The courts of British Columbia have recently wrestled with the question whether they can review the award of an arbitrator dealing with the exercise of an option. In Urban Communications Inc. v. BCNET Networking Society, the arbitrator and a single judge of the B.C. Supreme Court arrived at diametrically opposite conclusions as to whether the option had been validly exercised. For this reason the judge of the B.C. Supreme Court set aside the arbitrator’s decision.

However, relying on the recent decision of the Supreme Court of Canada in Sattva Capital Corp. v. Creston Moly Corp. [2014] 2 S.C.R. 633, the B.C. Court of Appeal held that the review of the arbitrator’s decision involved matters of both fact and law, and not just matters of law. Since the B.C. Arbitration Act requires that that there be an issue of law before an appeal from an arbitrator’s award may be allowed, the Court of Appeal held that no appeal lay from the arbitrator’s decision in this case. Accordingly, the Court of Appeal set aside the decision of the judge of the B.C. Supreme Court and restored the arbitrator’s decision.

While the logic of the Court of Appeal’s decision is apparent, the result is that the courts did not deal with some fundamental issues relating to the exercise of options. The Urban decision may be a poster child for both sides of the debate about the wisdom of the restrictive appeal regime introduced by Sattva. Those in favour of this regime will see the Urban decision as a demonstration that courts should stay out of the matter if the arbitrator has made a factual or legal determination. Those in favour of more court review of arbitral awards will see the Urban decision as an impediment to the determination of fundamental legal issues by the court system and an interference with the development of the common law.

Background

Section 31 of the Arbitration Act of British Columbia permits an appeal to a judge of the B.C. Supreme Court if a question of law is involved, or the parties consent to the appeal.

Under an agreement made in 2001, Urban leased fibre optic strands to BCNET for a ten-year period. The agreement contained an option to renew “exercisable upon at least six (6) months written notice by [BCNET] to [Urban]. The consideration to be paid for the renewal term will be the sum of $1.00, and other than the consideration to be paid, such renewal will be on the same terms and conditions as this Agreement. …” The Agreement required that any disagreement or dispute between the parties be determined by arbitration.

In July 2011, counsel for BCNET wrote to Urban, stating inter alia, the following;

“Pursuant to section 4.1 and 4.2 of the [Agreement], BCNET hereby exercises its option to renew the [Agreement] and its IRU rights with respect to the IRU Fibres, including all Access Cables, New Segments and New Fibre Builds constructed or commissioned pursuant to the [Agreement]…., BCNET also hereby request that Urban waive the six months’ notice requirement set out in section 4.1 and accept the renewal effective July 23, 2011….

We trust that you will find the above proposal acceptable and ask that you indicate Urban’s assent by signing on the signature line provided below. Upon receiving your assent, we will tender the necessary consideration in accordance with section 4.1 of the [Agreement].”

BCNET did not include payment of the $1.00 renewal fee with this letter. Urban did not return the requested written assent sought in the letter. In August 2012, Urban wrote to BCNET advising that the July 18, 2011 letter did not constitute a valid exercise of the option to renew and that the renewal period for Phases one and two had expired. BCNET then replied, stating that, in its view, the option to renew had been properly exercised as the agreement was silent on when the $1.00 renewal fee had to be paid and did not require its payment as a condition of the renewal. BCNET enclosed a cheque for $1.00, which Urban rejected.

In September 2012, by Notice of Arbitration BCNET applied for a declaration that it had validly exercised the renewal option under the Agreement. The hearing commenced in early October 2012.

In November 2012, BCNET sent another letter to Urban purporting to exercise its option to renew. BCNET’s position was that it had exercised the option in its July 2011 letter, but had decided to exercise the option again out of an abundance of caution.

The arbitrator issued his award on January 3, 2013, upholding BCNET’s position that the option had been properly exercised. Urban sought leave to appeal to the British Columbia Supreme Court. On all grounds, the judge of the B.C. Supreme Court held that the option had not been properly exercised, allowed the appeal and set aside the award of the arbitrator.

