Alberta – legislative rule “unique” to Alberta applied to refuse leave to appeal extricable question of law in multimillion dollar dispute – #058

In KBR Industrial Canada Co v. Air Liquide Global E&C Solutions Canada LP, 2018 ABQB 257,  Alberta’s Court of Queen’s Bench refused leave to appeal a final award by application of the “unique” section 44(3) of Alberta’s Arbitration Act, RSA 2000, c A-43 which stipulates that a party may not appeal a question of law which the parties expressly referred to the arbitral tribunal for decision.  In denying leave to appeal, Madam Justice Ritu Khullar added that, in the alternative, if she were mistaken, then that question did not meet the threshold set by section 44(2.1).  The latter limits leave to appeal on a question of law only if the court is satisfied that (a) the importance to the parties of the matters at stake in the arbitration justifies an appeal, and (b) the determination of the question of law at issue will significantly affect the rights of the parties.

The dollar amounts mentioned in the reasons range in the millions. The dispute stems for a contract between KBR Industrial Canada (“KBR”), Applicant, and Air Liquide EC Solutions Canada LP (“AL”), Respondent.  AL had contracted with a third party to design and build a plant in Alberta.  AL subcontracted to KBR the manufacture of 77 modules to be installed at the plant.  The subcontract included an arbitration clause.

Disputes arose over KBR’s ability to meet the delivery schedule set out in the parties’ subcontract. AL invoked a contractual right to reduce the scope of the work and remove 20 modules from the subcontract and assign to a new supplier (“JVD”).  KBR initiated arbitration to claim sums owing under their subcontract and damages from the reduction in scope, changes orders and disruption to its work.  AL defended and countersued for costs incurred in reducing the scope and having JVD complete the other modules.  AL claimed the right to a set off of any amounts owing to KBR.

The arbitration proceeded in a sequence familiar to complex commercial disputes including the exchange of pleadings, records, witness statements and expert reports as well as oral hearings.  Just prior to finalizing the award, the arbitral panel’s Chair requested submissions on the contractual right of set-off and a limitation of liability clause in the parties’ subcontract.  The parties delivered their briefs and two additional days of oral pleadings on those issues were held.

The arbitral panel issued an award one week after that last oral pleading.  The panel had majority reasons and dissent reasons.   All agreed on the issue of liability and damages.  The dissent disagreed with the majority’s interpretation of the limitation of liability clause and the right of set-off.  The difference in their respective interpretations exceeded $14 million:

(a) The majority held that KBR was liable to pay AL $22 million and AL was liable to pay KBR $18 million.  The majority then set off those two amounts and ordered KBR to pay AL $5.2 million; and,

(b) The dissent decided that the subcontract meant that he had to first cap KBR’s liability to AL at $8 million then set off that $8 million due to AL against the amount AL owed to KBR.  He would have ordered AL to pay KBR $9.7 million.

In seeking appeal, KBR submitted what it characterized as four extricable questions of law.  Khullar J. viewed three of them as relating to the single issue of the interplay between the limitation of liability and the set-off sections in the parties’ subcontract and the fourth relating to an onus of proof issue. Nonetheless, Khullar J. addressed each separately, in turn:

(a) inconsistent findings;

(b) failure to properly consider and apply set-off;

(c) failure to construe the contract as a whole; and,

(d) reversal of onus respecting reasonable expenses.

Prior to analyzing each in turn, Khullar J. reproduced excerpts of section 44 of the Arbitration Act and pointed to earlier Alberta appellate and Queen’s Bench holdings which “have recognized that the clear policy thrust of the legislation is to limit court intervention and to promote arbitral autonomy”,  referring the reader to Agrium Inc. v. Babcock, 2005 ABCA 82 paras 7-10 and the more recent January 11, 2018 application of that approach in 1285592 Alberta Ltd v Moderno Homes Inc, 2018 ABQB 23 para. 5.  The latter reference from Mr. Justice R.A. Neufeld reads as follows:

[5] It is commonplace for parties to a commercial contract to agree that disputes will be resolved through arbitration. Alternate dispute resolution (“ADR”) is often considered preferable to civil litigation, being cheaper, quicker, and more predictable in result. Legislators have supported the arbitration mechanism for ADR by statutorily restricting judicial intervention; particularly where parties have not agreed that an arbitrator’s decision may be appealed on a question of law (as is the case here). In Alberta, these restrictions are contained in section 44 of the Arbitration Act.

At paras 20-24 of her reasons, Khullar J. provided a summary of the Supreme Court’s updated approach to situating contractual interpretation and extricable questions of law by excerpting 2014’s Sattva Capital Corp. v. Creston Moly Corp., [2014] 2 SCR 633, 2014 SCC 53 and the follow up 2017 reasoning in Teal Cedar Products Ltd. v. British Columbia, [2017] 1 SCR 688, 2017 SCC 32.  In doing so, she noted that the Supreme Court had acknowledged that it was possible to identify an extricable question of law in a court’s interpretation of a contract but such instances were limited (and she flags them for ease of reference).  She also reproduced the caution in Sattva that where the legal principle is not readily extricable, then the matter is one of mixed fact and law and the reminder in Teal that, even if a question of law can be extricated, a deferential standard of review of reasonableness applies in deciding whether there is an arguable case that an error of law occurred.

