HCA 1560/2018

[2019] HKCFI 1840

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1560 OF 2018

________________________

________________________

Before: Deputy High Court Judge MK Liu in Chambers

Date of Hearing: 19 July 2019

Date of Decision: 19 July 2019

________________________

D E C I S I O N

________________________

INTRODUCTION

1. On 6 July 2018, the Plaintiff commenced this action against the Defendant for RMB387,010, 874. On 17 December 2018, the Plaintiff obtained a default judgment against the defendant (“the Judgment”). The application now before me is the Defendant’s application by its summons dated 2 April 2019 (“the Summons”) for an order to set aside the Judgment, to stay this action, and the dispute between the parties herein be referred to arbitration.

2. I would first briefly set out the factual background.

FACTUAL BACKGROUND

3. By a shareholding and shareholder’s loan transfer agreement (股權和股東貸款轉讓協議) dated 6 January 2015 (“the Transfer Agreement”), the Plaintiff agreed to sell, and John Dewey Group Limited (“Dewey”) agreed to purchase, the Plaintiff’s entire shareholding in GCREF Investment III Limited (“the Shareholding” and “GRCEF”) and a shareholder’s loan in the sum of the USD equivalent of RMB 574,793,648 (“the Loan”), for the total consideration of RMB 1,127,046,368. GRCEF held, and still holds, 99% of the issued share capital of 徐州城置有限公司 (“the Project Company”), which in turn owns a property development project in Xuzhou, Mainland China (“the Project”).

4. By a letter of surety (履約保函) (“the Letter of Surety”) dated 5 January 2015 addressed to the Plaintiff, the Defendant has undertaken an unconditional and irrevocable payment obligation towards the Plaintiff regarding a total sum of RMB 637,046,680.

5. By a counter-guarantee (反擔保函) (“Counter-Guarantee”) dated 6 January 2015 addressed to the Defendant, Dewey, the Project Company, and Mr Kong Dehui (孔德輝) (“Kong”) (the ultimate beneficial owner of Dewey, and also the General Manager and person-in-charge of the Project both before and after the sale of the Shareholding and Loan), have undertaken that if the Defendant paid part or all of the secured sum pursuant to the Letter of Surety, the three counter-guarantors (namely Dewey, the Project Company and Kong) had to unconditionally repay the Defendant the sums.

6. Subsequently, the Plaintiff and Dewey entered into an amended transfer agreement (股權和股東貸款轉讓協議之修訂協議) dated 7 April 2015 (“the Amended Transfer Agreement”).

7. On or about 16 April 2015, the Plaintiff transferred the Shareholding and assigned the Loan to Dewey.

8. On 27 July 2015, the Plaintiff and Dewey entered into a supplemental agreement (“the Supplemental Agreement”) to amend and supplement certain terms in the Amended Transfer Agreement.

9. It is the Plaintiff’s case that although the Plaintiff had fulfilled all the conditions set out in the Amended Transfer Agreement, Dewey failed (and still fails) to pay part of the total purchase price owed in the sum of RMB 420,707,754. In light of Dewey’s failure to pay despite the Plaintiff’s demand, the Plaintiff through its solicitors wrote to the Defendant on or about 13 March 2018 to demand the Defendant to pay to the Plaintiff the amount of RMB 387,010,874 under the Letter of Surety.

10. There is no dispute that the Judgment is a regular judgment. It is trite that in order to set aside a regular judgement, the defendant has to show a real prospect of success in his defence.

11. The Defendant contends, inter alia, that there is an arbitration clause in the Letter of Surety and the dispute between the parties ought to be referred to arbitration. For this reason, the Judgment should be set aside, this action should be stayed and the matter should be referred to arbitration.

12. The parties are in agreement that the stay application should be determined first. If the court is of the view that the stay application would succeed or is likely to succeed, the court would not consider the merits of the defence at all.

13. When faced with a stay application made under section 20 of the Arbitration Ordinance (“the Ordinance”), the court must refer the dispute to arbitration unless one or more of the following is demonstrated:

(1) There is no arbitration agreement at all;

(2) The arbitration agreement is null and void, inoperative or incapable of being performed;

(3) There is in fact no dispute or difference to be referred to arbitration; or

(4) The relevant dispute is not one that is covered by the arbitration agreement.

14. In considering whether there should be a stay in favour of arbitration, the proper test is whether there is a prima facie case that the parties are bound by an arbitration clause. The onus is on the applicant to demonstrate this. Unless the point is clear, the court should not attempt to resolve the issue and the matter should be stayed for arbitration.

THE STAY APPLICATION

15. Section 19 of the Ordinance has given effect to Article 7 of the UNCITRAL Model Law. Article 7(1)(6) provides:

“The reference in a contract to any document containing an arbitration clause constitutes an arbitration agreement in writing, provided that the reference is such as to make that clause part of the contract.”

16. Accordingly, there is an “arbitration agreement in writing” in a contract if the following 3 conditions are satisfied:

(1) There is a reference in the contract to a document;

(2) That document contains an arbitration clause; and

(3) The reference is such as to make that clause part of the contract.

17. There is no dispute that the Transfer Agreement is referred to in the Letter of Surety, and there is an arbitration clause in the Transfer Agreement, ie Clause 13.2. The difference between the parties is whether the reference to the Transfer Agreement in the Letter of Surety has the effect of making the arbitration clause part of the Letter of Surety. This is a question concerning interpretation of the Letter of Surety.

18. The principles on contractual interpretation are trite and not in dispute:

(1) The ultimate aim of interpreting a provision in a contract, especially a commercial contract, is to determine what the parties meant by the language used, which involves ascertaining what a reasonable person would have understood the parties to have meant. The relevant reasonable person is one who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2) The exercise of construction is essentially one unitary exercise in which the court must consider the language used and ascertain what a reasonable person would have understood the parties to have meant. In doing so, the court must have regard to all the relevant surrounding circumstances. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other. The business sense is that which businessmen, in the course of their ordinary dealings, would give the document.

(3) Some agreements may be successfully interpreted principally by textual analysis, for example because of their sophistication and complexity and because they have been negotiated and prepared with the assistance of skilled professionals. The correct interpretation of other contracts may be achieved by a greater emphasis on the factual matrix, for example because of their informality, brevity or the absence of skilled professional assistance. Textualism and Contextualism are not conflicting paradigms. The extent to which each tool will assist the court in its task will vary according to the circumstances of the particular agreement.

(4) The more unreasonable the result the more unlikely it is that the parties could have intended it, and if they do intend it the more necessary it is that they shall make that intention abundantly clear. On the other hand, the Court must also be alive to the possibility that one side may have agreed to something which with the benefit of hindsight may not have served his interest.

19. Counsel for the parties have made thorough submissions and I am most grateful for the assistance provided by them. With respect, I am of the view that the arguments advance by each side have strength and weakness.

20. Mr David Chen, counsel for the defendant, has put forward the following points:

(1) All the contractual agreements in this case concern the same acquisition, namely, the sale and purchase of the Shareholding and the Loan.

(2) Although there were two contractual relationships which were entered into, one between the Plaintiff and Dewey as seller and purchaser under the Transfer Agreement and the other between the Plaintiff and the Defendant under the Letter of Surety, they were entered into in the context of a single commercial relationship between the Plaintiff on one side and Dewey and the Defendant on the other:

(a) The Plaintiff lay under the obligation to transfer the Shareholding and the Loan to Dewey under the Transfer Agreement;

(b) Dewey and the Defendant lay under the obligation to pay the Plaintiff under the Transfer Agreement and the Letter of Surety respectively.

(3) Given the close connection between the Transfer Agreement and the Letter of Surety, and between the parties involved, one would expect the parties as rational businessmen to agree a common method of dispute resolution and, in the interests of efficiency, expediency and costs, for there to be a common tribunal (whether an arbitral tribunal or a court) to determine all the disputes arising out of the commercial transaction.

(4) It would be surprising if the Transfer Agreement was to be subject to Hong Kong law and arbitration but any dispute under the Letter of Surety would be determined by some unspecified court in some unspecified jurisdiction according to some unspecified governing law.

(5) The analysis above is fortified by the Counter-Guarantee, by which the Plaintiff, Dewey, the Project Company and Kong agreed to pay the Defendant a sum equivalent to the amount paid out by the Defendant under the Letter of Surety. While the Counter – Guarantee does not contain any dispute resolution provision, it is abundantly clear that by reason of various references to the Transfer Agreement, the Counter-Guarantee is also subject to Hong Kong law and arbitration. It would be surprising if the parties to the Counter-Guarantee (two BVI companies, one Mainland China company and one Mainland China individual), two of which were parties to the Transfer Agreement, had intended for disputes arising out of the Counter – Guarantee to be determined by some unspecified court in some unspecified jurisdiction according to some unspecified governing law.

(6) Indeed, from the Plaintiff’s perspective, it would be highly undesirable if disputes arising from the Transfer Agreement were resolved in arbitration but disputes arising from the Letter of Surety were resolved in a court, which may or may not be the same court as the one which has jurisdiction over the disputes arising from the Counter – Guarantee. Not only would the Plaintiff be compelled to incur substantial additional costs in pursuing or defending two (or potentially three) sets of parallel proceedings in what might be three different jurisdictions, there is also a risk of inconsistent factual findings and issue estoppel that might prejudice the Plaintiff.

(7) The same analysis applies to Dewey, who was a party to the Transfer Agreement and the Counter-Guarantee, and the Defendant, who was a party to the Letter of Surety and the Counter-Guarantee. It would be highly desirable for Dewey and the Defendant to resolve their respective disputes in the same tribunal applying the same law.

(8) The Transfer Agreement was negotiated against the background of the envisaged Letter of Surety, and was finally concluded (on 6 January 2015) when the Letter of Surety (signed on 5 January 2015) was already in place. It must be intended that all the parties involved in the acquisition, namely, the Plaintiff, Dewey and the Defendant, would be subject to the same dispute resolution mechanism.

(9) The Defendant was given a copy of the draft Transfer Agreement before it entered into the Letter of Surety. The Defendant therefore knew that the payment obligation which it guaranteed arose from a contract that was governed by Hong Kong law and was subject to an arbitration clause.

(10) Compared with the Transfer Agreement, the Letter of Surety is patently more informal, less detailed and appears to be prepared without any professional assistance. It is therefore not surprising that the parties did not see the necessity to expressly spell out the dispute resolution mechanism, believing instead that the mechanism provided for in the Transfer Agreement would apply to the Letter of Surety.

(11) The Plaintiff never communicated to the Defendant that it intended for the Letter of Surety to be governed by a dispute resolution mechanism different from that set out in the Transfer Agreement.

(12) In the circumstances, a reasonable person would have understood the Plaintiff and the Defendant to have intended for the governing law of and dispute resolution mechanism in the Transfer Agreement to apply to the Letter of Surety (and the Counter – Guarantee). This accords with business common sense. Were it otherwise, the Plaintiff might be exposed to the substantial expense and inconvenience of litigating in different courts across three different jurisdictions applying different laws in respect of disputes arising from the same transaction. This is an eminently uncommercial result that no reasonable businessman would desire. Clear words would have to be used in the Letter of Surety to produce this result.

21. These are forceful submissions. However, as pointed out by Mr Richard Khaw SC (leading Ms Queenie Lau), counsel for the Plaintiff, the arbitration clause in the Transfer Agreement is different from the arbitration clause in the Amended Transfer Agreement – the former specifies the arbitration to be held in Hong Kong, while the latter requires the arbitration to be held in Shanghai. In reply to this, Mr Chen submits that the arbitration clause incorporated into the Letter of Surety is the arbitration clause in the Transfer Agreement. That being the case, if Mr Chen is right, the disputes arising from the Amended Transfer Agreement would be resolved by arbitration in Shanghai, while the disputes under the Letter of Surety would be resolved by arbitration in Hong Kong. That means the businessmen involved have no intention that all the disputes concerning the acquisition of the Shareholding and the Loan be resolved by one single tribunal. This has certainly weakened Mr Chen’s arguments.

22. Mr Khaw SC submits that:

(1) Whether there has been incorporation of any arbitration clause in a contract is a matter of construction.

(2) When the incorporation relied on concerns terms of a contract made between different parties (even if one of them is a party to the contract in suit), in order for there to be incorporation, it would need to be clear that parties intended to incorporate the arbitration clause (and not only the substantive provisions of the other contract). Further, as arbitration clauses are “essentially personal to the parties which agree them”, and oust the jurisdiction of the courts, clear words of incorporation are required.

(3) Mere reference to the Transfer Agreement in the preamble of the Letter of Surety is not sufficient reference to incorporate the arbitration clause in the Letter of Surety. It is untenable that the Defendant makes reference to the Counter-Guarantee to support the argument for incorporation when the Counter – Guarantee simply contains no arbitration agreement at all.

(4) There is no substance in the Defendant’s complaint that the Plaintiff did not communicate to the Defendant the Plaintiff’s intention for a different dispute resolution mechanism to govern the Letter of Surety. It is inconceivable as to why and how the Plaintiff should be under such a duty to inform in the first place.

(5) The submission concerning “business common sense” and an assumption that one would “expect the parties as rational businessmen to agree a common method of dispute resolution” is incorrect. Given the separate and independent nature of the Letter of Surety being an indemnity, there is no basis to assume that the parties expected any common method of dispute resolution.

23. These are also forceful submissions. However, with respect, I am of the view that there is also weakness in Mr Khaw SC’s submissions.

(1) The Plaintiff’s position is that the Letter of Surety is governed by Hong Kong law, as evidenced by the fact that no foreign law is pleaded in the Statement of Claim. Matters of foreign law must be specifically pleaded where foreign law is applicable.

(2) There is no express jurisdiction clause in the Letter of Surety.

(3) By merely looking at the contents of the Letter of Surety, it is difficult to see the connection between this contract and Hong Kong. The Plaintiff, the Defendant, and Dewey are all BVI companies. The obligation guaranteed in the Letter of Surety is not an obligation which must be performed in Hong Kong.

(4) The Transfer Agreement is not only mentioned in the preamble, but is repeatedly mentioned in the Letter of Surety.

(5) There is no dispute that the Letter of Surety is governed by Hong Kong law.

(6) It is at least reasonably arguable that the Letter of Surety is governed by Hong Kong law because the Letter of Surety has close connection with the Transfer Agreement, and the Transfer Agreement is governed by Hong Kong law by virtue of Clause 13.1 of the same. Applying business common sense, the parties to the Letter of Surety must have intended that Clause 13.1 of the Transfer Agreement be incorporated into the Letter of Surety.

(7) Both Clause 13.1 and Clause 13.2 of the Transfer Agreement concern dispute resolution. It would be unreasonable to say that the parties to the Letter of Surety only intended to incorporate Clause 13.1 but not Clause 13.2 of the Transfer Agreement into the Letter of Surety.

24. In my view, both Mr Chen and Mr Khaw SC have put forward respectable arguments. While I cannot definitely say that the arbitration clause in the Transfer Agreement has been incorporated into the Letter of Surety, at the same time I cannot definitely say the otherwise. My conclusion is that it is arguable that there is such incorporation. If Clause 13.2 of the Transfer Agreement has been incorporated into the Letter of Surety, the dispute between the Plaintiff and the Defendant would be covered by this clause. I am satisfied that the Defendant has demonstrated a prima facie case that there is an arbitration clause in the Letter of Surety.

25. Accordingly, I have to make an order to stay this action in favour of arbitration. That being the case, the Judgment must also be set aside.

26. After arriving at this conclusion, it would not be necessary for me to go into the merits of the defence put forward by the Defendant. Since the dispute between the parties may be resolved by arbitration at a later time, the merits of the defence should be considered by the arbitral tribunal.

DISPOSISITON

27. I make the following order:

(1) the Judgment be set aside; and

(2) This action be stayed and the dispute between the parties be referred to arbitration.

28. As to the costs of the Summons, I bear in mind that the Judgment is a regular judgment. Although I have ruled in favour of the Defendant on the issue of incorporation, the Defendant has only made clear its position in Mr Chen’s written reply submissions provided to the Court yesterday, i.e. the arbitration clause which has been incorporated into the Letter of Surety is the one in the Transfer Agreement, not the one in the Amended Transfer Agreement. By yesterday, almost all the costs in relation to the Summons have been incurred by the parties. In these circumstances, I am of the view that costs of the Summons (including all costs reserved) should be borne by the Defendant. There be a certificate for 2 counsel for the hearing today. The said costs be summarily assessed at HK$850,000.

29. Lastly, it remains for me to thank all counsel for the very helpful assistance rendered to the court.

Mr. Richard Khaw SC & Ms. Queenie Lau, instructed by Vincent T.K. Cheung, Yap & Co., for the Plaintiff.

Mr. David Chen, instructed by Lu & Partners LLP, for the Defendant.

COURT OF APPEAL FOR BRITISH COLUMBIA

Date: 20190822

Dockets: CA45400; CA45420

Docket: CA45400

Between:

Greata Ranch Holding Corp. and Greata Ranch Development Corporation

Appellants

(Petitioners)

And

Concord Okanagan Developments Ltd., The Crestmark Developments Limited Partnership and One West Holdings Ltd., formerly known as Concord Pacific Group Inc.

Respondents

(Respondents)

– and –

Docket: CA45420

Between

The Crestmark Developments Limited Partnership

Respondent/

Appellant on Cross Appeal

 (Petitioner)

And

Greata Ranch Developments Limited Partnership, Greata Ranch Holdings Corp. and Concord Okanagan Developments Ltd. in their capacity as general partners of the Greata Ranch Developments Limited Partnership, and Greata Ranch Development Corporation in its capacity as limited partner of the Greata Ranch Development Limited Partnership

Appellants/

Respondents on Cross Appeal

 (Respondents)

Sealed in Part pursuant to the
Order of Mr. Justice Fitch, issued March 28, 2019

On appeal from:  an order of the Supreme Court of British Columbia, dated June 7, 2018 (Greata Ranch Holding Corp. v. Concord Okanagan Developments Ltd., 2018 BCSC 931 (CanLII), Vancouver Docket S176664; and The Crestmark Developments Limited Partnership v. Greata Ranch Developments Limited Partnership, 2018 BCSC 932 (CanLII), Vancouver Docket S177033).

Summary:

Two parties to a commercial contract, Greata and Concord, challenge a chambers judge’s decision granting and denying leave to appeal a question of law arising from anarbitration award interpreting that contract. Greata submits the chambers judge erred by denying it leave to appeal the award on the question of whether the arbitrator erred in law by ignoring the phrase “in accordance with and proportionate to the schedule of payments of fees and costs set out in the Budget”. Greata also submits the chambers judge erred by granting Concord leave to appeal the award on the question of whether the arbitrator erred in law by ignoring relevant provisions of the Partnership Act. Concord submits the chambers judge erred by denying it leave to appeal the award on the question of whether the arbitrator erred by ignoring the phrase “at the Interest Rate”. Held: Greata’s appeals dismissed; Concord’s appeal allowed. The arbitrator did not ignore the phrase Greata identifies, but rather interpreted that phrase in light of the parties’ conduct by proceeding without adopting a Budget that had such a schedule. The arbitrator did not consider the potentially-relevant sections of the Partnership Act and the pleadings do not show Concord ought to have identified those sections at the arbitration. The arbitrator does not appear to give any effect to the words “at the Interest Rate” despite acknowledging their applicability, thus raising a potential extricable error of law.

Reasons for Judgment of the Honourable Mr. Justice Willcock:

Introduction

[1]           These appeals arise from decisions made by a chambers judge on applications for leave to appeal arbitration awards. They require us to consider the grounds upon which the chambers judge exercised or might have exercised his discretion pursuant to s. 31 of the Arbitration Act, which provides that a party to an arbitration may appeal to the court on any question of law arising out of the award, with leave, if the court determines:

(a) the importance of the result of the arbitration to the parties justifies the intervention of the court and the determination of the point of law may prevent a miscarriage of justice,

(b) the point of law is of importance to some class or body of persons of which the applicant is a member, or

(c) the point of law is of general or public importance.

[2]           The scope of this provision was considered by the Supreme Court of Canada in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 (CanLII), and again in Teal Cedar Products Ltd. v. British Columbia, 2017 SCC 32 (CanLII), and by this Court, recently, in Greater Vancouver Sewerage and Drainage District v. Wastech Services Ltd. 2019 BCCA 66 (CanLII). In the latter case, Newbury JA observed:

[4]               With respect to standard of review, the Supreme Court in Sattva and Teal Cedar suggested that a standard of reasonableness (as explained in Dunsmuir v. New Brunswick 2008 SCC 9 (CanLII)), now the norm in administrative law, applies to all questions of law on appeal in commercial arbitrations, unless “the question is one that would attract the correctness standard, such as constitutional questions or questions of law of central importance to the legal system as a whole.” (See Sattva at para. 106; TealCedar at para. 74.) Since the Court in Sattva also decided that in future, questions of contractual interpretation were to be regarded as questions of mixed fact and law, only a very small window for appellate review of arbitral decisions remains.

The Disputes

[3]           The arbitration in the case at bar addressed competing claims under contracts to develop a vineyard on the west side of Okanagan Lake for residential and commercialuse. The project was structured as a Limited Partnership between the landowner (Greata Ranch Development Corporation, “Greata”) and its affiliate, and a developer (Concord Okanagan Developments Ltd., “Concord”) and its affiliate.

[4]           Greta and Concord and their affiliates entered into a Limited Partnership Agreement on January 30, 2007 (the LPA) pursuant to which the partnership purchased the lands from Greata.

[5]           The partnership entered into a Project Management Agreement on February 6, 2007 (the PMA) with a project manager affiliated with Concord, One West Holdings Limited (“One West”). The Agreement set out the terms and schedule upon which the development would proceed.

[6]           The project encountered difficulty, leading to delay in completion of the planned phases of development and, ultimately, the disputes addressed at arbitration.

One West project costs (DCA 1349)

[7]           In December 2011, One West delivered an invoice to the partnership for project costs of approximately $6.6 million. Greata took the position the partnership could not be charged any amount by One West pursuant to the PMA until and unless the project was abandoned or suspended.

[8]           The provision of the PMA permitting One West to claim payment for services rendered on account of work abandoned or suspended (s. 9.1) provides that payment will be made “in accordance with and proportionate to the schedule of payments of fees and costs set out in the Budget”.

[9]           Section 7.1 of the PMA provides:

Concurrently with the execution of this agreement One West shall submit a Budget for the development, aggregating the total cost of completing the development, including Project Costs and Concord Costs. The Budget shall set out in separate line items the various parts of the development and attribute a monetary value to each line item include a projected net income/expense statement.

[10]        One West and the Partnership were required by the PMA to “act diligently and reasonably to come to a final agreement on the Budget” within 15 business days of its execution. No Budget was ever adopted. The arbitrator attributed this in part to the fact some architectural designs had not reached the stage at which cost estimates could be made.

