When Does An Arbitral Award Contain An Appealable Question Of Law?

The Supreme Court of Canada has recently re-examined the issue of whether a statutory and contractual interpretation by an arbitral tribunal may be appealed. The court re-iterated the principle that arbitral awards are not appealable on a question of law when in reality the question is one of mixed fact and law. On this basis, in Teal Cedar Products Ltd. v. British Columbia, 2017 CarswellBC 1648, 2017 SCC 32, the Supreme Court re-instated an arbitral award which had been set aside in whole or in part, by the courts of British Columbia.

In doing so, the court re-affirmed its previous decision in Sattva Capital Corp. v. Creston Moly Corp., [2014] 2 S.C.R. 633 to the effect that, unless a discrete question of law arises, the interpretation of a contract is a question of mixed fact and law, not a question of law, and that an arbitral award interpreting a contract cannot be appealed to the courts if the right of appeal is only on a question of law.

I reviewed the Sattva decision in an article dated August 10, 2014 and the decision of the British Columbia Court of Appeal in Teal in an article dated July 7, 2015

The Issues

Teal held a license to harvest timber on provincial Crown land. The province then reduced the amount of Teal’s allowable harvest. The parties were able to settle the amount of Teal’s compensation for its loss of harvesting rights (the Rights Compensation) but were unable to agree on the compensation for the improvements Teal had allegedly made to Crown land (the Improvements Compensation). The parties agreed to arbitrate the amount of Improvement Compensation to which Teal was entitled. The arbitrator made an award in Teal’s favour and the province appealed.

The issues upon which the arbitral award was appealed were as follows:

  1. Did the arbitrator err in selecting a valuation method that was allegedly inconsistent with the governing statute, the Revitalization Act?
  2. Did the arbitrator err in his interpretation of the contract between the parties, especially in resorting to the factual matrix to interpret an amended settlement agreement between the parties in light of the negotiations between the parties?
  3. Did the arbitrator err in denying compensation to Teal Cedar relating to the improvements associated with one of its licences because it never lost access to those improvements?

The Decision Of The Majority Of The Supreme Court Of Canada

The nine-member court was divided 5-4 in this appeal. The majority held as follows with respect to these questions:

  1. This question was a question of law. Accordingly it could be appealed under the British Columbia Arbitration Act. However, the arbitrator applied the plain meaning of the statute prescribing that valuation and reasonably selected a suitable valuation method. Accordingly, his award was valid and could not be set aside.
  2. This question was either a question of mixed fact and law, or was without reviewable error as it was based on the wording of the contract interpreted in light of the factual matrix. In either case it was not appealable to the courts since section 31 of the B.C. Arbitration Act limits appeals to questions of law.
  3. This question was one of mixed fact and law and not reviewable under the B.C. Arbitration Act.

The four judges who dissented held that the arbitrator erred on Question 1. They held that Teal was entitled to compensation only for its limited interest in the improvements.  Teal, as a licence holder, did not own the improvements, which belonged to the Crown. The arbitrator selected a valuation method — the cost savings approach —, which failed to consider that Teal had only a limited interest in the improvements as a licence holder and was therefore not entitled to compensation on that basis under the Act.

In arriving at its conclusions, the majority of the court provided some further explanations and clarifications of its historic decision in Sattva. Here are three addition principles that can be extracted from Teal and added to the principles arising from Sattva:

  1. Alteration Of A Legal Test Raises A Legal Question.

If, in the course of the application of a legal principle, the underlying legal test has been altered, then a legal question arises. “For example, if a party alleges that a judge (or arbitrator) while applying a legal test failed to consider a required element of that test,” –for example, if “the correct test requires him or her to consider A, B, C, and D, but in fact the decision-maker considers only A, B, and C” – then a question of law arises. “If the correct test requires him or her to consider D as well, then the decision-maker has in effect applied the wrong law, and so has made an error of law.”

This situation is an example of an “extricable question of law” which under Sattva is reviewable as a question of law, but the alleged error is hidden or “covert” in the arbitrator’s award. The legal issues or tests are “implicit to their application of the test rather than explicit in their description of the test.”

