In its recent decision in Newfoundland and Labrador v. ExxonMobil Canada Properties, 2017 NLTD(G) 147, the Supreme Court of Newfoundland and Labrador decided a number of issues relating to the review of arbitral awards. In particular, the court held that the parties may limit the scope of court review of arbitral awards provided by the domestic arbitration statute. In addition, the court made a ruling concerning the interpretation of contracts which is relevant to construction law.

Background

The Province of Newfoundland and Labrador (the “Province”) entered into the Hibernia Project Royalty Agreement (the “HRA”) and the Hibernia Project Allocation Agreement (the “Allocation Agreement”) with the oil companies developing the Hibernia offshore oil project (the “Project Owners”). The issue in the arbitration related to the calculation of the royalty to be paid by the Project Owners to the Province under the HRA.

The Province asserted that, under clause 24.5 of the HRA, the insurance costs incurred by the developers did not qualify as costs of the Hibernia Project for the calculation of royalty payable to the Province by the Project Owners, while the Project Owners asserted that these costs were deductible.

The arbitral tribunal held that the insurance premiums were deductible, finding that a clause in the agreements between the Province and the developers specifically permitted the deduction of insurance premiums paid by the developers.

The Statutory And Contractual Regimes To Review The Arbitral Award

The Province brought an application to set aside the arbitral award. Two regimes were relevant to that application:

First, the domestic Arbitration Act of Newfoundland and Labrador (the Act); and

Second the Arbitration Code contained in a schedule to the Allocation Agreement.

Under section 14 of the Act, an award may be set aside by the court if the tribunal has “misconducted” itself or the award has been “improperly procured.”

This style of arbitral statute may be called “old fashioned” in the sense that it reflects the wording of Canadian arbitral statutes before the modern arbitral regime was brought into being by the various domestic Uniform Arbitration Acts proposed by the Uniform Law Conference of Canada. Those Uniform Acts have not been adopted in Newfoundland and Labrador so far as its domestic arbitration statute is concerned.

In contrast, section 34 of the Arbitration Code in the parties’ agreement provided that the award could be set aside by the court in certain circumstances. Summarizing those circumstances, they included: the incapacity of a party; the invalidity of the arbitration agreement; lack of due notice or due process; lack of jurisdiction; impropriety of the arbitral tribunal’s composition or procedures; the unarbitrability of the dispute; or the conflict of the award with public policy. Those grounds were the same as those referred to in Article 34(2) of the 2016 UNCITRAL Model Law

In other words, the parties wrote into their arbitration agreement a prohibition against seeking a review of an arbitral award by adopting the wording of the UNCITRAL Model Law. That Law had been adopted by Newfoundland and Labrador for international arbitrations in the Newfoundland and Labrador International Commercial Arbitration Act, R.S.N.L. 1990 c. I-15.

Contracting Out Of The Arbitration Act

The Project Owners asserted that, by the Arbitration Code, the parties had agreed to restrict the grounds for setting aside the award to those set out in the Code, while the Province argued that the parties could not legally limit the grounds set out in the Act. Both parties agreed that it was impermissible to completely contract out of the Act, but the Project Owners asserted that it was permissible to contract out of the Act to the extent that the parties had done so in their Arbitration Code, namely, to the extent provided for in the UNCITRAL Model Law.

The judge in the present case referred to Thomas & Sons v. Hackett, [1939] 2 D.L.R. 332 (N.S.S.C) and Beach v. Hydro-Electric Power Com’n of Ontario, (1924) 56 O.L.R. 35 (Ont. S.C.), affirmed on other grounds, 57 O.L.R. 603 (Ont. C.A.), [1927] S.C.R. 251, as authority for the proposition that the parties cannot entirely contract out of the domestic arbitration statute.

In other sections of the Act, the parties’ right to contract out of those sections was specifically contemplated. Even though section 14 did not state that the parties could do so, the judge held that they could, at least to the extent provided for in the Arbitration Code:

“I am satisfied that the adoption by the parties of article 34 of the Arbitration Code is not contrary to the Arbitration Act. The Arbitration Act was enacted to provide parameters for the private resolution of disputes. Among its objects is the protection of the Court’s inherent jurisdiction to review the decisions of inferior tribunals. Permitting parties to agree to their own scope review for their private dispute resolution in a manner that does not unduly infringe upon the Court’s inherent jurisdiction is in keeping with the attainment of the objects of the Arbitration Act in accordance with its true meaning. This is especially so for sophisticated entities contracting commercially.”

The judge also found that the restriction of the right to set aside an arbitral award, at least to the extent provided for in the Code, was not contrary to public policy. Similar restrictions were found in: Royalty Regulations, 2003 under the Petroleum and Natural Gas Act of Newfoundland and Labrador; the federal Commercial Arbitration Act; and, as already noted, the Newfoundland and Labrador International Commercial Arbitration Act which adopts the Model Law.

Accordingly, the Newfoundland and Labrador court found that article 34 of the Arbitration Code set forth the recourse that a party to the HRA might have to the court. The court found that the Province’s complaints with respect to the arbitral award did not fall within any of the provisions of article 34 of the Arbitration Code and dismissed the application so far as it was based on that Code.

The Newfoundland and Labrador court also found that the Province’s application based upon section 14 of the Act failed since, applying the standard of reasonableness to the review of the arbitral award and a high degree of deference to the award, the arbitral award met the standard of reasonableness.

Incorporation by Reference

A further argument before the court arose from a contractual mechanism known as “incorporation by reference”. That mechanism applies when one document is incorporated by reference into another document, and the question arises as to how the resulting contract should be interpreted.

