This article was first published on the Arbitration Matters blog, here.
In D Lands Inc. v KS Victoria and King, 2022 ONSC 1029, Justice Dietrich granted the Landlord leave to appeal the tribunal Majority’s award in a rent reset arbitration, but ultimately dismissed the appeal and the Landlord’s application to set aside the Majority’s award on jurisdictional grounds. Her reasons summarize the legal principles to be applied to determine whether the parties agreed to a right of appeal and, in particular: (1) the effect of an arbitration agreement when it spans a period of time in which more than one piece of arbitration legislation governed that provided for different rights of appeal; and (2) as a matter of contract interpretation, the language necessary for the parties to contract out of rights of appeal. Here, the parties’ agreement was entered into in 1968 and the arbitration legislation in Ontario changed since then from an “opt in” regime to an “opt out” regime. However, the parties provided in their arbitration clause that any arbitration was to be conducted under the ICDR Rules, which were silent on appeal rights. Therefore, it was necessary for Justice Dietrich to interpret the contract as a whole to determine the parties’ intentions. The words in the arbitration agreement that the tribunal’s award “is conclusive on the parties” and that judgment may be entered in any court having jurisdiction were not sufficiently clear to express an intention to contract out of a right to appeal.
The parties’ dispute concerned the rent to be paid by a commercial tenant for the 25-year period commencing December 1, 2018. The Applicant D Lands Inc. owned the land. The Respondent KS Victoria and King Inc. owned the 18-storey building on the land, and conducted its business in the building. It also sub-let space in the building. The Landlord and Tenant were successors to the parties who had negotiated the 99-year lease in 1968. The lease reset every 25 years. Failing agreement on the rent for each new 25-year term, the lease provided that it was to be determined, through arbitration, with reference to the “appraised value of the Demised Premises as vacant, unimproved and unencumbered and free of any leases”. The most simple characterization of the dispute is that the parties disagreed on the meaning of this language, the permitted use, and ultimately, the value of the Demised Premises.
Justice Dietrich summarized the arbitration clause in the lease as follows:
(a) Where the terms of the lease provide that any matter shall be determined by arbitration or appraisal, such arbitration or appraisal shall be conducted in accordance with Article 26 (Art. 26.01);
(b) Such arbitrations are to be conducted by a 3-member or 1-member arbitral tribunal (Art. 26.02) in accordance with the “rules then obtaining (sic) of the American Arbitration Association” (Art. 26.07);
(c) The arbitrators, “shall have the right only to interpret and apply the terms of this lease, and may not change any such terms or deprive any party to this lease of any right or remedy expressly or impliedly expressed in this lease” (Art. 26.03); and
(d) The determination of the majority of the arbitrators or sole arbitrator shall be “conclusive on the parties” and judgment may be entered in any court having jurisdiction (Art. 26.04).
The parties appointed a three-member tribunal to determine the rent. The ICDR Rules effective as of January 1, 2015, governed the arbitration. The tribunal sat for 22 days of hearings and three days of closing and reply submissions. The majority of the tribunal rendered a Majority Partial Final Award dated June 4, 2021, in which it concluded that the appraised value of the Demised Premises as of December 1, 2018, was $63,300,000. The minority of the tribunal rendered a Minority Award, in which it determined that the appraised value of the Demised Premises was $95,000,000.
The Landlord applied, pursuant to s. 45(1) of the Ontario Arbitration Act, 1991, S.O. 1991, c. 17, for leave to appeal the Majority Award. If leave to appeal was granted, the Landlord sought a finding that the Majority had erred in its interpretation of the lease and to vary the Majority Award in accordance with the Minority’s determination of fair market value of the Demised Premises.
In the alternative, the Landlord sought an order setting aside the Majority Award pursuant to s. 46 of the Act, on the ground that it was an unreasonable and erroneous exercise of the tribunal’s mandate and jurisdiction. The Landlord sought a declaration that the Majority had exceeded its jurisdiction, and that the court remit the matter back to the tribunal for a re-determination of the fair market value of the Demised Premises, with directions.
