Canada – Jurisdiction Involves Whether Arbitrator has Authority to Make Inquiry, Not the Answer to the Inquiry

Apr 2021

This article first appeared on Urbas Arbitral, here.

In Parc-IX Limited v. The Manufacturer’s Life Insurance Company, 2021 ONSC 1252, Mr. Justice Markus Koehnen distinguished between an objection to jurisdiction and an appeal because one does not agree with an answer made within that jurisdiction.  “Jurisdiction is determined not by asking whether the arbitrator made a correct decision but by asking whether the arbitrator had authority to make the inquiry he made”. Koehnen J. recharacterized Applicant’s challenge to the award. “What [Applicant] really complains about here is not the arbitrator’s jurisdiction to make the inquiry but the arbitrator’s answer to the inquiry.  That, however, is beyond the purview of a jurisdictional review”.  Koehnen J. also dismissed Applicant’s attempt to impose an arbitrator’s exercise of discretion in a costs award issued in 1990 on another arbitrator’s exercise of his discretion in 2020. Koehnen J. held that the 1990 determination was based on the exercise of discretion applied to circumstances of that case and it would be an improper exercise of discretion to determine costs in 2020 simply by applying the result arrived at in 1990.  Koehnen J. also noted differing treatments of Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65 but supported applying the correctness standard to a review of an arbitrator’s award for reasons set out at para. 72 of Ontario First Nations (2008) Limited Partnership v. Ontario Lottery and Gaming Corporation.

The parties disputed the calculation of rent related to an August 15, 1964 ground lease by which Parc-IX Limited (“Parc-IX”) rented a parcel of land from Standard Life Insurance Co. (“Standard Life”) for a term of ninety-nine (99) years (“Lease”).  The Lease provided that rent be re-set every twenty-five (25) years and calculated as “6.75% of the fair market value of the property as if it were unimproved”.  In the event the parties failed to agree on the fair market value, a final and binding determination would be made by arbitration.

Parc-IX and Standard Life engaged in a first rental arbitration conducted in 1990. Koehnen J. observed from the record that certain restrictions existed in 1990. “Then, as now, the highest and best use of the property was re-development as a condominium project.  At the time, however, there were a series of restrictions in place that prohibited the demolition of rental properties and strictly controlled rent rates on those properties”. 

In the first arbitration, Standard Life argued that the land be appraised as vacant land or “unimproved”, capable of being re-developed as a condominium. Parc-IX argued that valuation had to take into account demolition and rent control restrictions.  Koehnen J. noted that the parties and subsequent decisions referred to the restrictions as “encumbrances”.

The first award issued in favour of Parc-IX, adopting it approach to valuation of the land based on the assumption that the land could only be used as a rental apartment building. On application for judicial review by Standard Life, the Ontario Divisional Court in Standard Life Assurance Co. v. Parc-IX Ltd.  (1991) 1991 CanLII 7350 (ON SC), 3 O.R. (3d) 78 upheld the arbitral award.  “Even though the reviewing court found that it would have adopted the approach that Standard Life had advocated, it nevertheless dismissed the application because the approach taken by the arbitral panel had nevertheless been reasonable”.

Standard Life assigned the Lease to Manufacturer’s Life Insurance Company (“Manulife”).

In 2014 Parc-IX and Manulife disputed the fair market value and applied to the court for a determination of law under section 8(2) of the Arbitration Act, 1991, SO 1991, c 17.

Section 8(2) The arbitral tribunal may determine any question of law that arises during the arbitration; the court may do so on the application of the arbitral tribunal, or on a party’s application if the other parties or the arbitral tribunal consent”.

Manulife applied for:

(i) a declaration that the interpretation of the land market value was res judicata and/or subject to issue estoppel between it and Parc-IX as a result of the Divisional Court’s decision; or,

(ii) in the alternative, a declaration that the correct interpretation of land market value should be interpreted to include the highest and best possible use of the land as if it were unimproved and unencumbered, including its value if available for freehold condominium development as of the valuation date.

Parc-IX argued before McEwen J. that the 1990 arbitration panel had established the principles applicable to interpreting the lease which gave rise to the doctrines of res judicata and issue estoppel.  Alternatively, Parc-IX argued that the value of the property under the ground lease must account for legal encumbrances that restricted Parc-IX’s ability to develop the property for freehold condominium use.  McEwen J. found in favour of Parc-IX”.