[11]        Even though a Budget had not been agreed upon, the parties continued to work on the development. On February 19, 2007, One West provided the Management Committee with its summary revenue, cost and profit projections for the project as whole and a more detailed ‘cash flow to sales’ estimate for Phase 1 projecting costs to the expected commencement of presales. By July 2007, One West had incurred costs it estimated at $3.7 million. Thereafter One West incurred additional project costs of approximately $3 million.

[12]        Following receipt of the December 2011 invoice, Greata advised One West it considered One West to have breached s. 3.2 and 3.3 of the PMA (the provisions setting out the project manager’s obligations to obtain subdivision and development permits and market the properties). One West denied the alleged breach but advised Greata that it would regard the failure to pay the invoice as repudiation of the PMA.

[13]        A notice to arbitrate the resulting disputes with respect to the alleged breach and One West’s project cost claim was issued by Greata on May 14, 2012.

Concord loan (DCA-1657)

[14]        Section 10.5 of the LPA provided that if certain progress (the Phase One benchmark) was not made by February 4, 2008 Concord, at its option, could either terminate the LPA or lend sufficient funds to the partnership to enable it to pay $4,500,000 to Greata and to repay a promissory note issued to Greata for $1,500,000. Concord advanced $6,000,000 to the partnership, however there was a difference of opinion between Greata and Concord with respect to the terms upon which it did so.

[15]        The Loan was made pursuant to s. 4.4 of the LPA, which provided:

Concord may make, but is not obliged to make, a loan or loans to the Limited Partnership at the Interest Rate and another terms acceptable to the General Partners, such funds as are necessary to enable the Management Committee to carry out the purposes of the Limited Partnership.

[16]        “Interest Rate” is defined in the LPA:

“Interest Rate” means the variable nominal rate of interest per annum being the prime interest rate of Canadian Imperial Bank of Commerce (or its successor) (the “Bank”) for Canadian Dollar commercial loans in Canada as publicly declared by the Bank from time to time as its “Prime Rate”.

[17]        Concord demanded repayment of the loan and interest in February 2015. When the Loan was not repaid it issued a notice to arbitrate in March 2015. That arbitration was joined with the arbitration of the project cost claim.

Arbitration Awards

[18]        The arbitrator, the Hon. Kenneth Mackenzie, made two awards on June 2, 2017 (BCICAC File Nos. DCA-1394 and DCA-1657).

[19]        In the first, he determined One West had not breached the PMA by failing to take appropriate steps to pursue the project. The One West invoice was invalid as there had not been suspension or abandonment of the project when it was issued. The refusal to pay the invoice did not amount to repudiation of the contract. By the time the disputes got to arbitration, however, the parties had agreed the partnership should be dissolved. The arbitrator therefore made a declaration dissolving the partnership. He found One West entitled to claim $6,221,539 in project costs (including a claim of more than $1.1 million in pre-incorporation costs) upon dissolution.

[20]        In the second award, he found Concord’s loan to the partnership to be “an Interest of Concord … under s. 10.7(c)(vi) for the purposes of asset proceeds distribution on winding up”.

[21]        Section 10 of the LPA provided for the payment of debts and distribution of assets on dissolution of the partnership. Section 10.7 provides, in part:

10.7 Dissolution and Distribution

(c) After the application of section 10.7(a) [which provides for re-transfer to Limited Partners of assets not yet paid for by the Partnership] and/or section 10.7(b) [which provides for the return of a Deposit], … all of the remaining assets of the Limited Partnership shall be liquidated by the Receiver. In liquidating such assets the Receiver shall [sell assets and then distribute the proceeds as follows]:

(iv) firstly, to payment of all debts and liabilities of the Limited Partnership …

(v) secondly, to set up such cash reserves … as the Receiver may deem necessary for any contingent liabilities …

(vi) the balance, if any to the Limited Partners in proportion to their respective Interests.

[22]        In effect, the arbitrator determined that the loan was not a demand loan, as alleged by Concord, but created an interest to be accounted for when the assets of the partnership were liquidated, thus placing Concord behind other creditors in priority.

[23]        He further held that in the absence of any agreement by the Management Committee to pay interest “no interest is claimable” (award at para. 95).

Petitions for Leave to Appeal

One West project costs

[24]        On July 14, 2017 Greata filed a Petition seeking to set aside the award on the ground the arbitrator exceeded his jurisdiction by allowing a claim arising from dissolution that had not been submitted to arbitration. It argued dissolution of the partnership was never pleaded as a basis for finding that work on the Project was “abandoned or suspended” within the meaning of s. 9.1 of the PMA.

[25]        Further, Greata sought leave to appeal on the ground it was an error of law on the part of the arbitrator to make an award to One West for a claim arising upon dissolution that was not a payment “in accordance with and proportionate to the schedule of payments of fees and costs set out in the Budget”. It sought leave to address the following question of law:

Did the arbitrator err in law in making the One West award having regard to section 9.1 of the Project Management Agreement in the absence of an approved Budget as defined by section 7.1 of that agreement?

Concord loan

[26]        By Petition filed July 26, 2017 and subsequently amended, Concord, in turn, sought leave to appeal the following questions of law, arising out of the second award:

Whether the Arbitrator … erred in law in finding that, further to the dissolution of the … Limited Partnership … the loan in the amount of $6,000,000 … made by [Concord] to the Partnership is to be included as part of Concord LP’s “Interest” for the purposes of asset proceeds distribution under section 10.7(c)(vi) of the [LPA] … ;

Whether the Arbitrator erred in law in finding that, in the dissolution of the Partnership, the Loan … does not fall within the expression “all debts or liabilities” for the purposes of the distribution of asset proceeds under s.10.7(c)(vi) of the LPA;

Whether the Arbitrator erred in law in finding that the loan was subject to the implied terms as set out in the Award;

Whether the Arbitrator erred in law in failing to find that the Loan was a demand loan and that payment of the Loan was properly demanded by Concord … in February 2015; and/or

Whether the arbitrator erred in law in failing to enforce a term of the Loan, namely, that the loan was made at the “Interest Rate” as defined and mandated in the LPA.

[27]        The July 26 Petition set out an argument not made before the arbitrator: that the determination of payment priorities in the award is inconsistent with the provisions of the Partnership Act.

Judgment on the Petitions

[28]        The chambers judge, for reasons indexed as 2018 BCSC 931 (CanLII), dismissed Greata’s petition to set aside the award in favour of One West and dismissed the petition for leave to appeal a question of law arising from the award.

[29]        For reasons indexed as 2018 BCSC 932 (CanLII), he granted leave to Concord to appeal one question of law: “did the Arbitrator err by failing to consider relevant provisions of the Partnership Act when determining the distribution priority of the Loan under the LPA?” The balance of the Concord petition was dismissed.

One West project costs

[30]        The chambers judge rejected Greata’s application to set aside the One West award pursuant to s. 30 of the Arbitration Act as an award that exceeded the arbitrator’s jurisdiction. He concluded, after reviewing the pleadings:

[61]            … It is apparent that One West pleaded both that the PMA was terminated as a result of repudiation or, alternatively, dissolution.

[62]            One West argues, and I agree, that termination of the PMA effected by dissolution of the Partnership necessarily results in work on the Project being abandoned or suspended within the meaning of s. 9.1. Section 9.1 of the PMA stipulates that if the Project is abandoned, One West is entitled to compensation for unpaid work.

[31]        Turning to the application for leave to appeal, he rejected Greata’s submission that the arbitrator had not directed his mind to the requirement in s. 9.1 of the PMA that the payments were to be made in accordance with and proportionate to the schedule of payments set out in an approved Budget. He held:

[88]            The Arbitrator … made a number of findings with respect to the informal budgeting that One West presented to the Partnership including:

(i)                  that Greata did not object to One West’s informal budgeting practice until disputes arose;

(ii)               that One West had followed its established accounting practices in preparing cost estimates and recording expenditures;

(iii)               that no loss or damage to the Partnership was caused by the absence of a formal Budget; and

(iv)              that Greata accepted many of One West’s costs were reasonable.

            …

[90]            The structure of the Award, read as a whole, clearly indicates that the Arbitrator considered the question of whether One West was entitled to compensation despite the absence of approved Budgets, and determined that One West was entitled to compensation on the basis of its own accounting.

[91]            I am satisfied that the Arbitrator turned his mind to the requirements of s. 9.1 of the PMA and decided that, in the circumstances, the absence of a formal Budget did not preclude the possibility of compensation for One West.

[92]            In my view, the question posed by Greata, in essence, challenges the Arbitrator’s contractual interpretation of the PMA, including the application of s. 9.1, and is properly characterized as a question of mixed fact and law.

[93]            In any event, even if Greata’s proposed question does raise an issue of law related to the Arbitrator’s justification for the One West Award, I do not find that a determination has the potential to prevent a miscarriage of justice as required by s. 31(2)(a).

…

[99]            Further, I note that the position taken by Greata is an attempt to hold One West to the strict budgeting requirements of the PMA after a clear choice not to do so in the course of their contractual dealings. I agree with the following statement from One West’s written argument:

the Arbitrator’s determination on this issue avoided the commercially unreasonable interpretation that Greata could execute the PMA, accept an alternative, informal budgeting process by which One West continued to incur costs in performing services under the PMA, but then unilaterally preclude any payment to One West in respect of these or its pre-LPA services by refusing to agree to a Budget.

Concord loan

[32]        The chambers judge granted leave to address the question whether the arbitrator erred in law by interpreting the LPA without reference to the provisions of the Partnership Act, R.S.B.C. 1996, c. 348.

[33]        He noted the arbitrator had reviewed ss. 4.4, 10.5, 10.7(c), 1.1 and 3.1 of the LPA in order to properly characterize the Loan. The arbitrator had concluded it was a loan within the terms of s. 4.4 of the LPA for “the purposes of the [Partnership]”. The arbitrator had weighed Greata’s submission and Concord’s response. Greata had submitted that the Loan created an Interest, since s 1.1 of the LPA defines an Interest as “all outstanding loans or capital contributions made by the General Partners or a Limited Partner to the [Partnership]”. Concord had responded that this definition of Interest should not apply to it as a limited partner, based on the language of s. 3.1 of the LPA, which describes Limited Partners’ Interests but does not include loans to the Partnership in that description. The chambers judge held:

[62]            It is apparent that the Arbitrator’s determination that the Loan was part of [Concord’s] Interest under the LPA occasioned a detailed examination of the LPA and the circumstances of how and why the Loan was provided. This portion of his analysis was an exercise in contractual interpretation.

[34]        He declined to grant leave to appeal in relation to other questions, also considered to be matters of contractual interpretation: whether the arbitrator erred in law by attributing implied terms to the Loan (specifically that repayment was to be governed by the LPA’s dissolution provisions); and whether consistent definition of a partner’s Interest in the LPA required the Loan to be treated as a demand loan.

[35]        However, the chambers judge found the question whether the arbitrator erred in law by failing to consider relevant provisions of the Partnership Act to be an extricable question of law relating to a material issue that could affect the result. He considered the question whether a contractual right can be determined without reference to a relevant statute to be one of precedential value.

[36]        While noting the provisions of the Partnership Act had not been raised at arbitration and, accordingly, the court’s residual discretion under s. 31(2) was engaged and “generally militates against granting leave” (citing VIH Aviation Group Ltd. v. CHC Helicopter LLC, 2012 BCCA 125 (CanLII) at para. 45), he accepted the submission that the relevant provisions of the Partnership Act had not been raised because it was not anticipated the arbitrator would address post-dissolution asset distribution. He was satisfied the issue was one of pure law that might be resolved with reference to the parties’ pleadings and submissions, and granting leave would not result in prejudice to the responding party (referring to the criteria described in On Call Internet Services Ltd. v. Telus Communications Company, 2013 BCCA 366 (CanLII) at para. 66).

[37]        Turning to the question of interest on the loan, he noted the arbitrator had interpreted Section 4.4 of the LPA (which provides: “Concord may make … loans to the [Partnership] at the Interest Rate and on other terms acceptable to the General Partners”) to “require a determination by the management committee about whether or not interest could be claimed in addition to any other applicable terms”.

[38]        He rejected Concord’s argument that this interpretation is untenable and that the arbitrator erred in law by failing to take into account and enforce an express provision of the LPA. He held:

[125]        The Arbitrator interpreted s. 4.4 of the LPA in a particular way, and a conclusion that the Loan did not attract interest flowed from that interpretation. He quoted s. 4.4 in full at the beginning of his analysis, discussed it, and applied it to the facts before him. I do not agree that he failed to consider or enforce the provision as [Concord] contends.

Grounds of Appeal

One West project costs

[39]        Greta contends the chambers judge erred in failing to grant leave to address the question whether the arbitrator erred in law in making the One West award, having regard to s. 9.1 of the PMA and the absence of an approved Budget as defined by s. 7.1.

Concord loan

[40]        Greta contends the chambers judge erred in allowing Concord to raise a question not raised before the arbitrator. It says there was no evidence before the Court that the effect of the provisions of the Partnership Act was not considered by Concord prior to the arbitration and the chambers judge failed to consider whether the legal issue could reasonably have been determined in Greata’s favour.

[41]        Concord contends, by way of cross-appeal, that the Chambers Judge erred in denying it leave to appeal the question whether the arbitrator erred in law in failing to enforce the term of the LPA providing the loan was made at the defined “Interest Rate”.

Analysis

Standard of Review

[42]        There is an issue with respect to the standard of review. Greata, citing Richmont Mines Inc. v. Teck Resources Limited, 2018 BCCA 452 (CanLII), says the standard of review on an appeal from a decision to grant or refuse leave under s. 31 of the Arbitration Act is correctness. Concord says the function of this Court on an appeal from a decision to grant or refuse leave under s. 31 is to determine whether the chambers judge erred in law, erred in principle or misapprehended the facts. It says the standard of review should be deferential and this Court should not substitute its own judgment for that of the chambers judge.

[43]        In Richmont, Smith J.A. said:

[60]            A judge’s decision on a leave application is a question of law alone that attracts the correctness standard of review: Housen v. Nikolaisen, 2002 SCC 33 (CanLII) at para. 8.

[44]        In my view, that passage must be read together with the following description of the error at issue in the case:

[61]            In my view, the judge erred in his approach to s. 31 of the Act. The issue for the application judge was whether Richmont had demonstrated an extricable question of law in the arbitrator’s analysis, as described in Teal Cedar at paras. 59–60. However, the judge did not address that issue but instead determined the substantive issue of the correctness of the arbitrator’s decision by agreeing with Richmont’s interpretation of Recital “B”. This, in turn, led the judge to conclude that Richmont had identified an extricable question of law to appeal.

[62]            The approach taken by the judge to s. 31 of the Act was not consistent with the analytical framework articulated in Sattva and Teal Cedar.

[45]        There is no doubt the characterization of the issue to be addressed on a s. 31 application is a question of law and the adoption and use of the wrong test in addressing that question is an error of law, reviewable on a standard of correctness. In my view Richmont is authority for the proposition that a judge’s decision on whether a question of law has been identified on a leave application is a question of law alone that attracts the correctness standard of review.

[46]        It is important to bear in mind that s. 31 of the Arbitration Act requires a chambers judge to address a number of questions. First the judge must determine whether or not the applicant has identified a pure legal question. Appellate courts can and should pass judgment upon the question whether a chambers judge has correctly characterized the question posed by the appellant as an extricable question of law. That is the process this Court and the Supreme Court of Canada have engaged in on numerous occasions on appeals from applications for leave to appeal from arbitral decisions.

[47]        If an extricable question of law is identified, the judge must go on to consider the criteria expressly identified in ss. (a) to (c) (cited above at para. 1). As the Teal Cedar majority noted:

[39]      … [Once] the statutory preconditions are met, granting leave to appeal an award under the Arbitration Act is a matter of judicial discretion: “… the court may grant leave …” (Arbitration Act, s. 31(2)).

[48]        Because the consideration of the criteria enumerated in ss. 31(a) to (c) requires a chambers judge to exercise judicial discretion, deference should be afforded to the judge’s assessment of the importance of the result of the arbitration to the parties; the risk of a miscarriage of justice; and the importance of the point of law to the class of persons of which the applicant is a member and to the public. An appeal is not intended to substitute the opinion of a division of this Court for that of the chambers judge in relation to these issues.

[49]        The decision to permit a party to seek leave in relation to an issue not raised before the arbitrator is also discretionary: Alberta (Information and Privacy Commissioner) v. Alberta Teachers’ Association, 2011 SCC 61 (CanLII), [2011] 3 S.C.R. 654 at paras. 22–29. In R. v. Vidulich, 1989 CanLII 231, Lambert J.A. wrote at p. 11 of an application for leave to argue a new issue on appeal:

The decision whether to grant leave is a matter for the discretion of the court. The exercise of the discretion will be guided by balancing the interests of justice as they affect all the parties. The rule is no different in criminal cases than it is in civil cases, though the balancing of the interests of justice may have a different emphasis.

[50]        Accordingly, in my view, the standard of review in relation to the issue of whether the parties have identified extricable questions of law is correctness. However, we should defer to the trial judge’s assessment of the importance of the result to the parties and the public, the risk of a miscarriage of justice and whether Concord should be able to raise a legal question on appeal that was not argued before the arbitrator.

[51]        Insofar as the identification of an extricable question of law is concerned, we must closely scrutinize the argument, as Gascon J. cautioned in Teal:

[44]        [W]hile the application of a legal test to a set of facts is a mixed question, if, in the course of that application, the underlying legal test may have been altered, then a legal question arises. For example, if a party alleges that a judge (or arbitrator) while applying a legal test failed to consider a required element of that test, that party alleges that the judge (or arbitrator), in effect, deleted that element from the test and thus altered the legal test. As the Court explained in Southam, at para. 39:

. . . if a decision-maker says that the correct test requires him or her to consider A, B, C, and D, but in fact the decision-maker considers only A, B, and C, then the outcome is as if he or she had applied a law that required consideration of only A, B, and C. If the correct test requires him or her to consider D as well, then the decision-maker has in effect applied the wrong law, and so has made an error of law.

Such an allegation ultimately challenges whether the judge (or arbitrator) relied on the correct legal test, thus raising a question of law (Sattva, at para. 53; Housen, at paras. 31 and 34-35). Accordingly, such a legal question, if alleged in the context of a dispute under the Arbitration Act, and assuming the other jurisdictional requirements of that Act are met, is open to appellate review. These “extricable questions of law” are better understood as a covert form of legal question — where a judge’s (or arbitrator’s) legal test is implicit to their application of the test rather than explicit in their description of the test — than as a fourth and distinct category of questions.

[45]        Courts should, however, exercise caution in identifying extricable questions of law because mixed questions, by definition, involve aspects of law. The motivations for counsel to strategically frame a mixed question as a legal question — for example, to gain jurisdiction in appeals from arbitration awards or a favourable standard of review in appeals from civil litigation judgments — are transparent (Sattva, at para. 54; Southam, at para. 36). A narrow scope for extricable questions of law is consistent with finality in commercial arbitration and, more broadly, with deference to factual findings. Courts must be vigilant in distinguishing between a party alleging that a legal test may have been altered in the course of its application (an extricable question of law; Sattva, at para. 53), and a party alleging that a legal test, which was unaltered, should have, when applied, resulted in a different outcome (a mixed question).

One West project costs

[52]        Greta submits the chambers judge erred in his assessment of whether the question it posed was a question of law and whether the proposed appeal had arguable merit.

[53]        Greata submits the arbitrator failed to construe the contract as a whole because he ignored the requirement that payments on suspension or abandonment of the project be “in accordance with and proportionate to the schedule of payments of fees and costs set out in the Budget”. The project cost claim, it argues, is addressed in only the last sentence of para. 75 of the award: the simple conclusion that “One West is entitled to claim for costs incurred on the termination of the PMA concurrently with the dissolution of the Partnership.”

[54]        Greata suggests the arbitrator made two errors of law: failing to give words in the contract any meaning (citing Deslaurier Custom Cabinets Inc. v. 1728106 Ontario Inc., 2017 ONCA 293 (CanLII)) and interpreting the contract by reading one part of a clause in isolation (citing 1298417 Ontario Ltd. v. Lakeshore (Town), 2014 ONCA 802 (CanLII)). As I have noted, such arguments must be weighed carefully so as to identify the strategic framing of mixed questions as legal questions.

[55]        Greata contends the arbitrator did not adopt either of the interpretations of s. 9.1 upon which an award might have been founded. He did not expressly hold that liability arises when the work is abandoned or suspended, irrespective of whether there is an approved “Budget” in place. Nor did he expressly hold that recovery under s. 9.1 is not conditional upon adoption of a “Budget”. Either of those conclusions, Greata submits, if made, would have, in any event, amounted to an extricable error of law.

[56]        Greata acknowledges the arbitrator was aware of the submission that a Budget had not been approved, as contemplated. He addressed that fact at para. 82 of the award:

I am satisfied that no loss or damage to the Partnership was caused by the absence of a formal Budget or any deficiencies in One West’s less formal budgeting and costs control procedures.

[57]        However, Greata says it was not open to the arbitrator to conclude that because the parties had not adopted a Budget and because that choice had caused no loss, there was no need to consider whether s. 9.1 precluded payment. It says there was no plea by One West or Concord that Greata had waived the budget requirement and “to the extent that the award can be read as accepting that payments under s. 9.1 could be made in accordance with the ‘informal’ budgeting process which was used, there is nothing in the award that demonstrates that the arbitrator turned his mind to the effect of the requirement that One West’s recovery be proportionate to the line items of cost required by the Budget”.

[58]        I would not accede to that argument. It amounts to saying: “while the arbitrator may have concluded that payments under s. 9.1 could be made in accordance with the ‘informal’ budgeting process, he did not turn his mind to the requirement that One West’s recovery be proportionate to the line items of cost required by the Budget”. That argument suggests the arbitrator ought to have read into the contract an absurd term: that where costs and fees are recoverable as a result of the implicit agreement to proceed without a budget, the claim must be proportionate to a schedule of payments of fees and costs set out in the non-existent Budget.

[59]        Concord says the arbitrator was faced with the question whether One West could claim the significant costs it incurred in the period during which the parties sought to advance the development or whether it was precluded from doing so because they had not agreed upon a Budget within the first 15 days. Concord says this question was clearly one of mixed fact and law: what did the parties intend by the language of the agreement, viewed objectively, in the circumstances in which it was made: Hayes Forest Services Limited v. Weyerhaeuser Company Limited, 2008 BCCA 31 (CanLII); Petty v. Telus Corp., 2002 BCCA 135 (CanLII).

[60]        The position taken by Greta, that One West can only claim to be entitled to payment “in accordance with and proportionate to the schedule of payments and fees and costs set out in the budget”, was clearly enunciated in Greata’s pleadings. Concord submits the arbitrator cannot be taken to have ignored the pleadings and must be taken to have rejected Greata’s position. Further, however, Concord says the arbitrator expressly referred to the argument. He noted that Greata disputed the material invoice, in part, because the two-line statement it contained did not comply with a budget schedule and no “Budget”, as defined by the PMA was ever adopted (a phrase emphasized by the arbitrator).

