COURT FILE NOS.: CV-18-78036, CV-19-78860 and CV-19-79585
DATE: November 15, 2019
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Tall Ships Landing Development Inc.
Applicant
– and –
Corporation of the City of Brockville
Respondent
Jeff Saikaley and James Plotkin for the Applicant
Keith MacLaren and Bryce Dillon for the Respondent
HEARD: May 29 and 30, 2019
JUSTICE SALLY GOMERY
[1] Tall Ships Landing Development Ltd. (“Tall Ships”) challenges three arbitral awards with respect to its claims against the City of Brockville (the “City”).
[2] The claims arose in connection with a waterfront development project on property acquired by Tall Ships. The project included a mixed residential/commercial condominium tower and an attraction known as the Maritime Discovery Centre or MDC. In a series of agreements, Tall Ships undertook to remediate the project site and assumed various roles with respect to the construction of the MDC. The City agreed that Tall Ships would qualify for multi-year tax credits based on its remediation costs and receive a fee for its work as construction manager. Once the MDC was built, Tall Ships would sell it to the City and the City would pay a purchase price equivalent to the construction budget for the building. In addition, the City agreed to pay Tall Ships for construction work for fit-ups and exhibits, known as “MDC Exclusions”.
[3] The MDC ended up being a bigger and more costly project than foreseen in the parties’ written agreements. After the MDC was sold to the City in March 2016, Tall Ships submitted various claims. It claimed for remediation costs that, on its submission, the City ought to have accepted; recovery of additional construction costs for the MDC; and payment of interest on an invoice for MDC Exclusions.
[4] Tall Ships’ claims were submitted to arbitration. Pleadings were exchanged and a single arbitrator selected by the parties (the “Arbitrator”) heard evidence. The Arbitrator dismissed the claims in three awards issued between September 2018 and February 2019.
[5] In this appeal, Tall Ships contends that the Arbitrator based his decisions on legal theories and arguments that the City never advanced and that, as a result, it was deprived of an opportunity to be heard. It also contends that the Arbitrator made errors of law.
LEGAL FRAMEWORK
[6] In their purchase agreement dated March 9, 2011 (the “Purchase Agreement”), the parties agreed to submit any disputes to binding arbitration. They agreed that the decisions by the single arbitrator appointed under s. 9.2 of the Agreement would be final and would “not be subject to appeal by any party other than on a question of law in accordance with Subsection 45(2) of the Arbitration Act, 1991 or pursuant to a specific ground for appeal or for setting aside the arbitrator’s award pursuant to Section 46 of the Arbitration Act, 1991”.
[7] In this appeal, Tall Ships relies on both s. 45(2) and 46(1) of the Arbitration Act, 1991, S.O. 1991, c. 17 (the “Arbitration Act”). Section 45(2) provides that a party may appeal an award to the court on a question of law if their arbitration agreement so provides. Subsection 46(1) states that, on a party’s application, the court may set aside an award on ten enumerated grounds. Tall Ships contends that it “was not treated equally and fairly [or] was not given an opportunity to present a case or respond to another party’s case” (ground 6) and that “the procedures followed in the arbitration did not comply with the Act” (ground 7).
[8] The standard of review of a decision in a commercial arbitration under a provincial arbitration statute is reasonableness, “except in the rare circumstances where the question is one that would attract a correctness standard, such as a constitutional question or a question of law of central importance to the legal system as a whole and outside the adjudicator’s expertise”: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at para. 75. As the Court of Appeal noted in a decision it just released in Tomec v. Economical Mutual Insurance Company, 2019 ONCA 882, at para. 22, the Supreme Court has to date found such rare circumstances in only two cases.
[9] A decision is reasonable if it is justified, transparent, intelligible, and figures within the range of possible, acceptable outcomes in respect of the facts and applicable law: Teal Cedar Products Ltd. v. British Columbia, 2017 SCC 32, [2017] 1 SCR 688, at para. 84, citing Dunsmuir v. New Brunswick, 2008 SCC 9, [2008] 1 S.C.R. 190, at para. 47.
[10] Tall Ships concedes that, in general, any legal errors committed by the Arbitrator should be reviewed on a standard of reasonableness. It argues however that the Arbitrator’s reliance on legal theories and arguments not advanced by the parties is an error that should be reviewed on a correctness standard, because these types of errors fall within the Sattva exceptions. Tall Ships also contends that this type of error, as well as the Arbitrator’s failure to provide reasons for one of his conclusions, offends procedural guarantees in the Arbitration Act and therefore gives rise to this court’s intervention.
[11] The City argues that any error made by the Arbitrator is a mixed error of fact and law, and as such is not appealable. Alternatively, it argues that the Arbitrator did not make any legal or procedural errors serious enough to warrant this court’s intervention.
[12] I will expand on the applicable standard of review in the context of the discussion of each award.
AWARD #1: THE REMEDIATION COSTS CLAIM
[13] In Award #1 issued on September 5, 2018, the Arbitrator rejected Tall Ships’ claim for remediation costs under a brownfields agreement with the City executed in November 2007 (the “Brownfields Agreement”).
Key Underlying Facts
[14] The Brownfields Agreement provided for compensation to Tall Ships for the costs of its environmental remediation of the project site. Compensation was in the form of a tax rebate provided to Tall Ships over a ten-year period. The amount of the rebate was calculated based on the remediation costs submitted by Tall Ships and approved by the City.
[15] Clause 22.3 of the Brownfields Agreements set out the process whereby Tall Ships would submit its claims for eligible remediation costs as the site clean-up work progressed. Clause 22.3(c) provided that, upon receipt of a claim submitted by Tall Ships (referred to as the “Owner” in the Agreement):
[T]he City shall, within thirty (30) days … give written notice to the Owner wherein the City either accepts, rejects or requests additional information from the Owner. A request for additional information shall detail the type or nature of the information required by the City and a rejection of the submission shall provide reasons and details for the rejection. In the event of a request for additional information, the City shall have a further period of thirty (30) days following the receipt of the additional information to assess the additional submissions as aforesaid and provide the Owner with its written notice of acceptance, rejection or request for additional information.
[16] Clause 22.3(d) provided the mechanism whereby Tall Ships could challenge the rejection of a claim for eligible remediation costs:
[I]f the City gives notice to the Owner of its rejection or partial rejection of the Owner’s request for payment of Actual Rehabilitation Costs (the “Rejection Notice”), the Owner shall be conclusively deemed to have accepted the determination of the City in respect to the elements of cost detailed in the Rejection Notice and have waived and released the City from any claims in respect thereof unless within fifteen (15) days after receipt of the Rejection Notice, the Owner sends a notice in writing of dispute to the City (the “Dispute Notice”).
[17] The procedure following delivery by Tall Ships of a Dispute Notice was set out in clause 22.3(e). The parties would negotiate and, if they were unable to resolve the dispute, refer the matter to the City Treasurer with appeal, if necessary, to City Council for determination. Clause 22.3(f) provided however that “nothing herein shall prevent the Owner from commencing legal proceedings or taking such other steps as it deems appropriate against the City should the Owner be dissatisfied with the City’s determination of the matter which has been the subject of a Dispute Notice or the City’s actions or administration of the Program Assistance under the Agreement.”
[18] From January 12, 2010 to October 31, 2011, Tall Ships submitted seven claims for eligible remediation costs under clause 22.3 of the Brownfields Agreement. Tall Ships received the last of the City’s responses to these claims on August 30, 2012. None of the responses were provided to Tall Ships within the 30-day deadline set out in clause 22.3(c); in fact, the City waited over a year to respond to the last four claims submitted by Tall Ships.
[19] In each of the City’s responses, its Finance Officer indicated that the City accepted a portion of the amounts set out in the claims but required further documentation from Tall Ships with respect to the remaining items. The Officer noted in the responses that the City was seeking the further documentation “in order to determine the eligibility of the cost. Once this Data is received, the claim will be re-evaluated”.
[20] After receiving these responses between February 17, 2010 and August 30, 2012, Tall Ships neither provided further documentation nor submitted a Dispute Notice.
[21] In the arbitration statement of claim served in September 2016, Tall Ships alleged that the City had breached the Brownfields Agreement by not responding in writing to the remediation costs claims within 30 days, as required in clause 22.3(c). In its written submissions to the Arbitrator, it argued that, because it failed to reach a determination within 30 days, the City should be deemed to have accepted each of the claims in their entirety.
[22] In its statement of defence and counterclaim served in September 2016, the City alleged that it was reviewing Tall Ships’ total rehabilitation costs and that it would “make payment in due course”. On July 7, 2017, counsel for the City sent a letter to Tall Ships’ counsel giving notice of the revised position it intended to take at the upcoming arbitration hearing. It now asserted that each response from the City requesting further documentation was a Rejection Notice under clause 22.3(d) of the Agreement and that, since Tall Ships had not disputed them within fifteen days of receipt, it was deemed to have accepted the City’s determination and to have released the City from all claims. It further argued that Tall Ships’ claim was time-barred, because more than four years passed between any alleged breach of the Agreement by the City and the issuance of the arbitration statement of claim.
