ITC Partners Canada Inc. v. Freimanis

2011 BCSC 1176 ITC Partners Canada Inc. v. Freimanis IN THE SUPREME COURT OF BRITISH COLUMBIA Citation: ITC Partners Canada Inc. v. Freimanis, 2011 BCSC 1176 Date: 20110830 Docket: S106881 Registry: Vancouver Between: ITC Partners Canada Inc. Petitioner And Robert Freimanis Respondent Docket: S107579 Registry: Vancouver Between: Robert Freimanis Petitioner And ITC Partners Canada Inc. Respondent Before: The Honourable Mr. Justice Leask Reasons for Judgment Counsel for Mr. Freimanis: Murray L. Smith Counsel for ITC Partners Canada Inc.: Nigel P. Kent Place and Date of Hearing: Vancouver, B.C. April 18-19, 2011 Place and Date of Judgment: Vancouver, B.C. August 30, 2011 INTRODUCTION [1] Mr. Freimanis was an employee of ITC Partners Canada Inc. ("ITC Partners" or the "Company") who owned 600 shares of common stock in the Company. He resigned as an employee on November 21, 2008 which triggered a mandatory sale of his shares to the Company. The Company Articles included a provision for valuing the shares and an arbitration clause to resolve valuation disputes if the Company and the employee could not agree on the value. The Company's interpretation of the value of Mr. Freimanis' shares was that they were worthless. However, to be consistent with their treatment of other recently departed employees, they offered him $96.80 per share for a total of $58,080. He did not accept this offer and the arbitration clause was triggered. The parties agreed to appoint Mr. Donald Selman, C.A., as the Arbitrator. The Arbitrator issued his Award with Reasons on September 7, 2010. He found that the value of Mr. Freimanis' 600 company shares was $970,000. On September 23, 2010 he made an Award respecting costs in which he ruled that each party should bear its own costs of the arbitration. These two Awards by the Arbitrator have resulted in two Petitions to this Court. The Company petitions the court for leave to appeal the Arbitrator's Award determining the value of the shares and Mr. Freimanis seeks leave to appeal the costs Award. FACTS [2] The ITC Group of Companies was founded in 1983 by Peter Rezansoff and Anthony McGill (the "Founding Partners"). By 2007, the ITC Group comprised a number of different corporate entities created at different times and in different geographical territories, specializing in the construction of concrete residential high-rises and diverse commercial construction projects. Before that time, ITC employees could and did become shareholders in only one of the companies forming part of the ITC Group, namely, ITC Construction Inc. ("ITC Construction"). [3] In 2007 the ITC Group underwent a major corporate reorganization (the "Reorganization Transaction") which, among other things, saw the creation of ITC Partners as the ownership vehicle for the enterprise. The purpose of the reorganization was to freeze the value of the Founding Partners' various interests in the Group and to provide for the transition of ownership and control of the company to employees by means of an internally leveraged buy-out. [4] Pricewaterhouse Coopers ("PWC") prepared an estimate of the value of the ITC Group. They produced an Estimate of Value Report dated March 30, 2007 that estimated the value of the ITC Group to be between $38 and $43 million. Their report used a "discounted cash value" method for determining the fair market value. [5] For the purpose of the Reorganization Transaction the parties visualized themselves as three groups: (1) the Founding Partners; (2) key employees (Lloyd Tasoff and Doug MacFarlane); and (3) minority shareholder employees (approximately 23 including Mr. Freimanis). Both the Founding Partners and the key employees had legal and accounting advice during the negotiation of the Reorganization Transaction. One of the minority shareholders retained Borden Ladner Gervais LLP ("BLG") to assist himself and his fellow minority shareholders. Mr. Freimanis insists he took no part whatsoever in the consultation with BLG nor did he retain any legal advisor of his own. [6] Eventually the Founding Partners' interest was valued at approximately $34 million. That amount was to be paid to the founders by the new entity, ITC Partners, by a combination of promissory notes and preferred shares. [7] As part of the Reorganization Transaction, the individual employee shares in the capital of ITC Construction were exchanged for the same number of shares in ITC Partners. Mr. Freimanis, who owned 600 shares in the capital of ITC Construction, became the owner of 600 "A" shares in the capital of ITC Partners following the re-organization. The value ascribed to the Class "A" common shares was $80 per share. [8] Article 28 of the Articles of ITC Partners provided for a mandatory buy-sell transaction in the event that any employee-shareholder ceased to be an employee of ITC Partners, and required ITC Partners to purchase the employee shares for a "Purchase Price" based on "Adjusted Book Value". The pertinent terms of Article 28 include the following: Departure Buy-Sell & Other Transfers 28.1 Departure Buy-sell. If a shareholder other than a Founder ceases to be an Employee, the shareholder must sell all of his or her common shares to the company and the company must buy those shares. For clarity, these obligations will arise regardless the reason the shareholder ceases to be an Employee including, without limitation, resignation, death, or dismissal (whether for cause or without cause). Upon a shareholder ceasing to be an Employee (i.e. the Trigger Date), that shareholder (i.e. the Seller) will be deemed to have agreed to sell to the company, and the company will be deemed to have agreed to purchase from the Seller, all of the Seller's common shares. 