Standard Form Contracts Are To Be Reviewed On A Standard Of Correctness: Supreme Court Of Canada

In, Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co, 2016 SCC 37, the Supreme Court of Canada has held that the interpretation of a standard form contract is a matter of law alone, and not a matter of mixed fact and law. Accordingly, it is not sufficient for a judge to arrive at a reasonable interpretation of a standard form contract: the interpretation must be correct or it may be set aside by an appellate court.

In this respect, the Supreme Court has decided that a different standard of review applies to standard form contracts than for contracts generally. In Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, the Supreme Court held that a decision of an arbitrator interpreting a contract amounted to a matter of mixed fact and law, and not just a question of law. Accordingly, the Supreme Court held that the B.C. Court of Appeal had no jurisdiction to grant leave to appeal on a matter of law from a decision of a trial court upholding the arbitral award.

So, in Canada there are two kinds of contract which involve two different kinds of contractual interpretation:

General contracts; The interpretation of these contracts amounts to a question of mixed fact and law. Appellate courts will show great defence to a trial judge’s decision interpreting the contract.

Standard form contracts: The interpretation of these contracts amounts to a question of law alone. Appellate courts may reverse the trial judge’s decision if that decision is not correct.

For those involved in arbitration, the question is whether these two standards will be imported into the review of arbitral decisions.

The Supreme Court’s decision in Ledcor v. Northbridge also contains an extremely important ruling with respect to the exclusion for faulty workmanship contained in most Builders’ Risk insurance policies. This aspect of the decision was discussed by me in an article dated September 17, 2016. The present article addresses the “standard of review” issue.

Background

As discussed in my previous article, the Ledcor v. Northbridge case arose from damage done to the windows of a building under construction. Before the project was completed, the owner hired cleaners to clean the windows. The clearers used improper tools and methods and scratched the windows. The windows had to be replaced and the building’s owner and the general contractor claimed the replacement cost under the Builders’ Risk insurance policy covering the project. The insurers denied coverage, asserting that the claim fell within the policy’s exclusion for the “cost of making good faulty workmanship”.

The Alberta trial judge held that the clause was ambiguous and applied the contra proferentem rule to find that the claim was not excluded. The Alberta Court of Appeal reversed the trial judge’s decision. It concluded that the damage to the windows was excluded because it was directly caused by the intentional scraping and wiping motions involved in the cleaners’ work.

Accordingly, the appeal before the Supreme Court of Canada involved the application of two sets of principles.

First, the principles relating to the interpretation of contracts – in this case, an insurance contract.

Second, the principles to be applied to an appellate court’s review of a lower court’s decision interpreting a contract. It is this second aspect of the Supreme Court’s decision which is notable because the court applied a different standard of review than it had very recently pronounced in Sattva.

The Sattva Decision

In Sattva, the Supreme Court held that the interpretation of a contract is a question of mixed fact and law. Because a contract is negotiated in a factual setting, the interpretation of the contract is not just a matter of examining the words of the contract, but also examining the facts which gave rise to the contract.

Under s. 31(2) of the British Columbia Arbitration Act, the arbitrator’s award could only be appealed if the appeal raised “questions of law”. The judge of the B.C. trial division dismissed the appeal from the arbitral award, holding that the interpretation of the contract by the arbitrator raised a question of mixed fact and law, not a question of law. The Supreme Court agreed with that view. Accordingly, the Supreme Court held that the B.C. Court of Appeal erred in hearing the appeal since there was no question of law properly before the Court of Appeal over which that court had jurisdiction.

The Ledcor decision

In Ledcor, the majority of the Supreme Court held that the reasons for its decision in Sattva do not apply to the interpretation of a standard form contract, for several reasons.

First, there is no relevant factual matrix in which a standard form is signed. A standard form contract is prepared by one party and presented to the other side on a “take it or leave it” basis, with little or no negotiation between the parties. In the absence of a relevant factual matrix that could influence the proper interpretation of the contract, the interpretation should be characterized as a matter of law.

Second, the interpretation of a standard form contract applies to all users of that contract. The contract cannot have a different meaning for some parties than for others. For this additional reason, the interpretation of the contract should be seen as a matter of law. This is particularly so for insurance contracts which are usually prepared as “standard form policies” and are provided by the insurer to the insured without negotiation, except as to the amount of the premium.

Third, a standard of correctness properly sorts out the responsibilities of trial judges and appellate courts. The function of trial judges is to make factual finding. The function of appellate courts is to decide legal principles that will be applied by and to society at large, and not just those who are parties to the immediate dispute. In this setting, it is more appropriate that the review by an appellate court of a trial judge’s interpretation of a standard form contract be conducted on a standard of correctness. As the majority said, “ensuring consistency in the law and reforming the law” is the function of appellate courts.   By “selecting one interpretation over the other as correct” the appellate court provides “certainty and predictability.” For all these reasons, there is one correct interpretation of a standard form contract, and if the trial judge does not come to the correct conclusion, then the appellate court may set it aside.

Justice Cromwell dissented. In his view, all contracts have a factual matrix. Even standard form contracts involve surrounding facts, including the market, industry or setting in which they exist, their purpose, the parties’ reasonable expectations and commercial reality, etc. For this reason, there is not a sufficient generality associated with a standard form contract to turn its interpretation into a question of law.

Discussion

There are a number of interesting aspects to the Ledcor decision.

First, one may ask whether it is a practical or commercially sensible to differentiate between general contracts and standard form contracts. What if the contract is partly standard form and partly negotiated? Does the “correctness standard apply to part of the contract, or part of the judge’s decision, but not to the balance? Can the two parts be separated?

Second, what amounts to a “standard form contract” for the purposes of Ledcor? This is an important issue in the construction industry. “Standard form” construction contracts, such as the CCDC contracts prepared by the Canadian Construction Document Committee, are not prepared by one party or one side of the industry and presented to the other on a “take it or leave it” basis. Rather, they are prepared by the consensus of the participants on all sides of the construction industry. Are these contracts “standard form contracts” within Ledcor?

Third, does the Ledcor decision apply to the review of arbitration awards involving standard form contracts? The Ledcor decision involved appellate review of a trial court decision, and the majority of the Supreme Court decided that that review should have been conducted on a correctness standard. One of the factors in its decision was the relationship between trial judges and appellate courts which, in the Supreme Court’s view, supported a correctness standard of review. In Sattva, the original decision being reviewed was an arbitral award that was appealed to the superior court. The Supreme Court ultimately decided that appellate review of the superior court’s decision did not involve a pure question of law, but a question of mixed fact and law. Does the fact that Sattva originally involved an arbitration decision and Ledcor originally involved a court decision make a difference? And if an arbitrator is dealing with a standard form contract, as opposed to a negotiated contract, does that make a difference?

Some provincial arbitration statutes allow the parties to appeal an arbitral award on a question of law, sometimes by agreement of the parties or with the court’s leave. Sattva involved such a statute, and the Supreme Court of Canada held that leave to appeal the trial court’s decision reviewing the arbitral award should not have been granted under the B.C. arbitration statute since the interpretation of the contract in question did not involve a question of law, but rather a question of mixed fact and law. If the contract had been a standard form contract, would the interpretation of the contract now be a matter of law under Ledcor?

In addition, are the roles of a judge and arbitrator in interpreting a contract, and is the relationship of a judge and arbitrator to an appellate court, the same? Is the arbitrator, even though selected by the parties and selected because of his or her expertise and knowledge of the industry, bound to approach the interpretation of the contract in exactly the same way as a judge?

In the net result, is a decision of an arbitrator under a CCDC contract reviewable by a court on a standard of correctness? If so, the “hands off” approach of courts toward arbitration, which has been the trend in arbitration law over the last twenty years, may be changed by Ledcor.

See Heintzman and Goldsmith on Canadian Building Contracts (5th ed.), chapter 11, part 11.

Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co, 2016 SCC 37

Contracts – interpretation of contracts – standard of review – questions of law and mixed fact and law

Thomas G. Heintzman O.C., Q.C., FCIArb                             October 10, 2016

www.heintzmanadr.com

www.constructionlawcanada.com

Review Of Arbitral Awards: Where Is Sattva Taking Us?

The decision of the Supreme Court of Canada in Creston Moly Corp. v. Sattva Capital Corp., 2014 SCC 53 (Sattva) is a seminal decision in the review of arbitral awards. That decision apparently set a wide net of protection around arbitral awards. It did so by ruling that an arbitral award interpreting a contract should usually be considered to be based upon mixed fact and law. Accordingly, such an arbitral decision may not be appealed if the only ground of appeal is an error of law. Moreover, if the decision is otherwise reviewable by the court, then the standard of review is reasonableness, not correctness. However, the Supreme Court said that, if a separate issue of law can be discerned in the arbitral award, then the decision can be reviewed on a standard of correctness. The Sattva decision has been reviewed in my previous article dated August 10, 2014.

The Sattva decision was recently applied by the British Columbia Court of Appeal in Teal Cedar Products Ltd. v. British Columbia. The Teal decision is important because the two decisions in Sattva and Teal both arose from appeals from decisions of the British Columbia Court of Appeal. The Teal case was sent back by the Supreme Court of Canada to the B.C. Court of Appeal to be re-considered in light of the Sattva decision.  

