragraph 60

[^10]: Ibid, paragraphs 12-13

[^11]: Ibid at paragraph 14

[^12]: Ibid at paragraph 18.

[^13]: Ibid paragraph 24

[^14]: Ibid. paragraph 69

[^15]: Ibid, paragraph 79

[^16]: See paragraph 7 of applicant’s factum

[^17]: Note 2, above

[^18]: Aronowicz at paragraph 23

[^19]: 28 ed. (London: Sweet & Maxwell, 1998) at paragraph 12-046, as quoted in Casurina Limited Partnership v. Rio Algom Ltd. (2004), 2004 ON CA, 40 B.L.R. (3d) 112 (O.C.A.)

[^20]: Aronowicz, op cit