First appeal of an arbitration award under section 59 of British Columbia’s new Arbitration Act

Overview

In Escape 101 Ventures Inc. v. March of Dimes Canada, 2022 BCCA 294, the British Columbia Court of Appeal (BCCA) held that a material misapprehension of evidence that is central to the reasoning process underlying an arbitral award is an extricable question of law under section 59(2) of the Arbitration Act, S.B.C. 2020, c. 2. Further, an error of law does not have to be apparent on the face of (or within the four corners of) an arbitrator’s award, and the reviewing court is entitled to look beyond an arbitrator’s award and reasons.

The decision reflects that factual issues involving misapprehension of evidence may give rise to an appeal of an arbitral award on a question of law. Absent a compelling indication that the arbitrator made an error of law that was central to their underlying reasoning, however, courts are reluctant to interfere with an arbitral award. It should be noted that this was the first appeal of an award under the Arbitration Act which came into force in September 2020. The BCCA’s judgment will form the basis for the development of future jurisprudence on this topic.^[1]

Background

In April 2017, the appellant (Escape 101 Ventures Inc.) and the respondent (March of Dimes Canada) signed an agreement under which the appellant sold its employment assistance and community counselling services business to the respondent (the Agreement). The purchase price under the Agreement included an “earnout” clause worth up to $1.1 million, which provided that the respondent would pay the appellant a percentage of some revenues earned from the business over five years. The Agreement did not address whether new contracts generated by the business during the five-year period would be excluded for the purposes of the earnout calculation. In 2018, the respondent won a bid for a new contract (the Contract). The Contract came into effect in April 2019. The respondent did not reflect the revenue earned under the Contract in the earnout calculations required under the Agreement. The appellant disputed the respondent’s approach and commenced arbitration.

The arbitration proceeded by way of a virtual hearing. In April 2021, an award was rendered in favour of the respondent. The arbitrator found that the appellant failed to object to the non-disclosure of revenues generated from the Contract until May 2019, and that this post-contractual conduct constituted an informed acceptance by the appellant that the Contract would not be included in the earnout calculations under the Agreement. However, the evidentiary record showed that there was no revenue generated from the Contract prior to April 2019 and no basis for the appellant to object until it became aware of the non-disclosure in July 2019. It was clear that the arbitrator had misapprehended the evidence before him.

In May 2021, the appellant applied to the BCCA for leave to appeal the arbitrator’s award under section 59 of the Arbitration Act. The BCCA granted leave in August 2021, primarily on the basis that the arbitrator may have misapprehended the evidence before him in a way that affected the award in a material way.

Principles applicable to appeal of arbitral award on question of law

Before dealing with the issues on appeal, the BCCA set out a summary of the principles that apply to its jurisdiction to review arbitral awards pursuant to section 59 of the Arbitration Act, as follows:

• Appellate review of arbitral awards is limited to “extricable questions” of law.^[2] Even where an extricable question of law exists, an award generally attracts the deferential “reasonableness” standard of review in order to recognize the finality of awards and advance the aims of arbitration.
• Questions of interpretation of contracts, including in the arbitration context, generally give rise to questions of mixed fact and law, and not to extricable questions of law. Courts should exercise caution in identifying extricable questions of law.^[3] One relevant factor in deciding whether the interpretation of a contract is a question of law, or a question of mixed fact and law, is whether the interpretation has precedential value. However, the BCCA considered these principles to be of limited relevance in the context of the case because the narrow issue on appeal, in the Court’s view, did not engage a question of interpretation of the Agreement.
• A “misapprehension of evidence” that is palpable and overriding so as to go to the core of the outcome of the case is an extricable error of law. This may refer to a failure to consider evidence relevant to a material issue, a mistake as to the substance of the evidence, or a failure to give proper effect to the evidence. Demonstrating a misapprehension of evidence is a high standard for the appellant.

Issues on appeal

With respect to the appellant’s contention that the arbitrator had misapprehended the evidence before him, the respondent raised three issues which are analyzed in turn below.

Jurisdiction

First, the respondent argued that the Arbitration Act, as compared to its predecessors, has narrowed the right to appeal an arbitral award. In this regard, the respondent also suggested that the BCCA lacks jurisdiction to set aside the award because a misapprehension of evidence is not an extricable question of law under section 59 of the Arbitration Act.

The BCCA reviewed the evolution of section 59 of the Arbitration Act (including the 1982 Law Reform Commission of British Columbia Report on Arbitration which formed the basis for the inclusion of a right of appeal on questions of law in the former Commercial Arbitration Act, S.B.C. 1986, c. 3) and found that there is no basis to suggest that a party’s already narrow rights to appeal an award have been further restricted by the Arbitration Act.

In respect of jurisdiction, the BCCA noted that under section 59(2) and (3) of the Arbitration Act, an appeal may be brought “… on any question of law arising out of an arbitral award” (BCCA’s emphasis) and held that where an appellant raises a question of law, there is no basis to further limit the appellant’s right of appeal. Accordingly, the BCCA rejected the respondent’s suggestion that it lacked jurisdiction to hear an appeal based on misapprehension of evidence.

Error of law

Second, the respondent argued that an error of law has to be apparent on the face of, or within the four corners of, an arbitrator’s award. This issue was relevant because it was not completely clear from the arbitration award itself whether the arbitrator had misapprehended the evidence. However, this was clear from the evidentiary record in the arbitration.

The BCCA noted that under section 59(2) and (3) of the Arbitration Act, an appeal may be brought on any question of law “arising out of an arbitral award” (BCCA’s emphasis). The Court referred to its existing jurisprudence^[4] and the Law Reform Commission of British Columbia Report on Arbitration and said that where there is an extricable question of law, a court is entitled to look beyond an arbitrator’s award and reasons to determine whether the evidence was misapprehended. On this basis, the BCCA rejected the respondent’s argument that an error of law has to be apparent on the face of the award.

Standard of review

Third, the respondent argued that, despite the alleged extricable error of law, the BCCA should uphold the award applying the reasonableness standard of review.

The BCCA declined to deal with the question of whether commercial arbitration awards subject to a statutory right of appeal should be reviewed on a reasonableness or correctness standard because the parties to the appeal did not address it and the application of a reasonableness standard could not have upheld the award. Given the arbitrator had misapprehended the evidence before him and that misapprehension was central to his reasoning process, the BCCA did not find any basis to conclude that the award was reasonable.

The respondent also sought to rely on additional facts in the record which it argued could have led the arbitrator to the same conclusion as in the award. However, the arbitrator had failed to record the arbitration hearing and the additional facts, and a transcript of the hearing was not available for the Court’s review.

Accordingly, the BCCA dismissed the appeal. The appellant asked the BCCA to decide the issue that was before the arbitrator, but the Court said that it lacked the evidentiary foundation necessary to do so and remitted the matter to the arbitrator for reconsideration.

Takeaways

The decision reflects that factual issues involving misapprehension of evidence may give rise to an appeal of an arbitral award on a question of law. However, absent a compelling indication that an arbitrator made an error of law that was central to their underlying reasoning, courts are reluctant to interfere with an arbitral award. Parties seeking finality may draft their arbitration agreements to exclude appeals on any question of law arising out of an arbitral award.