28.2 Purchase price. In a Departure Buy-sell, the purchase price for the Seller's common shares will be the price agreed in writing between the company and the Seller. If the company and the Seller do not so agree, the purchase price will be the Common Share Price. For the purpose of determining the purchase price for a Seller's common shares under this part 28: "Adjusted Book Value" of the common shares outstanding will be determined according to the following guidelines. (a) The consolidated book value of the company's share capital will be based on the shareholders' equity as shown in the balance sheet which forms part of the company's most recent financial statements made up as of the fiscal year-end immediately before the Trigger Date. (b) To account for, among other things, changes between the date of the said year-end and the Trigger Date, the directors will, acting reasonably, make adjustments to the said book value consistent with generally accepted accounting principles taking into account factors which a reasonably sophisticated person would consider in determining the consolidated book value of all the shares outstanding in the company's capital as of the Trigger Date. Without limitation, those factors will include the following: (i) Work in progress on construction projects will be valued using the percentage of completion method. (ii) Capital assets (tangible fixed assets) will be valued at estimated fair market value, not book value. (iii) Undeclared bonuses to company employees will be estimated and accrued based on bonuses paid in prior years but with regard to changes in circumstances which affect employees' expectations. (iv) The amount of income or other taxes which the company would incur (or which the company would recover) if it liquidated its assets, paid its liabilities, and distributed its net assets to its shareholders will be considered. (v) The amount of any dividends declared after the said year-end will be considered. (vi) An amount will be included for goodwill. This amount will be determined in accordance with the approach used by Price Waterhouse Coopers LLP in preparing the Estimate of Value Report dated for reference 30 March 2007. For greater clarity: · The goodwill amount will include the discounted value of cash flows expected to be received up to 31 May 2009 and, separately, those expected to be received from 1 June 2009 until 31 May 2013, each determined in a manner consistent with the said approach used by Price Waterhouse Coopers LLP. · No amount will be included for the value referred to in the said report as "terminal" goodwill. · Accordingly, when this provision is being applied to make a determination of the Adjusted Book Value after 31 May 2013, no amount will be included for goodwill. The amount included for goodwill may be adjusted for changes which become known after 30 March 2007. (c) Then, to determine the Adjusted Book Value of the common shares, from the adjusted book value of the company's share capital arrived at under clause (b) will be subtracted the amount which the company would be required to pay if it redeemed all of the Preferred shares on the Trigger Date. "Common Share Price" means the product of: (a) the quotient obtained by dividing the Adjusted Book Value of the common shares by the total number of common shares then outstanding (that is, a "per share" price), and (b) the number of common shares held by the Seller, but, if the Adjusted Book Value of the common shares is nothing or is negative, the Common Share Price for all of the Seller's common shares will be a nominal amount, namely $1 in total. ... 28.15 Dispute about share price. If there is a dispute between a Seller and the company about the price for the Seller's common shares: (1) the arbitrator appointed to resolve the matter must be a chartered accountant; (2) in determining the price, the arbitrator will have regard to and, as far as possible, will follow the approach set out in article 28.2, in particular the definitions "Adjusted Book Value" and "Common Share Price"; and (3) the cost of the arbitration will be borne as follows: (a) if the arbitrator determines that the Seller acted unreasonably in refusing to accept a price offered by the company, the Seller will bear the entire cost (100%); and (b) otherwise, the company and the Seller will bear the cost equally (i.e. 50/50). For the purposes of clause 28.15(3), unless the arbitrator determines that price the company offered to the Seller is at least 5% too low, the Seller will be presumed to have acted unreasonably. THE ARBITRATION [9] The main issue before the Arbitrator was whether