Canada – Continuing Confusion Over Nature of Court Review of Arbitration

This article was first published on the Arbitration Matters blog, here.

In PCL Constructors Canada Inc. v Johnson Controls, 2022 ONSC 1642, Justice Conway heard and dismissed four applications, two by PCL and two by Johnson, relating to two arbitrations arising out of disputes over the construction by PCL of the Humber River Regional Hospital (“the Humber Arbitration) and the Milton District Hospital (“the Milton Arbitration”). PCL  brought applications to the court, pursuant to s. 17(8) of Ontario Arbitration Act, 1991, S.O. 1991, c. 17 (“the Act”), to “decide the matter” of the tribunal’s ruling on jurisdiction as a preliminary matter.  Justice Conway applied the “correctness” standard of review; the arbitrators both ruled correctly that they had jurisdiction and that the prerequisites to arbitration in the arbitration clause did not constitute conditions precedent to arbitration.  Johnson brought applications under s. 8(2) of the Act, which provides that the court may determine any question of law that arises during an arbitration on an application if the parties or the tribunal consent. The issue concerned a party’s right under the contract to apply to the court for a reconsideration of the arbitrator’s determination.  That right had not crystallized because the arbitration continued and no determination had been made.

The arbitrations – The parties entered into several agreements for the construction of the hospitals. For the purpose of these applications, only the Facility Coordination Agreement (“FCA”) was relevant.  It set out a procedure that was to be invoked whenever Johnson became aware of a “Defect”, which it believed was a “Construction Defect”. Section 4 of the FCA contained a three-stage process which included notice of a “Defect”, and if there was a dispute about that issue, either party could commission an independent engineer’s report.   The last stage, the “Dispute Resolution Procedure” (“DRP”), was set out in section 4.1(a)(ix) of the FCA: “ Either party may dispute the engineer’s report. PCL may also dispute that the Defect is a Construction Defect or dispute the nature or extent of its liability under the Warranties.”

As Justice Conway held, the DRP worked as follows:

[7] The DRP… commences with the delivery of a “Dispute Notice”. The parties will then attempt to resolve the Dispute by a settlement meeting. If they do not resolve the Dispute within five Business Days after the Dispute Notice is delivered, the parties will submit the Dispute for resolution pursuant to binding arbitration under s. 7.4 of the FCA, to be conducted in accordance with the Act. Section 7.4 sets out, among other things, the process for selecting an arbitrator and the jurisdiction and powers of the arbitrator”.

In the Humber Arbitration, Johnson delivered two Notices of Construction Defect in October, 2019, relating to the elevators at the hospital.  PCL disputed the Notices and the report of the independent engineer. An arbitrator was appointed (“the Humber Arbitrator”).

PCL challenged the jurisdiction of the Humber Arbitrator on the basis that Johnson had failed to comply with the DRP or, in the alternative, that his jurisdiction was limited to determining whether an alleged “Defect” was a “Construction Defect” and that he had no jurisdiction to determine any of the other remedies Johnson was seeking. 

The Humber Arbitrator dismissed PCL’s challenge. He held that he had the jurisdiction to deal with all the “Defects” raised by Johnson in its claim, even though they went beyond the issues raised in the Notices of Defect, because they all related to failures of the elevators.  He also found that Johnson had complied with the DRP process. Even though the engineering report did not conclude that the alleged “Defects” constituted “Construction Defects”, it concluded that the alleged “Defects” were, “in part design defects as a result of non-conformance with the prescriptive and performance requirements…” of the elevators.  Therefore, PCL had satisfied the prerequisites to arbitration. He also held that his jurisdiction under s. 4 of the FCA included the ability to make a monetary award.

In the Milton Arbitration, Johnson delivered two Notices of Construction Defect in January and October, 201, concerning issues with the humidification system and a sanitary pipe failure. PCL also disputed these notices and the two independent engineers’ reports.  An arbitrator was appointed (“the Milton Arbitrator”).

PCL challenged the jurisdiction of the Milton Arbitrator on the same grounds as it had challenged the jurisdiction of the Humber Arbitrator. The Milton Arbitrator dismissed PCL’s challenge. He found that neither engineering report complied with s. 4 of the FCA, because neither opined on whether the alleged “Defect “was a “Construction Defect”, but that this was a procedural irregularity and not a matter of jurisdiction. He found that the three-stage process in s. 4 of the FCA did not constitute mandatory prerequisites before arbitration.