[61]        He expressly addressed Greata’s conduct, observing that its position in relation to pre-contract legal costs and expenditures (that they were not recoverable) was “otherwise inconsistent with the conduct of the parties and the overall Partnership relationship”.

[62]        As the chambers judge noted, the arbitrator considered the fact One West had produced cost projections for the project as a whole. He found that compliance with the requirement that a Budget be adopted was precluded, in part, by difficulty in estimating the cost of not yet designed portions of the project. He noted Greata’s position was that more, rather than less, should be spent on development and considered the fact non-compliance was not prejudicial to Greata.

[63]        Here, as in Richmont, the arbitrator described the issue, addressed it and expressly rejected the position being taken by the appellant. He did not ignore ss. 7.1 and 9.1 but expressly referred to them. He had regard to the factual matrix and was alive to the issue of whether his interpretation of the agreement would accord with good business sense.

[64]        Even assuming Greata has correctly identified an error in the arbitrator’s award in the manner in which s. 9.1 was construed, that error “could not … be extricated from the factual matrix” of the case.

[65]        Greata is correct to say the arbitrator did not expressly construe the meaning of s. 9.1 of the PMA. He did not clearly rely upon waiver or upon quantum meruit in support of the award (as those doctrines are only described by the arbitrator as alternate means of arriving at the same result). However, in the circumstances, because the contract might have been read as Concord suggests, in a manner consistent with the result, the failure to expressly adopt the waiver or quantum meruit arguments is not evidence of a failure to give weight to ss. 7.1 and 9.1.

[66]        Concord points out that payment upon suspension or abandonment of the project expressly depends upon one condition: that the work is not defective. There is no other clear condition. The applicable clause reads as follows:

9.1      If any work undertaken by [One West] is abandoned or suspended by the Partnership in whole or in part, [One West] will, provided that such work or services is not defective, be paid on abandonment or suspension for the services rendered on account of such work, in accordance with and proportionate to the schedule of payments of fees and costs set out in the Budget.

[Emphasis added.]

[67]        Concord argues this provision may be read in such a manner as to require a determination that the work or services are not defective but does not establish any other precondition to payment. The phrase “in accordance with” describes a standard against which the cost of the work is to be assessed but is not mandatory. This interpretation leaves it open to the arbitrator to make an award for payment of work or services that are not defective so long as the fees and costs are reasonable.

[68]        I cannot say the arbitrator ignored s. 9.1 of the PMA. I therefore cannot say the chambers judge erred in concluding that Greta had not identified an extricable question of law as a basis upon which to challenge the arbitrator’s decision.

[69]        I would dismiss the appeal from the refusal to grant leave to appeal the One West award.

Concord Loan

[70]        When considering whether a new argument, founded upon the provisions of the Partnership Act could be advanced on appeal, the chambers judge referred to two of the leading authorities: On Call Internet Services and Laursen v. Director of Crime Victim Assistance, 2017 BCCA 8 (CanLII). He correctly identified the criteria set out in Laursen, namely: whether the issue is a question of pure law, capable of resolution on appeal; and whether any prejudice would be occasioned by hearing the new argument. In my view there was no error in describing or applying the appropriate test in relation to the decision to grant leave to advance a new argument.

[71]        Greata says Concord failed to adduce evidence about why the Partnership Act issue was not raised for determination by the arbitrator. It argues the chambers judge erred in accepting, at face value, counsel’s assertion that it had not been anticipated that the arbitrator would address post-dissolution asset distribution. In the result, it says, the chambers judge erred in failing to exercise the residual discretion to deny leave in circumstances where a new argument is advanced on appeal.

[72]        Referring to paras. 94 and 95 of the award, Greata says it was no surprise that the priority of the Loan would be an issue on dissolution of the partnership. It says “the analysis of s. 10.7(c)(iv) of the LPA, and the priority it gives to ‘debts and liabilities’ over the Interests of the partners was at the core of the Arbitrator’s analysis”.

[73]        It is correct to say that on an application to address an issue not previously raised, the application judge may require evidence in support of the submission that the party seeking to raise the issue was taken by surprise and did not make an informed decision not to raise it earlier. For example, in On Call Internet Services Ltd. v. Telus Communications Company, 2013 BCCA 366 (CanLII), Kirkpatrick J.A. discussed the importance of the evidentiary record on an application to advance a new argument on an appeal from arbitration. Similarly, in Price v. Robson, 2017 BCCA 419 (CanLII) (Chambers), Fitch J.A. refused to grant leave for a new issue to be raised for the first time on appeal when the applicant had not provided an adequate explanation for why the issue was not raised in the Court below.

[74]        However, that is not an inflexible rule. Indeed, in this case it is clear from the circumstances that neither party recognized the issue in time to address it at arbitration. As Concord points out, while dissolution of the Partnership was at issue in the arbitration proceeding, Greata’s position until argument was that the Partnership was not dissolved and, while Concord sought declarations in support of dissolution, it did not expressly seek a declaration with respect to priorities of claims on dissolution. Indeed, before the chambers judge, Greata submitted that the arbitrator had exceeded his jurisdiction by allowing a claim arising from dissolution that had not been submitted to arbitration. It argued dissolution of the partnership had not been pleaded as a basis for finding that work on the Project was “abandoned or suspended”. I can see no basis for setting aside the chambers judge’s assessment of the case for granting leave to address a new issue when both parties before him, albeit for different reasons, argued that the effects of dissolution had not been front and centre when the parties went to arbitration.

[75]        In my view the chambers judge did not err in concluding the arbitration took an unexpected turn and the provisions of the Partnership Act were not raised because Concord did not anticipate the arbitrator would address post-dissolution asset distribution.

[76]        Greata says the issue of the effect of the Partnership Act provisions on the terms of the Loan is not a purely legal question. Greata says a more extensive evidentiary record could have shed “further light” on the interaction of the Partnership Act with the terms of the loan if Concord had raised this issue at the arbitration. Specifically, Greata submits a certificate required by the Partnership Act that was not in evidence could have been relevant.

[77]        Such a certificate is indeed provided for in the Partnership Act. Section 27 of the Partnership Act provides that advances or payments made by partners fall to be categorized either as an “amount of capital” which the partner agreed to subscribe, or as a further amount, on which the partner would be entitled to interest. In respect of limited partnerships, s. 51 of the Act requires a certificate to be filed that sets out the “aggregate amount of cash and the nature and fair value of any other property to be contributed by all of the limited partners” and the “aggregate amount of any additional contributions agreed to be made by limited partners and the times at which or events on the happening of which the additional contributions are to be made”.

[78]        In response, Concord says its argument based upon the Partnership Act depends upon the characterization of the advance to the partnership as a loan, rather than a contribution to the partnership’s capital. Concord says it might have adduced the certificate in evidence had Greata sought to establish at arbitration that the $6,000,000 advance was an “amount of capital” that a partner agreed to contribute. However, Greata did not take that position at arbitration. In my opinion the chambers judge did not err in concluding that Greata was not prejudiced by the inability to lead evidence with respect to the certificate on appeal.

[79]        Insofar as the merits of the proposed appeal are concerned, Greata submits the chambers judge should have found that consideration of the Partnership Act is unlikely to have affected the result. Greata notes the chambers judge considered its position to be a “robust” (and therefore, it says, a strong, arguable) interpretation of the Partnership Act as it relates to contractual rights. That being the case, Greata says he ought to have dismissed Concord’s Petition.

[80]        Concord says Greata mischaracterizes the role of the chambers judge. It says he was called upon to determine whether the question of law in issue pertained to a material issue which, if decided differently would affect the result. That required the chambers judge to determine whether the legal point has “arguable merit”. Concord says an appeal has arguable merit if “the issue raised by the applicant cannot be dismissed through a preliminary examination of the question of law”. In support of that proposition Concord cites the following passage from Sattva which, in my view, is decisive of the issue:

[74]        [The] appropriate threshold for assessing the legal question at issue under s. 31(2) is whether it has arguable merit. The arguable merit standard is often used to assess, on a preliminary basis, the merits of an appeal at the leave stage … “Arguable merit” is a well-known phrase whose meaning has been expressed in a variety of ways: “a reasonable prospect of success” … “some hope of success” and “sufficient merit” …; and “credible argument” … In my view, the common thread among the various expressions used to describe arguable merit is that the issue raised by the applicant cannot be dismissed through a preliminary examination of the question of law. In order to decide whether the award should be set aside, a more thorough examination is necessary and that examination is appropriately conducted by the court hearing the appeal once leave is granted.

[75]        Assessing whether the issue raised by an application for leave to appeal has arguable merit must be done in light of the standard of review on which the merits of the appeal will be judged. This requires a preliminary assessment of the applicable standard of review. As I will later explain, reasonableness will almost always apply to commercial arbitrations conducted pursuant to the AA, except in the rare circumstances where the question is one that would attract a correctness standard, such as a constitutional question or a question of law of central importance to the legal system as a whole and outside the adjudicator’s expertise. Therefore, the leave inquiry will ordinarily ask whether there is any arguable merit to the position that the arbitrator’s decision on the question at issue is unreasonable, keeping in mind that the decision-maker is not required to refer to all the arguments, provisions or jurisprudence or to make specific findings on each constituent element, for the decision to be reasonable… Of course, the leave court’s assessment of the standard of review is only preliminary and does not bind the court which considers the merits of the appeal. As such, this should not be taken as an invitation to engage in extensive arguments or analysis about the standard of review at the leave stage.

[Citations omitted.]

[81]        I agree with Concord’s submission that Greata’s first position, that leave should not have been granted unless a convincing case could be made out, invites us to go well beyond a preliminary examination of the question of law.

[82]        Greata further contends, however, that Concord’s proposed appeal lacks arguable merit. Concord seeks to rely on what it says are “mandatory provisions” of ss. 42(1), 60 and 73 of the Partnership Act, which it says govern the operation of the LPA. Greata argues that s. 42 gives partners the right to have the property of the partnership applied in payment of the debts and liabilities of the firm but it does not address the distribution priority. It says that s. 60 is not mandatory but simply permits limited partners to receive a proportionate share of the assets, along with other creditors, in payment of their claims to be repaid money lent to the partnership (other than capital contributions). It says s. 73 provides a mandatory scheme for distribution on dissolution of a limited partnership, which prioritizes the payment of “liabilities of the partnership to creditors” over payments to “limited partners on account of their contributions”. But nowhere in the Act is a “contribution” defined. It says the characterization of a payment of funds as either a liability or a contribution is a question of fact, analogous to the characterization of shareholder loans versus capital contributions, and argues the arbitrator concluded that as between them, the partners agreed the Loan would be treated as equivalent to a capital contribution. It relies on the statement of Newbury J.A. in Ghassemvand v. Premium Weatherstripping Inc., 2017 BCCA 309 (CanLII) (at para. 35) that “the law seems to be clear that this ‘characterization’ is primarily a question of fact, or perhaps mixed fact and law (insofar as Sattva applies), to be determined by reference to all the circumstances at the time of the advance”.

[83]        Concord disputes this interpretation of the award. It says it is an error to say the arbitrator concluded that the $6 million loan was a capital contribution rather than a debt of the Partnership. It says the arbitrator used no such language, and argues that it was “not open” to the arbitrator to conclude the advance was a capital contribution for two reasons. First, because such a finding would have been inconsistent with Greata’s express refusal to treat the advance as capital because doing so would equalize the partners’ capital accounts. Second, because capital contributions cannot be withdrawn whereas Greata admitted that the $6,000,000 advance was repayable upon a benchmark being met.

[84]        Concord also says Greata misstates its argument with respect to the effect of the Partnership Act. It intends to argue that the Act was intended to displace the common law rule that the transfer of money by a partner to a partnership will not create a debtor/creditor relationship between the partner and the firm but is considered an “advance”, which is dealt with only on a taking of accounts following a dissolution of the firm.

[85]        Concord explains its position on the impact of the Partnership Act as follows. Pursuant to subsection 60(2) of the Partnership Act, the $6 million “loan” has the same legal status as loans from third parties. Pursuant to ss. 42(1) and 73 of the Partnership Act, an agreement, such as the arbitrator found existed, to subordinate the $6 million loan such that it is not rateable with other debts owed to third parties would be legally ineffective. Pursuant to s. 73, the partners’ agreement can vary the order of distribution under sub-sections (c) through (f); however, their agreement cannot alter the requirement that a limited partnership pay its liabilities to creditors first, before subsequent distributions are made from the remaining assets. In support of this argument Concord relies upon the description of similar (and dissimilar) legislation and the common law rule in Byers v. CanEnerco Ltd., 2001 CanLII 28275 (ON SC), 30 C.B.R. (4th) 195; 2001 CanLII 28275 (ON SC).

[86]        These competing arguments clearly require consideration. I would not accede to the argument that the chambers judge ought to have dismissed the petition because the extricable question of law could not arguably have affected the result. In the words used, at para. 74 of Sattva, “a more thorough examination is necessary and that examination is appropriately conducted by the court hearing the appeal once leave is granted”.

[87]        There remains for consideration only the question of whether the chambers judge erred in concluding that an extricable question of law was not raised in relation to the arbitrator’s refusal to allow a claim for interest on the Concord loan.

[88]        In relation to that issue, the parties’ roles are reversed. Concord relies upon the proposition that it is an extricable error of law on the part of an arbitrator to fail to apply a specific and relevant portion of a contract (citing Greata’s factum and para. 64 of Sattva); whereas Greata says Concord’s appeal rests on a faulty premise: that s. 4.4 of the LPA requires the payment of interest at the Interest Rate for all loans made by Concord. It describes that as a question of contractual interpretation and a question of mixed fact and law that is not open to review.

[89]        For ease of reference, I reproduce the material clause:

4.4      Concord may make, but is not obliged to make, a loan or loans to the Limited Partnership at the Interest Rate and on other terms acceptable to the General Partners, such funds as are necessary to enable the Management Committee to carry out the purposes of the Limited Partnership.

[90]        Concord says s. 4.4 of the LPA requires the General Partners to agree upon the terms of a loan other than the Interest Rate. The applicable interest rate is pre-determined. It argues the definition of “Interest Rate” in the LPA and the reference to the defined term in clause 4.4 are unnecessary if partners have to agree on the rate of interest on loans made pursuant to the section. The contract should not be read in such a manner as to make its provisions superfluous or unnecessary.

[91]        Concord says the evidence at arbitration was that the only term of the loan ever discussed between the partners was whether or not it would be payable on demand.

[92]        The arbitrator reproduced s. 4.4 at para. 90 of the award and noted that the parties agreed the loan was made pursuant to s. 4.4. He noted, in the same paragraph, that the parties had been unsuccessful at negotiating the terms of the loan. He then turned (at paras. 91–92) to the question of whether the loan was a demand loan, as Concord argued, or an “interest” of Concord payable pursuant to s. 10(7)(c)(vi) of the LPA, as Greata argued. He discussed (at paras. 93–95) the definition of a partner’s “Interest” in the partnership before concluding: “[i]t follows that in the absence of any agreement by the MC to pay interest on the loan, no interest is claimable”.

[93]        The arbitrator’s analysis does not refer to the phrase in s. 4.4 that loans made pursuant to that section are made “at the Interest Rate”, nor to the definition of “Interest Rate” in s. 1.1 of the LPA.

[94]        Concord contends there is no explanation in the award justifying the failure to apply the plain language of s 4.4 of the LPA and the definition of “Interest Rate” in s.1.1. It argues, further, that it was inconsistent for the arbitrator to default to the terms of the LPA to resolve uncertainty with respect to the repayment term but not to default to the defined Interest Rate to resolve uncertainty with respect to interest.

[95]        Greata says the arbitrator concluded that the loan was a loan made under s. 10.5 of the LPA. It submits s. 10.5 provided for a mandatory loan from Concord LP, under certain conditions but did not provide any specific terms for the Loan regarding either the term of the loan or the interest rate.

[96]        Although Greata’s submissions here are correct, they are beside the point. The question is not whether s. 10.5 provided for specific terms, but whether s. 4.4 provided for such terms. As acknowledged by the arbitrator, the parties agreed the loan was made pursuant to s. 4.4. That provision of the LPA referred to a defined Interest Rate.

[97]        In my view, the chambers judge erred by not granting Concord leave to appeal on this question. The question whether the arbitrator erred by failing to assign meaning to all the contested terms of a contract and by adopting a construction of a contract inconsistent with the governing principles of contractual interpretation is an extricable question of law: Richmont. There is arguable merit in Concord’s position.

[98]        I would allow the appeal only insofar as I would grant leave to Concord to raise on appeal the question whether the arbitrator erred in law by failing to consider the effect of the definition of the term “Interest Rate” in the LPA and to give effect to the defined term.

“The Honourable Mr. Justice Willcock”

I agree:

“The Honourable Mr. Justice Fitch”

I agree:

“The Honourable Mr. Justice Abrioux”

IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF
ENGLAND AND WALES
COMMERCIAL COURT (QBD)

Introduction

1. 1. This is an application by the Claimant, Process and Industrial Developments Ltd (“P&ID”), pursuant to s. 66 Arbitration Act 1996, for an order that P&ID have leave to enforce an arbitration award dated 31 January 2017 in the same manner as a judgment or order of this court to the same effect. The Defendant, the Federal Republic of Nigeria (“the FRN”), resists the making of such an order.
   2. The award of 31 January 2017 to which this application relates is stated to be a Final Award made by the majority of a tribunal consisting of Sir Anthony Evans, Chief Bayo Ojo SAN, and Lord Hoffmann (“the Tribunal”). The majority was comprised of Sir Anthony Evans and Lord Hoffmann, and Chief Bayo Ojo dissented. I will refer to that award as “the Final Award”.
   3. The Final Award was made in arbitration proceedings relating to a dispute between P&ID and the FRN arising out of a Gas Supply and Processing Agreement (the “GSPA”) entered into between P&ID and the FRN acting by its Ministry of Petroleum Resources (“the Ministry”), dated 11 January 2010.
   4. An application to enforce an arbitration award under s. 66 Arbitration Act 1996 is a summary procedure. It usually does not require a detailed investigation of the facts of the arbitration. In the present case, however, because there is an issue between the parties as to the seat of the arbitration, and as to whether enforcement under s. 66 Arbitration Act 1996 is available to P&ID at all, it is necessary to summarise the salient facts.

Factual Background

1. 1. Under the terms of the GSPA between the parties:

(1) The FRN was to supply natural gas (“Wet Gas”), at no cost to P&ID, via a government pipeline, to the site of P&ID’s production facility.

(2) P&ID was to construct and operate the facility necessary to process the Wet Gas by removing the natural gas liquids (“NGLs”) contained within it, and to return to the FRN lean gas suitable for use in power generation or other purposes, at no cost to the FRN.

(3) P&ID was to be entitled to the NGLs stripped from the Wet Gas.

(4) The GSPA was to run for 20 years from the date of first regular supply of Wet Gas by the FRN.

1. 1. Clause 20 of the GSPA provided, in part, as follows:

“The Agreement shall be governed by, and construed in accordance with the laws of the Federal Republic of Nigeria.

The Parties agree that if any difference or dispute arises between them concerning the interpretation or performance of this Agreement and if they fail to settle such difference or dispute amicably, then a Party may serve on the other a notice of arbitration under the rules of the Nigerian Arbitration and Conciliation Act (Cap A18 LFN 2004) which, except as otherwise provided herein, shall apply to any dispute between such Parties under this Agreement. Within thirty (30) days of the notice of arbitration being issued by the initiating Party, the Parties shall each appoint an arbitrator and the arbitrators thus appointed by the Parties shall within fifteen (15) days from the date the last arbitrator was appointed, appoint a third arbitrator to complete the tribunal. …

The arbitration award shall be final and binding upon the Parties. The award shall be delivered within two months after the appointment of the third arbitrator or within such extended period as may be agreed by the Parties. The costs of the arbitration shall be borne equally by the Parties. Each Party shall, however, bear its own lawyers’ fees.

The venue of the arbitration shall be London, England or otherwise as agreed by the Parties. The arbitration proceedings and record shall be in the English language.

The Parties shall agree to appropriate arbitration terms to exclusively resolve any disputes arising between them from this Agreement.”

1. 1. By 2012 a dispute had arisen in relation to the GSPA. P&ID contended that the FRN had failed to make available Wet Gas in accordance with the GSPA. On 22 August 2012 P&ID served its Notice of Arbitration. On 19 September 2012, P&ID appointed Sir Anthony Evans to act as arbitrator. On 30 November 2012, the FRN appointed Chief Bayo Ojo, SAN as its arbitrator. The two arbitrators invited Lord Hoffmann to become “chairman” of the arbitral tribunal, and he accepted this appointment on 29 January 2013.
   2. By its initial Statement of Case in the arbitration, served on 28 June 2013, P&ID claimed that the FRN was in repudiatory breach of the GSPA, and that that repudiation had been accepted. P&ID claimed damages, quantified at that stage as US$5,960,226,233 plus interest.
   3. On 3 July 2014 the Tribunal made a unanimous Part Final Award. It bore the heading “In the matter of the Arbitration Act 1996 (England and Wales) and in the matter of an arbitration under the Rules of the Nigerian Arbitration and Conciliation Act (Cap A18 LFN 2004)”. That Part Final Award dealt with certain preliminary issues which arose. The first was as to whether the Tribunal had jurisdiction to rule on its own jurisdiction. It held that it had. It said that the Arbitration Rules scheduled to the Nigerian Arbitration and Conciliation Act 1988 (“ACA”) were clear on this point, and cited Article 21 of those Rules. It continued in paragraph 36: “By the law of the seat of arbitration, England, section 30(1) of the Arbitration Act 1996 confers a similar jurisdiction.” The Part Final Award also determined that the Ministry and the Government of the FRN were one and the same, and it had entered into the GSPA on behalf of the Government. The Part Final Award specified, at the end: “Place of arbitration: London, United Kingdom”.
   4. A hearing on liability took place before the Tribunal on 1 June 2015. On 17 July 2015 the Tribunal issued a second Part Final Award, which has been referred to on this application, and to which I will refer, as “the Liability Award”. It bore the same heading as the first Part Final Award. In the Liability Award the Tribunal unanimously decided that the FRN had repudiated the GSPA by failure to perform its obligations thereunder; that P&ID was entitled to and did accept the FRN’s repudiation of the GSPA; and that P&ID was entitled to damages, in an amount to be assessed, for the repudiation of the GSPA. The Liability Award stated, at the end: “Place of arbitration: London, United Kingdom”.
   5. Following the Liability Award, there occurred a number of matters which have been the subject of debate on this application, and which it is necessary to refer to in somewhat more detail.
   6. On 23 December 2015 Stephenson Harwood LLP, acting for the FRN, issued an Arbitration Claim Form in this Court (ie the Commercial Court). In that Claim Form the “Remed[ies] Claimed” were as follows: (1) an order under CPR Part 62.9(1) extending the time under s. 70(3) Arbitration Act 1996 for an application under s. 68 of that Act; and (2) an order setting aside the Liability Award and/or remitting it for further consideration under s. 68(2)(d) or s. 68(2)(f) Arbitration Act 1996, on the basis that there had been a serious irregularity. The Grounds specified in the Claim Form were: (A) that there was an internal inconsistency in the Liability Award; (B) that the Tribunal had not dealt with the Ministry’s case that it lacked factual authority to perform the GSPA separately from its case that it lacked legal capacity to do so; and (C) that there had been no reasoning on the issue of whether the Ministry’s conduct was repudiatory.
   7. The FRN’s solicitors served a witness statement in support of its applications for an extension of time and under s. 68 Arbitration Act 1996. This was a statement of Folakemi Adelore, the Director of Legal Services at the Ministry, and was dated 22 December 2015. Ms Adelore stated (at paragraph 10) that the proposed claim was brought 4 months, 8 days out of time; that “this delay was not in any way deliberate or calculated”; and that the reason for it was the political situation in Nigeria, which had seen elections on 28 and 29 March 2015 result in the defeat of the administration of President Goodluck Jonathan, and a subsequent period in which the new administration was settling into office, meaning that ministers, including the Attorney-General of the FRN, had only been appointed in November 2015.
   8. Ms Adelore’s witness statement stated, at paragraph 22:

“On 21 July 2015, TMS [Twenty Marina Solicitors (the legal representatives of the Ministry in Nigeria)] advised me as to whether the Award failed completely and/or clearly to address the issues presented by the Respondent and as to whether or not it should be challenged accordingly. The Ministry understood that in order to challenge the Award, it would need to instruct a firm of solicitors in the U.K. given that any such challenge would have had to be before the English courts under the English Arbitration Act 1996. (Nothing set out in this statement shall constitute a waiver of privilege.)”

