Alberta – “surrounding circumstances” for contract interpretation exclude subjective intentions – #460

In 719491 Alberta Inc. v. The Canada Life Assurance Company, 2021 ABQB 226, Mr. Justice W. Patrick Sullivan dismissed attempts to identify an error of law based on the arbitrator’s handling of surrounding circumstances known at the time of contract formation. Sullivan J. agreed that contract interpretation required reading the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with those surrounding circumstances but disagreed that “surrounding circumstances” included the parties’ subjective intentions. The latter cannot serve to add to, detract from, vary or otherwise overwhelm the agreement’s written words.  In obiter, Sullivan J. also endorsed the concurring three (3)’s approach in Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7 to apply Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65 to appeals of commercial arbitration awards.

719491 Alberta Inc. (“719”) and Canada Life Insurance Company (“Canada Life”) disputed calculation of the land market value (“Land Market Value”) used as part of a formula contained in a 99-year lease signed April 29, 1968 (“Lease”) to set basic annual rent at regular intervals.  Sullivan J. at paras 6-7 sets out the leased property and the original parties’ motivation to enter into the Lease, the assignment to 719 in May 1997 and the components of the rent calculation at paras 8-9.

In case of disputes over the Land Market Value, the Lease provided for arbitration.

719 and Canada Life had “drastically different views on the quantum of the Land Market Value” for calculating the rent for the twenty (20) year term between July 1, 2018 and June 30, 2038 (“Term 3”) and following “months of impasse” engaged in arbitration and mutually agreed on an arbitrator. By October 31, 2019 arbitration agreement, 719, Canada Life and the arbitrator entered into an agreement which stated that the terms of the arbitrator’s decision would be final and binding, except on questions of law, as provided by Alberta’s Arbitration Act, RSA 2000, c A-43.

The parties put two (2) issues before the arbitrator: determine the Land Market Value for use in calculating Term 3’s annual rent; and, (2) whether Canada Life acted in bad faith in negotiating the Term 3 rent reset.  In the award (“Award”), the arbitrator accepted Canada Life’s $20,850,000.00 calculation of the Land Market Value  and determined that Canada Life acted in good faith.

Leave to appeal – Sullivan J. set out the text of section 44 of the Arbitration Act and reiterated key principles to guide the courts in determining whether a question of law arises for appeal.

[18] In order to obtain leave to appeal the arbitrator’s decision, 719 must establish, on a preliminary basis, that its appeal is based on a question of law. Generally, “questions of law “are questions about what the correct legal test is”: Sattva Capital Corp v Creston Moly Corp, 2014 SCC 53 at para 49 [Sattva]. Unlike pure questions of law, questions of mixed fact and law pertain to whether the facts satisfy the legal tests, or differently put, they pertain to the application of a legal standard to a set of facts: Sattva at para 49; Canada (Director of Investigation and Research) v Southam Inc, 1997 CanLII 385 (SCC), [1997] 1 SCR 748 at 767.

[19] If, however, in the course of the application of a legal test, an arbitrator fails to consider a requisite element, the arbitrator is effectively altering the legal test, thereby giving rise to an error of law: Teal Cedar Products ltd v British Columbia, 2017 SCC 32 para 44 [Teal Cedar]; Alberta (Workers’ Compensation Board) v Appeals Commission, 2005 ABCA 276 at paras 20-21”.

Sullivan J. reiterated cautions by the Supreme Court to “be aware of litigants strategically obfuscating the line between a question of law and a mixed question in an attempt to gain jurisdiction in appeals from arbitration awards” and stated that a policy of a narrow scope for extricable questions “upholds the notion of finality in commercial arbitrations and is consistent with the deference afforded to factual findings of an arbitrator”. See Teal Cedar Products ltd v British Columbia, 2017 SCC 32 para. 45.

Relying on Agrium Inc v. Babcock, 2005 ABCA 82 paras 7-10 and 1285592 Alberta Ltd v. Moderno Homes Inc, 2018 ABQB 23 paras 5-7, Sullivan J. noted that courts are ‘indeed alive to the fact that in many commercial arbitrations, two sophisticated parties have chosen for themselves the forum and method of dispute resolution and that courts’ intervention should be minimized to promote arbitral autonomy”.

To close his outline of the guiding principles, Sullivan J. referred to two (2) cases: first, to Alectra Utilities Corporation v. Solar Power Network Inc., 2019 ONCA 254 to remind that appeals from private arbitral awards are “neither required nor routine”; and, second, to 1285592 Alberta Ltd v Moderno Homes Inc, 2018 ABQB 23 to note that interpretation of private commercial contracts “will rarely” give rise to questions of “extraordinary importance and precedential value”.

Alleged errors – Sullivan J. identified four (4) errors of law alleged by 719:

(1) alleged failure to consider certain surrounding circumstances – paras 25-32

(2) alleged misinterpretation of legal restrictions on alternate uses – paras 330-40

(3) alleged failure to consider the 1998 rent reset – paras 41-52

(4) alleged commercial absurdity – paras 53-58

To address the parties’ arguments on the first ground, Sullivan J. set out principles set by the Supreme Court for interpretation of contracts including “surrounding circumstances known to the parties at the time of formation of the contract”.  See Sattva Capital Corp v Creston Moly Corp, 2014 SCC 53 para. 47.  Sullivan J. limited access to such factual matrices.

[28] The scope of the objective factual matrix is, however, circumscribed by an important principle: surrounding circumstances do not include the contracting parties’ subjective intentions and cannot be used to add to, detract from, vary, or otherwise overwhelm the written words within the agreement: Sattva at paras 57 and 59. This approach is consistent with the parol evidence rule because it preserves and promotes the objectives of finality and certainty: Sattva at para 60”.