 Justice Conway summarized the Milton Arbitrator’s reasons on this issue as follows:

“[15] He reviewed the language of the FCA and read it as a whole. He concluded that the parties “do not seem to have been as interested in their FCA in creating mandatory tiered dispute resolution provisions and settlement [off-ramps] as much as they were clearly interested in preserving their mutual right to arbitrate”: at para. 78. He noted that even when the parties set out the precise order in which dispute resolution steps were to occur (such as in s. 7.2), they did not expressly state what would happen if a step was missed or happened out of order. At para. 82, he stated that “nothing in the language of sections 4.1 or 7 of the FCA elevates any Defect Dispute pre-arbitration steps to the status of true conditions precedent to the jurisdiction of the arbitrator.” He accepted Johnson’s argument that “its failure to substantially comply with the requirements of s. 4.1(a)(vi) of the FCA is a correctable irregularity and not a circumstance nullifying the arbitration”: at para. 82.[2]

Therefore, each of the Arbitrators made a preliminary determination that he had jurisdiction.

PCL’s applications to challenge Arbitrators’ preliminary jurisdiction determinations under s. 17(8)

Standard of Review – PCL brought applications to the court, pursuant to s. 17(8) of the Act, to “decide the matter” of the tribunal’s ruling on jurisdiction as a preliminary matter. PCL relied upon Russian Federation v Luxtona, 2018 ONSC 2419 (Justice Dunphy’s decision), at para. 23, in support of its submission that the standard of review of the preliminary jurisdiction determinations made by the Humber and Milton Arbitrators was correctness.

Johnson agreed that correctness is the standard of review on a “true jurisdiction issue”, but argued that most of the alleged errors raised by PCL were those in the interpretation of the FCA and were therefore matters of mixed fact and law that attract a standard of deference pursuant to Sattva Capital Corp. v Creston Moly Corp, 2014 SCC 53. Specifically, Johnson said that PCL argued that the two Arbitrators were wrong in their conclusion that the language of the FCA did not create true conditions precedent to the jurisdiction of the arbitrator over the dispute.

Justice Conway rejected Johnson’s argument for three reasons. First, the arbitrator will typically have to interpret the contract to determine jurisdiction, which would reduce the standard of review for questions of jurisdiction from correctness to deference in most cases. Second, Johnson’s argument that issues relating to the prerequisites for arbitration were procedural rather than matters of jurisdiction was circular; it required Justice Conway to accept the Arbitrators’ interpretation of the FCA before she could determine standard of review. Justice Conway said that she was required to apply the correctness standard of review before she determined whether the Arbitrators’ jurisdiction decisions were correct. Third, both parties had argued these issues as matters of jurisdiction before the two Arbitrators.

Findings on jurisdiction – The question before Justice Conway was whether the two Arbitrators were correct in concluding that they had jurisdiction over the disputes and that the prerequisites were not conditions precedent to arbitration. She concluded that they were correct and accepted their reasoning (paras. 30 to 37): “…I agree with [the Humber Arbitrator] that the steps constitute a ‘road map’ towards resolution and that they were intended to get the parties towards dispute resolution if they could not resolve the matter themselves. PCL’s interpretation would yield the opposite result.”

Further, the Arbitrators were not limited to making a determination of whether a “Defect” is a “Construction Defect”. Section 4.1(a)(ix) gave the arbitrator jurisdiction over disputes about the “nature or extent of PCL’s liability under the Warranties”, which showed that the parties clearly intended that the arbitrator would have the power to determine disputes over monetary issues.  Also, the DRP in the Milton FCA contained a provision that allowed the arbitrator broad power to “award any remedy or relief that a court of competent jurisdiction in Ontario court could grant”. There was no such express power in the Humber FCA, but Justice Conway found that it gave other broad powers to the arbitrator, so that this power could be implied, relying upon Desputeaux v. Éditions Chouette (1987) inc., 2003 SCC 17, [2003] 1 S.C.R. 178, at para. 35:

“In order to understand the scope of the arbitrator’s mandate, a purely textual analysis of the communications between the parties is not sufficient. The arbitrator’s mandate must not be interpreted restrictively by limiting it to what is expressly set out in the arbitration agreement. The mandate also includes everything that is closely connected with that agreement, or, in other words, questions that have … “a connection with the question to be disposed of by the arbitrators with the dispute submitted to them”. [Emphasis Added]. [Citation Omitted].

