COURT FILE NO.: CV-18-591277 DATE: 20181009

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

PILLER INVESTMENTS LIMITED Applicant/Appellant – and – 1594342 ONTARIO LIMITED Respondent/Respondent

Counsel: Melvyn L. Solmon, for the Applicant Stephen Waque, Robert Wood, for the Respondent

HEARD: August 1, 2018

Koehnen J.

I. Introduction

[1] Piller Investments Limited appeals from a partial award of an arbitral panel. The award was the result of summary judgment motions brought by both parties to the panel. The panel determined some of the issues raised by the parties and deferred others to a full hearing.

[2] The panel’s decisions on substantive legal issues were reasonable and free from errors of law. Piller also appeals from the panel’s decision to defer certain issues to a full hearing. That is a procedural determination on which there is no right of appeal. If I am wrong in that determination, I find that the panel’s decision was consistent with the principles applicable to motions for summary judgment and should not be with.

[3] As a result, I dismiss the appeal with costs.

II. Background to the Arbitration and the Underlying Motions

[4] In December 1984, Piller entered into a commercial lease as a landlord with a tenant for property located at 160 Eglinton Ave. E. in Toronto. The original tenant subsequently assigned the lease to 1594342 Ontario Limited which remains the current tenant.

[5] The lease runs for a term of 66 years. It requires the tenant to pay basic rent and, beginning in the eighth year of the term, Additional Rent. Additional Rent was calculated according to a formula based on increases in the tenant’s cash flow.

[6] Although the tenant was to have begun paying Additional Rent in 1992, the tenant never did so and the landlord never demanded payment of any Additional Rent.

[7] It appears that, at least during the early years of the Additional Rent period, no such payments would have been required because depressed conditions of the neighbourhood meant there was no increase in cash flow. Having fallen into disuse, both the tenant and the landlord appear to have forgotten about the obligation.

[8] The lease also gives the tenant an option to purchase which the tenant purported to exercise in 2016.

[9] The landlord took the position that the tenant’s purported exercise of the option to purchase was invalid for a number of reasons. The principal substantive reason on which the landlord relied is found in article 14.07 of the lease. It provides that the tenant’s right to exercise the option is

“subject to the conditions precedent that the Tenant shall have paid all of the Rent and Additional Rent and other sums required to be paid under the terms and provisions of this Lease.”

[10] The landlord submits article 14.07 requires that the tenant have paid Rent and Additional Rent at the times set out in the lease in order to exercise the option to purchase. The tenant submits that it can exercise the option provided it has paid all amounts owing before it exercises the option even if it was late in paying Additional Rent.

[11] The landlord and the tenant submitted their dispute to a three person arbitration panel comprised of three experienced commercial arbitrators: David McCutcheon (Chair), Larry Bannack and Derry Miller. Both the landlord and the tenant brought motions for summary judgment which were argued over four days in the summer of 2017. The record before the arbitrators fell just shy of 13,000 pages. In December 2017, the panel released a unanimous 50 page award in which they awarded partial summary judgment on certain issues in favour of the landlord and on others in favour of the tenant. On still other issues, the panel required the parties to proceed to a full hearing.

[12] The landlord appeals from that partial award. In the statement of issues and law of its factum, the landlord sets out six issues for appeal; namely whether the panel erred by:

(i) Interpreting article 14.07 as it did? (ii) Failing to set the interest rate on any amounts owing at 5%? (iii) Failing to apply the proper legal principles to a motion for summary judgment? (iv) Failing to find that the tenant’s payment in purported exercise of the option to purchase was conditional? (v) Failing to find that the tenant was not entitled to equitable relief? (vi) Failing to determine whether GST or HST was payable on the Additional Rent?

[13] I will deal with issues (i) – (iii) as separate issues. I will deal with issues (iv) – (vi) as a single issue because they are issues on which the panel deferred a decision until the final hearing. The question on those three issues is really whether the panel had the ability to defer issues to a final hearing or whether it was obligated to address those issues on a motion for summary judgment.

