Executive Summary: Key Legal and Evidentiary Issues

• The Court of Appeal for British Columbia addressed two related proceedings arising from an arbitration between a film production company and its distributor over a terminated distribution agreement.
   
• A 2024 decision denied Puppet Killer Productions Inc.'s application to vary a chambers judge's order, finding the arbitrator's refusal to award special costs was not appealable under section 59(2) of the Arbitration Act.
   
• Justice Mayer's 2026 reasons considered whether the arbitrator erred in assessing additional damages at $50,000 without adequate reasons, in awarding Industryworks Studios Inc. $50,000 in set-off damages, and in applying a "fully successful" rather than a "substantial success" test for costs.
   
• Insufficient reasons for the $50,000 damages award to Puppet Killer Productions Inc. led the Court to remit that issue to the arbitrator rather than substitute its own figure.
   
• Evidence showed the arbitrator had forgotten or ignored findings limiting Industryworks Studios Inc.'s recoverable expenses to $16,000, resulting in the set-off award also being remitted.
   
• Costs of the original arbitration were referred back to the arbitrator as well, along with confirmation that the correct legal test is "substantial success," not "full success."
   

Facts of the case

Puppet Killer Productions Inc. ("PK Productions") is a small independent film production company based in British Columbia. In 2019, it produced an independent horror film titled "Puppet Killer" on an overall budget of $150,000. In April 2020, PK Productions entered into an exclusive, 25-year distribution agreement with Industryworks Studios Inc. (the "Distribution Agreement"), under which PK Productions was required to deliver the film by June 1, 2020, and Industryworks was required to market and distribute it. The agreement entitled PK Productions to 70% of gross revenue generated on the sale of the film, subject to a minimum guarantee of $150,000. Industryworks released the film theatrically in September 2021 and subsequently entered into sub-distribution agreements with distributors internationally.

On December 7, 2021, Industryworks purported to terminate the Distribution Agreement, asserting it had just cause because PK Productions had not met certain technical delivery obligations. Industryworks refused to pay the $150,000 minimum guarantee and, according to PK Productions, failed to provide an accounting of revenue earned from the film. PK Productions accepted Industryworks' repudiation and demanded return of the film, but Industryworks did not return it, instead continuing to market and distribute the film and entering into further sub-distribution agreements. PK Productions commenced arbitration under the Vancouver International Arbitration Centre's expedited rules on March 23, 2022, and Industryworks counterclaimed. Because the matter proceeded as an expedited arbitration, potential damages were capped at $250,000, exclusive of interest and costs.

Policy and legislative provisions at issue

The proceedings engaged section 29 of the Court of Appeal Act, S.B.C. 2021, c. 6, which governs applications to vary an order of a single justice of the Court of Appeal sitting in chambers, and section 59 of the Arbitration Act, S.B.C. 2020, c. 2, which permits appeal of a question of law arising from an arbitral award where a justice determines the criteria in section 59(4) are met — namely, that the importance of the result justifies court intervention, that the point of law affects a class of persons the applicant belongs to, or that the point of law is of general public importance. Section 59(6) of the Arbitration Act empowers the Court to confirm, amend, or set aside an arbitral award, or to remit it to the arbitrator with the Court's opinion on the relevant question of law.

The terms of the Distribution Agreement were also central. The agreement fixed a $150,000 minimum guarantee, entitled Industryworks to recoup expenses only out of gross receipts it received under the agreement, and provided that costs for materials Industryworks created were eligible for set-off only with PK Productions' approval.

Reasoning and analysis

In the 2024 decision, Puppet Killer had been granted leave to appeal the arbitrator's award of damages and ordinary costs but denied leave to appeal the arbitrator's refusal to award special costs; it applied under section 29 to vary that order. The arbitrator had declined to award special costs because "neither party was fully successful." Justice Stromberg-Stein held that this discretionary decision did not raise an appealable question of law under section 59(2), and that even if it did, the chambers judge had correctly found insufficient merit in the proposed appeal, since the power to award special costs is exercised sparingly and only in exceptional circumstances. The application to vary was dismissed.

In the 2026 decision, the arbitrator had found Industryworks breached the Distribution Agreement in several respects, ordered it to return the film, and awarded PK Productions the $150,000 minimum guarantee, $50,000 in additional damages, and $21,324.62 in prejudgment interest, for a total of $221,324.62. Against this, the arbitrator set off $50,000 awarded to Industryworks for expenses incurred assisting PK Productions with its delivery obligations, for a net award of $171,324.62 to PK Productions. The arbitrator declined to award costs, again on the basis that neither party was fully successful.

On appeal, Justice Mayer rejected PK Productions' argument that the arbitrator should have drawn an adverse inference from Industryworks' failure to provide accounting records, noting the inference had not been requested before the arbitrator and that the question was one of fact owed deference absent palpable and overriding error. However, Justice Mayer agreed that the arbitrator's reasons for assessing PK Productions' additional damages at $50,000 were inadequate: the arbitrator did not explain how he arrived at that figure, did not accept or reject the competing expert evidence on projected earnings, and left the reasoning inscrutable even when read against the record. This issue was remitted to the arbitrator rather than resolved by substituting a new figure, since the record did not permit the Court to make its own findings.

On the $50,000 set-off awarded to Industryworks, Justice Mayer found the arbitrator had not relied on unjust enrichment, which Industryworks had not pleaded, but rather characterized the award as recoupable expenses under the Distribution Agreement. This was found to be an error in law, because the arbitrator had earlier found Industryworks could only recoup expenses out of the $16,000 in gross receipts it claimed to have received, and had required PK Productions' approval for any set-off relating to materials Industryworks created — approval for which there was no evidence. The arbitrator's $50,000 award was inconsistent with these findings, amounting to an error of forgetting or ignoring evidence.

Finally, on costs, Justice Mayer confirmed that the applicable test for ordinary costs is whether a party was "substantially" successful, not "fully" successful, and that a failure to seek costs submissions may itself amount to an error in principle. Rather than deciding costs itself, the Court remitted this issue to the arbitrator along with the other remitted matters.

Ruling and overall outcome

In the 2024 decision, the application to vary was dismissed, and Industryworks Studios Inc. was awarded costs of that application. In the 2026 decision, the appeal was allowed in part: the arbitrator's $50,000 award of additional damages to Puppet Killer Productions Inc. and the $50,000 set-off award to Industryworks Studios Inc. were both remitted to the arbitrator for reassessment, with Industryworks' recoverable expenses capped at $16,000 given the absence of any appeal from that finding. The issue of costs from the original arbitration was likewise remitted to the arbitrator. No final monetary amount was fixed by the Court of Appeal; the ultimate award remains to be determined on remission.