In his decision in The Manufacturers Life Insurance Company v. Parc-IX Limited, 2018 ONSC 3625, Mr. Justice T. McEwen agreed that the Divisional Court decision governed the parties and served to estop Manulife from re-litigating the dispute resolved.  After an analysis buy McEwen J. of the Divisional Court’s decision , legal developments since then and the current state of the law, which Koehnen J. qualified as “detailed and careful”, McEwen J. in his  decision concluded as follows:

[31] As I outline below, as a result of that evolution, it is my respectful view that the correct interpretation of the words “fair market value of the property as if it were unimproved” only allows the parties to disregard the physical improvements to the Property. Having used no language showing that the parties intended to disregard legal encumbrances, I find that the Land Market Value must account for the fact that Parc-IX is legally prohibited from developing freehold condominiums by virtue of the existence of the lease and the legislative restrictions that it attracts”.

Koehnen J. paused to put the latter statement in context.

[18] The last sentence of paragraph 31 could, if taken in isolation, be interpreted as an absolute statement to the effect that condominium re-development was prohibited.  That sentence must, however, be read in context.  It follows an assessment of the effect of the 1990 decision at which time condominium re-development was prohibited.  It precedes 18 pages of careful analysis.    

[19]The gist of that analysis is that the reference to the land being unimproved in the valuation formula means that the value of the building constructed on the property should not be taken into account when determining land value.  However, legal encumbrances applicable to the property should be taken into account, even if those encumbrances arise from the presence of a rental building”.

After excerpting paras 116, 122-123 and 126-127 which contained the “thrust” of McEwen J.’s decision, Koehnen J. identified the limitation of its application to the parties dispute before him.

Justice McEwen did not, however, refer to any legal encumbrances that were in force in 2014 or how they might affect re-development or value.  In those circumstances I interpret McEwen J. as saying legal encumbrances must be taken into account but that the specific nature of the encumbrances or their specific effect on the property would be left to the arbitrator”.   

Parc-IX and Manulife engaged in arbitration again which lead to a February 3, 2020 award (“Award”) and to an application by Parc-IX to set aside and an application by Manulife for recognition and enforcement.  Parc-IX argued that the arbitrator had exceeded his jurisdiction by allegedly failing to take into account legal regulations affecting the land as he was obliged to do by McEwen J.’s decision.

Koehnen J. dismissed Parc-IX’ application and granted recognition and enforcement of the Award.

At paras 22-35, Koehnen J. outlined the reasoning in the Award, focusing in on certain passages in light of the reproaches made by Parc-IX. A key component of that reason was a City of Toronto Official Plan Policy 3.2.1.6 which required that “if an existing rental building were replaced and the replacement resulted in the loss of six or more rental units, at least one of which was at or below the mid-range rent, then the new development had to contain rental units of at least the same number, size and type as the old building”.  Koehnen J. referred to the latter requirement as the Rental Replacement Unit (“RRU”) policy.

Parc-IX characterized the arbitrator’s handling of the RRU policy in a manner, reproduced at para. 24 which Koehnen J. accepted that, had the arbitrator done so, would have been a jurisdictional error.  That handling involved interpreting the Lease to create a distinction between legislative restrictions arising from the land and those arising from the building.  Having made that alleged distinction, the arbitrator would then have categorized the RRU policy as arising from the building and therefore not within the elements to consider despite it limiting re-development and land market value.

Koehnen J. agreed with Parc-IX that certain paragraphs in the Award “if read in isolation” might lend themselves to the distinction Parc-IX alleged.  Koehnen J. resisted concluding as Parc-IX urged him to do, noting that reading the Award as a whole lead to a different understanding.

If, however, one reads the decision as a whole, the distinction on which Parc-IX bases this application is more a question of wording that of substance.  At the end of the day, the arbitrator recognized and considered the RRU policy but found that its application to the building did not prevent replacement of the building with a condominium.  As a result, there was no legal encumbrance that prevented Parc-IX from achieving the highest and best use of the property, namely re-development as a condominium building”.

Koehnen J. observed that the arbitrator had undertaken a close examination of the facts and the parties’ changed ability to “manage around the RRU policy” since 2014.  In 1990, neither party could avoid the application of the legislation then in force but by 2014 “the situation was different”.

