Canada: Mattamy (Downsview) Limited v. KSV Restructuring Inc. (Urbancorp): Procedural Fairness In Arbitral Proceedings

In this article, we consider the Ontario Superior Court's decision in Mattamy (Downsview) Limited v. KSV Restructuring Inc. (Urbancorp), 2023 ONSC 3012, and its implications for the limits to an arbitrator's discretion over matters of procedure and evidence in arbitration.

Brief Factual Background

Downsview Homes Inc ("DHI") owned land where DHI had developed a residential construction project (the "Downsview Project"). Ownership of DHI was shared by Urbancorp Downsview Park Development Inc. ("UDPDI") and Mattamy (Downsview) Limited ("Mattamy"), where the rights and obligations between the two parties were governed by the Amended and Restated Co-Ownership Agreement (the "Co-Ownership Agreement").

In May of 2016, KSV Restructuring Inc. was appointed monitor (the "Monitor") over UDPDI and its affiliated entities under a Companies' Creditors Arrangement Act ("CCAA") proceeding. Consequently, Mattamy became a lender under a debtor-in possession ("DIP") facility, secured by a charge over UDPDI's property, which included UDPDI's interest in DHI. As part of the CCAA proceeding, KSV Restructuring was appointed as the monitor (the "Monitor") over UDPDI.

In June of 2021, the Superior Court approved a sale process (the "Sale Process Order") proposed by the Monitor for the sale of UDPDI's interest in DHI to Mattamy. The proceeds were intended to satisfy the outstanding DIP facility. Additionally, the Sale Process Order also directed the Monitor to arbitrate various disputes, including, among other things, the determination of any Urbancorp Consulting Fees (the "Consulting Fees") payable by Mattamy to Urbancorp Toronto Management Inc ("UTMI") - from the same group of companies as UDPDI (together, "Urbancorp") under the Co-Ownership Agreement.

Notably, section 2.7 of the agreement of purchase and sale provided that the transaction was:

The above-mentioned purchase and sale transaction closed in January of 2022 (the "Transfer Date").

The Arbitration

In March of 2022, the Monitor (on behalf of the Urbancorp parties) submitted a Notice of Request to Arbitrate. The Monitor/Urbancorp sought a determination that UTMI was entitled to receive the Consulting Fees amounting to $5.9 million as of the Transfer Date. This amount was based on a calculation of "Gross Receipts" (as defined by the Co-Ownership Agreement) for the Downsview Project and the corresponding 1.5% percent Consulting Fee entitlement.

The dispute revolved around the definition of "Gross Receipts", in respect of which the Monitor argued that revenues from the sale of residential dwellings should be included on a "non-cash basis". This interpretation suggested that revenues from sales were to be included under "Gross Receipts" when such dwellings were sold, regardless of whether the sale proceeds were actually collected at that time. Conversely, Mattamy contended that "Gross Receipts" only included revenues from residential dwellings once the sales had closed as of the Transfer Date.

In determining the correct interpretation of "Gross Receipts", the Arbitrator posed questions that were not covered in the parties' pre-filed evidence or submissions. As such, the Arbitrator introduced a new issue (the "New Issue") regarding accounting standards and the status of specific residential units that were sold, but not closed.

Accordingly, the arbitration hearing was adjourned, and the parties were directed to provide supplementary materials addressing the New Issue. Mattamy sought to adduce an affidavit that included portions of the ASPE [accounting standards for private enterprises] and a handbook published by the Real Property Association of Canada entitled "Recommended Accounting Practices for Real Estate Investment and Development Entities Reporting in Accordance with ASPE" (the "Handbook").

The Urbancorp parties objected to some aspects of this affidavit, but interestingly, none of these objections were related to the Handbook. Mattamy indicated that if there were further objections to their proposed supplementary evidence, they would bring a motion for leave to file the evidence based on a proper record.

However, in June of 2022, the Arbitrator orally ruled at a case conference that certain parts of Mattamy's affidavit would not be allowed into evidence. Specifically, the Arbitrator declined Mattamy's request to schedule a motion to determine the admissibility of the Handbook, and struck all references to the Handbook, without providing written reasons for his decision.

In accordance with the Arbitrator's ruling, Mattamy provided a revised version of their affidavit and argued that the application of the ASPE supported the proposition that Gross Receipts should not include revenue from sales until such revenue had been recognized at the interim closing date. Since certain residential condominium sales in question reached interim closing after the Transfer Date, Mattamy contended that such sales should not be calculated as part of the Gross Receipts.

The Arbitrator dismissed Mattamy's argument and ruled that the definition of "Gross Receipts" did not require revenues to be received in order to be included within the Gross Receipts. Hence, the residential units in question could be recognised as Gross Receipts even if certain amounts were yet to be collected, and the Arbitrator granted the Monitor/Urbancorp an award of $5.9 million (the "Award") in respect of the unpaid Consulting Fees.

