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

Arbitration Award Enforced Through The Oppression Remedy

Arbitration law and corporate law are usually thought to be two separate legal categories. But when it comes to remedies, they can overlap, especially in Canada where the oppression remedy is available. In the recent decision in T.Films S.A. Future Films (Three) Ltd. v. Cinemavault Releasing International Inc., the Ontario Supreme Court of Justice relied upon the oppression remedy in the Ontario Business Corporations Act (OBCA) to enforce an arbitral award. Any parties coming to Ontario to enforce arbitration awards against Ontario corporations, or person or corporations affiliated with an Ontario corporation, should be aware of this means of enforcing the award.

Background

The applicants were Luxembourg and U.K. companies which in 2004 entered into a film sales agency agreement with the respondent Cinemavault, an Ontario company. That agreement provided that any disputes under it were to be resolved by arbitration in Toronto in accordance with rules and procedures established by the Independent Film and Television Alliance (IFTA).

The applicants commenced an arbitration seeking to exercise contractual audit rights and for unpaid distribution revenues. The respondents failed to participate in the arbitration and ultimately the arbitrator awarded the applicants damages and costs in the total amount of about US $496,000.00.

The award was not paid and in May 2013, the applicants applied to the Ontario Superior Court to enforce the award. In their application the applicants also sought enforcement of the award by way of the oppression remedy in the OBCA. The applicants also asserted the monies received by the respondents were trust funds held for their benefit. In a prior decision, another judge of Ontario Superior Court had granted judgment enforcing the award and ordered that the balance of the application be dealt with in a separate hearing. In addition, in a further hearing another judge of the Superior Court had dismissed the respondents’ argument that the oppression and trust fund claims ought to have been asserted by way of arbitration.

The Decision

The Court found that the individual person behind the Cinemavault companies had:

“used the Cinemavault companies interchangeably to achieve whatever ends were thought desirable at the time. He cannot, under the law articulated in Sidaplex-Plastic and SCI, supra, treat his corporations’ contractual and financial obligations like an elaborate shell game where, unless the pea happens to sit under the shell selected by a creditor, [the principal] and his companies are judgment proof.”

The court concluded that the re-orgainzation of the Cinemavault companies was “carried out for the purpose, of denuding CRI of its assets such that it was not in a position to fulfill its financial obligations to the applicants under” the sales agreement. The court accordingly concluded that the respondents had acted in a manner which was oppressive and unfairly prejudicial to the applicants.

In making an order against Mr. S., who was a director of Cinemavault, the court said that person was:

 “the directing mind of the Cinemavault operating corporations and the corporations, ……. which held the controlling interest over the operating corporations. He derived a direct personal benefit from the reorganization of Cinemavault’s business operations. Funds that the arbitrator found ought to have been paid to the applicants were diverted within the Cinemavault group to [the director’s] ultimate benefit. I conclude, therefore, that qua director [Mr. S]….. through the control he exercised over the Cinemavault companies, acted in a manner which was oppressive and unfairly prejudicial to Cinemavault’s creditors, namely the applicants. I therefore find [the director] to be personally liable for the arbitration award as well.”

The court also found that the funds received from the film distribution were trust funds in respondents’ hands. The Court then found that the respondents had knowingly participated in a breach of trust and knowingly received trust funds which they knew to be the rightful property of the applicants and were therefore liable for the arbitrator’s award for knowing participation in a breach of trust.

Discussion

It is unusual to see an application to enforce an arbitration award combined with other remedies. But this decision demonstrates that there may be more than one arrow in the enforcement quiver.

The oppression remedy is a particularly useful remedy if an arbitral award has been made against a corporation incorporated in a Canadian province. Most of those provinces have a Business Corporations Act or other corporate statute that contains the oppression remedy. The oppression remedy is available if the corporation, or its directors, officers or affiliates have conducted themselves in a manner which is oppression of, or unfairly prejudices the complainant or unfairly disregards the complainant’s interests. In some provinces, such as Alberta, creditors are listed as potential complainants. In other provinces, such as Ontario, creditors are not so listed and the court has to determine that a creditor is a proper complainant.

The oppression remedy usually provides a substantive remedy. That is, it usually addresses the wrongful conduct or management of the corporation which leads to a substantive wrong and the institution of an action or arbitral claim. But it may also provide a remedy after a judgment or award has been obtained, if oppressive conduct occurs which renders the corporation unable to pay the judgment or award. If that occurs, then the oppression remedy may be available to recover against the directors and affiliates who engaged in that conduct.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 10, part 9.

T.Films S.A. Future Films (Three) Ltd. v. Cinemavault Releasing International Inc., 2015 CarswellOnt 112, 2015 ONSC 6608

Arbitration – Enforcement of Arbitral Award – Oppression Remedy

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                             January 31, 2015

 

 

 

No Appeal From Order Appointing An Arbitrator: Ontario Court of Appeal

In a recent decision, the Ontario Court of Appeal has held that there is no appeal from an order appointing an arbitrator. This decision highlights the legislative policy in Canada that the courts should take a hands-off approach to arbitration.

Background

In Toronto Standard Condominium Corporation No. 2130 v. York Bremner Developments Limited, the parties had entered into an agreement called the Complex Reciprocal Agreement (the “CRA”). The CRA related to the management of the common facilities, areas and services of a condominium in a development called Maple Leaf Square. The CRA contained an arbitration clause.

The Condominium Corporation issued a notice of arbitration seeking arbitration under the CRA and the Arbitration Act, 1991 and proposed a named arbitrator. The CRA required the respondents to give notice whether or not they accepted the proposed arbitrator. The responding parties failed to give such notice. The Condominium Corporation then applied to the court for the appointment of an arbitrator, nominating two persons.