[14] At the hearing before me, the landlord also brought a motion for leave to file a reply factum which dealt with the standard of review. In its original factum the landlord had argued that the standard of review was correctness. In its responding factum, the tenant argued that the standard was reasonableness. In effect, the landlord conceded in its proposed reply factum that the standard was reasonableness and adjusted some of its arguments accordingly. Although the tenant objected to the reply factum, I allowed it to be filed and have taken it into account in my decision. It is more consistent with the ends of justice to ensure that all arguments are before me than it is to prevent a party from advancing relevant arguments.

[15] Before addressing that the issues on appeal, I will address the standard of review.

III. The Standard of Review

[16] The modern starting point for the standard of review from arbitral decisions is Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53. In Sattva, the Supreme Court of Canada held that reasonableness was the appropriate standard unless the issue on appeal was of central importance to the legal system as a whole and was outside of the adjudicator’s expertise: at para. 106.

[17] The expertise of an arbitral panel should be presumed because the parties have chosen the adjudicators. Arbitral decisions should be presumed to be correct even if the reasons are defective. The court should first seek to supplement arbitral reasons before subverting them with excessively rigorous review: Sattva at para. 110.

[18] On this appeal, the landlord bears the onus to demonstrate that the arbitral decision is unreasonable: 1353837 Ontario Inc. v. City of Stratford (Corporation), 2018 ONSC 71 at paras. 20-25.

[19] A reasonable decision is one which is justifiable, transparent and intelligible: Sattva at para. 119.

[20] A decision is justifiable if the result falls within a range of outcomes which are defensible in fact and law: Intact Insurance Co. v. Allstate Insurance Company of Canada, 2016 ONCA 609, [2016] O.J. No. 4113 at paragraph. 63; PQ Licensing S.A. v. LPQ Central Canada Inc., 2018 ONCA 331 at paras. 26 and 32-34. The question is to determine whether the decision falls within a range of reasonable outcomes, not whether it is the same decision that the reviewing judge would have reached. Appellate judges should not substitute their own reasons for those of the arbitrator. The fact that there is an alternative interpretation which might have been preferred by the appellate judge, does not make the initial decision unreasonable: N.L.N.U. v Newfoundland & Labrador (Treasury Board), 2011 SCC 62 at para. 15-18.

IV. Is the Interpretation of Article 14.07 Unreasonable?

[21] The core issue in the appeal deals with the panel’s interpretation of article 14.07 of the lease.

[22] Article 14.07 provides:

14.07 The Tenant's right to exercise the option to purchase is subject to the conditions precedent that the Tenant shall have paid all of the Rent and Additional Rent and other sums required to be paid under the terms and provisions of this Lease.

A. Positions of the Parties

[23] The tenant takes the position that article 14.07 allows it to exercise the option provided the tenant is up-to-date in its payment of Rent and Additional Rent when it exercises the option.

[24] The landlord takes the position that article 14.07 allows the tenant to exercise the option to purchase only if the tenant has paid Rent and Additional Rent within the time periods stipulated in the lease for those payments. According to the landlord, late payment of those amounts voids the option to purchase.

[25] The landlord relies on the timing requirements contained in article 4.01(b) of the lease and submits that they form part of the definition of Additional Rent. In other words, the timing requirement associated with payment of Additional Rent is part and parcel with the concept of Additional Rent, not a separate covenant to pay an amount by a particular time.

[26] Article 4.01 (b) provides:

(b) Additional Rent: The Tenant shall also pay to the Landlord commencing with the eighth Lease Year of the Term and in each and every Lease Year thereafter during the Term, Additional Rent. The Additional Rent shall be 20% of the amount by which Excess Cash Flow exceeds the Initial Excess Cash Flow and the amount of the Additional Rent shall be adjusted every second year (whereby the rent payable by the Tenant to the Landlord in the ninth Lease Year shall be the identical amount as payable in the eighth Lease Year and whereby in the even years the sum is adjust ed and in the odd years the sum payable will be identical to the sum payable during the preceding year). Additional Rent shall be apportioned as herein set forth and increments thereof paid on the first day of each calendar month. For the purposes of payment of Additional Rent, prior to each even Lease Year commencing with the eighth Lease Year, the Tenant shall deliver to the Landlord a bona fide estimate of Excess Cash Flow for the ensuing Lease Year and the Tenant shall pay 20% thereof by equal monthly installments in advance payable along with at the time for payment of Basic Annual Rent during the next two years. Within a reasonable period of time following the end of each even Lease Year the Tenant shall calculate Additional Rent for the previous Lease Year and any underpayment or overpayment thereof in respect of such Lease Year shall be forthwith paid, or repaid, as the case may be (emphasis added).

