Why Not Equity? BC (Forests) v Teal Cedar Products 2013 SCC 51

Arbitration is simply exciting because it allows parties to design a framework by which to resolve their conflict. This immense flexibility, though, also means that parties may not explicate all of the necessary rules. Herein lies the question: should a reference to rules, one of which grants equitable remedies, be sufficient to grant the arbitrator with jurisdiction? The Supreme Court of Canada (SCC) had the opportunity to grapple with this question in BC v Teal Cedar Products, where it considered whether the arbitrator had the power to award compound interest, despite conflicting legislation. Its brief response to the question, though, appears to have created profound consequences for arbitrations across Canada.

In 1999, British Columbia (“Province”) reduced the annual timber cut license of Teal Cedar Products (“Teal”) to create a park. Teal initiated legal action against the Province pursuant to s.60 of the Forest Act, claiming compensation for partial expropriation in 2001. The parties could not agree on the appropriate compensation and subsequently underwent arbitration under the Commercial Arbitration Act (“CAA”) per s. 60(7) of the Forest Act. The arbitrator awarded Teal more than $6.3 million, $2.2 million of which was interest compounded annually from the date when the Province reduced the annual cut to the date of the award, claiming that compound interest was not “proscribed by legislation.”

Both parties appealed the award for various reasons. However, the SCC only considered whether the arbitrator erred in awarding compound interest.

The lower courts concluded that the arbitrator made no mistake. Specifically, the British Columbia Supreme Court (BCSC) upheld the order for compound interest because there was no statutory bar to include compound interest “as part of” the award. The court relied on McKechnie v McKechnie (“McKechnie”), which upheld the arbitrator’s decision to award compound interest as “part of” and not “on” the award. The BCSC also drew on Morriss v BC, a non-arbitration case in which the court used its equitable jurisdiction to award compound interest.

The British Columbian Court of Appeal (BCCA) later denied the Province leave to appeal for similar reasons.

Supreme Court of Canada:
Rothstein J, for the unanimous court, allowed the appeal, arguing that the arbitrator exceeded his jurisdiction in awarding compound interest. From the statutory perspective, the arbitrator was bound by s.28 of the CAA, which requires arbitrators to apply the Court Order Interest Act (“COIA”) for pecuniary judgments. Section 1 of COIA, in turn, requires a court to add interest to the pecuniary judgment, and s.7(2) of the COIA requires simple, not compound, interest on the “sum direct to be paid by an award.”

Rothstein J held that s. 28 of the CAA implies that “court[s]” include arbitrations and traditional judicial courts. Otherwise, only courts would be able to award interest, and s.28 of the CAA would serve no purpose.

He also dismissed Teal’s assertion that the arbitrator could award compound interest “in the award itself,” as done in McKechnie, because this interpretation would make s.28 of the CAA operate to add interest upon an award that already had interest, essentially allowing double recovery. In doing so, Rothstein J reversed McKechnie.

From the equity perspective, Rothstein J distinguished the case from Morriss, holding that unlike judges in common law courts, the arbitrator had no equitable jurisdiction pursuant to s.23 of the CAA, which only gives arbitrators jurisdiction if the parties have so agreed. According to Rothstein J, “the agreement between Teal end the Province did not permit the arbitrator to deal with equitable grounds.”

Rothstein J provided a convincing explanation for why the arbitrator had no jurisdiction under the governing legislation. Specifically, he showed that any alternative statutory interpretation would be incomprehensible.

However, his analysis of the arbitrator’s equitable jurisdiction was not as convincing. He did not reference any case law, nor did he excerpt a relevant clause of the arbitration agreement. Consequently, Rothstein J left open two possible reasons for the limitation.

Option 1: Explicit Prohibition
It is possible that the parties explicitly prohibited the arbitrator from having power to award equitable remedies. If this is the case, then, Rothstein J’s use of s.23 of the CAA is an exemplary instance of courts respecting the parties’ freedom to contract (see Seidel at para 22).

Option 2: Implicit Prohibition
If, though, Rothstein J barred the arbitrator’s jurisdiction under the assumption that the parties never explicitly permitted the arbitrator to have such power, then the decision becomes more contentious. Recall that the parties agreed to be bound by the British Columbia International Commercial Arbitration Center (BCICAC) Rules. Rule 29(1)(k) of the BCICAC Rules states that arbitrators have the jurisdiction to “make an award ordering… equitable remedies.” Is this not the permission that s.23 of the CAA seeks?

The answer is unclear.

Up until recently, rule 29(1)(k) of the BCICAC Rules would likely have been insufficient to give arbitrators equitable remedies jurisdiction on its own (see AMS Homecare). Arbitration powers were limited in part because “judges were reluctant to relinquish their grasp on dispute resolution, and they even viewed alternative dispute resolution as antithetical to the parties’ interests” (from Seidel at para 54, see National Gypsum.)

But, there is reason to believe that legislatures and courts are beginning to regard arbitrations as a tool to complement traditional courts and enhance access to justice. For nstance, BC law now grants arbitrators comparable powers to court judges to issue equitable orders (Seidel para 55). According to Cassey and Mills, moreover, BC legislation grants arbitrators broad remedial power (Cassey and Mills, Arbitration Law of Canada: Practice and Procedure at 151). Both examples, then, suggest that a more expansive interpretation of arbitrators’ powers is justified.

Courts are also beginning to encourage arbitration (see Desputeaux at para 38). Regarding the arbitrator’s jurisdiction to award equitable remedies, specifically, two cases are worth mentioning. In Hayes Forest Services, the BCCA held that rule 29(1)(k) of the BCICAC Rules was sufficient to confer equitable remedies jurisdiction, in this case an injunction, upon the arbitrator in order to uphold the purpose of rule 29(1)(k) of the BCICAC Rules (para 84).

The 4-5 dissent in Seidel reaffirmed this growing acceptance of arbitrations as a means to uphold justice when LeBel and Deschamps JJ asserted that an arbitrator could, unless the parties agreed otherwise, grant the declaratory and injunctive relief pursuant to rule 29(1)(k) of the BCICAC Rules (para 148). Thus, the reasoning that once made rule 29(1)(k) of the BCICAC Rules insufficient may no longer be as convincing.

In not explaining why the arbitrator did not have equitable jurisdiction, then, Rothstein J weakened his own decision because he might have reached a different conclusion had he considered such case law and current attitudes. Had he done so, he might have allowed the compound interest, which, according to Rothstein J, is the more accurate method of compensating parties for the time-value of money.

Rothstein J also missed an opportunity to enhance access to justice across Canada. Instead of promoting arbitration, Rothstein J reaffirmed that arbitrators are less powerful than court judges. In doing so, he implied that parties wanting justice should choose courts, not arbitrations. This message may, in turn, discourage people from using arbitration or other alternative dispute resolution mechanisms and thereby make courts even more backed up, accentuating the scarcity of judicial resources.

In the end, then, Rothstein J’s cursory analysis of the current state of arbitrator’s equitable jurisdiction may have wronged not only Teal, but Canada as a whole.

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