[23] On April 13, 2018, the Arbitrator granted the City leave to advance its revised position with respect to the remediation claims, over Tall Ships’ objections.
The Arbitrator’s decision
[24] The Arbitrator found in the City’s favour on the remediation claims. In his view, the City’s failure to meet the 30-day deadline in clause 22.3(c) was inconsequential; he noted that, at the time, Tall Ships had not objected to the delay in the City’s responses. He found that each of the City’s responses under review included a partial rejection coupled with a request for further information. In his view, a reasonable reading of clause 22.3 was that the parties had agreed to make time of the essence and that, by failing to submit a Dispute Notice within 15 days of receiving notices of partial rejection of the claims, Tall Ships had released the City from any liability for them.
[25] Based on this interpretation of clause 22.3, the Arbitrator concluded at para. 52 that Tall Ships was “conclusively deemed to have accepted the City’s determination of its remediation claims. The Arbitrator also accepted the City’s limitations argument, concluding that the claims were time-barred.
Grounds of appeal or review advanced
[26] In its appeal to this court, Tall Ships argues that the Arbitrator committed four reversible errors in Award #2:
(1) His interpretation of the Brownfields Agreement turned on an implied “time is of the essence” term, even though this theory was not pleaded or argued by the City.
(2) He failed to consider Tall Ships’ limitation argument or to provide sufficient reasons for concluding that the claims were time-barred.
(3) His conclusion that Tall Ships had a 15-day deadline to respond to the City’s requests for information was manifestly unreasonable.
(4) He applied the “time is of the essence” rule unevenly.
[27] Tall Ships argues that these grounds all involve serious legal errors that resulted in fundamental unfairness and the Arbitrator’s conclusion on the remediation claims should therefore be reviewed on a standard of correctness. Alternatively, it argues that the Arbitrator’s conclusions were unreasonable. It also seeks relief under s. 46.
[28] The City contends that the Arbitrator’s decision hinged on his interpretation of the Brownfields Agreement and that this interpretation involved mixed issues of fact and law. Since the Arbitrator’s interpretation was not manifestly unreasonable, his decision is immune from review by this court.
Analysis
First ground of appeal: Reliance on a theory of law not advanced or argued
[29] In rejecting the remediation costs claims, the Arbitrator found that there was an implied “time is of the essence” term in the Brownfields Agreement. He acknowledged Tall Ships’ argument that clause 22.3 did not set any deadline for it to respond to a request by the City for further information, but explained beginning at paragraph 49 of the Award that this was “not the final word on the matter”:
There is a presumption in contract law that time is not of the essence. However, where the parties have not expressly made time the essence of the contract, a tribunal may still conclude that time is of the essence if the nature of the property involved or the circumstances of the case call for such an interpretation.
[30] In support of this statement of applicable legal principles, the Arbitrator cited Sail Labrador Ltd. v. Challenge One (The), 1999 CanLII 708 (SCC), [1991] 1 S.C.R. 265, 169 D.L.R. (4th) 1, and a House of Lords decision cited by the Supreme Court, United Scientific Holdings Ltd. v. Burnley Borough Council, [1978] A.C. 904. Applying these principles, he went on to find that the 15-day deadline for Tall Ships to issue a Dispute Notice under clause 22.3 was peremptory:
[P]arties may explicitly choose to make time of the essence by their contractual language. That is the case here. A reasonable reading of Art. 22.3 draws one to the inevitable conclusion that, in the Nov. 07 Agreement, the parties made time of the essence by the language of that clause. It is a logical, indeed, a necessary inference, that where the City issued a Determination (which included a Rejection) and also a Request within or adjunctive to the Determination/Rejection, then [Tall Ships] was accepting the Determination/Rejection as rendered if it did not (a) file a Dispute Notice or (b) respond to the Request, within 15 days after receipt of the Determination/Rejection.
[31] Although the Arbitrator stated that the parties “explicitly” chose to make time of the essence, there is in fact no “time is of the essence” clause in the Agreement. The Arbitrator apparently inferred this term based on the stipulation in clause 22.3(d) that, if it failed to issue a Dispute Notice within 15 days of receipt of a Rejection Notice, Tall Ships was “conclusively deemed to have accepted the determination of the City in respect to the elements of cost detailed in the Rejection Notice and have waived and released the City from any claims in respect thereof”.
[32] The Arbitrator’s reliance on an implicit “time is of the essence” term was critical to his conclusion that Tall Ships, through its inaction at the time, lost its right to contest the City’s non-acceptance of its remediation claims. He himself acknowledged that there was no explicit time frame in the Brownfields Agreement for Tall Ships to respond to a request by the City for further information. He concluded as he did by both equating a request for further information to a rejection, and by reading into clause 22.3 a decision by the parties to make the 15-day deadline absolute. This second point required him to find that time was of the essence.
[33] The Arbitrator’s reasoning is problematic because it hinged on a contractual interpretation that was neither advanced nor argued. The City did not allege, in its statement of defence, that the parties agreed that time was of the essence in the performance of their obligations under the Brownfields Agreement or, more specifically, in Tall Ships’ response to a Rejection Notice under clause 22.3(d). As already mentioned, there is no reference to time being of the essence in the Agreement itself. The point was not raised in written or oral argument to the Arbitrator, nor did he ask the parties, before reaching his decision, for additional submissions on this point.
[34] Judges and arbitrators sometimes cite cases and authority that the parties did not refer to in argument. They may realize, during deliberations, that the parties have not addressed a particular point. This is not a problem if the point is uncontroversial or minor, and it can be resolved on the evidence as presented. It is however problematic if it is the lynchpin for the disposition of a party’s argument or gives rise to a defence that was never pleaded or argued.
[35] In light of this, the Arbitrator’s reliance on “time is of the essence” violated mandatory rules of procedural fairness in the Arbitration Act.
[36] Paragraph 6 of s. 46(1) provides that a court may set aside an award if a party “was not treated equally and fairly” and, more specifically, “was not given an opportunity to present a case or respond to another party’s case”. Section 19(1) states that: “In an arbitration, the parties shall be treated equally and fairly”. Although parties may contract out of most provisions of the Act, s. 3 prohibits them from agreeing to exclude the application of either s. 19 or s. 46. Court intervention in arbitral proceedings is limited pursuant to s. 6, but an exception is made “to prevent unequal or unfair treatment of parties to arbitration agreements”.
[37] The introduction of a novel theory of liability via reasons for judgment is “fundamentally unfair” to the parties; Rodaro v. Royal Bank of Canada (2002), 2002 CanLII 41834 (ON CA), 59 O.R. (3d) 74 (ONCA), at para. 61; Moore v. Sweet, 2017 ONCA 182, 134 O.R. (3d) 721, at para. 29. But, as Doherty J.A. observed at paras. 62-63 of Rodaro, fairness is not the only reason why a judge must decide lawsuits within the boundaries of the pleadings. A decision based on a theory not advanced by the parties is also inherently unreliable:
We rely on the adversarial process to get at the truth. That process assumes that the truth best emerges after a full and vigorous competition amongst the various opposing parties. A theory of liability that emerges for the first time in the reasons for judgment is never tested in the crucible of the adversarial process.
[38] Justice Blair similarly observed that, by introducing a new theory of liability in the course of arriving at a decision, the trial judge erred in law by depriving the parties “of the ability to make a proper record relating to it, thereby rendering the result unreliable and justifying appellate intervention”: Moore v. Sweet, at para. 30.
[39] The Arbitrator himself recognized at paragraph 7 of Award #1 that it was a fundamental arbitral principle that “the Tribunal must decide the case on the arbitral issues, as pleaded” and cited both Rodaro and Moore v. Sweet.
[40] The standard for determining whether a decision maker complied with the duty of procedural fairness is correctness: Mission Institution v. Khela, 2014 SCC 24, [2014] 1 S.C.R. 502, at para. 79. In Eagle’s Nest Youth Ranch Inc. v Corman Park (Rural Municipality #344), 2016 SKCA 20, 395 D.L.R. (4th) 24, at para. 20, the Saskatchewan Court of Appeal noted that it is awkward to use the term “correctness” in the context of procedural fairness, but it is still the best way to capture the applicable standard of review:
[T]he rule of law ultimately requires that superior courts still ask whether the decision is itself borne of a "'just' exercise of power" (Dunsmuir at para 90). So, while awkward, this is best reflected in the correctness standard… .
[41] As is evident in the reasons in Sail Labrador Ltd. and other decisions dealing with the “time is of the essence” doctrine, the question of whether parties intended to make this a term is often hotly contested. As the Arbitrator himself noted, a decision-maker should assume that time is not of the essence in the performance of contractual obligations in the absence of a specific provision to that effect. Time is of the essence is not the rule but rather the exception. As a result, litigants would not expect a decision-maker to rely on an interpretation that is premised on an implicit “time is of the essence” term, unless this issue were raised in the pleadings by one of the parties. This would allow the other party to explore the issue in examination and cross-examination and both parties to argue the issue based on a full evidentiary record.
