In Ostergaard v. Uhl, 2020 ABQB 789, Madam Justice Sandra L. Hunt McDonald set aside an award on the merits and its corresponding costs award after determining that the costs award involved a breach of procedural fairness stemming from how the arbitrator determined costs. Recognizing that arbitral tribunals have “extended leeway” to determine their own procedure under section 20 of the Arbitration Act, RSA 2000, c A-43 in order to “ensure, in part, a workable ‘fit’ to address both the needs of the parties before them and the specific issues in play”, Hunt McDonald J. observed that such leeway “does not provide the ability to disregard the rules of natural justice”. Due to “a flood” or “onslaught” of submissions by A following the award on the merits, the arbitrator acknowledged significant inconsistencies involving how he calculated certain inputs “going to the very heart of the contractual dispute” and decided that procedurally their revisions would only be accounted for as an offset to the costs award. In doing so, Hunt McDonald J. held that the arbitrator constructed a process procedurally unfair to A and his costs methodology bestowed a relative advantage upon R to the detriment of A.
Applicant and Respondent entered into a September 2, 2015 Purchase-Sale Agreement and Agreement for Services (“Services Contract”) by which Applicant enabled Respondent to complete his acquisition of specific tractor and accessories (“Equipment”) upon completion of specific construction services by Respondent for Applicant.
Respondent had initially advanced a deposit through or by his wholly-owned corporation Daytona Ventures Inc. to purchase the Equipment, Respondent sought financing from Applicant to complete the payment. Rather than loan or otherwise provide that amount to or on behalf of Respondent, Applicant undertook to purchase the Equipment and, under the terms of the Services Contract, transfer title once Respondent had provided adequate services or payment equivalent to satisfy the Services Contract.
The Services Contract stipulated the type of services, the average minimum hours per week, the hourly rate and overtime rate, the completion of supporting time sheets and the rate of interest charged on the outstanding amount owing less the value of accumulated services. The Services Contract further stipulated the locations at which Respondent would perform the services and completion dates.
Subsequent to the Services Agreement, Applicant and Respondent negotiated a second, similar arrangement by which Applicant undertook to transfer title of a truck (“Truck”) to Respondent in exchange for Respondent’s provision of services valued to retire the truck’s value.
By the Spring of 2018 disputes arose. Respondent asserted he had paid of the Truck and provided sufficient work to have title in the Equipment transferred to him. Respondent offered to complete the transfer of the Equipment by making an additional payment of $4,000.00 to Applicant. Applicant disagreed that Respondent had fully performed the Services Contract. Applicant issued a notice of default under the Services Contract, reported to the insurer of the Equipment that it was missing, placed a lien on the Equipment and instituted an action for replevin. Hunt McDonald J. commented that the November 28, 2018 service of the replevin order on Respondent led to “various legal proceedings”. Applicant also attempted to have the Equipment seized by bailiff.
The Services Contract provided for arbitration before a specific arbitrator, a lawyer, named in the Services Contract. By December 10, 2018 court order, confirmed May 14, 2019, the court ordered that the parties engage in arbitration. Hunt McDonald J. recorded that, because the named lawyer “was in a conflict position”, Applicant and Respondent agreed to have their dispute heard by another professional which they identified and jointly nominated. Hunt McDonald J. noted that the new arbitrator “an engineer and Chartered Arbitrator and is not a lawyer”.
Applicant and Respondent entered into a June 3, 2019 arbitration agreement (“Arbitration Agreement”) which provided, among other things, for interim awards, “dealing with and awarding costs” and that the award will be final and binding on the parties. The Arbitration Agreement made no mention of appeal rights.
The arbitration hearing proceeded on July 17, 2019 with each party represented by counsel. The arbitrator issued two (2) awards: a September 18, 2019 award (“Initial Award”) and a January 12, 2020 award (“Costs Award”). Hunt McDonald J. at paras 15-25 outlined the arbitrator’s findings in the Initial Award and at paras 33-36 the arbitrator’s findings in the Costs Award.
Initial Award – In his Initial Award, the arbitrator concluded that, based upon his calculations, Respondent had fully paid for the Equipment and the Truck and, due to an overpayment, Applicant owed Respondent $3,885.86. The arbitrator added that, even if Applicant’s calculations were accepted, Respondent’s offer of $4,000.00 to settle the matter would have met Respondent’s obligations.
The arbitrator then addressed costs.
