Lutzak v Medisystem Technologies Inc, 2016 ABQB 258

Court of Queen ’ s Bench of Alberta Citation: Lutzak v Medisystem Technologies Inc, 2016 ABQB 258 Date: 20160505 Docket: 1403 08128, 1503 05098 Registry: Edmonton Between: 1403 08128 Donald Lutzak, Central Care Medical Pharmacy Inc., Central Care Pharmacy 2000 Inc. and Haridon Investments Ltd. Applicants - and - Medisystem Technologies Inc., Medisystem Pharmacy Alberta Limited, and Shoppers Drug Mart Corporation Respondents Between: 1503 05098 Donald Lutzak, Central Care Medical Pharmacy Inc., Central Care Pharmacy 2000 Inc. and Haridon Investments Ltd.

Applicants - and - Medisystem Technologies Inc., Medisystem Pharmacy Alberta Limited, and Shoppers Drug Mart Corporation Respondents _______________________________________________________

Reasons for Judgment of the Honourable Madam Justice J.M. Ross _______________________________________________________ Introduction [ 1 ] In two related appeals, the Applicants [Claimants in the arbitration], Donald Lutzak, Central Care Medical Pharmacy Inc., Central Care Pharmacy 2000 Inc. [Central Care], and Haridon Investments Ltd. [Haridon], challenge the Partial Final Award and the Final Award granted in arbitration proceedings between the Applicants and the Respondents. The Applicants also apply to set aside the Final Award on procedural grounds.

Background [ 2 ] In 2005, the Applicants sold their interest in a pharmacy business to the Respondents, Medisystem Technologies Inc. and Medisystem Pharmacy Alberta Ltd. [Medisystem]. The parties entered into a number of agreements for this purpose, referred to as the Asset Purchase Agreement, the Earn Out Agreement, the Consulting Agreement and the Escrow Agreement [collectively, the Business Agreement]. [ 3 ] The purchase price for the business was stated in the Asset Purchase Agreement to be “approximately $5,975,000,” paid by: 1.

Approximately $2,505,500 loan repayment paid at closing; 2. $875,000 cash at closing; 3. 370,000 shares of Medisystem (later exchanged for shares of Shoppers Drug Mart Corporation [Shoppers]), subject to the Escrow Agreement providing that the shares would be released to the sellers at such time as the business attained $750,000 earnings before interest, taxes, depreciation and amortization [EBITDA] in any given financial year within 4 years of closing; 4.

Contingent amounts to a maximum of $1,375,500 [Earn Outs] to become payable if the business reached stipulated levels of EBITDA and stipulated levels of gross income within 2 and 4 years of closing. [ 4 ] In addition, under the Consulting Agreement, the Applicant Haridon was to provide Lutzak’s consulting services to Medisystem for an annual fee of $75,000 and bonuses to a maximum of $2,000,000, contingent on stipulated levels of EBITDA. [ 5 ] In July 2006, the Respondent Shoppers purchased Medisystem. [ 6 ] Clause 3.15 of the Earn Out Agreement provided that EBITDA included EBITDA of affiliates of the buyer. [ 7 ] A dispute arose as to whether the requisite levels of EBITDA had been reached such that the shares in escrow should be released and the contingent amounts and consulting bonuses became payable.

In particular, the Applicants contended, and the Respondents disputed, that EBITDA of Shoppers and its affiliates should be included in the calculation of EBITDA. [ 8 ] The Applicants commenced a Court of Queen’s Bench Action against the Respondents. Subsequently the parties agreed to submit the disputes to arbitration.

The issues agreed to be submitted to arbitration were “all of the issues and disputes between them arising from or relating to the matters that were pleaded or could have been pleaded in the statement of claim in the Action.” [ 9 ] Pursuant to the arbitration agreement: 1. the Applicants were to deliver a statement of claim in the arbitration, setting out the facts and positions relied upon and the relief sought; 2. the Respondents could elect to bring a motion to strike all or part of the claims on the ground that even if the allegations pleaded were true, the claim was bound to fail. [ 10 ] The first Arbitration Statement of Claim included claims in eight categories against the Respondents Medisystem and Shoppers: breach of contract, breach of duty of good faith and fair dealing, breach of fiduciary duty, conspiracy to injure, unlawful means tort, breach of confidence, inducement of breach of contract and corporate oppression.