[27] The landlord seeks further support from Article 18.20 of the lease which provides:

18.20 Time: Time shall be of the essence of this Lease, save as herein otherwise specified.

[28] The landlord submits that the arbitral panel erred by failing to apply the time limits within the definition of Additional Rent and by failing to apply the time is of the essence clause to the payment of Additional Rent.

B. Reasons of the Arbitral Panel

[29] The arbitral panel disagreed with the landlord. It found that the tenant could exercise the option to purchase provided the tenant had paid Additional Rent before it exercised the option, even if the Additional Rent had been paid later than set out in article 4.01(b).

[30] The panel based its decision on the wording of article 14.07. It noted that the condition precedent referred to in article 14.07 was payment. Article 14.07 contained no precision about when payment had to be made except that the tenant “shall have paid” certain amounts as a condition precedent to exercising the option. For the panel, the language of article 14.07 suggested that payment could be made at any time before the tenant exercised the option.

[31] The panel considered judicial precedents concerning the exercise of options and noted that many of the precedents involved options which required that the party exercising the option be in full compliance with the contract or not have defaulted under contract. The option to purchase in the lease at issue contains no such language.

C. Review of Arbitral Decision

[32] The first question to determine is whether the panel’s decision on article 14.07 is subject to review on the standard of reasonableness or correctness.

[33] I find that the appropriate standard is reasonableness.

[34] As noted earlier, correctness is reserved for issues that are of central importance to the legal system and that are beyond the panel’s expertise.

[35] The interpretation of clause 14.07 is not of central importance to the legal system. It is a particular clause applied in a particular legal and factual context. It involves no new legal principles and does not extend any existing legal principles.

[36] The question is also within the panel’s expertise. The interpretation of article 14.07 constitutes the fundamental substantive dispute between the parties. The parties chose the arbitral panel, presumably because they had confidence in its expertise to resolve the central dispute at hand.

[37] A decision is reasonable if it is transparent, intelligible and justifiable. The decision is on its face transparent and intelligible. The arbitral panel explained why it reached the decision it did. It explained its reasoning in a manner that is clear and understandable.

[38] The panel’s decision is also justifiable.

[39] The landlord’s position is predicated on the assumption that the timing requirements contained in article 4.01(b) of the lease are integral to the concept of Additional Rent. The landlord says this is the case because Additional Rent is a defined term in the lease. Article 1 defines Additional Rent as the additional rent specified in article 4.01(b). That article, however, contains more than a definition. While article 4.01(b) does define Additional Rent as 20% of the amount by which excess cash flow for one year exceeds cash flow for an earlier year, it also contains a number of other provisions. The other provisions relate to the time by which the tenant is required to provide estimates of its cash flow, the times at which Additional Rent is to be recalculated and the times at which it is to be paid.

[40] A plain reading of the clause would distinguish between the meaning ascribed to a particular concept (Additional Rent) and the time at which the concept is to be performed. The time of performance would generally be considered to be separate from the definition of the concept absent something particular in the drafting of the clause. In other words, the concept of Additional Rent is an additional payment that is based on increases in the tenant’s cash flow. That concept is, however, different from the time at which the Additional Rent is to be calculated and the time at which it is to be paid.

[41] Put another way, the definition gives meaning to the concept of Additional Rent. The remaining provisions of article 4.01(b) are personal covenants to perform an obligation is respect of Additional Rent at particular times.

[42] The language of the lease supports the decoupling of the definition from the covenants to perform. Article 4.03 of the lease contains a covenant by the tenant to pay the landlord the Basic Rent and the Additional Rent “at the time and in the manner in this Lease provided”. If the timing obligation were coupled with and integral to the definition of Basic Rent and Additional Rent, article 4.03 would be redundant.