This issue arose in the following context. The Project Owners had, amongst themselves, entered into the Hibernia Ownership and Unanimous Shareholders’ Agreement (“HOUSA”) at the same time that they entered into the HRA with the Province. The Province was not a party to the HOUSA. The arbitral tribunal interpreted a provision of the HOUSA in the context of that agreement, before it then considered how that provision should be interpreted within the HRA.

The Province asserted that the arbitral tribunal had erred in doing so, and that the tribunal was obliged to interpret the provision from the HOUSA solely as if it were part of the HRA, and not by first interpreting it as part of the HOUSA.

The application judge held that the province’s “incorporation by reference” argument had not been raised before the arbitral tribunal and so was improperly raised on the application to the court. In any event, the judge held that the proper principle of contractual interpretation to apply was the “related contracts” doctrine. Under that principle, the court interprets all the contracts together to arrive at their proper meaning. In applying that principle, the application judge held that the arbitral tribunal properly considered the provision in question within the HOUSA before turning its attention to how it should be considered within the HRA.

The application judge also found that the “incorporation by reference” doctrine did not apply in any event. The provision in question in the HRA read as follows:

“….premiums for insurance required to be carried by a Project Owner by the third paragraph of clause 18.1.2 of the [HOUSA] shall be a Resource Project Eligible Cost. “

The province argued that these words incorporated section 18.12 of the HOUSA into the HRA. The court disagreed:

“…what is incorporated into…. the HRA is not the language of the third paragraph of clause 18.1.2 but the result of a directive by the HEC pursuant to that paragraph.” (italics in the original)

The application judge accordingly concluded:

“I am satisfied that although the Threshold Issue called for an interpretation of clause 29.7 of the HRA, that exercise could not be completed without first understanding what was intended by the third paragraph of clause 18.1.2 of the HOUSA in the context of the HOUSA. I find that the Tribunal applied the applicable law and followed a transparent, logical and reasoned path to arriving at its conclusion. Not only was that conclusion reasonable, but there was no error of law, or of mixed fact and law, made in this respect.”

Discussion

The Newfoundland and Labrador court’s holding that parties may contract out of the court review provision of the domestic arbitration statute, at least to the extent that these parties did so in their Arbitration Code, raises a number of issues.

First, what if one of the grounds for review mentioned in that Code was not there. Would the agreement to contract out of the Act be valid? What if two, or three grounds were not mentioned? What if only one of those grounds was mentioned? Would the agreement to contract out still be valid? How does one draw the line between a valid and invalid agreement to contract out of the Act?

Second, agreements to contract out of a procedural statutes and statutes providing for court review of administrative or arbitral decisions are of a different order than agreements to contract out of substantive statute law. The legality of contracting out of the Judicature Act or the Courts of Justice Act is a very different thing than contracting out of the Sale of Goods Act. Yet, this distinction does not seem to be clearly drawn in this decision.

Third, if parties can contract out of arbitration statutes, at least to some extent, what agreements will be effective to contract out of the UNCITRAL Model Law which is attached to the various provincial International Commercial Arbitration Acts and incorporated into the federal Commercial Arbitration Act?

In many places, the Model Law states that the parties may contract out of that Law, using such words as “unless otherwise agreed by the parties” or ” “the parties are free to agree”. These sort of contracting-out provisions are found in Articles 3, 10, 11, 17, 19-26 and 28. But no such contracting-out language is found in Articles 34 and 35, dealing with recourse against the award and enforcing the award.

In view of many places in which the Model Law states that the parties may contract out of that Law, the conclusion seems to be that contracting out is not permissible with respect to recourse against or enforcing the award. In those respects, the Model Law appears to be a minimum standard of arbitral law, especially since it was designed to be adopted by states in that form and enforced consistently across political boundaries.

While the present decision does not directly raise the spectre of contracting out of the provisions in the Model Law relating to recourse against the award – since the parties in their Arbitration Code adopted the Model Law grounds for review of arbitral awards – nevertheless, the decision does raise the possibility that the parties may do so.

So far as the provincial domestic Arbitration Acts in Canada are concerned, most common law provinces have adopted the Uniform Arbitration Act. In its form before the recent version adopted in 2016, section 3 of the Uniform Arbitration Act stated that the parties may contract out of the Act except with respect to certain specific sections which the parties may not contract out of. The section dealing with court review of arbitral decisions (section 46 in the Uniform Arbitration Act) was listed as one of the sections that the parties may not contract out of. (In the 2016 Uniform Arbitration Act, these sections are now 4 and 66.) So, if this case had arisen in most other common law provinces, the parties would not have been able to contract out of the court review section in those provinces.

The other finding by the court that is of interest to construction law practitioners is that there is a difference between “incorporation by reference” and “related contracts.”

Construction contracts often refer to other related documents. Sometimes they do so to incorporate the provisions of one contract into the other (such as the main contract being incorporated into a subcontract) and sometimes they do so for procedural or reference purposes (such as rules of mediation or arbitration for dispute resolution purposes, or insurance requirements).

Whatever the situation may be, it is important to recognize that it may not be appropriate to simply drop the provision in one document into another. It may be necessary to interpret the first document, or all the documents together, before the utility or impact of that document can be determined in another document.

Newfoundland and Labrador v. ExxonMobil Canada Properties, 2017 NLTD(G) 147

Arbitration – court review of arbitral awards – contracting out of court review of arbitral awards – interpretation of contracts – incorporation by reference – related contracts

Thomas G. Heintzman O.C., Q.C., LL.D. (Hon.), FCIArb                   October 13, 2017

www.heintzmanadr.com

www.constructionlawcanada.com