Appellate Restraint and Commercial Reasonableness in Commercial Arbitration
The B.C. Court of Appeal’s recent decision in Spirit Bay Developments Limited Partnership v. Scala Developments Consultants Ltd., 2022 BCCA 407 highlights three important aspects of commercial arbitration appeals:
- First, Spirit Bay clarifies that commercial reasonableness is an important interpretative aid in contractual interpretation, but is neither determinative of a contract’s meaning nor a standalone requirement that overrides other considerations.
- Second, Spirit Bay illustrates a restrained approach to appellate review of arbitral awards: even if an arbitrator misstates the law, an appellate court generally will not intervene unless the error affected the award.
- Third, Spirit Bay, like several other recent appellate decisions (see our earlier blog post), leaves open the issue of whether Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65 changes the standard of review on a statutory appeal of an arbitral award. A majority of the Supreme Court of Canada has yet to resolve this issue.
Spirit Bay concerned a commercial dispute between a builder, Scala Developments Consultants Ltd. (“Scala”), and the developer of a large residential development project, Spirit Bay Developments Limited Partnership (“Spirit Bay”).
In 2015, Spirit Bay and Scala signed a contract whereby Scala would construct houses on lands leased by Spirit Bay and would receive a series of fixed payments upon achieving certain construction milestones. The contract provided that either party could terminate on 60 days’ notice and that, upon termination, Spirit Bay would pay “all moneys owed” to Scala.
In 2018, Spirit Bay terminated the contract and asked Scala to complete its work-in-progress. Within a few months, the parties reached an impasse on payment, and Scala stopped work.
Scala commenced an arbitration seeking damages for unpaid invoices. Spirit Bay commenced a counterclaim seeking damages for negligent construction work.
The Arbitrator’s Decision
The arbitrator ruled in Scala’s favour, awarding it over $1.7 million for unpaid invoices and lost profits, and dismissing Spirit Bay’s counterclaim.
In reciting the law on contractual interpretation, the arbitrator stated that the parties’ post-contractual conduct may be considered “regardless of whether there is ambiguity in the contract”. The arbitrator also stated that “a contract must be interpreted … in a commercially reasonable manner”. The arbitrator also referred to and applied principles of unjust enrichment.
On the evidence, the arbitrator found that the parties had entered into a second contract whereby Scala would complete the houses it was still working on at the time of termination, and Spirit Bay would pay for that work. The arbitrator also found that this contract ended when Spirit Bay improperly appropriated money that should have been paid to Scala.
The B.C. Supreme Court’s Decision
The B.C. Supreme Court allowed Spirit Bay’s Arbitration Act appeal in part. The court held that although the arbitrator had misstated the law on contractual interpretation, these errors did not affect the award. However, the court also held that the arbitrator had erred by applying principles of unjust enrichment in a contract dispute.
The B.C. Court of Appeal’s Decision
The Court of Appeal dismissed Spirit Bay’s appeal, allowed Scala’s cross-appeal, and restored the arbitrator’s award. In doing so, the Court of Appeal reached four main conclusions.
First, the Court of Appeal held that the arbitrator misstated the law on post-contractual conduct. As explained in our earlier blog post, post-contractual conduct may be considered only if the contract contains ambiguity—not, as the arbitrator stated, “regardless of whether there is ambiguity”. But the Court of Appeal held that this misstatement did not affect the award, so it declined to intervene.
Second, the Court of Appeal held that the arbitrator “somewhat overstated” the law on commercial reasonableness. The Court of Appeal clarified that commercial reasonableness is an “important interpretive aid”—even a “crucial consideration”—in interpreting a contract, but it is not “determinative” or a “standalone requirement overriding other considerations”. But, the Court of Appeal again held that this misstatement did not affect the award, so it declined to intervene.
Third, the Court of Appeal held that the arbitrator’s references to unjust enrichment principles were “unnecessary” and “potentially confusing” because his award was rooted in contract. Though again, the Court of Appeal again held that these references did not affect the award, so it declined to intervene.
Fourth, the Court of Appeal left open the issue of whether Vavilov changes the standard of review on a statutory appeal of an arbitral award. The Court of Appeal held that since the outcome of the appeal did not turn on the standard of review, it would leave the issue for another day.
- Commercial reasonableness. Commercial reasonableness is an important interpretative aid in contractual interpretation, but is neither determinative of a contract’s meaning nor a standalone requirement overriding other considerations. The guiding principle of contractual interpretation remains constant: a decision maker must read the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of contractual formation.
- Appellate restraint. Even if an arbitrator misstates the law, an appellate court generally will not intervene unless the error affected the award. Spirit Bay continues a broader trend of appellate restraint in Canada on review of commercial arbitral awards.
- Standard of review. The issue of whether Vavilov changes the standard of review on a statutory appeal of an arbitral award remains unsettled. Although three concurring justices in Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7 (see our earlier blog post) stated that the Vavilov framework applies on a statutory appeal of an arbitral award—and therefore questions of law are subject to correctness review—the majority in Wastech declined to resolve the issue. Absent a majority ruling, the issue remains unsettled.
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