Arbitral Authority

The 2017 SCC ruling in Teal reinforces the scc’s broad deference toward arbitral decisions, even when tribunals are found to have erred on questions of fact.
A RECENT SUPREME COURT OF CANADA decision on a dispute between a forestry company and the government of British Columbia makes it more difficult to gain judicial review of rulings made by arbitrators, reinforcing the court’s deference to arbitral awards. On June 22, 2017, the SCC ruling in Teal Cedar Products v. British Columbia, 2017 SCC 32, affirmed that only questions of law, not fact, can provide grounds for leave to appeal an arbitral award, and addressed the standard of review in such appeals. The SCC “is reaffirming the message that it and various courts of appeal have sent out over the past decade or more, that when parties decide to arbitrate disputes and the arbitrator makes a decision, a great deal of deference is to be given by the court to the arbitral tribunal,” says John Terry, a partner at Torys LLP in Toronto.

Arbitration clauses are increasingly included in consumer contracts, agreements between large companies, and those between governments and companies. Arbitration is popular as an alternative to civil litigation for several reasons. It can be more efficient and therefore less expensive, and it is subject to confidentiality.

One of the biggest reasons for arbitration’s growing popularity, however, is the kind of finality that arbitration decisions provide, in contrast to the risk of drawn-out appeals in civil litigation cases. “It becomes pointless to choose the arbitral route,” says Terry, “if you’re simply going to end up going through several levels of court re-arguing the same issues.”

Appeals of arbitration awards “are not necessarily common,” says Robert Deane, a partner at Borden Ladner Gervais LLP in Vancouver. “But if the outcome of the award is material to either party, then it’s almost expected that there will be at least an application for leave to appeal. And I have not seen that phenomenon diminish in recent years at all.”

Lawrence Thacker, a partner at Lenczner Slaght Royce Smith Griffin LLP in Toronto, agrees. “Appeals are less frequent than in civil litigation cases, but attempts to change the outcome [of an arbitration] are probably as frequent or more frequent. Sometimes you have to use a non-appeal route,” such as an application for judicial review. “In the end, arbitral awards are more final than court awards because most of those other attempts to change the outcome don’t succeed.”

The Teal case was decided under British Columbia’s Arbitration Act, which is similar to statutes of other provinces and the federal government that govern domestic commercial arbitration. Provincial statutes governing international commercial arbitration follow the UNCITRAL Model Law on International Commercial Arbitration, either the 1995 or 2006 version.

There are no “appeals” of international arbitration awards. However, there are limited grounds on which they can be “set aside.” Those include matters of jurisdiction, matters of public policy and certain matters of procedural fairness. “It’s not an appeal on the merits,” explains Deane, “but on whether the arbitrator had jurisdiction to resolve the dispute, and if they did, whether they acted in a procedurally unfair manner or contrary to public policy.”

In Canadian domestic arbitration, awards can be appealed but only on points of law. Awards cannot be appealed on points of fact. In Teal, the two grounds cited in the application for leave to appeal were the arbitrator’s alleged failure to identify the applicable principles of contractual interpretation; and an alleged error in the interpretation of a statute that governs the disposition of the commercial arbitration. (In Teal, the parties were governed by arbitration rules set out in a BC statute called the Forestry Revitalization Act.)

The SCC overturned the BC Court of Appeal’s decision that had allowed judicial review of the arbitrator’s decision in Teal. The SCC re-affirmed its 2014 decision in the case of Sattva Capital v. Creston Moly, 2014 SCC 53, and narrowed the standard of review. In so doing, the high court further limited the rights of parties to seek appeals of arbitral decisions.

Furthermore, the Teal decision has clarified that, even when a court finds grounds of law to grant review of an arbitral decision, the court must apply the standard of reasonableness, rather than correctness, which is the standard of review in civil litigation appeals. The decisions of arbitrators on issues of law therefore receive greater deference from the courts.

Says Terry: “If the standard of review were, is the arbitrator correct or not, you can only have a binary answer. The reasonableness standard allows a number of answers that might be reasonable. You might not agree that the arbitrator got it correct, but if you think it’s reasonable you’re going to let the decision stand.”

Luis Sarabia, a partner at Davies Ward Phillips & Vineberg LLP in Toronto, says: “An arbitrator’s decision doesn’t have to be right; it just has to be reasonable. And the reason for that is that the courts want to encourage arbitration. It’s a way of ensuring that the parties’ initial objective of having finality in an arbitration is given effect. As long as the arbitrator’s decision is reasonable, the courts are not going to interfere with that, except in very rare circumstances.”

Those circumstances would have to comprise a constitutional question or a question of law of central importance to the legal system as a whole; and a question that was outside the arbitrator’s expertise. “If all of those factors were combined in a certain case, the court would insist on a standard of correctness,” says Sarabia. “You can imagine that’s going to be the rare case.”

In the 5-4 decision in Teal, Justice Denis Gascon wrote: “It would be an error to claim that all statutory interpretation by an arbitrator demands correctness review simply because it engages a legal question.”

IN THE SATTVA RULING, the SCC restricted appeals of arbitral awards by saying they are final unless a pure question of law is in dispute. In the Teal ruling, the Supreme Court affirmed Sattva and went even further, holding that arbitrators’ awards should be reviewed only on questions of law; while appeals based on mixed questions of fact and law should not be allowed.

Even contract language is a mixed question of fact and law, the top court found in Teal, and only the elements of law have the potential for appeal, i.e., they must be separated or extricated from the mix. “A narrow scope for extricable questions of law is consistent with finality in commercial arbitration, and, more broadly, with deference to factual findings,” the SCC held in the Teal ruling.

The SCC was concerned, says Terry, “that counsel will try to frame issues in a way that will turn them into questions of law when they’re really properly questions of mixed fact and law, which shouldn’t be reviewed as questions of law.” Sarabia says, “The Supreme Court was alive to the possibility that parties might try to characterize any particular case in a way to fit it within the appeal jurisdiction of a court.”

The SCC also reaffirmed Sattva by saying lower courts must be careful to distinguish between a claim that a legal test may have been altered when applied — which is an extricable question of law — and a claim that a legal test, when applied to an arbitration decision, would have resulted in in a different outcome. “The court said we have to be careful about distinguishing the use of the wrong test, when applying a test, from the application of the right test with an outcome that one side doesn’t like,” says Thacker. “It is only if you can show that the wrong test was applied that you have a pure question of law.”

The Teal ruling notes the difference between the standard of review in civil litigation cases and that in arbitration cases. “The identification of a mixed question when appealing an arbitration award defeats a court’s appellate review jurisdiction,” said the high court. “In contrast, the identification of a mixed question when appealing a civil litigation judgement merely raises the standard of review.”

So will Teal impact how arbitration clauses are written in future? Teal will require arbitration-clause drafters to be more careful and stipulate the issues of appeal more clearly, says Sarabia. “We used to just look at it and say, ‘If you want an appeal on a question of law, you’ll be fine.’ We now need to be more clear about a question of law, maybe define exactly the standard of review in the clause itself, and maybe say we should have an appeal on a mixed question of fact and law,” says Sarabia. “If we decide to go with an appeal only on a question of law, the client has to know that’s a very, very narrow right and probably effectively eliminates an appeal.”

Says Thacker: “The primary aim for parties when they enter into an arbitration agreement is finality and efficiency. For that reason, they’re probably not going to include rights of appeal. But parties will have to be warned when entering into an arbitration provision, they are putting their fates in the hands of a decision-maker who can make a legally incorrect decision and it will still be binding against them. My experience is that, when deals are happening, the parties are prepared to live with that risk.