Commercial arbitration has a long, established history of allowing parties to resolve their disputes on their own terms. Despite this long history, the distinction between the scope of authority of arbitrators and courts is a subject that frequently arises. In British Columbia (Forests) v. Teal Cedar Products Ltd., the Supreme Court of Canada (SCC) considered the distinction between arbitrators and courts with respect to awarding interest. Specifically, the SCC considered whether arbitrators in British Columbia were subject to the same limitations as courts in ordering interest pursuant to B.C.'s Court Order Interest Act.
Teal Cedar Products Ltd. (Teal) is a forestry company that held a forest licence issued by the province (Province) to harvest timber in a particular area of B.C., including the right to cut a certain amount of timber known as an allowable annual cut. In 1999, following the creation of a provincial park, Teal's allowable annual cut was reduced by the Province. Teal began legal action against the Province under the Forest Act, claiming compensation for this partial expropriation. The Forest Act provided that if the parties could not agree on an appropriate amount of compensation, the dispute would be resolved by arbitration under the Commercial Arbitration Act (the CAA). The parties were unable to agree and proceeded to arbitration.
At arbitration, the arbitrator awarded Teal over C$6.3-million, including over C$2.2-million in interest compounded annually from the date when the Province reduced the allowable annual cut to the date of the award. On appeal, the judge upheld the arbitrator's award of compound interest. The B.C. Court of Appeal denied the Province's further application for leave to appeal the issue of compound interest. The Province then appealed to the SCC.
ISSUES BEFORE THE SUPREME COURT OF CANADA
The only issue before the SCC was whether the arbitrator had the authority to award compound, as opposed to simple, interest to Teal to compensate the company for the time between the loss of its timber harvesting rights and the time of the arbitration award.
In a unanimous decision, the SCC held that the Province's appeal should be allowed. The SCC concluded that arbitrators operating under section 28 of the CAA cannot award compound interest because section 1 of the Court Order Interest Act requires that a pecuniary court judgment bear simple interest, and only simple interest. While section 28 of the CAA does not expressly deem an arbitrator to be a court, this is a necessary implication of the wording of the CAA which provides that a sum directed to be paid by an arbitration award is "a pecuniary judgment of the court." Given both its ordinary meaning and its legislative history, section 28 of the CAA requires arbitrators to apply the provisions of the Court Order Interest Act and, accordingly, limits the interest on a sum directed to be paid by an award to simple interest.
Rothstein J., writing for the SCC, acknowledged that there is no doubt that compound interest is a more accurate way of compensating parties for the time-value of money. However, the B.C. legislature has not yet amended the Court Order Interest Act, so simple interest remains the rule in B.C.. Rothstein J. specifically noted that this conclusion was based on the specific statutory regime in place in B.C. and may not apply to other Canadian provinces.
IMPLICATIONS OF THE TEAL DECISION BEYOND THE SUBJECT OF INTEREST
In coming to this conclusion, Rothstein J. distinguishes the earlier B.C. Court of Appeal case of Morrissv. British Columbia. Rothstein J. noted that the B.C. Court of Appeal in that case was exercising a court's equitable jurisdiction to award compound interest. Unlike a court, Rothstein J. held that an arbitrator under the BCCAA "does not have jurisdiction to consider equity":
"Morriss is also inapplicable to the case at bar because it concerned the jurisdiction of a court that was relying on equity to award compound interest. In reaching the conclusion that compound interest could be awarded by the court in that case, the B.C. Court of Appeal relied on the equitable jurisdiction of the court, which permitted the award despite the provisions of the COIA. The arbitrator in this case did not have jurisdiction to consider equity. Under the CAA, arbitrators can only consider equitable grounds where the parties specifically agree (s. 23). In this case, the agreement between Teal and the Province did not permit the arbitrator to deal with equitable grounds. As a result, the reasoning adopted by the B.C. Court of Appeal in Morriss, whether right or wrong, is not relevant to the resolution of this appeal."
With this comment, Rothstein J. appears to have waded into an area of considerable controversy with no analysis of the existing case law and no attempt to interpret the meaning of the CAA statutory limitations on the arbitrator applying "equitable principles or good conscience".
In most Canadian jurisdictions such as Ontario and Alberta, arbitrators are given the express authority under the relevant arbitration legislation to decide a dispute in accordance with law "including equity". However, the CAA requires that the arbitrator decide the dispute "by reference to law", with no express inclusion of equity. This language is a reflection of the merger of the common law courts and courts of equity of over a century ago. In Canadian common law jurisdictions, the substantive law applied by the courts includes both common law and equity.
One narrow interpretation of the CAA is that an arbitrator may not consider equity as part of the substantive law applicable to a dispute. It appears that Rothstein J. with his comments is adopting this very narrow interpretation. However, the existing case law in this area has interpreted the CAA to permit arbitrators to make equitable orders such as declarations, injunctions, rectification and specific performance.
Perhaps a better interpretation is that the reference to "law" in the CAA is that it is simply a reference to the substantive law of British Columbia, including both common law and equity. Under this interpretation, the prohibition on deciding an arbitration on "equitable principles" means that an arbitrator must apply the substantive law and not decide simply on the basis of fairness or "good conscience". Despite the absence of any real analysis of this difficult issue, Rothstein J.'s comments may have a significant impact.
In light of the above, this recent decision is not only noteworthy for its clarification of the law with respect to interest in arbitral award in B.C., but it may have more important ramifications for commercial parties electing to resolve disputes through arbitration beyond the issue of compound interest. It remains to be seen how other courts will address Rothstein J.'s reasoning on equitable jurisdiction given the existing case law. This is an area that is sure to be the source of further judicial analysis and commentary as commercial parties are increasingly electing to resolve commercial disputes by arbitration.