Decision of application judge

Before the application judge, the respondents took no issue with the process of proposing an arbitrator and did not object to the individuals proposed by the Condominium Corporation to act as arbitrator. Rather, they submitted that the issues proposed to be arbitrated did not fall within the arbitration agreement, and so there was no point in appointing an arbitrator. The application judge held that there was at least one issue that arguably fell within the jurisdiction of the arbitrator and that an arbitrator should be appointed and determine his jurisdiction, and appointed one of the nominees as arbitrator.

Decision of Ontario Court of Appeal

In the appeal, the respondents sought to argue that the application judge was required to assess each of the issues raised in the notice of arbitration and to refer only those that she determined were arbitrable or at least potentially arbitrable under the arbitration agreement. However, they accepted that the application judge had authority to appoint an arbitrator. They only took issue with the scope of the matters to be referred to the arbitrator.

The Court of Appeal held that the respondents in the application were not entitled to appeal the order appointing the arbitrator. That is because section 10(2) of the Arbitration Act, 1991 states that “[t]here is no appeal from the court’s appointment of the arbitral tribunal.” Accordingly, the respondents appeal was quashed.

The Court of Appeal distinguished its prior decision in Brennan v. Dole (2005), 11 B.L.R. (4th) 169. There, the court held the purported arbitration agreement was not enforceable by the respondents against the appellants. Accordingly, there was no basis for an arbitration proceeding against the respondent, and accordingly jurisdiction at all to appoint an arbitrator.

Discussion

This decision highlights two features of the Ontario Arbitration Act, 1991.

First, the Act states in a number of places that there is no appeal from an order made by the court relating to arbitration. Thus, as noted in this decision section 10(2) says there is no appeal from an order appointing an arbitrator. Section 7(6) says that there is no appeal from a court decision about staying an action when there is an arbitration agreement between the parties. Section 15(6) says that there is no appeal from an order removing an arbitrator (except for an order concerning fees or compensation). Section 17(9) says that there is no appeal from the court’s review of a preliminary decision by the arbitral tribunal as to its jurisdiction.

Clearly, these sections represent a policy that the courts should not be involved in the arbitral process. So if there is to be a review of the arbitral decisions mentioned in these sections, then there is to be only “one kick at the can”, and no more. Since these sections do not involve matters going to the merits of the dispute, the policy is to let the matter rest with no more than one level of court review.

Second, this decision reflects another feature of arbitral law in Canada, namely deference to the arbitral tribunal’s jurisdiction, and respect for the tribunal’s competence to decide its own competence – known as the competence-competence principle. In the present case, the Ontario Court of Appeal held that, as long as it was arguable that the arbitral tribunal had authority over something in relation to the dispute, it was the arbitral tribunal – and not the court – which should first decide what that authority was. Then, a party could seek review of that decision by the court. But in the first instance, the respondent could not require the court to define the jurisdiction of the arbitral tribunal during the arbitral-appointment process.

There is a limit to that deference, however. The courts have allowed appeals if the legal issue or jurisdictional issue is clear. Thus, if a stay of a court proceeding is refused on the ground that no arbitration agreement is in place, then an appeal may be taken since the issue is entirely legal or jurisdictional. And as the Brennan v. Doyle case shows, if on a correct view of the facts and law there is no arbitration agreement applicable to the dispute, then an appeal may be taken from an order appointing an arbitrator.

All of which shows that in Ontario, both the statute and judicial policy are in favour of letting the arbitrator make the first decision about the jurisdiction of the arbitrator, but only if there is an arguable basis for that jurisdiction.

Toronto Standard Condominium Corporation No. 2130 v. York Bremner Developments Limited, 2014 ONCA 809

arbitration – appointment of arbitrators – appeal – competence-competence

Thomas G. Heintzman O.C., Q.C., FCIArb                                                         January 15, 2015

www.heintzmanadr.com

www.constructionlawcanada.com

Ontario Court Has No Power To Extend Period For Setting Aside A Domestic Arbitral Award

In R & G Draper Farms (Keswick) Ltd. v. 1758691 Ontario Inc., the Ontario Court of Appeal recently held that an Ontario court has no power to extend the time for an application to review or appeal from a domestic arbitration award. This is an important decision for anyone involved in arbitrations, especially in light of the short period for reviewing domestic arbitral awards found in most of the Arbitration Acts across Canada and the longer limitation period for seeking review of international commercial arbitration awards.

The Background

The dispute arose from contracts for the purchase and sale of carrots between two Ontario-based farming concerns. The parties submitted their disputes to the Fruit and Vegetable Dispute Resolution Corporation (DRC) for resolution in accordance with the DRC’s mediation and arbitration rules. The arbitrator awarded $58,507.42 to the respondent, ATV.

R & G applied to the Superior Court of Justice to set aside the arbitral award. That application and R& G’s appeal to the Ontario Court of Appeal were dismissed. Both courts held that the application had been commenced outside the 30 day period for applying to set aside an arbitral award under section 47 of the Ontario Arbitration Act, 1991. That Act, like those in many provinces in Canada, is modelled on the Uniform Arbitration Act prepared by the Uniform Law Conference for domestic arbitrations.

The limitation period for applying to set aside an award of an international commercial arbitration tribunal is much longer than that provided for in the Uniform Arbitration Act. Under Article 34 of the UNCITRAL Model Law attached to the International Commercial Arbitration Act of Ontario and similar statute in most other provinces, the period for bringing an application to set aside an arbitration governed by that Act is three months.