“ Finally, the Arbitrator looked at the [Applicant]’s actions following the termination of the contract by [Respondent]. He found that [Applicant]’s choice of pursuing replevin as opposed to the required arbitration resulted in a series of other actions over the next year which proved to be “time consuming, delaying and costly” (para 169). He concluded that the costs associated with this “unnecessary” action arose directly from the Services Agreement and therefore needed to be “more specifically defined and considered for purposes of awarding costs” given that the Services Agreement expressly provided that “the costs of any adjudication” were to be borne by the unsuccessful party (paras 172 and 173). The Arbitrator then went on to examine the types of costs sought. Of note, each party claimed not only legal expenses as costs, but also compensatory costs for personal loss of time, punitive damages based upon allegations of misconduct and more. The Arbitrator thus concluded, at para 178 that:
It is my interpretation that the [Services Agreement] provides only for ‘adjudication’ costs, meaning costs of arbitration; it did not foresee other actions. However, the intent was for full indemnity to the Party suffering damages. This is consistent with the Parties suggested remedies noted above.
 In sum, after reserving jurisdiction for the purpose of awarding costs, the Arbitrator ordered the following award as ‘final and binding’ on the parties (para 186): (i) [Applicant] is to immediately execute an unencumbered bill of sale for the Equipment in favour of [Respondent]; (ii) [Applicant] is to pay [Respondent] $3,885.86 representing the overpayment on the Truck purchase, plus interest, for a total of $4,250.85; (iii) [Applicant] is to pay ‘costs’ to [Respondent] on a full indemnity basis, to be determined following submissions for costs by [Respondent] personally and on behalf of Daytona if applicable. The parties were directed to “follow the process for submission and review of the costs claim and the guidelines with respect to content and format of the claims that are outlined in Schedule C (of Alberta’s Rules of Court)””.
Correspondence between Initial Award and Costs Award – In between those Hunt McDonald J.’s sections outlining the Initial Award and the Costs Award, Hunt McDonald J. at paras 26-32 set out an exchange of correspondence which followed the release of the Initial Award. Hunt McDonald J. referred to the exchange as “a flood of correspondence” which issued “chiefly” from Applicant’s former counsel, not the counsel before her on the application leading to her reasons. She noted that “[m]any of the points contained therein inappropriately attempted to reargue factual matters upon which [Applicant] had initially been unsuccessful”.
Hunt McDonald J. noted that section 43(1) of the Arbitration Act, RSA 2000, c A-43 permits the arbitrator, with or without a party’s application to correct typos, calculation errors and “similar errors”. “Its purpose is not to permit dissatisfied parties to relitigate matters fully argued on the evidence before the arbitrator which did not go their way at first instance”.
The arbitrator rejected the invitation to reconsider factual findings made in the Initial Award but accept submissions from both parties dealing with costs and damages. The arbitrator issued a “stay” of certain aspects of his Initial Award and “noted certain “inconsistencies” which needed to be addressed with respect to costs”. The parties and the arbitrator exchanged on “revised calculations” and the “need to ‘refine’ the calculations”. In those exchanges prior to the Costs Award, and in regard to partially lifting the stay he had issued, the arbitrator mentioned the following.
“ … there is a need to ‘refine’ the calculations to ensure they properly adhere to the [Services Contract], that work credits, pay outs, adjustments etc., are fully and correctly accounted for so that any ‘cost’ imbalances can be appropriately considered within the ongoing proceedings with respect to costs … Although at first sight, this may appear as a step backwards, I believe it is required for procedural fairness”.
Hunt McDonald J. records the various exchanges, noting the arbitrator’s use of various terms such as “offset costs”, “refinement of calculations”, “transactional costs”, “traditional costs” and “arbitration costs”. For example, the arbitrator discussed “offset costs” in the following manner:
“… the process for refining calculations for determining offset costs will be referred to as ‘refined calculations’ to distinguish this from the ‘arbitration costs’ which have been awarded to Party A [Respondent] and are currently the focus of this Arbitration. My reasons for this are:
a. I am aware that these ‘offset costs’ are transactional and are different from the arbitration costs that were awarded to Party A. the need for refining the transactional costs and for including these in the final costs award arises from [sic] nature of evidence and of the ‘calculations’ (contradictions, complexity) difference choices of calculation model and choices in adjustments”.
Costs Award – The Costs Award contained two (2) parts: “Part one of the award deals with what the Arbitrator defined as ‘offset costs’, and part two deals with traditional costs, as well as “compensation for costs associated with compensatory damages and punitive damages””.
At para. 33, (a) to (d), Hunt McDonald J. sets out the categories of determinations made by the arbitrator in the Costs Award.