The Respondents brought a motion to strike all of the claims on the ground that they were bound to fail. The Applicants sought dismissal of the motion or, alternatively, if it was found that elements of claims were not sufficiently pled, leave to amend those claims. [ 11 ] In a Partial Final Award, dated May 8, 2014, the Arbitrator dismissed the application to strike with respect to the breach of contract claims. The Arbitration proceeded against Medisystem alone with respect to those claims, resulting in a Final Award, dated

March 30, 2015, which is the subject of the second appeal before the Court today. [12] The Arbitrator allowed the application to strike with respect to all other claims, although he granted the Applicants leave toapply to amend the pleading with respect to inducing breach of contract.

Appeal of the Partial Final Award [13] The only aspect of the Arbitrator’s Partial Final Award that is subject to the first appeal before the Court is his decision tostrike the portions of the Statement of Claim alleging breach of the duty of good faith and fair dealing, without leave to apply to amend. [14] The claim with respect to the duty of good faith and fair dealing is found at para 29 of the Arbitration Statement of Claim. It isalleged that the duty was breached by: (

a) not including Shoppers’ locations in calculation of EBITDA; (

b) not taking steps to protect the profit interests of the Applicants in the business; (

c) allowing the business to stagnate and decline; (

d) not utilizing the consulting services of the Applicants. [15] The Arbitrator’s decision to strike these claims is found in paras 115-116 of his Partial Final Award. The decision to strikewas based on the Alberta Court of Appeal decision in Bhasin v Hrynew, 2013 ABCA 98, 544 AR 28, which had concluded that there isno implied duty of good faith and fair dealing in relation to most contracts. The Arbitrator noted that the decision was under appeal to theSupreme Court of Canada, but that it represented the current state of the law in Alberta which he was bound to follow.

Therefore theportions of the Statement of Claim alleging breach of the duty of good faith and fair dealing must be struck as they were bound to fail. Hefurther was not prepared to grant leave to amend the pleading, given the state of the law in Alberta. [16] The Supreme Court of Canada subsequently reversed the decision of the Alberta Court of Appeal in Bhasin v Hrynew, 2014SCC 71, [2014] 3 SCR 494. The Supreme Court summarized the applicable legal principles (para 93):

(1) There is a general organizing principle of good faith that underlies many facets of contract law; …

(2) It is appropriate to recognize a new common law duty that applies to all contracts as a manifestation of the general organizingprinciple of good faith: a duty of honest performance, which requires the parties to be honest with each other in relation to theperformance of their contractual obligations. Appeal on Question of Law/Standard of Review [17] The Arbitration Act, RSA 2000, c A-43, s 44(1) [Arbitration Act] provides that, if an arbitration agreement so provides, aparty may appeal an award on a question of law, or fact or mixed law and fact.

The arbitration agreement in this case provides that anappeal is allowed only on a question of law. [18] The standard of review in an arbitration appeal on a question of law is reasonableness, unless the question of law is of centralimportance to the legal system as a whole and outside the adjudicator’s expertise: Sattva Capital Corp v Creston Moly Corp, 2014 SCC53 at para 106, [2014] 2 SCR 633. [19] The question of whether there is a potentially applicable duty of good faith and fair dealing in relation to contracts underAlberta law is a question of law. [20] The Applicants submit that there is an additional question of law that must be considered – the question of the test that applieson an application to strike out a cause of action, where there is a prospect that the current state of the law governing the cause of actionmay be subject to change.

It is a well-known principle that important or serious questions of law should not be decided on a striking outapplication. The Alberta Court of Appeal has held that, therefore, “[e]ven authority binding on the chambers judge is not sufficientground to strike out a pleading, if an appeal to a higher court might reasonably produce a different view of the law”: Fullowka vWhitford (1996), (NWT CA), 147 DLR (4th) 531 at para 45, [1997] NWTR 1 (NWT CA) (WL) [Fullowka]. [21] Both of these common law questions of law are arguably of central importance to the legal system.

