The Supreme Court of Canada’s recent decision in Teal Cedar Products Ltd v British Columbia[1] confirms that commercial arbitration awards can only be appealed in narrow circumstances.

The judgment further indicates that, even where arbitration awards can be appealed, barring exceptional circumstances, the courts will adopt a deferential standard of review for commercial arbitration awards.

The Court’s judgment provides vital guidance to litigants seeking to appeal or opposing a proposed appeal from a commercial arbitration award, and outlines some key differences between the standards of review applicable to appeals from arbitration awards and appeals from civil litigation judgments.

Background

The case arose from a dispute between a forestry company, Teal Cedar Products Ltd., and the Government of British Columbia over the amount of compensation owed to the company as a result of changes to some of its timber harvesting licenses.

These changes were effected under the Revitalization Act, which modified forestry companies’ rights under their licenses by removing areas from their land base and reducing the volume of allowable harvest. The Act allowed affected forestry companies to claim compensation for reductions to harvesting rights and for the value of improvements made to Crown land.

The parties agreed on the former but not the latter. The matter proceeded to mandatory arbitration.

The issues, which remained contested as the case proceeded to the Supreme Court of Canada, included:

  1. Statutory interpretation – what was the appropriate valuation method for calculating compensation for improvements, under the Act (the “Valuation issue”)?
  2. Contractual interpretation – did an interim agreement reached by the parties while settlement discussions were ongoing permanently bar the accrual and payment of interest on compensation owing for improvements that Teal Cedar made (the “Interest issue”)?
  3. Statutory application – was Teal Cedar barred from compensation for improvements associated with one of its licenses because it did not lose access to those improvements (the “Compensation issue”)?

On the first issue, the parties presented “three generally recognized valuation approaches.” The arbitrator accepted a valuation method that calculated compensation based on the cost of rebuilding the improvements from scratch to their current degraded condition. This valuation method was the only method found to be consistent with the Act.

On the second issue, the arbitrator determined that an interim agreement between the parties had only barred the accrual of interest while settlement negotiations were ongoing and did not bar the accrual or payment of interest once negotiations failed and arbitration commenced.

On the third issue, the arbitrator denied compensation to Teal Cedar for improvements related to one of its licenses, since the Act did not remove the company’s access to the improvements in question.

Rulings of the BC Supreme Court and the BC Court of Appeal

The Arbitration Act, RSBC 1996, c 55, like arbitration statutes in most provincial jurisdictions, limits appeals to questions of law which have arguable merit. As a result, the courts reviewing the arbitration award had to address whether any of the issues in the arbitration award were questions of law.

The BC Supreme Court characterized the Valuation issue as a question of law, the Interest issue as a question of mixed fact and law, and the Compensation issue as a question of law.

The Interest issue was thus found to be beyond the jurisdiction of the Court, while the Valuation and Compensation issues were deemed appealable. On review, the BC Supreme Court upheld the findings of the arbitrator on the Valuation issue, but found that he had erred in his determinations on the Compensation issue.

The BC Court of Appeal determined that all three issues were matters from which questions of law could be extricated, and were thus subject to appeal.

The Court of Appeal then applied a correctness standard and found that the arbitrator’s rulings were incorrect on all three issues.

Framework for Assessing Proposed Appeals from Arbitration Awards

On appeal, the Supreme Court of Canada indicated that a three-step analysis applies to appellate review of arbitration awards:

  1. Jurisdiction: Did the appellate court have jurisdiction to review the alleged error?
  2. Standard of Review: If so, was the standard of review reasonableness or correctness?
  3. Review: Does the arbitration award withstand scrutiny under the applicable standard of review?

The Court then outlined the principles applicable at each stage of the analysis and applied them to the facts of the case.

Jurisdiction to Review Commercial Arbitration Awards

The Supreme Court noted that, unlike privative clauses which merely signal deference in the context of judicial review of administrative tribunal decisions, the statutory limitation on the scope of appellate review of arbitration awards are “absolute.”

A finding that the questions on appeal are not questions of law would wholly dispose of the courts’ jurisdiction to review those questions.

As such, the appropriate characterization of the questions on a proposed appeal was vital. In that regard, the Court noted that questions of law are about what the correct legal test is; questions of fact concern what transpired between the parties, while mixed questions involve applying a legal standard to a set of facts.

However, if, in the course of applying a legal standard to a set of facts, the underlying legal test was altered, a legal question arises. Such a legal question, extricated from a mixed question, is subject to appellate review.

The Supreme Court warned courts to exercise caution in extricating questions of law and to remain wary of motivations for counsel to strategically frame mixed questions of law and fact as legal questions in order to gain jurisdiction in appeals from arbitration awards. The Court noted that a narrow scope for extricable legal questions is consistent with finality in commercial arbitration and with deference to factual findings.