Issues In The Arbitration And The Appeal To The B.C. Supreme Court

The only issue in the arbitration and the appeal was whether the option in the agreement had been properly exercised. However, there were four sub-issues upon which the arbitrator and the B.C. Supreme Court disagreed.

  1. Did BCNET exercise the option conditionally? If so, is a conditional exercise an invalid exercise of an option?

Urban had contended that the letter was consistent only with a conditional exercise (or qualified acceptance) of the option as it contained a proposed modification of the agreement and was, therefore, effectively a counter-offer. The arbitrator examined the evidence and concluded that by its July 2011 letter, BCNET had validly exercised the renewal option. He held that the first part of the letter was “a perfectly clear exercise of the option” and that any proposed modification of the option was mentioned in the letter only after the making of a new bilateral contract by the exercise of the option.

The application judge held that a qualified acceptance of an offer constitutes a counter-offer. The judge’s reading of the July 2011 letter was that it sought to amend the option and was not unconditional or absolute. Accordingly, the letter was a qualified acceptance of the option that constituted a counter-offer. The judge therefore held that the July 2011 letter was an ineffective exercise of, and extinguished, the option.

  1. Did BCNET’s failure to enclose $1.00 with its July 2011 letter invalidate its exercise of the option?

The arbitrator held that it was not necessary for BCNET to enclose a $1.00 payment for the renewal fee because: (i) the original grant of the option was supported by ample consideration; and (ii) a valid exercise of the option included an obligation by Urban to give BCNET the use of the fibres and an obligation by BCNET to pay money to Urban for their maintenance. Therefore, the $1.00 consideration was only a nominal rent payment for the extended term and its non-payment did not invalidate the exercise of the option.

The judge concluded that the plain and ordinary reading of the agreement required $1.00 to exercise the renewal option. He held that the $1.00 payment had to be tendered with the purported exercise of the option. Otherwise, an indeterminate date would lead to uncertainly and make no commercial sense.

  1. Was Urban estopped from asserting that the option was not validly exercised?

The arbitrator held that, if BCNET had defectively exercised its option under the Agreement, Urban was estopped from relying on those defects because: (i) it knew from the 2011 letter that BCNET intended to exercise the option; and (ii) knowing this intention, Urban chose to remain silent in the hope that the alleged defects would not come to BCNET’s attention until after the option expired.

The application judge held that, as between the two commercial parties, there was no legal obligation on Urban to advise BCNET that its purported exercise of the option was defective. Accordingly, Urban was not estopped from asserting the invalidity of the July 2011 exercise of the option.

  1. If BCNET had defectively exercised the option in July 2011, did that preclude BCNET from thereafter exercising the option, so that the purported exercise of the option in November 2012 was invalid?

The arbitrator held that, even if was not validly accepted in July 2011, the option remained a standing offer and could not be withdrawn, and was still open for acceptance in November 2012. He held that an optionor is bound by its option agreement and could only avoid its obligations under the option contract if there were legal or factual grounds for it to avoid the option contract itself, which there were not.

The application judge held that, as a result of his finding that the invalid exercise of the option in July 2011 had extinguished the option, the option could not be accepted by BCNET in November 2012.

Decision of the B.C. Court of Appeal

The B.C. Court of Appeal only felt it was necessary to deal with the first issue. In commenting on this part of the arbitrator’s decision, the B.C. Court of Appeal said:

The arbitrator was of the view that the words of the contractual documents offered more than one potential meaning. He applied the legal principles on contractual interpretation…to determine the parties’ objective intention with respect to the requirements in Article 4.1 of the Agreement, and then to determine the objective intention of BCNET in its July 18, 2011 letter. He considered the objective meaning of the words of these documents in the context in which they were made and all of the surrounding circumstances. Based on his application of the legal principles for contractual interpretation and his findings of fact from the evidence, he concluded that: (i) BCNET’s July 18, 2011 letter was a clear unconditional notice of its intention to exercise the renewal option over all seven Phases, which created a new bilateral contract between the parties; and (ii) only thereafter did BCNET propose to modify that contract by having all of the renewal terms run from the same date. Sattva mandates that these findings must be accorded deference and, absent an extricable error of law of the kind identified in para. 53 of Sattva, are not reviewable under s. 31 of the Act….

