COURT FILE NO.: CV-22-677164-0000
DATE: 20230208
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Aquanta Group Inc. and Forthspace Cananbis Inc.
Applicants
– and –
Lightbox Enterprises Ltd.
Respondent
Jean-Marc Leclerc, for the Applicant
A. Irvin Schein and Jamie Arabi, for the Respondent
HEARD: January 30, 2023
J.T. Akbarali J:
Overview
[1] The applicants bring an application for an order setting aside the award of an arbitrator, the Hon. F. Newbould, K.C., dated January 19, 2022, and a related procedural order dated January 5, 2022. The respondent brings a cross-application for an order enforcing the arbitral awards dated January 19, 2022 and March 7, 2022. The applicants also brought a motion for stay of the enforcement of the arbitral awards in the event they were unsuccessful in their application, but in the face of jurisprudence from the Court of Appeal that they subsequently uncovered, they have withdrawn the motion to stay.
[2] The parties agree that if the applicants’ application for an order setting aside the arbitrator’s award is unsuccessful, the respondent’s application for an order enforcing the arbitral awards must succeed.
[3] For the reasons that follow, I dismiss the applicants’ application and allow the respondent’s application.
Brief Background
[4] The applicants (hereinafter “Aquanta”) were among the few who were awarded cannabis licences in August 2019, after the legalization of cannabis sales in Canada in 2018. But Aquanta needed assistance. It entered into six licence and services agreements with the respondent (hereinafter “Lightbox”) for the operation of retail cannabis stores in Ontario in respect of six stores. The agreements contained arbitration provisions.
[5] On July 8, 2021, Lightbox commenced an arbitration against Aquanta for the payment of fees owing to it under the agreements. The arbitrator described the issue as follows:
The License Agreements provide for a fee to be paid to Lightbox calculated on a percentage of Aquanta’s gross sales for each store… The Service Agreements provide for a monthly fee of $10,000 to be paid to Lightbox for each store. [Aquanta raises] as a defence an alleged oral agreement that the payments owed under the License Agreements were to be “trued” up periodically to reflect an agreed EBITDA split in favour of Aquanta of 60/40 for four stores, 70/30 for one store and 63/35 for one store, and that pursuant to the oral agreement, money is [owed] by Lightbox.
[6] The arbitration was scheduled to proceed on September 27, 2021, but by this point, Aquanta’s then-counsel had not filed a defence. The hearing was adjourned at Aquanta’s request to January 10 and 11, 2022, peremptory to Aquanta.
[7] Aquanta’s statement of defence was filed on October 8, 2021. It pleaded the alleged oral agreement in defence to Lightbox’s claim for payment.
[8] On October 26, 2021, the date of a motion before the arbitrator for Aquanta to pay interim amounts owing under the agreements to Lightbox, Aquanta’s counsel was not in attendance. He advised Lightbox’s counsel that his retainer had been terminated. New counsel had been retained, but was unavailable on the day of the motion. The arbitrator proceeded with the motion, and made an interim award against Aquanta in the amount of $271,500, which amount was paid.
[9] New counsel had to deal with producing Aquanta’s documents and attending examinations on a fairly tight timeline. On January 5, 2022, Aquanta moved for an order allowing it to amend its defence to advance an alternative plea of negligent misrepresentation, and argued that it could do so on the same factual basis that had been adduced with respect to the alleged oral agreement, because the alleged negligent misrepresentation and the alleged oral agreement were one and the same.
[10] The arbitrator denied Aquanta’s request to amend its pleading to add the negligent misrepresentation claim. He summarized Lightbox’s argument resisting the amendment as follows:
It is agreed that on the examinations for discovery, no questions were put by either party regarding any alleged misrepresentation, and Lightbox contends that there would need to be evidence filed by both sides on this issue and discoveries held to deal with it. As the hearing next week is peremptory to the respondents, it would not be possible to deal with this new issue before then.
[11] The arbitrator concluded that it would be unfair to Lightbox to have the issue of negligent misrepresentation raised so late in the day without any chance to deal with it in any proper way before the hearing. He rejected Aquanta’s argument that the claim for negligent misrepresentation simply arose from the oral argument already pleaded.