[42] Based on the provisions of the Arbitration Act as well as fundamental principles of fairness, it was not open to the Arbitrator to determine a central issue based on an implied “time is of the essence” term, when such an interpretation was neither pleaded nor argued. Applying the correctness standard, I find that this was a reviewable error under s. 46(1) of the Act.
[43] Tall Ships argues that the Arbitrator’s introduction of the “time is of the essence” theory to his interpretation of clause 22.3 was not only a violation of its procedural rights, but a legal error giving rise to a right of appeal under s. 45. The City contends that, even if the Arbitrator departed from the parties’ submissions, the issues addressed in Award #1 fell within the foreseeable scope of his mandate; Teal Cedar, at paras. 81-82. Intervening in the decision would therefore undermine the choice that the parties themselves made to submit their dispute to him. The court should defer to choices made by the arbitrator within the context of his presumed expertise, as this same expertise presumably grounded the parties’ decision to appoint him.
[44] In my view, the Arbitrator’s error is a reviewable legal error, because his recourse to a legal theory that was not advanced or argued was clearly unreasonable.
[45] A judge’s reliance on a theory that was not pleaded or argued is an error of law; Rodaro, at para. 61; Moore v. Sweet, at para. 30. The Court of Appeal’s rationale for this characterization is grounded in fundamental principles of natural justice. Although its judgment in Moore v. Sweet was overturned on appeal, the Supreme Court did not suggest that this holding, which echoed the Court of Appeal’s earlier conclusion in Rodaro, was wrong.
[46] In Tomec, the Court of Appeal considered whether an adjudicator’s failure to apply the discoverability doctrine to a statutory limitation period attracts review on a correctness standard or a reasonableness standard. It concluded that the reasonableness standard applied, because while limitation periods are generally of central importance to the fair administration of justice, the interpretation of this particular statute only affected Ontario insurance claimants; Tomec, at para. 23, citing McLean v. British Columbia (Securities Commission), 2013 SCC 67, [2013] 3 S.C.R. 895, at para. 28. The Court went on to say at paras. 24 and 25, however, to hold that what is reasonable may itself vary and, in certain situations, there may be only one reasonable interpretation:
[R]easonableness also “takes its colour from the context” and “must be assessed in the context of the particular type of decision making involved and all relevant factors”: Catalyst Paper Corp. v, North Cowichan (District), 2012 SCC 2, [2012] 1 S.C.R. 5, at. para. 18. Here, we are concerned with a question of law — whether a common law doctrine applies to a statutory provision. This differs, for instance, from a highly discretionary ministerial decision, which would likely result in a much wider range of reasonable outcomes.
In fact, McLean acknowledged the possibility that where “the ordinary tools of statutory interpretation lead to a single reasonable interpretation and the administrative decision maker adopts a different interpretation, its interpretation will necessarily be unreasonable — no degree of deference can justify its acceptance”: at para. 38.
[47] Deference to arbitral decisions is based on a desire for efficiency and finality: Popack v. Lipszyc, 2016 ONCA 135, 129 O.R. (3d) 321, at para. 6. Courts must recognize that arbitral decisions are the product of choices that the parties have made, both in agreeing to submit a dispute to arbitration and in selecting a particular arbitrator. These considerations require that courts avoid simply substituting their own conclusions for those reached by a tribunal in the absence of a reversible error.
[48] The need for deference does not however displace the imperatives of fairness and reliability that underpin any legitimate dispute resolution process. By submitting their dispute to the Arbitrator, the parties granted him the discretion to exercise discretion in procedural issues. They did not grant him carte blanche to make decisions grounded in legal theory or positions that they did not advance and that they never had the chance to address. Deciding otherwise would fly in the face of the imperative provisions of the Arbitration Act.
[49] Based on my review of his reasons, the Arbitrator would not have concluded that Tall Ships waived its right to dispute the rejection of its remediation claims, absent his finding that time was of the essence in the contract. This conclusion fell outside the scope of his foreseeable mandate and was therefore unreasonable. Reliance on a legal theory not advanced or argued by the parties is an error of law by a trial judge that is alone serious enough to justify reversal. In the context of a commercial arbitration, it is likewise a reversible error of law under s. 45 of the Arbitration Act.
[50] I find that the Arbitrator’s interpretation of clause 22.3 in the Brownfields Agreement hinged on his finding of an implied “time is of the essence” term, even though this theory was never pleaded or argued by the City. This was neither reasonable nor fair. The Arbitrator’s finding is therefore an error of law giving rise to intervention under s. 45 and a violation of Tall Ships’ procedural rights giving rise to intervention under s. 46.
Second ground of appeal: Failure to address discoverability and to provide reasons
[51] In addition to finding that Tall Ships had waived its right to dispute the City’s determination of its remediation claims the Arbitrator also concluded that its claims were time-barred. For Tall Ships to successfully challenge the dismissal of the claims, it must also show that he erred on the limitations issue.
[52] In rejecting Tall Ships’ submissions on limitations, the Arbitrator stated summarily that the remediation claims “were certainly well beyond the two-year limitation period”. He did not address Tall Ships’ argument that it would not have been legally appropriate for it to sue the City at the time. He did not make any finding about when the claims became discoverable.
[53] The City contends that the Arbitrator’s failure to provide more detailed reasons is not an error of law. It says that the Arbitrator did not need to elaborate on the limitations issue, because his conclusions on that issue were self-evident. I disagree.
[54] The Supreme Court has cautioned that adequacy (or rather inadequacy) of reasons is not, in of itself, a basis for quashing an arbitral award; Newfoundland and Labrador Nurses’ Union v. Newfoundland and Labrador (Treasury Board), 2011 SCC 62, [2011] 3 S.C.R. 708, at para. 14.
[55] Tall Ships’ counsel points out that the decision in Newfoundland Nurses was not made in the context of an appeal from an arbitral award governed by the Arbitration Act, and that s. 38(1) of the Act explicitly requires that an arbitral award must state the reasons on which it is based. It also relies on cases (Kalatzis v. Daniels, 2002 CarswellOnt 8527 (ONSC); Peters v. D’Antonio, 2016 ONSC 7141) where arbitrators provided no reasons at all.
[56] In my view, s. 38(1) must be read in light of the principles articulated in Newfoundland Nurses, because the reasoning in that case is not at odds with the obligation to provide reasons. The question explored by Justice Abella in that case was rather: when are the stated reasons sufficient? The key passage in Newfoundland Nurses at para. 16 on this point applies equally in the context of a review under the Arbitration Act:
Reasons may not include all the arguments, statutory provisions, jurisprudence or other details the reviewing judge would have preferred, but that does not impugn the validity of either the reasons or the result under a reasonableness analysis. A decision-maker is not required to make an explicit finding on each constituent element, however subordinate, leading to its final conclusion… . [I]f the reasons allow the reviewing court to understand why the tribunal made its decision and permit it to determine whether the conclusion is within the range of acceptable outcomes, the Dunsmuir criteria are met. [Internal citations omitted, emphasis added.]
[57] Applying this test, I must consider whether the Arbitrator’s reasons permit me to understand why he concluded that Tall Ships’ remediation claims were time-barred.
[58] Section 4 of the Limitations Act, 2002, SO 2002, c 24, Sch B. (the “Limitations Act”) provides that the applicable limitation period begins to run only when a claim is discoverable. In its written submissions to the Arbitrator, Tall Ships argued that discoverability did not begin to run when it received the City’s responses to its claims, because it did not suffer any immediate loss. It further argued that it would have been inappropriate for it to initiate a legal proceeding against the City at the time.
[59] The Ontario Court of Appeal has consistently held that consideration of when a proceeding was an appropriate means to remedy a claim is an essential element in the discoverability analysis. Failure to consider s. 5(1)(a)(iv) of the Limitations Act is an error of law: Presley v. Van Dusen, 2019 ONCA 66, at para. 15, and the decisions cited therein.
[60] I infer, based on the Arbitrator’s summary handling of this issue, that he agreed with the City’s submission that the starting point for the two-year limitation period was Tall Ships’ receipt of the City’s responses to the claims. There is nothing in the reasons, however, that allows me to understand, or even speculate, as to why the Arbitrator concluded that the claims were discoverable at that time. He does not indicate any basis for finding that Tall Ships sustained a loss, as required under s. 5(1)(a)(i) of the Limitations Act, or that it was appropriate for it to begin legal proceedings at the time, as required under s. 5(1)(a)(iv). As aptly noted by counsel for Tall Ships, a judge may be required to connect the dots but there must be dots to connect, and there are none here.
[61] I conclude that the Arbitrator failed to provide any meaningful reasons for the rejection of Tall Ships’ limitation argument, and that there is nothing to indicate that he turned his mind to the discoverability issue. His failure to comply with s. 38(1) of the Arbitration Act permits the court to set the award aside under s. 46(1)(7). This was not a mere technical noncompliance with the Act, but an error which undermines the fairness of the arbitral process and the ability of the court to ascertain whether the Arbitrator’s award falls within the range of reasonable outcomes.
