Canada – No Issue Estoppel Regarding Arbitrator’s Findings in Later Litigation

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

In The 6th Line Mofos Limited v Stewart, 2022 ONSC 520, Justice Healey dismissed a summary judgment motion brought by parties to court proceedings, who argued that issue estoppel applied to prevent the court from making findings that were inconsistent with those made in a previous arbitration. The plaintiffs, who were adverse in interest in the arbitration, sued a land appraiser whose report was central to their dispute and which the arbitrator found did not meet the requisite professional standards. The plaintiffs argued that this finding was sufficient to establish the negligence of the defendant appraiser and they sought in damages recovery of the costs they had incurred in relation to the arbitration. Justice Healey disagreed and found that two elements of issue estoppel could not be met: (1) the same question was not before both the court and the arbitrator; and (2) the defendant appraiser was a witness in the arbitration and was not a party or its privy.

The plaintiffs in these two actions [6th Line Mofos Limited and Bayview-Wellington (Bradford) Inc.] were co-owners of a parcel of undeveloped land, which they intended to develop into a residential subdivision. The relationship between the co-owners was governed by 2003 a co-tenancy agreement (“CTA”).

The dispute – The parties’ relationship broke down and became litigious. After several years, they agreed that Bayview would purchase 6th Line’s interest in accordance with terms set out in the CTA. The CTA allowed Bayview to purchase 6th Line’s interest at a price equal to 85% of its appraised value. However, the parties could not agree upon the value of the property. The CTA provided that, in such an event, each party would obtain an appraisal of the property. Each appraiser was to “generally be recognized as a person experienced in appraising real estate and qualified and accredited with the designation “AACI” to appraise properties such as the Property”. (“AACI” refers to the Accredited Appraiser Canadian Institute.) If the parties still did not agree on the property’s fair market value, its value would be determined by averaging the two appraisals.

Each of the parties retained an appraiser. The appraisals were widely divergent. Bayview’s appraiser delivered a report assessing the property’s value at $199,000 per acre. 6th Line’s appraiser delivered a report valuing the property at $325,000 per acre. Bayview did not accept the methodology used in the 6th Line’s appraisal and took the position that it was not a bona fide appraisal as required under the CTA and a Side Agreement that set out additional terms necessary to complete the purchase and sale transaction. Bayview refused to close the transaction. This triggered the dispute resolution clauses in the parties’ agreements, which required “binding arbitration”. Bayview commenced an arbitration in June, 2012.

The arbitration – The arbitration hearing took place between the period November, 2012, and April, 2013. The arbitrator rejected the report of 6th Line’s appraiser and found that it did not qualify as an appraisal under the CTA because it did not meet the Canadian Uniform Standards of Professional Appraisal Practice (“CUSPAP”). Therefore, only the report of Bayview’s appraiser could be used to calculate the buyout price of the property. This allowed Bayview to purchase the property for $2.5 million, rather than $4.2 million, which would have been the price if the report of 6th Line’s appraiser had been used to calculate the purchase price.

The litigation – Thereafter, both 6th Line and Bayview sued 6th Line’s appraiser in separate actions for negligence, breach of contract, and other relief. They sought to recover their costs of the arbitration. 6th Line’s appraiser added as third parties the lawyers who had acted for 6th Line both before and during the arbitration, seeking contribution and indemnity.

There were four motions for summary judgment before Justice Healey. 6th Line’s appraiser sought summary dismissal of both actions against it, relying primarily upon the doctrine of expert witness immunity to shield it from liability. Both Bayview and 6th Line sought summary judgment as against 6th Line’s appraiser on the basis of issue estoppel.

Justice Healey found that, despite the extensiveness of the record before her, she was able to  “weigh evidence, find the necessary facts and apply the relevant legal principles to resolve the issues in dispute”. She found that most of the disputed issues were questions of law and that most of the facts were not in dispute.

Both Line 6th and Bayview relied upon the arbitrator’s finding that the report of 6th Line’s appraiser was not prepared in compliance with CUSPAP and therefore constituted an invalid appraisal for the purpose of the CTA and the Side Agreement. Therefore, they argued that the arbitrator had found that the report of 6th Line’s appraiser fell below the appropriate standards mandated by the Appraisal Institute of Canada (“AIC”) and did not qualify as an appraisal under the CTA and Side Agreement. Further, 6th Line argued that the defendant appraiser, by asserting in this litigation that the appraisal was prepared in accordance with the CTA and applicable standards, was making an impermissible attack on the arbitrator’s decision and attempting to re-litigate the issue that was before the arbitrator.

The parties agreed that the three requirements for issue estoppel are those set out in Angle v MNR, [1975] 2 S.C.R 248:

(i)  the same question has been decided;

(ii)  the judicial decision which is said to create the estoppel was final; and

(iii)  the parties to the judicial decision or their privies participated in the earlier litigation.