The Background To The Teal Decision

The Teal decision was reviewed by me in an article dated December 1, 2013 relating to an earlier decision of the Supreme Court of Canada relating to the award of compound interest.

Teal had been issued timber licenses by the province of British Columbia under the B.C. Forest Act. By ministerial order, Teal’s allowable annual cut and cut areas were reduced. Teal was entitled to compensation and its claim was submitted by the parties to arbitration. That claim included a claim for interest. In the original decision of the B.C. Court of Appeal, the majority of that court held that the arbitrator had mis-interpreted the statutory provisions applicable to Teal’s substantive claim and the provisions relating to interest. That decision was appealed to the Supreme Court of Canada. In light of its decision in Sattva, the Supreme Court ordered that the appeal in Teal v. B.C. be re-heard by the B.C. Court of Appeal.

Second Teal Decision

The B.C. Court of Appeal noted that Sattva involved an arbitrator’s interpretation of a contract, not a statute. The court said that, according to Sattva, an arbitrator’s decision interpreting a statute should be reviewed on a standard of reasonableness when “the error of law is within the expertise of the arbitral tribunal and is not a question of law of central importance to the legal system as a whole.” Teal argued that the decision of the arbitrator in the present case fell into neither exception and that therefore the arbitrator’s decision should be given deference and only set aside if it was unreasonable.

The B.C. Court of Appeal disagreed. It said:

“None of the criteria that might justify the deference associated with the reasonableness standard of review in respect of statutory interpretation is present here. Specifically, it is not suggested the arbitrator had any specialized expertise in forest legislation or forestry tenures and it certainly could not be said the Act was his “home” statute. Although the parties chose the arbitrator (the Court is not privy to the reasons for his selection), it is significant that arbitration was statutorily required (Act, s. 6(6)). As the Province says, the statutory interpretation question that arose — the meaning of compensation in s. 6(4) — was an issue of importance to compensation statutes generally, and arose for the first time under the Act in this arbitration. We agree with the Province these factors point to a standard of correctness…”

Furthermore, the B.C. Court of Appeal said:

“In any event, Sattva did not explicitly restrict, or provide an exhaustive list of, the exceptional circumstances in which an arbitrator’s award based on a question of law would be reviewable on a standard of correctness. The Court was providing examples that cannot be read as excluding the interpretation of a statute.”

In the result, the court held that the interpretation of the Forestry Act was a question of law to which a correctness standard applied. Since the arbitrator’s interpretation of the Act was not correct, it was properly set aside in the prior decision.

In any event, the court held that the arbitrator’s decision was unreasonable and should be set aside under the unreasonableness test. According to the court, the arbitrator’s decision “provides for a substantial publicly financed windfall, which would serve no purpose”. The arbitrator’s award was based upon “the depreciated replacement value of all of the improvements made to Crown land in the affected areas of each of Teal’s three tenures” while the proper interpretation of the Act only provided compensation for the holder’s “actual financial loss.”

In determining what a “reasonable” decision of an arbitrator is, the B.C. Court of Appeal adopted its prior decision in  British Columbia Hydro and Power Authority v. British Columbia (Workers’ Compensation Board), 2014 BCCA 353, in which it had given the following meaning to the word “reasonable”:

“A reasonable decision must be both factually and legally defensible. Where the legal issue under examination is one of statutory interpretation, the common objective of both administrative decision makers and courts must be to ascertain the intent of the legislature by applying the “modern principle” of statutory interpretation. This requires an examination of the words of the provision under consideration according to their grammatical and ordinary sense, in their entire context, and in harmony with the scheme and object of the Act. The fact that the choice between reasonable interpretations falls to the administrative decision maker does not absolve it from following this cardinal principle…”.

Since the Forestry Act provided for “compensation”, the arbitrator’s award of an amount which was “in no way linked to Teal’s actual financial loss” was not consistent with this principle and was therefore unreasonable.

The B.C. Court of Appeal then turned to the question of whether its prior decision dealing with interest should be upheld in light of the Sattva decision. The arbitrator had allowed interest despite a clause in the arbitration agreement that the Province submitted precluded interest. The Chambers judge had held that the arbitrator’s interpretation of the contract was based upon a consideration of the surrounding circumstances, and therefore amounted to a question of mixed fact and law, not a question of law. Since the arbitration statute in British Columbia only permits an appeal on a question of law, there was no right of appeal.

In its prior decision, the B.C. Court of Appeal had held that the decision of the arbitrator raised a pure question of law. It had held that the arbitrator’s decision had changed the plain meaning of the arbitration agreement, which precluded the award of interest, and that decision therefore amounted to an error law. Accordingly, the court had set aside the arbitrator’s decision.

In its present decision, the B.C. Court of Appeal held that nothing in Sattva required its prior decision to be changed, for three reasons:

  1. In Sattva, the Supreme Court had adopted the B. C Court of Appeal’s approach to identifying a question of law. In the present decision, the B. C. Court of Appeal said:

“It seems clear that what the Court did in Sattva was to largely endorse the approach to ascertaining what constitutes a question of law and of mixed fact and law in contractual interpretation that has in recent years been taken by some courts as reflected in the authority cited which includes the Hayes Forest Services and Otter Bay decisions of this Court. As indicated, that is the authority upon which the reasons given for the majority [in the previous Teal decision] are predicated in determining that the arbitrator’s interpretation of the Settlement Framework Agreement and Addendum #2 raise a question of law.”

In other words, the B.C. Court of Appeal held that the Supreme Court in Sattva endorsed the B.C. Court of Appeal’s approach to identifying a discrete point of law in an arbitrator’s decision, thereby entitling a reviewing court to review the decision based upon an error of law.

  1. In Sattva, the Supreme Court had not suggested or found that an error of law cannot be found in an arbitrator’s decision just because the arbitrator had regard to the surrounding circumstance. The B.C. Court of Appeal said:

“To the contrary, it is because contractual interpretation is an exercise in applying legal principles to the express language of an agreement considered in the circumstances that questions of law can arise.”

Accordingly, the B.C. Court of Appeal held that in its prior decision it had been correct in identifying a question of law even though the arbitrator’s interpretation of the agreement was based upon the surrounding circumstances.

  1. In Sattva, the Supreme Court had reiterated that the extraneous circumstances cannot over-ride the plain meaning of the contract. That is the principle that the B.C. Court of Appeal had applied in its prior decision.

Accordingly, the B.C. Court of Appeal upheld its prior decision setting aside the arbitrator’s award of interest on the ground that that decision was contrary to the plain meaning of the Settlement Framework Agreement.

Discussion

The initial impression of Sattva was that it would substantially reduce the scope of review of arbitral decisions because the Supreme Court held that the interpretation of an agreement is normally a matter of mixed fact and law. Many arbitration statues only permit appeals on a question of law, not mixed fact and law. Accordingly, it was thought that Sattva had substantially eliminated appeals from arbitral decisions interpreting agreements.

This decision of the B.C. Court of Appeal in Teal v. B.C. may lead to the opposite conclusion for numerous reasons:

  1. The B.C. Court of Appeal has confirmed that Sattva has opened wide the evidence that must be considered in interpreting a contract. Now, the surrounding circumstances may and should be considered in interpreting the contract. While those circumstances cannot “overwhelm” the plain meaning, they may be considered, and once considered it is obvious that there is a wider basis for controversy or dispute, and uncertainty, about the real meaning of the contract.
  1. The B.C. Court of Appeal has held that if the arbitrator is considering a statute, then the standard of review is correctness, not reasonableness. So now there are two different standards of review, one for contracts and one for statutes.
  1. The B.C. Court of Appeal has adopted a very strict test of “reasonableness”. The test appears to adopt almost all the ingredients of the correctness test. It is hard to imagine an interpretation of a statute that, under its test, will be found to be an incorrect but reasonable interpretation.
  1. Even though the arbitrator has considered the surrounding facts, that does not preclude the court from finding or identifying an error of law. It is not the arbitrator’s process that is important. It is not a question of whether the arbitrator found or operated upon a principle of law that is incorrect. Rather, it is a question of whether the court can identify in, or distill from, the arbitral decision an error of law. If it can, then that decision may be set aside. Indeed, the B.C. Court of Appeal found that in Sattva, the Supreme Court had approbated its prior approach in identifying errors of law in arbitral decisions.
  1. The B.C. Court of Appeal has said that the decision in Sattva does not provide an “exhaustive list” of those circumstances in which an arbitral award may be reviewed on the basis of correctness. This means that courts may find other grounds for applying the correctness standard.

When all these ingredients are added up, the principles applied by the B.C. Court of Appeal seems to be very much the same as those which courts have historically applied in reviewing arbitral decisions. So perhaps, plus ca change….