an amount should be included for goodwill based on future cash flow. The Company's position was that goodwill for future cash flows (particularly contracted cash flows in the amount of $20 million) should be excluded from the calculation while Mr. Freimanis' position was that Article 28 required that goodwill for contracted cash flows be included in the share valuation. [10] Each party relied on different language from Article 28. The Company emphasized that when goodwill is discussed in Article 28.2(b)(vi) the second sentence says: This amount will be determined in accordance with the approach used by Price Waterhouse Coopers LLP in preparing the Estimate of Value Report dated for reference 30 March 2007. [11] Mr. Freimanis relied on the first and third sentences of the same paragraph: An amount will be included for goodwill. ... For greater clarity: · The goodwill amount will include the discounted value of cash flows expected to be received up to 31 May 2009 and, separately, those expected to be received from 1 June 2009 until 31 May 2013, each determined in a manner consistent with the said approach used by Price Waterhouse Coopers LLP. ... [12] The Arbitrator determined that the value of Mr. Freimanis' shares, if he had left his employment after the s. 85.1 rollover and the creation of the common shares in ITC Partners on May 31, 2007, would have been $129,500. At paragraph 3 of the Company's argument it is said that the shares were acquired by Mr. Freimanis at a cost of $80 per share. Mr. Freimanis' point of view is that the Company imposed a penalty on any employee that did not convert his shares in Construction Inc. to shares in ITC Partners. Mr. Freimanis did not accept the penalty and took the shares in Partners but $80 was not the value of each share. As found by the Arbitrator each share was worth $216 on June 1, 2007 and increased dramatically in value to the date of departure valuation in September 2008 to $1,617.00 a share because of an unexpected $30 million increase in the estimate of profits. On the arbitration hearing the Company argued the Commercial Efficacy principle as the key to interpretation on the basis that there would be a windfall to common shareholders if goodwill were included in value. Mr. Freimanis said that the Company was ignoring the fact that their interpretation, which would give the shares a negative value, would be commercially unrealistic when those shares had a value of $129,500 on the day they were acquired and increased dramatically in value with the unexpected increase in profits of $30 million. [13] The Arbitrator accepted Mr. Freimanis' argument that the unexpected and significant increase in the valuation of ITC Partners between the date of the s. 85.1 rollover at June 1, 2007 and the date of departure in 2008 was based on significantly higher earnings to the end date for contracted cash flows under the Article 28 formula. The Arbitrator took into account the fact that profits were estimated at $12,333,000 but actually came in at $42,733,000. [14] The parties each presented expert reports. The report tendered by Mr. Freimanis included an amount for goodwill for contracted cash flows. The Company's report deducted the contracted cash flows (notwithstanding that the report stated that the revenue from contracted cash flows were virtually certain) and concluded that Mr. Freimanis' shares were worthless (with an actual negative value). [15] The Arbitrator considered the competing expert reports. The report tendered by Mr. Freimanis placed a value on Mr. Freimanis' shares of $969,000 compared to no value being ascribed to them in the Company's report. The Arbitrator preferred Mr. Freimanis' report, which included an amount for goodwill as required under Article 28 of the corporate articles of ITC Partners and rejected the ITC report that excluded goodwill. [16] The Arbitrator's conclusion that discounted cash flows needed to be included in the valuation is found at paragraph 33 of the Award. [17] Counsel for ITC Partners argued that even if the corporate articles required that an amount be included for goodwill in the valuation of the shares, the articles gave the directors discretion in this respect which would allow them to exclude an amount for goodwill in the calculation of value. At para. 37 of his reasons, incorrectly marked as para. 36, the Arbitrator found that the directors did not have this discretion. [18] In the final result, the Arbitrator accepted the expert report tendered by Mr. Freimanis and determined the value of Mr. Freimanis' shares to be $970,000. THE COSTS AWARD [19] The language in the Company Articles dealing with the costs of arbitration state: (3) the cost of the arbitration will be borne as follows: (a) if the arbitrator determines that the Seller acted unreasonably in refusing to accept a price offered by the company, the Seller will bear the entire cost (100%); and (b) otherwise, the company and the Seller will bear the cost equally (i.e. 50/50). [20] The entire argument before the Arbitrator turned on whether "the cost of the arbitration" as used in Article 28.15(3) included the party's legal bills or not. [21] The Arbitrator ruled that "the cost