Canada: Can An Arbitration Award Be Set Aside For Unreasonableness?

If an arbitration agreement states that there is to be no appeal from the award under the agreement, can a party seek judicial review on the ground that the award is unreasonable?

In Dunsmuir v. New Brunswick, [2008] 1 S.C.R. 190, the Supreme Court of Canada set out a comprehensive analysis for the judicial review of the decisions of administrative tribunals. The Court held that there are two tests for determining the legal validity of the decisions of those tribunals: correctness and reasonableness. Generally speaking, the Court held that an administrative tribunal cannot, by legal error, assume a jurisdiction it does not have. True questions of statutory jurisdiction must be correctly decided by the tribunal, and therefore may be reviewed on the basis of correctness. All other decisions will not be set aside unless they are unreasonable, with the degree of deference being shown to the tribunal's decision depending on the nature of the decision (the "Dunsmuir test").

Is the unreasonableness test a proper one to apply to an arbitral award when the parties have agreed that there shall be no appeals from the award? That is the question that was raised in the recent case of Parmalat Canada Inc. v. Ontario Teachers' Pension Plan Board. While the court did not refer to or address this issue in its decision, this case provides a good opportunity to discuss whether the Dunsmuir test should apply to the review of an award under a commercial arbitration agreement.

Factual Background

During 2003 to 2005, Parmalat Canada refinanced itself to avoid default on its financial obligations. Its predicament arose from the financial collapse of its Italian parent. Parmalat Canada entered into a Credit Agreement with Ontario Teachers' Pension Plan Board (Teachers) whereby Teachers provided $530 million in financing to Parmalat Canada.

One of the agreements which Parmalat Canda and Teacher entered into was a Liquidity Payment Agreement ("LPA"). Under the LPA, Parmalat Canada agreed to pay Teachers a Liquidity Payment equal to 10 per cent of the value of Parmalat Canada if a Liquidity Event occurred within seven years of the closing of the Credit Agreement. That closing occurred on June 29, 2004. The definition of Liquidity Event included an "Indirect Change of Control" which included "any Person or Persons, acting jointly and in concert, acquiring, directly or indirectly, ....securities or the right to vote securities of Parmalat Italy carrying any number of votes where thereafter a majority of the board of directors of Parmalat Italy are nominees of such Person or Persons."

On June 28, 2011, or one day before the seventh anniversary of the closing of the Credit Agreement, a slate of director nominated by Group Lactalis S.A. was elected to the board of directors of Parmalat Italy. In March 2011, Lactalis had acquired 28.97 % of the shares of Parmalat Italy. That purchase enabled Lactalis to elect its slate of directors, who were elected on June 28, 2011.

The Arbitration

Teachers then commenced an arbitration asserting that a Liquidity Event had occurred and that Parmalat Canada was required to pay the Liquidity Payment to Teachers. Teachers relied upon the plain language of the agreement and asserted that, under that language, a Liquidity event had occurred and the Liquidity Payment was due to it.

Parmalat Canada took the position that a significant liquidity or realization of value must result from any transaction for it to qualify as a Liquidity Event. It argued that there must be a value realization and/or liquidity, which in turn would fund the Liquidity Payment, for a Liquidity Event to have occurred.

The Arbitrator found that the acquiring shareholder Lactalis, being able to elect its slate of directors on June 28, 2011, thereby gained control of Parmalat Italy. The Arbitrator applied the plain reading of the agreement and concluded that a Liquidity Event had occurred. Under the LPA, the decision of the Arbitrator was final and binding with no appeal.

Does Dunsmuir Apply?

Parmalat Canada applied to the Superior Court to set aside the arbitrator's award under section 46 of the Ontario Arbitration Act, 1991. Among other arguments, it submitted that the arbitrator's decision was unreasonable. It relied on the Dunsmuir decision of the Supreme Court of Canada, and other decisions of the Supreme Court in which that court had applied the Dunsmuir test in its review of two arbitration decisions. Parmalat Canada referred to my article of January 22, 2012 in which I reviewed those two decisions and discussed the potential application of Dunsmuir outside the administrative law context.

Parmalat Canada also relied upon the decision of the Ontario Court of Appeal in Smyth v. Perth and Smith Falls District Hospital (2008) 92 OR 3d 656 in which the Court of Appeal applied Dunsmuir in its review of an arbitration decision.

Smyth concerned an arbitration relating to the appointment of a doctor to the staff of a hospital. The arbitration agreement provided that there was to be no appeal to the court from the arbitrator's decision. The arbitrator decided that the doctor should be given the opportunity to resign or his appointment to the hospital should be terminated. The doctor sought to have the award reviewed under section 46 of the Ontario Arbitration Act, 1991. The superior court judge applied the test of correctness, held that the arbitrator had incorrectly exercised his jurisdiction and overturned the arbitrator's decision. The Court of Appeal applied Dunsmuir, held that the reasonableness test should apply, found that the arbitrator's decision was reasonable and set aside the superior court judge's decision.