The Tenant argued that the Landlord had no right of appeal of the Majority Award, that the Landlord had failed to establish any errors in the Majority Award, and that it was correct, reasonable, and within the jurisdiction of the tribunal.
Landlord’s right to appeal – Because the lease was entered into in 1968, Justice Dietrich considered the relevant arbitration legislation as it existed from that date to the present and the language of the lease. She found that an appeal of the Majority Award was permitted because the parties did not exclude a right to appeal.
In determining whether the lease contained a right of appeal, she applied the principles in Labourers International Union of North America v Local 183 v Carpenters and Allied Workers Local 27 (1997), 34 O.R. (3d) 472 (C.A.) (“the LIUNA case”), which dealt with circumstances in which an arbitration clause spanned former and current arbitration legislation. The LIUNA case directed her to take a “fact-driven approach to determine the intention of the original parties to the lease regarding a right to appeal. This approach includes consideration of the applicable provisions of the statutory regime in force at the time that the arbitration agreement was reached” (para. 33). The 1960 Arbitrations Act, was in place when the lease was signed. It did not include a statutory right of appeal and did not specifically exclude a right of appeal, which she called an “opt in regime”. Justice Dietrich found that the same regime also applied to the Arbitrations Act, R.S.O. 1980, c. 25. The arbitration was commenced and took place under the current Ontario Arbitration Act, 1991, S.O. 1991, c. 17, s. 45 of which provides for a right of appeal in limited circumstances. Justice Dietrich called it an “opt out regime”. She found that the parties opted out of the 1960 Arbitrations Act by providing that the arbitration would be conducted in accordance with the AAA Canadian (ICDR) rules in effect at the time of the arbitration. Because the rules in effect in 1968 and on October 12, 2018 (the significance of which is not explained in the reasons) were silent on appeal rights, this left it to the parties to provide for an appeal. They neither expressly provided for an appeal in their arbitration agreement, nor excluded one.
Therefore, Justice Dietrich looked to the language of the lease and the surrounding circumstances to determine the original parties’ intentions. Article 26.04 of the lease provided that “the determination of the majority of the arbitrators…..shall be conclusive upon the parties and judgment upon the same may be entered in any court having jurisdiction thereof”. Justice Dietrich reviewed the case law on the subject of the language that is necessary for the parties to clearly express their intention to exclude an appeal. For example, in the LIUNA case, the Ontario Court of Appeal found that the words, “final and binding” reflected an intention to exclude an appeal; however, later cases which described awards as “final and binding”, “final”, “binding”, and “not subject to any appeal” have not been consistently interpreted, and one case held that the parties’ agreement to be “bound by any decision reached by pursuant to such arbitration” was not sufficient to exclude appeal rights. Further, Justice Dietrich found that the word “conclusive” may simply refer to the parties’ intention that the final award is res judicata as between the parties. See paras. 41 to 43 and 45 to 49. She concluded that that waiver of a substantive right to appeal must be clearly and an unequivocally established. In this case, the language used in the lease did not meet that test.
Therefore, the parties did not exclude the right to appeal.
Application for leave to appeal – There was no dispute that the arbitration was governed by the Arbitration Act, 1991, which “applies to arbitrations under arbitration agreements made before the date that the Act came into force if the arbitration is commenced after that day” pursuant to s. 2(2). The Landlord asserted that its appeal raised questions of law, specifically, that the Majority failed to interpret the lease in accordance with the governing principles of contractual interpretation and failed to apply binding authority regarding the interpretation of similarly-phrased ground rent renewal clauses. Specifically, it misdirected itself on the meaning of “unencumbered”, which was important for the determination of the appraised value of the Demised Premises. The Tenant argued that the issues on appeal were matters of contract interpretation, and therefore questions of mixed fact and law and not subject to appeal. Justice Dietrich found that the Landlord met the requirements of section 45(1), which provides a statutory right to an appeal on a question of law, because the importance of the matter to the parties justified an appeal and the determination of the question of law would significantly affect the rights of the parties. The alleged errors would affect the valuation of the Demised Premises by as much as $31 million and would reduce the Tenant’s rent obligation by over $1 million per year over the 25-year rental period.
Therefore, she granted leave to appeal.