of the arbitration" did include the party's legal bills. He then determined that the language of Article 28.15(3)(b) "the company and the Seller will bear the cost equally (i.e. 50/50)" would effectively be implemented by his ruling that each party would bear its own costs. LAW [22] In order to appeal from the decision of the arbitrator, the parties must either consent, or apply for leave of the court. Section 31 of the Commercial Arbitration Act, R.S.B.C. 1996, c. 55 (the "Act") provides: 31 (1) A party to an arbitration may appeal to the court on any question of law arising out of the award if (a) all of the parties to the arbitration consent, or (b) the court grants leave to appeal. (2) In an application for leave under subsection (1) (b), the court may grant leave if it determines that (a) the importance of the result of the arbitration to the parties justifies the intervention of the court and the determination of the point of law may prevent a miscarriage of justice, (b) the point of law is of importance to some class or body of persons of which the applicant is a member, or (c) the point of law is of general or public importance. [23] The seminal decision respecting s. 31 of the Act is BCIT (Student Association) v. BCIT, 2000 BCCA 496 ("BCIT"), a unanimous decision of a five-member panel of the British Columbia Court of Appeal. The decision focused primarily on s. 31(2)(a), but offered considerable guidance with respect to the entire section. [24] The requirement that, in order to appeal to the court, there must be a question of law arising out of the arbitration award, is found in s. 31(1). The requirement that a party applying for leave to appeal must establish a point of law at issue is also consistently found in each of the three subsections of s. 31(2). In examining this at the stage of determining whether to grant leave to appeal, the court must consider the merits of the alleged question of law. The merits must be considered regardless of which part of s. 31(2) a petitioner tries to bring themselves within: BCIT at para. 29. When examining the merits, Saunders J.A. found at para. 30 that "an appellant should establish more than an arguable point" and the point "must have sufficient substance to warrant the appeal proceeding." [25] Accordingly, based on the language of the statute, and the decision in BCIT, the threshold question to appeal an arbitration decision to the court under s. 31 is whether there is a meritorious question of law arising out of the award. Once this threshold has been met, in order to be granted leave the petitioner must bring themselves within the requirements of s. 31(2)(a), (b), or (c). [26] With respect to the considerations under s. 31(2)(a), Madam Justice Saunders stated at paras. 26-28: [26] How, then, should a court approach a leave application under s. 31(2)(a)? There are three requirements: [1] the importance of the result of the arbitration to the parties justifies the intervention of the court; [2] the determination of the point of law may prevent a miscarriage of justice; [3] granting leave is an appropriate exercise of judicial discretion. [27] The first criterion is, in my view, well described in Domtar Inc. v. Belkin Inc.: is the result of the arbitration sufficiently important, in terms of principle or money, to the parties that the expense and time of court proceedings is justified. This criterion excludes frivolous appeals and appeals on non-weighty matters. [28] The second criterion was described in Domtar Inc. v. Belkin Inc. as whether, if the point of law were decided differently, the arbitrator would have been led to a different result. In other words, was the alleged error of law material to the decision; does it go to its heart? I agree that this is the essential consideration for a party prepared to spend the time, money and energy on an appeal. [27] Speaking more broadly on s. 31(2) as a whole, the Court said: [31] I do not consider that the application of any formula will determine whether a chambers judge should exercise discretion and grant leave to appeal. The discretion is to be exercised judicially, that is, trial judges will take into consideration those matters with which they are well familiar. Those matters include the apparent merits of the appeal, the degree of significance of the issue to the parties, to third parties and to the community at large, the circumstances surrounding the dispute and adjudication including the urgency of a final answer, other temporal considerations including the opportunity for either party to address the result through other avenues, the conduct of the parties, and the stage of the process at which the appealed decision was made (in my view, unlike the facts in "The Nema", interlocutory orders would rarely, if ever, pass the sieve of judicial discretion). Undoubtedly included in this assessment will be respect for the forum of arbitration, chosen by the parties as their means of resolving disputes, and recognition that arbitration is often intended to provide a speedy and final dispute mechanism, tailor made for the issues which may face the parties to the arbitration agreement. [28] Accordingly, I will begin my