1. 1. Ms Adelore’s witness statement further stated, at paragraph 33:

“Since receipt of the documents on 25 November 2015, Stephenson Harwood and Leading Counsel have been considering the merits of the Applications, advising the Ministry on the same and preparing the Applications. The issue of jurisdiction of this Court and the seat of the Arbitration had first to be considered, in particular given the differing headings on the various procedural orders and the Part Final Award dated June 2014.”

1. 1. As is standard practice, the FRN’s applications were put before a judge of the Commercial Court on paper. On 10 February 2016 Phillips J made an order dismissing the FRN’s application for an extension of time. Phillips J’s Reasons stated that there was no adequate explanation for the delay. Paragraph 3 of those Reasons was as follows:

“In refusing to extend time I further take into account that the grounds of appeal have no merit. As to ground (A), it is incorrect to say that the Tribunal found that the claimant was not in breach of art 6(a): the finding was that the claimant had put itself in a position where it was impossible for it to comply with art 6(a) by virtue of its own breach of art 6(b). There was no internal inconsistency in the Tribunal’s reasons. As to ground (B), the Tribunal clearly addressed the actual authority of claimant to enter and perform the GSPA, holding that that was the prima facie position and rejecting the claimant’s arguments to displace that starting point. There was no ambiguity or confusion in its findings between the concepts of capacity and authority. As to ground (C), there was a clear and sufficient finding that the breach of art 6(b), rend[er]ing it impossible to perform art 6(a), was a repudiatory breach. The contention that separate consideration should have been given to a breach of art 6(b) alone is misconceived.”

1. 1. After this decision by Phillips J, by Originating Motion dated 24 February 2016 the Minister of Petroleum Resources of the FRN commenced proceedings in the Lagos Judicial Division of the Federal High Court of Nigeria. The Originating Motion sought essentially the relief which had been sought in the English action: an extension of time, and the setting aside and/or remission of the Liability Award. One of the Grounds of this application was stated to be that “The parties have effectively agreed that the seat of arbitration is Nigeria and consequently Nigerian law is the lex arbitri.” In the Affidavit in Support sworn by Safiat Kekere-Ekun, she said that after the ruling of Phillips J, the FRN had “embarked on a careful and comprehensive review of the entire case file of the arbitration proceedings … followed by series of brainstorming sessions particularly with respect to the seat of the arbitration.” She said that, as a result of this consideration, she believed that the GSPA was “more closely connected to Nigeria than any other country including England”, and that “the present Applicant’s reference to the English courts was as an inadvertence.”
   2. The Originating Motion and, the Affidavit in Support were sent to P&ID’s representatives and to the members of the Tribunal, by email, on 4 March 2016. On 7 March 2016, the legal representatives of the Ministry wrote to the Tribunal, requesting an extension of time to serve its statement on damages. The letter stated: “As the Tribunal is aware, we are dissatisfied with the Award on liability; we are currently contesting the Award in a court of law.” This produced a response from SCA Ontier on behalf of P&ID on 8 March 2016. That response strongly opposed any extension of time. As to the mention of a contest to the Liability Award in a court of law, SCA Ontier referred to the prior application to the English court, following consideration of the issue of the location of the seat by the Ministry’s legal team. SCA Ontier stated that “P&ID regards [the Nigerian] proceedings as abusive and as a deeply unattractive attempt to forum shop.” The Ministry’s legal representatives responded to this on 9 March 2016. That letter stated, in part “It cannot seriously be contended that the parties have agreed to any other curial law or law governing the proceedings of this arbitration than the Nigerian Arbitration and Conciliation Act 1988 … and the Rules made pursuant thereto… Since the claimant has chosen to address matters of ‘seat’ not raised in our request we feel it is important to respond by way of clarification. Contrary to the Claimant’s assertion the issue of seat of the arbitration has not been determined by any Court. Furthermore, and contrary to the Claimant’s assertion, the arbitration clause did not designate ‘England as the Seat of the Arbitration’. The Arbitration clause merely makes mention of the ‘venue’ of the arbitration. In any event we fail to see the relevance of these matters to the fairly straight forward application for extension of time.”
   3. On 10 March 2016, SCA Ontier replied to the email of 9 March 2016. This email stated that P&ID’s position was that the parties had agreed, by the arbitration clause in the GSPA, that London was the seat of the arbitration; alternatively, it had been determined by the Tribunal, without objection from the FRN, by the statement in the two Part Final Awards and in procedural orders that the “Place of Arbitration” was London; alternatively, by the English Court’s assumption of jurisdiction at the invitation of the FRN. The Ministry’s representatives took issue with this by email on 11 March 2016, stating that “Place of Arbitration” referred simply to the venue for hearings; and that the Ministry had “always maintained its position that this arbitration including its seat is Nigeria.” SCA Ontier replied on the same date, disagreeing, and stating that the “place of the arbitration” meant the seat; and also referring to a letter which P&ID’s solicitors had written on 24 October 2013 which had stated that the seat of the arbitration was London with which no issue had been taken by the Ministry until 2016. The Ministry’s legal representatives disputed these matters on 13 March 2016.
   4. On 14 March 2016 Lord Hoffmann, on behalf of the Tribunal, sent an email to the parties’ legal representatives. This email stated: “The Tribunal notes the correspondence between the parties as to (1) the seat of arbitration (2) the respondent’s application for an extension of time for it to serve its evidence. The Tribunal will shortly give a ruling on these matters and does not invite further submissions.”
   5. On the same date, Mr Shasore SAN on behalf of the Ministry sent an email to the Tribunal which stated: “Respondent has not made an application for determination of seat which we do not believe is in controversy. We merely asked for extension of time.” The terms of this email are perhaps surprising. That a “controversy” in relation to the seat of the arbitration had by now arisen was quite clear from the correspondence of the previous ten days.
   6. On 16 March 2016 the Tribunal gave to the FRN an extension of time for its statement and evidence on quantum until 8 April 2016. On 18 March 2016 SCA Ontier wrote to the Ministry’s legal representatives, copying in the Tribunal, saying that it was clear that the issue of the seat of the arbitration was in controversy and that “the Tribunal’s forthcoming determination of the issue of seat will provide necessary clarity on the point.” On 1 April 2016 SCA Ontier wrote to the Tribunal encouraging it to rule on the seat of the arbitration prior to a hearing in the Nigerian proceedings scheduled for 20 April 2016.
   7. In response to these developments, on 5 April 2016 the Ministry issued a Motion on Notice in the action which it had commenced in the Federal High Court of Nigeria giving notice that it would seek “An order restraining the parties in this suit whether by themselves or through their agents, servants, privies, assigns, representatives or anybody whatsoever from seeking and or continuing with any step, action and or participate directly or indirectly in the arbitral proceedings between the parties before: Lord Leonard Hoffmann (‘Presiding Arbitrator’), Sir Anthony Evans, and Chief Bayo Ojo, SAN pending the hearing and determination of this suit.” A copy of this Motion was sent by email to SCA Ontier and to the Tribunal on 5 April 2016.
   8. SCA Ontier responded on 8 April 2016, stating that P&ID would not be participating in the Nigerian proceedings, “inter alia on the basis that London is the seat of the arbitration”, and (amongst other things) that “the reality is that your client’s recently instituted Nigerian proceedings, including its application for injunctive relief, are an illegitimate attempt to circumvent the ongoing arbitration and a breach of your client’s own obligation to participate in the arbitration in good faith.”
   9. The Ministry’s response was, on 14 April 2016, to ask the Tribunal to await the outcome of the pending interlocutory application in the Nigerian Courts. SCA Ontier on 19 April 2016 urged the Tribunal to make a prompt ruling in relation to the issue of the seat of the arbitration, which was “now especially urgent” in light of the hearing in the Nigerian Courts scheduled for 20 April. On the same day, Lord Hoffmann responded on behalf of the Tribunal:

“The Tribunal acknowledges receipt of [SCA Ontier’s email of 19 April 2016]. Until now, the Tribunal has not considered that there was an issue arising in the arbitration which required it to pronounce upon where the seat is located. It has not been invited to do so by the Nigerian court. However, if that court were to grant an injunction affecting the arbitration, the Tribunal would of course have to rule on the question of the seat in order to decide what effect should be given to the injunction. [SCA Ontier’s email of 19 April 2016] invites the Tribunal to give such a ruling in advance of any decision in Nigeria. The members of the Tribunal will consult on whether it would be appropriate to do so.”

1. 1. On 20 April 2016, the Hon Justice I.N. Buba made an order in the Lagos Judicial Division of the Federal High Court of Nigeria, as follows

“(1) That an order is granted to the Applicant [the Minister of Petroleum Resources] restraining the parties to this suit whether by themselves or through their agents, servants, privies, assigns, representatives or anybody whatsoever from seeking and or continuing with any step, action and or participate directly or indirectly in the arbitral proceedings between the parties before: Lord Leonard Hoffmann (‘Presiding Arbitrator’), Sir Anthony Evans, and Chief Bayo Ojo, SAN pending the hearing and determination of the Motion on Notice dated 5/4/2016.”

The Court adjourned the hearing of the substantive application for an extension of time and to set aside or remit the Liability Award until 23 May 2016.

1. 1. The fact that this order had been made by the Nigerian court was notified by the Ministry’s legal representatives to the Tribunal, and to SCA Ontier, by email on 21 April 2016. On that date SCA Ontier also wrote to the Tribunal referring to the events in the Nigerian Court on the previous day, and saying “we would be grateful if the Tribunal would confirm that a ruling will now be made on the question of seat” and “it would assist [P&ID] to know if that ruling is likely to be made prior to 23 May 2016.”
   2. On 26 April 2016 the Tribunal made “Procedural Order No. 12”. It stated at the end: “Place of arbitration: London”, and was “signed on behalf of the Tribunal” by Lord Hoffmann as “Presiding Arbitrator”. Procedural Order No. 12 was to the following effect:

(1) In light of the Ministry’s commencement of proceedings in the Federal High Court in Lagos, it was apparent that there was a dispute between the parties as to whether the Nigerian courts were entitled to exercise supervisory or curial jurisdiction over the arbitration, and that this depended on whether Nigeria or England was the “seat” or “place” of the arbitration. It was stated that “This is an important question, not only for the purpose of determining the jurisdiction to supervise the proceedings and award, but also for the purpose of the enforceability of the award.”

(2) That the issue of the seat of the arbitration had been first raised by the Ministry in its originating motion in the High Court of Lagos on 24 February 2016; that it had been contested by P&ID and that the parties had made submissions on it in letters or emails dated 8, 11 and 13 March 2016.

(3) That P&ID had requested a ruling on seat before the injunction granted by the Nigerian court. “The Tribunal considers that it must therefore consider the question of the seat of arbitration for the purpose of deciding the future conduct of the arbitration. The Tribunal has the power to determine its own jurisdiction (section 12 of the Nigerian Arbitration Act) and its opinion on the disputed question may also be of assistance to the Nigerian court.”

(4) That, as to the law, the meaning of the words “the venue of the arbitration shall be London, England” in the GSPA were to be construed in accordance with Nigerian law, and reference was made to s. 16 of the ACA. The Tribunal concluded that the parties had agreed on the “place of the arbitral proceedings” within s. 16(1) of the ACA and thus that the Tribunal’s power to determine that place was excluded. The question was as to what was the effect of the choice of London by the parties. Having referred to the fact that the ACA was based on the UNCITRAL Model Law, to textbook authority, and to the decision of the Supreme Court of Nigeria in Nigerian National Petroleum Corporation v Lutin Investments (2006) 2 NWLR (Pt 965) 506, the Tribunal said:

“In the opinion of the Tribunal, the parties’ selection of London as ‘the venue of the arbitration‘ rather than of any particular steps (such as hearings) in the arbitration indicates that London was selected under section 16(1) as the place of the arbitration in the juridical sense, invoking the supervisory jurisdiction of the English court, rather than in relation to any particular events in the arbitration.”

(5) That in any event, by reason of matters in the course of the arbitration – set out in paragraphs 19-39 of Procedural Order No. 12 – “the parties and the Tribunal have consistently acted upon the assumption that London was the seat of the arbitration”, and that “the Tribunal considers that the Government must be taken to have consented to this being the correct construction of the GSPA.”

1. 1. On 9 May 2016 the FRN issued an originating motion in the Nigerian Courts seeking to set aside the Tribunal’s Procedural Order No. 12 and to remove the arbitrators. This motion contended that the Tribunal had misconducted itself, had not given the FRN a proper opportunity to present its case on the issue of seat, and had violated the obligation to provide the FRN with a fair hearing. It was contended that Procedural Order No. 12, which it argued was a partial award, was contrary to Nigerian public policy. The action commenced by this originating motion was ultimately struck out on 21 November 2016 for want of prosecution by the FRN.
   2. On 24 May 2016 the High Court of Lagos made an order in the action which had begun on 24 February 2016 as follows:

“1. That an order is granted to the Applicant enlarging the time within which the Applicant may apply to set aside the arbitration award of the tribunal on liability dated 17^th July 2015 …

2. That an order is granted to the Applicant setting aside and/or remitting for further consideration all or part of the arbitration Award of Lord Leonard Hoffmann, Chief Bayo Ojo, SAN and Sir Anthony Evans and for such further or other orders as this Honourable Court may deem fit to make in the circumstances.”

1. 1. When this order was notified to the Tribunal, Lord Hoffmann emailed the parties on 27 May 2016, as follows:

“… As the parties will be aware from Procedural Order No 12, the Tribunal has decided that the seat of the arbitration is England. It follows that the Federal Court of Nigeria had no jurisdiction to set aside its Award.

The Tribunal will therefore be proceeding with the reference and would be grateful if the Respondent would indicate whether it intends to take part in the proceedings. It wishes to issue a Procedural Order for the further conduct of the arbitration and would therefore wish to have the Respondent state its position before Friday 3 June 2016.”

1. 1. On 21 June 2016, the Ministry wrote to the Tribunal saying that it intended to participate in the damages phase of the arbitration “while maintaining its position on the award on liability.”
   2. The arbitration proceedings continued. There was an oral hearing on quantum on 30 / 31 August 2016. The Tribunal issued its Final Award, as I have said, on 31 January 2017. In the Final Award:

(1) The majority of the Tribunal found that, had the FRN not repudiated its obligations under the GSPA, P&ID would have performed its obligations thereunder, and had therefore suffered loss in the amount of the income over 20 years from the sale of the NGLs which would have been extracted from the Wet Gas supplied by the FRN, less CAPEX and OPEX.

(2) As the damages had to be assessed once and for all, it was necessary to estimate the value of that stream of profit at the time of the breach, making an appropriate discount for the fact that P&ID would be awarded immediate payment of sums which would actually have been received over a 20 year period.

(3) The net present value of the profits which would have been earned was assessed by the majority as being US$6,597,000,000. It was stated (in paragraph 110): “This is the measure of damages. It is a very large sum because (a) it is the present value of income which would have been earned over a long period and (b) the GSPA would have been very profitable for P&ID and (although the Tribunal has not had to make any findings on the point) probably for the Government as well.”

(4) The FRN was also ordered to pay interest on the sum of US$6,597,000,000 at 7% per annum from 20 March 2013 until the date of the Final Award and at the same rate thereafter until payment.

1. 1. The FRN has not paid any part of the Final Award, and has not applied to set it aside in any jurisdiction.

The present proceedings

1. 1. P&ID commenced the present proceedings in this Court, seeking leave to enforce the Final Award in the same manner as a judgment, on 16 March 2018.
   2. On 24 May 2018, the Foreign and Commonwealth Office served the Arbitration Claim Form on the FRN. The FRN did not file an Acknowledgement of Service in time, or until 12 October 2018, when it applied for relief from sanctions. At a hearing on 21 December 2018, Bryan J granted relief from sanctions and set a timetable for the filing of further evidence and skeleton arguments leading to a planned hearing on 15 February 2019. Due to an increase in the time estimate for the hearing, that hearing date was vacated, and the matter came on before me on 14 June 2019.

The nature of the hearing

1. 1. CPR r. 62.18 establishes a procedure whereby an applicant may apply to the court without notice for an order giving permission to enforce an arbitration award in the same manner as a judgment; for the court to give such permission; for the defendant, if it wishes to do so, then to apply to set aside that order; and for there to be no enforcement of the award until after the end of the period in which the defendant may apply to set the order aside or until any application made by the defendant within that period has been disposed of. That is not the procedure which has been followed here, in that P&ID has not sought an order under s. 66 Arbitration Act 1996 without notice, but has sought an order on notice and inter partes. This way of proceeding has been sensible in the circumstances. As Mr Mill QC for P&ID submitted, the significant matter to observe is that the objections to enforcement which can be raised by the FRN must be the same as could have been raised on an application to set aside an order made without notice.
   2. That, however, is subject to a further particular feature of the present case. Through Mr Mill, P&ID stated that, if the Court were to consider that the juridical seat of the arbitration was not in England and Wales, and thus, as he put it, the Final Award was not “a domestic award”, then P&ID’s present application under s. 66 Arbitration Act 1996 would fail and should be dismissed. He said that in such circumstances P&ID would take other steps to seek to enforce the Final Award, which I understood to mean an application under s. 101 Arbitration Act 1996 to enforce a New York Convention Award. Whether, in view of s. 2(2)(b) and s. 104 Arbitration Act 1996, this concession was necessary is not clear to me, but it was made, and the hearing proceeded on that basis: P&ID Skeleton, paras. 25, 29.4; Transcript pp. 71-72, 111, 168-169.

The Contentions of the Parties

1. 1. For P&ID, Mr Mill made the following principal submissions.

(1) First, that the Tribunal was entitled to rule, as it did in Procedural Order No. 12, on the seat of the arbitration, and that it is no longer open to the FRN to challenge that ruling. On that basis, the order of the High Court of Lagos on 24 May 2016, purportedly setting aside or remitting the Liability Award was of no effect: the seat of the arbitration was England, and only the English courts had jurisdiction over challenges to an award, and England was the sole forum for remedies seeking to attack an award by the Tribunal.

(2) Secondly, and if necessary for P&ID to succeed which Mr Mill submitted it was not, that Procedural Order No. 12 created an issue estoppel in relation to the seat of the arbitration.

(3) Thirdly, that, in any event, the conclusions of the Tribunal in Procedural Order No. 12 were correct.

(4) Fourthly, and again if necessary, that the FRN’s application to the English Court under s.68 Arbitration Act 1996 had itself created an issue estoppel which precluded an argument that Nigeria was the juridical seat of the arbitration.

(5) Fifthly, that the arguments which the FRN has sought to raise as to (a) the award of damages in the Final Award being manifestly excessive and penal, and (b) the Tribunal having no jurisdiction to award pre-award interest, are without merit.

1. 1. For his part, Mr Matovu QC, for the FRN, made the following main submissions:

(1) That the issue of the location of the juridical seat of the arbitration was to be determined in accordance with the law governing the arbitration clause of the GSPA; that that was Nigerian law; and that as a matter of Nigerian law the seat of the arbitration was Nigeria.

(2) That the orders of the Nigerian Court (i) on 20 April 2016 to restrain further conduct of the arbitration, and (ii) on 24 May 2016 to set aside and/or remit the Liability Award were highly significant, given that, as he contended, the Nigerian Court was the supervisory court. Procedural Order No. 12, on this basis, was issued in “flagrant breach” of an injunction of the supervisory court, as well as having been arrived at in a procedurally unfair fashion. Equally, the Liability Award had been set aside by the supervisory court, and the Final Award, which depended on it, was therefore a “nullity”.

(3) That the FRN’s earlier application under s. 68 Arbitration Act 1996 to the English Court had been a mistake, and had not created an issue estoppel.

(4) That in light of the foregoing there was nothing to prevent the FRN from arguing before this Court that the seat of the arbitration was Nigeria.

(5) If, contrary to these arguments, the seat was England, then nevertheless as a matter of discretion the Final Award should not be enforced because (a) the amount awarded and the basis on which it was awarded were manifestly excessive and contrary to English public policy; and (b) that as a matter of Nigerian law, as the governing law of the GSPA, pre-award interest was not available.

Analysis

1. 1. There are two groups of issues which fall for consideration. In the first place, the issue of what is the seat of the arbitration, and whether it is open to the FRN to contend that it is Nigeria and not England. Secondly, if the seat of the arbitration is England, or if it is not open to the FRN to contend otherwise, are the other bases on which the FRN resists enforcement of the Final Award valid. I will deal with these two matters in turn.

The Seat of the Arbitration

1. 1. As I have said, there are issues as to whether it is open to the FRN to contest that the seat of the arbitration was England, and if it is, where the seat was. It is convenient before considering those issues to summarise the legal framework of these debates.

Legal Framework

1. 1. There was no dispute that the concept of the legal or juridical seat of an arbitration indicates a link between the arbitration and a system of law. Nor was it in issue that it is the courts of the seat of the arbitration which, alone, will have supervisory jurisdiction over challenges to awards in the arbitration.
   2. Section 3 of the Arbitration Act 1996 provides:

“In this Part ‘the seat of the arbitration’ means the juridical seat of the arbitration designated-

(a) By the parties to the arbitration agreement, or

(b) By any arbitral or other institution or person vested by the parties with powers in that regard, or

(c) By the arbitral tribunal if so authorised by the parties,

or determined, in the absence of any such designation, having regard to the parties’ agreement and all the relevant circumstances.”