In my article of January 22, 2012, I commented on the decisions of the Supreme Court of Canada in Nor-Man Regional Health Authority v. Manitoba Association of Health Care Professionals, 2011 SCC 59 and Newfoundland and Labrador Nurses Union v. Newfoundland and Labrador (Treasury Board) 2011 SCC 62. In both those cases, the Supreme Court upheld a labour arbitration award applying the reasonableness standard in Dunsmuir. I said in my article that those cases are powerful supports for person seeking to uphold arbitration awards.

None of these cases involved commercial arbitrations. In none of these decisions did the court determine whether the reasonableness test is a proper test for the review of the decisions of arbitral tribunals under commercial arbitration agreements, particularly when the parties have agreed that there is no appeal from an arbitral decision. That issue remains to be decided by Canadian courts.

What are the arguments for and against the application of a reasonableness test to commercial arbitrations?

The Rationale For Applying Dunsmuir

The arguments for the application of a reasonableness test have been stated in Dunsmuir and the other Supreme Court of Canada decisions applying Dunsmuir. A quote from Dunsmuir was cited in Smyth and sets out its rationale:

Reasonableness is a deferential standard animated by the principle that underlies the development of the two previous standards of reasonableness: certain questions that come before administrative tribunals do not lend themselves to one specific, particular result. Instead, they may give rise to a number of possible, reasonable conclusions. Tribunals have a margin of appreciation within the range of acceptable and rational solutions. A court conducting a review for reasonableness inquires into the qualities that make a decision reasonable, referring both to the process of articulating the reasons and to outcomes. In judicial review, reasonableness is concerned mostly with the existence of justification, transparency and intelligibility within the decision-making process. But it is also concerned with whether the decision falls within a range of possible, acceptable outcomes which are defensible in respect of the facts and law.

In Nor-Man, the Supreme Court of Canada explained the reason for applying the reasonable test from Dunsmuir as follows:

The standard of reasonableness, on the other hand, normally prevails where the tribunal's decision raises issues of fact, discretion or policy; involves inextricably intertwined legal and factual issues; or relates to the interpretation of the tribunal's enabling (or "home") statute or "statutes closely connected to its function, with which it will have particular familiarity" (Dunsmuir, at paras. 51 and 53-54; Smith, at para. 26).

Similarly, in Newfoundland and Labrador Nurses Union, the Supreme Court of Canada said the following in support of its application of the Dunsmuir reasonableness standard to a labour arbitrator's decision, referring to Professor Dyzenhaus' explanation of Dunsmuir:

This, I think, is the context for understanding what the Court meant in Dunsmuir when it called for "justification, transparency and intelligibility". To me, it represents a respectful appreciation that a wide range of specialized decision-makers routinely render decisions in their respective spheres of expertise, using concepts and language often unique to their areas and rendering decisions that are often counter-intuitive to a generalist. That was the basis for this Court's new direction in Canadian Union of Public Employees, Local 963 v. New Brunswick Liquor Corp., 1979 CanLII 23 (SCC), [1979] 2 S.C.R. 227, where Dickson J. urged restraint in assessing the decisions of specialized administrative tribunals. This decision oriented the Court towards granting greater deference to tribunals, shown in Dunsmuir's conclusion that tribunals should "have a margin of appreciation within the range of acceptable and rational solutions" (para. 47).

These expressions of the rationale behind the reasonableness test are largely based upon the statutory jurisdiction of administrative tribunals. Even labour arbitrators are usually exercising their authority in the context of arbitration mandated by statute. The statutory source of jurisdiction justifies the court imposing a standard of reasonableness on the arbitrator's reasons for decision.

Does this rationale apply when the parties have quite voluntarily chosen arbitration as their dispute resolution mechanism and have agreed that there shall be no appeal to the courts?

The Rationale For Not Applying Dunsmuir

The argument that it does not can conveniently be started by examining the Ontario International Commercial Arbitration Act (ICAA) and the Model Law attached to it. That Model Law has been adopted by many countries around the world. Pursuant to that Model Law, international commercial arbitration decisions are rendered and enforced around the world. Under Article 34(1) of the Model Law, recourse to a court against an arbitral award may be made only by an application for setting aside in accordance with that article. No right of appeal is provided in the Model Law. Article 34(2) of the Model Law says that an award may be set aside by the court only on the following grounds:

(i) a party to the arbitration agreement was under some incapacity; or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of this State, or

(ii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case, or

(iii) the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the award which contains decisions on matters not submitted to arbitration may be set aside, or

(iv) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Law from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Law; or

(b) the court finds that:

(i) the subject-matter of the dispute is not capable of settlement by arbitration under the law of this State, or

(ii) the award is in conflict with the public policy of this State.

