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Supreme Court of Canada Shuts Down British Columbia’s Cottage Industry of Arbitral Appeals

Date

August 6, 2014

AUTHOR(s)

Michael Feder
Tammy Shoranick
Herman Van Ommen


Our partner Michael Feder was counsel for the successful appellant in this important appeal. Our partner Herman Van Ommen, Q.C. was counsel in the underlying arbitration and in the British Columbia courts. Please contact Michael at [email protected] or 604-643-5983, or Herman at [email protected] or 604-643-7973, if you wish to discuss.

The Supreme Court of Canada’s recent decision in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 will drastically limit appeals of arbitral awards in British Columbia, and has far-reaching implications for the law of contractual interpretation throughout Canada.

In British Columbia, as in many other provinces, legislation limits the appeal of domestic commercial arbitral awards to questions of law. Sattva establishes that contractual interpretation will almost always be considered a question of mixed fact and law given the central role of the factual matrix in the interpretation exercise. This will have two significant results. The first is to limit the ability of courts in British Columbia and other provinces to hear appeals of commercial arbitral awards, which almost inevitably involve the interpretation of a contract. The second is to erase persistent uncertainty in contract law regarding what comprises a question of law and regarding the relevance of the contract’s factual matrix.

Background

Contrary to the notion that arbitrations are efficient, decisive and private, the procedural history of this case is quite protracted and public. The parties, both sophisticated commercial entities, made an agreement that required Creston Moly to pay Sattva a finder’s fee in relation to Creston Moly’s acquisition of a mining property. A dispute arose regarding the manner of payment of the finder’s fee under the agreement. The parties submitted their dispute to binding arbitration. The arbitrator found in favour of Sattva, and awarded damages of over $4 million.

Creston Moly applied to the Supreme Court of British Columbia for leave to appeal the arbitral award, pursuant to s. 31(2) of the British Columbia Arbitration Act. Under the Act, an appeal from a domestic commercial arbitral award is permitted only with leave (or consent), and only on a question of law.

The Supreme Court of British Columbia dismissed Creston Moly’s leave application because it did not raise a question of law. Creston Moly appealed. The Court of Appeal for British Columbia granted Creston Moly leave to appeal the award, holding that a question of law had been identified. The matter returned to the Supreme Court of British Columbia for adjudication on its merits; the court dismissed Creston Moly’s appeal, holding that the arbitrator had correctly interpreted the parties’ agreement. Creston Moly again appealed. A different division of the Court of Appeal reversed the lower court’s decision and allowed the appeal, on the theory that both it and the lower court were bound by the Court of Appeal’s initial opinion about the merits of the appeal, which it had expressed when granting leave. Sattva appealed from both the decision of the Court of Appeal that granted leave and that which allowed the appeal.

The Supreme Court of Canada’s decision

The Supreme Court of Canada unanimously allowed the appeal and reinstated the arbitral award in full. Writing through Rothstein J., the Supreme Court concluded that the Court of Appeal erred in finding that the construction of the parties’ agreement constituted a question of law. Such an exercise raises a question of mixed fact and law, meaning that the Court of Appeal erred in granting leave to appeal. Further, the Supreme Court firmly rejected the notion that a court’s judgment regarding leave to appeal creates binding precedent regarding the merits of the appeal. Comments by a leave court regarding the merits of the question of law to be appealed cannot bind or limit the powers of the court hearing the actual appeal.

In coming to these conclusions, the Supreme Court held that it was time to abandon the historical approach to contractual interpretation, under which determining the legal rights and obligations of the parties to a written contract was considered a question of law. The court noted that contractual interpretation involves issues of mixed fact and law as it is an exercise in which the principles of contractual interpretation must be applied to the words of the written contract considered in light of the factual matrix. While the court stated that it may be possible to identify an extricable question of law in contractual interpretation (including legal errors such as the application of an incorrect principle, the failure to consider a required element of a legal test or the failure to consider a relevant factor), it also stated that the circumstances in which a question of law can be extricated will be rare.

Though unnecessary to its disposition of this appeal, the Supreme Court took the opportunity to establish three additional principles regarding appeals of arbitral awards. The first principle is applicable to appeals of arbitral awards generally. The second and third principles concern appeals under the Act specifically. All three principles cement the idea of deference to arbitrators and promote finality in the arbitration process:

  • First, in the commercial arbitration context, where appeals are restricted to questions of law, the standard of review is reasonableness unless the question is one that specifically calls for 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. In reaching this conclusion, the Supreme Court noted that the standard of review framework developed in Dunsmuir v. New Brunswick, 2008 SCC 9, [2008] 1 S.C.R. 190 is not entirely applicable in the commercial arbitration context, but nonetheless provides guidance in determining the appropriate standard of review.
  • Second, in the specific context of s. 31(2)(a) of the Act, assessing whether the legal question at issue “may prevent a miscarriage of justice”, as is required for leave to appeal, depends on whether the proposed appeal has arguable merit. An appeal has arguable merit if it cannot be dismissed on a preliminary examination.
  • Third, s. 31(2) of the Act confers a discretion to deny leave even where the requirements of s. 31(2) are met and an appeal is technically permissible. The Supreme Court enumerated specific discretionary factors that a court may consider, including the conduct of the parties, the existence of alternative remedies, undue delay and the urgent need for a final answer. The Supreme Court also noted that a court’s use of its discretion to deny leave to appeal should not be overturned lightly.

Significance

Parties often bind themselves to arbitration in lieu of the usual litigation process because of the perceived speed, cost-effectiveness, confidentiality and finality of arbitration. Nonetheless, in recent years, domestic commercial arbitrations in British Columbia had generally ceased to possess these characteristics, as parties had taken advantage of the courts’ willingness to hear appeals of arbitral awards in astounding numbers. A cottage industry of arbitral appeals had taken root. The effect of Sattva should be to shut down this cottage industry.

Most other provinces (Alberta, Manitoba, Ontario, New Brunswick, Nova Scotia, Prince Edward Island and Saskatchewan) have legislation similar to British Columbia’s and limit appeals of domestic commercial arbitral awards to questions of law. Though appeals of arbitral awards have been much less routine in these provinces, the Supreme Court’s decision in Sattva will ensure respect for the aim of their corresponding legislation to limit judicial intervention in arbitration and to ensure that commercial parties receive the benefits of arbitration for which they have bargained.

As a result of Sattva, parties seeking to appeal domestic commercial arbitral awards under the Act and similar legislation must now pass multiple hurdles, including:

  1. identifying a clear question of law, even though commercial arbitration usually revolves around contractual interpretation, which involves issues of mixed fact and law; and
  2. on appeal, establishing that an arbitrator’s decision was not merely incorrect but also unreasonable.

Outside the context of commercial arbitrations, Sattva is equally significant. First, Sattva confirms the central role of the factual matrix in contractual interpretation, despite earlier Supreme Court authority to the contrary. Second, by stating that contractual interpretation involves issues of mixed fact and law, the Supreme Court has significantly limited appellate review of all decisions interpreting contracts.

Expertise