- with Inhouse Counsel
- with readers working within the Law Firm industries
Why This Decision Matters
Tehama Group Inc. v. Pythian Services Inc, 2025 ONSC 4134 illustrates how Ontario courts assess challenges to set aside bespoke arbitration awards, particularly where a party alleges a breach of natural justice.
Background: The Jurisdiction and Earnout Disputes
The dispute between Tehama Group Inc. ("Tehama"), an Ontario corporation, and Pythian Services Inc. (Pythian"), a Delaware corporation, arises from a 2019 Asset Purchase Agreement (the "APA"). Pythian purchased a business from Tehama pursuant to the APA, which included a provision for an additional earnout payment. If the purchased business generated over $11 million in adjusted earnings during the 2021 calendar year, an earnout payment of $10 million would become payable to Tehama (the "Earnout").
The APA included an explicit arbitration procedure for any dispute over Pythian's Earnout calculations, providing dispute resolution by the Toronto office of PricewaterhouseCoopers LLP ("PwC"). In June 2022, Pythian reported that the Earnout threshold had not been met. Tehama disputed this conclusion, triggering the arbitration process.
PwC ultimately determined that Pythian's Earnout calculation was correct Pythian (the "Award"). In response, Tehama brought an application in the Ontario Superior Court of Justice to set aside the Award.
Pythian first sought to stay Tehama's application on the basis that the application was properly before New York courts.1 The Ontario Court disagreed, finding that it had jurisdiction to consider the application to set aside the Award, and the jurisdiction clause did not preclude the application. For more detail on this threshold jurisdiction decision from 2024, see our post The Place of Arbitration vs Forum Selection Clauses that discusses the decision in detail.
Tehama then proceeded with its application to set aside the award, arguing that the process followed by PwC was contrary to the parties' agreement and violated the principles of natural justice.2
Pythian had disclosed two quality of earnings reports related to a proposed sale, which Tehama relied on to argue that certain items in the earnings calculation were non-recurring. Specifically, Tehama challenged three items: (1) an interest add-back; (2) rent expense adjustments; and (3) non-recurring charges, including integration, severance, relocation, and recruiting costs. A ruling in Tehama's favour on any of these disputed items would entitle it to the Earnout.3
The parties exchanged initial and reply submissions in June and July 2023. Tehama objected to a declaration submitted by Pythian in its reply, arguing that it contained new information to which Tehama had no opportunity to respond.4 Tehama attempted to submit a letter responding to Pythian's declaration, but PwC requested no further communication on the matter.5 On September 19, 2023, PwC issued the Award in favour of Pythian.
Tehama claimed that the APA and principles of natural justice were breached because PwC received improper evidence from Pythian in its reply submission.6 Tehama argued this amounted to a denial of justice because it was not given the opportunity to respond to the disputed items.7
Court's Reasoning: Natural Justice and the Commercial Bargain
Natural justice requires arbitrators to act with procedural fairness, "the requirements of which depend on the subject-matter of the dispute, the circumstances of each case, the nature of the inquiry, and the rules under which the parties have agreed to arbitrate their dispute".8
The Court emphasized that under the APA's arbitration clause, the parties "bargained for an accounting expert, not a judge or lawyer" as their goal was to obtain specialized accounting expertise for the arbitration.9 The terms of PwC's engagement required it to make a final and binding determination on the accounting treatment of the disputed items in the earnings calculation.10
The Court found no breach of natural justice. PwC was not required to revert to the parties before deciding the earnings calculation issues, even in light of Pythian's reply evidence, which did not amount to a breach of natural justice.11 Rather, PwC followed the process set out by the parties and fulfilled its obligation to provide a "final and binding determination as to the appropriate accounting treatment" on all three disputed items in writing.12 PwC was required to provide "a brief summary of the Accounting Firm's reasons for its determination of each issue", which it did.13 The Court placed particular emphasis on the parties' commercial bargain in reaching this conclusion.
The Court further noted that, even if a breach of natural justice had occurred, the exercise of judicial discretion would not have led to the Award being set aside.14 The language of the APA, the subject-matter expertise of the arbitrator, and the summary procedure chosen by the parties were all relevant considerations favouring the exercise judicial discretion not to set aside the Award.15 By choosing final and binding arbitration by a technical, non-lawyer, subject matter expert, the parties sought an Award based on accounting expertise —"and that is what they got".16
Concluding Thoughts
This decision reinforces the principle that Ontario courts will respect the parties' commercial bargain for arbitration. Whether principles of natural justice were violated will be assessed within the framework that the parties chose for themselves.
Footnotes
1. Tehama Group Inc v. Pythian Services Inc., 2024 ONSC 1819.
2. Tehama at para [4].
3. Tehama at para [30].
4. Tehama at para [21].
6. Tehama at para [48].
7. Tehama at para [55].
8. Tehama at para [56].
9. Tehama at para [66].
10. Tehama at para [67].
12. Tehama at paras [64]-[68].
13. Tehama at paras [8], [64].
14. Tehama at para [47].
15. Tehama at para [74].
16. Tehama at para [72].
To view the original article click here
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.