Teal Cedar Products Ltd. v. British Columbia, 2015 BCCA 263, 2015 CarswellBC 1550

Arbitration – Appeal and Review of Arbitral Decisions – Standard of Review – Error of Law

Thomas G. Heintzman O.C., Q.C., FCIArb                                   July 7, 2015

www.heintzmanadr.com

www.constructionlawcanada.com

Grounds For Reviewing Arbitration Decisions Are Narrow: B.C. Court of Appeal

A recent decision of the British Columbia Court of Appeal warned that the grounds for reviewing an arbitral award are narrow. In Boxer Capital Corp. v. JEL Investments Ltd., the court noted that arbitral dispute had gone through two separate arbitrations and nine (yes, nine) judicial proceedings already. The Court of Appeal said: “Surely that procedural history is inconsistent with the objectives of commercial arbitration.” The court held that the motion judge had no basis to over-turn the last arbitral award and re-instated that award.

Background

The issue in the appeal was whether the second arbitrator was bound by principles of res judicata arising from the award of the first arbitrator or the decision of the judge who heard an appeal from that first award. The second arbitrator held that he was not bound by those decisions by reason of res judicata. The judge hearing an appeal from that decision held that the second arbitrator was so bound. I wrote about that decision in my article of February 17, 2014.

From that latter decision an appeal was taken to the British Columbia Court of Appeal.

The B.C. Court of Appeal’s decision

The B.C. Court of Appeal agreed with the arbitrator. The issue turned upon whether the issue before the second arbitrator was the same as the issue before the first arbitrator or the court which heard the appeal from the first award. The Court of Appeal held that it was not:

“Respectfully, Mr. Justice Abrioux erred in characterizing the issues so broadly, and in finding that they had been the same throughout. When the issues are properly framed, it becomes apparent that they are quite different. The issue before [the firs] Arbitrator….., as defined by the parties who chose to submit their dispute to him, was whether the shotgun purchase price under the [Co-Owner’s Agreement, or COA] was $1.425 million or $2.19 million. The issue before[the court on appeal from the second arbitral award], as defined by this Court’s decision granting leave to appeal, was whether [the second] Arbitrator “erred in failing to have regard to established principles of law in deciding that a term should be implied”. Finally, the issue before [the second] Arbitrator, again as defined by the parties, was whether the Boxer Parties had a continuing interest in the venture. These are different issues.”

  The B.C. Court of Appeal then concluded:

“It was open to [the second] Arbitrator to construe the COA afresh on the continuing interest issue. It is not for this Court to review the merits of his decision in this regard. His decision is the last word on the interpretation of the COA.”

In the course of making its decision the court made a number of comments about the decision of the Supreme Court of Canada in Creston Moly Corp. v. Sattva Capital Corp., 2014 SCC 53.

First, it distinguished the role of a court in an appeal from an arbitral award from its role in an appeal from another judicial decision; the former role is much more limited than the latter. It said:

Like the present appeal, Sattva dealt with an issue of contractual interpretation. Mr. Justice Rothstein explained that in most cases, issues of contractual interpretation will be important only to the parties themselves, and will not have a broader impact….. However, the role of appellate courts (including the B.C. Supreme Court, when sitting on appeal from an arbitral award) is generally not to provide “a new forum for parties to continue their private litigation” but rather to ensure “the consistency of the law” and decide legal issues of public importance (ibid.). Accordingly, “our legal system leaves broad scope to tribunals of first instance to resolve issues of limited application”…. In sum, “the goals of limiting the number, length, and cost of appeals, and of promoting the autonomy and integrity of trial proceedings … weigh in favour of deference to [arbitrators] on points of contractual interpretation”.”

Second, it said that if the principles in Sattva had been applied in the present case, there might have been no appeal from the first arbitral award and the matter might have ended there:

“Sattva held that questions of contractual interpretation should almost always be regarded as questions of mixed fact and law…. (Historically they were seen as questions of law.) This means that, after Sattva, leave will rarely be granted to appeal an arbitral award on a question of contractual interpretation. (If Sattva had been decided earlier, leave arguably would not have been granted to appeal the parties’ initial arbitral award and this lengthy saga would have been avoided.)”

Discussion

As in most debates, defining the question largely defines the answer. The Court of Appeal said this about the exercise involved in defining the question in an appeal from an arbitral award:

“This appeal serves as a reminder of the importance of judicial restraint in the review of arbitral awards, at least in the commercial context. When sitting on appeal from an arbitral award, a court’s jurisdiction is narrow. The inquiry differs fundamentally from a trial, and even from a judicial review of an administrative decision.”

As a result of the new test in Sattva for reviewing arbitration decisions, and the narrow definition of the question involved in the appeal from the second arbitral award, the Court of Appeal held that that question was not the same as the questions in the first arbitration or the appeal from the first arbitral award.

This decision does not mean that the doctrine of res judicata should be applied narrowly by arbitral tribunals. It means that, in reviewing a decision by an arbitrator about that doctrine, the court has a very narrow jurisdiction. If the arbitrator has the jurisdiction to determine whether the doctrine applies or not – and that was not doubted in the present case – then the conclusions of the arbitrator must be accepted, unless the arbitrator’s errors about those matters result in a complete loss of jurisdiction or an error on a pure question of law.

In any event, this decision can go down as Exhibit A about how arbitration can lead to expense and delay if the procedures get out of hand. As I said in my February 12, 2014 article about the lower court decision in this case, “proponents of arbitration may wonder if there are better ways to find speedy justice. The parties selected arbitration presumably to avoid the costs and delays of the court system. That objective was not achieved in the present case.”

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 11, part 3.

Boxer Capital Corp. v. JEL Investments Ltd., 2015 CarswellBC 96, 379 D.L.R. (4th) 712

Arbitration – Appeal – Res Judicata – Standard of Review – Shot-gun agreements

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                March 13, 2015

www.heintzmanadr.com

www.constructionlawcanada.com

The Supreme Court Of Canada Proclaims 10 Rules For The Interpretation Of Contracts And The Review Of Arbitration Awards

The Supreme Court of Canada’s recent decision in Sattva Capital Corp. v. Creston Moly Corp. is a remarkable document. It is more than a judicial decision. It is literally a textbook or checklist for the interpretation of contracts and the review of arbitration decisions.

Background

First, the context. Creston agreed to pay Sattva a finder’s fee in relation to its acquisition of a mining property.  The parties agreed that Sattva was entitled to a finder’s fee of US$1.5 million and was entitled to be paid this fee in shares of Creston. They disagreed on which date should be used to price the shares and therefore the number of shares to which S was entitled.  S argued that the share price was to be fixed on one date, and therefore it was entitled to about 11,460,000 shares priced at $0.15.  C claimed that the proper date was the date when the compensation was payable, that the agreement’s “maximum amount” proviso prevented S from receiving shares valued at more than US$1.5 million on that date and therefore that S should receive approximately 2,454,000 shares priced at $0.70.  The parties agreed to arbitrate their dispute under the B.C. Arbitration Act.

The arbitrator found in favour of Sattva.  Creston was denied leave to appeal on the basis that the issue was not a question of law.  The Court of Appeal reversed that decision and granted C’s application for leave to appeal, finding that the arbitrator’s failure to address the meaning of the agreement’s “maximum amount” proviso raised a question of law, and remitted the matter to the superior court.

The superior court judge then dismissed C’s appeal from the arbitrator, holding that the arbitrator’s interpretation of the agreement was correct.  The Court of Appeal allowed C’s appeal, finding that the arbitrator reached an absurd result.  The Court of Appeal also held that the superior court judge was bound by the Court of Appeal’s prior decision. S appealed to the Supreme Court of Canada which re-instated the decisions of the arbitrator and the superior court judge.

Decision of the Supreme Court of Canada

Here are the major pronouncements in the Supreme Court’s decision. They are not listed in the decision in this way but they appear to be the major grounds for the decision.

  1. A contract should be interpreted in light of the surrounding circumstances.

The Supreme Court held that a contract should be interpreted in light of all the surrounding circumstance. Moreover, doing so does not contradict the parol evidence rule. The court said:

“The parol evidence rule does not apply to preclude evidence of the surrounding circumstances. Such evidence is consistent with the objectives of finality and certainty because it is used as an interpretive aid for determining the meaning of the written words chosen by the parties, not to change or overrule the meaning of those words.”

  1. The interpretation of a contract is a question of mixed fact and law, not a question of law.

The Supreme Court held that, except in the “rare” instances in which an “extricable question of law” can be found, the interpretation of a contract is a matter of mixed fact and law, not a matter of law. The court acknowledged that historically, the determination of the rights and obligations under a contract was considered a question of law. However, Justice Rothstein, speaking for the unanimous court, said that rule should no longer apply:

“I am of the opinion that the historical approach should be abandoned.Contractual interpretation involves issues of mixed fact and law as it is an exercise in which the principles of contractual interpretation are applied to the words of the written contract, considered in light of the factual matrix.”

Justice Rothstein said that it “may be possible to identify an extricable question of law from within what was initially characterized as a question of mixed fact and law” but that “courts should be cautious in identifying extricable questions of law in disputes over contractual interpretation.”

  1. Leave cannot be granted to appeal the interpretation of a contract by an arbitral tribunal award if the test for granting leave is “a question of law”

Under the arbitration statutes of most provinces, leave to appeal from the arbitrator’s award can be granted if there is a question of law involved. A strong argument can be made that the whole regime relating to appeals from arbitral awards was premised on the historical assumption that the interpretation of a contract was a matter of law. In Sattva, the Supreme Court held that an interpretation of a contract does not raise a question of law, and so it held that leave to appeal should not have been granted in this case. So in the future, and except in rare instances, a court may no longer grant leave to appeal to determine if the arbitrator was correct in his or her interpretation of the contract.

