On January 15, 2013, Ontario’s Superior Court of Justice (Commercial List) allowed in part the appeal of an arbitrator’s decision in Meridian Gold v. Southwestern Gold, a dispute respecting Peruvian gold mining rights. The appellant alleged that the arbitrator made several errors of law, which, per Ontario’s Arbitration Act, 1991, could be appealed with leave. Justice Pattillo allowed the appeal, on the basis that the arbitrator erred by providing the respondent with a remedy which did not align with the appellant’s breach of contract. This case illustrates how the wrong remedy in a breach of contract case, even where the claimant is successful, can result in an arbitration proceeding ending up before the courts – something that commercial parties which have opted for a commercial arbitration would wish to avoid in most cases. Particularly where a breach of contract cannot be resolved through a damage award, it is important to ensure that the arbitral award is consistent with the alleged contractual breach.

In 2004, the Peruvian government sought to auction off two early-stage gold mining properties in Peru (the Concessions). One of the appellant companies, Minera Meridian Peru S.A.C. (Meridian) and the respondent Minera del Suroeste S.A.C. (Misosa) decided that, rather than bid against each other, they would enter into letters of understanding (the LOU) which provided, among other things, that both parties would bid for the Concessions. If either party were successful, it would hold the Concessions 50% for itself, and 50% for the other party. The LOU also contained a reciprocal right of first offer clause, stating that a party wishing to dispose of “any or all of its interests” in the Concessions must first offer such interest to the other party.

Meridian’s bid was successful. As of 2004, it was the registered owner of the rights and interests in the Concessions, holding 50% of these rights and interests for the benefit of Misosa.

In 2009, Meridian’s ultimate parent company, Yamana Gold Inc., entered into an options and operations agreement (the Agreement) with Consorcio Minero Horizonte S.A. (Horizonte). The Agreement provided, among other things and as part of a larger transaction, that Horizonte would be appointed operator of the Concessions for 36 months. In order to allow Horizonte the legal right to perform its obligations as operator of the Concessions, the parties entered into a 36-month “cesión minera”, which effectively assigned Meridian’s rights to the Concessions to Horizonte.

The Arbitral Award

The arbitrator held that Misosa’s right of first offer was triggered when Meridian agreed to the cesión minera with Horizonte, since doing so effectively disposed of Meridian’s interest in the Concessions. The Agreement with Horizonte, which gave Horizonte the option to acquire control of Meridian through a share purchase of its parent, did not trigger the right of first offer. As such, it was only when Meridian began to contemplate entry into the cesión minera that it became obliged to advise Misosa of its intentions, and to offer the opportunity to Misosa on the same terms as were being offered to Horizonte.

The arbitrator also held that Meridian’s holding of Misosa’s 50% interest in the Concessions constituted a classic trust relationship that imposed fiduciary duties to Misosa upon Meridian. The arbitrator held that by failing to inform Misosa of the cesión minera, Meridian acted in bad faith. He further held that Meridian breached other fiduciary duties which it owed to Misosa.

Finally, the arbitrator held that, as the preferred remedy was to put Misosa in the position it would have been but for the breach, Misosa should be offered the rights that were disposed to Horizonte under the Agreement, and that the cesión minera should be cancelled. Under a supplementary award, the arbitrator ordered Meridian to provide Misosa with “the whole of the interest heretofore transferred or assigned to [Horizonte] in the Concessions …. on terms substantially equivalent to those contained in the [Agreement] read as a whole, including but not limited to the payments in Schedule “I” and those provisions appointing Horizonte as Operator and granting it a cesión minera, plus US$1.00.”

Leave to appeal was granted on the following grounds:

  • Did the arbitrator err in finding that Meridian’s entry into the cesión minera as contemplated by the Agreement triggered the right of first offer under the LOU?
  • Did the arbitrator err in finding that Meridian breached its fiduciary duties as a partner or otherwise by entering into the cesión minera?
  • Did the arbitrator err in granting the remedy that he did?

The Appeal Decision

On the appeal, Pattillo J. agreed with the arbitrator’s legal conclusion that the cesión minera triggered a right of first offer. He held the cesión minera was “disposing” of Meridian’s interest, in that Meridian was “ceding control over” its interest in the Concessions.

Furthermore, he found that the existence of a bare trust was beyond dispute. Meridian won all the legal rights to explore the gold mining opportunities, but agreed to hold half of these legal rights for the benefit of Misosa. By breaching the right of first offer in respect of the cesión minera, Meridian was found to be in breach of trust. However, Pattillo J. found that the arbitrator erred in his finding that Meridian owed fiduciary duties to Misosa over and above those defined in the LOU. In particular, Pattillo J. found that the relationship did not create a fiduciary relationship because it lacked the vulnerability on behalf of Misosa that was required to create a fiduciary relationship, stating: “[T]here will always be a degree of vulnerability in a commercial relationship where one party can unilaterally fail to perform its contractual obligations. That type of vulnerability however, does not elevate the relationship to fiduciary.”

As the arbitrator had found that there had been a breach of trust due to the breach of the right of first offer, Pattillo J. found that the arbitrator’s error respecting the related breach of fiduciary had no effect, as Misosa was entitled to specific performance for the breach regardless of whether or not Meridian also breached its fiduciary duties.

On the question of remedy, however, Pattillo J. found the arbitrator made a reversible legal error by ordering Meridian to offer the same interest to Misosa that it had offered to Horizonte under the Agreement. He found that by requiring Meridian to offer Misosa the equivalent of the Agreement with Horizonte as a whole, the arbitrator provided a remedy that was contrary to his finding that the sale of Meridian under the Agreement was not a breach of the right of first offer. In the circumstances, Pattillo J. found that the appropriate remedy was to offer Misosa a cesión minera on the same terms and conditions as Horizonte. Misosa was entitled to be put back into the position it would have been in had Meridian not breached the LOU. The proper remedy was therefore for Meridian to offer only the same cesión minera on the same terms to Misosa as it did to Horizonte. That was the extent of the breach, so that should be the extent of the remedy. Since the court was unable to determine, on the record before it, the proper terms for solely the cesión minera portion of the Agreement, the matter was remitted back to the arbitrator to hear further evidence and decide this issue.

Conclusion

The Meridian case provides an example of the type of legal error that can result in an arbitral award being set aside. In particular, the case illustrates the importance of ensuring that the remedy in an arbitral award is rationally connected to what an arbitrator determines to be the breach of contract.