The Court of Appeal’s decision in R & G Draper Farms can be summarized as follows:

First: The arbitration was a domestic, not an international commercial, arbitration for the following reasons: both parties had their place of business in Ontario; the carrots were grown, sold by R & G to ATV; processed and resold to R & G in Ontario; the parties had not agreed that the subject-matter of the arbitration related to more than one country; and the dispute was arbitrated in Ontario.

While the DRC described itself and its mandate as international, and while the carrots were bought for shipment to a California customer, those elements did not make the arbitration international. ICAA’s definition of “international arbitration” does not turn on the reasons for or mandate of the organization administering the arbitration process, but rather on the location of the place of business of the parties, the location of the actual arbitration, the place where the obligations are performed and the place the subject matter of the arbitration is connected with. All of those elements were in Ontario.

Accordingly the limitation period in the domestic statute, not in the international statute, applied.

Second: Section 47 of the Arbitration Act, 1991 gave the court no power to extend the 30 day period for applying to set aside the arbitral award. There was no prior decision that supported such a power. Nor does the Act support a judicial discretion to extend the s.47 time period. In other sections of the Act, the relaxation of time periods is contemplated, but no such provision is made with respect to the 30-day time period in s.47.

Discussion

There are several reasons why this decision is important and of concern.

First, there seems to be no good reason to have different time periods for applying to set aside an arbitral award, one dealing with domestic arbitrations and the other with international arbitrations.

Second, a thirty-day period to set aside an arbitral award is quite short. The three month period prescribed under the UNCITRAL Model Law seems to provide a more realistic period in which to absorb the reasons of the arbitral award and make an informed decision about seeking to set it aside. Certainly the three month period in the Model Law is the internationally accepted time period for doing so and there seems to be no good reason to have a different one for domestic awards in Canada.

Finally, in British Columbia, the court has the power to extend the time period in the domestic arbitration statute, including the time to set aside or appeal an arbitral award (which is 60 days in British Columbia, not 30 days). Should the right to seek an extension of the period for setting aside an arbitral award be consistent across Canada?

R & G Draper Farms (Keswick) Ltd. v. 1758691 Ontario Inc. 2014 ONCA 278

Arbitration – Setting aside arbitral award – Limitation Periods

Thomas G. Heintzman O.C., Q.C., FCIArb                                           August 28, 2014

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

Can An Arbitrator Decide An Issue Falling Within A Statutory Regime?

The recent decision in Advanced Explorations Inc. v. Storm Capital Corp. dealt with the question of whether an arbitral tribunal has the authority to decide an issue arising out of a statutory regime over which a regulatory tribunal has specific authority. That question is a thorny jurisdiction issue in the law of arbitration. The decision was rendered by Justice Graeme Mew of the Ontario Superior Court who was, until his recent appointment to the bench, a well-known litigation counsel and arbitrator. His decision that the arbitral tribunal had authority to decide the issue is of additional interest due to his experience in the field of arbitration.

Background

Storm Capital (“Storm”) entered into a Finder’s Fee Agreement with Advanced Explorations Inc. (“AEI”) under which Storm was to seek investors for AEI. In the Finder’s Fee Agreement, the parties agreed to resolve “any dispute, difference of opinion or question … touching on this Agreement or any part thereof” by arbitration. The arbitrator’s decision “shall be binding and conclusive on all parties in interest and no appeal shall lie there from.”

One of the investors introduced by Storm to AEI made investments in the company. AEI refused to pay Storm a finder’s fee for the investments. The parties went to arbitration and the arbitrator held that Storm was entitled to compensation. The arbitrator found that there was a nexus between Storm’s introduction and the investments and that the transactions resulted from the introduction and that therefore Storm was entitled to the finder’s fee.

The arbitrator rejected AEI’s argument that Storm was required to be registered as an LMD/EMD under the Securities Actso as to ensure that it would be compliant with the applicable securities laws (the “securities issue”).

AEI then applied to court to set aside the arbitration award and Storm filed a cross-application to enforce it. Justice Mew dismissed the application and granted the cross-application to enforce the arbitration award.

The Decision

There are three important aspects of Justice Mew’s decision.

First, Justice Mew considered AEI’s submission that the award should be set aside as unreasonable. Justice Mew reviewed several conflicting decisions dealing with the question of whether the court has authority to set aside an arbitral award based upon unreasonableness, and in particular the decision of the Ontario Court of Appeal in Smyth v. Perth & Smiths Falls District Hospital (2008), 92 O.R. (3d) 656. In Smythe, the Court of Appeal considered whether the result was “reasonable” as that term has been defined in Dunsmuir v. New Brunswick, even though the parties had agreed that the arbitration would be the final determination of the issue and that there would be no appeal. Justice Mew noted that the Court of Appeal did not identify the source of its authority to review an arbitral award for reasonableness and he agreed with the view, stated by some commentators, that Smyth is “at best ambiguous” as authority for such a proposition. However, he concluded that even if Smyth was authority for an arbitrator’s award to be reviewed for reasonableness, the arbitrator’s award was reasonable for the reasons referred to by him in the balance of his decision.

Second, Justice Mew dealt with AEI’s submission that the arbitrator’s decision was wrong because the arbitrator had relied upon conduct and agreements other than the Finder’s Fee Agreement itself in interpreting that agreement and the arbitration clause in it, even though the arbitrator had found that the Finder’s Fee Agreement was “clear and unambiguous”.
Justice Mew held that the arbitrator had concluded that“ “the context and factual matrix into which the [Finder’s Fee Agreement] was born” was important to understanding the terms of the contract” and looked to a prior agreement for that reason. However, the arbitrator had “anchored AEI’s liability to Storm in the language of the Finder’s Fee Agreement, and at no point did he incorporate a term or condition from a prior contract.” Justice Mew held that “when ascribing meaning to the various terms of the contract, the arbitrator was entitled to take note of the parties’ sophistication and prior dealings with each other.”