The Landlord’s appeal – Justice Dietrich also decided the appeal and dismissed it. She found that the determination of the “appraised value of the Demised Premises as vacant, unimproved and unencumbered and free of any leases” turned on the definition of Demised Premises and the use to which the land could be put.
During the arbitration, the Landlord submitted that the Demised Premises should be valued as a capital asset, based on the fee simple owned by the Landlord as if it were a vacant gravel lot on which any proposed development would be permitted, including condominiums. The Tenant argued that only an office tower would be permitted and that if residential use was permitted, a condominium would not be permitted. It said that set-backs from the street would be necessary, resulting in a smaller building area. The tribunal considered the parties’ expert evidence and the Majority determined that the land’s highest and best use was a mixed use residential and commercial building, in which the Demised Premises were less than the entire area of the land. The Minority concluded that a mixed use building using the full area of the land would be legally permitted. This explained the significant difference in the values attributed to the Demised Premises by the Majority and Minority. The Majority and Minority agreed on the factual matrix to be used to interpret the lease and applied Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, and Weyerhaeuser Company Limited v. Ontario (Attorney General), 2017 ONCA 1007, which required them to examine the lease as a whole and to read the text in a fashion that accords with sound commercial principles and good business sense.
On appeal, the Landlord argued that the Majority had grossly undervalued the lands and had erred in that it: (a) failed to apply the principles of contract interpretation set out by the Court of Appeal in Weyerhaeuser; (b) failed to give effect to an ordinary, grammatical, and harmonious interpretation of all the terms of the lease, including “unencumbered and free of leases”; (c) mistakenly relied on Art. 26.03 of the lease; (d) mistakenly applied historic, expired restrictions in the valuation exercise; and (e) failed to give effect to the commercial purpose of the rent renewal clause. In other words, it failed to execute on its mandate, which was the value the Demised Premises as vacant land. The Tenant argued that the tribunal’s mandate, which it executed properly, was first to determine the real property to be valued and then the how to value it, so the Landlord conflated these two issues. Therefore, the Majority made no legal error in interpreting its mandate.
Justice Dietrich found that the Majority had instructed itself correctly on the application of the legal principles, did not ignore binding jurisprudence, and applied the principles correctly. It also complied with the direction in Art. 26 of the lease, which contained terms with which the tribunal was required to comply in determining the value. She found that the Landlord had not discharged its burden to establish that the Majority made an error in the interpretation of the lease or that it exceeded its jurisdiction.
She dismissed the appeal.
The Landlord’s set aside application – The Landlord argued that by misinterpreting its mandate, the Majority acted outside the scope of the arbitration agreement, which was an error of jurisdiction. Alternatively, it asked that the award be set aside under s. 46(3) of the Ontario Arbitration Act, 1991, S.O. 1991, c. 17, which provides that an award may be set aside where the award deals with a dispute that the arbitration agreement does not cover or contains a decision on a matter that is beyond the scope of the agreement.
The Tenant described this as an attempt to bring an appeal of the award without obtaining leave. This was not a true issue of jurisdiction, but was based upon the same arguments as the Landlord had made on its appeal. Finally, it argued that the question of jurisdiction was without merit. Finally, it argued that it could not raise at this time a jurisdiction issue which it did not raise with the tribunal.
Justice Dietrich accepted the Tenants’ arguments and dismissed the set-aside application as an, “attempt at a second kick at the can”.
First, this case is another of many examples of the difficulty in predicting what will be considered a question of law for the purposes of an appeal of an arbitral award.
Second, Justice Dietrich noted that the parties did not make submissions on the standard of review. She found that there was a “difference of opinion on the proper standard of review in cases of commercial arbitration” since the release of Canada (Minister of Citizenship and Immigration) v Vavilov, 2019 SCC 65. She concluded that the standard of review of correctness applied because the appeal right arose under a statute, relying upon Northland Utilities (NWT) Limited v Hay River (Town of), 2021 NWTCA 1.
Third, if you have some interest or expertise in rent reset arbitrations, you will find interesting Justice Dietrich’s review and analysis of the tribunal’s interpretation of the technical language and definitions in the lease. See paras. 85 to 125.
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