In my view, the arbitrator properly applied the interpretive guidelines established in the 1990 arbitration decision and in the decision of McEwen J.  He applied the RRU policy but concluded that it did not, on the facts of this case, preclude condominium development.  In doing so he relied on Parc-IX’s own expert evidence.  The arbitrator did not exceed his jurisdiction in doing so but operated squarely within his jurisdiction”.

Standard of review – Koehnen J. noted that the parties had competing submissions on the applicable standard of review and observed that, since Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65, a controversy existed as to the scope of that Supreme Court decision.  He noted that some cases applied it, noting Freedman v. Freedman Holdings Inc., 2020 ONSC 2692, and some did not, noting Ontario First Nations (2008) Limited Partnership v. Ontario Lottery And Gaming Corporation, 2020 ONSC 1516.

The question in this case is somewhat academic given that I have found that the arbitrator applied both 1990 decision and the decision of McEwen J. correctly.  I would, in any event, have applied the correctness standard to a review of an arbitrator’s decision for the reasons set out at para. 72 of Ontario First Nations (2008) Limited Partnership v. Ontario Lottery and Gaming Corporation”.

Koehnen J. continued that, apart from any jurisdictional argument, section 46 of the Arbitration Act does provide authority to the court to set aside an award if it “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” but does not, in doing so, provide a right of appeal.

This does not provide a right of appeal but a limited right of review based on jurisdictional grounds.  Jurisdiction is determined not by asking whether the arbitrator made a correct decision but by asking whether the arbitrator had authority to make the inquiry he made”.

Koehnen J. closed his reasons by drawing the line between an objection to jurisdiction and an appeal because one does not agree with answer made within that jurisdiction.

[41] Here there is no doubt that the arbitrator had the authority to determine the ground rent.  He was obliged to do so by applying all relevant legal restrictions.  The arbitrator did so by applying the RRU policy and asking whether it precluded condominium development.  Not only did the arbitrator have authority to make that inquiry, he was obliged to do so under the 1990 decision and under the decision of McEwen J.

[42] What Parc-IX really complains about here is not the arbitrator’s jurisdiction to make the inquiry but the arbitrator’s answer to the inquiry.  That, however, is beyond the purview of a jurisdictional review”.

Costs – Parc-IX also objected to the costs awarded by the arbitrator.  Referring to the costs set in 1990 as a precedent, Parc-IX argued that the costs award was unreasonable.  Koehnen J. dismissed the attempt to impose one arbitrator’s 1990 exercise of discretion on another arbitrator’s 2020 exercise of discretion.

[44] Parc-IX complains that the arbitrator awarded almost $900,000 in costs which was unreasonable because neither party achieved the outcome it sought.  Parc-IX submits that a precedent was established by the 1990 decision which held that each party should pay its own costs despite Parc-IX being substantially successful in that arbitration.

[45] The determination of the cost award in 1990 decision was based on the exercise of discretion applied to the circumstances of that case.  It would be an improper exercise of discretion to determine costs in 2020 simply by applying the result that was arrived at in 1990.  Costs are to be determined on the facts of each case.  Parc-IX has advanced no reason to suggest that the arbitrator had no jurisdiction to make the cost award he did.  Rather, the complaint is predicated on dissatisfaction with the result of the cost award”.

urbitral notes – First, referred to but not excerpted in Koehnen J.’s reasons, para. 72 from Ontario First Nations (2008) Limited Partnership v. Ontario Lottery And Gaming Corporation, 2020 ONSC 1516 reads as follows:

[72] Further, as a matter of legal principle it is appropriate that Vavilov does not apply to commercial arbitrations. The administrative law standard of review established in Vavilov derives from constitutional considerations that justify deference by the judiciary to the legislature. This principle does not apply to commercial arbitrations. The standard of review for commercial arbitrations is guided by commercial considerations about respect for the decision-makers chosen by the parties.  As a result, deference is justified by the parties’ contractual intent. It is for this reason that Rothstein J. identified the key differences between administrative decisions and arbitral awards in [Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 (CanLII), [2014] 2 SCR 633] and concluded that the judicial review framework for administrative decisions is not applicable in the commercial arbitration context”. 

author

Daniel Urbas

Daniel Urbas is an experienced litigator, arbitrator and mediator with over 25 years of dispute resolution experience. He has earned a variety of repeat, annual peer recognitions including “Leading Lawyer” in “Commercial Arbitration” in the 2019 edition of the Lexpert ® / American Lawyer Guide to the Leading 500 Lawyers…

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