[12] The arbitration proceeded on January 10 and 11, 2022. In closing argument, Aquanta again raised the issue of negligent misrepresentation. Lightbox argued that the question of whether negligent misrepresentation could be raised had been settled by the arbitrator’s January 5, 2022, procedural order. The arbitrator’s decision does not address negligent misrepresentation.
[13] In the arbitrator’s decision on the merits, he found that an oral agreement was entered into between Mr. Singhal, the principal of Aquanta, and Mr. Rowe, a member of the management team at Lightbox. In his view, that agreement was reached on December 2, 2019 and perhaps again on February 28, 2020. However, the arbitrator found the oral agreement could not be enforced for three reasons:
a. Mr. Rowe did not have the authority to bind Lightbox; rather, a written agreement signed by Mr. Donnelly, the president of Lightbox, would have been required to bind it.
b. The license and service agreements each contained an entire agreements clause. After a review of the law in the area, the arbitrator concluded that if the oral agreement had been legally binding on Lightbox, it would have been inadmissible under the parol evidence rule.
c. The terms of the oral agreement were illegal. The parties had attempted to obtain an operating license on terms that included an EBITDA split, but the license had been rejected by the Alcohol and Gaming Commission of Ontario (“AGCO”) because it interpreted the EBITDA split to reflect a partnership arrangement between Aquanta and Lightbox that ran contrary to the legislation at the time. The parties thus reformulated their arrangement to provide for fixed fees, and submitted the new arrangement to the AGCO. The license was granted on that basis. Aquanta was aware that the legislation changed by February 2022, such that a fee split would be permitted. However, it did not advise the AGCO of the alleged fee split agreement or apply for an amendment to its license on that basis, although the conditions of the license included an obligation on the holder of the license to notify the Registrar if it entered into any agreement with respect to changes in ownership, control or affiliations of the license holder. The arbitrator reviewed the law on illegality and concluded that the provisions at issue were for the predominant purpose of protecting the public. He found that Aquanta deliberately chose and intended to break the condition in its license, and by extension the Cannabis Licence Act, by not informing the Registrar of the terms of the oral agreement. He found that the deliberate and intentional breach of the statute by Aquanta would have rendered the oral agreement unenforceable had it otherwise been binding.
Issues
[14] The sole issue on this application is whether the decision of the arbitrator should be reversed pursuant to s. 46(1)(6) of the Arbitration Act, 1991, S.O. 1991, c. 17, on the basis that, by failing to permit Aquanta to raise the defence of negligent misrepresentation, Aquanta “was not treated equally and fairly, was not given an opportunity to present a case or respond to another party’s case…”
[15] In considering this issue, it is important to note that, pursuant to the parties’ arbitration agreement, the arbitration “shall be final and binding on the parties and no appeals shall lie therefrom.”
Analysis
[16] The role of the court when it is asked to review an arbitration decision is a narrow one. Section 46 of the Arbitration Act, 1991, provides a narrow basis upon which a court may interfere with an arbitration award. It does not create a right of appeal; nor does it invite a review of the correctness or reasonableness of an arbitrator’s decision: Mensula Bancorp Inc. v. Halton Condominium Corporation No. 137, 2022 ONCA 769, at para. 5. As the Court of Appeal held in In Alectra Utilities Corporation v. Solar Power Network, 2019 ONCA 254, at para. 20, appeals from private arbitration decisions are neither required nor routine.
[17] The grounds for setting aside an arbitration aware are not concerned with the substance of the parties’ dispute, but concern issues such as the requirements of procedural fairness, which is invoked by Aquanta in this case. Where, as here, no right of appeal is provided for in the arbitration agreement, the court does not ask whether the arbitrator’s decision is unreasonable or incorrect. The court asks whether the arbitrator acted within the bounds of authority granted by the arbitration agreement pursuant to which they were appointed: Alectra, at paras. 24–27; Mensula, at para. 5.
[18] There is no doubt that the procedural question as to whether to allow Aquanta to amend its statement of defence to plead negligent misrepresentation was properly before the arbitrator. There is no allegation that, in making his procedural order, the arbitrator exceeded his jurisdiction. Rather, Aquanta argues that the arbitrator unfairly prevented it from presenting its case or making its defence, and treated it unequally or unfairly. It also argues that the arbitrator gave no or insufficient reasons for rejecting Aquanta’s submission that the claim for negligent misrepresentation simply arises from the oral agreement already pleaded.