analysis in this case by examining whether any of the points raised by ITC Partners or Mr. Freimanis amount to a meritorious question of law. If such a question has been raised, I will proceed to examine whether, based on the Court of Appeal's guidance in BCIT, they have brought themselves within one of the subcategories of s. 31(2) of the Act. 1. ITC Partners' Petition Analysis [29] The first task is to decide if the Arbitrator's decision raises a meritorious question of law. In the Company's written argument four alleged errors of law are discussed. I intend to analyze each of them in turn. The petition included a fifth alleged error of law. No argument was addressed to the Court concerning this alleged error and I regard it as having been abandoned. For the sake of completeness I am satisfied that the alleged error dealt with a question of mixed fact and law and that the factual component involved events that occurred after the relevant Article was drafted. For both of these reasons it cannot be a foundation for an appeal by the Company. Turning now to the four alleged errors of law. A. Legal Principles of Contract Interpretation [30] The Company formulated this error of law by stating: ... Notwithstanding detailed submissions by both parties on the legal principles of contract interpretation and the construction of possibly ambiguous or conflicting terms in a contract, the Arbitrator failed to articulate and apply such principles to the contract at hand but rather simply substituted his own opinion as to the meaning of the contract and value of the shares; ... [31] In reply, Mr. Freimanis says: The first error alleged in the ITC Petition is that the parties made legal arguments that were not taken into consideration by the Arbitrator. The Petition does not identify any principle of law relating to contract interpretation that was violated by the Arbitrator. It is respectfully submitted that leave should not be granted on the basis of a generalized allegation that the arbitrator made an error of law when the error of law is not identified and stated in the Petition for leave to appeal. ... [32] If forced to choose between the arguments of the Company and those of Mr. Freimanis, I prefer the latter's position. However, I am also in disagreement with the Company's position for other reasons. Like a trial judge, while an arbitrator must give comprehensible reasons for his decision, he is not obliged to recite each submission made to him and explain why he did not accept it. I found the Arbitrator's reasons to be clearly expressed and convincing on most of the issues he dealt with. His interpretation of the relevant Company Articles met the standards for contract interpretation applied by the courts of this Province. Some of his reasoning on accounting issues was a bit difficult for the Court to follow. The language in the Articles which addressed the resolution of disputes about the share price specified that the arbitrator must be a chartered accountant. I do not believe that his resolution of certain of the accounting issues by application of his specialized expertise involves the first error of law alleged by the applicant. Indeed, I am satisfied that his accounting expertise provided more sensible solutions to the interpretation dilemma presented to him than would necessarily have been found by a tribunal that possessed legal expertise but not accounting experience. [33] In the result, I find no error of law in the Arbitrator's approach to contact interpretation. [34] For all of the reasons cited above, I do not find an error of law in the manner in which the Arbitrator interpreted the relevant provisions. B. Did the Directors Act Reasonably? [35] The Company alleges that a second error of law made by the Arbitrator was: ... The Arbitrator failed to appreciate and decide one of the fundamental questions in dispute in the Arbitration, namely, whether the directors of ITC Partners acted reasonably in making their adjustments to the book value of the company's share capital (the "Step 2" adjustment); ... [36] Mr. Freimanis' position on this allegation is: This is quintessentially a question of fact and involves no error of law. [37] I agree with this submission. Furthermore, I am in complete disagreement with the Company's allegation under this heading. The Arbitrator clearly considered and decided that the directors did not have discretion to deduct the value of the future contracts from the book value of the Company's share capital. Accordingly there could be no question as to whether they exercised that discretion reasonably. At para. 37, incorrectly marked para. 36 in the reasons of the Arbitrator, he wrote: Mr. Kent asserts that the intent was to give the directors a reasonable discretion to make an adjustment in the "name of goodwill" to offset the impact of the preferred shares. I cannot find support for this in reading Article 28. I cannot perceive from the wording that the directors were given a discretion even acting reasonably to override the requirement that there would be an inclusion of "goodwill" in the terms of the article as explained above."