This decision goes affects much more than applications for leave to appeal. It affects any legal regime relating to the interpretation of a contract. For example, if the parties agree to an appeal on a point of law – and most of the provincial and territorial arbitration statutes allow the parties to do so – now such an agreement will not allow an appeal concerning the interpretation of the agreement.

Accordingly, this decision will require that parties proposing to enter into an arbitration agreement re-think how they express in their agreement the rights of appeal from the arbitral decision. If they intend that the interpretation of the contract by the arbitral tribunal is to be appealable, then it is no longer sufficient for them to provide for an appeal on a question of law. They must now provide for an appeal on a question of mixed fact and law.

In addition, many provincial and territorial arbitration statutes – including British Columbia’s – do not allow the parties to agree to an appeal from an arbitral decision on a question of mixed fact and law, only on a question of law. Under this decision of the Supreme Court of Canada, none of those statutes will now allow the parties to include a review of the interpretation of a contract as a ground of appeal. A whole subject of contract law has potentially been removed from the court’s review.

  1. The test for leave to appeal is “arguable merit”

The Supreme Court of Canada held that the test for a superior court to apply when considering an application to appeal from an arbitral award is “arguable merit.” The test may be described in many different ways using different words, but they come down to these two words.

This test is met if “the issue raised by the applicant cannot be dismissed through a preliminary examination of the question of law. In order to decide whether the award should be set aside, a more thorough examination is necessary and that examination is appropriately conducted by the court hearing the appeal once leave is granted.” In the case of legal issues, “the appropriate threshold ….is whether it has arguable merit, meaning that the issue raised by the applicant cannot be dismissed through a preliminary examination of the question of law.”

  1. The court has a residual discretion not to grant leave to appeal

Even if the court considers that the appeal has arguable merit, the Supreme Court of Canada has confirmed that the court has a residual discretion not to grant leave to appeal. Discretionary factors to consider in a leave application include:

o   the conduct of the parties

o   existence of alternative remedies

o   undue delay and

o   the urgent need for a final answer.

However, “courts should exercise such discretion with caution.” If the court finds an error of law and a potential miscarriage of justice, then the discretionary factors “must be weighed carefully before an otherwise eligible appeal is rejected on discretionary grounds.” There should be no double-counting of the relevant factors. For example, “respect for the forum of arbitration chosen by the parties is a consideration that animates the legislation itself and can be seen in the high threshold to obtain leave…Recognition that arbitration is often chosen as a means to obtain a fast and final resolution tailor-made for the issues is already reflected in the urgent need for a final answer.” So this factor should not be counted again in exercising a residual discretion not to grant leave to appeal.

In considering misconduct in relation to this residual discretion, the court said that the misconduct of a party need not be directly relevant to the question of law in issue in the appeal.

  1. The exercise of discretion should be reviewed by an appellate court with deference

The Supreme Court held that a discretionary decision by the court considering an application for leave to appeal from an arbitral award should be reviewed by another court with deference. An appellate court “should not be interfered with merely because an appellate court would have exercised the discretion differently… An appellate court is only justified in interfering with a lower court judge’s exercise of discretion if that judge misdirected himself or if his decision is so clearly wrong as to amount to an injustice.”

  1. The review of an arbitral decision is not by way of judicial review applicable to administrative tribunals

The Supreme Court drew an important distinction between the review of an arbitral decision by a superior court under the statutes applicable to commercial arbitrations, and a review of the decision of an administrative tribunal by way of judicial review. Arbitral review is not judicial review in the latter sense. Appellate review of arbitral awards “takes place under a tightly defined regime specifically tailored to the objectives of commercial arbitrations and is different from judicial review of a decision of a statutory tribunal.” As the court pointed out, “for the most part, parties engage in arbitration by mutual choice, not by way of a statutory process. Additionally, unlike statutory tribunals, the parties to the arbitration select the number and identity of the arbitrators.” Furthermore, in the arbitration statutes of some provinces and territories (like British Columbia, but unlike the arbitration statutes in many other provinces and territories), the court is prohibited from reviewing an arbitral tribunal’s factual findings. However, in the judicial review of administrative tribunals, a prohibition against the review of an administrative tribunal’s factual findings “signals deference” under the Supreme Court’s decision in Dunsmuir v. New Brunswick, [2008] 1 S.C.R. 190.

  1.    The Dunsmuir test may be helpful to the review of arbitral awards

The Supreme Court did find, however, that the standard of review developed for administrative tribunals may be relevant or useful to the appeal or review of arbitral awards. The court said the two systems of review are:

“analogous in some respects. Both involve a court reviewing the decision of a non-judicial decision-maker. Additionally, as expertise is a factor in judicial review, it is a factor in commercial arbitrations: where parties choose their own decision-maker, it may be presumed that such decision-makers are chosen either based on their expertise in the area which is the subject of dispute or are otherwise qualified in a manner that is acceptable to the parties. For these reasons, aspects of the Dunsmuirframework are helpful in determining the appropriate standard of review to apply in the case of commercial arbitration awards.”

In applying the Dunsmuirtest, the Supreme Court said the following:

“In the context of commercial arbitration, where appeals are restricted to questions of law, the standard of review will be reasonableness unless the question is one that would attract the correctness standard, such as constitutional questions or questions of law of central importance to the legal system as a whole and outside the adjudicator’s expertise …The question at issue here, whether the arbitrator interpreted the Agreement as a whole, does not fall into one of those categories. The relevant portions of the Dunsmuiranalysis point to a standard of review of reasonableness in this case.”

  1.    The Court may supplement the reasons of the arbitral tribunal

The Supreme Court of Canada held that, in considering an application for leave to appeal from an arbitral award, the court may supplement the award by its own analysis before undermining the award by finding it deficient. The court quoted from its decision in Newfoundland and Labrador Nurses’ Union v. Newfoundland and Labrador (Treasury Board), [2011] 3 S.C.R. 708:

“even if the reasons in fact given do not seem wholly adequate to support the decision, the court must first seek to supplement them before it seeks to subvert them. For if it is right that among the reasons for deference are the appointment of the tribunal and not the court as the front line adjudicator, the tribunal’s proximity to the dispute, its expertise, etc, then it is also the case that its decision should be presumed to be correct even if its reasons are in some respects defective.” (underling in both decisions)

The Supreme Court proceeded to supplement the decision of the arbitral tribunal by its own reasoning. Having done so, it concluded that the interpretation of the contract by the arbitral tribunal award met the reasonableness standard and upheld the award.

10.   The Leave to Appeal decision is not binding in subsequent hearings

The B.C. Court of Appeal had held that its previous decision granting leave to appeal, and the factual findings in that decision, were binding on the superior court judge and on itself during the subsequent hearings. The Supreme Court held that this was wrong:

“A court considering whether leave should be granted is not adjudicating the merits of the case… A leave court decides only whether the matter warrants granting leave, not whether the appeal will be successful…. This is true even where the determination of whether to grant leave involves, as in this case, a preliminary consideration of the question of law at issue. A grant of leave cannot bind or limit the powers of the court hearing the actual appeal.”

Discussion

This decision has a profound impact on the interpretation of contracts and the appeal and review of arbitral decisions. Some time is required to reflect upon and absorb the decision. The following comments are only a first stab at its full implications.

The decision apparently reduces the authority of the superior court to review arbitral decisions in two respects.

First, it reduces the grounds upon which an existing arbitration agreement may give rise to appellate review: except in rare instances, no leave to appeal on a matter of law may be granted to review the correctness of the interpretation of a contract by an arbitral tribunal, and an agreement providing for an appeal on a matter of law will not encompass such a review.

Second, it reduces the ability of parties to future arbitration agreements to agree on appellate review of the correctness of the interpretation of a contract by an arbitral tribunal; if the applicable arbitration statute does not permit the parties to agree to an appeal on a question of mixed fact and law, then no such appellate review appears possible.

The decision also provides guidance on the practice which applies to applications for leave to appeal from arbitral awards. This guidance particularly applies to the scope of the court’s discretion, the impact of a party’s improper conduct upon the exercise that discretion, the non-binding effect of the leave to appeal decision and the scope of the reviewing court’s entitlement to supplement the reasoning contained in the award. So while the leave to appeal door may have been partially closed by this decision, to the extent that the door is still open the decision clarifies and to some extent broadens the court’s powers to deal with the application.

Sattva v. Creston goes into the first drawer of the Contract and Arbitration tool boxes with a big red sticker on it.

Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53

Contracts – Interpretation of Contracts – Arbitration – Appeal and Review of Arbitral Awards

Discretion – Standard of Review

Thomas G. Heintzman O.C., Q.C., FCIArb                                                     August 10, 2014

www.heintzmanadr.com

www.constructionlawcanada.com

What Is The Effect Of Res Judicata On Arbitration?

The recent decision of the British Columbia Supreme Court in Boxer Capital Corp. v. JEL Investments Ltd. raises some fascinating issues with respect to the application of the doctrine of res judicata to the arbitration process.  The court effectively held that res judicata applies with all its force and effect to arbitration.  For this reason, the court set aside an arbitral decision which did not follow or apply a previous arbitration decision and court decision arising in the same dispute.

