Ontario – unsuccessful attempt by new counsel to enjoin further arbitration after partial award

In Lobanova v. Grynyshyn, 2019 ONSC 3064, Mr. Justice Frederick L. Myers dismissed an attempt by new counsel to enjoin the arbitrator from completing the arbitration and deciding isolated monetary issues intentionally left unresolved by an earlier, partial award.  Myers J. stated that access to the courts is not a “do-over” once the arbitral “main event” concludes.  Despite appointing new counsel, a change in strategy and new arguments cannot excuse positions taken earlier in the arbitration or contradict evidence already adduced.  Myers J. discouraged challenges to discretionary procedural orders, especially fully reasoned ones, including challenges which prevent the court from having a full case if and when an appeal was authorized.

Applicants and Respondents disputed ownership of a residential property (“Property”) which Applicants claimed was the object of a business relationship between Applicants and Respondents. Though legal title was registered in Respondents’ names, Applicants claimed that they and Respondents had agreed to buy and redevelop the Property.  Applicants claimed that they were entitled to partition, sell and share in the proceeds of the sale of the Property.  To resolve the dispute, Applicants sued Respondents in Superior Court on November 20, 2017. 

Following the January 2018 sale of the Property for $2,410,573.92, the proceeds were paid into court pending the outcome of the litigation.  The parties subsequently agreed to submit to arbitration and, on September 24, 2018, appointed an arbitrator to resolve their dispute over the proper allocation of proceeds deposited in court.

Myers J. recorded that that the merits hearing “was held very quickly on several days in December, 2018” and lead to an April 1, 2019 award in which Respondents succeeded “[i]n the main” (“Award”).  Myers J. noted that, “[a]s the parties had not documented their relationship formally, the arbitrator had to determine the terms of their agreement as they related to several specific claims.

One of those undocumented terms which remained unresolved by the Award was whether HST was due.  The answer would have an impact on the arbitrator’s allocation of the proceeds deposited in court.  Experts for both parties agreed that the redevelopment project was “an adventure in the nature of trade” which required that HST be paid.  The uncontradicted evidence of Respondents’ expert quantified the HST, less applicable input tax credits, at a net $504,434.41.

At para. 14, Myers J. identified the conundrum presented to the arbitrator: how to give effect to the parties’ agreement to share HST liability when the parties had separate tax returns to file but still allow the arbitrator to complete the allocation of the funds deposited in court.  Aware of the need for the parties to cooperate on filing their respective tax returns but alert to the their “mutual concern and distrust”, the arbitrator in the Award gave the parties 20 days to confer and agree on how to do so, failing which he set a one (1) day hearing to determine what could or should be done. The arbitrator allocated the rest of the funds held in court but ordered that the HST amount of $504,434.41 would remain deposited until either the parties had an agreement or he decided the issue.

Soon after the Award issued, Applicants changed counsel.  Rather than meeting and conferring on the HST as required, Applicants’ new counsel on April 17, 2019 advised that Applicants would seek leave to appeal the Award.  New counsel further argued that the arbitrator had no jurisdiction to make an award on HST and contested his jurisdiction to hear further issues regarding the parties’ tax returns.

The tax returns were due on April 30, 2019.  Advised that Applicants contested the arbitrator’s jurisdiction to deal with the $504,434.14 deposited in court, Respondents applied to the court for payment of the funds out of court to pay the tax by April 30.  Applicants contested the application, arguing that only the arbitrator could allow the funds to be paid out of court despite also challenging his jurisdiction to deal with the HST.  That application was adjourned.

The arbitrator held a May 6, 2019 case management call to schedule the hearing on the remaining HST issues.  He agreed with the suggestion by Applicants’ new counsel to hear the two (2) issues separately. Despite this concession, Applicants’ new counsel argued that the hearing should be held June 13, 2019.

During the case conference, [new counsel] argued that resolution of the remaining HST issues was not urgent; that he needed time to get up to speed on the file; that he was pressed to meet the leave to appeal deadlines in the arbitration and an appeal deadline in an unrelated case in which he was acting; that he had to keep some time open as he had committed a block of time for scheduling possible hearings before the Workplace Safety and Insurance Appeal Tribunal, and therefore he asked for a hearing date no earlier than June 13, 2019.

During the case conference call, new counsel “lost his temper and raised his voice”, prompting the arbitrator to end the call due to counsel’s “intemperate conduct”. 

[20] On May 8, 2019 [new counsel] wrote to the arbitrator to apologize for raising his voice during the scheduling call. He went on to explain that he is under stress as a result of issues in his family life as well as a spike in his workload. He then made several allegations of misconduct against the arbitrator essentially asserting that during the conference call the arbitrator had pre-judged the issues; was helping the respondents’ counsel; was not even-handed; and had ignored [new counsel]’s scheduling concerns. The arbitrator responded in a separate letter refuting [new counsel]’s characterizations.