Third ground of appeal: Finding of 15-day deadline to respond to requests for information
[62] Tall Ships argues that the Arbitrator erred in finding that the 15-day deadline in clause 22.3(d) applied to the City’s requests for further information. It contends that this interpretation was inconsistent with a reasonable interpretation of the contract applying the principles set out in Sattva. The City argues that the Arbitrator’s interpretation was a mixed determination of fact and law, and there is no extricable legal error that would allow this court to interfere with it.
[63] In my view, Tall Ships has not identified a reviewable error in the Arbitrator’s determination that a request by the City for further information was equivalent to a rejection.
[64] As already noted, a decision is reasonable if it falls “within a range of possible, acceptable outcomes which were defensible in respect of the facts and law, and the decision was justified, transparent, intelligible and defensible”; Teal Cedar, at para. 84.
[65] Clause 22.3(c) identifies three possible responses that the City might provide to a remediation claim:
[T]he City shall, within thirty (30) days … give written notice to the Owner wherein the City either accepts, rejects or requests additional information from the Owner. A request for additional information shall detail the type or nature of the information required by the City and a rejection of the submission shall provide reasons and details for the rejection.
[66] On the Arbitrator’s reading of this clause, a request for further information was effectively a rejection of any costs that the City had not accepted. The conflation of a rejection and a request for further information was critical since, in its absence, Tall Ships’ failure to file Dispute Notices within 15 days could not mean that it waived its right to the remediation costs at issue.
[67] Despite the disjunctive “or” in the phrase “accepts, rejects or requests additional information”, when clause 22.3 is read in its entirety, it is clear that the City could accept part of any given claim and reject another part of the same claim. This was explicitly foreseen in clause 22.3(d), which refers to the possibility that the City would give notice of “its rejection or partial rejection” of a claim, which in either case was defined as a “Rejection Notice”.
[68] Since the parties anticipated, through their contractual language, that the City could partially accept and partially reject any given remediation claim, despite the disjunctive language in clause 22.3(c), it follows that the City could also partially accept a claim and seek further information with respect to the balance of it.
[69] Tall Ships argued that the City’s responses could not be read as rejections because they did not set out the “reasons and details” for the rejection, as required in clause 22.3(c). The Arbitrator did not explicitly deal with this argument. As already noted, however, an arbitrator is not required, in his reasons, to address every argument advanced by the parties. The Arbitrator implicitly found that the City’s request for further information was, in itself, an explanation for the rejection of certain costs.
[70] I conclude that it was not outside the range of possible, acceptable outcomes for the Arbitrator to find, as he did, that the City could likewise both reject certain costs submitted and request further information in respect of those same costs. I furthermore do not find that the Arbitrator’s explanation of his reasoning to be so deficient as to offend s. 38(1) of the Arbitration Act.
[71] I accordingly reject this ground of appeal.
Fourth ground of appeal: Uneven application of the “time is of the essence” rule
[72] Tall Ships argued that the Arbitrator applied the “time is of the essence” theory unevenly. He concluded that the City’s deadline to respond to claims in clause 22.3(c) could be implicitly waived by the parties through their conduct, but that Tall Ships’ deadline to issue a Dispute Notice in clause 22.3(d) could not.
[73] In my view, this was not a clearly unreasonable interpretation, given the reference to waiver and release found in (d) but absent from (c).
[74] I accordingly reject this ground of appeal.
Conclusions on Award #1
[75] I find that the Arbitrator made two errors attracting this Court’s review in Award #1. Further to s. 45(5) and s. 46(8) of the Arbitration Act, I may vary or set aside the award, or remit it back to the Arbitrator with or without directions. I will discuss the appropriate remedy at the end of these reasons.
AWARD #2 – THE CLAIM FOR ADDITIONAL CONSTRUCTION COSTS
[76] In Award #2 issued on December 4, 2018, the Arbitrator rejected Tall Ships’ claim for $1,839,991.08 in additional construction costs.
Key underlying facts
[77] In the parties’ Purchase Agreement executed in March 2011, Tall Ships was the vendor of the property that was to be built, known as the Maritime Discovery Centre or MDC, and the City was the purchaser. The parties stated that the purchase price should be equal to the construction budget, which was set at $7.4 million but which could be “amended from time to time with the consent of the Purchaser”, that is, the City. In the Agreement, the projected size of the MDC was 27,000 square feet.
[78] In clause 3.9 of the Agreement, the City appointed a committee, known as the MDC Steering Committee, to act on its behalf during its construction in all matters “relating to the design, the allocation of funds within the aggregate total Construction Budget and the construction of the MDC”. The clause specifically stated, however, that the Steering Committee did not have the authority to increase the construction budget.
[79] Clause 2.2 of the Purchase Agreement provided that Tall Ships would also act as construction manager with respect to the construction of the MDC, in return for a fee calculated as a percentage of the estimated project cost. The clause referred to the construction management fee being paid “without risk” and concluded as follows:
It is understood and agreed that the assumption of the construction management of the MDC shall not give rise to any obligation upon [Tall Ships] or a related party or a party designated by [Tall Ships] th … nor give rise to any claim for delay or failure to complete.
[80] Over the course of the construction, the MDC Steering Committee approved design changes for the MDC that had the effect of increasing both its size and cost. The completed MDC was roughly 33,000 square feet in size, or a little over 20% greater than the design at the time the Purchase Agreement was signed.
[81] In January 2015, Tall Ships advised the City that the cost of building the MDC would clearly exceed the $7.4 million budget. The parties had discussions about how they would resolve this issue through the rest of the year. They had not done so by March 2016, when Tall Ships transferred ownership of the MDC to the City and received a payment of $7.4 million as well as additional amounts for MDC Exclusions that Tall Ships had invoiced separately in 2015.
[82] In an invoice dated March 31, 2016, Tall Ships claimed $1,839,991.08 in additional construction costs from the City. It took the position that the risk of cost-overruns rested with the City, pursuant to clause 2.2, and that the City was aware, even before the Purchase Agreement was signed, that the size and cost of the MDC would increase. Furthermore, as the construction progressed, the Steering Committee approved design changes that inevitably increased construction costs.
[83] The City claimed that it was unaware until January 2015, when the MDC was substantially complete, that the construction costs greatly exceeded the budget in the Purchase Agreement. It refused to pay the invoice, on the basis that the additional construction costs had not been authorized by the City.
The Arbitrator’s decision
[84] The Arbitrator held that Tall Ships was not entitled to the additional construction costs either pursuant to the terms of the Purchase Agreement or based on the doctrine of unjust enrichment. The Arbitrator’s conclusions turned on his findings of fact, his interpretation of Tall Ships’ obligations as a construction manager, and his application of the good faith doctrine in Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494.
[85] “Construction management” was not defined in the Agreement nor were Tall Ships’ specific obligations as construction manager set out. Based on his interpretation of this term, the Arbitrator concluded that Tall Ships owed a wide scope of duties to the City. At paragraph 214 of Award #2, he found that Tall Ships was responsible for carrying out the work that it retained for itself, co-ordinating subtrades and suppliers; preparing project schedules; and ensuring that suppliers and subtrades adhered to the schedule. In addition to this, at paragraph 216 of Award #2 the Arbitrator found that, as construction manager, Tall Ships was required to:
• Assist the City and the Steering Committee in a cost-benefit analysis of the financial impact of various design enhancements or changes in the scope of work on the estimated construction budget of $7.4 million;
• Manage the expectations of the City and the Steering Committee so that they could make “fully informed decisions with a realistic appreciation of cost consequences where design changes or design enhancements were up for approval”;
• Warn and advise the Steering Committee and the City where either of their “wish lists” for enhancements to the Centre were likely to exceed $7.4 million and, if so, by how much; and
• In an overall way, assist the City in managing its risk with respect to the work including the potential for cost over-runs.
[86] In summary, the Arbitrator concluded that Tall Ships was contractually obligated, as construction manager, to assist the City in managing its financial risk. Although the Arbitrator mentioned, in passing, the “without risk” language in clause 2.2, he did not explain what impact, if any, this language had on his conclusions about Tall Ships’ contractual duties.
[87] The Arbitrator then made a series of findings of fact based on the evidence presented at the hearing:
• The $7.4 million budget in the Purchase Agreement for the MDC’s construction was an estimate.
• Tall Ships’ principal Simon Fuller knew, when the Agreement was signed, that the MDC would be larger than 27,000 square feet and that the construction costs would be higher than $7.4 million.
• Tall Ships were construction experts while the City’s representatives were not.
• The City was relying on Tall Ships to advise it of the increased size and cost of the MDC.
• Mr. Fuller failed to share information with the City about the increased project costs prior to or as they were incurred, a failure that the Arbitrator dubbed “the Critical Withholding of Key Information”.
[88] Based on these findings, the Arbitrator concluded that Tall Ships had not carried out its duties to the City as construction manager in good faith. By repeatedly withholding key information from the Steering Committee, Tall Ships acted unreasonably and arbitrarily towards the City.
[89] As a result of these breaches, the Arbitrator found that Tall Ships was estopped from making a claim for the additional construction costs either under the contract or pursuant to a claim for unjust enrichment.
Grounds of appeal advanced
[90] Tall Ships advances three grounds of appeal of Award #2:
(1) The Arbitrator found that Tall Ships breached implied obligations that were not pleaded or argued by the City.
