Ontario – court opts for practical solution by appointing existing arbitrator to hear additional dispute – #126

Mr. Justice Glenn A. Hainey in Sears Canada Inc., et al. (Re), 2018 ONSC 5852 ordered that a purchase price dispute between two parties regarding commercial property be resolved by an arbitrator already appointed by the court under the Companies’ Creditors Arrangement Act, RSC 1985, c C-36 (“CCAA”) to resolve two other disputes between the same parties for the same property. Hainey J. gave effect to the parties’ agreement which anticipated that some of their disputes would serve to offset the cash amount determined for the purchase price dispute. Without mention of any arbitration legislation and relying on the parties’ contract and the court’s authority under the CCAA’s section 11 to “make any order that it considers appropriate in the circumstances”, Hainey J. appointed the existing arbitrator to resolve all three (3) disputes because doing so avoided the additional cost and delay of a “piecemeal fashion”.

In the context of proceedings under the CCAA involving Sears Canada Inc. (“Sears”), Oxford Properties Group (“Oxford”) and Sears disputed the purchase price of commercial property (the “Newmarket Property”) covered by an option agreement entered into between Oxford and Sears (“Option Agreement”) 20+ years before Sears became subject to the CCAA.

The Option Agreement gave Oxford the option to purchase the Newmarket Property, which it exercised leading to a binding agreement. That agreement provided that Oxford would pay and Sears would accept a purchase price equal to the “Current Value” established at section 1(g) of the Option Agreement. The issued before Hainey J. stemmed from a provision in the Option Agreement that provided that, at the closing of the sale, all amounts due by Sears to Oxford or by Oxford to Sears in relation to the Newmarket Property “shall be settled and set-off or paid in full”. Those sums were not about the Current Value but appeared to be an attempt by the parties to tidy up the exchange of sums owing at that moment by/to either party.

In the CCAA proceedings, Oxford had submitted a March 2, 2018 proof of claim regarding the Newmarket Property (“Oxford Claims”) which the CCAA Monitor rejected July 27, 2018. The Oxford Claims comprised two (2) amounts:

(a) $1,821,178 in respect of alleged site work and repair costs pursuant to an operating agreement, approximately $1.77 million of which relates to projected parking lot repairs; and,
(b) $5,596,026 in respect of the present value of alleged lost annual common area maintenance and promotion fund contributions under that operating agreement.

Those amounts concern the Newmarket Property but arise under the operating agreement and not the Option Agreement.  In that way, the disputes arise under separate contracts but between the same parties.

Oxford responding by filing a Notice of Dispute for approximately the sum of those two amounts and Hainey J. noted that he had earlier submitted them to one arbitrator pursuant to an earlier CCAA procedural order for claims.

The purchase price owing by Sears to Oxford would be affected by the adjustment, if any, generated by the Oxford Claims.

The Option Agreement had a tiered process for determining the Current Value of the Newmarket Property requiring first negotiation, then valuation by appraisers and then arbitration. The arbitration would occur if the parties’ valuations differed by more than five (5) percent, which was the case.

Though the arbitration agreement was not reproduced, Hainey J. commented that it stipulated that the arbitrator must render his/her decision within 20 days of his/her appointment and that the decision is final and binding on Sears and Oxford and cannot be appealed.

Perhaps motivated by the short-tail period for issuing an award and/or that the Current Value was distinct from the Oxford Claims, Oxford applied to have a second arbitrator appointed to determine the Current Value. Hainey J. declared that he was satisfied that Oxford’s arbitrator “is qualified and appropriate to act as arbitrator, that he has subject matter expertise and no connection to the matter to be arbitrated and that his appointment would be consistent with the wording of the Option Agreement. He is a highly regarded arbitrator.

In contrast, Sears sought to have the Current Value dispute decided by the arbitrator already named earlier for the Oxford Claims.

It is clear that both disputes – the Current Value and the Oxford Claims – stemmed from the same contract between the same parties. It is unclear but arguable that both disputes were separate disputes but “interrelated”. Hainey J. favoured a practical solution, shunning what he characterized as deciding the two disputes in “piecemeal fashion” and resulting in additional cost and delay. “The dual-track proceeding proposed by Oxford will result in the additional expense of preparing for and participating in two separate proceedings related to the same property. This will not be efficient or cost-effective.

