In recent years it has become increasingly common for commercial contracts to include arbitration clauses requiring disputes that arise under the contract to be resolved through arbitration rather than by recourse to the court process. Such clauses are also very prevalent in partnership agreements as they allow partners to resolve disputes in a relatively quick and efficient manner and in a less public forum than the courts.
Notwithstanding that the parties to such agreements have agreed to proceed by way of arbitration, under the B.C. Commercial Arbitration Act, R.S.B.C. 1996, c. 55 (the “CAA”), a party dissatisfied with the result of an arbitration may seek to appeal to the Supreme Court of British Columbia in certain limited circumstances. Specifically, under section 31 of the CAA, a party may appeal on a question of law arising out of the arbitration decision if all parties agree or the court grants leave. In order for the court to grant leave, it must be established that:
(i) The importance of the result of the arbitration to the parties justified the intervention of the court and the determination of the point of law may prevent a miscarriage of justice;
(ii) The point of law is of importance to some class or body of persons of which the applicant is a member; or
(iii) The point of law is of general or public importance.
One of the vexing questions that often arises under section 31 is whether an issue on which a party seeks to appeal is in fact a “question of law”, and therefore within the scope of section 31, or a question of fact, in which case no appeal lies. The courts have often had to grapple with this question in connection with issues of contractual interpretation. Some courts have held that issues of interpretation are pure questions of law whereas other courts have taken the view that, to the extent that the underlying factual matrix is relevant to interpreting the contract, it is a question of fact or at least a question of mixed fact and law.
The B. C. Court of Appeal addressed this question in its recent decision in Greg Dowling Architects Inc. v. J. Raymond Griffin Architect Inc., 2012 BCCA 366. The Court’s decision in this case also provides some useful lessons for partners involved in disputes amongst themselves, particularly in respect of how newer partners treat their more senior members.
The dispute in issue arose when a number of partners purported to expel the respondent, Mr. Griffin, from the architectural firm that he had founded. Mr. Griffin sought damages resulting from his expulsion and the issue was arbitrated in accordance with the arbitration agreement contained in the governing partnership agreement. The arbitrator concluded that the expulsion of Mr. Griffin from the partnership was unlawful because (i) it was not effected in good faith; (ii) it was procedurally flawed; and (iii) the reasons for the expulsion lacked substance. While the expulsion was thus inoperative, the arbitrator recognized that the parties could no longer work together and therefore he ordered a partial dissolution of the partnership with the effect that Mr. Griffin ceased to be a partner. However, he also awarded Mr. Griffin damages for the effective repudiation of the partnership agreement by the remaining partners.
The remaining partners sought leave to appeal the arbitration decision under section 31 of the CAA. They argued first, that the arbitrator erred in finding that damages were available for repudiation of the partnership agreement and second, that the arbitrator erred in his interpretation of the partnership agreement in holding that the expulsion of Mr. Griffin was a repudiation of that agreement. In the Supreme Court, Mr. Justice N. Smith denied leave on both grounds on the basis that neither issue raised a pure question of law. In his view, the arbitrator was called upon to interpret the partnership agreement in the context of the factual matrix in relation to the formation of the agreement, the operation of the partnership and the relationship of the parties. As a result, the errors alleged by the remaining partners fell outside of the scope of section 31 of the CAA (2009 BCSC 960).
On appeal to the Court of Appeal, Madam Justice Saunders, writing for the Court, disagreed with the Mr. Justice Smith’s conclusion. In her view, relying upon a number of recent Court of Appeal decisions, both issues involved questions of law. In particular, the issues engaged the application of the law of contract to determine a partner’s entitlement to share in the proceeds of the partnership upon dissolution, the principles governing the repudiation of a contract and the principles of contract interpretation. While the issues had to be determined in light of the facts found by the arbitrator, at the end of the day the questions raised are questions of law that meet the threshold test under section 31 of the CAA.
Madam Justice Saunders also found that the other elements of the leave to appeal test set out in section 31 were met in that the amount of money in issue is significant to the parties and the alleged errors raise important issues of contract and partnership law. However, she held that the analysis does not end there as the court still has a discretion as to whether or not to grant leave and the principal factor in exercising that discretion is whether it is in the interests of justice to do so.
In Madam Justice Saunders’ view, the interests of justice in this case weighed against granting leave to appeal. In coming to this conclusion, she noted that the dispute arose in the context of a partnership, which is a relationship imbued with the principles of equity requiring that partners act with the utmost fairness and good faith towards their fellow partners. Here, the arbitrator had found that the remaining partners had acted in bad faith towards Mr. Griffin and that the reasons they advanced for his expulsion from the partnership lacked substance. In her view, the remaining partners were “seeking to bring themselves within a relationship steeped in the principles of equity, while falling far short of equity’s expectation of them.” This factor combined with the fact that the parties had agreed to arbitration under the partnership agreement and that Mr. Griffin was in the twilight of his professional years and would be unduly prejudiced by the prolonging of the dispute, led her to dismiss the application for leave to appeal.
As suggested at the outset, the Court of Appeal’s decision is useful in that it makes clear that issues of contractual interpretation will generally be treated as questions of law. This is important not only for the purpose of determining whether leave to appeal may be granted under section 31 of the CAA from arbitration awards but also for the standard of appellate review that will be applied to contract interpretation decisions more generally. Of equal importance, the decision sends a clear message to members of partnerships that given the equitable nature of the relationship, partners may not be able to stand upon their strict legal rights if their conduct towards their fellow partners falls below the standard of good faith and fair dealing that equity demands.