[19] In my view, the arbitrator’s procedural order does not warrant an order under s. 46(1)(6)s of the Arbitration Act, 1991 to set aside the arbitrator’s procedural and final order.
[20] First, the motion to amend the pleading was brought mere days before the date the arbitration was to begin, peremptory to Aquanta. This was a factor relevant to the arbitrator’s exercise of discretion, and he did not act unfairly, or inequitably, in considering it.
[21] Second, it is apparent from the arbitrator’s reasons that he accepted Lightbox’s argument that evidence would need to be filed by both sides to deal with negligent misrepresentation, and discoveries would have to be held, none of which could happen in the days remaining before the commencement of the arbitration.
[22] While Aquanta endeavoured to persuade me that there was evidence on the record that spoke to the existence of a duty of care in tort, and reasonable reliance on the alleged negligent misrepresentation, the fact that some evidence already in the record might have been relevant is not the point. Rather, it became clear during the application that much evidence that would be relevant to negligent misrepresentation had not been explored when the discoveries — focused on the alleged oral agreement — were held. For example, if negligent misrepresentation had been pleaded, Lightbox would have explored the factual foundation for the alleged duty of care. It would have explored the reasonableness of Mr. Singhal’s alleged reliance on Mr. Rowe’s representation that Lightbox would engage in a fee splitting arrangement based on EBITDA.
[23] Moreover, Lightbox operated six stores for Aquanta for over a year. If negligent misrepresentation were established, Aquanta argued it would seek to unwind the agreements between the parties. What, then, would become of the work Lightbox did running the stores? The parties agreed there was no evidence in the record to assess the value of Lightbox’s work on a quantum meruit basis. Aquanta could not tell me definitively what its position on remedy would have been. Perhaps other remedies would have had to be explored, necessitating discoveries and evidence.
[24] The arbitrator did not cite chapter and verse of the evidence that would not be before him, but there is no question that factor influenced his decision not to allow leave to amend the defence. His reasons are sufficient to permit review by this court.
[25] Aquanta argues that the arbitrator considered whether Mr. Rowe had authority to enter into the oral agreement even though Lightbox had never pleaded that Mr. Rowe had no authority. It argues that by considering Lightbox’s unpleaded arguments, and by failing to allow Aquanta to advance the unpleaded negligent misrepresentation argument, the arbitrator treated it unfairly and unequally compared to Lightbox.
[26] I do not accept this argument. First, the question of Mr. Rowe’s authority is subsumed under the very live and pleaded issue as to whether there was a binding oral agreement. Second, even if that were not the case, the arbitrator found three independent bases for declining to enforce the alleged oral agreement. The other two – the parol evidence rule and the illegality of the contract – had nothing to do with Mr. Rowe’s authority. If the arbitrator should not have considered the question of Mr. Rowe’s authority to bind Lightbox, there is no change in the result of the arbitration, because he identified and relied on two other bases on which he would not have enforced the alleged oral agreement.
[27] In the result, the arbitrator answered a question squarely before him, and gave reasons sufficient to understand why he declined to permit the amendment to the statement of defence. There was nothing unfair or inequitable in considering the need for discovery and evidence on the proposed new defence. There was nothing unfair or inequitable in considering the fact that the arbitration had already been adjourned once, and that the new date was peremptory to Aquanta. There was nothing unfair or inequitable in taking note of the fact that mere days remained before the peremptory arbitration was scheduled to start.
[28] In these circumstances, it cannot be said that the arbitrator did not allow Aquanta to present a case or respond to Lightbox’s case, or treat Aquanta unfairly or inequitably compared to Lightbox by failing to allow it to amend its pleadings. Aquanta had all the same opportunities that Lightbox had. Section 46(1)(6) of the Arbitration Act, 1991 is not a do-over to protect a party from its own choices, but rather to protect a party from unfair or inequitable conduct by an arbitrator. Here, any limit on Aquanta’s ability to fully present the case it wanted to present was a result of its own decisions and actions.