1. 1. In the present case, the GSPA was governed by the laws of the FRN, and clause 20 of the GSPA provides that the rules of the ACA apply to any dispute between the parties. It was not in dispute that the exercise of determining the seat of the arbitration (by whoever conducted) requires a consideration of Nigerian law. In the first place, because Nigerian law is the governing law of the GSPA, questions of construction of the GSPA have to be conducted in accordance with the principles of construction recognised by Nigerian law. Secondly, because of the incorporation of the rules of the ACA it is necessary to see whether and what that Act provides as to what the seat of the arbitration is, and how it may be chosen or determined.
   2. The provisions of the ACA include the following:

“[Section 15] (1) The arbitral proceedings shall be in accordance with the procedure contained in the Arbitration Rules set out in the schedule to this Act.

(2) Where the rules referred to in subsection (1) of this section contain no provision in respect of any matter related to or connected to any particular arbitral proceedings, the arbitral tribunal may, subject to this Act, conduct the arbitral proceedings in such a manner as it considers appropriate so as to ensure fair hearing.

…

[Section 16] (1) Unless otherwise agreed by the parties, the place of the arbitral proceedings shall be determined by the arbitral tribunal having regard to the circumstances of the case, including the convenience of the parties.

(2) Notwithstanding the provisions of subsection (1) of this section and unless otherwise agreed by the parties, the arbitral tribunal may meet at any place it considers appropriate for consultation among its members, for hearing witnesses, experts or the parties, or for the inspection of documents, goods or other property.

…

[Section 26] (1) Any award made by the arbitral tribunal shall be in writing and signed by the arbitrator or arbitrators.

…

(3) The arbitral tribunal shall state on the award-

(a) the reasons upon which it is based, unless the parties have agreed that no reasons are to be given or the award is an award on agreed terms…

(b) the date it was made; and

(c) the place of the arbitration as agreed or determined under section 16(1) of this Act which place shall be deemed to be the place where the award was made.”

1. 1. The ACA also provides, by section 12:

“(1) An arbitral tribunal shall be competent to rule on questions pertaining to its own jurisdiction and on any objections with respect to the existence or validity of an arbitration agreement.

…”

1. 1. The Arbitration Rules which appear as schedule 1 to the ACA contain, in Articles 15 and 16, the following:

“General Provisions

Article 15

Subject to these Rules, the arbitral tribunal may conduct the arbitration in such manner as it considers appropriate, provided that the parties are treated with equality and that at any stage of the proceedings each party is given a full opportunity of presenting his case.

…

Place of Arbitration

Article 16

1. Unless the parties have agreed upon the place where the arbitration is to be held, such place shall be determined by the arbitral tribunal, having regard to the circumstances of the arbitration.

2. The arbitral tribunal may determine the locale of the arbitration within the place agreed upon by the parties. It may hear witnesses and hold meeting for consultation among its members at any place it deems appropriate, having regard to the circumstances of the arbitration.

3. The arbitral tribunal may meet at any place it deems appropriate for the inspection of goods, other property or document. …”

1. 1. It was not in dispute before me that, as it appears in section 16(1), as opposed to section 16(2), of the ACA, the “place of the arbitral proceedings” meant the same as the juridical seat (Transcript p. 119, 125).
   2. The issue which, from the end of February 2016 onwards, separated the parties was as to where the juridical seat of the arbitration was, and in particular whether the provision in clause 20 of the GSPA that the “venue” of the arbitration was to be “London, England or otherwise as agreed by the Parties” represented a choice of that seat, or merely of the geographical location where the arbitral tribunal might hold hearings. There was (and is) no issue but that the parties could determine the seat. Equally, there was (and is) no suggestion that this was a case in which, because the parties had not chosen the seat, it fell to the arbitral tribunal to choose the seat.

P&ID First Argument: Procedural Order No. 12 determines seat without reference to the doctrine of issue estoppel

1. 1. P&ID contended that the decision of the Tribunal in Procedural Order No. 12 meant that the issue of seat was determined between the parties, and not something which the FRN could now challenge. Further, P&ID contended that this was so, whether or not Procedural Order No. 12 technically established an issue estoppel.
   2. The issue which the Tribunal addressed in Procedural Order No. 12 is perhaps a somewhat unusual one. It was not an issue which was amongst the matters in dispute between the parties at the outset and which had been referred to arbitration. Yet it was an issue which depended on the proper construction of the GSPA, and upon whether the conduct of the parties had established some other agreement.
   3. Nevertheless, although not amongst the pre-existing issues which were referred to arbitration, I consider that it was an aspect of the parties’ agreement to arbitrate that the Tribunal should have the ability to determine an issue as to where the seat of the arbitration was, including an issue as to the construction of the arbitration clause in the GSPA. It is true that, if such an issue arose and were not first determined by the arbitral tribunal, then it would fall to be determined by a court, whether on enforcement or otherwise, but in the first instance it would be for the arbitral tribunal to decide. I consider that this is implicit in the agreement to arbitrate in the present case. It is clear that, by reason of subjecting the arbitration to the ACA and Arbitration Rules, the parties agreed that, to the extent that they had not effectively provided for the seat, the Tribunal could decide on where it should be. It would be consistent with that for the Tribunal to be able to decide any dispute as to whether there had been an effective choice of seat, and if so what the chosen seat was. The parties may be taken to have desired that the Tribunal should determine that matter, because if the arbitrators could not do so, then the question would arise as to who should, in circumstances where the parties might be at loggerheads as to where the seat was, and thus what was the curial court. Furthermore, although I do not consider that the issue of the determination of seat is strictly one of the arbitrators’ jurisdiction or as to the existence or validity of an arbitration agreement, s. 12 ACA, applied to the arbitration by clause 20 of the GSPA, demonstrates the intention of the parties to confer a very wide power on the arbitrators to decide issues relating to the validity and width of the arbitration agreement itself.
   4. The somewhat unusual nature of this type of determination might give rise to an argument as to whether a ruling on such an issue constitutes an award or a procedural order. In the present case, the Tribunal decided it by way of procedural order. In its origination motion in the Nigerian courts commenced on 9 May 2016, by contrast, the FRN contended that it amounted to an award. Mr Mill for P&ID submitted before me that it could have been an award but that it made no difference. It appears to me that the correct characterisation of the determination might have had implications as to whether the Tribunal itself could have revisited it and, at least if the seat of the arbitration is England and ss. 67-69 of Arbitration Act 1996 are applicable, as to when and how it could be challenged in court: see the review of the law in relation to procedural orders and awards in ZCCM Investments Holdings PLC v Kansanshi Holdings PLC [2019] EWHC 1285 (Comm). Here, however, no challenge has been pursued in any court, either to the decision on seat itself, or as to the Final Award in the arbitration.
   5. As I understood P&ID’s first argument, the combination of a matter which the Tribunal was, in accordance with the arbitration agreement between the parties, authorised to decide, coupled with the lack of challenge to that decision in any court means that that decision must be taken as binding on the FRN for the purposes of ascertaining the seat of the arbitration when it comes to enforcement; and that it is not necessary to examine in turn all the requirements of an issue estoppel, which is a concept which applies to a wider field, and whether or not it applies is not determinative of whether there can a challenge to the location of the seat here. In principle, I consider that this submission is correct. Given the consensual nature of arbitration, and the importance to be accorded to respecting the integrity of the parties’ choice, given that the Tribunal has made a ruling on seat, which has not been successfully challenged in any court, then subject to an examination of the particular arguments of the FRN to which I will turn, I consider that this is not an issue which can be revisited on an application under s. 66 Arbitration Act 1996.
   6. The FRN relied, as I understood it, on three particular grounds to resist the above conclusion.
   7. The first was that it contended that Procedural Order No. 12 was sought by P&ID and made by the Tribunal in breach of the injunction of the Nigerian Court of 20 April 2016. Mr Matovu submitted that, as the Nigerian court was the supervisory court, Procedural Order No. 12 was a nullity, or at least that this Court could not, in exercising its discretion as to whether to enforce the Final Award, fail to have regard to the breach.
   8. As to this, while it may be the case that, assuming the Nigerian Court had relevant jurisdiction, P&ID’s request on 21 April 2016 for the Tribunal to confirm that it would proceed to make a ruling on seat might have been in breach of the order of 20 April 2016, I do not consider that the Tribunal was acting in breach of that order in issuing Procedural Order No. 12. The arbitrators were not named as respondents to the application for an injunction; they had not been named in the Motion on Notice for this injunction as parties who would be served; and the terms of the injunction did not, in my judgment, apply to them. The order restrained the parties, “whether by themselves or through their agents, servants, privies, assigns, representatives or anybody whatsoever from seeking and or continuing with any step, action and or participate in the arbitral proceedings between the parties before” the Tribunal. I do not consider that, when the Tribunal proceeded to a ruling, there was thereby a breach of the injunction that the parties should not seek or continue with any step or action or participation in the arbitration, or that the parties were in some way acting by the arbitrators when the Tribunal issued its Procedural Order No. 12. In the circumstances, I do not consider that Procedural Order No. 12 was made by the Tribunal in breach of an order of the Nigerian Court.
   9. Insofar as Mr Matovu sought to bolster this first point by submitting that the order of the Nigerian court was an order “of the supervising court”, that depends, in part, on Procedural Order No. 12 not being a binding determination of what the seat of the arbitration was, which is what, at this juncture, the FRN is seeking to establish. It is pertinent to recall, in this context, that at the time at which the injunction order was made, and at the time of Procedural Order No. 12, there had been no argument before and no resolution by any court, whether in Nigeria or elsewhere, that Nigeria was the seat of the arbitration. On the contrary, to the extent that any court’s jurisdiction had been invoked as that of the supervisory court, it was that of this Court, to which the FRN had applied under s. 68 Arbitration Act 1996 in respect of the Liability Award.
   10. The second point raised by the FRN in this context is a contention that the Tribunal was not invited to decide the issue of seat. This point overlaps with the third point as to procedural unfairness, considered below. Insofar as it was a discrete point, however, I did not consider that it had force. It is certainly true that the correspondence which led to the making of Procedural Order No. 12 commenced with the FRN seeking an extension of time. During the course of the correspondence it nevertheless became quite apparent that the parties had come to be in disagreement as to what was the seat of the arbitration. No doubt because the FRN wished to get before the Nigerian Courts before the Tribunal had ruled on seat, it sought to suggest that there was not an issue on the subject for the Tribunal to determine (see its email of 14 March 2016). Because it wanted the Tribunal to rule on seat before the Nigerian courts considered the motion to set aside the Liability Award, P&ID, by contrast, was seeking that the Tribunal should proceed to rule on the seat. In my judgment, in light of the fact that it was apparent that the parties disagreed on the issue, and that P&ID had asked it to do so – as it did by its communications of 1 April 2016 and 19 April 2016 – the Tribunal was entitled to decide to make a ruling as to seat.
   11. The third point raised by the FRN is that the procedure adopted by the Tribunal in coming to its conclusion on seat was unfair. Mr Matovu, in his measured and attractive submissions, contended that it had involved “something of a rush to judgment by the Tribunal at the instigation of [P&ID] without giving [the FRN] a fair and proper opportunity to present a fully developed case for the purposes of a putative ruling on seat.” Mr Matovu made a particular criticism of the fact that the Tribunal did not give a proper indication of the issues which it was considering deciding. It could, he said, have been contemplating deciding (i) whether there had been an agreement in clause 20 of the GSPA as to seat and if so what it was; (ii) if there had not, should the Tribunal now determine a seat, and if so what it should be; (iii) whether the parties had conducted themselves in such a way that there was a convention or agreement by conduct as to seat; and (iv) whether the Tribunal should rule on those issues or give directions for their determination. As the Tribunal had not identified what matters it was contemplating deciding, it had not had proper submissions on them. Mr Matovu submitted that if proper notice had been given, the Tribunal would have been provided with much fuller submissions on the relevant Nigerian law, and on whether there could be said to have been any agreement as to seat, or an estoppel by convention, by reason of the conduct of the parties. He also argued that it was particularly unfair to the FRN, in that once it had issued its Motion on Notice on 5 April 2016, and a fortiori after the injunction order of 20 April 2016, it was precluded from making submissions in the arbitration.
   12. In my judgment, the difficulty with these submissions, whatever otherwise might be their cogency, is that the FRN had remedies for any procedural unfairness, but it did not utilise them.
   13. Thus, if Procedural Order No. 12 was, correctly analysed, a decision which the Arbitral Tribunal itself had power to review and amend, then the FRN could have made submissions to the Tribunal that it should do just that. It did not do so. If, as the FRN was at one point disposed to argue, Procedural Order No. 12 constituted an award, then it could have been subject to challenge pursuant to section 68 Arbitration Act 1996, on the basis that there had been serious irregularity affecting the tribunal, the proceedings or the award. If, on the other hand, Procedural Order No. 12 was, as it said it was, a procedural order, then it would have been open to the FRN to attack the Final Award pursuant to section 68 Arbitration Act 1996, on the same basis. It did neither and the time for doing so is long past.
   14. It might be said that the curial remedies which I have referred to in the previous paragraph could only have been sought by recognising that England was the seat of the arbitration, which was the matter the FRN wished to dispute. I consider that the FRN could properly have sought those remedies in order to challenge the Tribunal’s finding of seat, without prejudice to its contention as to where, putting that ruling aside, the seat was located. In any event, and be that as it may, the FRN did not even take the equivalent steps which, consistently with its position that the courts of Nigeria were the supervisory courts, it might have taken there. Thus, it did not pursue, and allowed to be struck out, the action which it began in the Nigerian Court on 9 May 2016, which had included seeking to set aside Procedural Order No. 12 for misconduct under section 30(1) and/or the removal of the arbitrators for misconduct under section 30(2) ACA. Nor has the FRN applied to set aside the Final Award in any jurisdiction, including Nigeria. Again, the time for doing so in accordance with the ACA is long past.
   15. Mr Matovu submitted that it had not been necessary for the FRN to pursue these remedies, including in particular the action which it had begun in the Nigerian Court on 9 May 2016, because it had obtained an order from the Nigerian Court on 24 May 2016 “setting aside and/or remitting [the Liability Award] for further consideration”. He submitted that this rendered it unnecessary to seek what he described as “ancillary relief”. He referred to the case of Nigerian Agip Exploration Ltd v Nigerian National Petroleum Corp (2014) 6 CLRN 150, a decision of the Court of Appeal of Nigeria (Abuja Division).
   16. I do not accept this submission. Procedural Order No. 12 was issued before the order of the Nigerian Court purporting to set aside or remit the Liability Award for consideration. As long as Procedural Order No. 12 stood, it of itself created a basis for saying that the order of the Nigerian Court of 24 May 2016 was ineffective, as being made by a court which was not the supervisory court as determined by the decision of the arbitral panel. It also had implications for the future conduct of the arbitration and for future awards. Nor do I accept that the Nigerian Agip case is of relevance here. It concerned the question of whether, when an arbitral panel had issued a partial award, and was proceeding towards a final award on damages, a party which was challenging the partial award in court could obtain an interlocutory injunction stopping the arbitration from proceeding. It was held that it could not, and that the challenge to the partial award would be dealt with in the proceedings. That is not analogous to the facts here.
   17. As a result, I conclude that the terms of Procedural Order No. 12, coupled with the fact that neither it nor the Final Award have been set aside by this or any court, determine the location of the seat of the arbitration as being London, England, and that that is not a matter which the FRN can now ask this court to revisit.

P&ID’s Second Argument: Issue Estoppel

1. 1. P&ID’s second argument was that the Tribunal’s decision in relation to seat in Procedural Order No. 12 created an issue estoppel. It contended that it was not necessary for it to succeed on this point if I was with it in relation to its first argument, which I am.
   2. The doctrine of res judicata has two particular aspects of potential relevance in the present context. The first is what is termed “cause of action estoppel”. This was described by Lord Sumption JSC in Virgin Atlantic Airways Ltd v Zodiac Seats UK Ltd [2014] AC 160 at [17] as follows: “… once a cause of action has been held to exist or not to exist, that outcome may not be challenged by either party in subsequent proceedings. … It is properly described as a form of estoppel precluding a party from challenging the same cause of action in subsequent proceedings.” There was no contention that a cause of action estoppel of this sort arose in the present case.
   3. In addition to “cause of action estoppel” there can also be “issue estoppel”. The nature of such an estoppel was explained by Lord Keith of Kinkel in Arnold v NatWest Bank Plc [1991] 2 AC 93 at 105-106, as follows:

“Issue estoppel may arise where a particular issue forming a necessary ingredient in a cause of action has been litigated and decided and in subsequent proceedings between the same parties involving a different cause of action to which the same issue is relevant one of the parties seeks to re-open that issue. This form of estoppel seems first to have appeared in Duchess of Kingston’s Case (1776) 20 St. Tr. 355. A later instance is Reg. v Inhabitants of the Township of Hartington Middle Quarter (1855) 4 E. & B. 780. The name ‘issue estoppel’ was first attributed to it by Higgins J in the High Court of Australia in Hoysted v Federal Commissioner of Taxation (1921) 29 CLR 537, 561. It was adopted by Diplock LJ in Thoday v Thoday [1964] P 181.

…

Issue estoppel, too, has been extended to cover not only the case where a particular point has been raised and specifically determined in the earlier proceedings, but also that where in the subsequent proceedings it is sought to raise a point which might have been but was not raised in the earlier.”

1. 1. The conditions which must be satisfied for there to be an issue estoppel have been considered in a number of cases. They were summarised as follows in Good Challenger Navegante S.A. v Metalexportimport S.A. (The ‘Good Challenger’) 2004 1 Lloyd’s Rep 67, at [50] per Clarke LJ:

“The authorities show that in order to establish an issue estoppel four conditions must be satisfied, namely (1) that the judgment must be given by a foreign Court of competent jurisdiction; (2) that the judgment must be final and conclusive and on the merits; (3) that there must be identity of parties; and (4) that there must be identity of subject matter, which means that the issue decided must be the same as that arising in the English proceedings: see in particular Carl Zeiss Stiftung v Rayner & Keeler Ltd (No. 2) [1967] 1 AC 853, The Sennar (No. 2) [1985] 1 WLR 490, especially per Lord Brandon at p. 499, and Desert Sun Loan Corporation v Hill [1996] 2 All ER 847.”

That case involved a decision by a foreign court as arguably founding an issue estoppel. There is however no doubt, and it was not contested before me, that an issue estoppel can be created by the decision of an arbitral tribunal: see Arbitration Law, ed Merkin, para. 18.132.

1. 1. I did not understand there to be an issue as to requirement (3) in Clarke LJ’s enumeration of conditions. Nor did I understand there to be any issue as to (4), in that the issue of the location of the seat addressed by the Tribunal is the same as that sought to be raised by the FRN now. As to (2), while the reference to a decision “on the merits” might suggest that only a decision on the substantive issues between the parties could create an issue estoppel, one of the cases referred to by Clarke LJ, Desert Sun Loan Corporation v Hill [1996] 2 All ER 847, [1996] CLC 1132 establishes that an issue estoppel can arise in relation to a procedural or non-substantive issue. As to the other requirement under (2) that the decision should be “final and conclusive”, if Procedural Order No. 12 was what it said it was, namely a procedural order, then it may well be that, in theory at least, it was susceptible of review by the Tribunal itself, and if that is right it would not, when issued, have been “final and conclusive”. I would consider, nevertheless, that it should be regarded as “final and conclusive” at the point when it could not be reviewed by the Tribunal, which was at latest when the arbitration concluded. If Procedural Order No. 12 was in reality an award which finally determined the issue before the Tribunal (even if it might have been subject to an appeal to a court), then it will have been final and conclusive on the issue of seat when made. On either basis I consider that Procedural Order No. 12 should be regarded as satisfying requirement (2).
   2. I understood Mr Matovu to contest whether condition (1) was satisfied, by his submission that a “ruling which an arbitral tribunal is not entitled to make will not create an issue estoppel” and that the Tribunal was not entitled to make the ruling contained in Procedural Order No. 12. The contention that the Tribunal had not been entitled to make that ruling was based on the argument that the courts of Nigeria had on 20 April 2016 injuncted the Tribunal from taking any further steps in the reference.
   3. For reasons which will already be apparent, I do not accept the contention that the Tribunal was not entitled to make a ruling on seat. As I have said, I consider that the Tribunal was authorised to determine a dispute as to the location of the seat; that it had been asked to do so by P&ID on 1 and 19 April 2016; and that the order of the Nigerian Court of 20 April 2016, even if the Nigerian Court had relevant jurisdiction, did not injunct the Tribunal from proceeding with the reference (see paragraph 58 above).
   4. Mr Matovu advanced four other arguments as to why there was no issue estoppel created by Procedural Order No. 12. These overlap with arguments of the FRN which I have already considered in relation to P&ID’s first way of putting its case.
   5. The first of these arguments was that the FRN “was not, in fact, given a proper opportunity to make submissions to the Tribunal in relation to the issue of seat”. Mr Matovu submitted that “Publication of a ruling in these circumstances was contrary to the basic notions of fairness and due process on which the principle of issue estoppel is based.” The “circumstances” to which he was referring here were, in particular, the way in which the issue of seat had emerged out of the FRN’s application for an extension of time, and what Mr Matovu characterised in the course of his submissions as the tribunal’s “rush to judgment”.
   6. Given the nature of the FRN’s complaint here, which was based on considerations of fairness, and due process, it must be very relevant that the FRN had remedies in relation to the suggested procedural unfairness of the Tribunal’s determination, which it did not pursue (see paragraphs 64-66 above). Given that, I am not able to accept that there would be an unfairness in recognising an issue estoppel as a result of Procedural Order No. 12.
   7. The second point advanced on behalf of the FRN in this context was that the FRN could not have participated in making submissions on seat because it had itself been enjoined from taking any steps in the arbitration by the order of 20 April 2016. Mr Matovu submitted that “An issue estoppel cannot reasonably be invoked when a party has been restrained by a court of competent jurisdiction from participating in the earlier proceedings on which the estoppel is founded.”
   8. I was wholly unpersuaded by this point. The fact that the FRN was subject to an injunction from the Nigerian courts was because it had obtained one. Moreover, the reason why the FRN had gone to the Nigerian courts to obtain an injunction was, as Mr Matovu frankly accepted, because it was concerned that the Tribunal would hold that the seat of the arbitration was London. But that was not of itself a good reason for seeking to enjoin the parties from pursuing the arbitration. As I have indicated, I consider that the parties had agreed that disputes as to seat should be resolved by the Tribunal and it had no good reason for seeking to prevent that happening. If it had concerns about its ability to make submissions on the point, it could have asked for further time to do so. But I do not see that the fact that, as it says, it was bound by an injunction which it had itself procured from the Nigerian courts, and which it could undoubtedly have had discharged if it had wanted to, constitutes a reason for not recognising an issue estoppel.
   9. The third argument raised was that once the Liability Award had been set aside or remitted by the Nigerian Court by its order of 24 May 2016, the FRN had no reason to seek to challenge the Tribunal’s ruling on seat. I have given reasons why I do not consider that that is correct in paragraphs 65-66 above. I do not consider that this provides a reason for not recognising there as being an issue estoppel on the issue of seat.
   10. Fourthly, Mr Matovu contended that in the light of the decision of the Nigerian High Court (Ogun Division) in Zenith Global Merchant Ltd v Zhongfu International Investment FZE [2017] All FWLR 1837, there was no issue estoppel. The submission was that that case, albeit decided after Procedural Order No. 12, provided an authoritative statement of the Nigerian law on the determination of seat; that it indicated that the decision of the Tribunal on the issue was wrong; and that, in line with the decision in Arnold v National Westminster Bank PLC [1991] 1 AC 93, the fact of such subsequent material demonstrates that to recognise an issue estoppel would create injustice.
   11. The exception to the doctrine of issue estoppel recognised in Arnold v National Westminster Bank is that, in the case of “special circumstances”, including in particular a subsequent change of the law, it may cause injustice to recognise an issue estoppel. The making of the decision in Zenith Global did not in my judgment constitute “special circumstances” of this sort. Zenith Global did not represent a change in the law of Nigeria. Furthermore, that case concerned the construction of an arbitration clause in terms different from clause 20 of the GSPA. The clause in that case did not contain the word “venue”. While Akinyemi J used the term “venue”, taking it from the submissions of counsel, to describe the geographical location where an arbitration may take place in contradistinction to the juridical seat, he was not actually construing a contract which included that term, and clearly was not construing one which contained that term in the particular context in which it is used in clause 20 of the GSPA. Moreover, Zenith Global was not a decision that the “venue” of an arbitration can never be the juridical seat, and Mr Matovu did not suggest that it was. In light of these points I do not consider that it can be said that the fact of the Zenith Global decision makes it unjust to recognise the Tribunal’s decision in Procedural Order No. 12 as giving rise to an issue estoppel.
   12. Accordingly, I consider that Procedural Order No. 12 did create an issue estoppel which precludes an argument as to seat on this application.