The Supreme Court also noted that issues of statutory interpretation are “normally” (but not always) characterized as questions of law. On the other hand, contractual interpretation could involve factual, legal and mixed questions. This made it necessary to characterize the nature of the specific question before the Court in order to correctly assess jurisdiction over the proposed appeal.

In contrast to the courts below, the Supreme Court found very limited jurisdiction to appeal the arbitration award.

On the Valuation issue, the Court determined that the arbitrator’s ruling about the pool of valuation methodologies valid under the Act was a matter of statutory interpretation. The courts had jurisdiction to review the arbitrator’s resolution of this question of law. However, the arbitrator’s determination of the preferable valuation method, within the broad category of acceptable methods, was inextricably linked to the evidentiary record at the hearing. The courts lacked jurisdiction to review this mixed question of fact and law.

On the Interest issue, the Supreme Court assessed two alternative formulations of the argument that the arbitrator had permitted the factual matrix to overwhelm the plain words of the agreements between the parties.

  1. The Province argued that the arbitrator had accorded excessive weight to the factual matrix in the interpretation of the relevant agreements. This argument was found to engage a mixed question of fact and law, which did not confer appellate jurisdiction.
  2. The Province argued that the arbitrator had interpreted and applied the factual matrix in isolation from the words of the contract, effectively creating a new agreement between the parties. This argument posited that the wrong legal test had been applied and was thus found to raise a question of law. However, to grant leave to appeal on this question, the Act further required the applicant to show that the proposed ground of appeal had arguable merit. Therefore, a preliminary examination of the question of law had to be undertaken in light of the applicable standard of review. A preliminary examination of the award indicated that, even though the arbitrator had placed significant weight on the factual matrix, the arbitrator’s interpretation of the relevant agreements was rooted in the words of the contract.

On the Compensation issue, Teal Cedar argued that the arbitrator had erred in law by finding that no compensation was payable pursuant to the valuation methodology selected. The Supreme Court found that the application of the valuation methodology to the improvements effected under the relevant license was a mixed question of fact and law. The Courts below were to found to have erred in assuming jurisdiction over this issue.

Standard of Review on Appeals from Commercial Arbitration Awards

The Supreme Court then outlined the applicable principles in assessing the standard of review for commercial arbitration awards, and reviewed the arbitrator’s determination of the pool of acceptable valuation methods.

Citing its previous decision in Sattva Capital Corp v Creston Moly Corp[2], the Supreme Court held that the standard of review of an arbitration award will be that of reasonableness in nearly every case. This deferential standard was consistent with the policy objectives of commercial arbitrations: efficiency and finality. It was only in rare circumstances – such as the instance of a constitutional question or question of law of central importance which resides outside the adjudicator’s expertise – that a standard of correctness would apply.

In this respect, appeals from arbitration awards were distinguishable from appeals of civil litigation judgments where a correctness standard applied to questions of law.

The Court concluded that the BC Supreme Court and the Court of Appeal had erred in applying a standard of correctness in addressing the Valuation issue. Determining the range of appropriate valuation methods under a BC forestry statute was not a constitutional question. Neither was the issue of central importance to the legal system as a whole, nor was it outside the expertise of the arbitrator. The arbitrator had been selected by the parties and was thus presumed to hold the necessary expertise.

The Supreme Court found that the arbitrator’s determination of the appropriate valuation method fell within a range of acceptable outcomes or valuation methodologies under the Act. The broad and open-ended language of the Act did not necessarily lead to a single reasonable interpretation as endorsed by the dissenting opinion of the Court or by the lower courts. The arbitrator’s finding that the other methodologies presented were not consistent with the Act was supportable and thus reasonable.

Key Takeaways

The judgment in Teal Cedar carries significant strategic implications for prospective appellants and respondents. To secure leave to appeal, prospective appellants will have to adopt a focused approach to identifying a limited number of questions of law on which the arbitrator has arguably erred and where the proposed appeal has arguable merit (in addition to any other statutory requirements for securing leave to appeal). On appeal, the appellant will usually have to show that the arbitrator’s determinations fall outside the range of reasonable outcomes, or show that the issue at hand leads to only one reasonable outcome which the arbitrator failed to reach.

Teal Cedar suggests that proposed respondents should carefully examine applications for leave to appeal in order to identify any questions of fact or mixed fact and law which are being dressed up as questions of law. Furthermore, even within apparent questions of law, it could be that some aspects of the question are really mixed issues of fact and law – and thus are not appealable.

On appeal, barring a narrow range of exceptional cases, the respondent should usually only have to establish that the arbitrator’s determination fell within a range of acceptable outcomes.