Justice Conway also rejected other arguments made by Johnson, which she found to be inconsistent with the language of the DRP, when read as a whole.  She concluded that the two Arbitrators were correct in finding that their jurisdiction was not limited to a determination of whether a “Defect” was a “Construction Defect”. She dismissed PCL’s applications; the two Arbitrators had jurisdiction.

Johnson’s applications for “reconsideration” under s. 8(2)

Johnson’s applications sought a determination by the court of the scope of the parties’ rights under s. 4.1(a)(xiii) of the FCA, which allowed a party, “within 30 days of the arbitrator’s Determination of the Defect Dispute, to apply to a court of competent jurisdiction, to decide on the Defect Dispute”, which Johnson referred to as the “Reconsideration Right”.

Johnson relied upon s. 8(2) of the Act, which provides that the court may determine any question of law that arises during an arbitration on the application of the tribunal or on a party’s application if the other parties or the tribunal consent.  The two Arbitrators consented to Johnson bringing these applications.  They concluded that they did not have the jurisdiction to determine the nature of the Reconsideration Right.

The parties disagreed on the nature of the hearing before Justice Conway. 

PCL argued that the language of s. 4.1(a)(xiii) entitled the parties to a hearing de novo in court – but not now.  Under the FCA, it asserted, the Reconsideration Right could not be brought until after the arbitrator’s decision, before which the issue has not “crystallized”. While the court would have to decide the nature of Reconsideration Right, it was not yet known what the issues will be when/if it is raised.

Johnson characterized the Reconsideration Right as an appeal of the arbitrator’s decision under s. 45 of the Act. It argued that it required a decision on the nature of this right before it could proceed with the arbitrations so that it could determine what resources it wanted to devote to the arbitrations. If PCL were right, the arbitrations would be nothing more than a “meaningless trial run” in determining the Defect dispute, which could later be decided by a court de novo.

Justice Conway agreed with PCL’s submissions and dismissed Johnson’s applications.  There was no reason that the Reconsideration Right had to be determined immediately.  The issue had not crystallized because the two Arbitrators had not yet made any determination. The court hearing the application would be able to determine the role of the court on a reconsideration in a “more contextual manner”, in support of which she cited Janssen Pharmaceutica Inc. v. Apotex Inc. (1998), 1998 CanLII 8415 (FCA), 82 C.P.R. (3d) 574 (Fed. C.A.). Also, Johnson had initiated arbitration without the certainty it now seeks as to the role of the court on a reconsideration. Therefore, Justice Conway dismissed these applications too.

Editor’s Notes:

First, s. 8(2) of the Act allows the tribunal or a party to seek the court’s assistance on a question of law during the arbitration.  The purpose of the provision is to obtain an expeditious decision on a matter that has arisen in the course of the arbitration while it is proceeding.  In this case, presumably the arbitrations continued after both Arbitrators determined that they had jurisdiction to hear the disputes before them.

Second, this case demonstrates the confusion that continues over the role of the court when it is asked to review the decision of a tribunal in circumstances which are not clearly an appeal under s. 45 or a set-aside application under s. 46 of the Act.  On the jurisdiction issues, PCL apparently relied upon the decision of Justice Dunphy in Russian Federation v Luxtona Limited, 2018 ONSC 2419, who considered Art. 16(1) of the Model Law, which contains comparable language to s. 17(8) of the Act. The Ontario Divisional Court confirmed a hearing de novo test at 2021 ONSC 4604.  However this result obtained after two Superior Court Justices (Justices Penny and Dunphy) came to different conclusions. We don’t yet know if this is the final word on this issue or whether it will go to the Ontario Court of Appeal.  The parties in this case do not appear to have made submissions on the complex issues that arise when they agreed that the standard of review to be applied by Justice Conway was correctness on an issue of jurisdiction in this context. For a history of the Russian Federation v Luxtona case, see previous Case Notes: Ontario – arbitral tribunal’s evidentiary record on jurisdiction challenge is not ignored but also does not confine court – #060Ontario – court revisits/reverses prior decision which allowed new evidence on post-award jurisdictional challenge – #272Ontario – Court application under Model Law Art. 16(3) to “decide the matter” of the tribunal’s jurisdiction is a hearing de novo and not a “review” of the tribunal’s decision – #513, and Lisa’s 2021 Top Pick: Ontario – Russian Federation v Luxtona Limited (Part 1) – #564. See also Case Note: Ontario – Courts decide consent to arbitration de novo, without deference to arbitral tribunal – #532, which applies The Russian Federation v Luxtona decision to the Ontario Act. TAGS

author

Lisa C. 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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