... C. Goodwill Amount [38] The third error of law alleged by the Company is: ... The Arbitrator failed to give meaning to, and simply ignored the direction in Article 28.2(b)(v) that the goodwill amount "will be determined in accordance with the approach used by PricewaterhouseCoopers in preparing the Estimate of Value Report dated March 30, 2007"; ... [39] Mr. Freimanis' answer is that, far from ignoring Article 28.2(b)(v), the Arbitrator expressly considered the approach used in the PWC Estimate of Value Report and followed that approach where appropriate. [40] Mr. Freimanis says that: The part of Article 28 said to have been ignored was actually considered at some length by the Arbitrator. The Arbitrator at para. 33 of the Reasons held that the language that goodwill be determined in accordance with the approach used by PWC in the Estimate did not have the effect of overriding the express language requiring that an amount will be included for goodwill. The Arbitrator found as a fact that the calculation of goodwill was not a necessary part of the PWC Estimate of Value Report and that the provision in Article 28 that an amount will be included for goodwill was not inconsistent with the Estimate of Value Report. The Arbitrator made the factual finding that that [sic] "the goodwill calculation in the Estimate was ancillary to it and did not form part of the conclusion as the Estimate was not done for the purpose of calculating goodwill". [41] The specific language from the Arbitrator's Reasons that summarizes his view comes from para. 33 of his Reasons: The reference to the Estimate is for guidance on matters not otherwise specifically dealt with in order to have some consistency (for instance to use a capital asset pricing model to calculate discount rates) and not to create an override on those specifics. [42] Earlier in the same paragraph he observed: I am conscious of my determination that the goodwill calculation in the Estimate was ancillary to it and did not form part of the conclusion as the Estimate was not done for the purpose of calculating goodwill. [Emphasis added] [43] Throughout the Company's allegations that the Arbitrator erred in law there is a recurrent theme. By including future cash flows in the calculation of goodwill, he is committing one or more errors of law. A careful reading of the Arbitrator's Award does not support this proposition however the Company chooses to frame it. I am satisfied that the Arbitrator dealt properly with the calculation of goodwill and also interpreted the Company Articles properly in their reference to "the approach used by PricewaterhouseCoopers in prepared the Estimate of Value Report dated March 30, 2007." D. Goodwill Amount (Part 2) [44] The Company's fourth alleged error of law was: ... The Arbitrator failed to apply an interpretation that would give meaning to the two good will adjustment requirements that both the 1. PricewaterhouseCoopers approach be applied and that 2. the discounted value of cash flows be included; and ... [45] Mr. Freimanis' position is that: (1) this alleged error does not involve a question of law,. The weighing of evidence and the interpretation of the formula were questions of fact. (2) this ... alleged error is also internally inconsistent "in that alleging" that the Arbitrator erred because he did not both include and exclude an amount for goodwill does not comport with logic or common sense and does not provide any foundation for an error of law. [46] I am in complete agreement with Mr. Freimanis' position on this alleged error of law and find that the applicant's argument under this heading is without substance. 2. Robert Freimanis' Petition Analysis [47] There are two issues I must decide on this petition. First, is Mr. Freimanis' allegation that the arbitrator erred in holding that the term "the cost of the arbitration" included the fees of the party's lawyers sufficiently meritorious to warrant an appeal? Second, even if the arbitrator did err, was the effect of the agreement of the parties with respect to the cost of the arbitration such that it replaced all of the costs provisions of the Act? A. Cost of the Arbitration [48] In the decision of the Arbitrator, he found that the term "cost of the arbitration" from Article 28.15(3) included not only the Arbitrator's costs, but the legal expenses of the parties. The Arbitrator wrote at para. 3 of his Award: I am of the view that Article 28.15 does not refer to only the arbitrator's fees and the incidental costs such as rent of the hearing room for two reasons: (1) I think the ordinary meaning of "cost of the arbitration" includes all of the costs including legal and expert fees and is not to be restricted by technical interpretations or practice; (2) there is an element of dissuasion from a shareholder bringing a dispute that was intended by the drafters as sub-clause (a) creates a risk of being liable for 100% of the costs. That risk would not be very great if the costs excluded the company's legal fees and particularly when the tough approach in Article 28.13 is considered as part of the context of the drafting of the articles generally, I think the drafters intended that the higher level of risk should exist. The article may be onerous but