(2) He failed to apply the appropriate legal analysis for implying contractual terms.
(3) He unreasonably misconstrued the duty of good faith.
Analysis
First ground of appeal: Finding of implied obligations not pleaded nor argued
[91] Neither the City’s statement of defence nor its written submissions made any reference to Tall Ships’ obligations as construction manager.
[92] In its written submissions following the second phase of the arbitration hearing, the City cited eight grounds for denying Tall Ships’ entitlement to additional construction costs. The core of the City’s defence was that Tall Ships had deliberately withheld information about cost overruns from the City and failed to seek or obtain its authorization for increase to the budget number in the Agreement. It also contended that Tall Ships was in charge of overall building design and for “formulating the budget numbers that gave rise to the Purchase Price”. The City did not however rely on, or even refer to, clause 2.2 of the Purchase Agreement or to Tall Ships’ role as construction manager. It did not allege, either in its statement of defence or in its written argument, that there were explicit or implied terms in the Purchase Agreement requiring Tall Ships to manage the financial risk of the project, failing which it would have to assume any costs that exceeded $7.4 million.
[93] As a result, I find that Tall Ships was not on notice of the theory relied on by the Arbitrator to reject its claim for additional construction costs. Had Tall Ships realized that the Arbitrator might interpret the Purchase Agreement as he did, it would have certainly argued, as it did on this appeal, that this interpretation was unreasonable.
[94] The City argues that Tall Ships’ obligations as construction manager were clearly at issue in the arbitration. Tall Ships cited the “no risk” language in clause 2.2 in its argument, and therefore cannot have been surprised by the Arbitrator’s focus on its role as construction manager.
[95] As will be discussed further below, the Arbitrator’s interpretation of Tall Ships’ legal duties as construction manager rests on his finding of implied terms in the Purchase Agreement. His interpretation was based on the parties’ disparity of knowledge and the City’s reliance on Tall Ships, as opposed to any language in clause 2.2 or elsewhere in the Agreement. The Arbitrator furthermore did not explain how his interpretation was compatible with the “no risk” language in clause 2.2, which on its face precluded any liability on the part of Tall Ships for construction costs. In my view, Tall Ships could not have reasonably anticipated this approach, based on the City’s pleadings and argument.
[96] The City also argues that, given the Arbitrator’s findings that Tall Ships withheld information and that the City was unaware of the cost overruns, it had no hope of recovering its additional construction costs, even in the absence of any reliance by the Arbitrator on implied terms. This presupposes that Tall Ships had an obligation to advise and disclose, that it was responsible for the City’s lack of awareness, and that the contract should be interpreted in such a way that additional construction costs should be borne by Tall Ships notwithstanding a contractual provision that seems to say the opposite.
[97] In my view, Tall Ships’ claim was not hopeless, even in the face of the Arbitrator’s findings of fact. The Arbitrator’s findings of fact are determinant only if his interpretation of the Purchase Agreement was free from reversible error.
[98] I conclude that in Award #2 the Arbitrator erred in basing his conclusions on a legal theory that was not advanced or argued, and that this attracts review under both s. 45 and 46 of the Arbitration Act.
Second ground of appeal: Wrong test for implying contractual terms
[99] The City argues that, in interpreting Tall Ships’ obligations as the construction manager for the MDC project, the Arbitrator engaged in an exercise of contractual interpretation that is shielded from review. Alternatively, the City contends that, if the Arbitrator implied terms in the Purchase Agreement, such terms were consistent with the test set out by the Supreme Court of Canada in M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd., 1999 CanLII 677 (SCC), [1999] 1 S.C.R. 619, 10 C.C.E.L. (4th) 75, at para. 27.
[100] In order to determine the intent of the parties and the scope of their understanding, “a decision-maker must read the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract”; Saatva, at para. 47. Relevant contextual factors can include the purpose of the agreement and the nature of the relationship created by the agreement; Saatva, at para. 48.
[101] The implication of the Arbitrator’s interpretation of Tall Ships’ role as construction manager is that it had almost a fiduciary relationship with the City. It was required to inform and advise the Steering Committee, and to ensure that it made the right choices, failing which, it assumed responsibility for any cost overruns on the MDC project.
[102] In my respectful view, the Arbitrator gave the term “construction manager” a meaning that cannot possibly be read into the words of the Purchase Agreement, absent recourse to an implied term. His interpretation of Tall Ships’ obligations was not rooted in the words in the parties’ contract, nor was it consistent with them. The Arbitrator seems to have been swayed by his perception of the City’s difficult financial situation, and the dilemma it faced as a result of the Steering Committee’s approval of design changes that increased the overall budget for the project. This led him to imply contractual obligations in the guise of interpreting explicit contractual terms. In implying terms, the Arbitrator furthermore did not apply the legal criteria for doing so.
[103] The Arbitrator identified Tall Ships’ obligations, as construction manager, at paragraphs 214 and 216 of his decision. Prior to doing so, he noted that construction management is not defined in the Purchase Agreement and acknowledged that this role “can cover a multitude of relationships”. He cited passages from two construction law texts emphasizing that the meaning of the term varies from contract to contract and referred to the dictionary definition of the verb “manage”. He then stated that he was basing his determination of Tall Ships’ role based on the “common sense” definition of that word, the terms of the Agreement, and the evidence he had heard.
[104] Based on the principles of contractual obligation in Sattva, it was appropriate for the Arbitrator to assess the parties’ intention with respect to Tall Ships’ role as construction manager in the context of the entire Purchase Agreement, and indeed in the context of all of their contractual arrangements. This is not however what the Arbitrator did.
[105] Despite the Arbitrator’s statement that his findings on the scope of Tall Ships’ obligations as construction manager were based on “a careful consideration” of the provisions of the Purchase Agreement, he did not refer to any explicit obligations in the contract terms that informed his findings. He did not point to any explicit terms that required Tall Ships to provide the Steering Committee or the City with the costing of proposed design changes, or to keep them apprised of any revised total budget based on changes in the size or design, or to advise them of the financial implications of their decisions. There were in fact no such provisions in the Purchase Agreement.
[106] The Arbitrator gave some indication of his reasoning in the discussion that followed paragraph 216. He noted that the City was relying on federal and provincial funding for the MDC project, and did not have the financial means to cover substantial cost overruns. He found that the principal of Tall Ships, Mr. Fuller, realized from the outset that the MDC would cost more than $7.4 million, but did not share this information with the City. Mr. Fuller was a construction expert, while the City’s representatives on the Steering Committee, who were not construction experts but volunteers, relied on Tall Ships’ knowledge of ongoing and projected costs. The Arbitrator concluded that:
At the very core of the Purchase Agmt., the City had the right to be apprised of this information and the [Steering Committee] ought to have been informed, as the design evolved, of the relative cost consequences of each scope-impacting decision that they were taking to increase the size and complexity of the MDC.
[107] The Arbitrator’s description of Tall Ships’ obligations at paragraph 216 was accordingly not based on the inherent or legal meaning of “construction manager”, on a common sense definition of this term, or on a reading of the Purchase Agreement or the parties’ agreements as a whole. He determined Tall Ships’ role on the project based on the City’s financial situation and the parties’ inequality of information and expertise.
[108] The principles of contractual interpretation in Sattva give decision-makers considerable latitude. This latitude does not however extend to an unfettered discretion. A decision-maker is bound to take the words of an agreement into account. While the surrounding circumstances will be considered in interpreting the terms of a contract, “they must never be allowed to overwhelm the words of that agreement”; Sattva at para. 57.
[109] The Arbitrator’s consideration of the context of the Agreement, including the equities of the situation, could not be used to override its explicit terms, nor could he define words in a way that went far beyond any usual meaning. The Arbitrator’s interpretation did not take into account the nature or language of the parties’ contract as a whole. It did not even take into account the language in clause 2.2, the explicit source of Tall Ships’ obligation as construction manager, because it did not account for the provision in that clause that its role would not cause it to “assume the obligations for or make payment of the cost of construction of the MDC”.
[110] Since his interpretation of the role of construction manager was not based on the actual terms of the parties’ agreement, the only way that the Arbitrator could have concluded that Tall Ships took on the role as the City’s financial advisor was by finding that this was an implied term in the Purchase Agreement. He correctly identified the three circumstances in which terms may be implied in a contract, as set out in MJB, at para. 47. Terms may be implied in a contract:
(1) Based on custom or usage;
(2) As the legal incidents of a particular class or kind of contract; or
(3) Based on the presumed intention of the parties where the implied term must be necessary “to give business efficacy to a contract or as otherwise meeting the ‘officious bystander’ test as a term which the parties would say, if questioned, that they had obviously assumed”.
[111] The Arbitrator did not cite MJB in the context of his consideration of Tall Ships’ duties as construction manager, but the City argues that he could have implied the obligations set out at paragraph 216 of Award #2 under any of the three branches of the MJB criteria. It points out that, in a standard construction contract, a contractor may not charge for extra work that is not approved, either explicitly or implicitly, by the owner.