However, dealing withthese legal issues in the context of a commercial contract is not, in my view, outside the arbitrator’s expertise. Therefore the standard ofreview is reasonableness. Application of the Standard of Review [22] While the standard of review is reasonableness, that standard was not met in this case, in relation to either question of law. [23] It is clear that the Arbitrator erred in law regarding the existence of a duty of good faith and fair dealing. He followed theAlberta Court of Appeal decision, which has since been overruled.

Based on the law as stated by the Supreme Court of Canada, theArbitrator failed to apply the applicable legal test. This is not a matter of an arguably incorrect but reasonable

interpretation of the legal

test; it is a complete failure to consider the “common law duty that applies to all contracts as a manifestation of the general organizing principle of good faith: a duty of honest performance.” The Arbitrator did not consider whether the claim made in this case, or that might be made following an amendment of the pleading, might succeed in establishing a breach of the duty of honest performance. [ 24 ] In addition, the Arbitrator erred in law by failing to consider the legal principle stated in Fullowka , that binding authority is not a sufficient ground to strike out a pleading, if an appeal to a higher court might reasonably produce a different view of the law.

The Arbitrator observed that the law in Canada was not settled as to whether there was an implied duty of good faith and fair dealing in the performance of contractual obligations. He further observed that the Alberta Court of Appeal decision had been appealed to the Supreme Court of Canada and the decision was on reserve. However, he did not consider whether, in these circumstances, he should decline to strike out the claim. He simply held that he was bound by the Alberta Court of Appeal decision.

He did not exercise the discretion provided to him under Fullowka , nor did he give any reasons to indicate that this discretion should not be exercised in the context of a commercial arbitration. Again, this is not a matter of an arguably incorrect but reasonable

interpretation of the legal test; it is a failure to consider the applicable test. [ 25 ] The Respondents submit that these errors would not change the result, as the duty of honest performance found by the Supreme Court of Canada is narrower than the duty of good faith and fair dealing alleged by the Applicants, and further submit that the Applicants’ allegations do not and cannot come within the scope of that narrower duty. [ 26 ] In my view, this is something appropriately determined by the Arbitrator.

The Supreme Court of Canada decision includes various descriptions of the duty of honest performance; its scope and application to the Applicants’ claims may be debatable. This is an issue between the parties “arising from or relating to the matters that were pleaded or could have been pleaded in the statement of claim” that the parties agreed should be determined by the Arbitrator.

The Arbitrator failed to determine that issue because he did not have the benefit of the Supreme Court of Canada decision; he should now make the determination in light of that decision. [ 27 ] The Applicants’ pleading was drafted before the Supreme Court of Canada decision, and they therefore have not had an opportunity to plead their case in light of the duty as described by the Supreme Court. The Arbitrator held that he had jurisdiction to give leave to the Applicants to apply to amend their pleadings rather than simply striking them out.

His denial of leave to apply to amend was based on the same law as his decision to strike out, and is likewise unreasonable. [ 28 ] The Arbitration Act , s 44(5) gives the court authority to vary or set aside an award or to remit the award to the arbitral tribunal and give directions about the conduct of the arbitration. As the Arbitrator has not yet determined the issue of whether the Applicants’ good faith claim should be struck out in light of the Supreme Court of Canada decision in Bhasin v Hrynew , the matter should be remitted to him for that purpose.

As the Applicants have not had an opportunity to plead their case in light of the legal duty as set out in the Supreme Court of Canada decision, I will further give directions that the Applicants have leave to apply to the Arbitrator to amend their pleadings. This application, with proposed amendments being specified by the Applicants, should be heard at the same time as the remitted striking out application. This will permit the Arbitrator to consider whether the claim should be struck out in the context of any proposed amendments to the pleadings.

Appeal of the Final Award [ 29 ] The second proceeding before me is the appeal of the Arbitrator’s Final Decision on the breach of contract claims. [ 30 ] The parties agreed that the appeal of the Partial Final Award would not proceed until after the Supreme Court of Canada issued its ruling in Bhasin v Hrynew . They further agreed to proceed immediately to arbitration on the breach of contract claims. [ 31 ] Following the hearing on the contract claims, the Arbitrator issued a Final Award in which he agreed with the Applicants’

interpretation of the Earn Out Agreement that the calculation of EBITDA of affiliates, including Medisystem’s parent company Shoppers and its affiliates, had to be taken into account to determine whether requisite levels of EBITDA had been reached. [ 32 ] However, this finding did not demonstrate that the Applicants were entitled to release of the escrow shares or payment of the Earn Outs and Bonuses. The Applicants needed to establish that, when properly calculated, EBITDA had reached the required levels (and, with regard to the Earn Outs, that gross income had also reached the required levels).

