Canada – Award Challenged for Legal Error, Denial of Natural Justice After Baseball Arbitration

Nov 2021

This article first appeared on the Arbitration Matters blog, here.

In 1150 Alberni Limited Partnership v Northwest Community Enterprises Ltd., 2021 BCSC 2053, Justice Groves heard a petition to set aside an arbitral award or, in the alternative, for leave to appeal the award, as well as a cross-petition to enforce the award. The award arose out of a final offer selection arbitration, which required the arbitrator to accept one party’s submission in its entirety and provide reasons. Justice Groves dismissed the set aside and leave to appeal petitions. The arbitrator had not erred in law or in denying the petitioner natural justice; the losing party was simply re-arguing its case. Justice Groves granted an order enforcing the award.

The parties’ dispute concerned payments arising from an agreement for the production by Northwest of a high-end lifestyle and cultural magazine promoting Alberni’s development of a luxury residential real estate project in Vancouver. The magazine was used by Alberni to market units for sale in the development. After the first issue of the magazine was published, Alberni decided that it did not want to proceed with a second issue. Aberni paid a portion of the latest invoice rendered by Northwest, but disputed the remainder on the basis that it believed that, with respect to invoices already paid to date, it had overpaid in respect of third party expenses that Northwest had not incurred. In essence, the question before the arbitrator was whether the parties had complied with their rights and obligations under terms of their magazine production agreement or amended it as a result of ongoing discussions about content of the magazine and number of pages.

The parties’ magazine production agreement provided that any disputes arising out of their agreement were to be resolved by arbitration “held as quickly as reasonably possible”. The arbitration was to take the form of final offer arbitration; the arbitrator was required to accept one party’s submission in its entirety and provide reasons.

On November 22, 2018, Northwest commenced an arbitration for payment of the invoice. Alberni sought to offset what it saw as overpayment against any amount it owed to Northwest. The arbitration hearing proceeded over five days from August to October, 2019. After the oral hearing, the parties delivered their final offers to the arbitrator under seal. Northwest’s offer was for Alberni to pay it $175,000. Alberni’s offer was that it was required to pay Northwest nothing.

The arbitrator issued an award on November 8, 2019, in which he set out his reasons for accepting Northwest’s final offer. The arbitrator found that the parties’ agreement had “evolved over time based on the words, conduct and written documents exchanged by the parties”, as a result of which the terms were amended. Specifically, the parties agreed to a written Change Order which changed the original agreement in that it provided for a fixed price to be paid to Northwest and did not require it to account for out-of-pocket third party expenses. This eliminated Alberni’s set off claim.

Alberni sought to set aside the award pursuant to s. 30 of the now repealed British Columbia Arbitration Act, RSBC, 1996, c. 55 on the basis that the arbitrator had committed an arbitral error. “Arbitral error” means a corrupt or fraudulent act, bias, exceeding the arbitrator’s powers, and/or failure to observe the rules of natural justice. Alberni claimed that the arbitrator had failed to observe the rules of natural justice because he failed to determine the issue of Alberni’s right to set off for the alleged overpayment. Justice Groves found that the arbitrator had considered the issue of set off. The arbitrator found that there was no reliable evidence to support the alleged overpayment, but, in any event, his determination that the parties had amended their agreement so that Northwest would be paid a fixed price meant that it was not required to account to Alberni for third party costs incurred. Justice Groves seems to have agreed with Northwest that Alberni was “making an impermissible attempt to revisit and reargue the arbitrator’s finding that the parties modified the Agreement and moved to a fixed-price model…”

In the alternative, Alberni sought leave to appeal the award under s. 31 of the Act on a question of law:

(1) The arbitrator placed an impossible burden on Alberni, by reversing the burden and requiring it to prove that Northwest had not incurred expenses billed for in circumstances in which Northwest had not kept reliable records as to what it had spent.

(2) The arbitrator made two critical findings of fact in the absence of any admissible evidence to support them, one of which was that the arbitrator had made a mathematical error in tallying the amount of the alleged overpayment; and

(3) The arbitrator proceeded on a wrong principle, effectively treating the approval and payment of an invoice as foreclosing Alberni’s ability to question its legitimacy later on.

Justice Groves found that none of those grounds were extricable errors of law, but were questions of mixed fact and law, and in light of the arbitrator’s finding that Northwest was not required to justify its out-of-pocket third party expenses under the fixed fee arrangement provided for in the Change Order.

Therefore, Justice Grove dismissed Alberni’s set aside and leave to appeal petitions.

Northwest’s application to enforce the award was granted.

Editor’s notes:

First, final offer selection arbitration (also called baseball arbitration) is most commonly used in labour arbitrations where the parties have an ongoing relationship. Parties may structure the process in a variety of ways – parties may make a submission that addresses the entire dispute, or they may make a submission on each issue in dispute. Parties may agree that the arbitrator is to provide reasons or not, although the latter approach does not foreclose challenges or problems with enforcement. Final offer selection arbitration provides several benefits to the parties. It requires each of the parties to realistically assess the strengths and weaknesses of its case and put forward a reasonable submission to the arbitrator in the hopes that the arbitrator will choose its submission. A by-product of this process is that it makes settlement more likely. But it also gives parties greater control over the outcome; parties (even the winners) sometimes believe that the tribunal has “split the baby” in the award.

It is interesting that the parties in this case chose final offer selection arbitration in a contract dispute where the parties had no ongoing relationship. Their contract provided that they wanted the arbitration to be held “as soon as reasonably possible”. It is difficult to determine from the decision whether the parties achieved either a cheaper or faster process. It appears that they had a full hearing over multiple days and the arbitrator was required to provide full reasons in his award. Also, it is not clear whether the process achieved the result of pushing the parties’ positions closer together. Alberni’s position was that it was not required to pay anything further to Northwest because it had overpaid by just over $380,00, while Northwest’s position was that it was owed $175,000, in respect of a contract in which the total amount paid by Alberni to Northwest before the arbitration was just over $690,000.

Second, this case demonstrates that a final offer selection arbitration process is not immune from challenges to the award. It appears that Alberni was simply re-arguing its case before Justice Groves. The frequency with which the courts hear challenges to awards has led to calls for changes to provincial arbitration legislation to eliminate the right of appeal, except where parties expressly “opt in” in their arbitration agreements. In this case, the proceeding before Justice Groves took five days of court time, which was equivalent to the number of hearing days and there may yet be another appeal.

Third, for other Case Notes in which courts have considered final offer selection arbitration, see Case Notes: Federal – Court of Appeal applies distinction between final offer arbitration and interest arbitration – #094Federal – successful offer in all-or-nothing final offer arbitration can include agreement to arbitrate – #392, and Ontario – offer by unsuccessful parties to engage in streamlined dispute resolution justifies reduced costs award – #504.

author

Lisa Munro

Lisa Munro is a partner at Lerners LLP, whose practice is limited to work as an arbitrator in domestic and international commercial arbitrations (both ad hoc and under institutional rules). She brings to this role more than 25 years of experience as counsel in commercial/business litigation and both international and…

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