December 06, 2016 Articles

High Deference: Appellate Review of Arbitration Rulings in Canada

As Canadian courts become less interventionist in reviewing arbitral awards, they increasingly align themselves with American jurisprudence.

By Marco P. Falco – December 6, 2016

In Canada, the courts are showing increasing deference to arbitral awards. They are also narrowing the circumstances in which appellate courts will intervene in arbitration proceedings. Whether the parties originally chose to arbitrate their dispute or whether the arbitration is imposed on the parties by statute, appeals courts will not scrutinize the arbitrator’s reasoning absent a serious error of law. 

Sattva: A Deferential Standard of Review
The leading case concerning the standard of review applicable to arbitrators’ decisions is Sattva Capital Corp. v. Creston Moly Corp., [2014] S.C.C. 53 (Can.). Sattva is a decision of the Supreme Court of Canada involving an appeal from a commercial arbitration award.

The parties entered into a contract in which the defendant, Creston Moly Corp. (Creston), agreed to pay the plaintiff, Sattva Capital Corp. (Sattva), a finder’s fee for helping Creston acquire a Mexican mining property. The contract provided that Creston would pay Sattva its finder’s fee in Creston shares. A dispute arose between the parties as to the date to be used to determine the price of the Creston shares. The share valuation date was critical to Sattva because it would determine the number of shares to which Sattva was entitled.

Based on the contract, Sattva argued that its shares in Creston were to be valued on the date announcing Creston’s acquisition of the mine, in which case Sattva would receive 11,460,000 shares. Creston argued that Sattva’s shares were payable five days after the closing date of the transaction, making Sattva entitled to only 2,454,000 shares. The arbitrator adopted Sattva’s interpretation of the contract.

On appeal to the British Columbia Court of Appeal, the court overturned the arbitrator’s ruling and ruled in favor of Creston. The British Columbia Court of Appeal’s decision was then appealed to the highest appellate court in Canada. The Supreme Court of Canada overturned the British Columbia Court of Appeal’s ruling and reinstated the arbitrator’s award in favor of Sattva.

Under the governing statute, the British Columbia Arbitration Act, R.S.B.C. 1996, c. 55 (Can.) (Arbitration Act), the circumstances in which an appellate court can review the decisions of arbitrators are narrowly circumscribed. Appeals are limited to “questions of law.” This means that a party cannot appeal the factual findings of the arbitrator. The Supreme Court of Canada described the appellate review of arbitral awards under the Arbitration Act as a “tightly defined regime specifically tailored to the objectives of commercial arbitrations.”

Unlike proceedings before a statutory tribunal, for example, commercial arbitrations are different. First, the parties engage in commercial arbitration by choice. That is, they decide to exclude judicial intervention in their dispute. Second, parties to arbitration select the number and identities of the arbitrators who will hear their dispute. Third, because the parties have chosen specific arbitrators, the courts presume that these arbitrators have special expertise in the matters that they adjudicate.

All of these factors militate in favor of a deferential standard of review. In Canada, the deferential standard is known as “reasonableness.” Accordingly, where the appeal from an arbitrator’s decision is restricted to questions of law, the standard of review is reasonableness.

However, the court also noted that where the issue involved constitutional questions or “questions of law of central importance to the legal system as a whole and outside the adjudicator’s expertise,” then the appeals court will not defer to the arbitrator’s ruling. In these cases, the less deferential standard of “correctness” applies. The court held thus:

In the context of commercial arbitration, where appeals are restricted to questions of law, the standard of review will be [the more deferential standard of] reasonableness unless the question is one that would attract the [less deferential] 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.

On the facts of Sattva, the standard of reasonableness applied. The arbitrator’s interpretation of the finder’s fee clause in the contract did not raise constitutional issues or questions of law that were of “central importance to the legal system.” The issue that the arbitrator had to decide was the date to be used to determine the prices of shares used to pay the finder’s fee. The arbitrator held that Sattva’s interpretation was the correct one. His interpretation of the contract met the reasonableness standard of review. That is, the contractual interpretation was justifiable, transparent, and intelligible. There was no basis for an appellate court to overturn the arbitrator’s award.