that was, I think, the intent. [49] In the submission of Mr. Freimanis the Arbitrator's decision that the phrase "cost of the arbitration" included legal costs was an error in law. He argues that this term is well known in the arbitration community in British Columbia, and that it refers strictly to the costs associated with the arbitrator, such as the fees and expenses of the Arbitration Tribunal, any fees paid or payable to the administering institution, and the costs of hearing rooms or related facilities. [50] The Company submits that the plain and ordinary meaning of the term "cost of the arbitration" includes all expenses related to the arbitration, including the parties' legal fees. [51] In Ridley Terminals Inc. v. Minette Bay Ship Docking Ltd., (1990) 70 D.L.R. (4th) 148, (B.C.C.A.) Mr. Justice Hinkson examined the jurisdiction of an arbitrator to award solicitor and own client costs. The parties to the arbitration had agreed to the following term: All costs and expenses of any such arbitration shall be borne by the parties hereto equally, unless the single arbitrator or a majority of the three arbitrators in their decision otherwise directs ... subject to the express provisions of this paragraph, the provisions of the Arbitration Act shall apply to any arbitration hereunder. [52] In a clause of the submission to arbitration, one of the issues put to the arbitrator was "Who is to pay the costs of the arbitration, having due regard to the agreements between the parties?" [53] Mr. Justice Hinkson rejected the argument of the appellants that the intent of the parties was that each party would bear their own legal costs and expenses of the arbitration unless otherwise directed. He wrote at 152: In my opinion, what the parties were doing in s. 35 was qualifying the provisions of s. 4(i) of the Arbitration Act and providing that in respect of the costs and expenses of the arbitration, namely, the fees and expenses of the arbitrators, of a clerk, secretary or reporter to assist in the arbitration, the provision of accommodation for the hearing of the arbitration and other like expenses, were to be borne by the parties equally, unless otherwise ordered by the arbitrators. [Emphasis Added] [54] Hinkson J.A. went on to find that the arbitrator did not have jurisdiction to award costs on a solicitor and own client basis, because there was no such authority granted in s. 11 of the Commercial Arbitration Act, S.B.C. 1986, c. 14, on its own or read in conjunction with related statutes or rules. [55] The Company, and the Arbitrator in his ruling, rely on Practicar Systems Inc. v. 696373 Alberta Ltd., 2007 ABQB 143. In that case, the Court found that the phrase "the expense of arbitration shall be borne equally by the disputing parties" did not relate only to the fees of the arbitrator, but included legal fees incurred by the parties. In support of this position, the court looked to the provisions of the Alberta Arbitration Act, R.S.A. 2000, c. A-43, which reads: 53 (1) An arbitral tribunal may award the costs of an arbitration. ... (3) The costs of an arbitration consist of the parties' legal expenses, the fees and expenses of the arbitral tribunal and any other expenses related to the arbitration. ... (5) In the absence of an award dealing with costs, each party is responsible for that party's own legal expenses and for an equal share of the fees and expenses of the arbitral tribunal and of any other expenses related to the arbitration. [56] Mr. Justice Lefsrud in Practicar found at para. 140 that "in the absence of some limiting language, the usual meaning of expense of arbitration would include legal expenses, both fees and disbursements." [57] In the present case it is important that the language in the Alberta Arbitration Act with respect to costs is significantly different from the language of the B.C. Act, in which the authority to award costs in an arbitration clearly distinguishes between two types of costs, those associated with the arbitration, and those associated with the legal costs of the parties: s. 11(2). [58] In Law and Practice of International Commercial Arbitration (4th ed.), Alan Redfern et al., (London: Sweet & Maxwell, 2004), the authors indicate that the "term "costs" in the context of arbitration may be divided into two broad categories: the costs of the arbitration and the costs of the parties." The costs of the arbitration are set out as being in reference to the fees and expenses payable to members of the tribunal, the institution administering the arbitration, and associated expenses. The fees and expenses of the lawyers of the parties are described as costs of the parties (396-397). [59] I find Mr. Freimanis' argument that the Arbitrator made an error of law in his interpretation of the phrase "cost of the arbitration" sufficiently meritorious to warrant an appeal. B. Did the Arbitrator have jurisdiction to award legal costs? [60] Section 11 of the Act grants the arbitrator jurisdiction to award costs. Section 11(2) provides that: In specifying the amount of costs under subsection (1) (c), the arbitrator may specify that the costs include (a) actual reasonable legal fees, and (b) disbursements, including