In Teal Cedar Products Ltd. v. British Columbia, the Supreme Court of Canada recently confirmed that contractual interpretation typically involves questions of mixed fact and law (at least for non-standard contracts), as it previously held in Sattva Capital Corp. v. Creston Moly Corp. In a narrow 5-4 judgment, the majority allowed the appeal in part and clarified the standard of review applicable to commercial arbitrations involving issues of statutory and contractual interpretation.

Background

Teal Cedar involved a dispute between Teal Cedar (a forestry company) and the Province of British Columbia regarding compensation issues under s. 6 of the Revitalization Act. After entering into a partial settlement agreement, Teal Cedar and the Province agreed to arbitrate the remaining points of contention. The arbitration required interpreting the provisions of both the Revitalization Act and the partial settlement agreement, the latter because it addressed the calculation of interest.

The parties’ dispute twice reached the British Columbia Court of Appeal. Prior to the Supreme Court’s decision in Sattva, the Court of Appeal initially overturned the arbitrator’s award, holding that the statutory and contractual interpretation issues raised questions of law to which the correctness standard applied. On the latter, the Court of Appeal held that the arbitrator erred in law by allowing the factual matrix to “overwhelm” the unambiguous terms of the contract. Teal Cedar applied for leave to appeal to the Supreme Court of Canada, which remanded the appeal back to the Court of Appeal to be reconsidered in accordance with Sattva (which had then been released). On remand, the Court of Appeal considered Sattva and concluded that its prior disposition of the appeal remained unaltered. Teal Cedar again appealed to the Supreme Court, which granted leave.

Supreme Court of Canada decision

Following the Supreme Court’s recent decision in Ledcor Construction Ltd. v Northbridge Indemnity Insurance Co., which applied the correctness standard to the interpretation of a standard form contract, it remained to be seen whether the Court might use Teal Cedar as an opportunity to revisit or clarify its earlier decision in Sattva. Significantly, the majority re-affirmed its commitment to Sattva and its conclusion that, “[i]n general […] 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)” (Teal Cedar, para. 47).

The majority likewise affirmed Sattva’s caution regarding identifying an extricable legal question:

Courts should, however, exercise caution in identifying extricable questions of law because mixed questions, by definition, involve aspects of law. The motivations for counsel to strategically frame a mixed question as a legal question — for example, to gain jurisdiction in appeals from arbitration awards or a favourable standard of review in appeals from civil litigation judgments — are transparent […] A narrow scope for extricable questions of law is consistent with finality in commercial arbitration and, more broadly, with deference to factual findings. Courts must be vigilant in distinguishing between a party alleging that a legal test may have been altered in the course of its application (an extricable question of law […]), and a party alleging that a legal test, which was unaltered, should have, when applied, resulted in a different outcome (a mixed question). (Teal Cedar, para. 45)

In jurisdictions such as British Columbia where appeals from commercial arbitral awards are statutorily limited to question of law, the determination that a contractual interpretation issue is a mixed question deprives the court of appellate jurisdiction to review the arbitrator’s award. This was the case in Teal Cedar in respect of the arbitrator’s interpretation of the partial settlement agreement. The Court rejected the Province’s argument that there was an extricable legal question regarding whether the arbitrator allowed the factual matrix to overwhelm the words of the contract.

The majority addressed two possible formulations of the “overwhelming” argument. To the extent that the Province alleged that the arbitrator placed excessive weight on the factual matrix, the majority held that this was a mixed question and did not confer appellate jurisdiction. On the other hand, to the extent that the Province alleged that the arbitrator interpreted the factual matrix in isolation from the words of the contract (effectively creating a new agreement), the majority held that this raises a legal question. However, the majority held that this ground lacked arguable merit.

In addition to confirming and clarifying Sattva’s treatment of contractual interpretation, the Court in Teal Cedar addressed another issue of appellate procedure in commercial arbitrations: the standard of review applicable to questions of statutory interpretation. The Court treated the interpretation of the Revitalization Act separately from the contractual interpretation issues, holding that the former raised a legal question to ground appellate jurisdiction. However, the majority limited its scope of review to determining the broad categories of valuation methodologies acceptable under the Revitalization Act (a pure question of law), to the exclusion of the mixed or pure factual question of the preferable method in the circumstances of the dispute.

Again confirming Sattva, the majority reaffirmed that “[i]n an arbitral context […] the standard of review is ‘almost always’ reasonableness” (para. 74). In determining that Teal Cedar was no exception, the Court emphasised the arbitrator’s expertise (unambiguously affirmed by the parties’ mutual selection of him to adjudicate this issue) and the arbitrator’s closer proximity to the facts.

In the result, the majority restored the arbitrator’s initial award granting Teal Cedar compensation.