The Superior Court's Decision

Following the Arbitrator's ruling, Mattamy brought an application to set aside the Award and to order a new arbitration under section 46 of the Arbitration Act, 1991 (the "Act") based on two grounds:

1. exceeding the scope of the Arbitration and the Arbitrator's jurisdiction; and
2. breaching the requirements of procedural fairness.

The Arbitrator did not Exceed his Jurisdiction

The Court first emphasized that an arbitrator's jurisdiction is derived "exclusively from the authority conferred by the parties in their arbitration agreement and the terms of appointment of the arbitrator." To determine whether the Arbitrator had gone beyond his jurisdiction, the Court applied the test established in Mexico v Cargill, 2011 ONCA 622 which involved the consideration of three questions:

1. What was the issue that the arbitral tribunal decided?
2. Was that issue within the submission to arbitration?
3. Is there anything in the arbitration agreement, properly interpreted, that precluded the tribunal from making the award?

In applying the foregoing test, the Court identified that the issue in question was UTMI's entitlement to any Consulting Fees and the mechanics and timing of when such fees were to be paid. This issue was clearly set out both in the Notice of Request to Arbitrate provided to the Arbitrator, and in the parties' pleadings. Although, the New Issue raised by the Arbitrator "shifted the analysis" as to whether monies paid after the Transfer Date fell within the definition of Gross Receipts, the Court determined that this was simply "another data point and perspective" to be considered when determining UTMI's entitlement to the Consulting Fees. Thus, the New Issue fell within the submission to arbitration.

The Court also confirmed that that there was nothing in either the Co-Ownership Agreement or the Terms of Appointment that precluded the Arbitrator from making the Award. Consequently, the Court ruled that the Arbitrator did not exceed his jurisdiction in raising and considering the New Issue.

The Arbitrator's Conduct gave rise to Procedural Unfairness

Mattamy argued that the Arbitrator's ruling on the inadmissibility of the Handbook gave rise to a procedural unfairness. According to Mattamy, they were denied a sufficient opportunity to present their case, as the Arbitrator failed to engage in a thorough procedure to determine the admissibility of the Handbook and further denied an appropriate way for the evidence to be received.

The Court concurred with Mattamy's position, and highlighted that Section 46(1)6 of the Act allows a Court to set aside an award on the basis that an applicant is treated unequally and unfairly, denied the chance to present a case or to respond to another party's case, or is not given proper notice of the arbitration or of the arbitrator's appointment.

Furthermore, the Court observed that the Handbook was relevant to the New Issue raised during the arbitration. The Handbook not only provided context and guidance on the application of ASPE principles concerning revenue recognition from the sale of residential condominium units, but it also provided rationale as to why revenue from the sale of residential condominium units was to be recognized at the time of interim closing. As such, the Arbitrator did not have the benefit of the full context of accounting principles from an industry perspective when making his decision.

Even if the accounting approach and the contents of the Handbook were, in hindsight, not found to be determinative in interpreting the definition of Gross Receipts, the Court held that an accounting rationale remained a "relevant data point" that Mattamy should have had the opportunity to present in support of its submissions on the New Issue.

Mattamy further asserted that if the Arbitrator was concerned that the Handbook was lacking support by an expert opinion, Mattamy would have rectified this issue (including by leading expert evidence) even if it were to delay the arbitration. The Court found that this point reinforced the conclusion that Mattamy was not afforded a sufficient opportunity to present its case on the New Issue.

The Court then turned to whether the Arbitrator engaged in a thorough proceeding to determine whether to admit the Handbook into evidence. The Court considered that the Arbitrator's decision to strike the Handbook was made despite:

1. the lack of objection from the respondents regarding the inclusion of this evidence;
2. Mattamy's request for an opportunity to bring a motion for leave to determine the admissibility of evidence contained in the affidavit; and
3. the admission of similar materials that contained the application of ASPE principles.

Considering these findings, coupled with the fact that the Arbitrator's decision was made without the benefit of a motion and supporting reasons for excluding Mattamy's evidence, the Court deemed the arbitration process to be unjust and unfair. The Court therefore ordered that the Award be set aside and the parties were directed to procced with a new arbitration before a different arbitrator.

Analysis and Commentary

Broadly speaking, Mattamy provides a useful reminder of the limits to an arbitrator or tribunal's procedural discretion. It is common practice - particularly in construction disputes - to provide that a set of procedural rules will apply to the arbitration (e.g. the UNCITRAL Arbitration Rules, which themselves provide the tribunal with wide procedural discretion), and to provide in Procedural Order No. 1 that the tribunal will then have the authority to modify those chosen rules to the extent the tribunal deems appropriate or just. However, as Mattamy shows, it is critical to bear in mind that such authority is necessarily limited by the requirement of fair and equal treatment, which is part of essentially all arbitration legislation (and cannot be excluded by the parties' agreement, unlike other legislative provisions).

