Archive for August, 2014

Appeals from Arbitrations and Courts on Contract Disputes

Friday, August 1st, 2014

The Supreme Court of Canada released today its decision in Sattva Capital.  The case is interesting both for its clarification of the law related to appeals from contractual disputes as well as providing clarification on appeals from decisions of arbitrators.

The factual background is quite simple.  The plaintiff assisted the defendant in finding a buyer for mining property.  The plaintiff was entitled to a finder’s fee and this was to be paid in shares of the defendant company.  The problem arose as to the manner in which the number of shares should be calculated.  If the plaintiff was correct, it would be entitled to approximately 11.5 Million shares and if the defendant was correct, then the plaintiff was entitled to only about 2.5 Million shares.  The parties took their dispute to arbitration and the arbitrator agreed with the plaintiff’s determination of how the shares should be calculated.  The defendant asked for permission to appeal the arbitrator’s decision to the B.C. trial court – which denied the request – and then appealed to the B.C. Court of Appeal – which allowed the appeal.  This is because in B.C. the Arbitration Act permits appeals only where either both parties consent or where the arbitrator has committed an “error of law” (and other, subsidiary circumstances arise).  The defendant, being given permission to appeal the arbitrator’s decision then proceeded with the appeal and the question was what was the standard of review for the court – did the arbitrator have to get it completely correct?  Mostly correct?  Could the arbitrator make the decision in any fashion?  Etc.

The Supreme Court of Canada addressed two main issues: (1) is the interpretation of a contract a “question of law” and (2) what is the standard of review for an arbitral decision.  While of great interest to litigators, the Court’s decision is also important for businesses as well.

Traditionally, the interpretation of a contract was always considered to be a question of law.  This approach came from the fact that all trials were performed by juries in the 1800′s and earlier and some jurors might not be able to read and write – so when it came to reading and understanding contracts, that was said to be a legal question and left for the judge (who could read and write).  Since jurors now can read and write, this is no longer an issue and there is no need to say that contractual interpretation is to be found as a question of law.  In many instances, it will now be found to be a mixed question of fact and law.  Only in a few instances will issues arising out of a contract be found to be a “pure” question of law.  Those instances are whether the judge or abitrator (i) incorrectly applied a principle; (ii) failed to consider all of the required elements of the legal test; and (iii) failed to consider relevant factors within the applicable elements of the legal test.  As noted by the court, these situations will be rare.  So, that’s all nice, but what does it mean?  It means that, whether you are before a judge or an arbitrator, your opportunities to successfully appeal a decision based on a contractual interpretation just went down significantly.

Appeals on questions of law in a court context are dealt with on the basis of “correctness”.  In other words, did the trial judge “get it right”?  It’s an all-or-nothing type of proposition.  If the judge got it wrong, then the appeal succeeds and the decision is either overturned or sent back down for another trial based on the correct view of the law.  Appeals on mixed questions of fact and law have a lower standard – the “palpable and overriding error” test.  Or, as I explain it to clients, it’s not that the judge in the Court of Appeal would have come to a different conclusion, but it is along the lines of “did the trial judge really botch up the decision?”  If there was evidence to support the trial judge’s decision, then that’s usually sufficient to uphold the decision on appeal (even if you were to ask 100 other judges and all 100 would have come to the opposite conclusion based on other evidence).  This puts more pressure on the parties to ensure that they win at trial.  Similarly, it puts more pressure on parties to win in an arbitration.  You cannot even get to appeal unless you are dealing with a question of law (see, for example, Section 45 of Ontario’s Arbitration Act which is similar to the B.C. law examined in Sattva Capital).  By restricting what is now considered a question of law, you are restricting the chances that you will be able to appeal the decision of the arbitrator.

On this first point, quick mention should also be given to the fact that, even if there is a question of law at issue, the Court still has a residual discretion in deciding whether to permit the appeal.  The Supreme Court approved of the following list of factors that a judge can take into account in deciding whether to permit the appeal (the list is not exhaustive): (i) the conduct of the parties; (ii) evidence of alternative remedies – that is, some relief that might be available instead of letting the appeal go forward; (iii) whether there has been undue delay in seeking to appeal; and (iv) whether there is an urgent need to bring the dispute to an end (for example, if the subject of the appeal is a perishable item like food sitting in a cargo ship at the dock that might spoil if the appeal is allowed to proceed).

The second issue deals with the standard of review of arbitrators.  This assumes that you have made it through the first hurdle and have a judge who will review the arbitrator’s decision.  Again, the Supreme Court has signalled that the standard arbitrators have to meet will be lower in most cases.  If the issue involves constitutional questions (extremely rare in commercial disputes) or “questions of law of central importance to the legal system”, then (and only then) will the correctness standard mentioned above apply.  Again, as a practical matter, very few legal questions in an arbitration will involve questions that are of “central importance to the legal system” as a whole.  Almost all will deal with disputes that are important to the parties, maybe some third parties, but that will be it.  As an extreme example, if A contracts with B to bring slaves from a particular country and then B fails to do so and A starts an arbitration to force B to send the slaves over AND the arbitrator should somehow find in A’s favour, then, yes, I suppose I could see this as being a case of “central importance to the legal system”.  Short of something that radical, the chances of the correctness standard being applied are very slim.  So, outside of those few exceptions, in most cases the standard of review will be “reasonableness” – which is really just another way of saying “did the arbitrator really botch up the decision”.  If there is some rational basis for coming to the conclusion reached by the arbitrator – even if the judge might have decided otherwise – the arbitrator’s decision will not be overturned.  Again, this will result in few arbitrator’s decisions being overturned (unless we suddenly get a flood of really bad arbitral decisions – which isn’t likely to happen).

Again, the end result is that if you have a contractual dispute, whether you go for arbitration or for a court action, the focus has to be on winning at trial or at the arbitration because your chances of getting a “second kick at the can” on an appeal are now even more slim than they were before (and they weren’t particularly great before).  As such, more thought and planning has to go into the drafting of contracts – the days of doing cut-rate contracts or using “one size fits all” contracts is either gone or will quickly pass away.  Similarly, this will increase the costs of litigation because you will have to ensure you win – and if you cannot win, then you have to focus on settling at an earlier stage and the old trick will pass away of taking the lawsuit to the bitter end, losing and then appealing and trying to settle at that point in the hopes that the other side doesn’t want to spend the money on the appeal and will settle for something less than it got from the trial, because the chances of success on appeal are even lower and the other side will know this and will be more forceful in their defence of the appeal.

Something to think about.