In her review of KBR’s submissions, Khullar J. concluded that on the three interconnected questions raised by KBR, the first two disclosed no extricable error of law.  For the third, regarding the alleged failure to construe the contract as a whole, she wrote that “I agree with KBR that this is one of those rare cases where a question of law had been raised.”  With regard to the fourth question invoking an alleged reversal of an onus, Khullar J.’s analysis of the record and the award allowed her to conclude that the panel had not improperly reversed the onus and no question of law arose in that regard.

Khullar J. then turned to section 44(3) of the Arbitration Act which denied the court jurisdiction to grant leave it the question of law was one that the parties expressly referred to the arbitral tribunal.

She identified this provision as “unique” to Alberta’s legislation and agreed that two competing lines of cases had emerged respecting how to interpret section 44(3):

(a)  narrow view – leave is refused “only when a very specific question of law was put to the arbitrator for decision”; and,

(b) wide view – leave is refused “if the question put to the arbitrator is framed in such a way that it necessarily involved answering a question of law”.

Referring to Madam Justice J. Antonio’s analysis in Driscoll v. Hautz, 2017 ABQB 168 on the very choice she had to make, Khullar J. followed the reasoning in that case and followed the narrow view as being appropriate.

In addition to having to identify and adopt the narrow view, Khullar J. was faced with a twist:  the express question of law came from the panel and not the parties.

The parties’ pleadings did identify the limitation of liability and set-off as issues but the parties did not address either in their written submissions.  The question was raised by the panel in an e-mail to the parties (reproduced at para. 64 of the reasons) The e-mail identifies the question as “one isolated issue and invited the parties to make written submissions and made oral submissions to address that question.  The e-mail reads, in part:

“In your submissions, are the amounts of such awards to be first set off against each other before the language of the contractual OLL is applied (if the Panel so chooses to apply same)?

 OR

 Is the “cap” under the OLL to be first applied to whatever award Air Liquide may be granted with the “capped amount” then being set off against any award that may be granted to KBR?

Khullar J. reviewed the record and noted: “Neither party objected to this process, and both willingly and actively participated.”  Based on the above, Khulllar J. held that the facts had triggered the application of section 44(3) and leave was denied.

[66] In enacting s 44(3), the Legislature clearly intended to forestall appeals to the courts when the parties choose arbitration as their dispute resolution process and thoroughly canvass identifiable legal issues before the arbitrator. The sole question of law that I have identified in this leave application was raised in the pleadings. This alone is not sufficient to meet the narrow approach to s 44(3). However, the question of law, how to interpret the OLL and set-off provisions in the context of the whole Contract, was expressly before the Panel and thoroughly canvassed by the parties and the Panel. While the process was initiated by the Panel, and not the Parties, it is in the context of the pleadings raising the same issue. I find that these two factors combined, are sufficient to find that s 44(3) applies. Therefore, in this case, on these facts, leave to appeal must be denied because of s 44(3).

Khullar J. was alert to the fact that the panel and not the parties had initiated the process.  She held that the combination of the parties’ own pleadings and the opportunity given to them to fully address the issue qualified as sufficient.

As a final precaution, in the event that she was incorrect and section 44(3) did not apply, Khullar J. did consider whether 44(2.1) applied.

Despite the amount in issue, Khullar J. held that the case raised no public interest and that result was not significant to either party.  She noted that it is “well-established” that appeals cannot be granted simply because one part will suffer economic loss: Rudiger Holdings Ltd. v. Kellyvone Farms Ltd., 2002 ABQB 601.  The contractual wording in issue was more custom than industry standard and she found no impact on the industry or on the parties themselves which, the record showed, no longer had any business relationship.

On a closing note, Khullar J. considered KBR’s argument that granting leave to appeal would reflect support of access to justice.  She acknowledged the guidance KBR referred to in Hryniak v. Mauldin, [2014] 1 SCR 87, 2014 SCC 7 but observed:

[83] But this concern must be balanced against giving parties an unnecessary second chance at litigation just because they are unhappy with the result at arbitration. This is especially so in the case of two sophisticated commercial parties who have consciously chosen to have any contractual disputes determined through private arbitration. The Arbitration Act establishes the considerations this Court must consider when granting leave to appeal, and Hryniak does not change that analysis.

Note: Given the legislative provision in issue and the context in which the “unique” section was triggered by the panel’s initiative and not by the parties, an appeal is likely.  Guidance from the Court of Appeal would be welcome if it explored when a panel’s request for submissions will or will not serve to trigger section 44(3) in the absence of an express, prior request by either or both of the parties.