“What if They Get It Wrong?”
One of the fears we often hear from business people and lawyers who are reluctant to put “final and binding” arbitration clauses in contracts is: “What if the arbitrator gets it wrong?”
The recent decision of the British Columbia Court of Appeal in Creston Moly Corp. v. Sattva Capital Corp., 2012 BCCA 329 (CanLII) offers an object lesson in how the courts may still be too eager to review arbitration decisions and may even get the result “wrong” in situations where the arbitrator actually “got it right”.
The case involved a dispute over the payment of a finder’s fee in a mining deal. In 2006, Sattva brought Creston (formerly called Georgia Ventures) a potential acquisition of a mine in Mexico. They agreed that Sattva would get a finder’s fee if the acquisition closed. The amount of the fee was subject to approval of the TSX Venture Exchange (VE) and was payable in shares. Under the TSX VE rules, the amount of the finder’s fee was $1.5 million, based on the value of the deal. There was no dispute about that. However there was a dispute about the value of the shares, which was submitted to arbitration.
When the companies signed the finder’s fee agreement, and before the acquisition deal was signed, GVI had issued a number of shares at $0.15. Trading in GVI shares was halted pending announcement of the deal. Soon after it was announced, GVI raised more money at $0.70 a share.
Sattva claimed payment of its finder’s fee in shares at $0.15 a share. Georgia offered to pay either in cash or in $0.70 shares. In seeking approval of the finder’s fee from the TSX VE and its own shareholders, Georgia apparently only sought approval of the payment of $1.5 million in cash. It did not disclose Sattva’s claim for shares at $0.15.
The Court of Appeal summarized the relevant portions of the arbitrator’s award as follows:
[14] The arbitrator addressed the import of the Agreement at paragraph 23 of the Award:
In summary, then, as of March 27, 2007 it was clear and beyond argument that under the Agreement:
(a) Sattva was entitled to a fee equal to the maximum amount payable pursuant to the rules and policies of the TSX Venture Exchange – section [3.3]. It is common ground that the quantum of this fee is US$1,500,000.
(b) The fee was payable in shares based on the Market Price, as defined in the Agreement, unless Sattva elected to take it in cash or a combination of cash and shares.
(c) The Market Price, as defined in the Agreement, was $0.15.
[15] He decided Georgia breached the Agreement by failing to act in good faith and honour the “best efforts” obligation the Agreement required. He found Georgia’s conduct in unilaterally obtaining TSXV approval of a finder’s fee payable in cash, without trying to obtain approval for payment in shares valued at $0.15, as Sattva demanded, had rendered it less likely the TSXV would have approved payment by the latter method. He observed the TSXV had discretion in applying its policies, and concluded that if Georgia had properly conducted the approval process there was an 85% probability the TSXV would have approved payment of the finder’s fee in $0.15 shares.
[16] The arbitrator calculated Sattva’s damages by converting the $1.5 million US finder’s fee to Canadian funds, and dividing that figure by $0.15, resulting in 11,459,853 shares. He found Sattva could have sold those shares in an orderly manner by the end of 2007 for gross proceeds of $0.40 to $0.44 a share, resulting in a loss of between $4,583,914 and $5,156,934. He assessed damages at 85% of the average of those amounts, producing an Award of $4,140,000.
[17] Georgia has made a cash payment of $1.5 million US (or the equivalent in Canadian dollars) to Sattva on account of the arbitrator’s award. The balance of the damage award is held in the trust account of Sattva’s solicitors pending determination of these proceedings.
Those funds were destined to sit in the trust account for four years.
Georgia sought leave to appeal the arbitrator’s award to the B.C. Supreme Court under the B.C. Commercial Arbitration Act. That Act, provides for appeals on questions of law, with leave from the court, if:
(a) the importance of the result of the arbitration to the parties justifies the intervention of the court and the determination of the point of law may prevent a miscarriage of justice,
(b) the point of law is of importance to some class or body of persons of which the applicant is a member, or
(c) the point of law is of general or public importance.
The Court found that the issue was not a question of law, but a question of fact or mixed fact and law. Even if it was purely a question of law, the court would have exercised its discretion not to grant leave, on account of Georgia’s conduct in misrepresenting the finder’s fee agreement to the TSX VE and in misrepresenting the TSX VE’s position to Sattva, when it said the exchange wouldn’t approve anything other than a cash payment (paragraph 39 of the decision).
The judge made a further observation, which is interesting in the context of the ultimate decision in the case.