P&ID’s Third Argument: the decision of the Tribunal in Procedural Order No. 12 was correct

1. 1. Mr Mill submitted that, if, contrary to his first two ways of putting the matter, it was open to the FRN to challenge the location of the seat of the arbitration on this application, then this court would have to resolve that question. As he submitted, if that issue was examined by this Court, it would itself reach the same conclusion as reached by the Tribunal in Procedural Order No. 12.
   2. The GSPA is written in English. As I have said, it was not in issue that the question of its construction is governed by Nigerian law. However, it was undisputed before me that Nigerian principles of construction should be taken to be the same as those of English law. In the present case, there was no evidence that those principles are different from those of English law, and so, on the present hearing, they are to be presumed to be the same. Furthermore, Mr Matovu suggested that this presumption probably reflected the reality. Applying the approach to construction of English law, I conclude that, while there are significant arguments the other way, the GSPA provides for the seat of the arbitration to be in England. I say this for the following principal reasons:

(1) It is significant that clause 20 refers to the venue “of the arbitration” as being London. The arbitration would continue up to and including the final award. Clause 20 does not refer to London as being the venue for some or all of the hearings. It does not use the language used in s. 16(2) ACA of where the tribunal may “meet” or may “hear witnesses, experts or the parties”. I consider that the provision represented an anchoring of the entire arbitration to London rather than providing that the hearings should take place there.

(2) Clause 20 provides that the venue of the arbitration “shall be” London “or otherwise as agreed between the parties”. If the reference to venue was simply to where the hearings should take place, this would be an inconvenient provision and one which the parties are unlikely to have intended. It would mean that hearings had to take place in London, however inconvenient that might be for a particular hearing, unless the parties agreed otherwise. The question of where hearings should be conveniently held is, however, one which the arbitrators ordinarily have the power to decide, as indeed is envisaged in s. 16(2) ACA. That is likely to be a much more convenient arrangement. Clearly if the parties were in agreement as to where a particular hearing were to take place, that would be likely to be very influential on the arbitral tribunal. But if for whatever reason they were not in agreement, and it is not unknown for parties to arbitration to become at loggerheads about very many matters, then it is convenient for the arbitrators to be able to decide. If that arrangement was to be displaced it would, in my judgment, have to be spelled out clearly. Accordingly, the reference to the “venue” as being London or otherwise as agreed between the parties, is better read as providing that the seat of the arbitration is to be England, unless the parties agree to change it. This would still allow the arbitrators to decide where particular hearings should take place, while providing for an anchor to England for supervisory purposes, unless changed.

(3) The reference in clause 20 to the provisions of the rules of the ACA is not inconsistent with the choice of England as the seat of the arbitration. The non-mandatory provisions of the Arbitration Act 1996 are displaced by that provision; but the mandatory provisions of the Arbitration Act 1996 apply.

(4) The case of Zenith Global was decided long after the conclusion of the GSPA. It cannot therefore be used to support any argument that, at the time of conclusion of the GSPA the word “venue” was being used in the sense in which it was used in that case. In any event, as I have already set out, it does not involve construction of a clause in the same terms as clause 20 of the GSPA.

1. 1. For completeness I should say that these conclusions appear to me to be in line with the English jurisprudence referred to in Arbitration Law ed. Merkin, para. 1.30, and in particular Shashoua v Sharma [2009] EWHC 957 (Comm) and Enercon GmbH v Enercon (India) Ltd [2012] EWHC 689 (Comm). The decision in Zenith Global suggests that such English authorities (as well as those of other common law jurisdictions) would be regarded as persuasive in ascertaining Nigerian law in this area. These cases were not, however, cited at the hearing of the application, and I reached my conclusions on construction without regard to them.
   2. I have also reached the same conclusion as did the Tribunal in relation to there being an agreement by conduct that the seat of the arbitration as provided for by clause 20 of the GSPA should be regarded as London. In this regard the terms of the Part Final Award of 3 July 2014, which I have quoted in paragraph 9 above are of significance. It stated in terms that the seat of the arbitration was England. Further, that Part Final Award, and the Liability Award both stated, at the end, that the place of the arbitration was London, England. Given the terms of s. 26(3)(c) ACA, that was a clear statement that the Tribunal considered that the legal seat was England. The FRN did not object to these statements in the Part Final Award of 3 July 2014 or the Liability Award and continued to participate in the arbitration. Like the Tribunal I consider that, objectively viewed, there was here an agreement by the FRN that the seat stipulated in clause 20 of the GSPA was England.

P&ID’s Fourth Argument: Effect of the application to the English Court

1. 1. P&ID also contended that the FRN’s conduct in making an application under s. 68 Arbitration Act 1996, and the refusal by Phillips J of an extension of time to bring such an application itself precluded the FRN from denying that the seat of the arbitration was England and that the English courts were its supervisory courts. This submission was not accompanied by any detailed analysis of how the requirements of an issue estoppel were made out in relation to that decision. In view of the conclusion which I have reached on the other points made by P&ID as to the seat of the arbitration and the effect of Procedural Order No. 12, I do not need to express a view as to this point, and in the circumstances, prefer not to do so.

Grounds for Non-Enforcement if the seat of the arbitration is England

Public Policy

1. 1. The FRN submitted that even if the seat of the arbitration was England and the Final Award was a “domestic” award, this court should refuse leave to enforce it in the same manner as a judgment. Two points were relied upon as reasons why the court should refuse leave.
   2. The first argument is that it would offend English public policy to enforce the Final Award. The FRN contends that it is contrary to English public policy to enforce an award for damages which are “not compensatory, but hugely inflated and penal in nature”. To support its contention that English public policy is against enforcement of an award of damages of that nature, the FRN relied on JSC VTB Bank v Skurikhin [2014] EWHC 271 (Comm), especially at paragraphs 90-92, and Midtown Acquisitions LP v Essar Global Fund Ltd [2018] EWHC 2545 (Comm), especially at [42]. To support its argument that the Final Award gave damages which were not compensatory, but hugely inflated and penal, the FRN relied on three particular points, namely (1) that the Tribunal had applied an incorrect and unduly low discount rate to the assessment of future cash flows from the project; (2) that the Tribunal had ignored the fact that the GSPA required P&ID to grant the FRN a 10% carried interest in the project; and (3) the majority of the Tribunal did not make any deduction on grounds of a failure to mitigate.
   3. In relation to these points, the FRN relied on evidence from Mark Handley, contained in his Third Witness Statement. That witness statement referred to the reasons why the FRN contends that the sum awarded was manifestly excessive, and stated (at paragraph 121): “… the massive payment of damages to P&ID far and above the level required to be compensatory demands the conclusion that the Final Award was punitive in effect.”
   4. The FRN also relied on an expert report of Prof. Louis T. Wells. At the outset of the hearing, P&ID objected to this report, which was served only on 15 May 2019, on the basis that it was served inexcusably late and without notice. I decided, however, that the FRN should be permitted to rely on the report. It had undoubtedly been served late, but I was satisfied that this had not been for tactical reasons. Given the nature of the case, and its importance to both sides, I considered that it was preferable for the report to be in evidence, if that did not create prejudice to P&ID. I concluded that it did not create prejudice to P&ID in that the points it makes, while expanding upon, and lending expert support to, points made by Mr Handley in his witness statement, did not cover entirely new ground, and also because P&ID confirmed through Mr Mill at the hearing that it was content to deal with the report if admitted, and would not seek an adjournment.
   5. Prof. Wells’ report focuses on a particular issue, namely the Tribunal’s approach to the discounted cash flow calculation, and in particular the discount rate applied. Prof. Wells expresses the view that the award of damages reached was, as a result of an erroneous approach to the discount rate, “clearly unreasonable and manifestly excessive and exorbitant”, and “not a reasonable assessment of P&ID’s actual loss; whether intentionally or not, it was punitive.”
   6. I did not understand P&ID to dispute that, if enforcement of an award would be contrary to public policy, that would be a ground for refusal of enforcement under s. 66 Arbitration Act 1996, even though it is not mentioned in the section. I accept, as suggested in Russell on Arbitration(24th ed), para. 8-011, that it would be a matter which fell to be considered by the Court in exercising its discretion.
   7. Looking at the Final Award itself, there can be no doubt that the Tribunal was intending to award only compensatory damages, and that there was not intended to be any element of penalty or punitive damages in the sums awarded. In paragraph 40 it is stated that: “The damage suffered by P&ID is the loss of the net income it would have received if it had been supplied with wet gas in accordance with the contract and had been able to extract and sell the natural gas liquids.” The Tribunal went on to consider and reject an argument that P&ID would not have performed the contract, and to hold that losses of the kind referred to in paragraph 40 were not too remote (paragraphs 41-56), and were quantified at US$6,597,000,000 (paragraphs 57-110).
   8. The Final Award, consistently with my earlier conclusions, was one given in an arbitration whose seat was England. It could, accordingly, have been the subject of an application under s. 68 Arbitration Act 1996 in relation to serious irregularity. No such application was made and the Final Award has, plainly, not been set aside or remitted.
   9. Are there any grounds of public policy on which such an award, which is intended to and is expressed as awarding compensatory damages, and which could have been but has not been subject to remedies under ss. 68 Arbitration Act 1996, should not be enforced? In my judgment there are not.
   10. The grounds on which enforcement of an award can be refused by reason of public policy are narrowly circumscribed. In Deutsche Schachtbau-und Tiefbohrgesellschaft mbH v Ras Al-Khaimah National Oil Co [1987] 2 Lloyd’s Rep 246, at page 254 Sir John Donaldson MR said this:

“Considerations of public policy can never be exhaustively defined, but they should be approached with extreme caution. As Burrough J remarked in Richardson v Mellish (1824) 2 Bing. 229, 252, ‘It is never argued at all, but when other points fail.’ It has to be shown that there is some element of illegality or that the enforcement of the award would be clearly injurious to the public good or, possibly, that enforcement would be wholly offensive to the ordinary reasonable and fully informed member of the public on whose behalf the powers of the state are exercised.”

1. 1. In IPCO (Nigeria) v Nigerian National Petroleum Corp. [2005] EWHC 726 (Comm), [2005] 2 Lloyd’s Rep 326 at [13], in the context of arguments to the effect that a foreign award should be refused enforcement under s. 103(3) Arbitration Act 1996, Gross J reiterated the extreme caution with which arguments to the effect that enforcement should be refused on public policy grounds should be approached. In that case he also considered an argument that because of errors allegedly made by the tribunal in its assessment of damages the award was so excessive and that its enforcement would be contrary to public policy. He dismissed the argument at paragraph 50, saying:

“I can take this point summarily. The NNPC argument was that the tribunal’s errors (amounting to misconduct) led to an award so exaggerated in size that its enforcement, against a state company, would be contrary to public policy. With respect, this complaint appears to lack substance. Were it soundly based, a mere error of fact, if sufficiently large, could result in the setting aside of an award. That cannot be right and I say no more about this topic.”

1. 1. Further, in considering whether there should be a refusal of enforcement of an award on the grounds of public policy, it is necessary to have regard to, and take into account, the strong public policy in favour of enforcing arbitral awards: see Westacre Investments Inc v Jugoimport-SPDR Ltd [1999] QB 740 at 770-771, 773 per Colman J (that decision was upheld on appeal: [1999] 2 Lloyd’s Rep 65).
   2. In Pencil Hill Ltd v US Citta Di Palermo SpA (Mercantile Court, 19 January 2016), the court considered an argument that a New York Convention award should not be enforced in England and Wales because it included an award in respect of a penalty. HHJ Bird conducted a review of relevant authorities at paragraphs 12 – 25, and concluded that the award should be enforced in its entirety. At paragraph 32 the judge said:

“In my judgment the public policy of upholding international arbitral awards … outweighs the public policy of refusing to enforce penalty clauses. The scales are tipped heavily in favour of enforcement.”

1. 1. I am clearly of the view that there is no public policy which requires the refusal of enforcement to an arbitral award which states and is intended to award compensatory damages, and where, even if the damages awarded are higher than this Court would consider correct (as to which I express no view), that arises only as a result of an error of fact or law on the part of the arbitrators. The enforcement of such an award would not be “clearly injurious to the public good” or “wholly offensive to the ordinary reasonable and fully informed member of the public”. Furthermore, the public policy in favour of enforcing arbitral awards is a strong one, and, if a balancing exercise is required at all, outweighs any public policy in refusing enforcement of an award of excessive compensation. The labelling of such excessive compensation as “punitive” or “penal”, as the FRN seeks to do in this case does not alter this conclusion.
   2. The cases to which the FRN referred do not, in my judgment, begin to establish a public policy which would require non-enforcement of the Final Award here. JSC VTB Bank v Skurikhin, which did not involve enforcement of an arbitration award, merely decided that there was an arguable case, for the purposes of CPR Part 24, that foreign judgments which themselves stated that they awarded “penalties or fines” (paragraph 11) would be unenforceable. Midtown Acquisitions v Essar was a case in which a foreign judgment creditor sought to enforce its judgment. It was successful. Moulder J rejected as unarguable on the facts a defence that, because the amount claimed was said to involve a double recovery, enforcement would be contrary to public policy. She did not examine the ambit of such policy.

Pre-award interest

1. 1. The FRN also contended that enforcement of the Final Award should be refused to the extent that it awarded pre-award interest. It contended that, under Nigerian law, pre-award interest was only available in circumstances where (i) the parties expressly provided for it in their contract, (ii) the contract includes an implied term to that effect, based on trade usage or mercantile custom, or (iii) there is an applicable statutory power to grant it; and that none of (i) – (iii) applied here. This was said to mean that the Final Award contained “a decision on matters beyond the scope of the submission to arbitration”.
   2. P&ID’s response to this issue was three-fold. In the first place it contended that this objection was premised on the Final Award being a New York Convention Award, the ground for non-enforcement sought to be relied upon being that in s. 103(2)(d) of the Arbitration Act 1996, and that it had no application if the Final Award was found to be a “domestic” award.
   3. Secondly, and in any event, that the suggestion that the arbitrators did not have jurisdiction to award pre-award interest was not advanced during the arbitration proceedings. Instead, P&ID had claimed interest in its Notice of Arbitration and in its Statement of Case; the FRN had not joined issue, in its Statement of Defence, with P&ID’s entitlement to claim interest; P&ID had maintained its pleaded interest claim in its Statement of Case on quantum; and the FRN, in its responsive written submissions on quantum, had noted that P&ID was claiming pre-award interest and had not argued that this was in issue.
   4. Thirdly, P&ID contended that the FRN was out of time to make an application to set aside the Tribunal’s award of pre-award interest.
   5. In circumstances where, as I have found, the seat of the arbitration was England, any excess of jurisdiction by the arbitrators could have been the subject of an application under s. 67 Arbitration Act 1996. Given that there was no such application in relation to the award of pre-award interest (or at all), I do not consider that there can now be a separate objection to enforcement on the basis of a lack of jurisdiction.
   6. In any event, the suggestion that the award of pre-award interest was beyond the scope of the submission to arbitration is not made out. Interest, which was not said to be confined to post-award interest, was claimed in the Notice of Arbitration. Issue was joined with P&ID’s claim, but there was no suggestion that the tribunal lacked jurisdiction to award pre-award interest. In the circumstances I do not consider that the issue was jurisdictional. It may be that the FRN had answers to the claim which it did not put forward, but that is a different matter.

Conclusion

1. For these reasons, I am prepared to make an order enforcing the Final Award in the same manner as a judgment or order of this Court to the same effect. I will receive submissions from the parties as to the precise form of order appropriate.

IN THE SUPREME COURT OF BRITISH COLUMBIA

Date: 20190808

Docket: S182143

Registry: Vancouver

Between:

Can-Faith Enterprises Inc. and Turner, Meakin Management Company Ltd.

Plaintiffs

And

0932784 B.C. Ltd. and Maurio Ramos

Defendants

Before: The Honourable Madam Justice Douglas

Reasons for Judgment

INTRODUCTION

[1]           This dispute arises from the termination of a lease agreement involving the parties including, in particular, whether an option to renew was exercised. The plaintiffs bring a summary trial application pursuant to Rule 9-7 for judgment against the defendants for arrears of rent, damages for breach of a lease agreement, leave to apply for an assessment of further damages for loss of future rent, payment by the defendants of their actual legal expenses, and interest on all amounts owed at the rate of 3% above prime. The defendants advance a counterclaim for set-off of amounts they say are due to them.

PROCEDURAL BACKGROUND

[2]           The plaintiffs commenced this action by notice of civil claim filed February 7, 2018. The defendants filed a response to civil claim on June 1, 2018 and a counterclaim on June 15, 2018.

[3]           The plaintiffs first advised the defendants of their intention to proceed with a summary trial in August 2018. On October 15, 2018, the plaintiffs obtained a one-day December 14, 2018 summary trial hearing date. The plaintiffs delivered filed copies of their notice of application for summary trial and supporting affidavits to the defendants on November 27, 2018.

[4]           On November 29, 2018, the defendants asked the plaintiffs to adjourn the summary trial on the basis service of the application materials was late and they would have insufficient time to consider whether to conduct any examinations for discovery of the plaintiffs, obtain expert evidence in support of their counterclaim, and provide a considered response.

[5]           On December 13, 2018, the plaintiffs agreed to adjourn the summary trial as their lawyer became unavailable due to unforeseen circumstances. By letter dated December 13, 2019, plaintiffs’ counsel expressly advised the defendants they should make use of the additional time afforded by the adjournment to complete any procedural steps they considered necessary before the summary trial.

[6]           The defendants scheduled no examinations for discovery and took no other steps in the action following the December 2018 adjournment of the plaintiffs’ summary trial application.

FACTUAL BACKGROUND

[7]           The plaintiff, Can-Faith Enterprises Inc. (“Can-Faith”) is the registered owner of property located at 689 Denman Street, Vancouver (the “Property”).

[8]           The co-plaintiff, Turner, Meakin Management Company Ltd. (“Turner”), is Can-Faith’s property management agent, authorised to collect rent and handle all property management responsibilities for the Property.

[9]           Pursuant to a lease dated February 23, 2012 between Basha Sales Co. Ltd., Leibel Sales Co. Ltd. and Newport Sales Co. Ltd. as landlord (the “Landlord”), 093284 B.C. Ltd. dba Rio Brazilian Steakhouse as tenant (the “Tenant”), and Maurio Ramos as indemnifier (the “Indemnifier”), premises with a total gross floor area of approximately 3,638 square feet at the Property (the “Premises”) were leased for a five-year term commencing May 1, 2012 (the “Lease”).

(a)  The Lease Agreement

[10]        The Lease provided, in part, as follows:

(a) the Tenant agreed and covenanted to pay Annual Base Rent in equal monthly instalments, in advance, on the first day of each and every month, in the amounts stipulated by the Lease (Articles 4.1(a) and 4.2(a));

(b) the Tenant agreed and covenanted to pay Additional Rent, being the aggregate of the Tenant’s Share of Tax Costs, Operating Costs, including management fees, and such other amounts, charges, costs and expenses required to be paid by the Tenant pursuant to the Lease, as estimated by the Landlord, in monthly installments in advance and at the same time as payment of Annual Base Rent (Articles 4.1(b) and 4.2(b));

(c) the Tenant agreed to pay Rent on the days and times specified in the Lease without set-off, abatement, compensation or deduction whatsoever (Article 4.1)

(d) if the Tenant shall fail to pay Rent promptly when due, the Landlord shall be entitled, if it shall demand it, to interest thereon at the rate of 3% per annum in excess of the Prime Rate, being the rate of interest declared from time to time by the main branch in Vancouver, British Columbia, of the Toronto Dominion Bank as its reference rate for commercial loans commonly referred to as its “prime rate” (Article 15.1(c));

(e) all costs and expenses incurred by the Landlord in connection with the Tenant’s default or in efforts to enforce the Landlord’s rights under the Lease, including legal costs on a solicitor and own-client basis, are to be borne by the Tenant (Article 15.1(d));

(f) a deposit of $35,103.00 will be paid by the Tenant to the Landlord to be held as a non-interest bearing security deposit (the “Deposit”) to be first applied to the Annual Base Rent for the first month of the Term and the balance ($17,599.37) shall be refunded to the Tenant at the end of the Term provided it has performed all of its obligations under the Lease. In the event the Tenant renews the Lease, the Deposit shall continue to be held by the Landlord as security for performance of the renewal lease (Article 16.11);

(g) in the event the Tenant defaults in the payment of Rent and fails to cure such default within 5 business days of receipt of written notice of default from the Landlord, then the Landlord has the right to re-enter the Premises and terminate the Lease by leaving upon the Premises notice in writing of such termination and the current month’s Rent and the next 3 ensuing month’s Rent shall thereupon immediately become due and payable by the Tenant, and the Tenant shall immediately deliver up possession of the Premises to the Landlord (Articles 15.1, 15.3, 15.4 and 15.5);

(h) if the Landlord re-enters or terminates the Lease by reason of the Tenant’s default, then, without prejudice to the Landlord’s other rights and remedies:

(i) the provisions of the Lease which relate to the consequences of termination and the provisions of the Lease as they apply with respect to acts, events, omissions which occurred prior to the termination, shall all survive termination; and

(ii) the Tenant shall pay to the Landlord on demand such reasonable expenses as the Landlord has incurred and a reasonable estimate of expenses the Landlord expects to incur in connection with the re-entry, termination, and collection of sums due and payable by the Tenant, including brokerage fees, legal fees and disbursements, the expenses of cleaning and repairing the Premises and preparing them for re-letting.