Third, Justice Mew addressed AEI’s submission that the arbitrator usurped the role of the Ontario Securities Commission (OSC) and Toronto Stock Exchange-Ventures (TSX-V) by deciding whether Storm was required under law to be registered as a LMD/EMD. This “securities issue” pertained to whether Storm was eligible to receive compensation under the Finder’s Fee Agreement. AEI submitted this issue was “not capable of being the subject of arbitration under Ontario law.”

Justice Mew held that AEI had waived its right to raise this argument by placing the issue before the arbitrator, as it had done, and then not asserting any definitive position before the arbitrator during the hearing.

In any event, Justice Mew held that the arbitrator had the jurisdiction to decide this matter. He applied the principle of “competence-competence” which is well known to arbitration law, namely that an arbitral tribunal has jurisdiction to decide in the first instance what matters are within its jurisdiction. Here, the arbitrator had raised the question of his jurisdiction on the securities issue with the parties, and had implicitly found that he had jurisdiction when he made his award, and any review of that award would be undertaken on the standard of correctness.

Justice Mew then found that the arbitrator had the jurisdiction to deal with the securities issue and that nothing in the Ontario Securities Act(OSA) deprived the arbitrator of jurisdiction. His remarks (leaving out the citations to cases) bear repeating at some length:

“Public policy in Ontario favours respect for the parties’ decision to arbitrate. The Arbitration Act, 1991 is designed … to encourage parties to resort to arbitration as a method of resolving their disputes in commercial and other matters, and to require them to hold to that course once they have agreed to do so……If the legislature wishes to preclude an issue from being the subject of arbitration, it must expressly state this intention…It is not enough that the subject matter over which arbitration is sought be subject to regulation or concern the public order……  AEI is correct that Ontario law establishes a comprehensive regime for the regulation of securities within the province, and that the OSC and the TSX-V are given wide-ranging powers of supervision…..However, no provision in the OSA or other statute was referred to that expressly precludes arbitration on matters of securities law. I also do not read the jurisprudence to evince a public policy that an arbitrator is unable to rule on securities matters…. On the contrary, the securities regulators are not given exclusive jurisdiction to decide questions of compliance with Ontario securities law. For example, under s. 128(1), the Superior Court of Justice may issue declarations on whether a person or company has complied with the OSA and the regulations promulgated thereunder. In addition, certain decisions of the OSC may be appealed to the Divisional Court, and the court on appeal has the power to “direct the Commission to make such decision or to do such other act as the Commission is authorized and empowered to do under this Act or the regulations and as the court considers proper”: OSA, ss. 9(1), 9(5). Private parties may also bring actions to redress injuries suffered from improper securities practices (even though the OSC could bring an enforcement action for the same misconduct): see OSA, ss. 130-138.14. 70.” (emphasis added)

Justice Mew also rejected AEI’s submission that AEI should not be placed in the position of contravening the securities laws of Ontario. The evidenced did not support a finding that AEI would violate securities laws if the finder’s fees were paid. In any event:

“the fact that AEI might have to choose between compliance with the arbitration award and compliance with its regulatory obligations goes to the question, not before the court at the present time, of whether AEI would be held in contempt of court if it refuses to pay. That is a separate matter from the question of whether the arbitrator lacked the jurisdiction, as a matter of Ontario law, to rule on the Securities Issue in the first place.”

On the issue of enforcement, Justice Mew held that, under section 50(3) of the Ontario Arbitration Act, 1991, once he had rejected the grounds for setting aside the award he had no discretion to refuse enforcement of a valid and final non-family arbitration award and he ordered that it be enforced.

Discussion

Each of the three issues addressed in this decision are important, but this comment will focus on the first and third.

The first issue is whether an arbitration award can be reviewed on the grounds of reasonableness. That issue was addressed by me in my blog of November 24, 2012 in which I discussed the Smythdecision. As Justice Mew mused in the present case, one is left to wonder where that authority is to be found. Section 46 of the Ontario Arbitration Act, 1991 sets forth very specifically and at some length the grounds for setting aside an arbitration award. Unreasonableness, or even an error in law, is not found in that section as a ground to set aside such an award. In the case of domestic arbitrations, the reason for that position appears to be clear: in their arbitration agreement, the parties may provide for appeals on matters of law (and fact), and if they do not then they can seek leave to appeal on a matter of law. And under the Ontario Act, they can agree that there shall be no appeals. So issues and mistakes of law are addressed as part of the arbitration process, not for setting aside arbitral awards. If there is an error or law, then the parties can appeal if they have so provided or seek leave to appeal if they have not provided at all, but not if they have specifically agreed that they cannot do so, as in this case.

The concept of review of a tribunal’s decision on the ground of unreasonableness is found in the law relating to the judicial review of the decisions of governmental officers, bodies and tribunals. As Justice Mew noted, there is no apparent source of authority for that sort of review in section 46(1) of the Ontario Arbitration Act, 1991.   Hopefully an appellate court will address this issue again soon.

The third issue is of equal importance: does a regulatory regime imposed by statute preclude arbitration? Here, Justice Mew made two decisions.