[29] Although Aquanta spent significant time in submissions reviewing the merits of its negligent misrepresentation argument, I do not delve into those arguments here. My conclusion that the arbitrator did not treat Aquanta unfairly or unequally, and did not deny it a chance to advance its case, is sufficient to dispose of Aquanta’s application. I see no value in speculating on the merits of the negligent misrepresentation defence had it been properly pleaded and explored. I note only that the question of whether it could have succeeded in the face of the findings the arbitrator made about the oral agreement, and whether the negligent misrepresentation, if found, would have been subject to the same conclusion with respect to illegality, were hotly contested.
[30] Because I have found that Aquanta’s application must be dismissed, it follows that Lightbox’s application to enforce the arbitral awards, dated January 19, 2022 and March 7, 2022, must be granted.
Costs
[31] Lightbox is the successful party and is presumptively entitled to its costs.
[32] The three main purposes of modern costs rules are to indemnify successful litigants for the costs of litigation, to encourage settlement, and to discourage and sanction inappropriate behaviour by litigants: Fong v. Chan (1999), 1999 2052 (ON CA), 46 O.R. (3d) 330, at para. 22.
[33] Subject to the provisions of an Act or the rules of court, costs are in the discretion of the court, pursuant to s. 131 of the Courts of Justice Act, R.S.O. 1990, c. C.43. The court exercises its discretion taking into account the factors enumerated in r. 57.01 of the Rules of Civil Procedure, including the principle of indemnity, the reasonable expectations of the unsuccessful party, and the complexity and importance of the issues. Overall, costs must be fair and reasonable: Boucher v. Public Accountants’ Council for the Province of Ontario, 2004 14579 (Ont. C.A.), 71 O.R. (3d) 291, at paras. 4 and 38. A costs award should reflect what the court views as a fair and reasonable contribution by the unsuccessful party to the successful party rather than any exact measure of the actual costs to the successful litigant: Zesta Engineering Ltd. v. Cloutier, 2002 25577 (ON CA), 2002 CarswellOnt 4020, 118 A.C.W.S. (3d) 341 (C.A.), at para. 4.
[34] Lightbox has delivered a bill of costs supporting its claim to partial indemnity costs of $55,886.53, inclusive of HST and disbursements. In contrast, Aquantas’s bill of costs, inclusive of HST and disbursements totals $20,813.94 on a partial indemnity scale.
[35] There is no reason in this case to award costs on anything other than a partial indemnity basis.
[36] With respect to the quantum of costs, I note the following:
a. The issues in the case were very important to the parties. The arbitration award is for $473,669.99 plus costs of $111,530.
b. The issue of the application of s. 46(1)(6) of the Arbitration Act, 1991 to the facts of this case was not particularly complex;
c. Lightbox’s counsel spent significantly more time on the applications than did Aquanta’s counsel, and as a result, Lightbox’s costs are significantly higher than Aquanta’s costs;
d. The partial indemnity rates of Lightbox’s counsel are reasonable for their market and experience;
e. Lightbox was put to the expense of responding to Aquanta’s motion to stay, which was eventually withdrawn because counsel uncovered binding law that they recognized set a test for a stay that would be impossible for Aquanta to meet;
f. No party behaved improperly or failed to admit something it should have admitted.
[37] I find that some reduction in Lightbox’s costs is warranted, in particular to reflect the reasonable expectations of the unsuccessful party. However, Aquanta’s costs are not the measure of reasonable costs in these applications, any more than Lightbox’s costs are.
[38] Taking all the factors above into consideration, I find that partial indemnity costs of the two applications and the motion, inclusive of HST and disbursements, in the amount of $40,000 is fair and reasonable.
Conclusion
[39] In summary:
a. I dismiss Aquanta’s application;
b. I grant Lightbox’s application;
c. I order that Aquanta pay Lightbox’s costs in the amount of $40,000, all inclusive, in respect of the applications and the abandoned motion for a stay, within thirty days.
J.T. Akbarali J.
Released: February 8, 2023
COURT FILE NO.: CV-22-677164-0000
DATE: 20230208
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Aquanta Group Inc. and Forthspace Cananbis Inc.
Applicants
– and –
Lightbox Enterprises Ltd.
Respondent
REASONS FOR JUDGMENT
Akbarali J.
Released: February 8, 2023