In that regard, Mattamy raises an interesting question as to the overlap between administrative law and arbitration. In particular the Court relied upon the Supreme Court of Canada's decision in Université du Québec à Trois-Rivières v. Larocque, [1993] 1 S.C.R. 471 to conclude that a decision to exclude evidence in an arbitration is not a "procedural" decision that is immune from review, unlike certain other procedural decisions which are immune from review (e.g. declining to admit fresh evidence following delivery of an award, or ordering security for costs). Indeed, the Court referred to "blanket categories" of procedural decisions of arbitrators that are immune from review, but did not elaborate on the underlying basis for which a given form of decision would qualify for such immunity.

In any event, while the Court's conclusion seems intuitively correct as a matter of procedural fairness, it nevertheless bears noting that the Supreme Court has clarified on several occasions that there are "important differences between commercial arbitration and administrative decision-making".¹ While it is important not to overstate the degree to which arbitration and administrative law are separate spheres², the most notable among these differences is arbitration's greater emphasis on party autonomy and freedom of contract (particularly in respect of crafting rules of procedure). As a result, it arguably would have been preferable for the Court to more fully articulate a freestanding rationale for why such a decision in the arbitral context is not immune from review, rather than relying on an administrative law authority.³ This would be particularly beneficial to determining a principled basis for when a form of procedural decision constitutes one of the aforementioned "blanket categories".

Similarly, it is worth also clarifying the significance of the lack of written reasons in respect of the New Issue since, understood through an administrative lens, the absence of written reasons might (in certain circumstances) be grounds in and of itself for a finding of procedural unfairness. In this case, the Court observed that (among other things), in the absence of any written or oral reasons from the Arbitrator as to why he decided to exclude the Handbook, the Court could not satisfy itself that a thorough procedure was followed in determining whether to exclude the Handbook.

Importantly, this is not to suggest that in all instances, a lack of written or oral reasons in the arbitral context will inevitably give rise to a finding of procedural unfairness. Indeed, it is not uncommon for parties to agree (for the sake of expediency) that a tribunal will not need to provide detailed (or any) reasons as part of its final award. The more salient point in respect of this issue is that, on this set-aside application, there was insufficient evidence before the Court that a thorough procedure had been followed in arriving at the decision to exclude the Handbook.

In that regard, the Arbitrator's decision to address the issue via case conference rather than formal motion appears to have been a significant factor, as the latter would have undoubtedly provided a more thorough procedure. In future, wary arbitrators may err on the side of caution in addressing similar issues - while this will ensure greater procedural rigour, it is arguable that some of the efficiency of arbitration may be eroded.

In addition, the nature of Urbancorp's position as to the admissibility of the Handbook raises an interesting question as to what qualifies as 'agreement' between the parties and its impact on the scope of the arbitrator's jurisdiction. As noted above, the Court observed that Urbancorp did not object to the admission of the Handbook into evidence. On that basis, the argument could be made that the parties agreed to its inclusion, thus modifying their arbitration agreement and thereby leaving the Arbitrator with no discretion to exclude the Handbook (meaning a decision to do so would exceed the arbitrator's jurisdiction).

However, this in turn raises the question of whether a lack of disagreement (i.e. a lack of objection) is synonymous with agreement; the Court's analysis is not clear whether Urbancorp expressly or implicitly agreed with the Handbook's admission, or whether Urbancorp simply took no position on the issue. As readers will appreciate, the issue of whether an agreement has been reached in the contractual context is highly fact-specific, and it is accordingly difficult to state as a general proposition that a lack of disagreement amounts to acquiescence and in turn agreement (or, in fact, whether acquiescence is itself sufficient for agreement as a matter of contract law).

Clearly, though, it appears that the Court is predisposed to protect a party's right to make its case and to be able to respond to the case against it, such that, as a conservative practice, the potential rejection of significant evidence by an Arbitrator should be accompanied by the opportunity to be heard and an articulation of the basis for exclusion.

Eric Lee (summer student) assisted with the preparation of this article.

Footnotes

1. See, for example, Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7 at para 119, citing Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 at para 104.

2. See, for example, Vento Motorcycles, Inc. v. United Mexican States, 2021 ONSC 7913, where the Ontario Superior Court concluded that the applicable test for admitting fresh evidence on an application to set aside an international arbitral award on procedural fairness grounds is akin to the test for admitting fresh evidence in the context of an application for judicial review of an administrative decision.

3. Parenthetically, this also calls to mind the current uncertainty in relation to the applicable standard of review for arbitral awards following the Supreme Court's decision in Vavilov.

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