The Arbitrator observed that the Applicants did not provide evidence of these calculations, but instead sought an order directing Medisystem to produce financial information regarding EBITDA of Shoppers and its affiliates, taking the position that the arbitration should be severed, and should continue at a later date to determine whether, based on the produced information, the ultimate claimed relief was available. [ 33 ] The Arbitrator declined to order production of documents or to sever the arbitration. The result was that, although he had agreed with the Applicants’

interpretation of the Earn Out Agreement, he found that the Applicants had failed to prove entitlement to the relief sought, and their claims were denied. These are the rulings that are appealed by the Applicants. Procedural Context of the Arbitration [ 34 ] The Applicants have raised issues regarding procedural fairness.

I will therefore set out relevant aspects of the procedure relating to the arbitration of the breach of contract claims in some detail. [ 35 ] The parties entered into two consent Procedural Orders relating to this arbitration. [ 36 ] Under Procedural Order #1, they agreed that the Applicants would deliver a second Arbitration Statement of Claim addressing the breach of contract claims as against the Medisystem Respondents alone (not Shoppers), and that Medisystem would deliver a Statement of Defence in response. [ 37 ] The second Arbitration Statement of Claim claimed breaches of the Business Agreement in paragraphs 13 and 14:

13. In breach of the Business Agreement, Medisystem and Medisystem Alberta failed to: (

a) keep and provide access to the financial books and records of Medisystem and Medisystem Alberta in the form and content required by the terms of the Business Agreement; (

b) provide financial statements in the form and content required by the terms of the Business Agreement; and (

c) provide realistic and reliable calculations of EBITDA. 14. As of July 2006, when Shoppers purchased all of the outstanding shares of Medisystem, Shoppers and all of its affiliates in Western Canada became affiliates of Medisystem for the purposes of calculating EBITDA under the Earn Out Agreement. Therefore, in further breach of the Business Agreement, Medisystem and Medisystem Alberta failed to: (

a) include the sales of affiliates of Medisystem in Western Canada, including its affiliate Shoppers and Shoppers’ other affiliates in Western Canada, in the EBITDA calculations; and (

b) pay Central Care and Haridon the Earn Outs and the Bonus. [ 38 ] In paragraphs 15-16 of the second Arbitration Statement of Claim, it was further alleged that, if the sales of affiliates were included in the EBITDA calculations, then the earn outs and bonus targets would have been met, so that the Applicants were entitled to be paid under the Business Agreements or, alternatively, entitled to damages for breach. [ 39 ] The second Arbitration Statement of Claim concluded with the following under the heading “Relief Sought”: (

a) A direction that the Escrow Shares and Funds be released; (

b) Judgment for the full amount of the Earn Outs and the Bonus in the sum of $4,526,200 together with interest thereon… (

c) In the alternative, damages jointly and severally for breach of the Business Agreement in the amount of $4,526,200; (

d) Interest ...; and (

e) Costs. [ 40 ] Medisystem’s Statement of Defence denied that they breached the Business Agreement; in particular, they denied that EBITDA of Shoppers or its affiliates should be included in the calculation of EBITDA under the Business Agreement. Under the heading “No Damages,” they denied further, or alternatively, that any breach caused or contributed to any loss to the Applicants. [ 41 ] Under Procedural Order #2, the parties agreed to dates for delivery of documents and expert reports, written submissions and witness statements, and a date for the hearing of the breach of contract claims. The

preamble to Procedural Order #2 stated that the Applicants would not rely on any further documents “other than those already produced” or expert reports. [ 42 ] The second Arbitration Statement of Claim did not expressly seek a disclosure order or any form of preliminary relief. The Applicants’ initial written submissions provided in advance of the hearing sought the relief outlined in the second Arbitration Statement of Claim, release of the escrow shares and payment under the contracts or damages in the same amount, as well as interest and costs.

