Wednesday, August 6, 2014

Supreme Court Limits Appeals from Commercial Arbitration Awards

One of the benefits of commercial arbitration is finality.  Parties to a commercial arbitration agreement have the ability to contract out of any appeal.   The giving up of appeal rights is one of the most significant factors that a party should consider when entering into an arbitration agreement.    Many provincial arbitration acts provide that a party to an arbitration agreement may appeal the decision of the arbitrator on a question of law only and that leave to appeal must be granted.  This supervisory role of the courts was recently tested in a case – Sattva Capital Corp. v. Creston Moly Corp. 2014 S.C.C. 53 – that went all the way to the Supreme Court of Canada.


In this case, Creston was obliged to pay a finder’s fee to Sattva as a result of Sattva introducing Creston to an opportunity to acquire a molybdenum mining property in Mexico.  According to the agreement, the finder’s fee of US$1.5 million would be paid in Creston shares.  The dispute between the parties concerned which date should be used to determine the price of the Creston shares and thus the number of shares to which Sattva was entitled.   Sattva argued that the share price was dictated by the market price definition in the agreement, i.e. the price of the shares “as calculated on close of business day before the issuance of the press release announcing the acquisition”.  Creston claimed that the agreement's “maximum amount” proviso meant that Sattva would receive shares on the date the fee was payable.  


The difference in interpretation amounted to approximately 9 million shares.


The parties entered into arbitration pursuant to the British Columbia Arbitration Act (“Act”).  The arbitrator found in favour of Sattva.  Creston sought leave to appeal the arbitrator’s decision pursuant to the appeal provisions of the Act.   Leave was denied by the BC Supreme Court.  Creston successfully appealed that decision and was granted leave to appeal the arbitrator’s decision by the BC Court of Appeal.  


A BC Supreme Court judge heard the appeal and upheld the arbitrator’s decision.  Creston again appealed that decision to the BC Court of Appeal which once again overturned the motion judge and found in favour of Creston.  Sattva appealed that decision and the Court of Appeal’s decision to grant leave to the Supreme Court of Canada.


The Supreme Court of Canada overturned both decisions of the BC Court of Appeal and restored the arbitrator’s award.  


Questions Answered By The Court


In reaching its decision the Supreme Court asked: when is contractual interpretation to be treated as a question of mixed fact and law and when should it be treated as a question of law?;  How is the balance between reviewability and finality of commercial arbitration awards under the Act to be determined?; and  Can findings made by a court granting leave to appeal with respect to the merits of an appeal bind the court that ultimately decides the appeal?


In answering these questions, the Supreme Court overturned its historical approach to contractual interpretation. 

The Court held that appeals from commercial arbitration decisions are narrowly circumscribed.  Under the relevant section of the Act, appeals are limited to questions of law, and leave to appeal is required if the parties do not consent to the appeal.  The court may grant leave if it determines that the result is important to the parties and the determination of the point of law may prevent a miscarriage of justice.


The Supreme Court held that the BC Court of Appeal had erred in finding that the construction of the finder’s fee agreement constituted a question of law.  The issue raised a question of mixed fact and law and therefore the Court of Appeal erred in granting leave to appeal.  


In reaching its decision, the Supreme Court said that the historical approach to contractual interpretation, according to which determining the legal rights and obligations of the parties under a written contract was considered a question of law should be abandoned.   It held that contractual interpretation involves issues of mixed fact and law because it is an exercise in which the principles of interpretation are applied to the words of the written contract, considered in light of the factual matrix of the contact.  


While it may be possible to identify an "extricable" question of law from the exercise, such circumstances will be rare.  The goal of contractual interpretation, which is to ascertain the objective intentions of the parties, is inherently fact specific.  Accordingly, courts should be cautious in identifying “extricable” questions of law in disputes over contractual interpretation.


Legal errors made in the course of contractual interpretation include the application of an incorrect principle, the failure to consider a required element of a legal test, or the failure to consider a relevant factor.  In this case, Creston’s application for leave to appeal did not raise a question of law. 

That finding in and of itself was sufficient to dispose of the appeal.  However, the Supreme Court continued with its analysis.


The Court also held that:

a)  In order to rise to the level of a miscarriage of justice for the purposes of the Act, an alleged legal error must pertain to a material issue in the dispute, which, if decided differently, would affect the result of the case.  According to this standard, a determination of a point of law “may prevent a miscarriage of justice” only where the appeal itself has some possibility of succeeding.  An appeal with no chance of success will not meet the threshold of “may prevent a miscarriage of justice” because there would be no chance that the outcome of the appeal would cause change in the final result of the case.


b)  At the leave stage, it was not appropriate to consider the full merits of the case and make a final determination regarding whether an error of law was made.  However, preliminary consideration of a question of law by the court granting leave is necessary to determine whether the appeal has the potential to succeed and thus to change the result in the case.  The Court held that the appropriate threshold for assessing the legal question is whether it has “arguable merit” meaning that the issue raised by the applicant cannot be dismissed by a preliminary examination of the question of law.


 Assessing whether the issue raised by an application for leave to appeal has arguable merit must be done in light of the standard of review in which the merits of the appeal will be judged.  The leave court’s assessment of the standard of review is only preliminary and does not bind the court which considers the merits of the appeal.


c)  The words “may grant leave” in the Act, confer on the court a residual discretion to deny leave even where the requirements of the Act are met.  However courts should exercise such discretion with caution.


d)  Appellate review of commercial arbitration awards is different from judicial review of a decision of a statutory tribunal, thus the standard of review framework developed for judicial review by the court in the case of Dunsmuir v. New Brunswick, 2008 S.C.C. 9 is not entirely applicable to the commercial arbitration context.   However, because judicial review is analogous in some respects to arbitral appeals, aspects of the Dunsmuir framework are helpful in determining the appropriate standard of review to apply in the case of commercial arbitration. 


In the context of commercial arbitration, where appeals are restricted to questions of law, the standard of review will be reasonableness unless the question is one that would attract the 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.  The question at issue here did not fall into one of those categories and therefore the standard of review in this case was reasonableness.


In this case, the arbitrator’s reasoning met the reasonable threshold of justifiability, transparency and intelligibility. 


e)  A court considering whether leave should be granted is not adjudicating the merits of the case.  It decides only whether the matter warrants granting leave, not whether the appeal will be successful, even where the determination of whether to grant leave involves a preliminary consideration of law at issue.  For this reason, comments by a leave court regarding the merits cannot bind or limit the powers of the court hearing the actual appeal.   




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