Applications to set aside – Applicant applied on October 10, 2019 to set aside the Initial Award and seeking leave to appeal. Applicant applied on February 6, 2020 to set aside the Costs Award. Despite the mention of “seeking leave to appeal” at para. 37 of her reasons, Hunt McDonald J. noted that leave was not actually pleaded.
“ This matter was argued before me on February 28 and August 17 of 2020 (with a rescheduling required due to the Covid-19 pandemic). The matter was argued as an application to set aside both the Initial Award and the Costs Award pursuant to s 45 of the Arbitration Act. Leave to appeal was not sought or argued, nor is a right of appeal provided in the Agreement. There was no mention of an appeal under s 44 of the Arbitration Act in the Applicant’s written submissions”.
At paras 39-41, Hunt McDonald J. summed up the “crux” of Applicant’s challenges. Applicant submitted that the process followed by the arbitrator was procedurally unfair because the arbitrator in his Initial Award had initially determined that Applicant breached the Services Contract but in his Costs Award held that Respondent owed Applicant. Applicant argued that the arbitrator breached the procedure set out in British Columbia (Minister of Forests) v. Okanagan Indian Band, 2003 SCC 71 (CanLII),  3 SCR 371 when “rather than revisit and recalculate the award based upon the revised figures, which would result in ultimately reversing the fundamental findings as to breach in his Initial Award, the Arbitrator only considered the ‘refined’ calculations in determining costs”.
Section 45 – Hunt McDonald J. identified the differing approaches authorized by sections 44 and 45 of the Arbitration Act, noting that Applicant invoked only sections 45(1)(f) and 45(1)(h). Hunt McDonald J. commented that the parties had not provided for an appeal in their Arbitration Agreement and that Applicant did not seek leave to argue a question of law.
Manifestly unfair and unequal treatment – Hunt McDonald J. referred to varying statements of the duty of procedural fairness and its contents, sourced from a number of cases listed at paras 47-49, 51, 54 and 61-62, including Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65. Those references allowed Hunt McDonald J. to identify certain key aspects of the duty recognized at section 19 of the Arbitration Act such as: where a duty of procedural fairness arises, the procedural requirements imposed by that duty are to be determined with regard to the context of the case; the presumption of reasonableness does not apply to issues involving a breach of natural justice or the duty of procedural fairness; and, allegations of bias engage considerations of fairness and natural justice.
“The case at bar is somewhat atypical in that the Applicant was not, in a technical sense, denied an ability to make his case or otherwise be heard by the Arbitrator, nor did the Arbitrator fail to receive relevant and material evidence or take evidence into consideration. Both sides were permitted the opportunity to effectively challenge the case of the opposite party. Indeed, it appears that both parties received a full, fair and exhaustive hearing before the Arbitrator. Rather, the Applicant alleges that the Arbitrator’s process of accounting for calculation refinements as an offset to the Costs Award as opposed to correcting the Initial Award constitutes a fundamental unfairness.”.
Hunt McDonald J. disagreed with Applicant’s argument that the arbitrator had improperly sequenced his determination of costs. She held that the arbitrator had addressed costs after having made a finding on the merits and did not breach the procedure set out in British Columbia (Minister of Forests) v. Okanagan Indian Band, 2003 SCC 71 (CanLII),  3 SCR 371.
Hunt McDonald J. did accept that, following correspondence on October 4, 2019 from Applicant’s counsel, the costs determination process became “convoluted”. She noted that the arbitrator acknowledged “significant errors” in the initial calculations which resulted in determining that Respondent had prevailed in the Initial Award and Respondent’s “consequent ability to claim related costs”.
“Notwithstanding this acknowledgement, the Arbitrator proceeds on the basis that the ‘refined’ figures, although transactional in nature, may only be assessed as against the outstanding costs claim. This, I agree, goes against the intent of a costs award which in general is meant to provide (in part) indemnification for the successful party to a legal dispute: see 321665 Alberta Ltd v Mobil Oil Canada Ltd, 2013 ABCA 326 paras 21-24”.
Though readily acknowledging that arbitral tribunals can determine their own procedure under section 20 of the Arbitration Act, have “extended leeway” to “ensure, in part, a workable ‘fit’ to address both the needs of the parties before them and the specific issues in play”, that leeway “does not provide the ability to disregard the rules of natural justice”.