  1. Statutory interpretation is normally a legal question and contractual interpretation is normally a question of mixed fact and law.

As explained in Sattva, “contractual interpretation remains a mixed question, not a legal question, as it involves applying contractual law (principles of contract law) to contractual facts (the contract itself and its factual matrix)”. But statutory interpretation is a matter of law.

  1. An arbitrator’s legal decision should be reviewed on a standard of reasonableness.

While an appeal of a court’s decision on a question of law should be conducted on the basis of correctness, an appeal of an arbitrator’s award on a question of law – in this case, the interpretation of a statute – should be conducted on the basis of reasonableness, based upon the arbitrator’s presumed special expertise. To do otherwise, and “to weigh an arbitrator’s actual (as opposed to presumed) expertise in every arbitration would require some sort of preliminary assessment of the arbitrator’s level of expertise with a view to establishing the standard of review for every particular hearing — which would be antithetical to the efficiencies meant to be gained through the arbitration process.” Moreover, “in a commercial arbitration context…..from a policy perspective, the deliberate aim is to maximize efficiency and finality.” All of these factors merit deferential review of the arbitrator’s decision.

The arbitrator is presumed to be an expert even though the arbitration process in this case was mandated by statute, not voluntary. If an issue arises in the course of an arbitration that is outside the subject matter of the arbitration, then in that case the presumed expertise of the arbitrator –and the review of the award on a reasonableness basis- might not apply.

This part of the Supreme Court’s decision may come as a surprise. In previous lower court decisions, it has been assumed that errors of law by an arbitral tribunal should be reviewed on a standard of correctness: see, for instance, Denali Construction Inc. v. Tremore Contracting Ltd.,2013 CarswellAlta 898, 2013 ABQB 321, 25 C.L.R. (4th) 54 at paras. 14-16 (Alta Q.B.). The Supreme Court has now said that the standard of reasonableness applies to the review of arbitral awards, even if the question is one of law.

Discussion

The legal principles stated in Teal have clear application to arbitrations arising under building contracts. For example, if the arbitrator is considering a statute such as the Construction Lien Act, his or her interpretation involves a question of law. If the relevant provincial arbitration statute permits an appeal on a question of law, then the arbitrator’s decision on this point is appealable. But in the appeal, the arbitral award will be reviewed on a standard of reasonableness and only set aside if it is unreasonable.

If, on the other hand, the arbitrator is interpreting a building contract, his or her interpretation will usually amount to a question of mixed fact and law, and will not be appealable as a question of law. However if there are several elements involved in a particular issue, and if the arbitrator fails to consider, or mis-applies one of the elements, then according to Teal that failure may give rise to a discrete question of law and be appealable.

Exactly how this element of the Teal and Sattva decisions will work out may be a matter of contention. For example, under GC 10.2.6 of CCDC 2 Stipulated Price Contract, the contractor is required to advise the consultant and obtain direction as required by GC 10.2.5 before performing work which is contrary to law, and if it does not, the contractor is obliged to bear the expense of correcting the work. If, in the absence of some other justification (such as waiver or estoppel), the arbitrator holds that the contractor satisfies this condition by reason of advising the consultant without considering the absence of written directions (or vice versa), is this an error of law, or just an error of mixed fact and law due to the involvement of the surrounding facts?

In any event, all construction law practitioners dealing with arbitrations under building contracts must be familiar with the trilogy of Supreme Court decisions: Sattva, and Teal and Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co, 2016 SCC 37 which apply Sattva.

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

Teal Cedar Products Ltd. v. British Columbia, 2017 CarswellBC 1648, 2017 SCC 32

Building contracts – arbitration – appeal of arbitral awards – questions of law and mixed fact and law

Thomas G. Heintzman O.C., Q.C., LL.D (Hon.), FCIArb                       July 16, 2017

www.heintzmanadr.com

www.constructionlawcanada.com

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

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

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

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

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

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

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

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

Background

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

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

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

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

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

The Sattva Decision

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

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

The Ledcor decision

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

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

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

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

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

Discussion

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

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

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

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

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

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

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

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

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

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

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

www.heintzmanadr.com

www.constructionlawcanada.com