Influenced by the context of the CCAA, Hainey J. referred specifically to the support given by employees, pensioners and the CCAA Monitor to Sears’ application to have the Current Value dispute added to the tasks given to the arbitrator already appointed for the Oxford Claims.
He rejected Oxford’s argument that, by appointing an arbitrator, he would be “re-writing the Option Agreement”. He pointed to section 12(d)(ii) which allowed him to appoint an arbitrator in the absence of agreement on his or her identity.

His reasons made no mention of either Ontario’s Arbitration Act, 1991, SO 1991, c 17 or its International Commercial Arbitration Act, 2017, SO 2017, c 2, Sch 5 or related case law. (Presumably, on the few facts provided and given the nature of the dispute, the Arbitration Act would have applied, absent other information suggesting that the ICAA would prevail). The reasons do not disclose whether any of the parties had raised the application of either statute.

The reasons identify the Current Value and the Oxford Claims as parts of a single solution anticipated by the parties’ agreement under the Option Agreement: how much to pay at the close of the sale. Though the Current Value was a distinct dispute and was to be determined by an arbitrator, the parties had expressly provided that payment of the Current Value could be affected by a possible offset by other sums owing. It is arguable that, at the time they entered into the Option Agreement, Oxford and Sears knew that any future offset would stem from a different dispute between the parties provided the dispute(s) stemmed from the Newmarket Property. That wording allowed Hainey J. to conclude that he could and should appoint one arbitrator to hear all three disputes even though one party resisted that solution. “In my view, this will be the quickest and most cost-effective way to determine the amount of cash to be paid on the closing of this transaction.

The reasons treat the three disputes as separate though “interrelated“.   The reasons do not treat the competing requests (or the court’s solution) as either enlarging the scope of the initial arbitration or collapsing the initial arbitration into the second one.  Also, the reasons do not address if the court was handling a request to consolidate.

Had the parties been involved in separate disputes subject to arbitration, and absent their agreement to operate an offset at the close of the sale of the Newmarket Property, the court might have had to consider the provisions of section 8 of the Arbitration Act (or even section 8 of ICAA) which address consolidation in limited circumstances.

(a) Arbitration Act’s section 8(4) “More than one arbitration”, 8(5) or 8(6).

8(4) On the application of all the parties to more than one arbitration the court may order, on such terms as are just,
(a) that the arbitrations be consolidated;
(b) that the arbitrations be conducted simultaneously or consecutively; or
(c) that any of the arbitrations be stayed until any of the others are completed.
(5) When the court orders that arbitrations be consolidated, it may appoint an arbitral tribunal for the consolidated arbitration; if all the parties agree as to the choice of arbitral tribunal, the court shall appoint it.
(6) Subsection (4) does not prevent the parties to more than one arbitration from agreeing to consolidate the arbitrations and doing everything necessary to effect the consolidation.

(b) ICAA’s section 8 “Enforcement of consolidation agreements

8 (1) If all parties to two or more arbitral proceedings have agreed to consolidate those proceedings, a party, with notice to the others, may apply to the Superior Court of Justice for an order that the proceedings be consolidated as agreed to by the parties.
(2) Subsection (1) does not prohibit parties from consolidating arbitral proceedings without a court order.
(3) On an application under subsection (1), if all parties to the arbitral proceedings have agreed to consolidate the proceedings but have not agreed, through the adoption of procedural rules or otherwise, to the following matters, the court may, subject to subsection (4), make an order deciding either or both of those matters:
1. The designation of parties as claimants or respondents or a method for making those designations.
2. The method for determining the composition of the arbitral tribunal.
(4) If the arbitral proceedings are under different arbitration agreements, no order shall be made under subsection (1) unless, by their arbitration agreements or otherwise, the parties have agreed,
(a) to the same place of arbitration or a method for determining a single place of arbitration for the consolidated proceeding within Ontario;
(b) to the same procedural rules or a method for determining a single set of procedural rules for the conduct of the consolidated proceedings; and
(c) either to have the consolidated proceedings administered by the same arbitral institution or to have the consolidated proceedings not be administered by any arbitral institution.
(5) In making an order under this section, the court may have regard to any circumstances that it considers relevant, including whether,
(a) one or more arbitrators have been appointed in one or more of the arbitral proceedings;
(b) the applicant delayed applying for the order; or
(c) any material prejudice to any of the parties or any injustice may result from making an order.