First, he held that unless such a statutory regime specifically excludes arbitration or does so by necessary implication, then parties can arbitrate an issue which pertains to their agreement even if it also pertains to the statutory regime of a government regulator. This decision is of considerable importance to persons engaged in businesses which are regulated to some extent or another, which includes just about any business today. For instance, the construction industry is impacted by zoning and building bylaws, and any businesses which hire employees are subject to labour relations statutes. Justice Mew has held that those regulatory regimes do not preclude the parties putting the same issues into their contracts and having them determined by arbitration as between themselves.

The second point is one of illegality. At some point, the dispute issue may involve an alleged illegality under the regulatory regime and the arbitrator may have to decide whether the illegality is so central to the claim being made that no relief should be granted. But that is an issue to be dealt with under the law of contract dealing with illegalities, which is another subject but one which an arbitral tribunal would apparently have no difficulty in determining. And even if the remedy awarded by the arbitrator would enforce an illegality, then the court may not find the respondent to be guilty of a contempt of court if the award is not obeyed. But that does not remove the arbitrator’s jurisdiction to address the issue in the first instance.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed. Chapter 10, part 3.

Advanced Explorations Inc. v. Storm Capital Corp.2014 CarswellOnt 8794, 2014 ONSC 3918

Arbitration – Jurisdiction of the Arbitral Tribunal – Enforcing and Setting aside Arbitral Awards – Illegality – Waiver – Regulatory Regime

 

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                   July 18, 2014

www.heintzmanadr.com

www.constructionlawcanada.com

 

When May A Mareva Injunction Be Issued To Enforce An International Commercial Arbitration Award?

In Sociedade-de-Fomento Industrial Private Ltd. v. Pakistan Steel Mills Corp. (Private) Ltd, the British Columbia Court of Appeal recently considered the use of a Mareva injunction to enforce an award of an international commercial arbitration. The court over-turned the lower court’s decision which had denied that remedy based upon alleged material non-disclosure. In doing so, the court’s remarks add further support for the regime of international commercial arbitration. The court also issued a caution about applying the principles relating to domestic pre-trial injunctions when enforcement is sought of a foreign arbitral award since that award is already a judgment which deserves to be respected as such, subject to the limited objections to enforcement found in the provincial International Commercial Arbitration Acts and their adoption of the UNCITRAL Model Law.

Background Facts

The appellant SFI is an Indian company and the respondent PSM is a Pakistani state corporation. SCI commenced an international commercial arbitration claim against PSM claiming damages for breach of a contract for the sale of iron ore. In June 2010, SFI obtained an award in the arbitration in an amount equivalent to Cdn. $8.6 million. PSM failed or refused to pay the award despite repeated demands for payment. SFI learned that PSM owned a load of coal which was to be shipped out of Vancouver. In April 2011, SFI filed a petition in the B.C. Supreme Court seeking payment of the amounts owed under the arbitral award. Before the hearing of its petition, SFI applied for and obtained an ex parte Mareva injunction restraining the use of PSM’s assets in British Columbia, including preventing the vessel from leaving British Columbia or PSM from disposing of assets aboard any vessel in British Columbia without first paying into court security for the award.

PSM alleged that SFI had wrongly obtained the ex parte injunction. It said that SFI had not explained to the judge who issued that injunction why it could not enforce the arbitral award in Pakistan, and indeed had wrongly told that judge that it would have challenges in enforcing that award in Pakistan. PSM effectively took the position that the award should be first enforced in Pakistan and only then should it be enforced in another jurisdiction. Since SFI had not yet obtained the recognition of the arbitral award from the B.C. court when it obtained the injunction, that injunction was in the nature of a Mareva injunction and a material non-disclosures about the enforcement of the award in Pakistan meant that the injunction order should be set aside, PSM argued.

The motions judge hearing the motion to set aside the injunction agreed. She held that the failure of SFI to properly explain why it couldn’t enforce the award in Pakistan amounted to material non-disclosure and she set aside the injunction.

Decision of the B.C. Court of Appeal

In allowing the appeal, the Court of Appeal undertook a detailed analysis of the law relating to international commercial arbitrations to demonstrate that the premises of the motion judge’s decision were incorrect.

First, the court noted that the enforcement of international commercial arbitration awards is not based on comity arising from a connection of the dispute or arbitral award to the regime of enforcement, in this case British Columbia. Rather, it is based upon an enforcement regime arising from an international treaty – the New York Convention. That regime requires the contracting states to enforce international arbitral awards made pursuant to the laws of another contracting state. And that enforcement is without regard to any connection of the dispute to the enforcing state, a connection which is presumed to exist for the purpose of enforcement, both for purposes of final enforcement and any interlocutory steps toward enforcement. The court said:

“The New York Convention and the enabling legislation in British Columbia recognize an international arbitration award on the same basis as if it were a domestic award originating in this province. The language of the legislation is not ambiguous in this regard. A real and substantial connection is presumed to exist. It would be illogical to ignore this presumed jurisdictional connection for interlocutory purposes, but recognize it for final judgment purposes. The statutory scheme anticipates an action to enforce the award. There are only limited grounds on which the defendant could dispute the award in a recognition action per art. V of the New York Convention and s. 36 of the International Commercial Arbitration Act. I reiterate that I do not see how a real and substantial connection could exist for some but not all purposes in pursuing the claim through to judgment and enforcement…..I conclude that the recognition and enforcement proceeding is akin to a domestic proceeding, and that the judge ought to have approached the application on the basis that it was akin to a domestic proceeding.” (emphasis added)

 

Second, the court said that the decision to issue a Mareva injunction arising from an award of an international commercial arbitration tribunal depends upon the justice and convenience in doing so. The court stated the following principles that should be applied to that decision:

