Appealing Arbitration Awards: Why the Courts’ Role is Limited

When parties arbitrate a dispute, as opposed to pursuing litigation in the Courts, there is an understanding that the arbitration should bring the matter to an end. A recent decision of the Supreme Court of Canada, Teal Cedar Products Ltd. v. British Columbia, 2017 SCC 32, reaffirms the very limited circumstances in which Courts will entertain an appeal from an arbitral award.

The Teal decision limits the Courts’ appellate jurisdiction. Moreover, where that narrow jurisdiction exists, Teal emphasizes that the appellate Court should show the arbitrator deference.

Teal involved a claim for compensation by a forestry company which possessed licenses to harvest Crown timber in British Columbia. The province reduced, amongst other things, the company’s access to roads and bridges which the company relied on to harvest the timber. Accordingly, the company claimed compensation for this reduction and the claim was sent to compulsory arbitration under the British Columbia Forestry Revitalization Act.

The arbitrator who heard the dispute had many issues to resolve. For the most part, the forestry company won the dispute.

First, there was an issue of statutory interpretation.  The arbitrator had to decide on a valuation method that was consistent with the compensation provisions  under the Forestry Revitalization Act (the “Statutory Interpretation Issue”). Ultimately, the arbitrator selected a “depreciation replacement costs method” as the proper methodology for awarding compensation.

Second, the arbitrator had to rule on a question of contractual interpretation. The issue on appeal was whether the arbitrator let the factual matrix, i.e. the circumstances surrounding the making of an amended settlement agreement between the parties, overwhelm the words of the agreement when he interpreted it. At issue was whether the arbitrator allocated too much weight to his consideration of the factual matrix and whether the arbitrator’s interpretation was isolated from the words of the contract (the “Contractual Interpretation Issues”).

Third, there was an issue of “statutory application”. The question was whether the arbitrator erred in denying compensation to the forestry company with regard to improvements associated with one of its licenses because the company never “lost access to those improvements, in contrast with other licences where the company did lose access”. This issue, according to the Supreme Court of Canada, involved “the application of a specific valuation methodology to the intricate facts before the arbitrator” (the “Statutory Application Issue”).

Under the British Columbia Arbitration Act, R.S.B.C. 1996, c.55, a Court hearing an appeal from an arbitral award is limited to hearing “questions of law” only. As the Supreme Court of Canada held in Teal, “statutory limitations on the scope of appellate review of arbitration awards are ‘absolute’ “,  meaning that if any of the above issues is not a question of law, the Courts have no jurisdiction to consider them on appeal.

What is a “Question of Law”?

Given the limited appellate jurisdiction of the Court under the British Columbia Arbitration  Act, the Court had to decide which of the issues above amounted to “questions of law”.

The Court classified three types of “questions” that are possible on appeal—legal, factual or mixed.

A legal question is a question “about what the correct legal test is”. Factual questions are questions about “what actually took place between the parties”.

Mixed questions of fact and law are questions about “whether the facts satisfy the legal tests”. In other words, mixed questions “involved applying a legal standard to a set of facts”. However, with respect to mixed questions, where a court applies a legal test to a set of facts and the legal test may have been altered by the Court, then a pure question of law arises. For instance, where a party alleges that an arbitrator failed to consider a required element of a legal test, the arbitrator “deleted” an element of the legal test and therefore altered it. This amounts to a “legal question” or “question of law”.

When considering the three classifications of “questions” available on appeal, the Court should be reluctant to identify “extricable questions of law” from mixed questions in order to gain jurisdiction on appeal.

In other words, Courts should be hesitant to identify pure questions of law in an arbitral decision as this would undermine the policy goal of limited appellate intervention in arbitral awards:

…A narrow scope for extricable questions of law is consistent with finality in commercial arbitration and, more broadly, with deference to factual findings. Courts must be vigilant in distinguishing between a party alleging that a legal test may have been altered in the course of its application (an extricable question of law…), and a party alleging that a legal test, which was unaltered, should have, when applied, resulted in a different outcome (a mixed question).

In Teal, the Statutory Interpretation Issue, i.e. which methods of valuation were acceptable under the Forestry Revitalization Act, was a “matter of statutory interpretation” and therefore a question of law, amenable to appellate review by the Courts.

With respect to the Contractual Interpretation issues, the issue of whether the arbitrator gave excessive weight to the factual matrix when interpreting a settlement between the parties was a question of mixed fact and law that fell outside the Court’s appellate jurisdiction. The arbitrator was required to weigh the factual matrix with the words of the settlement contract.

However, the issue of whether the arbitrator’s interpretation of the factual matrix was isolated from the words of the contract raised a question of law, but the matter was not reviewable on appeal because the argument lacked merit, i.e. the Court held that the arbitrator’s interpretation of the factual matrix “was clearly anchored in the words of the contract”.

As for the Statutory Application Issue, i.e. whether the arbitrator erred in denying compensation to the forestry company relating to the improvements associated with one its licences because it never lost access to those improvements, this question involved the application of a valuation method to the facts before the arbitrator. This was a mixed question beyond the scope of appellate review.