The Aftermath of Sattva: Why Appeals Courts Defer to Arbitrators
Following Sattva, Canadian courts have generally adopted a deferential standard of review when assessing arbitral awards. A recent decision of the Court of Appeal for Ontario, the highest appellate court in the province of Ontario, established that the rationale for deference to an arbitrator’s ruling has much to do with the parties’ choice to engage in private arbitration.

Ottawa (City) v. Coliseum Inc., [2016] O.N.C.A. 363 (Can.) involved a lease agreement for a sports stadium between Coliseum Inc. and the City of Ottawa. Following a dispute, the parties entered into a settlement. The settlement provided that the city had the right to terminate the lease if it intended to redevelop the stadium. However, the settlement also provided that if the city exercised this right, Coliseum Inc. would be granted an option to lease a similar city-owned property. Ultimately, the city delivered a notice of termination of the lease to Coliseum Inc. In accordance with the settlement, the city offered Coliseum Inc. a similar city-owned property. Coliseum Inc. did not want to lease the new stadium proposed by the city. As a result, Coliseum Inc. took the position that the city breached its settlement.

The parties were required to proceed to arbitration under the terms of the settlement. Following an eleven-day arbitration, the arbitrator interpreted the language of the settlement in Coliseum Inc.’s favor. It held that the city breached the settlement because the city had failed to provide Coliseum Inc. with an appropriate alternative property. The arbitrator awarded Coliseum Inc. damages of $2.2 million.

The city appealed the arbitrator’s decision to the first appellate-level court for arbitrations in Ontario, the Ontario Superior Court of Justice. The superior court reversed the arbitrator’s ruling, holding that the arbitrator’s interpretation of the settlement was unreasonable and amounted to an error of law.

On appeal to the Ontario Court of Appeal, the court restored the arbitrator’s ruling. The court began its analysis by emphasizing the underlying rationale for deference to an arbitrator’s ruling. One of the primary reasons that courts limit judicial supervision of arbitral awards relates to the parties’ choice of engaging in private commercial arbitration. That is, the parties made a deliberate decision to exclude or limit the courts’ review of their dispute. As such, Canadian courts are reluctant to intervene in overturning arbitrators’ rulings. To do so would undermine the parties’ choice and the exclusive nature of arbitration.

Citing another Ontario Court of Appeal decision, Popack v. Lipszyc, [2016] O.N.C.A. 135 (Can.), the court held thus:

In addition to the generally applicable principles that urge deference in the review of all discretionary decisions, the nature of the specific order under appeal can also enhance the deference rationale. . . . The parties’ selection of their forum implies both a preference for the outcome arrived at in that forum and a limited role for judicial oversight of the award made in the arbitral forum (emphasis added).

In Coliseum,the arbitrator’s ruling met the deferential standard of reasonableness. Even though the arbitrator’s interpretation of the settlement did not “flow entirely from . . . the four corners of the Minutes of Settlement” and relied on extraneous evidence, the arbitrator’s reading of the settlement could not be deemed unreasonable.

The Ontario Court of Appeal went further and held that although the superior court’s interpretation of the settlement was a “possible—even a reasonable—interpretation,” so was that of the arbitrator. In that case, the superior court erred when it set aside the arbitrator’s interpretation and substituted its own. Where the arbitrator’s interpretation of a contract is reasonable, the appeal court should not replace that interpretation with an alternatively reasonable one.

Reasonableness for Questions of Mixed Fact and Law
Even where an appellate court is reviewing an arbitral award that concerns a question of “mixed fact and law,” i.e., where the arbitrator is required to apply legal principles to a set of facts, Canadian courts have held that the more deferential standard of reasonableness, as set out in Sattva, applies.

In Intact Insurance Co. v. Allstate Insurance Co. of Canada, [2016] O.N.C.A. 609 (Can.), the Ontario Court of Appeal applied a reasonableness standard of review to the decision of an insurance arbitrator who interpreted an accident benefits statute.