[11]        Pursuant to Article 17.1 of the Lease, the Tenant was granted an option to renew the Lease for a further term of five years, commencing May 1, 2017 and expiring April 30, 2022, on the following terms and conditions:

The Landlord covenants with the Tenant that if

(a) the Tenant gives notice to the Landlord that the Tenant wishes to obtain a renewal of this Lease, such notice to be given not later than nine months before the expiry of the initial term herein granted;

(b) at the time of giving such notice the Tenant shall not be in

breach of any covenant or condition herein contained; and

(c) the Tenant has duly and regularly throughout the initial term observed and performed the covenants and conditions herein contained;

then the Landlord shall grant to the Tenant at the Tenant’s

expense a renewal lease of the Leased Premises for a further

term of that number of years specified in subclause 1.1 (i) upon the same terms and conditions as are herein contained, save and except this covenant to renew and save and except the Annual Base Rent which shall be the greater of the Current Market Rent for the Leased Premises with its Leasehold Improvements (having regard to the duration of the renewal term) and the sum of the Annual Base Rent payable for the last year of the initial term, and save and except any rent-free periods, tenant allowances or other inducements. If the Landlord and the Tenant are unable at least three months before the expiry of the initial term to agree upon

such Current Market Rent, the determination of such Current

Market Rent shall be referred to a single arbitrator…

The determination made by the arbitrators or the majority of them, or by the single arbitrator, as the case may be, shall be final and binding upon the Landlord and the Tenant and their respective successors and assigns. The Tenant shall pay the costs of the arbitration and the arbitrator(s).

[12]        The Lease provided that Annual Base Rent for the last year of the Initial Term was $32 per square-foot of Rentable Area (i.e., $116,415.96 per annum or $9,701.33 per month).

(b)  The Indemnification Agreement

[13]        Pursuant to an indemnity agreement dated February 23, 2012 between the Landlord and the Indemnifier (the “Indemnity”):

(a) the Indemnifier covenanted and agreed to pay all rent and perform all obligations of the Tenant under the Lease and to indemnify and save harmless the Landlord from any loss, cost or damage including costs on a solicitor and own client basis, suffered by the Landlord arising out of any failure by the Tenant to perform any of the Tenant’s obligations under the Lease (s.1);

(b) the Indemnity granted by the Indemnifier to the Landlord is absolute and unconditional and the liability of the Indemnifier will not be affected in any way by any renewal of the Lease term (s.2); and

(c) the Indemnity continues to apply with respect to periods prior to, after and during the term of the Lease, as extended, modified or renewed (s.2(j)).

(c)  Assignment of Lease

[14]        By a general assignment of leases dated June 29, 2012, the Landlord’s interest in the Lease and the Indemnity was assigned to Can-Faith.

(d)  Option to Renew the Lease

[15]        The parties’ fundamental disagreement relates to whether or not the Tenant exercised its option to renew the Lease pursuant to Article 17.1. The plaintiffs say the Tenant unequivocally did so; the defendants disagree and say the correspondence in this regard from the Tenant’s lawyer was qualified and conditional.

[16]        Article 17.1 contained three conditions precedent before a valid renewal could occur:

(i)   Notice by the Tenant to the Landlord 9 months before the expiry of the initial term of the Lease;

(ii)  The Tenant must not be in breach of any covenant or condition contained in the Lease; and

(iii) The Tenant must have observed and performed its covenants and conditions contained in the Lease.

[17]        By letter dated April 20, 2016, the defendants’ lawyer, Mr. Carlisle, wrote to Turner to inquire about the renewal of the Lease while reserving the option to obtain additional renewals. On May 3, 2016, Turner responded with a request for clarification. Mr. Carlisle’s May 3, 2016 response to this request is contentious and interpreted differently by the parties.

[18]        The relevant portion of Mr. Carlisle’s May 3, 2016 letter is set out below:

“To be clear, my clients are exercising their right to a 5-year renewal term under sections 1.1(f) and 17.1(a) of the lease entered February 23, 2016. They understand that there is no further renewal (i.e. second) renewal permitted under the current lease after the renewal term expires in 2022”.

[19]        The plaintiffs say these statements indicate a clear and unequivocal renewal of the Lease. The defendants say the subsequent statements in this letter regarding modification of the Lease or a new lease qualified any such renewal.

[20]        Mr. Carlisle’s May 3, 2016 letter further stated:

“[My clients] understand there is no further (i.e., second) renewal permitted under the current lease after the renewal term expires in 2011.

That said, they also seek either a modification of the existing lease to provide a second renewal term, or a new lease at the end of the first renewal term, with a further extension being their preference.

Kindly advise that you have accepted the notice of renewal, and also indicate if you would be willing to discuss either a modification of the existing lease, or a new lease to allow my clients to occupy the premises after the renewal term ends”.

[21]        Within two days, Turner responded to Mr. Carlisle’s May 3, 2016 letter as follows:

“We have received your letter of May 3, 2016. Thank you for your prompt response in clarifying your client’s intentions regarding renewal of the Lease.

At this time we acknowledge and confirm receipt of the notice of renewal from your client, 0932784 B.C. Ltd.”

[22]        There was no further correspondence between the parties regarding renewal of the Lease until August 2016. On August 9, 2016, Mr. Carlisle wrote again to Turner. The salient portion of his letter stated as follows:

“Additionally, my clients are interested to know what the proposed new base rent will be when the lease term ends at the end of April 2017. We are open to either a renewal (which would require a lease amendment as there is no allowance for a further renewal term) or a new lease. If a new lease can’t be agreed, my clients would need time to secure alternate rental premises. It is their intention to remain in the current premises if possible.”

[23]        At that point, the plaintiffs say the Tenant had already exercised its option to renew the Lease; the defendants say Mr. Carlisle’s August 9, 2016 letter clearly indicates it had not and, in the alternative, his May 3, 2016 letter did not accurately communicate the Tenant’s intentions.

(e)  Arbitration Proceedings

[24]        On May 15, 2017, Can-Faith commenced arbitration proceedings to determine the Current Market Rent for the renewal term by issuing a notice to arbitrate. On May 19, 2017, the British Columbia International Commercial Arbitration Centre (“BCICAC”) appointed an arbitrator.

[25]        The Tenant and the Indemnifier, through their legal counsel, attended a pre-hearing conference call with the arbitrator on May 29, 2017, at which time the arbitrator’s jurisdiction to determine whether there had been a valid exercise of the renewal option was discussed. The arbitrator directed the parties to make submissions on this jurisdictional issue. The Tenant and the Indemnifier did not do so.

[26]        On August 8, 2017, the arbitrator issued his first procedural award and direction, after concluding he had jurisdiction to determine whether there had been a valid exercise of the option to renew, as that determination was a pre-condition to deciding the Current Market Rent for the renewal term.

[27]        The Tenant and Indemnifier had notice of all steps taken in the arbitration and an opportunity to make submissions.

[28]        On November 2, 2017, the arbitrator issued a partial final award finding there had been a valid exercise of the Tenant’s option to renew the Lease. On December 8, 2017, the arbitrator issued a final award determining the Current Market Rent for the renewal term was $26.50 per square foot or $96,407.00 per annum. The arbitrator also found Can-Faith was entitled to its reasonable costs of the arbitration, including its actual legal fees and disbursements, to be assessed.

(f)   Notice of Re-entry and Termination of Lease

[29]        By notice of re-entry and termination dated January 15, 2018, Turner, as agent for Can-Faith:

(i)   Terminated the Lease due to non-payment of rent;

(ii)  Demanded payment of rent arrears including three-months’ accelerated rent; and

(iii) Retained the $17,599.37 remainder of the Tenant’s security deposit.

[30]        Can-Faith says it is owed a total of $247,921.76, as of the date of termination of the Lease, comprising:

(i)   Annual Base Rent for May to December 2017 and January 2018 ($9,701.33 per month x 9 months plus GST);

(ii)  Additional Rent for May to December 2017 and January 2018 ($9,975.00 per month x 9 months plus GST);

(iii) Three months’ accelerated Annual Base Rent ($9,701.33 per month x 3 months plus GST); and

(iv) Three months’ accelerated Additional Rent ($9,975 per month x 3 months plus GST).

[31]        Can-Faith claims interest at 3% above the prime rate of 3.95% on accumulated arrears of rent and three months’ accelerated rent in the amount of $17,253.75 to November 30, 2018 pursuant to Article 15.1(c) of the Lease.

[32]        In addition, Can-Faith says it incurred $12,188.61 in expenses under the Lease to repair, restore and maintain the Premises after the Tenant vacated.

[33]        After the Tenant vacated the Premises Can-Faith retained an agent to list and market the Premises for lease. No new tenant had been secured by the summary trial hearing date.

[34]        Can-Faith claims damages for the loss of seven months’ future rent to the end of November 2018 in the amount of $144,621.03 and leave to apply for assessment of further damages for prospective loss of rent for the unexpired term of the Lease.

ISSUES

[35]        The following issues arise on this application:

1. Is this claim suitable for a summary trial pursuant to Rule 9-7?
2. Does the doctrine of issue estoppel prevent the Tenant from asserting it did not exercise its option to renew the Lease?
3. Did Can-Faith comply with its obligations under the Lease and, if not, did such non-compliance constitute a fundamental breach of the Lease?
4. Is Can-Faith entitled to three months’ accelerated rent and prospective rent for the renewal period?
5. Has Can-Faith mitigated its damages?
6. Are the defendants entitled to a set-off?
7. Is the Indemnifier bound by the terms of the Indemnity?
8. Can Can-Faith recover special costs and interest at the rate of 3% above prime on any amounts it is owed pursuant to the Lease?

LAW AND ANALYSIS

Suitability for Summary Trial

[36]        All parties must come to a summary trial prepared to prove their claim or defence as judgment may be granted in favour of any party, regardless of who has brought the application, unless the court concludes it is not possible to find the facts necessary to decide the issues or that it would be unjust to do so (Gichuru v. Pallai, 2013 BCCA 60 (CanLII) at para. 32).

[37]        The plaintiffs concede the amount at stake in this action is significant but say there is little, if any, conflict in the evidence regarding the relevant facts. They say the main issues on this application involve an interpretation of the parties’ contractual obligations based on the law. They note the defendants have had ample time to prepare for this summary trial and to obtain the evidence necessary to respond to it.

[38]        The defendants argue this matter is too complex to be determined summarily. They say the summary trial itself will consume a considerable amount of time, that credibility issues and factual disputes render this matter inappropriate for summary disposition, and that a summary trial will not resolve all issues in this litigation.

[39]        The defendants say there are critical conflicts in the evidence regarding:

1. The parties’ intentions concerning the option to renew; and
2. Can-Faith’s conduct (which the defendants say constitutes a fundamental breach of the Lease).

[40]        The defendants argue some issues in this case are likely to require expert evidence, that there is no particular urgency to having this matter determined summarily, and that this case raises novel issues of law (including application of the arbitrator’s final decision to matters before this Court) which make a summary trial inappropriate.

[41]        The parties agree Inspiration Management Ltd. v. McDermid St. Lawrence Ltd. (1989), 1989 CanLII 229 (BC CA), 36 B.C.L.R. (2d) 202 (C.A.) sets out the relevant factors to be considered by a court in determining suitability for summary disposition.

[42]        If any party required expert evidence to address any matter in issue on this summary trial, there has been ample opportunity to obtain it since the start of this action in February 2018. I am satisfied the need to obtain expert evidence is not a valid reason for finding this matter unsuitable for summary disposition.

[43]        There are some conflicts in the evidence before this Court related to the defendants’ allegation Can-Faith breached its covenants under the Lease and the parties’ intentions regarding renewal of the Lease. The presence of conflicts in the evidence does not preclude determination of a matter by summary trial (Inspiration Management, supra, at para. 57). Rather, the essential questions are whether those conflicts prevent the Court from finding the facts necessary to decide the matter and whether it would be unjust to do so. On a review of all the evidence, I conclude the answer to both questions is no.

[44]        The defendants argue it would be unjust to decide this matter summarily because the consequences of an adverse judgment would be financially onerous and possibly ruinous. I conclude that is not a relevant factor in a court’s assessment of suitability for summary disposition or whether a summary trial would be unjust. In fact, it reinforces my view that a summary trial is suitable as a prolonged trial would result in increased costs.

[45]        The essential dispute between the parties relates to an interpretation of the Lease and application of the law to largely non-controversial facts. The parties’ intentions are objectively manifested in the documents in evidence. There are no significant credibility issues which this Court must resolve to decide this summary trial. I am of the view that complexity of the legal issues on this application does not preclude a summary determination of this matter. Resolution of this action by summary trial is consistent with the principles set out in Hyrniak v. Mauldin, 2014 SCC 7 (CanLII).

[46]        Having regard to all the evidence and the factors outlined in Inspiration Management, supra, I conclude it is possible to find the facts necessary to decide the issues before this Court and that doing so would not be unjust.

Issue Estoppel

[47]        The plaintiffs rely on the doctrine of issue estoppel and say the arbitrator’s final decision is binding on the defendants in this action. They say the defendants are barred from arguing the arbitrator had no jurisdiction to determine the validity of the Tenant’s exercise of the option to renew the Lease as this issue has already been determined by final order.

[48]        The defendants distinguish the authorities relied upon by the plaintiff on the basis the parties in those cases agreed to arbitration. By contrast, the defendants say the arbitration clause in the Lease (regarding determination of rent payable for the renewal term) was not binding because they did not renew the Lease.

[49]        The defendants note issue estoppel allows for the exercise of judicial discretion to ensure no injustice results from its application. They argue injustice may arise when there is a significant difference between the purposes, process, or stakes involved in the two proceedings and that it was unjust for the arbitrator to “bootstrap” himself to determine the validity of the renewal option when the defendants denied a renewal had occurred.

Jurisdiction of the Arbitrator

[50]        I consider as a preliminary matter whether it was open to the arbitrator to determine his jurisdiction to decide whether there had been a valid exercise of the Tenant’s option to renew the Lease.

[51]        Arbitrators are to determine their own jurisdiction under the “competence-competence principle”. Section 22 of the Arbitration Act, R.S.B.C. 1996, c. 55, confirms the BCICAC rules regarding the conduct of domestic commercial arbitrations apply to an arbitration unless the parties agree otherwise.

[52]        Rule 22(1) of BCICAC’s Domestic Commercial Arbitration Rules of Procedure (as revised September 15, 2016) states as follows:

(1) The arbitration tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement.

[53]        The legal effect of the adoption of the BCICAC rules is that any challenge to an arbitrator’s jurisdiction should first be determined by the arbitrator unless the challenge involves a pure question of law, or one of mixed fact and law that requires for its disposition only superficial consideration of the documentary evidence in the record:  Seidel v. Telus Communications Inc., 2011 SCC 15 (CanLII) at paras. 28-29; Dell Computer Corp. v. Union des Consommateurs, 2007 SCC 34 (CanLII) at para. 85.

[54]        In this case, the arbitrator had to consider the factual matrix surrounding the Lease and the arbitration clause and interpret correspondence purporting to renew the Lease. In the circumstances, I conclude determining whether was a valid exercise of the option to renew required more than a superficial consideration of the documentary evidence and was appropriately referred to arbitration.

[55]        Accordingly, I conclude it was appropriate for the arbitrator to consider whether he had jurisdiction to decide if the limited arbitration clause in the Lease applied.

Jurisdiction to Consider Validity of Option to Renew

[56]        In Cut & Run Holdings Ltd. v. Booze Brothers Holdings Inc. 2005 BCSC 167 (CanLII), Davies J. held as follows:

24      It is, in my view, fundamental to the consideration of the relationship between the potentially competing contractual and statutory rights and remedies that may be available to the parties to this litigation to bear in mind that it is well settled law that parties to an agreement containing an arbitration clause cannot be presumed to have agreed to submit all matters which may arise between them to arbitration.

25      In that regard, I adopt the following statement from Mart Huleatt-James and Nicholas Gould, International Commercial Arbitration: A Handbook (London: LLP, 1996) at 62:

Given the consensual nature of arbitration, it is clear that no one should be obliged to submit to arbitration without having agreed to it.

Furthermore, having agreed to the arbitration of a particular dispute, a party to the arbitration should not have to acquiesce in the inclusion in the arbitration of further disputes which the other party may try to include in it, but which are outside the scope of the parties’ agreement. These latter disputes may be of a kind which the respondent party, for good reason, does not wish to have settled by arbitration.

[Emphasis added in original judgment.]

26        Thus, an arbitrator errs when, “having jurisdiction conferred upon him to decide certain matters only, he [goes] on and decide[s] matters not referred to him at all” (BC Gas Inc. v. Westcoast Energy Inc., [1990] B.C.J. No. 2924 (B.C. S.C.) at para. 30).

[57]        However, as stated in Advanced Explorations Inc. v. Storm Capital Corp., 2014 ONSC 3918 (CanLII), at para. 57:

57        A privately appointed arbitrator has no inherent jurisdiction. His or her jurisdiction comes only from the parties’ agreement: see Piazza Family Trust, at para. 63. “The parties to an arbitration agreement have virtually unfettered autonomy in identifying the disputes that may be the subject of the arbitration proceeding”:  Desputeaux c. Éditions Chouette (1987) inc., 2003 SCC 17 (CanLII), [2003] 1 S.C.R. 178 (S.C.C.), at para. 22. An arbitrator has the authority to decide not just the disputes that the parties submit to it, but also those matters that are closely or intrinsically related to the disputes: Desputeaux, at para 35.

[58]        In Desputeaux c. Éditions Chouette (1987) Inc., 2003 SCC 17 (CanLII) at para. 35, LeBel J. stated as follows:

…In order to understand the scope of the arbitrator’s mandate, a purely textual analysis of the communications between the parties is not sufficient. The arbitrator’s mandate must not be interpreted restrictively by limiting it to what is expressly set out in the arbitration agreement. The mandate also includes everything that is closely connected with that agreement, or, in other words, questions that have [TRANSLATION] “a connection with the question to be disposed of by the arbitrators with the dispute submitted to them” (S. Thuilleaux, L’Arbitrage commercial au Québec: droit interne — droit international privé (1991), at p. 115.)…

[59]        This type of analysis is consistent with Re Cliffs Over Maple Bay Investments Ltd., 2011 BCCA 180 (CanLII) at para. 32, where the Court of Appeal held that issue estoppel applies “to the issues of fact, law, and mixed fact and law that are necessarily bound up [emphasis in original] with the determination of that ‘issue’ in the prior proceeding”. The Court of Appeal undertook a similar analysis in Fortinet Technologies (Canada) ULC v. Bell Canada, 2018 BCCA 277 (CanLII) at para. 32, rev’g 2017 BCSC 1066 (CanLII).

[60]        Applying these legal principles to this case, I conclude the relevant question is whether it was reasonable for the arbitrator to decide that validity of the Tenant’s exercise of the Lease renewal option was sufficiently connected or “necessarily bound up” with the powers set out in the limited arbitration clause in the Lease to give him jurisdiction over the issue.

[61]        While the issues in this case are similar to those considered in Fortinet, the parties do not agree there was a valid exercise of the option to renew. Exercise of the option to renew was, however, effectively a condition precedent to determination of the rent payable for the renewal term.

[62]        Based on the reasoning of the Court of Appeal in Fortinet, I conclude that determining whether the option to renew was validly exercised was “closely connected or necessarily bound up” with determination of the rent payable for the renewal term.

[63]        I therefore find the arbitrator’s jurisdiction included the power to decide whether there had been a valid exercise of the Tenant’s option to renew, even if not explicitly granted to him in the Lease. I conclude it was reasonable for the arbitrator to decide whether there was a valid exercise of the option to renew as part of his determination of rent payable for the renewal term.

[64]        The defendants have not applied for leave to review a question of law under s. 31 of the Arbitration Act. The arbitrator’s decision that there was a valid exercise of the option to renew is not therefore subject to review by this Court.

Application of Issue Estoppel

[65]        A prior judicial decision will not raise issue or cause of action estoppel unless the following requirements are met:

1. It was a final decision;
2. Pronounced by a court of competent jurisdiction over the parties and the subject matter;
3. Involving a determination of the same issues or cause of action as that sought to be controverted or advanced in the present litigation; and
4. The parties to the prior judicial proceeding or their privies are the same persons as the parties to the present action or their privies (Ahmed v. Canna Clinic Medicinal Society, 2018 BCCA 319 (CanLII), at para. 10, citing 420093 B.C. Ltd. v. Bank of Montreal, 1995 ABCA 328 (CanLII) at para. 18).

[66]        I conclude the requirements of issue estoppel have been satisfied. Accordingly, the defendants are estopped from arguing there was no valid exercise of the option to renew the Lease. For the reasons stated, I have concluded the decision of the arbitrator was final. The Court of Appeal confirmed in Fortinet, supra, at para 27, the doctrine of issue estoppel may arise out of proceedings before courts and tribunals. In Huck v. Komol Plastics Co., 1996 CarswellBC 1553 (W.L.) (S.C.), Hall J. held that previous arbitration proceedings can form the basis for applying the principle of res judicata. Accordingly, I conclude the arbitrator’s decision was that of a “court of competent jurisdiction”. The more contentious matter is whether the arbitration involved the same parties and the same issues as this action.

[67]        After finding he had jurisdiction to do so, the arbitrator determined the validity of the Tenant’s exercise of the Lease renewal option and the current market rent payable for the renewal term. The defendants chose not to participate in the arbitration of those matters despite having been given notice of the proceedings. They now argue there was no valid exercise by the Tenant of the Lease renewal option and the plaintiff has therefore suffered no loss of prospective rent for the renewal term. I conclude those are the same essential issues determined by the arbitrator in this case.

[68]        The defendants say the parties in this action are not the same as those in the arbitration. They note that Turner, while a plaintiff in this action, was not involved in the arbitration proceedings. The plaintiffs say Turner was included as a plaintiff in this action, in his sole capacity as agent for Can-Faith, for procedural reasons only and that Turner is not seeking to recover damages.

[69]        The central parties in this action are Can-Faith, the Tenant, and the Indemnifier; these same parties had notice of, and an opportunity to participate in, the arbitrationproceedings.

[70]        The defendants rely on Penner v. Niagara (Regional Police Services Board), 2013 SCC 19 (CanLII). The Court in that case held at para 42 that injustice may arise “where there is a significant difference between the purposes, process or stakes involved in the two proceedings”. The Court in Penner explicitly recognised “there will always be differences in purpose, process and stakes between administrative and court proceedings” and “[i]n order to establish unfairness” in the sense described, “such differences must be significant and assessed in light of this Court’s recognition that finality is an objective that is also important in the administrative law context”.

[71]        The Penner decision involved administrative disciplinary proceedings related to alleged police misconduct and a civil action for damages arising from the same incident. On that basis, it is distinguishable on its facts. In Penner, the stakes involved in the two proceedings were distinct. I do not find that to be the case here.

