In Sattva Capital Corp v Creston Moly Corp (2014 SCC 53) the Supreme Court, in the context of a challenge to a domestic arbitral award, has reaffirmed Canada’s longstanding pro-arbitration stance.
Unlike in the international context (in which Canada follows the principles set out in the United Nations Commission on International Trade Law Model Law and the New York Convention), domestic arbitral awards may be reviewed on a number of limited grounds, including with respect to pure questions of law (but only with leave of the court). A number of courts across the country have been grappling with the issue of whether an alleged error in the interpretation of a contract is a pure question of law (and therefore reviewable) or a question of mixed fact and law (and therefore not subject to review).
Parties on the losing end of domestic arbitral awards have repeatedly sought to argue that any error in the interpretation of a contract is a pure question of law and therefore subject to review. In Sattva v Creston the Supreme Court held that the interpretation of a contract is almost always a question of mixed fact and law, and therefore an application for review of an arbitral award based solely on an alleged contractual interpretation error should rarely be reviewable.
The global message from the Supreme Court to arbitration parties across Canada is that if they agree to arbitrate, they should expect to be bound by arbitrators’ decisions. In other words, Canadian courts expect parties to respect the process for which they signed up.
Sattva v Creston arose from Creston Moly Corporation’s contractual obligations to pay Sattva Capital Corp a finder’s fee in relation to the acquisition of a molybdenum mining property in Mexico. The parties had agreed that Sattva was entitled to a fee of US$1.5 million, which could be paid in shares of Creston, cash or a combination thereof. However, they disagreed on the date for determining the price of the Creston shares and thus the number of shares to which Sattva was entitled. Each party relied on a different contractual provision to support its view.
The parties entered into arbitration pursuant to the Arbitration Act (RSBC 1996, c 55), which governs domestic commercial arbitrations in British Columbia. The arbitrator found in favour of Sattva. Creston applied for leave to appeal that decision, which was denied by the British Columbia lower court. On appeal to the British Columbia Court of Appeal, Creston successfully obtained leave to appeal the arbitral award, which was then remitted back to the lower court to be heard.
The lower court upheld the arbitrator’s decision. Creston then appealed that decision, and the appeal court again overturned the lower court (and this time the arbitrator’s award too), holding in favour of Creston. Sattva itself then appealed to the Supreme Court on the grounds that the appeal court’s initial leave decision was wrong and in its second decision the appeal court erred in overturning the arbitrator’s award on the basis of an error of law.
The Supreme Court overturned the appeal court on both grounds; it therefore reinstated the arbitral award and held that the appeal court had erred in granting the leave application in the first place.
The Supreme Court also took the opportunity, in light of the history of Creston refusing to accept the arbitrator’s decision and repeatedly invoking the intervention of the courts, to clarify for future courts faced with leave applications the limited circumstances in which leave should be granted to review domestic arbitral awards. In doing so, the Supreme Court provided its views on:
- the ‘pure questions of law’ issue;
- what could amount to a miscarriage of justice;
- what should be the standard of review; and
- how courts should approach their residual discretion to deny leave even where grounds to grant leave may exist.
Limiting leave to appeal only pure questions of law
The Supreme Court found that the appeal court had erred in granting leave to appeal by misconstruing the interpretation of the contract as solely a question of law. The Supreme Court held that the arbitrator’s conclusions regarding the construction of the contract were made after duly considering the terms of the contract and the surrounding circumstances in which it was made. As such, the analysis involved questions of mixed fact and law which could not be reviewed under the Arbitration Act. The court recognised that the Arbitration Act deliberately restricts a party’s attempts to re-litigate an issue that it has willingly submitted to arbitration.
The court concluded that in most arbitral awards, the interpretation of a contract involves a question of mixed fact and law which cannot be appealed pursuant to the Arbitration Act. In reaching this conclusion, the Supreme Court provided the following guidance for future arbitrators and courts:
- While questions of law are questions which ask “what the correct legal test is”, contractual interpretation involves the application of such legal principles to the words of a contract considered in light of its factual matrix.
- The role of reviewing courts is to ensure consistency of the law as opposed to providing parties a new forum within which to continue their private litigation.
