In Clemina Hydro Power Limited Partnership v British Columbia Hydro and Power Authority, 2022 BCSC 25, Justice Carol J. Ross denied the petitioners’ application for leave to appeal an arbitral award arising out of two energy purchase agreements. Justice Ross found the petitioners failed to identify an extricable legal error in the arbitrator’s contract interpretation exercise. She also held that, in any event, the petitioners’ appeal had been rendered moot. One issue Justice Ross addressed was what the appellate court should do with an alleged error of law where the law has changed between the initial decision and the appeal.
The underlying dispute arose from two energy purchase agreements (“EPAs”) between the petitioners, Clemina Hydro Power Limited Partnership (“Clemina”) and Serpentine Hydro Power Limited Partnership (“Serpentine”), and the respondent, British Columbia Hydro and Power Authority. The petitioners alleged the respondent wrongly terminated the EPAs due to the petitioners’ failure to meet certain contractual deadlines. They also alleged the respondent improperly exercised its contractual discretion.
The respondent was B.C.’s public power authority. One of the ways it acquires power for use in the public grid is through a standing offer program allowing it to purchase power from independent power producers (“IPPs”), like the petitioners. IPPs wishing to participate in the standing offer program submit an application. If accepted, the IPP and the respondent enter into an EPA.
Among other things, an IPP must provide a target date on which it anticipates reaching commercial operation. This is known as the “Target COD”. The actual commercial operation date for an IPP project is called the “COD”. IPPs must also identify the electrical generation facilities they propose to use, which includes the Point of Interconnection (“POI”) with the respondent’s transmission facilities.
The respondent granted each of the petitioners’ applications and entered into EPAs with them. The EPAs included a Target COD of December 1, 2017, for Clemina and December 31, 2017, for Serpentine. Each of the EPAs contained a termination provision allowing the respondent to terminate the EPA if the project fails to reach its COD within two years of the Target COD. The COD deadlines were December 12, 2019, for Clemina, and December 31, 2019, for Serpentine.
Several events, including technical challenges associated with the POI, resulted in delays such that the petitioners missed the COD deadlines. In the interim, the respondent advised the petitioners that it had an energy surplus and was considering terminating the EPAs in any event.
When the respondent rejected the petitioners’ request to alter the POI, the petitioners triggered arbitration under the EPAs. The parties concluded “suspension agreements” in which they agreed to delay the effect of any future termination notices the respondent might issue until 60 days following the arbitral tribunal’s award with respect to this dispute. After the arbitration commenced, but before the final award was issued, the respondent sent the petitioners’ termination notices.
The Award – The first issue in the arbitration was whether the petitioners’ failure to meet the COD deadline entitled the respondent to terminate the EPAs. The parties agreed that the relevant contractual interpretation principles were those laid down in the Supreme Court of Canada decision in Sattva Capital Corporation v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633[Sattva].
The arbitrator’s interpretation exercise centred on a provision in the EPAs, clause 3.9, which read as follows:
“3.9 Change in Target COD – If the Estimated Interconnection Facilities Completion Date is later than 90 days prior to the Target COD, and unless otherwise agreed by the Parties in writing, the Target COD shall be postponed to the Estimated Interconnection Facilities Completion Date plus 90 days.”
The parties differed on the effect of the words “shall be postponed”. The respondent argued the provision operated prospectively. In other words, clause 3.9 only postpones the “Estimated Interconnection Facilities Completion Date” if the Target COD has not yet passed. On the facts, it had. The petitioners took the opposite view.
The arbitrator agreed with the respondent that the phrase “shall be postponed” does not operate to revive lapsed Target CODs. He based this conclusion on his reading of clause 3.9 in the EPAs’ broader contractual context. He also considered the factual matrix, including that the respondent “has to plan its energy needs in advance in order to match supply and demand, and to regulate the level and timing of additional capacity coming onstream from [IPPs], of which there (sic) many. Hence, the commercial necessity of what [the respondent] regards as the fixed time frame in the EPA.”
Based on this and other findings about the circumstances surrounding the EPAs’ conclusion, the arbitrator found the respondent was entitled to terminate the EPAs in accordance with the termination provisions.
The second issue before the arbitrator was whether the respondent was entitled to exercise its discretion to deny the petitioners’ request to change the POI. The EPAs granted the respondent “unfettered discretion” to deny a change in the POI. The respondent refused the petitioners’ request, stating that granting the request conflicted with its commercial interest.
Relying on Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494 [Bhasin], the arbitrator found the respondent did not exercise its discretion in a capricious or arbitrary manner, but in accordance with its own commercial interests, as it was entitled to do. He also found no deception on the respondent’s part. In fact, the respondent repeatedly warned the petitioners it would terminate the EPAs given the opportunity.
The Leave Petition and the Court’s Decision – The petitioners sought leave to appeal the award, arguing the arbitrator committed legal errors in denying the claims. Under B.C.’s former domestic arbitration statute, which applied to the dispute, a party can seek leave to appeal on a question of law upon demonstrating it falls within one of three alternative bases:
(a) the importance of the result of the arbitration to the parties justifies the intervention of the court and the determination of the point of law may prevent a miscarriage of justice,
(b) the point of law is of importance to some class or body of persons of which the applicant is a member, or
(c) the point of law is of general or public importance.
The petitioners relied on the first basis. According to Justice Ross, this required them to demonstrate three things: 1) the appeal concerns a pure question of law; 2) the appeal is on a matter of importance to the parties; and 3) the leave judge should exercise the court’s “residual discretion” to grant leave to appeal.
The respondent argued the Court should deny leave since the petitioners failed to identify an extricable legal error. Further, due to the terms of the suspension agreements, the petitioners’ proposed appeal was moot.
