By: I. Jamie Arabi - Litigation

In Aquanta Group Inc v. Lightbox Enterprises Ltd, the Ontario Superior Court of Justice considered the role of the courts when reviewing arbitral awards under the Arbitration Act, 1991 (“Arbitration Act”).

The court stated that, where arbitration agreements provide no appeal rights, the court should not examine whether the arbitrator’s decision was reasonable or correct. Rather, the court must consider whether the arbitrator acted within the bounds of the authority granted under the arbitration agreement. The decision in Aquanta Group should serve as a reminder that set-aside applications under subsection 46(1) of the Arbitration Act are not appeals.

The Underlying Dispute: The Breach of a Joint Agreement

In 2019, the applicant, Aquanta, agreed to pay the respondent, Lightbox, a percentage of gross sales to operate retail cannabis outlets on its behalf. The Alcohol and Gaming Commission of Ontario (“AGCO”) awarded Aquanta an operating license on those terms, which were reflected in the parties’ written agreements pertaining to each outlet. In addition to entire agreement clauses, the agreements contained provisions that compelled the parties to refer disputes to binding and final arbitration.

In 2021, Aquanta stopped paying Lightbox, which initiated arbitration proceedings.

The Arbitration

In its defence, Aquanta alleged that, prior to executing the agreements, the parties entered into a collateral, oral agreement. The oral agreement required payment to Lightbox under an EBITDA split, rather than on the basis set out in the written agreements. Days before the hearing, Aquanta moved to amend its defence to plead negligent misrepresentation. Aquanta argued that this cause of action arose from the oral agreement, which it had already pleaded. It claimed that, as a result, no further evidence would be needed to support the misrepresentation claim. The arbitrator disagreed and denied Aquanta’s motion because the request was made mere days before the hearing and there had been no opportunity for discovery on the issue.

At the hearing, the arbitrator ruled in favour of Lightbox. The arbitrator found that the oral agreement was inadmissible under the parol evidence rule and unenforceable by virtue of illegality. He found that the AGCO had initially denied Aquanta an operating license that included the same EBITDA split arrangement that Aquanta relied upon in its defence. That denial led to the parties entering into the written agreements, based on terms acceptable to the AGCO, which Lightbox sought to enforce. The arbitrator also ruled that the Lightbox representative who entered into the oral agreement did not have the authority to bind the company.

The arbitrator provided lengthy reasons, but made no comments on misrepresentation, even though Aquanta raised the issue again in closing argument.

The Set-Aside Application and the Narrow Role of the Court

Aquanta brought an application to set aside the arbitral awards under subsection 46(1) of the Arbitration Act, alleging that the arbitrator did not treat it equally and fairly.

First, Aquanta claimed that, by dismissing its motion to amend its defence, Aquanta was unfairly prevented from presenting its case on negligent misrepresentation. It argued that the arbitrator provided no reasons for rejecting its submission that the misrepresentation claim flowed from the already-pleaded oral agreement. Aquanta also argued that additional discovery was not required, as there was evidence already in the record to support a duty of care.

The court ruled that the arbitrator had the discretion to deny leave to amend. Aquanta brought the motion days before the hearing and there was no time for discoveries. The court agreed with the arbitrator that discoveries would have been crucial to explore the misrepresentation issue, despite Aquanta’s submissions to the contrary.

Second, Aquanta asserted that the arbitrator did not treat the parties equally. It argued that, while the arbitrator denied Aquanta leave to amend, he decided the arbitration based on an argument not pleaded by Lightbox. Specifically, Lightbox did not plead that the Lightbox representative who entered into the oral agreement lacked the requisite authority.

The court did not accept Aquanta’s argument. Aquanta’s defence of collateral, oral agreement, which was a live issue, required the arbitrator to consider whether such agreement, if entered into, was binding. Moreover, the arbitrator found two other independent bases for refusing to enforce the alleged oral agreement: the parol evidence rule and illegality.

Ultimately, the court ruled that the arbitrator answered the question before him and gave reasons sufficient to understand why he denied Aquanta’s motion. Based on those reasons, there was no inequality between the parties in the arbitration proceedings. The arbitrator had the jurisdiction to decide the motion to amend, and he exercised that jurisdiction after hearing full argument from Aquanta.

Subsection 46(1)(6) of the Arbitration Act is not a “do-over” to protect a party from its own choices, but rather to protect a party from an arbitrator’s unfair or inequitable conduct. In this case, any limits on Aquanta’s ability to present its case flowed from its own conduct in the litigation.

Implications from Aquanta Group

The decision in Aquanta Group is a reflection of recent appellate law, which prevents parties from trying to bootstrap substantive arguments for an appeal to which they are not entitled. Oftentimes, parties bound by non-appealable arbitral decisions will attempt to appeal through a disguised set-aside application under subsection 46(1) of the Arbitration Act. This decision affirms, however, that courts will not assess these kinds of applications on appellate standards of review.

Accordingly, before bringing an application under subsection 46(1), discontented parties would be wise to carefully consider:

1. whether the governing arbitration clause or agreement permits any right of appeal; and
2. if not, whether the arbitrator acted outside of the scope of his or her authority.

Parties who bring set-aside applications without considering those factors run the risk of frustrating the purposes of arbitration and enduring costly litigation for litigation’s sake.

Minden Gross LLP represented Lightbox in the proceedings mentioned in this article. If you would like more information on this topic or would like to discuss a business litigation issue, please contact Jamie Arabi at jarabi@mindengross.com.