Sullivan J.’s reading of the Award lead him to determine that the arbitrator was “alive to the correct legal test” and “correctly understood, articulated, and applied the legal principles with respect to surrounding circumstances or factual matrix”. Despite 719’s arguments on appeal, Sullivan J. held that the arbitrator did not err in law when he “declined to classify the expansive nature of the relationship between 719 and Canada Life and [expert]’s evidence as surrounding circumstances”.

Sullivan J. dismissed each of 719’s grounds, determining that none were questions of law. 

In regard to the second ground, Sullivan J. held that “719 seeks to argue anew the same issue that was before the arbitrator: namely, that an entirely different result should have been borne out of the application of the same contractual interpretation principles. This is a question of mixed fact and law”.

In regard to the third ground which involved the role, if any, of a 1998 rent reset, Sullivan J. observed that “determining which evidence forms surrounding circumstances in a contractual interpretation is a question of fact”.  See IFP Technologies (Canada) Inc. v. EnCana Midstream and Marketing, 2017 ABCA 157 para. 83.  

In regard to the fourth, final ground in which 719 argued that the arbitrator’s interpretation “fundamentally deviates” from the agreement and “begets a commercially absurd and one-sided relationship”, Sullivan J. again disagreed.  Sullivan J. noted 719’s reliance on Trico Developments Corporation v. El Condor Developments Ltd, 2020 ABCA 132 paras 27-31 and 48 and agreed that the Court of Appeal did mention that one “ought not to sanction contractual interpretations disconnected from economic reality”.  Sullivan J. noted that the Court of Appeal’s comments did not expand indefinitely, observing that “such a statement does not equate to a blanket statement that a failure to interpret a contract in a commercially reasonable manner is an error of law”.

Obiter – By paragraph 59 of his reasons, Sullivan J. confirmed he had taken the decision on the discussion set out in paras 1-58, to deny leave to 719 to appeal the Award.  Though he stated that he need not consider any further provisions of the Arbitration Act or case law, he offered further comment because “I note en passsant two points of law that appear to be in flux”.

(i) applicable standard of review – Sullivan J. endorsed the approach set out by the concurring three (3) in Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7 para. 121 to apply Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65 to appeals of commercial arbitration awards. Referring next to Northland Utilities (NWT) Limited v Hay River (Town of), 2021 NWTCA 1 para. 44 which Sullivan J. described the Court of Appeal as having “carefully canvassed the legal propositions flowing from [Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 (CanLII), [2014] 2 SCR 633] and subsequently Vavilov”, Sullivan J. stated his agreement that Vavilov modified the standard of review for arbitration appeals.

Sullivan J. also distinguished Alberta’s Arbitration Act from the B.C. legislation, noting that Alberta’s grants no discretionary power when determining to grant or deny leave to appeal.

[64] Unlike the British Columbia legislation, however, the Alberta Arbitration Act does not grant such discretionary power when determining whether to grant or deny leave to appeal. Under section 44(2.1), the court shall grant leave to appeal only if it 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. As adroitly explained by Wittmann CJQB in Capital Power Corporation v Lehigh Hanson Materials Limited, 2013 ABQB 413 at paras 45-51, the word “shall” is a clear indication that there is no residual discretionary power under section 44”.

(ii) set aside the award – Sullivan J. noted that section 45(1)(c) of the Arbitration Act operates independently of section 44.  719 asserted that the parties had acknowledged that the Lease “constituted an income sharing arrangement” and that the arbitrator held that the Lease was “merely a commercial lease document”.  719 argued that, in doing so, the arbitrator “effectively decided on a different dispute that the one that was before him and thus exceeded his jurisdiction”.

Sullivan J. disagreed.  Relying on Alectra Utilities Corporation v. Solar Power Network Inc., 2019 ONCA 254 para. 34 for the courts’ limited role in jurisdictional challenges, Sullivan J. observed that the court “must be satisfied that the award either dealt with a matter not covered by the arbitration agreement or included a decision on a matter beyond the scope of the agreement”.

Noting (a) the liberal interpretation of the arbitral mandate urged by Desputeaux v. Éditions Chouette (1987) inc., 2003 SCC 17, [2003] 1 SCR 178, (b) the record did not demonstrate 719’s and Canada Life’s agreement on the nature of the Lease and (c) the importance of the characterization of the relationship, Sullivan J. concluded that the arbitrator acted within the jurisdiction granted.

urbitral notes – First, paras 33 and 35 of Alectra Utilities Corporation v. Solar Power Network Inc., 2019 ONCA 254 gives additional context to the arguments made to the Ontario Court of Appeal and the scope of the concise statement relied on by Sullivan J.

[33] The problem with the respondent’s argument is plain: given that an arbitrator’s authority stems from the agreement pursuant to which he or she is appointed, any unreasonable or mistaken interpretation of that agreement could be characterized as resulting in an excess or loss of jurisdiction. On this approach, arbitration awards that are not subject to appeal would, nevertheless, be vulnerable to being set aside for jurisdictional error. In effect, arbitrators would have only the jurisdiction to make awards that are reasonable or correct.

[34] This is not the law in Ontario. The role of courts in addressing claims of jurisdictional error in the context of private arbitration is far more limited than the respondent would have it.

[35] In order to set aside the arbitrator’s award, the application judge was required to find either that the award dealt with a matter not covered by the arbitration agreement or included a decision on a matter beyond the scope of the agreement. Interpretation of the arbitration agreement, set out in s. 7 of the PAMA, was key to applying s. 46(1)3”.