The proceedings in this case also raise concerns about the ability of arbitration proceedings to deal with disputes on a cost and time effective basis.  This dispute about $750,000 arose in May 2008 and has already been through two arbitral hearings and several trips to the British Columbia courts, and this latest decision was rendered on December 27, 2013 five and a half years after the dispute arose.

The Background

Boxer and JEL were parties to a property development agreement. Boxer had contributed more money to the project than JEL. The agreement contained a shot-gun agreement whereby one party could give notice that it would sell its interest to the other.  Failing the receiving party’s agreement to buy, the receiving party was required to sell at the same price.  JEL gave notice in May 2008 that it was willing to sell its interest in the project for $1.425 million. Boxer declined the offer so it was obliged to sell for that price to JEL. Boxer took the position that it was entitled to receive an amount from JEL which would equalize the difference in their respective capital contributions. Boxer said that JEL would have to pay an extra $765,732.26 to compensate Boxer for the additional capital funds invested by it at the time the property was purchased. JEL said that it was not obliged to pay for that interest or capital contribution and that the monies it would pay as a result of the buy-sell process included whatever obligation it had to pay Boxer for its larger capital contribution.

The Arbitration and Court Proceedings

The parties went to arbitration.  In March 2009, the arbitrator found that JEL was obliged to buy Boxer’s interest for $1.425 million plus a capital adjustment payment of $765,732.26. The arbitrator held that the obligation to pay the capital adjustment payment arose from an implied term in the agreement.

JEL did not comply with the arbitration award. So Boxer commenced an action to specifically enforce that award.  In August 2009, the B.C. Supreme Court issued an order enforcing the arbitration award and incorporated the award into its judgment as a judgment of the court.  The order directed JEL to pay the $1.425 million amount and as well the $765,732.26 capital adjustment amount.  There was no appeal from this order.

In the meantime, JEL sought leave to appeal the 2009 arbitration award to the British Columbia Supreme Court.  Leave to appeal was denied and JEL appealed to the B.C. Court of Appeal and in March 2011 the B.C. Court of Appeal allowed the appeal and granted leave to JEL to appeal from the 2009 arbitration award.

In that appeal, in August 2011 the B.C. Supreme Court held that JEL had validly acquired Boxer’s shares pursuant to the shotgun clause but the court set aside the part of the arbitrator’s award that require JEL to pay the capital adjustment payment. The court agreed with Boxer that it was entitled to be paid the capital adjustment amount but held that Boxer was not entitled to that amount at the time of the buy-out but only when the project became profitable as a first charge on any profits.  The court held that JEL did not purchase or acquire the disproportionate capital contribution made by Boxer, and that that contribution remained “in the project” to be paid out of the project pursuant to the agreement, if and when profits were earned. No appeal was taken from that decision.

The purchase by JEL of Boxer’s interest proceeded and JEL paid the $1.425million to Boxer. JEL took the position that Boxer no longer had any interest in the project.  In December 2011, so Boxer commenced an action to enforce its right to the capital adjustment amount.  JEL brought a motion to stay the action and in May 2012, the action was stayed and Boxer’s claim was directed to proceed by way of arbitration.

The arbitration awards were dated August and December 2012. The arbitrator held that he was not bound by the prior arbitration award or decisions of the B.C. courts.  The arbitrator held that Boxer was not entitled to a capital adjustment amount and that Boxer no longer had any interest in or claim arising from the project.

Boxer sought leave to appeal the 2012 arbitral decisions and in April 2013 leave was granted. JEL appealed to the B.C. Court of Appeal and in June 2013 that appeal was dismissed.

The appeal from the 2012 arbitration decisions was allowed in December 2013. In case you are still following this saga, the proceedings have now been before two arbitrators, before the B.C. Supreme Court five times and before the B.C. Court of Appeal twice. And appeals to the B.C. Court of Appeal and Supreme Court of Canada are still possible.

2013 Decision of the B.C. Supreme Court

The B.C. Supreme Court held that the parties to the 2012 arbitration were bound by the principle of res judicata arising from the 2009 arbitration and the 2011 decision of the B.C. Supreme Court.  Both those decisions had found that Boxer was entitled to the capital adjustment amount. The only difference between those decisions was in relation to the timing of the payment of that amount and whether it was required to be paid at the time of the buy-out (as the 2009 arbitrator found) or at the time the project became profitable (as the 2011 judge found).  Accordingly, the arbitrator had erred in holding that those decisions were not binding upon him.

The B.C. Court essentially found that the 2012 arbitrator was not at liberty to go behind – or “deconstruct” as the 2012 arbitrator said – the 2011 decision of the B.C. Court.  It said:

“Both [the 2009] Arbitrator and [the 2011 judge] interpreted the agreement and found, for different reasons, that the $1.425 million did not include the disproportional capital amount and yet, [in] his first partial award, [the 2012] Arbitrator stated:… ‘I am not bound by [2011 judge’s] reasoning….With great respect to [the 2011 judge], J., I do not agree with his interpretation of the COA on this issue.’

In my view it was an error of law for [the 2012] Arbitrator to “deconstruct” [the 2011 judge’s] reasoning and interpretation of the COA so as to “arrive at an opposite conclusion” regarding the ownership of the disproportionate capital, specifically whether it was included in the undisputed $1.425 million. This was the exact same issue as the one considered by both [the 2009] Arbitrator and the [2011 judge]…”

The 2013 judge also held that the 2012 arbitrator erred in exercising discretion not to enforce the principle of res judicata.  It said:

“Secondly, I disagree that it would be manifestly unfair and would work an injustice to JEL to apply the doctrine of issue estoppel in this case. Discretion must be exercised judicially. In my view, discretion judicially exercised should lead to the opposite conclusion to that reached by [the 2012] Arbitrator. The proper exercise of discretion would work as a grave injustice to Boxer …if the doctrine of issue estoppel were not applied in the circumstances of this case.”

Discussion

The res judicata issue is an extremely important one for the law of arbitration.  That is because arbitration – or at least domestic arbitration – exists within a legal framework that includes two systems, courts and arbitrators. The principle of res judicata is one means by which that relationship is governed as the courts can over-rule an arbitral tribunal if it does not abide by a prior court decision. To maintain the proper balance between the two systems, it could be argued that the court should have due respect for the arbitral system and not impose an unduly strict regime of res judicata on arbitrators, and arbitrators should have due respect for the court’s decisions and make decisions which respect the integrity of those decisions.

What can we learn from the present decision?

First, the decision of an arbitral tribunal about res judicata will be reviewed on a standard of correctness. That is exactly what the 2013 judge has held. No respect for judgment or error will be accorded to the arbitral tribunal on this issue.

Second, it seems clear from this decision that the principle of res judicata does apply to arbitral decisions. Nobody asserted to the contrary in this case and the court clearly applied that principle.

Third, the principle of res judicata applies with the same strictness as it does to a court. Again, no-one apparently argued that there should be some leeway for the arbitral tribunal, on the ground that arbitration is a less formal and legal system than the court system.  Neither side argued that there was a public policy rational for a less lenient approach to res judicata in arbitrations than in court proceedings.  There is no hint of leniency in this decision.

Fourth, the courts will expect arbitral tribunals to give a broad and purposeful interpretation and effect to the court’s prior decisions.  In this case, the court appears to have been impatient with the 2013 arbitrator’s effort to fully understand the 2011 decision of the court.  The court did not accept that the arbitrator had any jurisdiction to disagree with that decision or to be technical with its interpretation.

And Fifth, the courts will expect the parties to exhaust their appeal rights from an arbitral decision before asserting in a subsequent proceeding that the arbitral decision or the court’s review of it was wrong.  In the present case, the failure of JEL to appeal the finding of the 2011 judge that Boxer had a remaining entitlement to the capital adjustment amount was fatal to its efforts to uphold the 2013 arbitral award finding that Boxer had lost its entitlement to that capital adjustment amount.

Proponents of arbitration may wonder if there are better ways to find speedy justice.  The parties selected arbitration presumably to avoid the costs and delays of the court system. That objective was not achieved in the present case.

Boxer Capital Corp. v. JEL Investments Ltd. 2013 CarswellBC 3913, 2013 BCSC 2366

Arbitration – Res Judicata – Standard of Review – Shot-gun agreements

Thomas G. Heintzman O.C., Q.C., FCIArb                                                     February 10, 2014

www.heintzmanadr.com

www.constructionlawcanada.com

When Is A Commercial Arbitration Decision Unreasonable?

Canadian courts will generally over-rule a decision of a domestic arbitral tribunal only if the decision is “unreasonable.”  What does this word mean? Is the standard of “unreasonableness” different in a commercial arbitration than, say, in a labour or employment arbitration?  If the arbitral award is found to fall within the bounds of reasonableness by the judge who hears the motion to over-rule it, how can an appellate court then say that the decision is “unreasonable”?

