A recent judgment of the B.C. Supreme Court (the Court) in Haisla Nation v. Bear Creek Contracting Ltd. illustrates the importance of clearly distinguishing between expert determination and arbitration in commercial agreements.
Expert determination clauses are found in many agreements and are generally meant to provide a relatively simple way of resolving discrete technical, accounting or scientific matters. The matters covered by expert determination clauses vary among different industries and commercial relationships. While expert determination can be an efficient means of resolving certain discrete technical issues by an independent decision-maker, it is not the same as the arbitration of a dispute.
The legal effect of expert determination and the process that it entails is significantly different than the legal effect and the process of international or domestic arbitration of a contractual dispute. Arbitration generally involves a more formal process in which an independent decision-maker undertakes more of a judicial function involving findings of law and fact. A typical arbitration provision is meant to apply to all legal and factual disputes arising from a contractual relationship and not simply a discrete technical matter.
Arbitration Clause or Expert Determination Clause?
Courts have struggled with distinguishing between expert determination and arbitration provisions. The leading cases have been applied in such a way in Canada that, when the characterization of a provision is in dispute, it is often difficult to predict whether a court will conclude that the provision is of one type or the other. For example, compare the decisions in Ivaco Inc. v. III Canada Acquisition Co. and Hanzek v. TRM (Canada) Corporation.
This unpredictability is a concern because such a conclusion is far from inconsequential. International and domestic commercial arbitration in Canada must proceed in accordance with the applicable domestic or international commercial arbitration legislation including any mandatory procedural rules. An expert determination is not governed by such legislation. Further, the availability of judicial review is quite different in the context of expert determination and in the context of arbitration. Judicial review of arbitral awards is essentially statute based while judicial review of expert determinations is governed by the common law. The scope of judicial review of an expert determination in Canada has been considered in a limited number of cases. This subject has received relatively more attention in other common law jurisdictions. Generally, the law in Canada is that the decision of an expert may be set aside where the expert departed materially from its instructions or where the expert was biased.
Lord Denning MR, in a leading common law decision in Campbell v. Edwards regarding expert determination, outlined the following principles:
"It is simply the law of contract. If two persons agree that the price of property should be fixed by [an expert] on whom they agree, and he gives that valuation honestly and in good faith, they are bound by it. Even if he has made a mistake they are still bound by it. The reason is because they have agreed to be bound by it. [emphasis in original] If there were fraud or collusion, of course, it would be very different. Fraud or collusion unravels everything."
To the extent that judicial review of expert determinations has been considered in Canada, these principles appear to be in accordance with the current law in Canada. As a corollary to the limited circumstances under which a court may set aside the decision of an expert, experts may be sued for negligence. In contrast, arbitrators are for the most part immune from civil liability.
Perhaps most significantly, a determination of an issue by an arbitrator is enforceable in its own right in most jurisdictions around the world whereas an expert determination merely creates contractual rights which can only be enforced through a further proceeding for breach of contract in the appropriate court with jurisdiction over the contractual dispute.
Haisla Nation v. Bear Creek Contracting Ltd.
Haisla Nation serves as an example of a decision where a court considered whether under a provision in an agreement the parties to the agreement contracted to submit an issue to an expert or to arbitration. In Haisla Nation, the defendant, Bear Creek Contracting Ltd. (Bear Creek), applied for an order that the proceedings commenced by the claimant, The Haisla Nation (Haisla), be stayed pursuant to s. 15 of B.C.'s Commercial Arbitration Act. Haisla and Bear Creek disagreed about the appropriateness of certain deductions made by Bear Creek from the profits of the parties' partnership.
Bear Creek took the position that the core of the action was a dispute concerning the correctness of certain audited financial statements and that the parties agreed to arbitrate such a dispute under s. 7.03 of the parties' agreement. Under s. 7.03, any dispute between the parties with respect to any financial calculations or determinations to be made under the agreement was to be submitted to the accountants of the parties' partnership. The decision of the accountants was to be final and binding on the parties except in the case of a manifest error. Haisla took the position that s. 7.03 was not an arbitration clause governing the dispute raised in the action. According to Haisla, the role of the accountants under s. 7.03 was to verify the accuracy of calculations or determinations while the issue in the action was whether Bear Creek was entitled to payment of the disputed deductions and a share of the profits under the parties' agreement.
In its analysis, the B.C. Supreme Court considered the four indicia of arbitration set out by the Supreme Court of Canada in Sport Maska Inc. v. Zittrer:
- there is a dispute or a difference between the parties which has been formulated in some way or another;
- the dispute or difference has been remitted by the parties to the person to resolve in such a manner that he is called on to exercise a judicial function;
- where appropriate, the parties must have been provided with an opportunity to present evidence and/or submissions in support of their respective claims in the dispute; and
- the parties have agreed to accept his decision.
In applying these indicia to the agreement between Bear Creek and Haisla, the Court held with respect to the first indicia that there was indeed a dispute between the parties as to the net income or profit of the parties' partnership. When considering the second and third indicia, the court examined the nature of the dispute and the involvement of the accountants more closely. The court concluded that the disagreement between the parties did not fall within the scope of s. 7.03. However, the court still considered whether s. 7.03 required the parties to submit to arbitration disputes within the scope of this section. The court noted as relevant that the parties did not explicitly agree to arbitration and that there was nothing in s. 7.03 which implied that the accountants were to exercise a "judicial function". The court emphasized that s. 7.03 did not contemplate the accountants receiving submissions from the parties. Ultimately, the court found that the second and third indicia of arbitration were absent. The court concluded that s. 7.03 was not an agreement by the parties to submit the kind of dispute raised in the action to the accountants for binding arbitration. Accordingly, Bear Creek's application to stay the proceedings was dismissed.
Careful Drafting of Dispute Resolution Clauses
Haisla Nation highlights the importance of careful drafting of dispute resolution provisions including expert determination and arbitration clauses. If the court in Haisla Nation concluded that the parties' dispute was within the scope of an arbitration provision agreed to by the parties, the court would have stayed the claimant's court proceedings. The claimant would have been required to pursue all legal and factual disputes by way of arbitration before the named accountants and subject to the Commercial Arbitration Act. Expert determination and arbitration clauses trigger significantly different processes and have significantly different legal effects. When drafting an expert determination or an arbitration provision, it is helpful to review Sport Maska Inc. and its application in cases such as Haisla Nation to provide as much certainty as possible to the parties who will be subject to the provision.