Preferring the “narrow interpretation” of section 44(3) of the Arbitration Act, RSA 2000, c A-43, Madam Justice Shaina Leonard in Athan Homes Inc v. Phan, 2021 ABQB 119 determined that the fundamental breach issue had not “expressly” been submitted to the arbitrator for decision and section 44(3) did not preclude leave to appeal. Applicant did succeed in identifying a question law but Leonard J. determined that its appeal had no merit. Leonard J. also dismissed Applicant’s alternative application to set aside the award due to alleged lack of opportunity to plead on the issue of fundamental breach. Though she had determined that fundamental breach had not been referred “expressly” to the arbitrator for the purpose of section 44(3), Leonard J. also determined that the issue was before the arbitrator for the purpose of natural justice. Omitted from the parties’ Joint Memorandum list of issues submitted to the arbitrator, the fundamental breach issue was present in the pleadings and Respondents’ written argument. Applicant’s choice not to make submissions on the issue did not result in a lack of opportunity to be heard.
New owners of a residential building, Respondents entered into a June 2018 cost-plus contract (“Agreement”) with Applicant, a construction and renovation company, to renovate the building. Under the Agreement, Applicant would receive a 20% builder’s fee on the cost of the work. An initial July 2018 budget of $641,500.00 increased to $960,200.00 by November 2018 and by January 2019 reached $1,564,400.00.
Applicant undertook the work and Respondents made monthly payments. A promised December 2018 occupation came and went and Respondents raised concerns about the quality of the work performed by Applicant and its subcontractors. A disagreement in mid-February 2019 prompted Respondents to change the locks to the building and, the following day, Applicant and certain subcontractors filed builders’ liens against the property.
Applicant initiated court litigation but, upon Respondents’ application, the court stayed the litigation on the basis that the Agreement provided for arbitration of any dispute between the parties.
Leonard J. observed at para. 9 listed the pleadings generated in the court litigation and observed that they “formed the pleadings” in the arbitration: Statement of Claim, Statement of Defence, Counterclaim, Statement of Defence to the Counterclaim.
Leonard J. also noted that the parties submitted a document in their arbitration which would turn out to be key her leave to appeal analysis: a two (2) page October 21, 2019 “Memorandum of Issues in Dispute for the Arbitration” which Leonard J. identified as the “Joint Memorandum”. Though her reasons make no mention of it being a document drafted or negotiated by the parties, the mention of “Joint” and the reference to it being “submitted” by the parties, supports qualifying it as a document drafted/negotiated with the approval of both parties.
The arbitrator issued an award (“Award”) in which he held that Applicant fundamentally breached the Agreement, that Respondents had the right to terminate it as well as holding and that Applicant was negligent in its role as contractor. The arbitrator awarded Respondents $499,190.50 representing “overpayment” and a nominal amount of $2,267.23 as damages. In a subsequent decision on costs, the arbitrator awarded Respondents $337,950.12 with interest at five (5) % per annum (“Costs Award”).
Applicant sought leave to appeal the Award under section 44 of the Arbitration Act, RSA 2000, c A-43. (The reasons do not expressly mention whether the proposed appeal also challenged the Costs Award but, in her dispositive at para. 69, the amount of $839,438.82 referred to confirms that the Costs Award was in issue, at least by way of Respondents’ undisclosed application for recognition and enforcement of the Award and Costs Award.) In summarizing Applicant’s grounds, Leonard J. also flagged Applicant’s reliance, in the alternative, on section 45 when seeking a set aside based on alleged lack of reasonable opportunity to address the issue of fundamental breach.
Leonard J. listed two (2) broad issues, the first of which comprised four (4) sub-issues.
First, does section 44(3) of the Arbitration Act preclude leave to appeal on the basis that the issue of fundamental breach was expressly put to the arbitrator for determination; has Applicant identified a question of law that warrants granting leave to appeal pursuant to section 44(2); is there arguable merit to Applicant’s position that the arbitrator’s award on fundamental breach of contract was unreasonable; and, has Applicant otherwise satisfied section 44?
Second, should the court set aside the Award pursuant to section 45 on the basis that Applicant was not afforded reasonable opportunity to make submissions to the arbitrator on the issue of fundamental breach of contract?
Parties’ positions – Applicant argued that the arbitrator filed to use the correct test for fundamental breach of contract. It submitted that its appeal did not challenge factual determinations made by the arbitrator but the arbitrator’s failure to consider particular elements of contractual repudiation identified by Leonard J. at para. 13.
Applicant disputed the role that Respondents’ change of locks played as an election or acceptance of the repudiation of the Agreement based on Applicant’s alleged fundamental breach. Applicant also relied on section 44(2) of the Arbitration Act, submitting that the appeal ought to be granted because the matters at stake were sufficiently important and determination of the proposed question of law would significantly affect the parties’ rights.
Applicant argued that the issue of fundamental breach was not expressly before the arbitrator and section 44(3) of the Arbitration Act did not preclude Applicant’s appeal. Article 44(3) stipulates that a party may not obtain leave to appeal under sections 44(1) and 44(2) “on a question of law that the parties expressly referred to the arbitral tribunal for decision”.