These questions are raised by the recent decision of the Newfoundland and Labrador Court of Appeal in St. John’s (City) v. Newfoundland Power Inc.  The Court of Appeal allowed an appeal and set aside the decision of the arbitral tribunal under a long term power lease, even though the judge who first heard the motion to set aside the arbitral decision upheld the decision as reasonable.  When one judge had found that the arbitral decision was reasonable, how did the Court of Appeal arrive at the decision that it was unreasonable?

Background

The arbitration arose under a long term lease between the City of St. John’s and Newfoundland Power. The lease was for the use of the Mobile River.  Clause 1 of the lease permitted the City to terminate the lease upon:

“payment to the Company of the value of all works and erections constructed or provided by the Company within and without the Mobile River watershed subsequent to the date of this Lease for the primary purpose of developing the waters of Mobile provided such works and erections are in use by the Company for that primary purpose at the time notice of termination of the Lease is given by the Council and also at the time of termination of the said Lease…” (emphasis added)

The meaning of the underlined words was the source of the contention. Newfoundland Power said that they meant that, on termination of the lease, the City was required to pay for the on-going value of its operating business in the Mobile River watershed as the time of the termination, including the value that it derived from the use of the river which it leased from the City.  The City said that, on termination of the lease, it was only required to pay for the physical works and erections which Newfoundland Power had constructed and nothing more.

The lease had been previously amended to delete the words “aggregate cost of works and erections … less depreciation” and replace them with the words “value of all works and erections … in use.”

The Arbitral Decision

The majority of the arbitral tribunal decided in favour of Newfoundland Power and held that the City was obliged to pay the full amount of the value of Newfoundland Power’s business in the Mobile River watershed.

The majority held that this interpretation followed from the concluding words of clause 1 of the Lease. Those words contained a proviso which referred to another right of the City under section 29 of the governing statute (the St. John’s Street Railway Act), namely, the right to purchase the assets and business of Newfoundland Power.  Under that right, the City was obliged to pay for the “value of the said undertaking, plant, property, assets and rights of the Company.”

The majority held that the reason for the reference to section 29 of the Act within clause 1 was to provide guidance to the appraisers in making valuation when the City terminated the lease.  The majority stated that “the wording of Clause 1 of the Lease as amended ties the termination process to the concepts expressed in Section 29 of the St. John’s Street Railway Act”.  Accordingly, the majority of the arbitral tribunal concluded that, upon termination of Newfoundland Power’s rights, (rather than the purchase of Newfoundland Power’s business),  the valuation of Newfoundland Power’s undertaking must take into account the “assets” and “rights” of the Company as they were explicitly referred to in section 29.

With respect to the meaning of the word “value” in the lease, the majority of the arbitral tribunal referred to dictionary meanings and concluded that the ordinary meaning of “value” did not mean “depreciated cost”.  The majority referred to the fact that clause 1 of the lease had been amended to remove the words “aggregate cost of works and erections… less depreciation” and had replaced those words with the words “value of all works and erections”.  From this amendment, the majority concluded that the appraisal process would be incorrectly conducted if it applied “cost less depreciation”.  Due to the amendment, the word “value” could not mean “cost less depreciation.”

Privative Clauses

In the present case, two privative clauses applied to the decision of the arbitral tribunal.  One was contained in clause 1 of the lease itself. That clause stated that “the award of any two such arbitrators shall be final and binding between the parties”.  The other was in section 36 of the Arbitration Act, RSNL 1990, c. A-14 which states that “the award made by arbitrators or an umpire is final and binding on the parties and persons claiming under them.”

Standard of Review 

 Newfoundland and Labrador has not adopted the Uniform Law Conference’s Uniform Arbitration Act.  That Uniform Act provides for a right of appeal if leave is granted by the provincial superior court from a decision of an arbitral tribunal.  The Uniform Act has been adopted in most of the Canadian provinces, but not in Newfoundland and Labrador.  Therefore, the only remedy to overturn the decision of an arbitral tribunal in Newfoundland and Labrador is an application for judicial review.

Both the judge hearing the original application and the Court of Appeal held that the proper standard of judicial review was set forth in the decision of the Supreme Court of Canada in Dunsmuir v. New Brunswick, [2008] 1 S.C.R. 190.  Under Dunsmuir, there are only two standards of judicial review: correctness and reasonableness. There are two steps in determining which standard of review applies. The first step in the Dunsmuir analysis is to determine whether the courts have already established an appropriate standard of review for the particular tribunal whose decision was being reviewed. Both courts agreed that no appropriate standard of judicial review had been established for this arbitral tribunal.

The next step in the Dunsmuir analysis is the “contextual analysis” in which the following factors are considered:

(1) the presence or absence of a privative clause;

(2) the purposes of the tribunal;

(3) the nature of the question at issue; and

(4) the expertise of the tribunal.

The Court of Appeal agreed with the application judge that when these factors were applied to the arbitral tribunal in the present case, the proper standard of review was reasonableness. That is, the arbitral decision should only be set aside if it was unreasonable.

The Court of Appeal then considered how the reasonableness standard should be applied. It referred to the decision of the Supreme Court of Canada in Newfoundland and Labrador Nurses’ Union v. Newfoundland and Labrador (Treasury Board), [2011] 3 S.C.R. 708.  It held that this decision had clarified that the adequacy of reasons is not a “stand-alone basis for quashing a decision.”  Courts are not required, as it said, to “undertake two discrete analyses – one for the reasons and a separate one for the result.”  The Court of Appeal noted Justice Abella’s statement in the Newfoundland and Labrador Nurses’ Union decision that:

 “even if the reasons in fact given do not seem wholly adequate to support the decision, the court must first seek to supplement them before it seeks to subvert them. For if it is right that among the reasons for deference are the appointment of the tribunal and not the court as the front line adjudicator, the tribunal’s proximity to the dispute, its expertise, etc, then it is also the case that its decision should be presumed to be correct even if its reasons are in some respects defective.”

 The Newfoundland and Labrador Court of Appeal then stated its duty in applying the Dunsmuir test as follows:

 “This Court must therefore determine whether the reasons meet the standard of ‘justification, transparency and intelligibility’.  Even if the reasoning is in some respects flawed, this Court must determine whether the outcome is acceptable as being defensible in respect of the facts and the law by examining any alternative arguments which could have been made.” (emphasis added)

 Decision of the Court of Appeal

 The Court of Appeal said the following in starting its analysis:

 “In this case, however, I am satisfied that the majority made a number of errors in its reasoning process which led to a result that is not reasonable and supportable given the wording of the lease and the context in which it was negotiated.  The outcome is not defensible as a possible, acceptable outcome, given the commercial context in which the lease was to be interpreted and applied.”

 The Court of Appeal held that the majority of the arbitral tribunal had made two fundamental errors in the interpretation of clause 1 of the lease. The first error arose from the majority applying the valuation provision relating to the purchase of the business of Newfoundland Power.  That provision had no application when the valuation related to the termination of the lease.

The Court of Appeal said:

 “What was to be valued varied significantly depending on whether the City acquired the electrical generating plant by purchase pursuant to section 29 or by termination of the lease.  If the City terminated the lease after forty-seven years it had to pay the value of the “works and erections … in use”.  If the City exercised its right to purchase the Company as a going concern under section 29 of the St. John’s Street Railway Act, which it could do during the forty-seven year term of the Lease, it had to pay the value of the “undertaking, plant, property, assets and rights”….

 Intuitively, the different bases of valuation make sense.  If the City terminated the lease, Newfoundland Power would no longer have the right to use the water or the land on which the works and erections sat.  In other words, its franchise would be terminated….

 Here, Newfoundland Power and the City entered into a lease from the City with an express right of termination after forty-seven years upon three years notice with a compensation formula in favor of Newfoundland Power limited to the value of works and erections in use at the end of the lease to be valued by three arbitrators.  There would be no other compensation based on a going concern or otherwise because of the express language set out in the amended clause 1 of the lease dated, October 21, 1949…..

 The majority’s holding that the closing portion of clause 1 supported the contention that the valuation which occurs on the termination of the lease must be consistent with the valuation that occurs upon the City exercising its rights under section 29 was unsupportable and unreasonable and ignores the specific nature of the franchise rights granted by the City to Newfoundland Power.”

The Court of Appeal also held that the majority of the arbitral tribunal had erred in its interpretation of the word “value.”  It effectively said that the majority had ignored the fact that what was to be valued was “the works and erections in use”, not the business. It said:

 “The words “works and erections” generally refer to physical assets, a fact noted by the minority arbitrator.  While the addition of the words “in use” could connote an intention that the City would be taking over an operating facility, read in the context of the discussion above, it is clear that the words “in use” did not intend to transform the valuation from one including only physical assets into one including all associated rights and intangible property.  Their inclusion was meant only to identify which physical assets are to be valued, i.e. only those which are in use.

 This interpretation is commercially sensible.  Presumably, the words “in use” were added so that structures which were no longer necessary or functioning for the purpose of electrical power generation, would not be included in the assessment of value.  Newfoundland Power is to be paid for the value of only those physical assets which it was using to generate electrical power at the time of notice and termination. These are the only structures of value that it is losing upon termination of the lease.

