Supreme Court of Canada Defers to Adjudicators: Sattva Capital Corp v Creston Moly Corp

On August 1, 2014, Canada’s highest court released its reasons in Sattva Capital Corp v Creston Moly Corp, 2014 SCC 53, marking an end to a series of long and protracted proceedings intended to be confined to arbitration. The highlight of the decision was the Supreme Court of Canada’s (“SCC”) limitation on the circumstances when a court can and should review arbitral decisions that involve contractual interpretation.

Similar to Ontario legislation, British Columbia’s Arbitration Act, RSBC 1996, c 55 (the “Act”), limits arbitral appeals to those concerning questions of law and where leave from the court has been granted (unless otherwise provided in the agreement). The SCC narrowed the instances where parties may appeal arbitral decisions involving contractual interpretation by departing from the previous standard whereby the exercise of contractual interpretation always amounts to a question of law. Instead, outside limited exceptions, such questions will involve a question of mixed law and fact.

The decision also clarified several other important considerations: (i) the role and scope of factual evidence to be considered by an adjudicator in the process of interpreting a contract (herein referred to as the “factual matrix”), (ii) the standard of review for appeals arising from arbitration awards under the Act, and (iii) whether the decision rendered by a leave to appeal court would bind the court that ultimately decides the appeal on its merits.

Background 

The parties entered into an agreement (the “agreement”) whereby Creston was to pay Sattva a finder’s fee for its acquisition of a molybdenum mining property. Following the closing of the transaction, both parties disagreed as to the quantum Creston owed to Sattva. Central to this issue was the interpretation of the provisions concerning the date for the valuation of the share price, which would thereby determine the number of Creston shares entitled to Sattva.

In accordance with the agreement, both parties entered into arbitration pursuant to the Act. The arbitrator found in favour of Sattva, consequently ordering an award against Creston. Creston appealed the decision and eventually obtained leave from the British Columbia Court of Appeal (“BCCA”), who ordered the decision back to the Superior Court of British Columbia to be heard on its merits. After hearing the merits of the case, the trial judge also found against Creston. Creston appealed the decision, which once again reached the BCCA, and which ruled in favour of Creston. Sattva appealed.

Contractual Interpretation as a Matter of Fact and Law 

The SCC overturned the decision of the BCCA  and reinstated the arbitrator’s award in full.  The court held that the contractual provision in question involved an exercise of mixed law and fact, thus the BCCA should have granted leave to appeal under the Act.

In its reasons, the SCC discussed the approach to contractual interpretation and the role of the factual matrix. The Court abandoned the historical approach in Canada, still followed in the UK (see Thorner v Major, [2009] UKHL 18, paras 58 and 82-83), whereby all contractual interpretation falls under a question of law. Two justifications were provided for this shift.

The first is a reflection of the Canadian courts’ adoption of a contractual interpretive approach that also factors in the surrounding circumstances of the contract, also referenced as the factual matrix. Rather than a strict concern with construction, the primary goal of decision-makers when giving meaning to contractual provisions is to ascertain “the intention of the parties and the scope of their understanding” (Jesuit Fathers of Upper Canada v Guardian Insurance Co of Canada, [2006] 1 SCR 744, para 27; Tercon Contractor Ltd v British Columbia (Transportation and Highways), [2010] 1 SCR 69, paras 64-65). Since words alone do not suffice to determine intention, their meaning must be supported by looking at contextual factors, such as the purpose of the agreement (Moore Realty Inc v Manitoba Motor League, 2003 MBCA 71, para 15).

The second justification recognizes that what constitutes a question of law, i.e., “questions about what the correct legal test is” (Housen v Nikolaisen, [2002] 2 SCR 235; Hunter et al v Southam Inc, [1984] 2 SCR 145, para 35), does not accord well what is an inherently fact-specific exercise – ascertaining the objective intent of the parties. This is further supported by the fact that contractual interpretation almost always involves a private dispute with narrow issues that will obtain limited benefit from appeal.

As with all general principles, the SCC left room for limited instances where contractual interpretation may involve only questions of law, such as the application of an incorrect principle or the failure to appropriately apply a legal test. However, the SCC cautioned that these instances should be rare.

The Scope of “Surrounding Circumstances” and the Parol Evidence Rule

The SCC went on to discuss the scope of the factual matrix, noting that the purpose of the surrounding circumstance inquiry is not to displace the meaning of the words of the agreement but rather to “deepen a decision-maker’s understanding of the mutual and objective intentions of the parties as expressed in the words of the contract” (para. 57). The general basis of the surrounding circumstances will be the objective evidence at the formation of the contract consisting of the reasonable knowledge the parties knew or ought to have known. This standard is a factual determination. The SCC noted that the parol evidence rule does not preclude the application of the surrounding circumstances because its function is limited to that of an interpretive aid.

Standard of Contractual Review 

Although not necessary to resolve the appeal, the SCC took the opportunity to weigh in on how courts should approach the granting of a leave to appeal from an arbitral ruling by establishing three principles.

The first principle applies to arbitration appeals generally. The SCC used the framework in Dunsmuir v New Brunswick, [2008] 1 SCR 190, to determine the appropriate standard of review. Accordingly, in commercial contexts where the appeal is restricted to a question of law, the standard of review will be one of reasonableness unless a constitutional question or one of central importance to the legal system and outside the adjudicator’s expertise arises. In such cases, the question demands a correctness standard.

The latter two principles are specific to the Act and involve an interpretation of “miscarriage of justice” and a discussion of the court’s discretion to deny leave even where the test under subsection 31(2) of the Act is met. It is also worth mentioning that the court held that a leave court’s decision will not be binding on the court hearing the appeal since both courts are dealing with different aspects of the case.

Significance of the Decision 

This decision has several significant implications. The first is the clarification of the role of the factual matrix in contractual disputes. All exercise of contractual interpretation must incorporate objective evidence when according meaning to words in the agreement, at all levels of decision-making.

Secondly, this decision emphasizes the importance of deference to the adjudicator where parties mutually agreed to bind themselves to arbitration. Parties in the commercial context striving for the privacy, finality and efficiency afforded by arbitration can take solace in the decisions’ restriction on appeals from arbitration. Consequently, commercial parties in the process of contractual drafting will be best advised to turn their mind to the possibility of an arbitral appeal on an interpretive issue of law, or providing for the possibility of mixed law and fact. Findings encompassed within the factual matrix will be overturned only where there is a palpable and overriding error.

Lastly, in accordance with the standard of review, parties who appeal the arbiter’s decision must now not only demonstrate that the decision was incorrect, but that it was also unreasonable. In summary, parties involved in contractual disputes should note the increasing role of the factual matrix and the deference courts accord to the expertise and finality provided by the arbiter.