What happens when an arbitrator refuses to implement a court’s binding directions? Unsurprisingly, in Eyelet Investment Corp v. Song, Ontario’s Divisional Court held that the arbitrator was wrong in his refusal and ordered that a new arbitrator hear the arbitration. This decision clarifies the interaction and hierarchy between Ontario’s courts and arbitral tribunals. It also reminds us that, simply put, arbitrators are duty-bound to follow court directions, even if they disagree with the logic behind these directions.
The Initial Award
The underlying dispute arose from several failed real estate transactions between a builder, Eyelet Investment Corp., and certain buyers. The buyers allegedly put down deposits to buy homes from the builder but later advised the builder that they did not intend to close their purchases. In turn, the builder kept the buyers’ deposits and sold the houses to others at a loss. Then, the builder initiated arbitration against the buyers to recover the remaining losses the builder claims to have incurred.[1]
The arbitration was in two parts, and the first part only dealt with liability. In his initial award on liability, the arbitrator found that the buyers were not liable because they were entitled to refuse to complete their purchases.[2] The arbitrator relied on his finding that the builder had not checked the “yes” or “no” boxes in the sales agreements indicating whether these agreements were subject to early termination provisions. The arbitrator held that this omission, no matter how immaterial, allowed the buyers to walk away from the sales agreements.[3]
The Initial Award Set Aside
The builder successfully appealed the initial award with Ontario’s Superior Court.[4] Justice O’Brien found that the builder’s failure to tick “yes” or “no” was immaterial and had “no meaningful effect on any [buyers] or their rights”.[5] Therefore, the buyers had no right to terminate the sales agreements. Justice O’Brien then set aside the arbitrator’s initial award, held that the buyers were liable, and referred the case back to the arbitrator to assess the builder’s damages.[6]
Arbitrator Allegedly Ignores the Court’s Directions
The arbitrator allegedly refused to implement Justice O’Brien’s directions. In his subsequent award on damages and costs, the arbitrator stated that “the fact that [Justice O’Brien’s decision] is binding on the parties concerned does not mean that it is binding on the tribunal”.[7]
The arbitrator was also unconvinced by Justice O’Brien’s finding that the buyers had breached the sales agreements.[8] In light of this, the arbitrator held that “each [party] shall be held responsible for its own fair share of damages that [the builder] claims to have suffered”, as it would be “unfair to order the [buyers] to pay for any other damages caused not exclusively by the [buyers]”.[9]
Notably, the arbitrator issued his subsequent award two weeks before the buyers were due to deliver their submissions.[10]
The Subsequent Award Set Aside
The Divisional Court set aside the arbitrator’s subsequent award and ordered that a different arbitrator hear the issue of the builder’s damages.[11] In particular, the following comments by the Divisional Court are noteworthy:
- The arbitrator’s initial findings were “wrong in law”, and Justice O’Brien was “empowered, entitled, and duty-bound to say so”.[12]
- The arbitrator had committed a “fundamental error of law” by refusing to acknowledge that Justice O’Brien’s directions were binding on him.[13] It is consistent with section 45(5) of the Arbitration Act and common sense that the “court’s directions…bind the arbitrator as they bind the parties”.[14]
- The arbitrator’s subsequent decision that each party should bear their “fair share” of damages is an error of law. The arbitrator held that the builder committed a “contributory breach of contract” by failing to tick the correct box in the sales agreements. However, there is no such thing as a “contributory breach of contract”.[15] It was a “legal fiction” created by the arbitrator.[16]
Lastly, the arbitrator had “denied both parties the right to adduce evidence” by releasing his subsequent award before the buyers delivered their submissions.[17]
Conclusion
The Song decision reinforces the longstanding principle that arbitrators, like judges, must follow the law of the land. It also confirms the hierarchy established by Ontario’s Arbitration Act: once a court issues any orders or directions regarding an arbitrator’s award, these are binding on the arbitrator. Lastly, this decision should bring confidence to the growing number of parties who rely on arbitration for dispute resolution. It demonstrates that when arbitral proceedings go awry, the courts are ready and willing to intervene to steer the arbitration back on track.
[1] Eyelet Investment Corp. v. Song, 2024 ONSC 2340 (“Song”), paras. 3-4.
[2] Song, paras. 7-8.
[4] Eyelet Investment Corp. v. Song, 2019 ONSC 5910.
[7] Song, para. 28. Emphasis added.
[15] Song, paras. 40-41.