 The Court of Appeal held that the majority of the arbitral tribunal had erred by relying so heavily on the changed definition of “value” in the lease.  In the court’s view, the amendment inserted into the lease “one method of valuation with the broader concept of ‘value’, which included as a possible interpretation the original method of valuation….The effect of the amendment, from a stand point of reasonableness, would appear to be intended to give greater flexibility to the arbitrators in determining which method of valuation is appropriate upon termination of the lease of those works and erections that are in use and are to be valued.”

The Court of Appeal then considered what result flowed from its conclusions, particularly in light of the finding by the application judge to the contrary.  It said the following:

 “The errors identified in the reasoning process of the majority of the arbitrators led to a decision which is unreasonable and unsupportable based upon the wording of the lease and the context in which the agreement was made.  Therefore, the applications judge erred by finding that the decision of the majority was reasonable and within the range of possible outcomes.”

 The Court of Appeal accordingly allowed the appeal and referred the matter back to the arbitral tribunal to be determined in accordance with the analysis in the Court of Appeal’s decision.

Discussion

This decision appears to reflect a tendency by the courts to review commercial agreements on a stricter basis than other agreements.  In the case of commercial agreements, the courts have at their disposal long-standing and well known principles of contractual interpretation.  When the arbitral decision offends one or more of those principles, then a court can conclude that the decision is “unreasonable”.

Two of the best known principles of contractual interpretation are the rule prohibiting reference to irrelevant considerations and the parole evidence rule.  Once the Court of Appeal concluded that the valuation principles applicable to the purchase of Newfoundland Power’s business were irrelevant to the valuation arising from the termination of the lease, then it was almost inevitable that it would conclude that the arbitral decision was unreasonable.  When, in addition, the court concluded that the prior versions of clause 1 were not helpful in arriving at the proper  interpretation of that clause, then its inclination to interfere was likely greater.  The only expertise brought by the arbitral tribunal to the process of interpreting the lease was legal expertise, and the court, which is comfortable with interpreting commercial agreements and rightly considers itself expert in doing so, undoubtedly felt that it should have little reluctance in setting the tribunal’s award aside.

This decision will be of interest to those involved in disputes involving the interpretation of construction and procurement agreements.  Those disputes often involve loaded words such as “value” and the dispute may revolve around whether certain factors are relevant or irrelevant in the interpretation process, or whether the negotiations or prior drafts of the agreement should be looked at. If one party to a construction dispute believes that the arbitration tribunal got the interpretation wrong, then the decision in St. John’s v. Newfoundland Power will be a useful decision in support of an application for judicial review.

Another view of this decision may be that courts are far too ready to set aside arbitral decisions.  Those with this view will see this decision as exactly the kind of case in which the court improperly intervened on a valuation matter that was at the heart of what the arbitral tribunal was asked to decide.

As a footnote to this decision, one could consider how it would have been decided if the arbitration in question was an international commercial arbitration, not a domestic arbitration, and the Model Law attached to the International Commercial Arbitration Act of Newfoundland and Labrador had applied. That Act is similar to the many provincial statutes which adopt the UNCITRAL Model Law across Canada.  Article 34 of the Model Law states the grounds upon which there may be recourse against an arbitral decision. Those grounds include:

  • incapacity by a party
  • invalidity of the agreement
  • lack of notice
  • the arbitral tribunal deciding a dispute or matter falling outside the terms of the arbitration agreement
  • the wrong composition of the tribunal or
  • the determination by the tribunal of a matter which is incapable of being arbitrated, or contrary to public policy.

None of those grounds appear to include an error of law made by an international commercial arbitration tribunal within its prima facie jurisdiction. If that is so, then this decision highlights the wider authority that international commercial arbitration tribunals have than domestic tribunals.  It also highlights the broader supervisory authority that provincial superior courts have over domestic arbitrations than over international commercial arbitration tribunals.  The Model Law appears to contemplate that international commercial arbitration tribunals may make errors of law within their jurisdiction and that Law gives the courts no express authority to set aside such errors.  This being the case, it may be doubtful that the Dunsmuir analysis has any application to international commercial arbitration.

With respect to domestic arbitration tribunals, however, Canadian law contemplates that provincial superior courts have authority to set aside errors of law made by domestic arbitration tribunals based upon the standards of “correctness” and “reasonableness” stated in Dunsmuir. If the decision in St. John’s v. Newfoundland Power tends to show that the courts apply a higher degree of scrutiny to legal error by commercial than to other types of arbitration, then it may be ironical that that there is no judicial review for error of law made in international commercial arbitrations.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed, chapter 10

St. John’s (City) v. Newfoundland Power Inc., 2013 NLCA 21

Arbitration  –  Standard of Review  –  Error of Law  –  Reasonableness  –  Contracts  -Interpretation

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                         August 1, 2013

www.heintzmanadr.com

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The Mother Of All Tender Cases Revisited: Three More Issues

The last article about the decision of the Superior Court of Ontario  in Envoy Relocation Services Inc. v. Canada (Attorney General), 2013 ONSC 2034 considered the impact of that case upon the Contract A  –  Contract B principles of tender law.  There are many more interesting issues which emerge from that case.  This article considers three more issues.

The first issue is:  What Standard of review should be applied by the Court to the procurement authority’s decision? Should that decision be over-ruled if the court considers it to be incorrect; or only if it is unreasonable; or only if it was made in bad faith or fraudulently?

The second and third issue concerns the Court’s entitlement to review the procurement decision in the first place.  Was the Court’s authority excluded by federal legislation?  And was a prior decision in this case on this point res judicata and binding on the court?

The fourth issue related to how the plaintiff’s damages should be awarded.  The Open Windows Bakery decision of the Supreme Court of Canada directs that damages for breach of contract are to be calculated according to the least burdensome way for the defendant to perform the contract. But what does this mean in the context of a tender or procurment? That issue will be addressed in my next article about this very interesting case.

The background

The facts were set out in my last article on this case.  Mr. Justice Annis took 1194 paragraphs to set forth the facts, so this article provides just a brief synopsis. The dispute arose in relation to a 2004 RFP by the Canadian government for a relocation service for personnel employed in the Canadian armed services, government services and RCMP.  An earlier RFP had been undertaken in 2002.

One element in both RFPs was a service called Property Management Services, or PMS.  Under PMS, the winning bidder was required to arrange and pay for various services to the individuals being moved, such as realty services, legal services and similar services. The incumbent provider which had won the 2002 RFP knew that the RFP services were hardly used at all by any of the transferred individuals. It had bid the 2002 RFP showing zero as the ceiling cost for the PMS service, thereby contracting to provide the service free of charge. In fact, it actually charged the few individuals who used the service under the 2002 contract.

Then, in the 2004 RFP, the incumbent provider knew that few individuals used the PMS service.  So it again included zero cost for this service in its bid.  The other bidders were told by the sponsor to include a specified number of projected users of the PMS service, and did so.  By reason of doing so, their bids were about $45 million more than they would otherwise have been if they had bid zero as a ceiling for PMS services.

These facts about the 2002 and 2004 procurements were discovered by the Office of the Auditor General.  One of the other bidders, Envoy Relocation Services Inc., sued the Canadian government and this trial ensued.

The Trial Judge’s decision

As discussed in the prior article, the trial judge found that the Crown breached the express terms of the contract applicable to the invitation to tender, and also breached the implied term that it would conduct the tender fairly.  In addition, the trial judge addressed the following three issues which are of importance to construction and procurement law.

Standard of Review

One of the important issues in tender cases is:  what standard of review should the court apply when considering the sponsor’s evaluation of the tender proposals? Should the sponsor’s decision to accept one tender and reject the others be overturned: if the court believes that the sponsor was incorrect in its assessment; or must the court apply a higher standard and find that the sponsor acted unreasonably before it interferes; or must the court apply an even higher standard and only interfere if the sponsor acted fraudulently, in bad faith, by mistake or unconscionably?

The trial judge appears to have applied a two part test. For those parts of the sponsor’s assessment which were based on its expertise, he concluded that a standard of reasonableness should be applied; for those parts of the assessment where the sponsor’s employees had no expertise or had acted improperly (due to clear error, conflict of interest, or obvious preference for one bidder), a standard of correctness should be applied.  The trial judge rejected the Crown’s submission that he must find fraud, mistake, bad faith or unconscionability before he could review the tender assessments made by the Crown, finding that such a standard was “overly deferential” to the sponsor and not supported by the case law.

These distinctions between the various standards of review are useful.  Often the standard of review may be the decisive factor in whether the court will interfere with the sponsor’s assessment of the bids.  The trial judge’s reasons for using the correctness standard when the conduct of the sponsor’s decision-makers does not deserve respect, but otherwise the standard of reasonableness, provide a nuanced approach to the standard of review.

The Court’s Jurisdiction

The Crown asserted that the court had no jurisdiction to deal with the plaintiff’s claim because the  Canadian International Trade Tribunal Act and the Canadian International Trade Tribunal Procurement Inquiry Regulations  had established a statutory code for procurement disputes falling within the jurisdiction of the Canadian International Trade Tribunal, and that the present dispute fell within the Tribunal’s jurisdiction. The Crown submitted that the statutory code operated to oust the jurisdiction of the Superior Court, such that the action must be dismissed.