The written submission of the Respondents raised the damages issue, submitting that the Applicants had provided no proof that the performance targets were achieved, and thus, failed to meet their onus of proving that Medisystem breached the Business Agreement or that the Applicants suffered damages as a result. [ 43 ] In their written reply, the Applicants responded to the defences raised by the Respondents, including the defence that “Central Care and Lutzak have not proved that the performance targets were achieved.” The Applicants submitted that under the Earn Out Agreement, Medisystem was required to provide annual calculations of EBITDA and other financial information.

Medisystem had taken the position that it was not required to produce financial information of Shoppers and its affiliates, and should be directed to produce this financial information “as this information is reasonably required for the purpose of confirming that the targets were attained.” [ 44 ] The issue was addressed in oral submissions before the Arbitrator at the conclusion of the hearing. Counsel for the Applicants said: Now the last point that Medisystem raises is they say that Central Care and Mr. Lutzak haven’t established that even on their

interpretation, that the targets would have been met. And that is true. At this point, although Mr. Lutzak strongly suspects the targets would have been met, he can’t prove that. Because of the

interpretation that has been placed by Medisystem …, they’ve taken the position that Shoppers is not an affiliate, and therefore none of the financial information from Shoppers, or its subsidiaries or affiliates in western Canada has been made available. So all I can ask for on that, and I think in this arbitration all I can ask for is a ruling with two components.

Firstly, that Shoppers and all of its subsidiaries and affiliates are affiliates within …the agreement; and secondly, that the financial information for Shoppers and its subsidiaries and affiliates be made available for the purpose of determining whether or not the targets were met. [ 45 ] In his oral submission, counsel for the Respondents observed that counsel for the Applicants “basically admits that she’s failed to prove” applicable EBITDA levels, “because now she’s asking for a production order of some kind from a party who is not a party to this claim.” He noted that the relief sought in the second Arbitration Statement of Claim did not include a production order, and that the Applicants could have sought a production order before the hearing, or could have sought an adjournment of the hearing to try to get a production order.

He submitted that the Arbitrator was required to decide the claim based on the evidence adduced.

[ 46 ] Counsel for the Applicants submitted in reply that, unless she got “through the hurdle” that Shoppers was an affiliate, she had no basis to get the financial information she sought. She had to prove the

interpretation and then seek the information. She was seeking a ruling on the

interpretation, and, if successful on that, she was looking for the information to determine whether or not the targets were actually met. She observed that under the arbitration agreement, the Arbitrator had all the powers of a Queen’s Bench judge, and therefore he had authority to sever issues, and to direct the production of documents, and she was requesting that he “exercise those powers.” [ 47 ] The Arbitrator stated: I’m a little concerned about the extent of my jurisdiction being defined by the pleadings, okay. What is the issue that has been put before me and how far could I go? Let’s say hypothetically I were to accept your argument with respect to the

interpretation issue, and then I look at the relief that you’ve claimed. And I don’t have any basis to award you monetary damages because there is no evidentiary record there. I know you’ve alleged that there would have been breaches in the failure to provide the information…let’s say I make the ruling in your favour and say, yes, you have the proper

interpretation. If I stop there am I then functus on my – can I go any further. I mean, it’s a question of what are the limits within which an arbitrator can operate. You know, it goes to the jurisdiction that an arbitrator has in this context of these pleadings. And given the arbitration agreement to which you refer, do I have jurisdiction? I don’t want to put the cart before the horse, but it seems to me I ought to get something more from each of you on that. Not – it doesn’t have to be really detailed, but I would feel much more comfortable having that in advance.

And I’m not trying to signal that I’m going any way in the award, because I’m not. …I do think it would be – I don’t want to kind of have a two-part award. I want to do it all at once, and I just think it would be helpful to have something in writing from both of you on that dealing with, you know, the limits of my jurisdiction. [ 48 ] Following the hearing, the Applicants submitted supplemental written submissions in support of their argument that the Arbitrator had jurisdiction to direct production of documents, including from non-parties, and further to sever issues and make interim awards.