[112] I cannot accept this argument. Tall Ships’ obligations did not spring from its limited role as contractor for a subset of the work, but rather from the Arbitrator’s findings about its role as construction manager. As noted by the Arbitrator, the Purchase Agreement was not a standard form agreement, and the duties of a construction manager vary from contract to contract. The Arbitrator accordingly could not have implied terms based on custom or usage, or as incidents of a standard form contract. A party to an arms’ length commercial contract is generally not required to ensure that the other party makes intelligent, informed choices, which is the implication of the obligations imposed on Tall Ships as a result of the Arbitrator’s analysis.
[113] Under the third branch of the MJB test, a party seeking to imply a term based on business efficacy must show that the parties necessarily intended to include such a term in their agreement. In Olympic Industries Inc. v. McNeil (1993), 1993 CanLII 318 (BC CA), 86 B.C.L.R. (2d) 273 (BCCA), at para. 31, the B.C. Court of Appeal emphasized that the evidentiary onus that lies on the party who seeks to have the term implied:
It is not sufficient to show that it would be reasonable or logical to imply such a term, or that the parties would probably have agreed upon such a term if they had put their minds to it, or, that having put their minds to it, chose not to express it. A higher burden of proof must be met.
[114] In MJB, at para. 29, Justice Iacobucci likewise emphasized that implying a term based on business efficacy requires evidence of the intentions of the actual parties, rather than the intentions of reasonable parties:
This is why the implication of the term must have a certain degree of obviousness to it, and why, if there is evidence of a contrary intention, on the part of either party, an implied term may not be found on this basis.
[115] Or, as stated by the B.C. Court of Appeal in Moulton Contracting Ltd. v. British Columbia, 2015 BCCA 89, 381 DLR (4th) 263, at paras. 55:
The key element is that the implied term is more than just reasonable; it is necessary to make the contract as the parties intended. That is, without the term, the contract, as intended by the parties, would not be effective.
[116] The Arbitrator found that, given the City’s financial situation, it would not have signed an agreement that allowed Tall Ships to increase the overall construction budget without any authorization. He made no findings with respect to Tall Ships’ intentions. He also did not explain why the City’s situation necessarily implied a term whereby Tall Ships assumed financial responsibility for cost overruns, as opposed to other possible implied terms, such as a term requiring the Steering Committee to exercise due diligence prior to approving design changes.
[117] Compounding the lack of findings to support an implied term imposing quasi-fiduciary duties on Tall Ships, the Arbitrator did not explain how his interpretation of its obligations as a construction manager could be reconciled with the explicit language of clause 2.2.
[118] Clause 2.2 specifically provided that “the assumption of the construction management of the MDC shall not give rise to any obligation upon the [Tall Ships] … to assume the obligations for or make payment of the cost of construction of the MDC”.
[119] An implied contractual term may not contradict an express term in the contract; see G.H.L. Fridman, The Law of Contract in Canada, 3rd ed. (Scarborough: Carswell, 1994), at p. 476; MJB, at para. 29; and Rio Algom Limited v. Attorney General of Canada, 2012 ONSC 550, at para. 46, and the caselaw cited therein.
[120] In Moulton, at para. 78, the B.C. Court of Appeal concluded a trial judge committed an extricable error of law, reviewable on a correctness standard, in finding an implied term without an evidentiary basis and in the face of explicit terms inconsistent with the implied obligation:
In my opinion, the trial judge erred in law in implying the Dissatisfaction Term into the TSLs. He did not apply the proper test: whether the parties actually intended to agree to such a term. There is no basis in any evidence to say that they did. Rather, the terms on which the parties did agree were inconsistent with such a term.
[121] Similarly, I conclude that the Arbitrator erred in law in implying a term that Tall Ships, as construction manager, was obliged to advise the Steering Committee on the implication of proposed design changes on the overall construction budget, failing which Tall Ships would be liable for any increase in the overall construction budget for the MDC.
[122] For all of the above reasons, this ground of appeal is well-founded.
Third ground of appeal: Unreasonable construction of the good faith doctrine
[123] Having found that Tall Ships was required to ensure that the Steering Committee understood the financial implications of any design changes it approved, the Arbitrator went on to conclude that its failure to do so was a breach of Tall Ships’ obligation of good faith. As a result, Tall Ships was precluded from making a contractual or restitutionary claim for additional construction costs.
[124] Tall Ships says that the Arbitrator erred by finding that it breached its duty without any finding of active dishonesty, and that the doctrine of good faith could not apply to a contractual obligation that should never have been implied in the Purchase Agreement.
[125] I reject the first part of this argument but accept the second part.
[126] At paragraph 206 of Award #2, the Arbitrator correctly characterized the Supreme Court’s decision in Bhasin as requiring that parties to a contract each have “appropriate regard to the legitimate contractual interests of the other contractor partner, specifically, each had an obligation of good faith or honest performance: meaning that each had to perform its contractual duties honestly and reasonably and not capriciously or arbitrarily”.
[127] At para. 73, the Court in Bhasin explained the scope of a “general duty of honesty in contractual performance”:
This means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. This does not impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from the contract; it is a simple requirement not to lie or mislead the other party about one’s contractual performance. [Emphasis added.]
[128] The Court emphasized again at para. 86 that the duty of honest performance did not imply a duty of disclosure that did not otherwise exist:
The duty of honest performance … should not be confused with a duty of disclosure or of fiduciary loyalty. A party to a contract has not general duty to subordinate his or her interest to that of the other party. … [A] clear distinction can be drawn between a failure to disclose a material fact … and active dishonesty. [Emphasis added.]
[129] Accordingly, the duty of good faith requires that a party not perform its contractual obligations in an actively dishonest way.
[130] The Arbitrator found that, before the parties even signed the Purchase Agreement, Mr. Fuller had actual knowledge that the MDC would be bigger and would cost substantially more than $7.4 million estimate in the Agreement. He further concluded that Mr. Fuller deliberately withheld this information from the Steering Committee and the City throughout most of the construction. His conclusions were captured at paragraph 235 of Award #2, at the end of his discussion of the claim in contract:
[T]he Critical Withholding of Key Information was not a one-time thing. There was a plethora of instances in which the genuinely concerned members of the [Steering Committee] were trying to gain an understanding as to what [Tall Ships] was going to deliver for $7.4M. As far as I’m concerned, these enquiries were never met with a straight answer. Pointedly, the minutes continue to reflect the fact that the [Steering Committee] was operating in the belief that the $7.4M was a “gravestone” number. Mr. Fuller never corrected that perception or assumption until the January 2015 “cash crunch” crisis. [Emphasis added.]
[131] Although the Arbitrator does not say so directly, in my view this amounts to a finding that Tall Ships actively misled the Steering Committee. Based on the Arbitrator’s findings, Mr. Fuller did not simply fail to provide information but attempted to conceal the impact of design changes on the overall budget.
[132] This was a finding of fact with which this court cannot interfere, unless it was manifestly unreasonable. Based on the evidence at the arbitration, this was a conclusion that the Arbitrator could reasonably reach. It is therefore not reviewable.
[133] The problem, however, is that the Arbitrator’s conclusion about Tall Ships’ breach of the duty of good faith is predicated on his earlier finding about the scope of Tall Ships’ obligation as construction manager for the MDC, as this passage at paragraph 227 of Award #2 shows:
The Critical Withholding of Key Information is a very, very serious matter. I cannot downplay it. Using the Supreme Court of Canada’s decision in Bhasin as the appropriate standard for assessing contractual behaviour, I am driven ineluctably to conclude that by the Critical Withholding of Key Information, TSL did not perform its contractual duties, as CM, reasonably. [Emphasis in the original text.]
[134] Without finding earlier that Tall Ships had a contractual duty to disclose the financial impact of design changes to the Steering Committee and to assist it in reaching informed decisions, the Arbitrator could not have found that it performed these duties in an unreasonable or arbitrary way. I have already found that the Arbitrator made an extricable error of law when he implied a term in the Purchase Agreement requiring Tall Ships, as construction manager, to function as the City’s financial advisor.
[135] The recognition of a duty of good faith cannot give rise to substantive obligations that the parties did not contemplate in their contract. Bhasin is “no authority for unbridled creativity in the creation from whole cloth of obligations in a contractual context which the parties have not provided for or have addressed in a fashion which one party regrets in hindsight.”; Addison Chevrolet Buick GMC Limited et al. v General Motors of Canada Limited et al., 2015 ONSC 3404, at para. 116. Bhasin does not transform commercial agreements to contracts of utmost good faith or impose fiduciary obligations on commercial parties.
[136] Since I have already concluded that the Arbitrator erred in implying obligations on Tall Ships, I must also find that he erred in rejecting its claim based on how it performed those obligations. This error was in turn the basis for the Arbitrator’s conclusion that Tall Ships was estopped from making a claim in contract or for unjust enrichment.
[137] The Arbitrator would also have disallowed the restitutionary claim for other reasons. His reasoning on this claim is however ultimately premised on the finding that Tall Ships had a contractual obligation to inform the Steering Committee and the City of the impact of design changes to the overall project budget. His rejection of the claim for unjust enrichment was therefore based on the same error that led him to reject the claim in contract.