The trial judge rejected this submission.  He noted that this submission had been made to the court by way of a motion to dismiss earlier in the action, and that motion had been dismissed.  Accordingly, the trial judge held that the issue was res judicata.  But the trial judge went on to agree with the motion judge’s decision.  He held that there would have to be very clear language in the statute before the court’s jurisdiction was ousted, and there was nothing in the legislation that expressly did so.

The trial judge also expressed some horror that the court’s jurisdiction could be usurped in this kind of case. He said

“The fundamental difference between a court like the Superior Court of justice and the CITT involves the capacity to determine facts. It would frankly be unthinkable for any judicial body, but a trial court to hear a matter such as this one.

 If I may resort to a Proustian sentence to make the point: this matter involves facts extending over several years [and the trial judge continued in one sentence for seventeen lines concluding] …and everything else that goes with a trial in which factual findings are fundamentalto the ultimate decision that teams of lawyers have spent thousands of hours working on.

I cannot imagine more inappropriate circumstances in which to advance an argument that the jurisdiction of the Superior Court should be ousted because Parliament intended that cases of this nature should be resolved before the CITT.

This is not intended to be disrespectful towards the CITT, but it is clearly not a fact-finding quasi-judicial institution. Matters of contract, tort and remedies resulting therefrom are generally fact driven. One cannot replace a trial court with an administrative tribunal, unless the tribunal takes on the general characteristics of the trial court, such as has happened in many respects in labour law. But there is nothing in the constitution and procedures before the CITT that suggests it has either the capacity or the experience to make factual determinations, unless of a fairly rudimentary nature…..

 In matters of procurement, there is an obvious need in some cases for recourse to a judicial institution whose primary responsibility is the finding of facts in the pursuit of justice. I consider this to be a strong policy argument supporting the conclusion that Parliament could not have intended to exclude the Superior Court’s jurisdiction in this area without the clearest words to that effect.”

The private sector may well share the judge’s concern that the review of government procurements exclusively by government appointed tribunals is no way to ensure independent justice. The private sector may well wish to be vigilant to ensure that Parliament and the provincial legislatures do not try to shut off recourse to the courts arising from government procurements.

Res Judicata 

 Res judicata was considered by the trial judge twice in his reasons.

First, he held that the earlier decision of the motions judge, that the role of the Canadian International Trade Tribunal (CITT) did not oust the jurisdiction of the court, was res judicata on that issue. Nevertheless, he agreed with that decision and arrived at the same conclusion.

Second, the trial judge concluded that the unsuccessful proceedings by Envoy before the CITT were not determinative of Envoy’s rights.  Again, that issue had been raised by the Crown before the motion judge on its earlier motion, and had been dismissed.  That made the earlier judge’s decision res judicata on the issue.

In addition, the trial judge considered this issue on its merits and concluded that the earlier proceedings before the CITT were not definitive for two reasons.

First, the “intervening circumstances” showed that the proceedings before the CITT “bear no relationship to those argued before and ultimately determined by the Court.” Moreover, the trial judge said that he would exercise his discretion to not apply the doctrine of res judicata having regard to the refusal by the CITT to allow any inquiry into the allegations raised by Envoy and the subsequent discovery by the Auditor General of the facts relating to PMS.

The reasoning of the trial judge can be a useful starting point for any litigant facing the issue of res judicata arising from a tender.  The decision could be that of a government tribunal, but it could also be that of the engineer or architect on the project.  If the issue is whether that decision is binding on the parties by reason of res judicata, or whether the court should exercise its discretion to relieve against the application of that doctrine, then reference to the Envoy Relocation Services decision may be useful.

Quantifying Damages: The Open Window Bakery Decision

Time and space do not permit this article to review the trial judge’s consideration of the Open Window Bakery decision of the Supreme Court of Canada to the calculation of the plaintiff’s damages.  The issue may be crucial in tender and procurement law. It will be addressed in the next article.  In all, it will take three articles to fully digest the issues raised in this Mother of All Tender Cases.

See Heintzman and Goldsmith on Canadian Building Contracts (4th ed.), chapter 1, paragraph 1(f)

Envoy Relocation Services Inc. v. Canada (Attorney General), 2013 ONSC 2034

 Construction Law  –  Tenders  –   Res Judicata  –  Standard of Review  –  Jurisdiction of the Court

 Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                                       May 16, 2013

How Correct Does An Arbitrator Have To Be?

What margin of error does an arbitrator have?  Should an arbitral tribunal’s decision be set aside if it is legally incorrect?  Or should a wider deference be shown, so that a decision will only be set aside if it is unreasonable, or perverse?

And how detailed does an arbitral decision have to be? Can it be struck down if the reasons are not adequate?

There are older appellate decisions which addressed these issues in the arbitration context.  In recent years, however, a seismic shift has occurred in administrative law relating to these issues as a result of decisions of the Supreme Court of Canada.  Do the same principles apply to the review of arbitral decisions?

In its 2003 decision in Dunsmuir, the Supreme Court of Canada collapsed the various standards of review which apply to administrative tribunals into two standards.

Decisions must be correct if they truly relate to the jurisdiction of the tribunal, or relate to general questions of law about which the tribunal has no particular expertise.  If they are of that nature, then they will be set aside if they are not correct (the “correctness” standard).  All other decisions of administrative tribunals will only be set aside if, in all the circumstances, they are unreasonable (the “reasonableness” standard).

In its 2002 decision in Sheppard, the Supreme Court held that a court’s decision should be set aside for legal error if the reasons are totally inadequate.  Without adequate reasons, the person who loses does not know why.  Nor does the appeal court have a proper basis to review the original decision without adequate reasons. The “adequacy of reasons” provides a second and related basis for reviewing a decision of an inferior court or tribunal.

In two recent decisions, the Supreme Court applied the Dunsmuir and Sheppard principles to arbitral tribunals.  While both decisions relate to labour arbitrations, there is every reason to expect that the same principles will apply to commercial arbitrations.

In Nor-Man Regional Health Authority v. Manitoba Association of Health Care Professionals, the Supreme Court upheld an arbitrator’s decision in which the arbitrator had applied the principle of estoppel.  The arbitrator found that the company had breached the collective agreement.  However, he held that the union was estopped from complaining about that breach because it had failed to raise any complaint about the same conduct, and the same interpretation of the collective agreement, by the company over a 20 year period and numerous collective agreements.

The Supreme Court held that the arbitrator’s decision should be reviewed on the standard of reasonableness, not correctness, for three reasons:

First, labour arbitration decisions are normally reviewed on the reasonableness standard.

Second, the principle of estoppel is well known to labour law and highly suited to the ongoing relationships between management and its employees.

Third, (and most importantly for general arbitration law), the Supreme Court held that an arbitrator’s application of common law principles must not always meet the correctness standard.  An arbitrator’s decision applying general principles of law will only be reviewed on that standard if the decision raises legal issues “both of central importance to the legal system as a whole and outside the adjudicator’s specialized area of expertise.”  In the present circumstances, the arbitrator’s reliance on estoppel did not fall in that category.

In Newfoundland and Labrador Nurses Union v. Newfoundland and Labrador (Treasury Board), the Supreme Court upheld a labour arbitrator’s award relating to the calculation of vacation benefits.  That decision was attacked on the basis that it was unreasonable due to the paucity of reasoning in the award.  The Supreme Court applied the Dunsmuir/Sheppard principles and adopted a wide scope of reasonableness, both as to the deference to be shown to the arbitrator and the necessity for detailed reasons.  The Court held that:

The arbitrator’s decision should not be scrutinized by the court separately for adequacy of reasons and reasonableness of result.  These two ingredients are inter-related.  The court’s review process “is a more organic exercise – the reasons must be read together with the outcome and serve the purpose of showing whether the result falls within a range of possible outcomes.”

The arbitrator’s reasons need not include “all the arguments, statutory provisions, jurisprudence or other details the reviewing judge would have preferred.”  Nor need they include “an explicit finding on each constituent element, however subordinate, leading to the final conclusion.”

The reviewing court should not seek to subvert the arbitrator’s decision but supplement them by logic and reasonable inference.

The issue of adequacy of reasons cannot be boot-strapped into the standard of correctness by being labelled a matter going to procedural fairness and therefore a matter of law:  “Any challenge to the reasoning/results of the decision should therefore be made within the reasonableness analysis.”

While these decisions relate to awards of labour arbitrators, the principles they adopt are readily applicable to commercial arbitrations.  They will be particularly important in protecting a decision of a commercial arbitral tribunal from court review when it is alleged that the decision:

does not deal with all issues raised by the complaining party;

or erroneously decides or applies general principles of law;

or is unfair or outside the bounds of reasonableness.

On all these grounds, the Nor-Man and the Newfoundland and Labrador Nurses Union decisions of the Supreme Court will provide powerful support to the party seeking to uphold the award.

Nor-Man Regional Health Authority v. Manitoba Association of Health Care Professionals,  2011 SCC 59;

Newfoundland and Labrador Nurses Union v. Newfoundland and Labrador (Treasury Board) 2011 SCC 62

Arbitration – estoppel – standard of review – adequacy of reasons – challenging arbitral award

Thomas G. Heintzman O.C., Q.C.                                                                                                     January 20, 2012

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