The Supreme Court has again restricted the scope of appeals from decisions of commercial arbitrators, this time upholding an arbitrator's award of compensation under a British Columbia statute by a close majority.

In a sharply split 5–4 decision, the court in Teal Cedar Products v. British Columbia1 overturned decisions in the B.C. courts and restored a commercial arbitrator's original rulings on the compensation owed to Teal.

The majority concluded that the arbitrator's interpretation of a B.C. statute was not unreasonable and declined to interfere with it. By contrast, four members of the court concluded that the arbitrator's legal interpretation was not only incorrect, but unreasonable.

It is unlikely that Teal will be the final word on the role of courts in reviewing arbitration decisions.

Limited Appeals to Canadian Courts

As noted in this article earlier this year, commercial arbitration awards are often difficult to challenge in Canadian courts. For domestic Canadian arbitrations, many provincial statutes restrict appeals to "questions of law" and require parties to make a formal court application for permission to appeal.2

The Supreme Court's 2014 decision in Sattva Capital v Creston Moly concluded that an appeal court will not interfere with a commercial arbitrator's decisions on questions of law unless a decision is unreasonable.3 Only in "rare circumstances" will a court on appeal require that the legal determination be correct. Those rare circumstances include where a constitutional question arises, or there is a question of law that is of "central importance to the legal system as a whole" and outside the arbitrator's expertise.4

Sattva concerned a consensual commercial arbitration between two private parties. The central legal point on appeal was contract interpretation. In Teal, the company was required by statute to arbitrate its compensation claims against the Province of British Columbia. One key legal issue was the interpretation of the statute on what compensation was payable.

Teal

The majority decision in Teal accepted the principle stated in Sattva that in nearly all cases, an appeal court will only overturn a commercial arbitrator's ruling on a question of law if that ruling is unreasonable. The majority opinion, authored by Justice Gascon, applied that principle to the arbitrator's interpretation of the provincial statute, adopting a deferential standard of review consistent with court review of administrative decision-making. The majority did not adopt a correctness standard, which would have applied to an appeal from a court.

Justice Gascon emphasized that in the arbitration context, the applicable standard of review is not to be determined solely by the nature of the question that the court is reviewing. That is, merely identifying a "question of law" does not imply that a court will require the arbitrator's legal interpretation to be correct. Because it is a commercial arbitrator's decision (rather than a trial court's decision), the standard of review is presumptively reasonableness—even on pure questions of law.

As already noted, there are exceptions, and Justice Gascon's reasoning provides some guidance on when a correctness standard may apply. He concluded that the question of law in Teal was not of central importance to the legal system as a whole because the interpretation of the B.C. Forest Revitalization Act was "limited … to a single province and a single industry". In addition, Justice Gascon concluded that the legal question was not outside the expertise of the arbitrator because both parties chose him to adjudicate this very dispute. His expertise was therefore presumed. In addition, the parties had unambiguously affirmed their acceptance of his sufficient expertise.5

Justice Gascon's reasons disclose that the limited jurisdiction of the court on appeal and the deferential standard of review both advance two central objectives of commercial arbitration: efficiency and finality.6 This is not entirely new. Members of the court have referred to efficiency in relation to the arbitration process in previous cases.7 Finality is an important principle underlying commercial arbitration regimes and was raised by the Chief Justice at the oral hearing of Teal.

On the merits, Justice Gascon concluded that in awarding compensation to Teal under the statute, the arbitrator reasonably selected a valuation method. That selection was within a range of possible, acceptable outcomes open to the arbitrator. There was no single reasonable interpretation of the legislation on determining compensation.

The four dissenting members of the Supreme Court concluded that they did not have to decide whether the arbitrator's interpretation of the legislation must be correct or unreasonable, because under either standard the arbitrator's interpretation could not stand.8 Relying on their view of the plain and ordinary meaning of the statutory provision, Justices Moldaver and Côté concluded that only one interpretation of the legislation could withstand scrutiny, and it was not used by the arbitrator. There was no defensible basis for the arbitrator's interpretation and as a result of it, Teal would be overcompensated, at the taxpayer's expense.

The Final Word?

Five members of the Supreme Court supported a deferential standard for review of statutory interpretation by a commercial arbitrator, consistent with Sattva. One of them was Chief Justice McLachlin, who has announced her retirement effective at the end of the year. The four dissenters in Teal expressly did not comment on the applicable standard of review. Three of them were not members of the seven-person panel of the Supreme Court that decided Sattva.

That is not to say that a future case would not follow the majority's reasons in Teal on the relevant standard of review. But given the Supreme Court's divisions in several recent cases concerning the standard of review to be applied to other decision-makers, it is unlikely that Teal will be the last word on the subject for arbitration.

Implications

Two concluding points. First, from a commercial perspective, if parties want "final and binding" arbitration, they can often have it in Canada. Depending in part on what terms are in the parties' agreement to arbitrate, appeals to courts will usually be limited and success on appeal may be difficult to achieve. Of course, the outcome depends on the specific circumstances.

Second, arbitration clauses in commercial agreements should account for how narrow appeal rights may be, and counsel should advise clients and draft clauses accordingly. In some provinces, such as Ontario, parties have the power to agree upon the scope of appeals in their agreement to arbitrate. Some sophisticated (and prescient) parties may even agree on the standard of review to the courts, or to a separate arbitral tribunal to hear an appeal. Care in drafting the arbitration clause, selecting a governing law and providing for attornment to a province's courts for appeal purposes, all may be more important following the Supreme Court's recent rulings.

Canadian legislation and the Supreme Court's decisions in Sattva and Teal have the combined effect of limiting access to public courts for an appeals of commercial arbitration awards. For the time being, alternative dispute resolution through commercial arbitration may be more "alternative" to the courts than ever.