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