B.C. Court of Appeal Sets Aside Arbitration Costs Award Over Parties’ Lack of Opportunity to Make Submissions

In Green Light Solutions Corp. v. Kern BSG Management Ltd., the British Columbia Court of Appeal found that an arbitrator breached the duty of procedural fairness by apportioning costs without giving the parties an opportunity to make submissions responsive to the substantive findings in the award. The issue was remitted to the same arbitrator, with the Court confirming that an arbitrator whose decision has been successfully appealed is presumed to remain impartial. 

Facts and Decision

The dispute arose under a contract for the construction of a cannabis growing facility. The owner, Green Light Solutions Corp. (GLS), withheld certain payments from its contractor, Kern BSG Management Ltd. (Kern), alleging deficiencies in Kern’s work. Kern initiated arbitration seeking payment of outstanding invoices. 

The arbitrator issued an award finding that there were deficiencies in Kern’s work and GLS was entitled to withhold payment, but GLS had not been entitled to do so indefinitely. The arbitrator then determined that Kern and GLS should be entitled to 60% and 40% of their costs, respectively, on the basis that neither party had been substantially successful. 

Under Procedural Order No. 1 (PO1), the parties had agreed that the arbitrator would have broad discretion over costs and could determine them summarily, and the timing of cost submissions would be determined by the arbitrator in consultation with the parties. In their written submissions on the merits, both parties sought costs and made brief submissions, but each did so on the assumption that it would be successful in the arbitration. GLS appealed on the basis that the arbitrator breached the duty of procedural fairness by failing to seek further submissions on the apportionment of costs having regard to the substantive findings in the award. 

The Court granted the appeal, noting that the requirements of procedural fairness in arbitration are to be considered with due regard to the circumstances of the case and the rules under which the parties agreed to arbitrate their dispute. In this case, the following factors were relevant: 

• PO1 contemplated a separate schedule for costs submissions
• The parties’ costs submissions were premised on them being successful on the merits
• The arbitrator concluded that neither party had been substantially successful and apportioned costs on that basis, without inviting submissions
• The arbitrator did not have an opportunity to consider a settlement offer that GLS claimed to have made
• The costs were significant relative to the amount in dispute

The Court held that, given the mixed outcome of the arbitration, procedural fairness required the arbitrator to invite submissions on substantial success and apportionment of costs following his decision on the substantive issues. The Court also rejected Kern’s argument that GLS could have made alternative submissions before the award addressing the allocation of costs in the event GLS was unsuccessful. It was not for GLS to anticipate the arbitrator’s decision on the substantive issues.

In the result, the Court remitted the matter of costs to the arbitrator for reconsideration, rejecting GLS’s request for remittance to a different arbitrator. The Court noted that the presumption that arbitrators are impartial is not displaced merely because of a successful appeal or because the arbitrator has made findings adverse to a party. The Court was not persuaded that the arbitrator would fail to render a reasoned and impartial decision on reconsideration despite the previous breach of procedural fairness. While GLS also raised concern about bias, given its challenge to the arbitrator’s fees and expenses, the Court noted that any recusal application should be decided by the arbitrator. The Court also questioned whether it had jurisdiction under the Arbitration Act to remit the matter to a different arbitrator at all, but left that question for another day.

Key Takeaways

1. Parties are owed procedural fairness in relation to costs. Parties are generally entitled to make submissions on costs entitlement and apportionment, particularly where the outcome on the merits is not clearly in one party’s favour.
2. Do not overlook costs in procedural orders. Procedural orders define the arbitral procedure and may affect the content of the duty of procedural fairness owed to the parties. If parties wish to provide for or foreclose submissions on costs, it is prudent to define that process in the procedural order.
3. Arbitrators are presumed to remain impartial. A successful challenge to an award does not rebut the presumption of impartiality. Matters are generally remitted to the original arbitrator for reconsideration, and an application for an arbitrator to recuse themselves should be heard by the arbitrator at first instance. 

For more information, please contact the authors or any other member of our Arbitration group.