The overarching factor in granting the injunction is whether doing so achieves a balance of justice and convenience between the parties… Depending on the facts of the case important factors may include the merits of the underlying claim, the risk of dissipation of the asset, the balance of convenience and the interests of third parties…In my view, the following factors militated towards a finding that the injunction was properly ordered: first, the merits of SFI’s claim were very strong, approaching certainty given the limited grounds upon which the claim could be defended; second, the assets were about to leave the jurisdiction; third, the debtor had refused to pay the award over the ten months since it had been made; and, finally, damage to the third party could be alleviated, as it was, by SFI’s fortified undertaking…. On the other side of the equation was the presumably significant inconvenience of arresting and detaining a ship with a valuable commodity on board in circumstances where the commodity’s value exceeded the amount of the Final Award. None of these latter factors persuaded the granting judge to decline the injunction application, nor did they factor into chambers judge’s analysis in a decisive way. (emphasis added)

Third, the enforcement of an international commercial arbitration award in one contracting state does not depend upon whether efforts to enforce the award have been made in another contracting state more connected to the party against whom the award was made. The court did say that the efforts to enforce the award may be relevant to a decision by the court to issue an injunction – or might be made relevant by the applicant submitting evidence about those efforts – but enforcement of the award in British Columbia did not necessarily depend upon enforcement first in Pakistan. The court said:

“The availability of enforcement proceedings in Pakistan was not in my view an entirely irrelevant factor. In some cases, but not this one, a strong case might be made out that there was no risk of dissipation because of other available enforcement proceedings. Such considerations may properly be part of the balance of convenience analysis. Where, in my view, the chambers judge erred was in her implicit assumption that there was an onus on the appellant to turn first to Pakistan’s courts because of the parties’ limited association with British Columbia…” (emphasis added)

The B.C. Court of Appeal acknowledged that the availability of enforcement proceedings in Pakistan could be a factor in determining whether a Mareva injuction should be issued. However, the court held that there had been no misrepresentation about the efforts to enforce the arbitral award in Pakistan and that the motion judge had applied the wrong test to that issue:

“[The motion judge] reviewed the appellant’s disclosure through the lens of her erroneous conclusion that the onus was on the appellant to establish it could not enforce the award in Pakistan. As I have already said that is not the test. In any event, the appellant did not say that the award could not be enforced, rather he stated that enforcement would be “challenging” which implies it could have been enforced, but with some difficulty. The analysis should have been directed more to the question of whether considering all the circumstances, it was just and convenient to grant the injunction. The judge’s balance of convenience analysis ought to have taken into account the delay that would accompany enforcement proceedings in Pakistan, as well as the considerable doubt about the enforcement of that part of the award representing interest under Pakistani law…I cannot agree with the chambers judge that the appellant failed to disclose a material fact. The amplified evidence supports the representation that enforcement of the Final Award would be challenging in Pakistan. There is no amplified evidence that materially alters the balance of convenience analysis done by the granting judge.

Discussion

This decision of the British Columbia Court of Appeal provides a strong endorsement of the enforcement regime relating to international commercial arbitration awards. The New York Convention is all about enforcement of those awards. Virtually the sole purpose of the New York Convention is to provide mechanism for the enforcement of awards in signatory countries. Without that enforcement regime, the Convention is nothing.

The proper place of a Mareva injunction in that enforcement process can be a matter of debate. On the one hand, there is an award already, so that the injunction can be seen as a post-judgment enforcement of the award. On the other hand, the award has not been recognized in the state in which it is now sought to be enforced, in this case British Columbia, so that the Mareva injunction can be seen as pre-judgment enforcement.

The British Columbia Court of Appeal effectively neutralized that debate by holding that the real question is not whether the enforcement is pre or post judgment, but whether it is just and convenient to grant such an injunction. In making that decision, the court pointed to a number of factors that are important from the standpoint of international commercial arbitration.

First, under the International Commercial Arbitration Act of British Columbia (and most Canadian provinces) and the UNCITRAL Model Law, the grounds for refusing to enforce the arbitral award are very limited. So the first question on the injunction motion –is there a strong case on the merits? – has to be answered from that perspective.

Second, the applicant for the injunction does not have to prove that the award can or cannot be enforced in another jurisdiction. While the use and availability of other enforcement remedies may be material to the judge’s decision to grant a Mareva injunction, the applicant does not have to prove that it cannot enforce the award elsewhere. This conclusion shows that the system for the enforcement of international commercial arbitration awards is truly an international system. It is not based upon a presumption that the enforcement of the award is tied to any specific jurisdiction.

See Heintzman and Goldsmith on Canadian Building Contracts, (4th ed.) chapter 10, parts 1 and 2.

Sociedade-de-Fomento Industrial Private Ltd. v. Pakistan Steel Mills Corp. (Private) Ltd, 2014 CarswellBC 1499, 2014 BCCA 205 (B.C.C.A.)

Arbitration – International Commercial Arbitration – Enforcement of Arbitral Awards -Injunctions – Mareva Injunctions

Thomas G. Heintzman O.C., Q.C., FCIArb                                                     June 29, 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

What Authority Does The Court Have To Interfere With Decisions Of Arbitrators?

This article will discuss the attitude of Canadian courts toward reviewing arbitral decisions.  The decisions of Canadian judges reflect the legislative regime in the provincial Arbitration Acts which mandates a starkly different approach toward final arbitral awards as opposed to interlocutory decisions (that is, decisions made by the tribunal during the proceeding, and not the final award).  That regime allows Canadian courts to have little hesitation in setting aside final awards if they offend fundamental principles of justice, but directs that interlocutory arbitral decisions are practically inviolate.