Intact involved a claim for motor vehicle accident benefits. Prior to the accident, the claimant had left her husband and moved herself and her daughters into her boyfriend’s house. The daughters suffered catastrophic injuries as a result of the accident. The insurer of the vehicle that was involved in the accident, Intact Insurance Co. (Intact), provided accident benefits to the daughters.

Intact argued that the boyfriend’s insurer, Allstate Insurance Co. of Canada (Allstate), was liable for paying the daughters’ accident benefits. According to Intact, Allstate’s liability arose because the daughters were dependent on their mother’s boyfriend at the time of the accident. The matter proceeded to insurance arbitration.

The arbitrator held that Intact was responsible for the daughters’ accident benefits. Applying the priority rules between insurers as set out in the Ontario Insurance Act, R.S.O. 1990, c. I-8 (Can.), the arbitrator, speculating that the mother’s relationship with her new boyfriend was temporary, reasoned that the mother’s relationship with the boyfriend was unlikely to last and was therefore not permanent. Accordingly, the daughters could not be described as “dependents” of the boyfriend such that the boyfriend’s insurer would be liable for their accident benefits.

On appeal to the first-level appellate court, the Ontario Superior Court of Justice, the appeals judge held that the less deferential standard of correctness applied to the arbitrator’s decision. The arbitrator’s decision was incorrect as the arbitrator had, among other things, improperly speculated about the permanency of the mother’s relationship.

On a further appeal to the highest appellate court in Ontario, the Ontario Court of Appeal, the court held that the standard of review applicable to the arbitrator’s decision was the deferential standard of reasonableness. However, the court reversed the arbitrator’s decision as unreasonable.

In concluding that the standard of review was reasonableness, and not the less deferential standard of correctness, the Ontario Court of Appeal held that the issue of whether the daughters were “principally dependent” on the mother’s boyfriend at the time of the accident involved a question of mixed fact and law. That is, the arbitrator was required to apply legal principles to a set of facts. The court noted that the fact that the appeal involved a question of mixed fact and law, as opposed to a pure question of law, did not alter the deferential standard of review as established in Sattva:

The question at issue here—determining dependency for purposes of [statutory accident benefits] and insurance priority disputes—does not rebut the presumption of reasonableness review established in Sattva. It is not a question of jurisdiction, a constitutional question, or a general question of law that is of central importance to the legal system as a whole and outside the [arbitrator’s] expertise.

Despite this deferential standard of review, the Court of Appeal held that the arbitrator’s ruling that the daughters were not “principally dependent” on the mother’s boyfriend at the time of the accident was unreasonable. The arbitrator improperly relied on his own speculative conclusion that the relationship between the mother and her boyfriend was temporary and unlikely to succeed. This conclusion was not supported by the evidence. At the time of the accident, the mother and boyfriend believed that they were “building a real relationship.” The parties even spoke about the possibility of marriage. The arbitrator’s emphasis on the fact that the relationship was unlikely to survive was based on speculation. Accordingly, the decision was reversed.

The decisions above illustrate a central theme to appellate review of arbitral awards in Canada—the presumption of deference. Since the Supreme Court of Canada’s ruling in Sattva, the courts have made it clear that the standard of review of arbitrators’ decisions is reasonableness.

The reasonableness standard serves an important purpose. It preserves the integrity of the arbitration process by excluding judicial interference in the parties’ dispute. Thus, even where an appellate court is reviewing the arbitrator’s decision on a question of law, the standard of review remains reasonableness, unless the legal question raises constitutional issues or is of central importance to the legal system. In this regard, the principle of deference to arbitral rulings aligns Canadian law with its American counterpart.

Keywords: litigation, appellate practice, deference, Canada, reasonableness standard, correctness standard, arbitration, Sattva, Creston, Coliseum Inc., Intact Insurance, Allstate Insurance

Marco P. Falco is a partner with Torkin Manes LLP in Toronto, Canada.

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