On the first question, 6th Line and Bayview argued that the arbitrator’s findings established that the 6th Line appraiser was negligent. However, Justice Healey noted that the arbitrator did not decide the question of whether 6th Line’s appraiser was negligent, which was the question raised in this litigation. Further, neither 6th Line nor Bayview delivered an expert report to support their allegations. In addition, she was referred to case law that said that the test for appraiser negligence is not necessarily conformity with CUCPAP or AIC standards, which set out standards of general application that do not “necessarily reflect how a typical and competent appraiser had to undertaking his or her work.”  Therefore, she concluded that the arbitrator’s reasons could not be used as a basis for a finding of negligence or breach of fiduciary duty by the appraiser.

On the third question, Justice Healey found that the parties to the decision (or their privies) did not participate in the earlier litigation. She relied upon the Ontario Court of Appeal decision of Rasanen v. Rosemount Instruments Ltd., 1994 CanLII 608 (ON CA), in which the Court found that non-party witnesses may be considered privies where they had sufficient participation rights and a “meaningful voice…in a proceeding which decided the very issue sought to be raised in the subsequent action”. In that case, at paragraph 47, the appellant was found to be a privy in a prior claim because he:

…clearly called the witnesses he wanted, introduced the relevant evidence he needed, and had the chance to respond to the evidence and arguments against him. He had the assistance of counsel provided by the Ministry of Labour, and there was no evidence that he sought his own counsel or that his choice would have been denied if sought. He enjoyed, in short, the full benefits that an official “party” designation would have provided, regardless of whether he was referred to specifically as a party in s. 50(4) (now s. 68(4)) of the Employment Standards Act.

Justice Healey found that the 6th Line appraiser could not be found to be a privy because (at para. 145):

“[The 6th Line appraiser] testified in the arbitration as an expert witness for 6th Line. [He] did not call the witnesses that he wanted—he was excluded from all litigation decisions. He had no say in the litigation strategy. He was confined to giving evidence strictly in response to the questions asked by the plaintiffs’ lawyers. He was not represented. He had no reason at the time to believe that he needed his own lawyer. 6th Line’s former lawyers both confirm that they were never acting as counsel to [the 6th Line appraiser]. He had no input into the clause in the CTA that made the arbitration decision final and binding.

Further, Justice Healey found that even if issue estoppel applied, she would exercise her discretion not to apply it in this case, relying upon Danyluk v. Ainsworth Technologies Inc., 2001 SCC 44, [2001] 2 S.C.R. 460, at para. 33:

“[149]…The agreements struck by the plaintiffs rendered the [Arbitrator’s] Award final and binding. [The 6th Line appraiser] was not a party to those agreements and had no input into them. Yet [the 6th Line appraiser] is barred from seeking review of [the Arbitrator’s] …findings and conclusions in that proceeding. These proceedings are the only way for [the 6th Line appraiser] to present the evidence that it believes necessary to demonstrate why it should not be liable for the claims made by the plaintiffs in these proceedings. And [the 6th Line appraiser] has presented evidence on this motion, which has not been challenged by the plaintiffs other than through their reliance on the [Arbitrator’s] reasons, which suggests that the findings of [the] Arbitrator…are open to challenge. For example, [the 6th Line appraiser] has provided evidence, some of which has been confirmed on cross-examination… that Bayview developed the subdivision and sold the final lot on a timeline that was consistent with [the 6th Line appraiser]—earlier than the projections in the [Bayview] appraisal. For the same reason, I cannot accede to the plaintiffs’ alternative argument that allowing [the 6th Line appraiser] to continue to assert its position is an abuse of process”.

Justice Healey dismissed the summary judgment motions of 6th Line and Bayview and granted the motions of the 6th Line appraiser for summary dismissal of the actions against it.

Editor’s Notes:

First, the parties apparently made the strategic decision to rely solely upon the arbitrator’s award in their motion for summary judgment. Justice Healey commented more than once in her reasons that they did not adduce any expert evidence on the standard of care issue. Therefore, the motion for summary judgment would have failed even if Justice Healey had found that the 6th Line appraiser was a party or its privy to the arbitration.

Second, Justice Healey did not consider herself bound by the arbitrator’s findings of fact and made a finding that was not consistent with a finding of fact made by the arbitrator, explaining that the arbitrator “did not explain why he came to that conclusion” (para. 100).

Third, for other Case Notes in which issue estoppel was considered to prevent a party in later litigation from raising an issue that it did not raise in the arbitration, see: Ontario – Court of Appeal upholds dismissal of litigation based on issue estoppel with Sharia Law arbitration – #037B.C. – arbitration parties cautioned to present their full case or risk post-award issue estoppel – #107Québec – no second opinion on issue determined by award issued by physician arbitrator – #408, and Alberta – binding valuation of shares not arbitrable, limits claims in litigation over overlapping issues – #472.

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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