After exchanges with counsel for the parties, the arbitrator released his Procedural Order No. 2 on May 9, 2019, setting the hearing of the first HST issue for May 29, 2019 with a May 17, 2019 deadline for Applicants to deliver their submissions objecting to his jurisdiction.

In his own reasons, Myers J. excerpted portions of the arbitrator’s reasons.  In doing so, Myers J. disclosed the care with which the arbitrator considered the issues before him, the competing interests and his reasons for deciding on the next procedural steps and timelines.  The arbitrator’s approach allowed Myers J. and the recipients of the Procedural Order No. 2 to see that they had been treated fairly and equally and in a manner consistent with the promises of arbitration.  See, for example, para. 22 for excerpts of Procedural Order No. 2 as well as paras 27, 28 and 29 for Procedural Order No. 4. 

[The arbitrator] noted that in the award he had given the parties 20 days to resolve the HST implementation issues themselves. He also referred to the goals of efficiency and fairness that underpin the tribunal’s authority to set its own procedure set out in ss. 19 and 20 of the Arbitration Act, 1991.

The release of Procedural Order No. 2 did not serve to convince Applicants’ new counsel to abide by the procedural timeline.  Instead, Applicants’ new counsel responded with further objections which are either summarized at para. 24 or excerpted at paras. 25 and 26 and addressed by the ensuing Procedural Order No. 3 and Procedural Order No. 4.

In the additional procedural orders, the arbitrator reprised the approach excerpted from Procedural Order No. 2.  Despite being interim procedural steps, the procedural orders benefited from the arbitrator’s careful but firm handling of the issues and submissions and outlining the reasons.  For example, the excerpt of Procedural Order No. 4 at para. 29 identified the excerpts as paras 26 and 27, reflecting a robust consideration of the scheduling issues.  The orders were not issued lightly and provided the necessary insights for Myers J. to consider.

Applicants did apply for leave to appeal the Award, with amendments to challenge the arbitrator’s subsequent costs award and to seek a stay of the arbitration pending their leave to appeal application.  As of the date of the hearing before Myers J., Applicants had yet to apply to challenge Procedural Order No. 2, either by appeal or to set aside under section 46.

Parallel to the leave to appeal application, Applicants also applied for an injunction or a stay preventing the arbitration from proceeding further pending Applicants’ hearing on their leave to appeal application.  Myers J. summarized Applicants’ grounds and then Respondents’ arguments.

Applicants’ submissions – Though Applicants had not (yet) challenged Procedural Order No. 2, they argued that it denied them procedural fairness, submitting various grounds:

(i) inadequate time to prepare – Applicants’ new counsel “argued that his schedule was “overwhelmed” and the arbitrator erred imposing Procedural Order No. 2 knowing that [new counsel]’s personal and professional circumstances left him without sufficient time to prepare.” Applicants argued that “undue speed increases the risk of error”.

(ii) uncertainty about need to deal with HST at this point – Applicants submitted that a 2009 Canada Revenue Agency memorandum, not in evidence, supported their argument that (i) filing the HST returns with certain ITC claims could permanently prevent the parties from relying on personal residence exemptions if the sale was ever found not to be subject to HST and (ii) unspecified sections of the applicable income tax legislation could affect the quantum and timing of the HST liability and thereby would “remove any sense of urgency to meet the 2018 taxation year filing deadline”.

(iii) animosity against Applicants – Applicants argued that the arbitrator had chosen the date which was “harshest” to Applicants’ new counsel and that the “draconian schedule” was incomprehensible unless attributable to the arbitrator’s “animus” against the new counsel and an effort to “punish” him.

Respondents’ submissions – Respondents resisted Applicants’ motion to enjoin the arbitration from continuing, submitting various grounds:

(i) doing indirectly – Respondents argued that Applicants were seeking a court order to overrulethe arbitrator’s Procedural Order No. 2. 

(ii) adequate time to respond – Respondents noted that the parties had had since April 17, 2019 to set out their arguments to the arbitrator.  The time spent by Applicants to prepare their motion for injunction could have been spent preparing Respondents’ HST submissions within the delay set.

(iii) inconsistent position – Both sides had called expert evidence already on the HST issue which Applicants argued Respondents now ignored by arguing, post-Award, that a personal residence exemption applies or may be at risk if tax returns are filed.

(iv) no irreparable harm – Respondents pointed out that, if the HST was subsequently deemed not to be due, that harm was quantifiable at $504,434.14 and therefore not irreparable.

(v) complete resolution – Applicants submitted that the arbitration should resolve all issues, including HST, before a leave to appeal application is heard.

Myers J. introduced his analysis by stating that “I agree with the respondents’ submissions.”

Myers J. observed that the same legal tests apply to the request for an interlocutory injunction and to an interim stay.  He referred to The Select Group of Canada Inc. v. Healy, 2019 ONSC 2860 as a recent statement of the applicable test, which had drawn itself on RJR-MacDonald Inc. v. Canada (Attorney General), [1994] 1 SCR 311, 1994 CanLII 117 (SCC) at paras 83-85.  He then addressed each of the elements in turn.