Conclusions on Award #2
[138] I find that the Arbitrator made reviewable errors in Award #2. As mentioned earlier, I will discuss the appropriate remedy at the end of these reasons.
AWARD #3 – THE INTEREST CLAIM
[139] In Award #3 issued on February 11, 2019, the Arbitrator rejected Tall Ships’ claim for interest on an invoice that the City paid a year after it was submitted.
Key underlying facts
[140] On March 2015, Tall Ships submitted an invoice for MDC Exclusions to the City. This work was excluded from its scope of work under the Purchase Agreement. The City was therefore required to pay for this work in addition to paying the purchase price for the MDC itself.
[141] Under the terms set out in the invoice, the City was obliged to pay the amount due within ten days of receipt. The City did not deny that it received the invoice, but delayed payment for about a year. It paid the invoice for the MDC exclusions, along with the amount of $7.4 million for construction costs, and some additional adjustments, in March 2016, when ownership of the MDC was transferred to the City.
[142] Tall Ships did not advise the City that it would be claiming interest on the invoice prior to the closing date. In its September 2016 statement of claim, however, it claimed interest on the invoice at 5% above the prime rate, pursuant to s. 4.1 of the Purchase Agreement.
The Arbitrator’s decision
[143] The Arbitrator held that s. 4.1 of the Purchase Agreement applied to the invoice for the MDC Exclusions, but rejected Tall Ships’ claim on the basis that it was equitably estopped by its conduct from recovering interest.
[144] The Arbitrator rejected the City’s allegation that the parties had reached an agreement to settle all monetary claims prior to closing. He however found that, by failing to advise the City that it planned to claim interest prior to March 2016, Tall Ships had led it to believe that it would not advance any further claims. This induced the City to pay the $315,000 invoice and other closing adjustments without seeking a complete accounting.
[145] Tall Ships’ silence about claims it intended to make after closing was, in the Arbitrator’s view, a further breach of its duties in Bhasin. At paragraph 64 of Award #3, he wrote that:
In the specific circumstances of this case, I find that TSL, in discharging its duty of honest performance and good faith, and in light of the collective communications by Mayor Henderson and Mr. Casselman was under a duty of disclosure, a duty to speak up if its intentions were actually to claim interest on the Invoice and to advance claims for further monies after Completion and Closing. By keeping its cards to its vest (particularly where it must have known it was building a $1.8M + claim), TSL breached these duties. It said nothing about the $1.8M claim. It said nothing about interest on the Invoice. Such conduct cannot be condoned.
[146] The Arbitrator concluded that, as a result of its conduct, Tall Ships was equitably estopped from making any claim for interest. He therefore dismissed its claim.
Grounds for appeal
[147] Tall Ships raises three grounds of appeal:
(1) The Arbitrator’s decision ultimately turned on finding that Tall Ships had breached implied terms of the Purchase Agreement, the same legal error that he made in Award #2.
(2) The estoppel defence was neither pleaded or argued by the City.
(3) The Arbitrator’s conclusion on estoppel was manifestly unreasonable.
Analysis
First ground of appeal: Error in finding that Tall Ships breached implied obligations
[148] The City’s position and argument on Tall Ships’ claim for interest were set out in a letter to the Arbitrator dated January 15, 2019, after he had issued Award #2. The City raised three defenses to the interest claim. First, the interest provision in s. 4.1 did not apply to payment for MDC Exclusions. Second, the parties had reached a verbal agreement in April 2015, whereby the City agreed to pay the MDC Exclusions invoice and other amounts at closing in March 2016, on the understanding that Tall Ships would not make any further claims against the City. Third, any interest payable should only run from November 2015, when Tall Ships provided back-up documentation for the invoice for MDC Exclusions.
[149] Neither the letter nor attached excerpts from the City’s written arguments referred in any way to any obligation that Tall Ships allegedly had to disclose its intention to claim interest, or to its duty of good faith or, as will be discussed further below, to the doctrine of estoppel.
[150] Likewise, the City’s statement of defence and counterclaim did not allege that Tall Ships had an obligation to disclose its interest claim, or that it breached this obligation, or that it acted in bad faith in failing to do so prior to the City’s payment of the invoice for MDC Exclusions. The City did allege, at paragraph 66, that Tall Ships “made numerous representations that the Construction Budget would not increase and, if it did, that TSL would absorb any overruns”, and that this was a breach of its duty of good faith and honest performance. This however had nothing to do with Tall Ships’ claim for interest for work on the MDC Exclusions which, as the title implies, fell outside the construction budget for the MDC itself.
[151] The Arbitrator’s reliance in Award #3 on a legal theory that was not pleaded or argued was a reversible error, as I have already found in the context of the first two Awards.
[152] Moreover, as is apparent from the passage from paragraph 64 of Award #3 cited above, the Arbitrator’s conclusion with respect to estoppel is premised on his finding of a duty to disclose and the application of the doctrine of good faith to that duty.
[153] The Arbitrator did not explain the source of Tall Ships’ obligation to disclose in Award #3. He commented that he would have expected a business person such as Mr. Fuller to mention a claim for interest at some point. Beyond this, in paragraph 50 of the Award, he linked the duty to disclose an eventual claim for interest to his earlier conclusions about Tall Ships’ implied duties as construction manager for the MDC:
[N]o one reading Award #2 and the findings of fact therein contained should downplay the Critical Withholding of Key Information as an insignificant breach of contract: it was a substantial breach of TSL obligations as Construction Manager in assisting Brockville to bring the Project to fruition and in helping the City to manage both public and private money (donations) available to fund the Project. And that finding of fact of TSL’s breach looms large over the question of interest.
[154] The Arbitrator found at paragraph 52 of the Award that, given Tall Ships’ role as construction manager, the City was relying entirely on the information it provided about all costs related to the MDC project. In his words, the Steering Committee and the City “were simply aware of what TSL chose to communicate to it”. It was on this basis that the Arbitrator concluded that the City could not reasonably have expected Tall Ships to advance a claim for interest in the absence of any reference to it prior to the closing date.
[155] Finally, in his conclusions about the duty to disclose in paragraph 64, the Arbitrator referred to Bhasin and “the notion that, in carrying out his or her own performance of the contract, a contracting party should have appropriate regard to the legitimate contractual interests of the contracting party”.
[156] It is therefore clear that, in the Arbitrator’s view, Tall Ships’ duty to disclose its intention to claim interest stemmed from its contractual duties as construction manager. I have already determined that this theory of an implied term was never pled or argued by the City.
[157] For reasons already set out above, basing an award on a novel theory is both fundamentally unfair to the parties and results in unreliable conclusions. It is therefore a reversible error.
Second ground of appeal: Estoppel not pleaded or argued
[158] The Arbitrator recognized at paragraph 66 of Award #3 that the City did not plead estoppel. He nonetheless reasoned that he could consider this defence because the City had alleged the material facts to support it. In particular, the City alleged that it paid the invoice for the MDC Exclusions “as part-and-parcel of its understanding that it was “closing the books” as between itself and TSL”.
[159] The City argues that the Arbitrator’s finding that it pleaded sufficient material facts in support of an estoppel defence, and his determination that Tall Ships was estopped, each involves a question of mixed fact and law. It therefore argues that these conclusions are not subject to this court’s review.
[160] I do not agree. In my view, the Arbitrator’s rejection of the interest claim on the basis of a defence that was never raised or argued was fundamentally unfair. It is therefore another reversible error. I furthermore conclude that the Arbitrator’s decision that the City had pleaded material allegations that could support such a defence was manifestly unreasonable.
[161] In its argument on the pleading requirement, the City relied on the decision of the B.C. Supreme Court in 32262 B.C. Ltd. v. McDonell, 1998 CanLII 3895. The Arbitrator himself cited paragraph 30 of McDonell for the proposition that even if estoppel must generally be pleaded, claims may be allowed “in circumstances where it is apparent from the pleadings and evidence that estoppel is in issue, even though it is not specifically called that”.
[162] I note that the City has not cited any decisions by Ontario courts holding that estoppel need not be specifically pleaded. As Justice Morrison notes in McDonell, Canadian courts have not reached a consensus on this issue.
[163] Beyond this, a review of the full reasons in McDonell is instructive. As noted at paras. 22 to 25 of Morrison J.’s decision, the defendant explicitly raised an estoppel defence for the first in his opening statement at trial. The plaintiff’s counsel objected on the basis that it had not been pled. When she was preparing her reasons after the hearing, the judge concluded that the defence had been raised, even though the word “estoppel” was not specifically mentioned in the statement of defence. As a result, she wrote to both counsel “asking them to deal with the issue of estoppel, concerned that the issue was present, but it should not be considered by the court until counsel had the opportunity to address the issue”. Both counsel then submitted written arguments and reply.
[164] McDonell therefore does not stand for the proposition that a judge or arbitrator may reject a claim based on estoppel in the absence of any argument of that defence. The case instead illustrates the proper approach when an adjudicator realizes that there is a critical issue at play that the parties have not addressed. Fairness dictates that the parties be given an opportunity to be heard. This approach was unfortunately not taken by the Arbitrator in the case at bar.