The submission concluded with a statement that, “in the present case, it is logical and efficient” for the Arbitrator to first rule on the interpretive issue. “If the ruling is in the affirmative, then once Shoppers’ financial information has been produced, the Arbitrator can address the issue of whether the targets were met.” [ 49 ] The Respondents replied, taking issue with the Applicants’ jurisdictional arguments, and further submitted that “in any event,’ the Arbitrator should not permit severance or order non-parties to produce documents.” The Respondents submitted that severance would result in “a form of ‘litigation by instalment’ that is anathema to the litigation efficiency that is supposed to be created by arbitration, and in particular, was supposed to be created by the [Applicants’] proposal to proceed with [the contract] claim.” Further, the Applicants failed to avail themselves of opportunities to seek financial information in advance of or during the arbitration hearing.

They first expressed the desire to seek more evidence – a new argument – in their written reply. Had they wished to proceed in a two-step manner, this should have been raised in advance.

As to production of documents, the Respondents submitted that the Arbitrator should not order non-parties to produce documents, given the late stage of the proceeding and the fact that notice had not been given to affected third parties. [ 50 ] The Applicants replied to the Respondents’ submission, asserting further grounds for the Arbitrator’s jurisdiction and a willingness to provide notice to Shoppers and an opportunity for them to respond. This submission was followed by a sur-reply by the Respondents and a reply to the sur-reply by the Applicants.

The Final Award [ 51 ] The Arbitrator concluded that he had jurisdiction to sever, and to order production of documents from a non-party. [ 52 ] The Arbitrator’s reasons regarding the exercise of his discretion commence at paragraphs 179 and 180 of the Final Award: 179. Even though I have made a determination as to the

interpretation of “affiliates” in

Article 3.15 of the Earn Out Agreement in favour of Claimants, I am not satisfied that the Hearing ought to be severed or bifurcated [so] as to allow for further and extensive production of financial information from Respondents and Shoppers and its affiliates followed by a final hearing dealing with compensation. 180. I have reached this conclusion after considerable reflection, recognizing that the result is a total dismissal of Claimants’ claims.

The reason for my decision is that, simply put, Claimants have failed to prove damages which are an essential element of their claim. [ 53 ] He outlined the procedure leading up to and during the hearing, noting that the Applicants did not take steps to obtain production of documents before or during the hearing. Instead, at the conclusion of the hearing they “simply asked that there be an order for severance, that directions to produce financial records be issued and that the Hearing then resume at an unspecified date.” [ 54 ] The Arbitrator declined to do this, for reasons set out in paras 188 to 190: 188.

With the greatest of deference, I find this unacceptable. Establishing damages is an essential element of every case. If there is no evidence in support, the claim simply fails. This is not a case in which a mistake was made in that this element was overlooked; rather, Claimants were fully aware that the gap existed and simply assumed the Arbitrator would find a way to bridge it. 189.

There are several things Claimants might have done to avoid this difficulty including conducting discovery, applying (on notice to Shoppers and its subsidiaries and affiliates) to the Arbitrator before the Hearing for a production Order, calling someone from Shoppers to give evidence, making a formal motion before Hearing for bifurcation of the case or seeking an adjournment before closing

Claimants’ case so as to allow additional evidence to be presented. For reasons known only to Claimants, none of this was done. 190. Given these circumstances, I am concerned that, at the 11th hour, for Claimants to say in closing submissions that they seekseverance, directions for production of documents from Respondents and Shoppers and a later phase of the hearing to deal withcompensation would be manifestly unfair to Respondents.

They were entitled to assume that the case set out in the pleadings was thecase they had to meet and not one that would proceed by installments until Claimants’ evidentiary gaps had been filled in. 191. In the result while I have, in this Final Award, issued my determination as to the meaning of “affiliates” used in

Article 3.15 ofthe Earn Out Agreement and also in the Consulting Agreement, I am not prepared to sever the hearing, issue orders for production offinancial information from Respondents or Shoppers and direct that a separate phase of the Hearing be held to deal with damages orcompensation. To do so would require me to ignore Claimants’ representations that they had no intention of entering further documentsinto evidence and would violate the spirit of the agreement that led to the second Arbitration Statement of Claim, the two ProceduralOrders and the scheduling of the Hearing on specific dates.

Moreover, doing so would be manifestly unfair to Respondents. Claimantsmade tactical decisions as to how to present their case, part of which was to proceed without any evidence proving damages. Claimantsmust live with that decision. Appeal on Question of Law/Standard of Review [55] As with the first appeal considered above, this appeal is restricted to a question of law.