Applicant further argued, in the alternative, to set aside the Award under section 45 for an alleged lack of opportunity to argue fundamental breach.
Respondents disputed Applicant’s arguments, submitting that the “parties elected to submit to arbitration” and “should be bound to the process they have agreed to”, adding that “the court should be slow to interfere”. Respondents argued that the arbitrator did apply the correct test for fundamental breach, that the determination made in regard to fundamental breach is a question of mixed fact and law and therefore not reviewable and the record does not support Applicant’s claim of lack of notice of Applicants’ termination of the Agreement. The error, if any, involving fundamental breach, would not affect the result.
Respondents disputed Applicant’s claim that it had no opportunity to address fundamental breach. “The issue of fundamental breach of contract was before the Arbitrator. [Applicant] chose not to address fundamental breach of contract. This does not entitle [Applicant] to a do-over”.
(1) Leave to appeal – The parties’ agreement to arbitrate made no mention of an appeal and Leonard J. held that section 44(2) therefore governed any appeal. The latter stipulated that, in the absence of a contractual right of appeal, any appeals were limited to questions of law and subject to leave.
Leonard J. referred to 1285592 Alberta Ltd v. Moderno Homes Inc, 2018 ABQB 23 and commented that leave to appeal “arbitral decisions is rarely granted given the high threshold in section 44”.
Relying on Alberta (Workers’ Compensation Board) v. Appeals Commission, 2005 ABCA 276 paras 21-22, Leonard J. observed that a question of law involves “the correct legal test, whereas questions of mixed fact and law are about whether the facts satisfy the legal test” and that an error of law arises when “the legal test is incorrectly stated, or there is a flaw in its application”.
At paras 30-32 Leonard J. added, with reference to Alberta Medical Association v. Alberta Health Services, 2019 ABQB 82 para. 14 and its reference to Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 (CanLII),  2 SCR 633 para. 72, Leonard J. set out the limits to the court’s analysis of the merits of the award and held that generally the standard of reasonableness will apply to arbitral decisions.
In regard to section 45(1)(f), Leonard J. observed that it “codifies the application of the principles of natural justice during arbitral hearings”.
“If a fair process is not provided during arbitration because a party does not have an opportunity to present its case or respond to another’s case, the Court may set aside an award that results from that arbitration: Ritchie v Ritchie, 2014 ABQB 219 at paras 8 and 38”.
Having set out the applicable principles, Leonard J. considered the record before her.
The Joint Memorandum contained four (4) issues identified by the parties as “Contract Termination Issues”: repudiation by Respondents; termination by Applicant, abandonment by Applicant and the effect of changing the locks. The Joint Memorandum did not expressly refer to fundamental breach and Leonard J. concluded that section 44(3) did not preclude leave to appeal.
In making her determination, Leonard J. explained that she preferred the “narrow interpretation” of section 44(3), reasoning that to interpreted it “more broadly” would “potentially render section 44(2) meaningless”. See Clark v. Unterschultz, 2020 ABQB 338 and the urbitral notes below for further references. Applying that “narrow interpretation”, Leonard J. concluded that section 44(3) did not preclude leave to appeal.
“Although the Joint Memorandum asked the Arbitrator to address all factual and legal issues between the parties, this language does not expressly put the issue of fundamental breach of contract to the Arbitrator”.
While Leonard J. considered that “some” of Applicant’s arguments “do stray” into application of the legal test to particular facts, she concluded that Applicant had raised a question of law, namely whether the arbitrator had identified and used the correct test for fundamental breach of contract.
At paras 42-49 Leonard J. reviewed the Award in light of the case law and concluded at para. 50 that “there is no arguable merit” to Applicant’s arguments that the arbitrator did not identify and apply the correct legal test for fundamental or “[i]n other words”, that the arbitrator’s approach was “unreasonable”.
Assuming that Applicant’s appeal had arguable merit, Leonard J. did not agree that the appeal qualified under section 44(2.1). “The financial outcome of this matter is undoubtedly important to the parties; however, this is insufficient to justify an appeal”.
(2) Reasonable opportunity – Asserting a breach of natural justice, namely “the right to be heard”, Applicant acknowledged that it had made no submissions on the issue of fundamental breach but argued that “there was no apparent reason to make submissions on this point and that the Arbitrator’s failure to request submissions amounts to a denial of an opportunity to do so”. Applicant argued further that no evidence or correspondence between counsel supported any potential finding of fundamental breach.
Leonard J. disagreed, listing four (4) signals made to Applicant that fundamental breach was a live issue:
– The parties’ pleadings in the Queen’s Bench action were the pleadings in the arbitration;
– Fundamental breach of contract was included in Respondents’ Statement of Defence f;
– Several pages of argument on fundamental breach of contract were included in Respondents’ Written Brief of Law filed in the arbitration hearing; and,
– Caselaw dealing with fundamental breach of contract was provided to the arbitrator by Respondents’ counsel.
