Appeal Courts Say “Hands Off” Arbitration

One of the main reasons to choose arbitration is that parties want a decision that’s final and binding. Until they lose. Then they want a court to give them a do-over to fix the arbitrator’s terrible mistakes.

Two recent decisions by the Courts of Appeal in British Columbia and Ontario remind us that the parties should get what they bargained for, “final” means final, and courts should not intervene except in exceptional situations.

In Spirit Bay Developments Limited Partnership v. Scala Developments Consultants Ltd. (2022 BCCA 407) the B.C. Court of Appeal said the court should not intervene, even if an arbitrator has misstated the law, unless the error affects the outcome.

The case involved a claim for unpaid invoices on a construction project and a counterclaim for negligent work. The arbitrator awarded damages to the builder and dismissed the counterclaim. The developer was granted leave to appeal to the BC Supreme Court on three questions of law under the Arbitration Act. The appeal judge found that there were errors of law on all three grounds, but found that two of them did not affect the award. On the third ground, the judge found that the arbitrator had erred in applying the law of unjust enrichment and referred the matter back to the arbitrator for a rehearing on that issue alone. Both parties appealed to the Court of Appeal.

The Court of Appeal dismissed the developer’s appeal, allowed the builder’s appeal and restored the original Award.

The Court noted, first, that under the Arbitration Act, appeals may be made only on questions of law. Issues of mixed fact and law are not subject to appeal. As Mr. Justice Hunter stated:

[6] In this case, I am not satisfied that any of the questions of law constitute extricable errors of law justifying appellate intervention. The Award was based upon an assessment of the evidence, findings of credibility and a construction of the contractual arrangement between the parties that falls within the jurisdiction of the arbitrator. I agree that the arbitrator misstated the law in some respects and referred to legal principles that had no obvious application to the task at hand. However, when the Award is read as a whole, I do not consider that these erroneous statements affected the determination of the largely factual issues required to be resolved. The result would be no different if a standard of review of correctness were applied.

In Ontario, the Court of Appeal, in Tall Ships Development Inc. v. Brockville (City), 2022 ONCA 5516, reaffirmed that when parties have agreed to limit their appeal rights, the court should give effect to that agreement.

The case arose from three arbitration decisions relating to a decade-long public-private waterfront development project with several related contracts and agreements. The agreed on arbitration and that awards would be subject to appeal only on questions of law.

The issues related to Tall Ships’ claim for extra costs of construction, site remediation costs, and interest on an amount paid in part settlement of the dispute. The arbitrator dismissed the claims in three separate awards. Tall Ships appealed. The application judge set aside the awards and ordered that a new arbitrator be appointed to rehear the claims.

At the Court of Appeal, Brockville argued that the issues before the arbitrator were mixed questions of fact and law, so there was no right of appeal under the Arbitration Act, 1991 or the Arbitration Agreement. And it argued that the application judge erred in finding any errors of law or procedural unfairness that warranted the court’s intervention.

The Court of Appeal agreed.

[3] In this case, the parties selected an arbitrator to deal with a number of issues arising out of a large project with a number of interrelated contracts and agreements. Moreover, they specifically chose to agree that only questions of law would be subject to appeal. As a matter of policy, and as the Supreme Court of Canada has stated repeatedly, judges exercising their appellate powers under s. 45 of the Arbitration Act should be cautious about extricating questions of law from the interpretation process: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at paras. 54-55; Teal Cedar Products Ltd. v. British Columbia 2017 SCC 32, [2017] 1 S.C.R. 688, at paras. 45-47. Failing to exercise such caution will result in the very inefficiencies, delays and added expense that choosing an arbitral process seeks to avoid. As I will explain in detail below, I conclude that none of the alleged errors made by the arbitrator could properly be considered extricable errors of law. Nor were there any breaches of procedural fairness that could attract review pursuant to s. 46 of the Arbitration Act.

[16] The principle that in exercising their role as appellate courts, judges should not be too ready to characterize particular issues as issues of law because doing so may render the point of consensual arbitration nugatory is of particular importance when, as here, the impugned terms form a relatively small part of a large and complex arbitration decision. As the Supreme Court has stated, “the circumstances in which a question of law can be extricated from the interpretation process will be rare”: Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, [2016] 2 S.C.R. 23, at para. 113, citing Sattva, at para. 55.

The Court in Tall Ships also refers to the fact that the arbitrator had heard four weeks of evidence and gave detailed reasons for his decision. It found that the application judge was wrong to characterize the issues in the appeal as questions of law. They were mixed questions of fact and law. The arbitrator’s awards were based on specific findings of fact, and they were not subject to appeal.

On the question of procedural fairness, the Court said:

[95] …It also bears repeating that s. 46 of the Arbitration Act cannot be used as a broad appeal route to bootstrap substantive arguments attacking an arbitrator’s findings which the parties had agreed would be immune from appeal… [On the claim for interest] There was no material surprise or unfairness to Tall Ships and the applications judge’s conclusion that the arbitrator’s decision was manifestly unfair cannot stand.”

The Court also made a point of warning generally against giving parties two kicks at challenging arbitration awards under both sections 45 and 46 of the Arbitration Act.

[2] …Moreover, in characterizing the same arguments as breaches of procedural fairness falling under s. 46 of the Arbitration Act, the application judge effectively bootstrapped the substantive arguments. This court has recently emphasized the narrow basis for setting aside an arbitral award under s. 46 of the Arbitration Act, which is not concerned with the substance of the parties’ dispute and is not to be treated as an alternate appeal route: Alectra Utilities Corporation v. Solar Power Network Inc., 2019 ONCA 254, 145 O.R. (3d) 481, at paras. 20-27, 40-44, leave to appeal refused, [2019] S.C.C.A. No. 202; Mensula Bancorp Inc. v. Halton Condominium Corporation No. 137, 2022 ONCA 769, at paras. 5, 40.

It seems to me that very few arbitrations would be open to a successful appeal or set-aside application applying the standards expressed in the Spirit Bay and Tall Ships decisions, or in the Supreme Court decisions they refer to.

In my experience, in commercial arbitration at least, almost every award is based on the construction of a contract, assessment of evidence and findings of credibility to a great degree. The losing party wants to appeal or set aside the award because the arbitrator got those things wrong, not because they didn’t understand the law or the process wasn’t fair.

Having said that, there are still plenty of cases where courts have been able to extract a “question of law” from the record – whether there really is one or not – when they think the award was wrong and they want to set it straight.

These two are examples where the lower courts did just that.

That may be changing, as the appeal courts remind the courts below that it is not their job to second-guess arbitrators who have heard all the evidence, even if they may not agree with the result.

Parties entering into arbitration should be prepared to live with the result, win or lose.

(On a personal note: this will be my last regular dispute resolution column for Slaw.ca. I’ve been writing these since 2012 and have enjoyed weighing in on many different ADR topics. Thank you to all who have taken the time to read it, and to those who’ve responded over the years. I’ve appreciated all the feedback. Now it’s time to turn to some other writing projects. All the best the Slaw community for 2023 and beyond!)