the arbitrator's fees, expert witness fees and the expenses incurred for holding the hearing. [61] In Four Seasons Hotel Ltd. v. Pacific Centre Ltd., 2002 BCSC 148, Madam Justice Neilson (as she then was) heard an appeal by Four Seasons against, in part, an order for special costs against them by an arbitrator. In the lease agreement under which the arbitration arose, the parties had included the following language: ... The provisions to be implied in submissions in pursuance of Section 4 of the said Arbitration Act shall not be applicable to arbitration hereunder. The following provisions shall govern any arbitration hereunder: ... (viii) The costs of the reference and award shall be in the discretion of the arbitrators or umpire who may direct to and by whom and in what manner those costs or any part thereof shall be paid, and may tax or settle the amount of costs to be so paid, or any part thereof, and may award costs to be paid, as between solicitor and client. [Emphasis added] [62] Neilson J. found that this section was clearly intended to exclude the application of the costs provisions of the predecessor to the Act, and replace it with a regime agreed to by the parties. [63] Section 22 of the Act indicates that: (1) Unless the parties to an arbitration otherwise agree, the rules of the British Columbia International Commercial Arbitration Centre for the conduct of domestic commercial arbitrations apply to that arbitration. [Emphasis added] [64] The Company submits that the parties expressly agreed to a formula for the allocation of costs, and that therefore, by operation of s. 22, s. 11 of the Act has no application. [65] In the present case, if the "cost of the arbitration" does not include the legal fees of the parties, then I find there is an open question as to whether the parties' agreement through the Articles of Incorporation was intended to "cover the field" with respect to costs, or only effected an agreement to supplant the terms of the Act with respect to the costs of the arbitrator. The facts in the present case are distinct from those in Four Seasons in that there was no express term exempting the parties from the costs provisions of the Act, only an agreement as to the "cost of the arbitration". [66] Again, I find the legal issue raised by Mr. Freimanis sufficiently meritorious to warrant an appeal. C. Requirements for Leave to Appeal [67] Mr. Freimanis submits that the error of law he argues was made by the Arbitrator fits within all three of the sub-sections of s. 31(2) of the Act. He submits that the amount of the cost award he might have been granted if the arbitrator had not erred is important enough to result in a miscarriage of justice if it is not corrected; that he belongs to a class of persons to whom the general point of law is of importance to; and that the point of law is of general importance. [68] ITC Partners submit that the alleged error of law has no substance, and that therefore no leave to appeal should be granted. [69] In examining the relevant authorities, I find there are two meritorious questions of law that arise out of the arbitrator's award. First, does the meaning of "the cost of the arbitration" include both legal costs of the parties as well as the costs associated with the arbitrator? Second, if the meaning of "the cost of the arbitration" only includes the costs of the Arbitrator, is the effect of s. 28.15 of the articles of incorporation to exclude the application of the remaining costs provisions of the Act? [70] Mr. Freimanis presented evidence that his legal costs were in excess of $200,000, which is clear evidence that the appeal is of great importance to him. If he would have received those costs but for an error on the part of the arbitrator with respect to his interpretation of "the cost of the arbitration", then a miscarriage of justice could be prevented by reversing that error. [71] I further find that the answer to the question of what is meant in British Columbia by the term "cost of the arbitration" is of some importance both to the parties, and the community at large. Mr. Freimanis presented an affidavit from an experienced arbitrator, Gerald Ghikas Q.C., who indicated that a decision from a court in this Province on this question would be of some assistance to the arbitral community in general. [72] For the foregoing reasons, I grant Mr. Freimanis leave to appeal pursuant to s. 31(2)(a). In the alternative, I would also grant leave pursuant to s. 31(2)(c). CONCLUSION [73] Having found no substance in the errors of law alleged by the Company in the Arbitrator's Award, it is not necessary for me to consider the factors set out in s. 31(2) of the Act. I will say that based on the material placed before me the proposed appeal appears to have very little merit. In the result, I hereby dismiss the petition with costs to Mr. Freimanis. [74] With respect to the error of law in the Arbitrator's costs award alleged by Mr. Freimanis, I find there is a meritorious question of law, and that Mr. Freimanis qualifies for leave to appeal under s. 31(2)(a) and (c) of the Act. Accordingly I grant him leave to appeal with costs against the Company. "P. LEASK, J."