Ontario – final award remitted to arbitrator to rework one term in order to not affect third party – #074

In Bedard v. Bedard, 2018 ONSC 2220, Mr. Justice David G. Stinson resolved a less common issue of jurisdiction involving dispositive terms of a final award having an impact on a non-party to the arbitration, albeit wholly-controlled by one of the arbitration parties.  Stinson J. exercised his authority under section 45(5) of Ontario’s Arbitration Act, 1991 S.O.1991, c. 17 to remit the award to the arbitrator, accompanied by specific directions regarding how to finesse the terms to affect only parties to the arbitration and that such additional work for the arbitrator be subject to prior discussions between the parties on draft language.

Stinson J.’s order stemmed from two procedural initiatives taken by the parties to an arbitration: an appeal brought by Mr. Richard D. Bedard and Richard Bedard Family (2001) Trust (referred to in the reasons as the “Ric” and “Ric parties”) under section 45 of the Arbitration Act; and, a cross-application by Ms. Hilda R. Bedard, Mr. Delano E. Bedard and Thorncrest Management Ltd.  (referred to in the reasons as the “Del” and “Del parties”) under section 50 for the Arbitration Act for enforcement.

Ric and Del were party to an arbitration agreement.  Over the course of that arbitration, which appeared to last “a period of years” and produced five interim and final awards.  The arbitration agreement expressly provided that any awards and directions issued in the arbitration would also bind two corporations controlled by Del, Actco Systems Inc. (“ASI”) and Cetaris Canada Inc. (“Cetaris”).  A third corporation, Cetairs Inc. (“Cetaris US”) was not a party to the agreement or, apparently, that stipulation by the parties.

The court’s involvement concerned one paragraph of Award No. 5 which issued April 12, 2017 in which the arbitrator directed that the profits of Cetaris US, payable ultimately to the Del parties under a 50/50 profit sharing agreement, be determined by the boards of directors of ASI and Cetaris Canada.

The Ric parties did not challenge any of the facts determined by the arbitrator or deny the close connection between Cetaris US and the Ric parties, including their control over Cetaris US.  Stinson J. asked specific questions to the Ric parties on these topics, the answers to which suggest that the arbitrator’s specific order was not an egregious straying beyond the limits but, rather, one step too far.  The Ric parties provided the following responses in answer to specific questions Stinson J. put to them:

a) Ric concedes and acknowledges that the 50/50 division of profits as found by the arbitrator is a binding determination of that issue that he does not and cannot challenge.

 b) Ric further concedes and acknowledges that the 50/50 division of profits extends to the profits of Cetaris US.

 c) Ric acknowledges that he controls Cetaris US and thus he is able to control the determination of its profits.

 d) In the event Ric conducts the affairs of Cetaris US in such a fashion as to undermine the rule that all profits are to be divided 50/50, Del could pursue a remedy against him for failure to comply with the previous determinations of the arbitrator.

Stinson J. cited Canadian Musical Reproduction Rights Agency Ltd. v. Canadian Recording Industry Assn. [2005] O.J. No. 6387 (S.C.J.) (at paras. 9 and 11) (no active online link available) to remind that an arbitrator has no inherent jurisdiction and an arbitration agreement cannot give the arbitrator jurisdiction over non-parties.

The parties’ arbitration agreement allowed them to apply to add non-parties to their arbitration.  This wording of this power presumably limited such parties to those over which either group had power.  Despite this power, the Ric parties did not apply to add Cetaris US to the arbitration.  Despite the caution in Canadian Musical Reproduction Rights Agency Ltd. v. Canadian Recording Industry Assn., the Ric parties had the power to compensate for such limitation.  They did not.

Stinson J. held that an arbitral award that purports to compel third parties to comply with the arbitration dispute resolution process is an excess of jurisdiction and an error in law.  He cited Rampton v. Eyre, [2006] O.J. No. 5222 (S.C.J.) (no active online link available), Pirner v. Pirner, 1997 CanLII 12165 (ONSC) and Machinists, Fitters and Helpers, Local 3 v. Victoria Machinery Depot Company Limited, 1960 CanLII 290 (BC CA).

The impact on Cetaris US was subtle but decisive:

[14]        Del further argues that the determination of profits for Cetaris US directed to be performed by ASI and Cetaris Canada is only “[f]or purposes of the 50/50 agreement” between Del and Ric. The problem with that submission is that, as a result of such determination, Cetaris US would be obliged to remit that sum to Del. Thus the result of the arbitration was to purport to bind or govern the affairs of a non-party.

 [15]        As mentioned above, Cetaris US was not a party to the arbitration agreement. Despite the fact that this issue was raised by Ric at the pleadings stage, Del took no steps to add Cetaris US as a party. Consistent with the authorities quoted above, Cetaris US cannot be bound by a decision made in an arbitration process to which it was not a party.

 [16]        Cetaris US is a distinct legal entity, separate and apart from its controlling shareholder, Ric. This was recognized by the arbitrator himself in Award No. 3 dated April 12, 2016, in which he commented (at para. 28) that he had “serious doubts that I possess the authority or jurisdiction in these proceedings to give effect to a corporate reorganization of Cetaris US, a Delaware corporation that is not a party to this arbitration.” In my respectful view, despite that concern, this is what the arbitrator went on to do in Award No. 5: he removed certain corporate authority from the board of directors of Cetaris US and assigned it to the board(s) of ASI and Cetaris Canada. In so doing, he “dispose[d] of the rights of non-parties to the arbitration” and thereby exceeded his jurisdiction.

Though the Ric parties were obliged to abide by all the other determinations made by the arbitrator in the award, paragraph 14 was set aside as an excess of jurisdiction.

Stinson J. allowed the appeal, in part, but continued on in order to determine how best to assist the parties to adhere to the undertaking to arbitrate.  Using his authority under section 45(5) to confirm, vary, set aside or remit the award back to the arbitrator with directions about the conduct of the arbitration, Stinson J. declined to redraft paragraph 14 himself.  Rather, he explained that the arbitrator had to “fashion a suitable directive” which Stinson J. stipulated achieve the following:

[21]  What the parties need to do is fashion a suitable directive to Ric to include in the formal judgment that will oblige him to (1) carry out fully the implementation of the 50/50 agreement to which he is bound; (2) cause the affairs of Cetaris US to be carried out in a fashion consistent with that obligation, including the timely determination of its profits consistent with the arbitrator’s conclusions, together with remittance of the funds owing; and (3) disclose fully and regularly to Del all information regarding Cetaris US that is required for Del to be satisfied that Ric is discharging his obligations properly.

Such terms ought to be discussed by the parties beforehand and Stinson J. ordered the parties to discuss and propose such wording to the parties.  “In this fashion a suitable and uncontestable directive can be incorporated into the arbitrator’s final formal judgment that will guide and govern the parties’ future conduct”.

He declined to grant or dismiss the Del parties’ cross-application to enforce the other portions of Award No. 5, determining that he remained available to do consider the cross-application at a later time if need be once the final award issued.

Stinson J.’s directions demonstrate supple but firm efforts to hold parties to the limits of their bargain.  Those directions underlined (a) that the bargain only binds the parties to it and (b) the arbitrator was best placed to finesse the wording of a result determined through the arbitral process, aided by the parties who went through it.