[43] While the tenant’s interpretation might be one of several possible interpretations of article 4.01(b), so is that of the arbitral panel. That of the panel is more reasonable.

[44] The net effect of the landlord’s position is that a single failure to pay Basic Rent or Additional Rent on the first of the month at any time during the 66-year lease term would automatically terminate the tenant’s option to purchase. The landlord confirmed that position during oral argument.

[45] In Sail Labrador Ltd. v. Challenge One, [1999] 1 SCR 265, the Supreme Court of Canada noted at para. 71 that it was “incredible that the parties could have intended that a single late payment among 35 payments made over a five-year term” would cause a party to lose the right to exercise an option and that this could not have been the intention of the parties when they entered into the agreement, unless they specifically said so. Here, the landlord’s position in this case is more draconian.

[46] In Sail, the court noted that the optionor’s interpretation was all the more unreasonable because it did not insist on strict compliance with the method of payment in the contract. In the case at bar, the landlord never asked for a calculation of, let alone payment of Additional Rent. Indeed, the landlord had signed written representations confirming that the tenant was not in default of any of its obligations under the lease.

[47] The landlord relies heavily on the time is of the essence clause and the need for commercial certainty. It argues that the parties must know at any one point whether an option can or cannot be exercised. It relies on the Supreme Court of Canada’s decision in Sail for the proposition that options to purchase must be certain and predictable. In doing so, however, the landlord ignores paragraph 68 of Sail in which the court states that time is not always of the essence in options to purchase and that a condition precedent to an option can be met if it has been performed by the time the option is exercised, even if it has been performed late.

[48] The landlord’s own position belies its purported reliance on commercial certainty. The landlord submits that a single payment during the 66-year lease term voids the option to purchase. A single late payment would not, however, appear to void other provisions of the lease or the lease itself. In other words, on the landlord’s view, a single late payment gives the landlord the right to pick and choose which contractual rights are terminated and which are not, apparently without even informing the tenant. That approach is inconsistent with commercial certainty.

V. Did the Panel Err in Setting the Applicable Interest Rate?

[49] Article 18.19 of the lease provides that all payments in default under the lease shall bear interest at the “Stipulated Interest Rate.” The agreement does not define Stipulated Interest Rate. Article 1.01 (s), however, defines Prime Rate as the rate of interest that CIBC charges its most credit worthy commercial customers.

[50] The arbitrators found that the Stipulated Interest Rate was the Prime Rate and that amounts owing on the lease bore interest at the Prime Rate.

[51] The landlord submits that there was no evidence in the record to support the finding that the Stipulated Interest Rate was intended to equal the Prime Rate and that such a conclusion was “pure speculation.”

[52] Instead, says landlord, section 3 of the Interest Act R.S.C., 1985, c. I-15 applies. It provides for interest at 5% per annum where interest is payable by agreement but no rate is fixed or where there is no meeting of the minds with respect to an interest rate: Royal Bank v. Larry Creighton Professional Corp., 1989 ABCA 53, 1989 95 AR 40 (Alberta Court of Appeal) and LaChance v. Transwest Financial Services Corp., 2008 ABQB 402 par 26 and 27.

[53] I do not accept this as a valid ground of appeal.

[54] It is fair to say that the reasons of the panel are conclusory on the interest issue. This is one of the circumstances in which the Supreme Court of Canada’s admonition to supplement arbitral reasons before subverting them with excessively rigorous review is apposite: Sattva at para. 110. Despite its conclusory nature, the decision on this issue is nevertheless reasonable.

[55] Interest was one of approximately 34 issues put to the arbitrators for resolution. It is understandably one on which most adjudicators would not spend a great deal of time because interest tends not to be a driving issue in a dispute.

[56] The landlord argues the interest finding is unreasonable because a landlord would not want to make it financially worthwhile for a tenant to fail to pay rent by providing low interest rate financing. While the landlord does not say so expressly, this argument appears to be based implicitly on the fact that interest rates have been below 5% in recent years.

