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Procedural Unfairness and the Limits of Arbitrator Discretion


The decision in Mattamy (Downsview) Limited v. KSV Restructuring Inc. (Urbancorp), 2023 ONSC 3013 [Mattamy] provides an insightful review of the limits of an arbitrator’s discretion in decision making. It is also an instance where the Court takes the uncommon step of overturning an arbitration award and ordering a new hearing by a different arbitrator.

The key parties in this dispute were major residential developers Mattamy (Downsview) Limited and Urbancorp Downsview Park Development Corp. Together these companies formed a separate entity, Downsview Homes Inc., as the vehicle through which they would build a residential complex consisting of condominiums, townhomes, semi-detached homes and rental units.

When Urbancorp went insolvent, its 51% ownership interest in Downsview Homes Inc. was sold to Mattamy.

Within the context of Urbancorp’s CCAA proceeding, a dispute arose concerning whether Urbancorp was entitled to a $5.9 million consulting fee from Mattamy. Urbancorp’s position was that the consulting fee, a 1.5% fee of the gross receipts on the project, was payable prior to the sale of its interest in Downsview Homes Inc. On the other hand, Mattamy argued that Urbancorp was not entitled to the $5.9 million payout based on an interpretation of gross receipts per the partnership agreement that, for instance, included the revenues received from the sale of residential units.

Upon hearing each party’s account of entitlement to the payout, the arbitrator came up with a series of question geared toward an issue that had not been addressed by either of the parties’ filings. Namely, the arbitrator wanted to know the following:

  1. What did the ASPE accounting principles require for the sale of residential condominium units?
  2. How did the auditors on the project account for the sale of residential condominium units?
  3. What was the closing status for [Phase 2] Block A and P units, including dates of actual and anticipated closings?

These questions came as a surprise to Mattamy because there was no previous disagreement between the parties concerning the application of gross receipts for Phase 2 of the residential units. Urbancorp never claimed the sale of the Phase 2 units were deemed received prior to Urbancorp’s sale of its interest to Mattamy.  In other words, it appeared as if the arbitrator was making hay of a non-issue.

As requested, both parties nonetheless provided supplementary material on these questions. Mattamy included several supporting documents for evidence including a handbook published by the Real Property Association of Canada which offers guidance on how accounting principles are applied to the sale of condominium units. The arbitrator later decided to strike any and all references to the handbook with no reason other than to say he “had a mind of his own”. In the end, the arbitrator awarded Urbancorp the full $5.9 million consulting fee.

In its application to set aside the arbitrator’s award, Mattamy claimed that the new questions raised by the arbitrator was beyond the arbitrator’s jurisdiction and the failure to allow Mattamy to present a complete record of evidence was procedurally unfair and a breach of the principles of natural justice.

The central issues the Court was asked to determine were as follows:

  1. Should the Award be set aside pursuant to s. 46(1) 3 of the Act for exceeding the scope of the Arbitration and the Arbitrator’s jurisdiction?
  2. Should the Award be set aside pursuant to s. 46(1) 6 of the Act for breach of procedural fairness?

With respect to the first issue, the Court determined that the arbitrator did not exceed the scope of his jurisdiction because the parties specifically asked the arbitrator to determine entitlement to the $5.9 million consulting fee. The Court cited the leading Ontario Court of Appeal decision in Mexico v. Cargill, Incorporated, 2011 ONCA 622, which provided the framework for assessing whether an award went beyond the scope of the arbitrator’s jurisdiction:

  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?

When the arbitrator asked about Phase 2 of the residential units and whether those payments could be considered “received” as well as how calculations were made based on accounting principles, the Court determined this was merely an attempt to “shift the analysis by introducing a new point of interpretation”. In other words, the arbitrator was simply providing a new perspective on how to assess the issue in dispute and not an attempt to, for instance, introduce completely unrelated considerations. The new question did not fall outside of the scope of the broad questions that had been submitted to the arbitrator to decide. Therefore, the arbitrator was not acting outside of his jurisdiction.

With respect to the second issue, the Court determined that there was procedural unfairness by the arbitrator in refusing to consider the full scope of Mattamy’s evidence. By denying the inclusion of the handbook, Mattamy was denied a sufficient opportunity to present their case. As part of its analysis, the Court acknowledged that while arbitrators have the authority to determine the procedure of a hearing, they cannot make rulings that result in procedural unfairness. The handbook was relevant because it addressed the questions the arbitrator himself asked concerning the calculation of general receipts and provided important context and an “interpretive guide” for the arbitrator. Furthermore, no real reason was given by the arbitrator for rejecting the evidence.

The Court took umbrage at Urbancorp’s suggestion that the award should stand because neither the new questions put forward by the arbitrator nor the exclusion of the handbook were ultimately dispositive or central to the final award decision. The Court made clear, citing the seminal Supreme Court of Canada ruling in Université du Québec à Trois‑Rivières v. Larocque, [1993] 1 S.C.R. 471, that once there is found to have been procedural unfairness or a failure of natural justice the arbitrator’s award must be set aside and a new arbitration must be ordered. It does not matter if the procedural unfairness related to matter that had no bearing on the result. Once unfairness is identified, the award must be set aside.

Moreover, in its decision, the Court also found it necessary to distinguish between discrete procedural decisions of an arbitrator, which are generally immune from review of a Court, and a procedure that is so flawed as to amount to procedural unfairness. Such a distinction is not always clear on its face but heavily driven by context.

Taken together, the Court decided that while the arbitrator was within his right to introduce new questions and raise an issue not originally presented by the parties, the arbitrator’s decision to exclude certain evidence presented by Mattamy pertaining to these new questions and issue amounted to procedural unfairness and a failure of natural justice.  It was ordered the award be set aside and the parties proceed to a new arbitration before a different arbitrator.

While Courts are generally deferential to the arbitration process and the decision of parties to resolve disputes privately through this alternative dispute mechanism, this case highlights a clear instance where the Court will not hesitate to step in.

The Court criticized the lack of explanation given by the arbitrator for excluding important evidence. While the arbitrator has significant discretion, that discretion must be exercised reasonably. The arbitrator has power in dictating procedure with the agreement of the parties, but power has it limits particularly when it comes to the evidentiary record.

In this case, the exclusion of evidence despite the lack of any objection from the respondents to that evidence; Mattamy's request for an opportunity to bring a motion for leave to file an affidavit if there was a question about the admissibility of any of the evidence contained in it; and the admission of other evidence about the application of ASPE principles amounted to a confluence of factors which deprived Mattamy of its right to procedural fairness.

Parties must be given a fair opportunity to present their case and this ruling is a reminder, perhaps a warning, that the arbitrator must ensure principles of procedural fairness and natural justice are upheld.