In a decision released in 2023, Justice Vermette of the Ontario Superior Court rejected an application to set aside an arbitration award on procedural fairness and jurisdictional grounds. This decision clarified when Ontario’s International Commercial Arbitration Act (the “ICAA“) applies and confirmed that arbitration awards may only be set aside by courts on narrow grounds.

Background

A group of accredited investors who had invested funds in EDE Capital—an investment company—brought a claim to arbitration on the basis of misrepresentation as to the use of these funds. EDE Capital had initially represented that they would use the funds for certain purposes, but never followed through. The investors sought to recover their monies, along with all of the profits EDE Capital had gained from the use of their investment proceeds. In a bi-furcated hearing, the arbitrator first ruled in the investors’ favour, holding that EDE Capital’s conduct towards them amounted to a breach of contract, oppression as well as fraudulent misrepresentations, and in the second phase of the hearing ordered a refund of the initial investments along with the disgorgement of ill-gotten profits earned from the investment proceedings.

When a claimant suffers a loss due to the misconduct of a defendant, the typical approach is to award damages that reflects the claimant’s loss. However, this does not always fit the circumstances of the breach. In some cases, a claimant may not have suffered damages, but the respondent has gained significantly. Disgorgement deprives a wrongdoer of ill-gotten gains and the arbitrator determined that disgorgement was the appropriate remedy for EDE Capital’s wrongdoing.

EDE Capital applied to set aside the arbitration award for procedural unfairness and lack of jurisdiction. Among other things, EDE Capital argued that the arbitrator reopened her previous award on liability in the second phase and made inconsistent findings of fact when applying the investors’ expert witness’s methodology to calculate disgorgement of profits.

One of the issues was whether the ICAA or Ontario’s Arbitration Act applied to the dispute. Although the parties agreed that it was not necessary to determine this matter during arbitration, it became a threshold issue in the set aside application with EDE Capital arguing that Ontario’s Arbitration Act applied because it was chosen by the parties.

The Decision

Justice Vermette sided with the investors in deciding that the ICAA applied to the dispute. While the parties had contractually agreed to apply the domestic Arbitration Act to the arbitration’s procedures, the ICAA applied by operation of law because of the commercial nature of the applicable shareholder agreement coupled with the fact that one of the signatories resided in China at the time the arbitration agreement was executed. In ruling that the ICAA applied to the dispute, the Court clarified that the Act’s provisions on setting aside an arbitration award were mandatory provisions which could not be excluded by agreement of the parties.

Justice Vermette also sided with the investors on the merits of the set side application. In doing so, Justice Vermette confirmed that an arbitration award can only be set aside on narrow grounds under the ICAA. When it comes to due process, alleged violations will only warrant judicial intervention if the arbitrator’s conduct “is so serious that it cannot be condoned under Ontario law.” Likewise, jurisdictional challenges will only justify intervention in “rare circumstances”.

Justice Vermette found that there was no procedural unfairness in the arbitrator’s decision to apply the investors’ methodology for calculating disgorgement because EDE Capital was given a full opportunity to respond and present its own case on the issue. Justice Vermette also rejected EDE Capital’s arguments that the arbitrator exceeded her jurisdiction in awarding disgorgement.

Key Takeaways

  • Parties to international commercial arbitration agreements may not contract out of the ICAA mandatory provisions on setting aside arbitration awards.
  • An arbitration award will only be side aside on narrow grounds.
  • Disgorgement of ill-gotten profits may be awarded in addition to repayment of funds in cases involving misuse of investment funds.

Michael Nowina and Juliette Mestre, Baker McKenzie LLP, represented the investors in this application.