[57] While it may be that the CIBC prime rate has been below 5% for much of the last 10 years, when the lease was entered into in 1982, interest rates were considerably higher than in recent years. For much of the lease term, use of the 5% rate in the Interest Act would have given the tenant an incentive not to pay rent because commercial interest rates were higher than 5%.

[58] The arbitral panel’s finding was not speculation as the landlord asserts. The panel’s task was to interpret the agreement. The agreement intended interest to apply to outstanding amounts. The question then was to determine whether the agreement referred to an interest rate. The lease did refer to a commercially reasonable and quite common interest rate: interest calculated by reference to the prime rate of a chartered bank.

[59] The landlord’s argument would effectively redact from the agreement the definition of Prime Rate. That would violate the rules of contractual interpretation. Provisions in an agreement are intended to have effect. Adjudicators are called on to read agreements harmoniously to give effect to each provision. The panel’s interpretation does so. It gives meaning to both the terms Stipulated Rate and Prime Rate. A stipulated rate is simply one that is set or referred to. The only rate that is stipulated in the lease is the Prime Rate.

[60] On no basis can it be said that it is unreasonable to interpret a contract in a way that makes outstanding payments subject to interest at the prime rate of a Canadian chartered bank. The interpretation the panel adopted calls for a flexible rate that varies with commercial and economic circumstances. An approach of that nature makes sense when dealing with a 66-year lease. While it might be possible to find that the rate specified in the Interest Act applied, it is not unreasonable for the arbitrators to have applied the Prime Rate as defined in the lease.

VI. No Error in Applying Principles of Summary Judgment

[61] The landlord submits that the arbitral panel erred in principle by failing to apply properly, principles of summary judgment.

[62] The landlord further submits that the basic principles applicable to every summary judgment motion are of central importance to the legal system and are not within the specialized expertise of the arbitrators. As a result, says the landlord, the standard of review is correctness.

[63] While I do not agree with the proposition, even if I apply the standard of correctness, the landlord has failed to persuade me that the arbitrators have improperly applied the principles applicable to summary judgment.

[64] The landlord submits the panel made palpable and overriding errors of fact, failed to decide issues, failed to draw inferences where appropriate and gave the tenant a “second kick at the can”.

[65] Although the landlord states frequently in its factum that the arbitral panel made palpable and overriding errors of fact, the landlord either does not identify the alleged error or if it does identify the alleged error, does so by way of a bald allegation. For example, in paragraph 35 of its factum the landlord states:

Award 45 contains a palpable and overriding error of fact relating to the conditions imposed by the Tenant on the payment it purported to make on September 2, 2016 and October 31, 2016. This will be dealt with in Issue No. 3.

[66] The alleged error is not in any way explained. The bald statement that a paragraph in an arbitral award contains a palpable and overriding error does not make it so. Although the factum promises to deal with the issue when discussing issue three, it never does so. Issue three is an allegation that the panel erred by failing to find that the tenant’s payment when purporting to exercise the option was conditional which, the landlord submits, amounts to an invalid exercise of the option as a matter of law. The panel made no determination of that issue but deferred it to a full hearing.

[67] The other alleged errors in applying the principles of summary judgment are that the panel failed to decide issues, failed to draw inferences were appropriate and gave the tenant a “second kick at the can”. These are not errors but are applications of the principles of summary judgment.

[68] The arbitral award noted that some of the 35 issues the parties put to the panel raised factual issues, evidentiary gaps and issues of credibility that the panel could not resolve on a motion for summary judgment and which it deferred to a full hearing. The panel recognized that it had the power to make assessments of credibility on a summary judgment motion but was not prepared to do so in the circumstances of this case.

[69] This amounts to a proper application of the basic principles applicable to summary judgment. The panel recognized that it had the power to make determinations of credibility but decided in its discretion that it would not be appropriate to do so. The panel applied the proper principles, it is simply that the landlord does not like the decision the panel reached when applying those principles.