The Decisions

In Toyota Canada Inc. v. Ali, the British Columbia Supreme Court  recently set aside an arbitrators decision when the arbitrator allowed evidence in the form of consumer complaints downloaded from the Internet to be adduced without further proof and refused to allow Toyota to obtain the information in the  the “black box” out of Mr. Ali’s car. Mr. Ali alleged that the software in his Toyota automobile was defective and caused the car to accelerate, causing an accident.  Toyota said that the information in the black box might disclose whether or not Mr. Ali had his foot on the accelerator and/or the brakes at the time of the accident. The arbitrator held that that the data from the black box would not be necessary as it would not have any effect on his decision.  The arbitrator proceeded to find that, in the condition described by Mr. Ali, the vehicle was not operating as intended and was therefore malfunctioning. The arbitrator held that this condition must be considered a manufacturing defect.

The B.C. Supreme Court set aside the arbitrators’ decision holding that in admitting hearsay evidence from the Internet without considering the purpose for which it is introduced, whether it is relevant and whether it may be fairly regarded as reliable, and in refusing to admit relevant evidence from the “black box”, the arbitrator had acted in breach of the rules of natural justice.

In Suncor Energy Inc. v. Alberta, Suncor and the province of Alberta were engaged in an arbitration.  Suncor brought an application to the arbitration tribunal for an order that the Province produce certain disputed documents which the Province acknowledged were relevant and material and in its possession and control but which, it asserted, it was legally not obliged to produce. The Province asked the arbitration tribunal to order a question of law to be determined by the court on this issue. The tribunal held that it had the jurisdiction to rule on Suncor’s motion and should do so, and refused to refer the matter to the court as requested by the Province. The Province appealed to the court.  The Province asserted that the documents in issue dealt with or affected the rights of third party producers and their rights to the statutory protections under the Mines and Minerals Act, and that for this reason the tribunal had no jurisdiction to order their production. The Province relied upon several cases in which it had been held that arbitral tribunals did not have the power to make orders against third parties.
The Alberta Court of Queen’s Bench dismissed the appeal. It held that the authorities relied upon by the Province dealt with orders directly affecting third parties, by requiring the third party to attend an examination for discovery or be subject to a Mareva injunction.  The orders sought by Suncor only applied to the Province. While the disputed documents had been provided to the Province by third party producers with the statutory promise of confidentiality under the Mines and Minerals Act, that Act did not create a privilege for the documents and the implied undertaking only to use the documents for the purpose of the arbitration should provide sufficient protection.  The arbitral tribunal had jurisdiction to deal with Suncor’s motion for production. Following decisions of the Ontario Court of Appeal, the Alberta court held that there was no appeal from the interlocutory decision of the arbitral tribunal under section 44 of the Alberta Arbitration Act.

Discussion

The contrast between these two decisions could not be greater. In the Toyota case, the B.C. court was not prepared to countenance any failure by the arbitrator to adhere to procedural fairness. Clearly, the court found it unacceptable that an arbitrator could find an automobile to be defective based upon postings of complaints on the Internet and in the absence of the information from the black box in the automobile which was intended to collect operational information. But the arbitral regime was Canadian Motor Vehicle Arbitration Plan (the “CAMVAP”) set up by Canadian automotive manufacturers, and the arbitrators are presumably selected for their experience, or accumulate experience in the course of the arbitrations they conduct.  Yet, the court was not prepared to accept anything short of the evidentiary rules applied by courts.

In the Suncor case, the Alberta court held that it had no jurisdiction to even touch the issue.  It was for the arbitrator and not the court to decide whether to order the production of documents in the possession of a party, even if that decision involved documents which the party had received from others. The Arbitration Act had made that decision for the court.

Have the provincial Arbitration Acts made the right policy choices?  Should the courts have a more restricted power to review final awards? Should there be a more flexible jurisdiction for the courts to review interlocutory awards?  Should third parties whose rights are potentially affected be given notice of arbitral proceedings?

On its face, the legislature seems to have struck the right balance. For centuries, final awards have been reviewed by courts for their legality.  The Uniform Arbitration Act was promulgated by the Uniform Law Conference of Canada (ULCC) (see https://www.ulcc.ca/en/uniform-acts). The Uniform Act has been adopted in most provinces. A great deal of thought went into that Uniform Arbitration Act before it was published by the ULCC. The Act reflects a conscious decision to limit the review of final arbitral awards to specific grounds and to eliminate in most cases the review of interlocutory arbitral decisions.   We can see the result of that decision in the Toyota and Suncor decisions.  While the contrast between the two review systems is great, there seems to be no good reason to reverse the policy decision.

See Heintzman and Goldsmith on Canadian Building Contracts (4th ed.), chapter 10, parts 3, 5 and 6.

Toyota Canada Inc. v. Ali 2013 Carswell BC 3159; 

Suncor Energy Inc. v. Alberta 2013 CarswellAlta 2530

Arbitration – Final Award and Interlocutory decision of Arbitral Tribunal – Judicial review of arbitration awards – Alternative dispute resolution – Grounds for review  – Public Contracts – Natural Justice – Third Party Rights

 

Thomas G. Heintzman O.C., Q.C., FCIArb       January 19, 2014

www.heintzmanadr.com

www.constructionlawcanada.com

Alberta Court Of Appeal Holds That A Court Action Is Not A Notice Of Arbitration

In previous articles I have warned readers about the dangers of the limitation period in relation to arbitration claims. You can look at my prior articles dated July 17, 2011, February 26, 2012 and August 26, 2012. These dangers are highlighted by the recent decision of the Alberta Court of Appeal in Lafarge Canada Inc. v. Edmonton (City).  The court held that that a Statement of Claim in an action is not a notice of arbitration under an arbitration clause. This may mean that an arbitration claim subsequently commenced is outside the limitation period.