“ I find that the issue of fundamental breach of contract was before the Arbitrator. It may not have been argued in the letters between counsel, but given its presence in the pleadings, the written argument of [Respondents], and the evidence that supported such a finding, [Applicant] should have been aware that it was an issue before the Arbitrator. This Court does not know why [Applicant] chose not to make submissions on the issue of fundamental breach of contract, but it cannot be said that it was denied its right to be heard”.
Leonard J. granted Respondents leave to file the Award as a judgment of the court in the amount of $839,438.82 (see comments above regarding Award and Costs Award).
In addition, Leonard J. discharged the liens registered by Applicant against Respondents’ property.
urbitral notes – First, Leonard J. identified an economy of effort and expense when noting that the list of pleadings mentioned at para. 9 were repurposed as pleadings in the arbitration. The list suggests a more lengthy give-and-take of activity in the court file before a stay was granted. The decision on the stay is not referenced in the reasons and no information exists on how promptly Respondents signalled their intention to apply for a stay.
Section 7(2)(d) of the Arbitration Act authorizes the court to refuse a stay if the application to stay the proceedings “was brought with undue delay”.
Second, at para. 9 Leonard J. inventoried the procedural measures adopted by the parties, allowing readers to track ways to prepare for their own hearings on the merits. Despite the economy suggested by repurposing court proceedings in the arbitration, not every jurisdiction’s courts would allow for the parties to engage as fully in the litigation before a court would agree to issue a stay.
“ The pleadings filed in the civil claim formed the pleadings in the Arbitration. These included the Statement of Claim, the Statement of Defence, the Counterclaim and the Statement of Defence to Counterclaim. The parties also submitted a two-page Memorandum of Issues in Dispute for the Arbitration, dated October 21, 2019 (the Joint Memorandum). The parties exchanged witness statements and expert witness statements. In all, fifteen witness statements were provided. Fourteen of these witnesses appeared for cross-examination at the arbitration, which was heard over a period of 10 days in June 2020”.
Third, in reference to para. 7 of, that para. read as follows:
“ These prerequisites are such that leave to appeal will rarely be granted. This result is especially so when it involves interpretation of a private commercial contract, because such a decision will not give rise to questions of extraordinary importance and has no precedential value: Driscoll v Hautz, 2017 ABQB 168”.
Driscoll v. Hautz at paras 21-22 offer the following, additional insights into leave to appeal and section 44(2), including discussion of whether section 44(2.1)(a) incorporates a public interest component:
“ Finally, there has been some conflict as to whether para 44(2.1)(a) incorporates a public interest component. It is now settled that it does not: [Capital Power Corporation v. Lehigh Hanson Materials Limited, 2013 ABQB 413] at para 35. This provision requires a somewhat awkward weighing of dissimilar things. Normally, where an appeal must be justified, it is done by considering, amongst other things, whether the issue is of general importance such that a pronouncement by an appellate court is warranted (see eg Supreme Court Act, RSC 1985, c S-26, ss 40(1) and 43(1), Park Avenue Flooring Inc v EllisDon Construction Services Inc, 2016 ABCA 327 at para 3). These tests can be viewed as a question of whether the public resources of the appellate process should be invested in a question of significance to the public. Even under these regimes, it is possible to justify an appeal where there is an arguable case and the practical effect on the parties and the result in the particular case is important (eg Jeerh v Yorkton Securities Inc, 2005 ABCA 64 at para 21).
 By contrast to a judgment of a court, a decision by an arbitrator has no precedential value and is unlikely to be publicly accessible. Therefore, any appeal can only be justified by the importance of the matter to the parties. The [Arbitration Act, RSA 2000, c A-43] imposes “a very high standard when considering whether the importance to the parties of the matters at stake in the arbitration justifies an appeal” (Capital Power at para 35). Any party who seeks leave to appeal must feel that his or her matter is important enough to justify continuing – or in the case of those who pursued arbitration, entering – the litigation process. For consistency within s 44 and with the scheme of the Act, I conclude that para 44(2.1)(a) requires the applicant to show that the matters at stake are of greater importance to the parties than may be expected in a typical leave application, and are of sufficient importance to justify engaging the appellate process. As with para 44(2.1)(b), this standard will be neither easy nor impossible to satisfy. Most applications will not meet it”.
Fourth, for case law commenting on how express must parties be when referring a question of law to an arbitrator, see paras 42-45 and the cases listed therein: Fuhr Estate v. Husky Oil Marketing Company, 2010 ABQB 495 paras 111-112; Capital Power Corporation v. Lehigh Hanson Materials Limited, 2013 ABQB 413 paras 41, 44; Frank v. Vogel & Company LLP, 2012 ABQB 432 para. 35; Driscoll v Hautz, 2017 ABQB 168 para. 19; KBR Industrial Canada Co v. Air Liquide Global E&C Solutions Canada LP, 2018 ABQB 257 para. 62; Prairie Roadbuilders Limited v, Flatiron-Dragados-Aecon-Lafarge, A Joint Venture, 2019 ABQB 934 para. 134.