[70] The principles of summary judgment necessarily give the adjudicator of first instance a broad range of discretion. The principles are flexible and depend on the circumstances of the individual case. Even on the correctness standard, the issue is not whether the reviewing court would have reached the same conclusion, but whether the adjudicator of first instance applied the appropriate principles.

[71] All of that said, an arbitral panel is entitled to even greater deference when applying principles of summary judgment than is a motions court judge.

[72] Section 20 of the Arbitration Act, 1991, gives arbitrators the power to “determine the procedure to be followed in an arbitration”.

[73] Paragraph 27 of the Arbitration Agreement provides that the “Arbitrators shall apply the laws of the Province of Ontario and the Rules of Civil Procedure where appropriate.” The arbitrators held that this provision gave them “the discretion not to slavishly follow the Rules of Civil Procedure in conducting the arbitration but rather to apply the Rules with the latitude appropriate to achieve the goals of achieving a fair arbitration process and conducting the arbitration in a cost efficient manner”. I agree.

[74] Arbitration is not a simple mirror of the litigation process in which the parties choose their own judge. It is an “autonomous, self-contained, self-sufficient process pursuant to which the parties agree to have their disputes resolved by an arbitrator, not by the courts”: Inforica Inc. v. CGI Information Systems and Management Consultants Inc., 2009 ONCA 642 at para. 14.

[75] As a general rule, judges have no business determining arbitral procedure and there are no appeals from procedural or interlocutory orders of arbitral panels: Inforica, at para. 18.

[76] An arbitrator’s decision to reserve judgment on certain issues until the conclusion of a full hearing on those issues is a procedural decision that is not subject to appeal: York Condominium Corporation No. 201 v. York Condominium Corporation No. 366, 2017 ONSC 3975, at paras. 36-37.

VII. Remaining Issues are Procedural

[77] The landlord raises three other issues for appeal which can be dealt with together: that the tribunal erred in failing to find that the tenant’s payment of Additional Rent was conditional and therefore invalid, that the panel improperly rejected the landlord’s claim for equitable relief and that the tribunal failed to determine whether there was a requirement to pay GST and HST on the Additional Rent.

[78] The panel did not decide any of those issues against the landlord but deferred them to the full hearing. As a result, those determinations are procedural at this stage.

[79] As noted earlier, there are no appeals from procedural determinations of arbitral panels. The panel decided that these issues depended on a fulsome consideration of the factual matrix. Here we have three experienced arbitrators who spent many months supervising the arbitration, spent untold hours reviewing a 13,000-page record and spent four days hearing summary judgment motions involving approximately 35 issues. At the end of that process they decided that they did not have a sufficient evidentiary base on which to decide certain issues by way of summary judgment.

[80] The appellant effectively wants me to tell the panel that they do have a sufficient evidentiary base on which to decide and that they must decide. It would be improper for a court to intervene to tell the arbitrators how they should do their work, in what order they should make decisions and at what times they should make those decisions. That would undermine the independent and autonomous nature of the arbitration process. It would also be a waste of public judicial resources. The courts have far more pressing issues to determine than whether privately selected arbitrators should determine a particular issue on a paper record today or on a full record in six months from now, particularly in the absence of any urgency or injustice in the panel’s decision.

[81] The only “injustice” the landlord points to is its $1 million legal bill to date. The landlord says that is excessive and that the parties need a more cost-effective way of resolving their dispute. How much the parties have spent on a particular dispute often depends on the strategies and tactics they pursue. Parties can easily run up fees by engaging in unnecessary motions and raising unnecessary issues. That may make their strategy unwise but it does not make the arbitration unjust.

[82] As a result of the foregoing I dismiss the appeal with costs.

[83] If the parties cannot agree on costs, the tenant shall have 14 days from the release of these reasons to make written submissions on costs. The landlord shall have seven days from receipt of the tenant’s submission to respond the tenant shall have five days to reply.

Koehnen J.

Released: October 9, 2018

COURT FILE NO.: CV-18-591277 DATE: 20181009

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

PILLER INVESTMENTS LIMITED Applicant/Appellant – and – 1594342 ONTARIO LIMITED Respondent/Respondent

REASONS FOR JUDGMENT Koehnen J.

Released: October 9, 2018