The standard of review isreasonableness, unless the question of law is of central importance to the legal system as a whole and outside the adjudicator’s expertise. [56] The question whether the Arbitrator should have permitted the hearing to be severed and ordered production of documents is aquestion involving the exercise of discretion.

At most, it is a question of mixed fact and law, which is not subject to appeal under thearbitration agreement in the present case. [57] However, the Applicants submit that the Arbitrator erred regarding two extricable questions of law. [58] Firstly, the Arbitrator found that the production sought would involve “extensive production of financial information” withoutany evidence to support that finding.

The Applicants submit that a finding of fact that is unsupported by any evidence is an error of law,and thus appealable: Blanchard v Control Data Canada Ltée, (SCC), [1984] 2 SCR 476 at paras 51-53, 14 DLR (4th)289(WL); Earth Sciences Inc. v Calgary (City) (1978), 1978 ALTASCAD 6 , 8 AR 22 at paras 10-13, 5 Alta LR (2d) 124(WL); Local Union 110 of the International Assn of Heat and Frost Insulators and Asbestos Workers v Local Union 92 of theConstruction and General Workers’ Union, 1986 CarswellAlta 1110 at para 29; and, Mountain Creeks Ranch Inc. v Yellowhead(County) Subdivision & Development Appeal Board, 2004 ABCA 177 at para 14. [59] Secondly, having declined the application for severance and production of documents, the Arbitrator dismissed theApplicants’ claim for damages, on the ground that “Claimants have failed to prove damages which are an essential element of theirclaim.” The Applicants submit that this was an error of law. [60] Not all of the breaches of contract alleged by the Applicants depended on required levels of EBITDA.

Medisystem wasrequired under the Earn Out Agreement to provide financial information and calculations of EBITDA, including the sales of affiliates.The Arbitrator accepted the Applicants’

interpretation of the Earn Out Agreement, that EBITDA of Shoppers and its affiliates had to beincluded in those calculations. It was admitted that Medisystem had not included EBITDA of Shoppers and its affiliates in itscalculations and had refused to provide information required to make the calculations. Thus, the Applicants submit, a breach of contracthad been proven.

Therefore, they were entitled to a remedy, and the Arbitrator was required to determine what remedy should beordered: Indutech Canada Limited v Gibbs Pipe Distributors Ltd., 2011 ABQB 38 at paras 479-480, 508 AR 1 [Indutech Canada]; Costigan v Ruzicka, 1984 ABCA 234 at paras 17, 19, 54 AR 385; and Hat Development Ltd. v Alberta Treasury Branches,1998 ABQB 621 at para 12. The Applicants submit that, at a minimum, they were entitled to nominal damages: Indutech Canada at479.

Further, they submit that the Arbitrator should have determined whether they were entitled to additional damages based on theevidence before the Arbitrator, including an adverse inference against Medisystem because it refused the Applicants’ request to supplycalculations including or information regarding Shoppers’ EBITDA: Ibid. [61] I conclude that the standard of review regarding each of these questions of law is reasonableness.

While the common lawregarding entitlement to a remedy for a breach of contract may be a question of law that is of central importance to the legal system as awhole, its application within a commercial arbitration is not outside the arbitrator’s expertise. Application of the Standard of Review [62] The Arbitrator’s reference to “extensive production of financial information” was not an error of law and was notunreasonable.

It was simply a comment made when he stated his conclusion that the hearing should not be severed, nor documentproduction ordered; it was not the basis for his decision, which relied on other factors. That alone is sufficient to dismiss this ground ofappeal. However, I would add that there was a reasonable basis for this factual inference, in any event. There was evidence that Shoppersoperated its business as a franchise operation, and the Arbitrator could reasonably infer that this business model could complicateproduction of financial information.

In addition, it is my view that the Arbitrator was entitled to take notice of the well-known fact thatShoppers operates a large pharmacy chain, including in Western Canada. [63] However, regarding the second ground of appeal, I agree with the Applicants that the Arbitrator erred in law and that hisdecision in this regard did not meet the standard of reasonableness. The Arbitrator did not consider the legal principle that a party whoestablishes a breach of contract is entitled to a remedy, even if damages are not proven. At a minimum, a party in this situation is entitledto nominal damages.