- Deference to fact-finders promotes the worthy goals of limiting the number, length and cost of proceedings, while upholding the autonomy and integrity of legal proceedings.
- Courts should be wary of creating extricable questions of law in disputes over contractual interpretation regardless of how issues may be characterised by parties and/or counsel.
- While it may be possible to identify an extricable question of law that may be reviewed, such circumstances will be rare as the goal of contractual interpretation is “inherently fact specific”.
- Properly extricable questions of law may include allegations regarding:
- the application of an incorrect principle;
- the failure to consider a required element of a legal test or a relevant factor; or
- other substantive law issues regarding the requirements for the formation of a contract and the capacity of the parties.
- While surrounding circumstances will be considered in interpreting a contract, such considerations cannot outweigh or contradict the words of the contract itself and they must be confined to objective evidence of the background facts at the time of the execution of the contract.
Limiting leave to appeal where there is no miscarriage of justice
Pursuant to Section 31(2)(a) of the Arbitration Act, a court may also grant leave to appeal a question of law in the limited circumstances where “determining the issue may prevent a miscarriage of justice” and “the importance of the result of the arbitration justifies the intervention of the court” (courts have held that this latter factor should not be broadly construed). In order for this threshold to be met, the Supreme Court stated that the following conditions must be satisfied:
- The alleged error of law must pertain to a material issue in the dispute which, if decided differently, would affect the final result of the case; and
- The appeal itself must have some possibility of succeeding because the alleged legal error has arguable merit (to be assessed without making any final determinations with respect to the merits of the case).
In doing so, the Supreme Court signalled to parties and counsel that this ground of review is to be viewed narrowly.
Limiting leave to appeal by applying deferential standard of review
The Supreme Court confirmed that the standard of review of arbitral awards rendered under the Arbitration Act should almost always be the higher threshold of “reasonableness” rather than the lower threshold of “correctness”.
The application of this standard asks a court to consider whether there is any arguable merit to the position that the arbitrator’s decision was unreasonable. More specifically, an arbitrator’s decision will be considered reasonable if it satisfies the thresholds of justifiability, transparency and intelligibility. The Supreme Court indicated that a decision may be reasonable even if the arbitrator did not expressly refer to all of the arguments, provisions or jurisprudence submitted or make specific findings on each constituent element of the claim before him or her.
The Supreme Court noted that an arbitrator’s decisions should be reviewed as being “correct” rather than “reasonable” only in rare cases, such as those involving a constitutional question or a question of law of central importance to the legal system as a whole and outside the arbitrator’s expertise.
Limiting leave to appeal by exercising residual discretion
Finally, even if all of the statutory conditions for granting leave are satisfied in a given case, the Supreme Court stated that courts should not be afraid to exercise the residual discretion that they have to deny leave. The court provided the following non-exhaustive list of factors to consider in a leave application under Section 31(2)(a) of the Arbitration Act (where parties have alleged that the result of arbitration is important to them and may prevent a miscarriage of justice):
- the conduct of the parties (regardless of whether such conduct was directly relevant to the question of law to be advanced on appeal);
- the existence of alternative remedies;
- any undue delay; and
- the urgent need for a final answer.
While additional factors may apply for leave applications where the point of law at issue is of importance to some larger class or the public in general, the Supreme Court emphasised that courts should not reconsider matters and that, among other things, the exercise of discretion must pertain to the facts and circumstances of a particular case rather than broader policy goals.
The Supreme Court also admonished appellate courts not to interfere with a lower court’s discretionary decision refusing leave unless the lower court judge misdirected himself or herself or the decision was so clearly wrong so as to amount to an injustice.
In Sattva v Creston the Supreme Court effectively instructed courts across the country to afford substantial deference to arbitral awards. The Supreme Court’s conclusions that most cases will involve questions of mixed fact and law and that a deferential standard of review of “reasonableness” should generally apply should result in far fewer arbitral awards being subject to court review, and therefore more awards being deemed final more quickly.
Arbitration is intended to provide parties with an efficient and effective binding resolution to their dispute without layers of process and the extra costs that necessarily follow. The Supreme Court in Sattva v Creston has signalled to parties that they should abide by the process that they freely chose.