The B.C. Court of Appeal concluded as follows:

“….the arbitrator’s finding that BCNET had unconditionally exercised its option under the Agreement ends the dispute. The arbitrator’s interpretation of the Agreement and the July 18, 2011 letter was open to him to make. His interpretation of those contractual documents does not raise a pure question of law and therefore is not reviewable. It also renders moot the remaining issues raised by Urban….(underlining added)

The court also said that, even under the pre-Sattva regime, leave to appeal the arbitrator’s decision should not have been granted:

“There was no consensus between the parties on the meaning of the words in the contractual documents. The arbitrator had to determine the true meaning of the words in the context and surrounding circumstances in which they were written. This engaged questions of mixed fact and law, which are not reviewable under s. 31(1) of the Act.”

Discussion

There can be two views of this decision, depending on whether one is in favour of, or against, the supervision of arbitral awards by the courts. Those who are against such supervision, and applaud the decision of the Supreme Court of Canada in Sattva, will applaud this decision as well. Arbitrators should be left to decide the meaning of contracts and to interpret letters between the parties exercising rights under those contracts and courts should not prolong the process by examining into further legal issues when issues of contract interpretation and fact have been decided, rightly or wrongly, by the arbitral tribunal.

Others will be concerned that the absence of court supervision will mean that the common law will not develop as it has in the past. Here, an arbitrator and superior court judge disagreed on some fundamental legal principles relating to the exercise of options. It is not healthy for the law to be uncertain and for fundamental legal principles to be controversial. The role of the courts, and in particular appellate courts, is to clarify and develop the law, and not to cut off that process.

Whatever one’s view of this issue is, the first view is now the law in Canada. As a result, the real supervision will be by appellate courts over the trial division, not by the trial division over arbitrators. The supervision by the appellate court depends upon whether, in the words from Sattva, there is or is not an “extricable question of law from within what was initially characterized as a question of mixed fact and law.” In the present case, the application judge held that there was; the Court of Appeal held that there was not.

On this issue, the B.C. Court of Appeal did not grant any apparent deference to the application judge’s decision, despite his express finding that there was an “extricable question of law” to be determined. On its reading of the arbitral award, the Court of Appeal simply held that “Urban cannot establish a pure question of law arising from the arbitrator’s interpretation of Article 4.1 of the Agreement and the July 18, 2011 letter.”

Contrast this decision with the B.C. Court of Appeal’s decision in Teal Cedar Products Ltd. v. British Columbia, 2015 BCCA 263, 2015 CarswellBC 1550. I reviewed that decision in my article dated July 7, 2015. In that case the B.C. Supreme Court declined to set aside the decision of an arbitral tribunal because that decision involved issues of mixed fact and law, applying Sattva. Then, the B.C. Court of Appeal reversed that decision, holding that the arbitrator’s interpretation of the applicable statute raised an “extricable question of law.”

It is not clear from these decisions how one is to identify an “extricable question of law”. In these decisions, the B.C. Court of Appeal did not identify the principle to apply in this exercise. Hopefully, appellate courts in Canada will develop those principles in the future. Otherwise, an application judge’s decision on this question will always be open to further appeal.

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

Urban Communications Inc. v. BCNET Networking Society, [2016] 2 W.W.R. 298, 386 D.L.R. (4th) 284, 2015 CarswellBC 1785

Arbitration – appeal of arbitral award – extricable question of law – options – estoppel – consideration

Thomas G. Heintzman O.C., Q.C., FCIArb                                                        May 1, 2016

www.heintzmanadr.com

www.constructionlawcanada.com

This article contains Mr. Heintzman’s personal views and does not constitute legal advice. For legal advice, legal counsel should be consulted.