The Arbitrator also did not consider whether an adverse inference should be drawn against Medisystem. Again,

there was a failure to consider applicable legal principles, so the standard of reasonableness was not met. [64] The Respondents observe that these legal principles were not argued before the Arbitrator.

However, new legal grounds maybe raised on appeal, provided they do not raise evidentiary issues which were not addressed at trial: Athey v Leonati, (SCC), [1996] 3 SCR 458 at paras 51-52, 140 DLR (4th) 235; Alberta (Chief Firearms Officer) v Runkle, 2015 ABCA 233 at paras 40,45, 2015 CarswellAlta 1238. [65] As the question of what remedy the Applicants are entitled to in respect of the proven breach of contract has not beenaddressed by the Arbitrator, this question is remitted to the Arbitrator for determination. Setting Aside Award due to Procedural Unfairness [66] Section 45(1)(

f) and (

g) of the Arbitration Act provides that an arbitration award may be set aside if the applicant was treatedmanifestly unfairly and unequally, or if the procedures followed in the arbitration did not comply with the Act.

Section 19 of the Actprovides that an arbitral tribunal shall treat the parties equally and fairly, and that each party shall be given an opportunity to present acase and to respond to the other party’s case. [67] The Applicants submit that the Arbitrator requested additional submissions at the conclusion of the hearing in relation to hisjurisdiction to sever and to order production of documents, particularly in view of the relief sought in the second Arbitration Statement ofClaim.

He did not seek submissions regarding factors that would favour the exercise of that discretion, and they were misled and did notprovide submissions on that point. [68] I have set out the procedure that was followed both pre- and post-hearing as well as at the arbitration hearing itself because itdemonstrates, in my view, that the Arbitrator treated both parties fairly and equally, and gave both parties a full opportunity to present acase and respond to the other party’s case. [69] The issue regarding proof of damages was raised by the Respondents in pre-hearing submissions, and was responded to by theApplicants, albeit briefly.

At the hearing, the Arbitrator requested additional submissions on jurisdiction, but also made it clear both thathe had not made any decisions at that point. The bases of jurisdiction argued by the Applicants at the hearing and in supplementalwritten submissions were discretionary; it would seem clear that any argument in that regard should include not only the existence ofdiscretion, but submissions as to why it should be exercised in favour of the Applicants.

The Respondents made fairly extensivesubmissions, both at the hearing and afterwards, that the Arbitrator should not exercise his discretion to permit severance or to orderproduction of documents. The Applicants did, in fact, respond to these submissions, again very briefly. [70] The Arbitrator gave the Applicants full opportunity to present their case and to respond to the Respondents’ case, evenensuring that the Applicants had the opportunity to be heard last, by way of sur-reply to a sur-rebuttal in post-hearing submissions. Theparties were, at all times treated fairly and equally.

I decline to set aside the arbitration award.

Costs Award on the Arbitration [71] In the Final Award, the Arbitrator awarded costs against the Applicants with respect to both the Final Award and the PartialFinal Award, but also provided that, if the parties failed to reach agreement on costs within 30 days, either party had leave to apply tohim on notice to determine costs and his jurisdiction to do so was reserved. [72] The Applicants submit that the costs award was unreasonable as they were not given an opportunity to make submissionsregarding costs, and that further, costs of the Partial Final Award were not before the Arbitrator at the time that he made the FinalAward. [73] As I have determined that questions should be remitted to the Arbitrator with respect to both the Partial Final Award and theFinal Award, it is appropriate to set aside his costs award, and remit the question of costs to be reconsidered following consideration ofthe remitted questions.

Conclusion [74] The appeals of the Partial Final Award and the Final Award are allowed, with questions remitted to the Arbitrator as described in these reasons. The application to set aside the Final Award is dismissed. [75] If the parties are unable to agree regarding costs, they may speak to me. Heard on the 21st day of April, 2016. Dated at the City of Edmonton, Alberta this 5th day of May, 2016.

J.M. Ross J.C.Q.B.A. Appearances: Janice A Agrios, QC/Kenneth F.Bailey, QC Kennedy Agrios LLP for the Applicants Mark Gelowitz/W David Rankin Osler, Hoskin & Harcourt LLP for the Respondents