Canada: Unfettered Discretion: The Risks Of An Overly Broad Arbitration Agreement

Last Updated: June 22 2015
Article by Kyle Magee

Arbitration gives parties the flexibility to craft their own procedure. However, a recent decision of the Ontario Superior Court of Justice, tasked with reviewing the process followed by a rabbinical court, highlights the risk of granting an arbitral tribunal complete procedural discretion. In Popack v. Lipszyc, 2015 ONSC 3460, the Honourable Justice W. Matheson declined to set aside an arbitral award despite finding that the arbitral tribunal had committed a “significant” breach of the arbitration agreement.

The Facts

Joseph Popack, a New York resident, and Moshe Lipszyc, an Ontario resident, embarked on a partnership to acquire commercial properties. When the business relationship deteriorated in 2005, an arbitration was held before a rabbinical court in Brooklyn. Following the arbitration, Mr. Lipszyc agreed to sell his interest in the business to Mr. Popack.

However, shortly after concluding the sale agreement, a further dispute arose. On the direction of one of the rabbis that heard the first arbitration, Rabbi Schwei, the Parties eventually agreed to arbitrate in another rabbinical court and entered into a new arbitration agreement.

The arbitration agreement appointed the Rabbinical Court of Mechon L’Hoyroa as the arbitral tribunal and gave it wide decision-making and procedural flexibility. Among other things, the agreement provided: (a) the tribunal could follow any procedure it decided; (b) there would be no transcript of the proceeding unless the tribunal decided otherwise; and (c) the tribunal could hear testimony and evidence in the absence of a party if that party did not attend a scheduled hearing.

At one point during the course of the subsequent hearing, Mr. Lipszyc requested that the tribunal hear from Rabbi Schwei. The tribunal did not clearly indicate one way or the other whether it had decided to hear from Rabbi Schwei.

The second arbitration finished in March 2013 after about eight weeks of hearings. In accordance with the arbitration agreement, the proceedings were not recorded. However, following the hearing and unbeknownst to the parties, the tribunal met with Rabbi Schwei. In response to rumours about the meeting, Mr. Popack’s rabbinical lawyer wrote to the tribunal in July 2013 and made submissions on the presumed testimony of Rabbi Schwei and on the arbitration generally.

In August 2013 the tribunal issued an award directing Mr. Popack to pay $400,000.00 to Mr. Lipszyc. There were no reasons for the decision.

Mr. Popack and his Ontario companies quickly commenced an application in Ontario to set aside the award based on the meeting with Rabbi Schwei. After learning of the application, the tribunal issued a letter indicating that the meeting with Rabbi Schwei had no impact on its decision.

The Application Decision

The Application proceeded pursuant to Ontario’s International Commercial Arbitration Act (the “ICAA”) which incorporates the UNCITRAL Model Law on International Commercial Arbitration. While both the ICAA and the Model Law recognize that parties are entitled to craft an adjudicative proceeding of their own choosing, Article 34 of the Model Law provides that a court may set aside an award where the procedure was not in accordance with the arbitration agreement.

The Applicants argued that the meeting between the tribunal and Rabbi Schwei, among other things, violated their right to present their case and that unauthorized ex parte meetings between arbitrators and material witnesses were contrary to Ontario public policy.

Justice Matheson held that, given the lack of a transcript, it was not clear whether the tribunal had communicated its decision to meet with Rabbi Schwei. However, even if it had, the tribunal had not provided notice of a “scheduled hearing” as  required under the arbitration agreement. In the circumstances, the Court concluded that the tribunal had breached the arbitration agreement and the award could, potentially, be set aside under Article 34 of the Model Law.

The Court noted that a decision to set aside an award under Article 34 of the Model Law is discretionary. In exercising its discretion the Court considered:

1. The Seriousness of the Breach: The tribunal had not met with Rabbi Schwei solely on its own initiative. In this case, the parties had agreed to defer to the arbitral tribunal’s discretion with respect to the process. Mr. Lipszyc had requested that the arbitral tribunal meet with Rabbi Schwei and Mr. Popack did not object;

2. The Potential for Prejudice: The Court considered whether the tribunal’s conduct might have prejudiced one of the parties. In this case, the parties had agreed that there would be no transcript of the arbitration. As a result, there was little information upon which to conclude whether Rabbi Schwei’s evidence might have prejudiced either party;

3. Actual Prejudice If the Award Were Set Aside: On the other hand, the Court noted that setting aside the award would result in actual prejudice given the lengthy and expensive hearing and the fact that a material witness had since died; and

4. Conduct of the Applicant That Would Weigh Against Relief: The Court noted that Mr. Popack’s lawyer had written to the tribunal and requested a hearing if the tribunal was going to consider Rabbi Schwei’s evidence. At the same time, the letter made ex parte submissions to the tribunal regarding Rabbi Schwei and the arbitration, more generally. The Court held that while this conduct did not disentitle the Applicants to relief, it did not weigh in their favour.

Justice Matheson concluded that while the breach of the arbitration agreement was significant, it had to be weighed against the other factors, including the actual prejudice that would result if the award was set aside. In exercising its discretion, the Court concluded that this was not an appropriate case to set aside the award.

Take Away Points

This decision emphasises the importance of crafting an arbitration agreement that will provide the parties with the procedural advantages they desire while maintaining sufficient control over the process to protect them in the event a party believes the arbitrator has gone astray. As noted in Popack, and emphasized recently by the Supreme Court of Canada in Sattva Capital Corp. v. Creston Moly Corp., the Court will start any analysis with the presumption that the decisions (including procedural decisions) of any arbitrator selected by the parties are entitled to broad deference and respect.

While one of the advantages of arbitration is the flexibility to craft the procedure, Popack highlights the risk of granting an arbitral tribunal unfettered discretion. In this case, the tribunal likely felt entitled to meet with Rabbi Schwei in the absence of the parties given the broad discretion granted to them to control the procedure. Parties should typically incorporate written procedural rules into their arbitration agreement to ensure that all participants, including the tribunal, have a common expectation of the process to be followed.

Popack also notes the importance of maintaining a record. The Court’s decision may well have been different if an accurate record of the arbitration hearing was available to allow the Court to determine whether Rabbi Schwei’s evidence impacted the Award. A record would have also mitigated the problem of prejudice which arose upon the death of a material witness. Even where the parties have agreed that there will be no appeal, this case is a reminder that an Award can still be challenged and a complete and accurate record may be critical to the outcome.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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