[72]        The Court of Appeal in Ahmed, supra at para 16, described “subject matter jurisdiction” as the authority to hear and decide the type of dispute raised. In this case, the parties granted authority to a single arbitrator to decide the rent payable for the renewal term if the parties to the Lease were unable to agree on that matter.

[73]        Courts nonetheless retain a residual discretion not to apply issue estoppel, even when the requirements are met, if it would be unjust to do so (Danyluk v. Ainsworth Technologies Inc., 2001 SCC 44 (CanLII) at para. 62).

[74]        The defendants argue it would be unfair for this Court to apply issue estoppel on a summary trial involving “a multiplicity of distinct issues” because doing so would result in financial hardship to them. I conclude financial hardship resulting from an adverse judgment is not relevant to an assessment of whether it would be unfair for this Court to apply the doctrine of issue estoppel.

[75]        On a review of all the evidence, I am not persuaded that the application of issue estoppel would be unfair in this case.

Fundamental Breach

[76]        The defendants say Can-Faith did not fulfil its obligations under the Lease because:

(i)   The Premises were not maintained in a good state of repair; and

(ii)  Turner substantially increased its management fees payable under the Lease, thereby fundamentally altering an essential term of the parties’ agreement.

[77]        In Guarantee Co. of North America v. Gordon Capital Corp., 1999 CanLII 664 (SCC), [1999] 3 S.C.R. 423, citing to 1999 CarswellOnt 3171 (W.L.) at para. 50, Justices Lacobucci and Bastarache reviewed the law regarding fundamental breach as follows:

50      The Court was called upon to consider the doctrine of fundamental breach, defined as a failure in the breaching party’s performance of its obligations under the contract that deprives the non-breaching party of substantially the whole benefit of the agreement.

Notwithstanding that in two separate minority reasons, Dickson C.J. (La Forest J. concurring) and Wilson J. (L’Heureux-Dubé J. concurring) concluded that the seriousness of the defects in the extraction boxes did not amount to a fundamental breach, both Dickson C.J. and Wilson J. discussed the legal consequences in the event that a fundamental breach had occurred.

As to the circumstances in which the doctrine applied, Wilson J., at pp. 499-500, noted that the distinction between a mere contractual breach and a breach that is more appropriately characterised as fundamental is the exceptional nature of the remedy; while the traditional remedy for contractual breach is the obligation to pay damages, a fundamental breach permits the non-breaching party to elect instead to put to an end all remaining performance obligations between the parties. Given the exceptional nature of the remedy, Wilson J. rightly noted that the purpose of the restrictive definition of a fundamental breach is to limit the remedy to those circumstances where the entire foundation of the contract has been undermined.

[78]        The B.C. Court of Appeal has followed this test in defining a fundamental breach. In Doman Forest Products Ltd. v. GMAC Commercial Credit Corp. – Canada, 2007 BCCA 88 (CanLII), Lowry J.A. summarises the relevant authorities and principles at paras 88-92.

Alleged Breach of Lease

[79]        Details of the alleged breaches of the Lease by Can-Faith are set out in the affidavit of Ms. Mariana Ramos, an employee of the defendant company at the time. The defendants argue these breaches constitute a fundamental breach of the Lease.

[80]        The plaintiffs deny Can-Faith breached its obligations under the Lease and say that, even if the defendants could establish such breaches, they do not rise to the level of a fundamental breach. The plaintiffs note the defendants have not pleaded a rescission of the Lease or claimed corresponding damages.

[81]        The plaintiffs rely on Spirent Communications of Ottawa Ltd. v. Quake Technologies (Canada) Inc., 2008 ONCA 92 (CanLII), 88 O. R. (3d) 721. The Ontario Court of Appeal in that case summarised at para. 35 the legal principles applicable to fundamental breach. That case involved an agreement by the plaintiff to lease part of an office building. The Court described a fundamental breach as “one which deprives the innocent party of substantially the whole benefit of the contract”, thereby permitting the plaintiff in that case to treat the lease agreement as being at an end.

[82]        The Court in Spirent, supra, outlined five factors to be considered when determining whether conduct has deprived an innocent party of substantially the whole benefit of a contract as follows:

1. The ratio of the party’s obligations not performed to that party’s obligations as a whole;
2. The seriousness of the breach to the innocent party;
3. The likelihood of repetition of such breach;
4. The seriousness of the consequences of the breach; and
5. The relationship of the part of the obligation performed to the whole obligation.

[83]        The defendants rely on the affidavit evidence of Ms. Ramos which summarises her observations regarding perceived deficiencies in the maintenance and repair of the Premises as follows:

1. July 16, 2016:  ceiling damage which Ms. Ramos believed was due to a leak;
2. October 5, 2016:  water leakage from the roof above the dishwasher in the kitchen at the Premises;
3. November 27, 2016:  a “huge” ceiling leak behind the bar;
4. December 7, 2016:  removal of the Tenant’s logo from a common window and a hole drilled into the kitchen of the Premises;
5. February 22, 2017:  non-functioning lights in the elevator from the common area lobby to the Premises;
6. February 28, 2017:  non-functioning elevator lights;
7. March 2, 2017:  non-functioning elevator lights;
8. March 2017:  building vandalism;
9. March 23, 2017:  non-functioning elevator lights;
10. March 28, 2017:  a roof leak in the kitchen of the Premises near the deep fryer; and
11. March 28, 2017:  non-functioning lights in the common area lobby outside the elevator bank.

[84]        No correspondence between the parties regarding any alleged fundamental breach of the Lease at the time of the notice of termination is in evidence. The plaintiffs say the first time the defendants asserted there had been a fundamental breach of the Lease was in response to the notice of civil claim in this action.

[85]        Photographs and email messages regarding the above-noted deficiencies from Ms. Ramos to Turner were in evidence. These email communications set out Ms. Ramos’ concerns regarding the condition of the Premises and her requests that Turner take steps to address them. They also include Turner’s responses to Ms. Ramos seeking clarification regarding a hole she indicated had been drilled in the kitchen floor, outlining steps taken in an effort to resolve the stated concerns, requesting periodic status updates, and providing emergency contact information. Turner advised Ms. Ramos that, although Turner could undertake repairs if requested by the Tenant, the Lease stipulated the cost of ceiling and kitchen floor repairs at the Premises were the Tenant’s responsibility. Turner noted that the broken window in question was on building common property and not the Premises and had been replaced.

[86]        In an email communication dated February 22, 2017, Ms. Ramos refers to a second occasion that week when the elevator lights were not working and stated she had “clients” who were “mad and scared to be riding on a dark elevator”. By email dated February 28, 2017, Ms. Ramos complained she had to “shut down” lunch service early due to the elevator light problem. The same day, Turner replied that an electrician had already attended at the Premises twice to address the lighting problem and Turner had understood this matter was resolved. Turner stated an electrician would be attending at the Premises “to completely replace the lighting in the elevator”. By email to Ms. Ramos dated March 3, 2017, Turner confirmed this electrical work had been completed and the elevator lighting was verified to be in good working order.

[87]        By email to Ms. Ramos dated March 24, 2017, Turner noted it was the Tenant’s responsibility to repair and maintain signs and lighting of the ground floor entrance to the Premises.

[88]        Significantly, there was no evidence on this summary trial indicating the Tenant ever communicated to Can-Faith or Turner that any of the alleged maintenance or repair deficiencies fundamentally deprived them of any benefit under the Lease.

[89]        While the concerns set out by Ms. Ramos in her affidavit evidence may not have been fully resolved to her satisfaction before the Tenant vacated the Premises, the evidence before this Court supports the conclusion that steps were being taken by Turner to address them.

[90]        While I accept that some of the defendants’ concerns regarding the condition of the Premises may have been serious, I conclude the evidence falls short of establishing the defendants were deprived of substantially the whole benefit under the Lease as a result.

[91]        Significantly, at no time did the Tenant inform Can-Faith or Turner it had elected to rescind the Lease because of breaches by Can-Faith of its obligations under the Lease. In fact, the Tenant sought to renew the Lease on similar terms.

Increase in Management Fees

[92]        The defendants argue the substantial increase in management fees payable under the Lease significantly “altered the commercial reality” of the Lease, particularly when combined with the alleged breaches of the Landlord’s covenants under the Lease.

[93]        Can-Faith clarified the management fees payable by the Tenant were not increased by 200% as alleged by the defendants. Rather, the Tenant’s annual share of this increase was approximately $5,000, as set out in Turner’s reconciliation statement dated January 18, 2018. The plaintiffs deny they unilaterally varied the terms of the Lease by increasing the management fees payable by the defendants.

[94]        The defendants introduced no expert evidence from anyone qualified to offer such an opinion to support their argument the plaintiffs’ increase in management fees was outside the range charged by comparable real estate management companies in Vancouver at the relevant time.

[95]        Without such evidence, I am unable to find the increase in management fees constituted a fundamental alteration of the terms of Lease and amounted to a fundamental breach of the Lease.

Damages for Loss of Prospective Rent and Accelerated Rent

[96]        In addition to arrears of rent to the date of termination of the Lease, Can-Faith seeks to recover damages for the loss of prospective rent for the five-year renewal term and three months’ accelerated rent. Because I find Can-Faith’s claim for damages for prospective rent is closely connected to its claim for accelerated damages, I consider them together in my analysis.

[97]        Can-Faith’s claim for damages for prospective rent is complicated by its additional claim for three months’ accelerated rent under Article 15.5(b) of the Lease. The issue before this Court is whether Can-Faith can claim both as separate heads of damages or whether the latter is a liquidated damages clause, which would fix the amount Can-Faith can recover for loss of prospective rent.

[98]        As this issue was not argued by the parties at trial, I asked them to provide supplementary written submissions, which were received by July 10, 2019. Can-Faith takes the position the accelerated rent clause was included in the Lease to provide a remedy if the Tenant became insolvent, pursuant to s. 136(1)(f) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the “BIA”). Can-Faith says accelerated rent and damages for the loss of prospective rent are separate remedies and it is entitled to recover both. The defendants argue s. 136(1)(f) of the BIA does not specify how the accelerated rent clause in the Lease is to be characterized under contract law. They say reference to accelerated rent in the Lease is a liquidated damages clause which represents all the damages the plaintiff may recover for the loss of prospective rent.

[99]        In Highway Properties Ltd. v. Kelly, Douglas & Co., 1971 CanLII 123 (SCC), [1971] S.C.R. 562 at  pages 565 – 577, Laskin J., as he then was, writes in obiter as follows:

…Clause 5 (a), so far as relevant here, provided that if the rent or any part thereof be in arrears for 15 days or if any covenant by the tenant should be unfulfilled, and the failure to pay rent or fulfil the covenant should continue 15 days after notice thereof to the tenant, then the current month’s rent and three months’ additional rent should immediately become due and the landlord might forthwith re-enter and thereupon the demise should absolutely determine but without prejudice to any right of action in respect of any antecedent breach of the tenant’s covenants…

…

Lest there be any doubt on the point, clause 5 (a) of the lease (previously referred to in these reasons) does not preclude the claim made herein for prospective damages. The landlord did not invoke the clause, and hence no question arises of an irrevocable election to rely on it.

[100]     In 365175 B.C. Ltd. v. Malamute Recreations Ltd., 2000 BCCA 293 (CanLII), Rowles J.A. held as follows:

28      The notice given by the landlord on 23 April 1997 to the corporate defendant and to the Indemnifier was notice that the landlord was terminating the lease and electing to claim liquidated damages pursuant to paragraph 13.02 of the lease. There is no suggestion that the three months’ accelerated rent could be taken to be anything other than a pre-estimate of damages. In other words, there is no suggestion that it was a penalty.

29      In the first action the landlord’s claim against the tenant and the Indemnifier was, in effect, a claim for prospective damages for three months pursuant to paragraph 13.02 of the lease. In my view, electing that remedy is inconsistent with the landlord’s position in the second action that the Indemnifier had entered into a new lease. If the landlord considered that there was a new lease in existence with the Indemnifier, it could not sue the Indemnifier for three months’ prospective rent.

[101]     A liquidated damages clause, if enforced, is a “complete remedy for the entire breach specified” (Elsley v. J.G. Collins Ins. Agencies, 1978 CanLII 7 (SCC), [1978] 2 SCR 916 at p. 932). If, however, the clause is waived, as it was in Highway Properties, supra, the plaintiff may seek to recover damages for prospective loss arising from the alleged breach.

[102]     The accelerated rent clause in the Lease was enforceable if the Landlord “re-enters the Leased Premises or if this Lease is terminated by any event set out in clause 15.3”. The evidence clearly supports the conclusion Can-Faith re-entered the Premises and terminated the Lease.

[103]     I conclude that inclusion of the three-month limit in the BIA has no bearing on whether or not the accelerated rent clause in the Lease is one for liquidated damages. Section 136(1)(f) of the BIA simply limits the amount of accelerated rent for which a landlord can claim priority in a bankruptcy proceeding. It does not prevent a landlord from setting accelerated rent at a lower or higher amount, provided no priority will be given to anything over three months’ accelerated rent.

[104]     In my view, the only reasonable interpretation is that the accelerated rent clause in the Lease provided a pre-contractual estimate of damages if the Tenant breached Article 15.5 of the Lease. By seeking to enforce this clause, Can-Faith has effectively elected to accept this amount as a complete remedy for the entire breach specified; namely, the defendant’s default in paying rent pursuant to the renewed Lease. The defendants have not argued this clause constitutes a penalty clause and I see no reason why it would be construed as such.

[105]     In the result, I find Can-Faith is entitled to recover three months’ accelerated as a complete remedy for the defendants’ breach of the renewed Lease. In the circumstances, whether or not Can-Faith provided adequate notice of its intention to pursue prospective damages becomes moot.

Mitigation of Damages

[106]     The plaintiffs retained Cushman & Wakefield on March 20, 2018 to list and market the Premises for lease. Despite the efforts of this broker, a new tenant for the Premises has not yet been found.

[107]     The onus of establishing a failure to mitigate is on the defendants. They did not examine the plaintiffs’ representatives for discovery in this action or cross-examine the affiants on this summary trial. They adduced no evidence to support the conclusion the efforts of the plaintiffs’ broker to market and lease the Premises were inadequate.

[108]     On a review of all the evidence, I conclude the defendants have not met the onus of proving the plaintiffs failed to mitigate by not making reasonable efforts to lease the Premises.

Are the Defendants Entitled to a Set-Off?   

[109]     The defendants say they are entitled to a set-off against any amounts ordered payable by them in this action as follows:

1. $8,744.20 for a water leak payment made by the defendants on April 3, 2017, which they now say was an improper demand for which they are not responsible;
2. $21,419.46 which they say represents excessive property management fee charges in 2016; and
3. $17,599.37 representing the balance of the Tenant’s security deposit not returned on termination of the Lease.

[110]     The defendants also seek general damages as a set-off for alleged breaches of the Lease, as described in the affidavit of Ms. Ramos. The burden is on the defendants to prove these claims.

(a)  Water Leak Payment

[111]     By letter dated January 10, 2017, Turner wrote to the Tenant enclosing an invoice in the amount of $8,774.20 for repair costs related to a water leak “caused by Rio Brazilian Steakhouse’s kitchen dishwasher leak” incident of October 5, 2016”. The defendants paid this invoice on April 3, 2017. They now say they did so under protest in response to an improper demand which was not the Tenant’s responsibility.

[112]     Beyond this assertion, the defendants provided no evidence to support their position. The evidence on this application in insufficient to permit this Court to conclude the source of the water leak was something other than the dishwasher at the Premises.

[113]     Can-Faith relies on Article 5.4 of the Lease pursuant to which the Tenant covenanted not to commit or permit any waste or injury to the building or the Premises including leasehold improvements and trade fixtures.

[114]     On a review of all the evidence, I am not satisfied the Tenant is entitled to a set-off for the $8,744.20 water repair payment.

(b)  Property Management Fees

[115]     The defendants say Turner increased the Tenant’s share of property management fees by approximately 200% on June 20, 2016.

[116]     The defendants say this increase grossly exceeded the fees charged by a first-class real estate management company in downtown Vancouver although that assertion was unsupported by expert evidence. The defendants suggested the Court could draw the necessary inference to support this assertion in the absence of expert evidence. I decline to do so.

[117]     The plaintiffs say the defendants have had ample time and opportunity to obtain expert evidence regarding the amount of real estate fees charged in Vancouver for use on this summary trial. They also say the actual amount of the Tenant’s share of increased management fees in 2017 was about $5,000. The plaintiffs deny this increase in management fees represented a breach or variation of the terms of the Lease agreement.

[118]     On all the evidence, I am unable to conclude that the increase in the Tenant’s share of Turner’s management fees supports the defendants’ claim for a set-off in the amount of $21,419.46.

(c)  Security Deposit

[119]     The Tenant seeks return of the security deposit paid in accordance with its obligations under the Lease and says the plaintiffs were required to return this deposit at the end of the Lease.

[120]     The plaintiffs say they were entitled to retain the security deposit as security for performance after the Lease was renewed. They also say that, because the defendants have failed to perform their obligations under the Lease, Can-Faith is entitled to credit the security deposit against their claims for arrears of rent and damages.

[121]     As I have found that Can-Faith is entitled to rent arrears and liquidated damages for accelerated rent, the defendants are entitled to a credit in an amount equal to the remainder of the security deposit (i.e., $17,599.37) as a set-off against the final award.

(d)  General Damages

[122]     The defendants bear the burden of proving their general damages claim. They have not provided the evidence necessary to permit this Court to quantify their counterclaim.

(e)  Repair Costs

[123]     Can-Faith seeks to recover costs it incurred to repair, restore and maintain the Premises after the Tenant vacated on April 30, 2017. These costs are itemised in the affidavit evidence of Turner and include junk removal, gas, heating and plumbing charges, the costs of rekeying the Premises, and invoices rendered by Turner in connection with litigation.

[124]     The defendants say the plaintiffs are not entitled to damages of $12,188.61, representing repair, restoration, and maintenance costs incurred after the Tenant vacated the Premises. The defendants say the Premises were left in “pristine condition” when they vacated on April 30, 2017.

[125]     Mr. Ramos deposes in his affidavit that he has “not been afforded sufficient opportunity” to “discover why the plaintiffs incurred expenses to repair, restore, and maintain the Premises”. That statement is not persuasive. It was open to the defendants to examine the plaintiffs for discovery in this action and to question the plaintiffs about these costs.

[126]     Turner’s invoices for costs incurred in the total amount of $5,281.24 in connection with “actual or threatened” litigation properly form part of Can-Faith’s claim for expenses under Article 15.1(d) as expenses incurred by the Landlord in efforts to seek remedies for the default, as discussed below.

[127]     Article 15.5(c) of the Lease provides as follows:

(c) the Tenant or person then controlling the affairs of the Tenant shall pay to the Landlord on demand such reasonable expenses as the Landlord has incurred, and a reasonable estimate of the Landlord of expenses the Landlord expects to incur, in connection with the re-entering, terminating, re-letting, collecting sums due or payable by the Tenant, and storing and realizing upon assets seized, including without limitation brokerage fees, legal fees, and disbursements, the expenses of cleaning and making and keeping the Leased Premises in good order, and the expenses of repairing the Leased Premises and preparing them for re-letting.

[128]     I am satisfied Can-Faith is entitled to recover the expenses it incurred in the amount of $12,188.61 pursuant to Article 15.5(c) of the Lease.

Is the Indemnifier Liable Under the Indemnity?

[129]     The Indemnifier does not dispute the validity of the Indemnity but argues the plaintiffs materially altered the risk to which he agreed to his detriment by significantly increasing the management fees payable under the Lease. The Indemnifier relies on Jens Hans Investment Co. v. Bridger, 2004 BCCA 340 (CanLII), in support of his position, a decision the plaintiffs say is distinguishable on its facts.

[130]     In Jens, supra, the landlord refused to consent to a sublease and the defendant was unable to operate its business as a result. The Court found the landlord’s unreasonable refusal to consent to a sublease amounted to a material change in the risks assumed by the indemnitor, thereby discharging him from his obligations under the indemnification agreement. The plaintiffs say the parties’ obligations under the Lease remained unchanged and there is no basis for relieving the Indemnifier of his obligations.

[131]     While the Indemnifier argues the increase in management fees was a material change in the parties’ agreement and the risks he assumed, I find that position to be unsupported by the evidence.

[132]     The evidence establishes the actual annual increase in the Tenant’s share of management fees was approximately $5,000 and not 200% as alleged by the defendants. There was no expert evidence before the Court to support the conclusion such an increase fell outside the norm for comparable property management services in the downtown Vancouver area at the relevant time.

[133]     Accordingly, I conclude the Indemnifier is not relieved of his obligations under the Indemnity.

Interest and Costs

[134]     The Lease provides as follows in Articles 15.1(c) and (d):

15.1(c)  if the Tenant shall fail to pay any rent promptly when due, shall be entitled, if it shall demand it, to interest thereon at a rate of 3% per annum in excess of the Prime Rate.

15.1(d) [The Landlord] shall be entitled to be reimbursed by the Tenant, and the Tenant shall forthwith pay the Landlord, the amount of all costs and expenses (including, without limitations, legal costs on a solicitor and own-client basis) incurred by the Landlord in connection with the default or in efforts to enforce any of the rights, or to seek any of the remedies, to which the Landlord is or may be entitled hereunder.

[135]     I see no reason to depart from the parties’ agreement regarding the payment of interest and costs as set out in the Lease. The Landlord is entitled to both costs and expenses in addition to the $5,281.24 already invoiced by Turner.

CONCLUSION

[136]     My conclusions and orders are summarised as follows:

1. This matter is suitable for summary disposition pursuant to Rule 9-7.
2. Issue estoppel precludes the defendants from taking the position the Tenant did not exercise its option to renew the Lease.
3. Can-Faith is not entitled to liquidated damages in the form of accelerated rent and damages for the loss of prospective rent.
4. There was no fundamental breach of the Lease by Can-Faith.
5. Can-Faith is entitled to damages for arrears of rent to the date of termination of the Lease in the amount of $247,921.76.
6. Can-Faith is entitled to $12,188.61 from the defendants for expenses it incurred to repair, restore and maintain the Premises after the Tenant vacated.
7. The defendants are entitled to credits in the amount of $9,152.64 (due to a 2017 common area expenses reconciliation) and $17,599.37 (representing the Tenant’s remaining security deposit paid pursuant to the Lease).
8. The Indemnifier is not discharged from his obligations pursuant to the Indemnity.
9. The defendants have not met the burden of establishing Can-Faith has failed to mitigate its damages.
10. The defendants are not entitled to a set-off of damages and their counterclaim is dismissed.
11. Can-Faith is entitled to recover interest on all amounts owing at the rate of 3% above prime as provided for in Article 15.1(c) of the Lease.
12. Can-Faith is entitled to recover its costs, including its costs of this application, to be agreed upon or assessed, pursuant to Article 15.1(d) of the Lease.

“Douglas J.”