“ In my view, in stating that the refined calculations demonstrated significant inconsistencies in relation to how the credits were calculated (with such credits going to the very heart of the contractual dispute between the parties), yet in deciding that procedurally these revisions would only be accounted for as an offset to the costs award, the Arbitrator constructed a process which was procedurally unfair to [Applicant]. That is, his methodology utilized a procedure that bestowed a relative advantage upon Rick to the detriment of the Applicant”.
Hunt McDonald J. noted that the Arbitration Act required “more than just a demonstration of unfairness” and that it be “manifest”. She accepted that the “idea of ‘compromising’ some level of procedural fairness in exchange for increased efficiency and finality of resolution is a well-established one” but the trade off had limits.
Hunt McDonald J. determined that the record justified an order under section 45(f) setting aside the Initial Award and the Costs Award.
“ The question of work credits provided and payments made pursuant to the Services Agreement was the central issue in dispute between the parties and almost singularly informed on the issue of which party was in breach. To adopt a procedure whereby evidence on this point would not go to the merits of the decision is manifestly unfair and unequal. While I realize that this ‘subsequent procedure’ was only mandated by the Arbitrator in response to the prolific onslaught of correspondence following the Initial Award, this does not alter the fact that the prescribed process resulted in a manifest injustice”.
Remedy – At paras 73-77, Hunt McDonald J. noted the scope of remedies available under section 45(7) of the Arbitration Act. Relying on Flock v. Flock, 2007 ABQB 307 paras 65-69 and 70 (leave to appeal denied Flock v. Flock, 2007 ABCA 287), Hunt McDonald J. agreed that a de novo hearing before a new arbitrator was appropriate. In so ordering, she urged the parties to select an arbitrator skilled in accounting. “If possible, given the starkly contradictory calculation methodologies used by each party, I would strongly encourage the parties to agree upon an arbitrator with a background in accounting or the like”.
Hunt McDonald J. also dismissed Applicant’s attempt to set aside the Initial Award and the Costs Awards on the basis of Applicant’s allegations of bias based on the arbitrator’s approach to costs calculation. See paras 67-72.
urbitral notes – First, the parties had agreed initially that a specific lawyer serve as arbitrator but he was conflicted out when the dispute arose. Having viewed the actual dispute argued before her, Hunt McDonald J. urged the parties to source an arbitrator with experience in the dispute, namely accounting.
Second, for decisions in which the parties undertake arbitration before an arbitrator having a pre-determined area of skill, namely medical, but subject to nomination conditional on having actual expertise in the medical condition in issue, see the following two (2) earlier Arbitration Matters notes.
“Québec – no second opinion on issue determined by award issued by physician arbitrator – #408” In Rivain v. La Capitale assureur de l’administration publique Inc. (La Capitale, assurances et services financiers), 2020 QCCS 3936, Mr. Justice Christian Immer declined to order parties to re-arbitrate an issue determined by a physician arbitrator under an insurance policy. That policy submitted medical disputes to arbitration before a physician and subjected awards to the typical three (3) post-award options available to arbitral parties: compliance, homologation, annulment. Immer J. did determine that the policy anticipated a 4th option, namely a subsequent arbitration before another medical specialist if the 1st arbitrator determined that the medical dispute fell within that other medical speciality. Immer J. also noted that, despite the complexity of the facts, a court was better placed to determine the jurisdictional issue, rather than defer to a first determination by the arbitrator, as the request to refer the parties to arbitration raised principally a question of law.
“Québec – arbitrator has jurisdiction/obligation to decide recusal even absent express grant of authority to do so – #451” In Syndicat des employés du CISSSMO, section locale 3247 v. Murray, 2021 QCCS 459, Madam Justice Suzanne Courchesne annulled an award rendered by a physician arbitrator appointed by a third party pursuant to a process set out in the parties’ agreement to arbitrate but who, despite demands to recuse himself, issued a decision on the merits of the dispute without addressing the demands for recusal. The parties’ agreement omitted any express mention of the physician arbitrator’s authority to recuse himself or any grant of such authority to another. Courchesne J. observed that the physician arbitrator, performing a quasi-judicial function, was subject to the impartiality and independence obligation and rules of procedural fairness and had both the jurisdiction and obligation to decide first on the grounds of his recusal. Courchesne J. held that the parties ought to have instructed the physician arbitrator on the rules governing a motion for recusal but did not. Despite that omission, by refusing to decide on the motion for recusal or by implicitly dismissing it without reasons, the physician arbitrator omitted to exercise his jurisdiction and breached the rules of procedural fairness. Courchesne J. annulled the award and ordered the parties to resume the arbitration before another physician arbitrator.