(a) there is a serious issue to be tried or plaintiff has a strong prima facie case

Though a stay motion faces only a “low hurdle” when assessing its merits, Myers J. saw no basis for a stay pending the hearing of the leave to appeal application. 

Myers J. questioned how a party could challenge the arbitrator’s jurisdiction to decide an issue when it had called evidence on the issue and argued it without contesting jurisdiction.  Also, he did not accept that Respondents could argue arbitral error based on (a) a CRA memo which was not in evidence or (b) a position not taken by Respondents when before the arbitrator and contrary to expert evidence they themselves lead.

Myers J. further held that the alleged breach of procedural fairness in Procedural Order No. 2 did not raise a serious issue.  Even though Applicants had not yet formally challenged Procedural Rule No. 2, Myers J. recognized that his decision on the interlocutory injunction would effectively determine the applicability of that order.  Myers J. held that the court must take a harder look at the merits of the appeal if the injunction would finally resolve the underlying matter – namely the validity of Procedural Order No. 2.  Even with this heightened level of scrutiny, Myers J. readily held that Applicants’ chances on appeal were not strong enough.

[47] While [new counsel] repeatedly asserts that the arbitrator ignored his scheduling problems, in fact, Procedural Orders Nos. 2 and 4 were both substantial and thorough decisions on the merits. The arbitrator expressly recited [new counsel]’s arguments and gave cogent reasons as to why he was not ruling in the applicants’ favour despite [new counsel]’s personal and professional problems. In Procedural Order No. 3, the arbitrator did convenience [new counsel] where he could do so without prejudicing the parties’ interests as he saw them. Scheduling is a highly discretionary decision. The applicants knew the scheduling issue that they faced. They made their arguments and they did not succeed for reasons that are clear and cogent. I see no strong claim that they have been denied procedural fairness at this time.

(b) the moving party will suffer irreparable harm if the injunction is not granted

Myers J. agreed with Respondents that the issue in dispute was whether the $504,434.14 HST amount was due or not.  “Damages are not just quantifiable; they are quantified.”  An award of monetary damages would be adequate compensation if the Award was set aside.

(c) the balance of convenience – Myers J.’s comments on the balance of convenience speak directly to attempts to challenge interim procedural orders and the preference to complete an arbitration so that the court would have the “full case” at a later date.

Justice of the case” – Having considered the three (3) formal elements, Myers J. went on to “take a step back” to examine Applicants’ motion from “a holistic basis” and evaluate the “justice of the case”. 

Myers J. readily rejected Applicants’ new counsel’s argument that the arbitrator was “punishing him”.  He underlined that, despite counsel’s dissatisfaction, the arbitrator did not ignore counsel’s personal issues.  Rather, Myers J. found that the arbitrator balanced those concerns among the parties’ interests and provided thorough reasons for his decision. 

At para. 54, Myers J. noted that new counsel knew or ought to have known the impact of his strategic decision to initiate the appeal.

He took a retainer in an arbitration that was not yet finished. He has had a month to prepare for the foreseeable results of his initial strategic view of the case. Objectively, that was more than enough time. If his subjective personal and professional circumstances did not allow him to do what needed to be done to implement the strategy that he believed ought to be advanced, the answer does not lie in repeatedly sending inappropriate communications to the arbitrator or begging for special dispensation despite the parties’ needs and interests.

Just prior to those comments, in a key passage in his reasons, Myers J. commented on how an agreement to arbitrate is a choice to pursue a resolution with reduced access to the courts.  He observed that the courts are not a “do-over” once the parties complete arbitration’s “main event”.

[51] In this dispute, the parties agreed to have their court proceedings resolved by arbitration. That was their right. They were heard by the arbitrator very quickly as they wished. One corollary of the parties’ decision to proceed by alternative dispute resolution is that the parties have very limited access to the courts when things do not go as they hope. In my view, a court is not justified in intervening where a new counsel for a party prefers an alternative theory of the case over one that was advanced by the party at the arbitration hearing. A party does not raise an error of law on appeal where it seeks to reverse its position and ignore the evidence it presented at the arbitration. An arbitration is not a test run in which evidence and positions can be tried on for size and then discarded in subsequent court proceedings. The parties opted-out of their court proceedings. Resort to the court after an arbitration is not a do-over. The arbitration is the main event. The court can intervene only on the prescribed grounds set out the Arbitration Act, 1991 none of which is raised on arguments made on this motion.

urbitral note – Myers J.’s reasons and the result on the application to enjoin the arbitrator from proceeding rest on the fact that the arbitrator provided detailed reasons for the procedural steps taken and the orders imposed.  The procedural orders demonstrated that the arbitrator heard the parties’ and balanced the competing interests.  The result was due not just to the fact that the order was procedural, and a matter of discretion.  The result was due in large part to how the arbitrator demonstrated an ample evaluation of the issues and ruled in a manner that preserved the parties’ bargain to arbitrate rather than litigate.