This is a pretty comprehensive list of grounds to set aside an award. Yet, nothing in Article 34(2) says that the substance of the award must be correct or reasonable, or that the arbitral tribunal must be correct or reasonable except with respect to jurisdiction or one of the other matters expressly stated in Article 34(2). Indeed, under Article 31(2) with the consent of the parties the arbitral tribunal need give no reasons. It must be assumed that the drafters of the Model Law envisaged that, sometime and somewhere, an international commercial arbitration panel might issue an award which was legally or factually incorrect or unreasonable. But no relief on those grounds was afforded in the Model Law.

If a Canadian court is asked to apply the Dunsmuir test to an award of an international commercial arbitration, on what basis could it do so? Would it say that simply because the award is unreasonable, then under Article 34(2)(iii) it does not fall within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration, or deals with matters not remitted to the tribunal? Can that be said when the Model Law does not require that the award be reasonable or correct?

Of course, if there is a true jurisdictional challenge to the award, then Article 34(2) (iii) will apply and the court will have to decide that issue using an appropriate jurisdictional test. But apart from that situation, the application of the reasonableness standard to the merits of the arbitral award does not appear to fit comfortably within Article 34.

If Canada applies a reasonableness standard to international arbitration awards outside of true jurisdictional issues, then it may apply a test that no other country applies to the Model Law, even though that Law was adopted by many countries for the purpose of uniformity.

Turning to the domestic Ontario Arbitration Act, 1991, section 46(1) states that an arbitral award may be set aside on the following grounds:

1. A party entered into the arbitration agreement while under a legal incapacity.

2. The arbitration agreement is invalid or has ceased to exist.

3. The award deals with a dispute that the arbitration agreement does not cover or contains a decision on a matter that is beyond the scope of the agreement.

4. The composition of the tribunal was not in accordance with the arbitration agreement or, if the agreement did not deal with that matter, was not in accordance with this Act.

5. The subject-matter of the dispute is not capable of being the subject of arbitration under Ontario law.

6. The applicant was not treated equally and fairly, was not given an opportunity to present a case or to respond to another party's case, or was not given proper notice of the arbitration or of the appointment of an arbitrator.

7. The procedures followed in the arbitration did not comply with this Act.

8. An arbitrator has committed a corrupt or fraudulent act or there is a reasonable apprehension of bias.

9. The award was obtained by fraud.

10. The award is a family arbitration award that is not enforceable under the Family Law Act.

Once again, this section provides a very comprehensive basis for setting aside arbitral awards, but does not state that correctness and reasonableness are separate tests for doing so. Except as a test to determine whether the arbitral tribunal had jurisdiction to determine the dispute or whether the tribunal has applied one of the other factors mentioned in section 46(1), the reasonableness test does not seem to fit well within that subsection.

Section 46 is found within a particular statutory setting as a separate test. Section 6 says that courts shall not intervene except for express statutory purposes. Section 45(1) provides a right to seek leave to appeal from an arbitral award unless the parties have agreed otherwise. Section 45(2) and (3) allow the parties to agree on an appeal on questions of law and fact. So the parties are afforded by statute the broadest right to agree on recourse to the courts to review the award. When the parties agree that there will be no appeal, they know that the award could possibly be in error or unreasonable, but they chose expedition and finality over legal perfection. In that context, a review of the decision based on reasonableness -outside the pure jurisdictional context under section 45(1).3 - seems difficult to justify.

The Parmalat Decision

Returning to the Parmalat Canada decision, Parmalat Canada argued that the interpretation of the LPA was unreasonable as it allegedly did not take into account the meaning of the word "liquidity" and common sense need for a transaction or other liquidity event to fund the Liquidity Event. Fitting that argument within the specific grounds for review found in section 46 of the Arbitration Act, 1991 was the challenge. Justice Cumming found that the arbitrator's decision was reasonable so he did not have to decide whether the award could be set aside if it was unreasonable.

Conclusion

The challenge for those who support the application of the Dunsmuir test to commercial arbitrations is to show that the administrative law rational for Dunsmuir applies to commercial arbitrations, and that the test can be useful or justified notwithstanding the limited right of courts to review awards of domestic and international arbitrations.

The challenge for those who oppose the application of Dunsmuir to commercial arbitration awards is to show that the administrative law rational for Dunsmuir does not apply in the commercial arbitration setting, and that the grounds for reviewing a commercial arbitration are sufficiently and definitively stated in the arbitration statutes and leave no need or room for Dunsmuir except in relation to true jurisdictional issues.

So far, there has been no real debate on these issues. In Smyth, the Dunsmuir test was applied to an arbitration in a hospital setting, as a convenient and apparently governing authority but without considering whether the rationale and the statutory setting justified that application outside a pure jurisdictional dispute. Let the debate begin.

See Heintzman and Goldsmith on Canadian Building Contracts(4th ed.), chapter 10

Parmalat Canada Inc. v. Ontario Teachers' Pension Plan Board, 2012 ONSC 5981

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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