[165] On the basis of the additional submissions from the parties, Morrison J. considered whether allowing the defence would be fair, in the circumstances of the case. She observed at para. 47 that estoppel “should not be sprung on a party at the last minute” and should only be considered “if both parties have had a chance to present evidence and cross-examine witnesses on the matter; such that the parties have had the opportunity to fully address the issue”. Having concluded that reliance on the defence would not be unfair to the plaintiff on the facts of the case before her, Morrison J. ruled in the defendant’s favour.
[166] On this analysis, a ruling should not be made on an estoppel defence that has not been specifically pleaded absent consideration of whether this would be fair, in the circumstances. Such consideration is completely absent from the Arbitrator’s reasons.
[167] For all of these reasons, I do not accept that McDonell is authority for the Arbitrator’s decision to reject the claim based on estoppel, without notifying the parties of his preliminary conclusions and giving them a chance to make further submissions, and without considering whether allowing the City to advance this defence was fair in the circumstances. In my view, the Arbitrator’s decision to adjudicate the claim on the basis of a defence that was not explicitly raised or advanced was fundamentally unfair, attracting this court’s review under both s. 45 and 46 of the Arbitration Act.
[168] With respect to the sufficiency of the City’s pleadings, a defendant relying on an estoppel defence must allege that the plaintiff clearly and unequivocally represented an intention to give up its legal rights, and that the defendant relied on this representation to its detriment; Sales Promotion Services Inc. v. Ultramar Canada Inc., 1998 CanLII 5995 (ON CA), 2 B.L.R. (3d) 243 (C.A.), at para. 4, and Ryan v. Moore, 2005 SCC 38, [2005] 2 SCR 53, at para. 59.
[169] In finding that the City had pleaded material facts that supported an estoppel defence, the Arbitrator referred to paragraphs 53 to 57 of its statement of defence and counterclaim. These paragraphs allege that the parties reached an agreement regarding the payment about the City’s payment of the invoice. In paragraphs 55 and 56, the City alleged that:
It was agreed that Brockville would make one final payment to TSL in the amount of $315,000 and TSL would abandon all other claims for compensation. TSL later resiled from this agreement, but insisted on payment to close the transaction.
[170] These allegations are at odds with the theory that the City paid the invoice based on Tall Ships’ representation that it was giving up its legal rights. The City instead alleges that the parties reached an agreement, but that Tall Ships tried to back out of it. The City fulfilled its end of the bargain – that is, paying the invoice – even though it knew that Tall Ships was resiling from the agreement.
[171] The City could not furthermore allege, or be held to allege, that it was pleading detrimental reliance while explicitly alleging that it knew, when it paid the MDC Exclusions invoice, that Tall Ships did not intend on honouring any pledge to abandon further claims.
[172] The Arbitrator could accordingly not find that the City had pleaded material facts that could ground an estoppel defence.
[173] On this appeal, the City argues that the Arbitrator’s conclusion that the City had pleaded the material elements of estoppel was a mixed finding of fact and law, and therefore shielded from any review. In my view, the Arbitrator’s error was more fundamental. The material facts giving rise to an estoppel claim were not alleged, and in fact a finding of estoppel was incompatible with the facts as alleged. Tall Ships accordingly was deprived on knowing the case it had to meet. As I have already found, such an error amounts to an error of law and ground for intervention under ss. 45 and 46 of the Arbitration Act.
[174] For all of these reasons, this ground of the appeal is well-founded.
Third ground of appeal: The Arbitrator’s conclusion on estoppel is manifestly unreasonable
[175] The Arbitrator described the legal test for estoppel at paragraph 60 of Award #3. Citing Ryan v. Moore and Maracle v. Travellers Indemnity Co. of Canada, 1991 CanLII 58 (SCC), [1991] 2 S.C.R. 50, he stated that there must be evidence of a representation as well as detrimental reliance:
Estoppel can arise from words or conduct. And conduct can include silence. Let us be very clear on this point: mere silence by itself usually will not amount to a representation. But, in certain specific circumstances, where the party is under an obligation to speak, then the failure by that party to speak can constitute a representation. And the representee must establish that, in reliance on the representations, she/he/it acted on it or in some way changed her/his/its position.
[176] Thus, on the Arbitrator’s own formulation of the test for estoppel, Tall Ships’ silence about whether it intended to claim interest would not amount to a representation unless it was under an obligation to speak. The only possible source of such an obligation was Tall Ships’ role as construction manager in the Purchase Agreement. That is why, in Award #3, the Arbitrator referred to his earlier findings about Tall Ships’ failure to disclose critical information about the costs of the MDC project, and why he considered the contractual duty of good faith under Bhasin to be relevant to his analysis.
[177] I have already concluded that the Arbitrator erred in law in interpreting clause 2.2 in Award #2. This error taints his estoppel analysis. He could not have concluded that, by saying nothing about an eventual interest claim, Tall Ships made a representation, without first finding that it had an obligation to disclose.
[178] I therefore conclude that this ground of appeal is well-founded.
Conclusions on Award #3
[179] I conclude that the Arbitrator made a series of reversible errors in Award #3.
REMEDIES
[180] In its appeal, Tall Ships asks the court to vary the Awards or set them aside or, in the alternative, send them back to the Arbitrator for reconsideration based on any directions I may provide.
[181] The City contends that, even if the Awards are defective, the court ought not to vary or reverse them. It says instead that I should remit them back to the Arbitrator with directions so that he may clarify his reasons and, if necessary, revise his conclusions. Relying on the Ontario Court of Appeal’s decisions in Victoria University (Board of Regents) v. GE Canada Real Estate Equity, 2016 ONCA 646, 76 R.P.R. (5th) 104 and Popack, the City argues that the Arbitrator’s errors, if any, are not egregious enough to merit a reversal of the Awards. It points out that the Arbitrator has already heard sixteen days of viva voce evidence (which was not recorded) and reviewed hundreds of exhibits.
[182] Popack and Victoria University provide guidance on the factors that a court should weigh when it concludes that an arbitrator made a reversible error. Popack is of less assistance, because the error in that case was procedural in nature, and the conduct of the party who challenged the award was a significant factor in the judge’s determination of the appropriate remedy. As well, the appeal was based on the International Commercial Arbitration Act, R.S.O. 1990, c. I.9 and not, as this case, the Arbitration Act.
[183] Victoria University is more relevant to this case. It involved a multi-phase arbitration of a complex land-valuation dispute. The arbitration panel consisted of three arbitrators, one of whom dissented. The losing parties appealed the award under sections 45 and 46 of the Arbitration Act. The appeal judge held that the majority on the arbitral panel had erred in law. Having set aside the award, however, he nonetheless remitted the dispute back to the same panel. On further appeal to the Court of Appeal, the appellant asked that the majority’s award be reinstated. The respondents asked the Court to adopt the reasons of the dissenting arbitrator or to remit the dispute to a new arbitral panel.
[184] The Court of Appeal ultimately concluded, at paras. 146 to 149 of its decision, that the appeal judge had appropriately exercised his discretion in remitting the dispute back to the original arbitral panel. One of the factors that he had considered was the panel’s extensive knowledge of the dispute, which would ensure “an expeditious and informed determination of the arbitration”. The Court of Appeal noted that the arbitration hearing lasted 40 days and involved 20 witnesses. It concluded that remitting the dispute back to the panel was consistent with the interests of justice and “the principles of efficiency and cost effectiveness that characterize the arbitral model of decision making”.
[185] In the case at bar, I must therefore consider the principles of efficiency, cost-effectiveness and fairness to the parties in determining the appropriate remedy.
[186] I do not accept the City’s argument that, given his findings of fact, the Arbitrator would have reached the same result in the Awards in the absence of the errors that have been identified in this decision. In all three Awards, the outcome turned on theories of the case that had not been pleaded or argued. The Arbitrator also misdirected himself with respect to legal principles integral to his conclusions.
[187] The Arbitrator’s errors were not trivial. They had a clear impact on the outcome of the arbitration. The Awards therefore cannot stand. I am not however in a position to vary the Awards.
[188] Recognizing this, counsel for both parties at the hearing before me agreed that, if I concluded that the Arbitrator had made serious, reversible errors, I should solicit further submissions from them on the appropriate remedy. This would give the parties the opportunity to assess the best course of action in light of my reasons. I expect that the parties will also wish to make submissions on costs.
[189] I accordingly direct the parties, through counsel, to contact the trial management office in Ottawa to schedule a case management conference before me as soon as reasonably possible, so that a timetable for submissions on remedy and costs may be ordered. I encourage counsel to communicate with each other in advance of the case conference to see if they are able to agree on a timetable and cost order for my review and endorsement.
Justice Sally Gomery
Released: November 15, 2019
COURT FILE NOS.: CV-18-78036, CV-19-78860 and CV-19-79585
DATE: November 15, 2019
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Tall Ships Landing Development Inc.
Applicant
- and –
Corporation of the City of Brockville
Respondent
REASONS FOR JUDGMENT
Madame Justice S. Gomery
Released: November 15, 2019