[41] I would further deny leave to appeal on the principle that one of the objectives of the Act is to foster and preserve the integrity of the arbitration system. This is one of the factors mandated to be considered by a judge in exercising discretion on a leave application…
The judge went on to cite earlier decisions of the B.C. Courts, which commented that:
“Arbitration is intended to provide a speedy and final resolution of the issues. No party may appeal any aspect of an arbitration award as of right. The court retains a certain discretion … to grant or refuse leave after weighing the importance of the result of the arbitration and the point of law invoked. … After most arbitrations, one party or the other, perhaps both, will be unhappy with the result. The substantial constraints on the granting of leave to appeal play an important role in preserving the integrity of the arbitration system. If leave were granted too readily, one of the beneficial and distinguishing features of arbitration (its finality) would be lost. Elk Valley Coal Partnership v. Westshore Terminals Ltd., 2008 BCCA 154 (CanLII), quoting from Ed Bulley Ventures Ltd. v. Eton-West Construction Inc., 2002 BCSC 826 (CanLII), at para 5.
In this case, however, the Court of Appeal did not see it that way. The decision was reversed, leave to appeal was granted and the matter was sent back to the B.C. Supreme Court for consideration of the arbitration award.
Once again the B.C. Supreme Court (a different judge from the first leave application) saw no reason to change the arbitrator’s decision. Once again, the B.C. Court of Appeal disagreed.
After reviewing the facts and the arbitrator’s award in some detail, the Court of Appeal noted that: “the interpretation of the Agreement is a question of law alone, reviewable on a standard of correctness.” The Court of Appeal concluded that neither the arbitrator nor the court below had given adequate attention to the “tension” in the contract between the maximum fee allowable under the TSX VE rules and the agreement to pay the fee in shares. It concluded that the maximum value of the finder’s fee was $1.5 million, regardless of whether it was paid in cash or shares. Therefore, there was no breach of contract.
In the end, one is left with the question: “Who got it wrong, the arbitrator or the courts?”
If the goal is to give effect to the original agreement of the parties, then it seems clear that the arbitrator actually got it right. The parties agreed that the fee would be $1.5 million, payable in shares at the market value immediately before the acquisition was announced. The arbitrator found that the parties must have anticipated that the value of the shares would go up after the acquisition. Why do it, otherwise. As noted by both the arbitrator and the court, Satva was also taking the risk that the shares could go down in value. The commercial intent of the agreement could not have been simpler – or clearer.
The B. C. Supreme Court clearly understood this: finding no reviewable question of law in the first instance; then upholding the award in the second go-round.
Of course, another arbitrator faced with the same facts could have come to a different decision.
For example, one might argue that the arbitrator should not have discounted the award by 15%. He determined that this was the risk that the TSX VE would not have approved the payment, if given all the relevant information. However, having determined on a balance of probabilities that the exchange would have approved payment in lower-priced shares, perhaps he should have awarded Sattva the full value of those shares.
On the other hand, the arbitrator could have concluded that the contract was impossible of performance, as written. If the TSX VE rules would not have allowed the payment in shares at the lower price, then the arbitrator could simply have awarded payment of the finder’s fee in cash.
This is what the Court of Appeal ultimately did. But they had to take a long, winding path to get there. Because the court could not reject the arbitrator’s findings of fact, they had to come up with a question of law (contract interpretation) and completely ignore the original intent of the parties.
In the process, the parties lost all of speed and cost benefits of arbitration.
The contract was made early in 2007. The arbitration award was rendered in 2008. After two trips to the B.C. Supreme Court and Court of Appeal, the decision reversing the award was released in 2012. (Surprisingly speedy, as litigation goes, but still five years after the fact.)
And the legal costs must have eaten up much of the amount in dispute. Both parties were awarded costs at various stages along the way. Nevertheless, each of them must have borne significant unrecoverable costs.
When all is said and done, it is difficult to see what important question of law or miscarriage of justice required the courts to intervene in this case. The facts of this case are interesting and unusual, but the contract terms in dispute may never arise again.
So those who worry about the final and binding nature of arbitration awards should be careful what they wish for. They may be far worse off going to court.
For those interested in following the full saga of Creston Moly Corp. v. Sattva Capital Corp, here are links to all of the B.C. court decisions.
Round 1 – Leave to Appeal Application
British Columbia Supreme Court
British Columbia Court of Appeal
Round 2 – Appeal of Arbitration Award
The BCCA seems to have thrown out the window the last 30 years’ worth of thinking about arbitration by law reformers, legislators, and judges, not to mention ignoring the very clear signals in the leave to appeal provisions that appeals are to be discouraged. A sad day for arbitration.
The irony is that this case is also an example of why parties might want a right of appeal from the arbitration where the value of the case warrants it. The BCCA did not agree the arbitrator got it right, or even made a decision that could have been right. The BCCA held that the arbitrator’s decision was absurd – see 2012 BCCA 329 at paras. 45-47.