Background

Lafarge entered into a contract with the City to provide cement pipe for a light rail transit project. The City alleged that Lafarge had not delivered the pipe in a timely manner and it set off the delay costs against Lafarge’s invoices. The supply contract contained an arbitration clause which stated that “if any disputes arise under the Contract and the parties are not able to resolve it, the parties shall appoint a single arbitrator to conduct an arbitration in accordance with the Arbitration Act.”

On May 28, 2009, or about 22 months after the dispute arose, Lafarge and the City entered into a standstill agreement.  That agreement provided that the limitation period did not run during the term of that agreement, that the parties could terminate that agreement and that if they did then the parties had 3 months to commence proceedings before the limitation period would apply. Lafarge terminated the standstill agreement on February 2, 2011 and commenced an action on February 11, 2011.  The City served its Statement of Defence on March 14, 2011, the City pleading inter alia that the parties had agreed to submit any disputes arising under the contract to arbitration. In delivering the Statement of Defence, the City’s solicitor said: “I think arbitration may be mandatory but we [sic] happy to discuss future process”. In July 2012 Lafarge delivered its documents and the City said that it would move to stay the action on the basis of the arbitration clause, and also asserted that Lafarge’s claim was now statute barred.  The City’s motion was not brought until June 2012.

Chamber Judge’s Decision

The chambers judge held that the Statement of Claim in the action was a sufficient notice of arbitration under s. 23 of the Alberta Arbitration Act. Section 23 states an arbitration may be commenced in any way recognized by law, including the following:

(a)   a party to an arbitration agreement serves on the other parties notice to appoint or to participate in the appointment of an arbitrator under the agreement; and

(b)   a party serves on the other parties a notice demanding arbitration under the arbitration agreement.

The judge therefore found that there were no limitations defence which applied and that the arbitration process had been sufficiently notified to the City by Lafarge in time under s. 23 of the Arbitration Act. The chambers judge held that in those circumstances it was unnecessary for him to address alternative issues concerning delay and attornment.

Alberta Court of Appeal’s Decision

The Alberta Court of Appeal reversed the chambers judge’s decision, holding that the Statement of Claim was not a notice of arbitration under section 23 of the Alberta Arbitration Act. The court held that to treat the Statement of Claim “as a form of notification of arbitration under s. 23 does not amount to giving a liberal reading to s. 23 of the Act but bursts its conceptual boundaries,” and that “to characterize what amounts to the opposite of notice to commence arbitration as being the same as notice to commence arbitration would take s. 23 outside the scope of predictable meaning.”

The Court declined to decide any issues arising from its decision, and in particular whether the City had attorned to the court’s jurisdiction or whether its delay precluded it from bringing the stay motion. The Alberta Court of Appeal returned the matter to the Court of Queen’s Bench to consider whether there should be a stay of the lawsuit in light of waiver, including attornment and delay in the stay application.

Discussion

As I have said in my prior articles, people tend to forget about limitation periods in respect of arbitration claims because they think they already have a contract so there must be an entitlement to assert an arbitration claim. Since there is no court office in which to start the arbitration claim, people tend to assume that there is no formality to the commencement of the arbitration claim. Not so. The provincial Arbitration Acts have very specific criteria about what amounts to the commencement of an arbitration claim. If those criteria are not met, then no arbitration claim has been commenced and the limitation period continues to run.

So, in the present case, Lafarge commenced an action within the limitation period stated in the standstill agreement but not an arbitration claim as defined in the Alberta Act. The Alberta Court of Appeal has held that the action did not amount to an arbitration claim.  While Lafarge may be held entitled to continue with its action by reasons of the City’s waiver, attornment or delay, the Alberta Court of Appeal’s decision means that it has not commenced an arbitration claim so far as the limitation period is concerned.

The fairness of this decision could be questioned. If the City knew of the claim through the commencement of the action, should it thereafter be able to rely on a limitation period? Should the City be required to renounce a limitation defence in the arbitration when seeking a stay of the action?  There are old cases holding that if a defendant seeks to stay an action on the ground that the courts of another country are the more convenient forum, then the defendant must give an undertaking not to raise a limitation defence in the other forum. Should this rule be adopted on motions to stay actions based upon an arbitration clause?

Some might object to this rule on the ground that it will encourage parties to commence actions in the face of arbitration clauses and then insist on a waiver of the limitation period in the arbitration.  After all, so it goes, arbitration clauses are obvious and can and should be adhered to.

But such a rule does seem sensible. After all, an action is a perfectly proper way to commence a claim. In fact, outlawing a court action is contrary to public policy. It is only if the other party insists on the arbitration clause that arbitration becomes mandatory; if the other party does not, then the court action is perfectly proper. The commencement of the action tells the defendant that there is a claim.  If the defendant invokes the arbitration clause, there is an element of fairness in requiring the defendant not to assert the limitation defence in the arbitration. Maybe the further proceedings in the Lafarge case will explore this issue.

See Heintzman and Goldsmith on Canadian Building Contracts (4th ed.), chapter 10, parts 3, 5,6

Lafarge Canada Inc. v. Edmonton (City), 2013 ABCA

Arbitration –  Limitation periods – Stay of action or arbitration – Building contracts – Public contracts – Alternative dispute resolution  – Relation of arbitration to court proceedings

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                                     January 12, 2014

 www.heintzmanadr.com

www.constructionlawcanada.com