On the first issue—whether the petitioners’ failure to meet the COD deadline entitled the respondent to terminate the EPAs—the petitioners’ submission was three-fold:
“1. In interpreting s. 3.9 of the EPAs, the Arbitrator found facts regarding the factual matrix of the EPAs in the absence of any evidence supporting those facts.
2. The Arbitrator gave weight to irrelevant and inadmissible evidence of the Respondent’s subjective intentions with respect to s. 3.9 of the EPAs; and
3. The Arbitrator misapprehended and misapplied the law of commercial reasonableness and commercial absurdity in contractual interpretation.”
Justice Ross dealt with each in turn.
On the first, Justice Ross acknowledged that making a finding of fact based on no evidence is an error of law (Aubrey v. Teck Highland Valley Copper Partnership, 2017 BCCA 144 at para. 22). However, she was satisfied all the impugned factual findings were sufficiently anchored in the record.
On the second, Justice Ross acknowledged one comment the arbitrator made that could suggest he considered the respondent’s subjective intent, rather than the parties’ objective intent as contract interpretation law requires. However, she found that “the evidence is not being used to construe the relevant provisions of the EPAs but to underscore the fact that there is an ambiguity in s. 3.9”. On that basis, she found the arbitrator’s comment insufficient to establish a legal error.
Finally, on the petitioners’ third argument, Justice Ross observed that although the petitioners rightly pointed out that conflating commercial reasonableness and the absence of commercial absurdity could be an error of law (Spirit Bay Developments v. Scala Developments, 2020 BCSC 1839), the petitioners failed to actually identify anywhere in the award where this error actually occurred.
On the second issue raised in the leave application—whether the respondent was entitled to exercise its discretion to deny the change in POI—Justice Ross found no extricable legal error. She observed that the arbitrator rendered the award before the Supreme Court of Canada issued its decision in Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7[Wastech], a case expounding on the good faith exercise of contractual discretion adopted in Bhasin. However, she found no defect in the arbitrator’s reasoning when read with the benefit of the subsequent Wastech decision.
In light of these conclusions, Justice Ross found the petitioners failed to identify an extricable error of law warranting the Court’s intervention on appeal.
For completeness, Justice Ross went on to consider whether allowing the appeal would prevent a miscarriage of justice and whether the appeal raised an issue important to the parties. She agreed with the respondent that, given the suspension agreement the parties concluded before the arbitration, and the respondent’s subsequent decision to terminate the EPAs, the appeal was moot. She rejected the petitioners’ position that the suspension agreement did not render the respondent’s termination notices effective until final resolution of any appeal. Rather, a “plain reading” of the suspension agreement forces the conclusion that the terminations became effective 60 days following the day on which the arbitrator released his award. That time had elapsed.
The application for leave to appeal was dismissed.
Contributor’s Notes
First, the parties acknowledged that the EPAs are standard form contracts. Indeed, the decision suggests the respondent uses these contracts to enter into agreements with all IPPs whose applications it accepts under the standing offer program. Despite this, it does not seem, from the Court’s reasons, that the petitioners relied on the Supreme Court of Canada’s post-Sattva decision in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, [2016] 2 SCR 23.
In that case, the Supreme Court qualified Sattva’s holding that contract interpretation is usually a question of mixed fact and law. It held that where the contract terms in issue are contained in a standard form contract, their interpretation is a pure question of law. The Court reasoned that the factual matrix carries less weight in such contracts since the parties do not negotiate the terms. The Court also stated that interpretations of standard form contracts are likely to hold precedential value since the same terms are liable to arise in future litigation (or arbitration). Assessing standard terms as pure questions of law, and on a correctness standard, furthers an appellate court’s function of ensuring consistency in the law.
Second, Justice Ross’s reasons detail an interesting and important point about what an appellate court should do when the law arguably changes between the decision under review and the appeal hearing. She acknowledged the petitioners’ reference to the recent decision in Eisler v. Connor, Clark & Lunn Financial Group Ltd., 2021 BCSC 1280, incidentally a decision on another application for leave to appeal an arbitral award in which Wastech’s release occurred between the award’s issuance and the leave application:
“[87] Eisler, like the present case, concerned an arbitration award that had been pronounced before the Supreme Court of Canada’s decision in Wastech. Justice Smith stated that the first question to be addressed was whether the issue of the duty of good faith was before the arbitrator. He concluded that it was. He then considered the arbitrator’s reasons and concluded that the arbitrator had failed to distinguish the duty of honest performance from the broader doctrine of good faith and therefore that he had concluded the issue of good faith was not before him because the claimants conceded there had been no subjective dishonesty. In light of Wastech, this conclusion raised a question of law; namely, whether the correct legal test had been applied: Eisler at para. 61.”
Although one might argue Wastech and its companion decision, C.M. Callow Inc. v. Zollinger, 2020 SCC 45 [Callow], did not change the common law of contractual good faith as described in Bhasin, those decisions, at a minimum, clarify much confusion Bhasin left in its wake. Indeed, Wastech and Callow have, and will hopefully continue to, rein in what one judge called “unbridled creativity in the creation from whole cloth of obligations in a contractual context” (Addison Chevrolet Buick GMC Ltd. v. General Motors of Canada Ltd., 2015 ONSC 3404, para. 116).
Third, although the decision refers, in paragraph 34, to the Court’s residual discretion to grant leave, the court’s residual discretion is to abstain from granting leave where the test is otherwise met. That residual discretion rests on the use of the word “may” in the provision on leave to appeal.
At paragraph 91 of Sattva, Justice Rothstein sets out a non-exhaustive list of factors a leave judge may consider in exercising residual discretion to deny leave to appeal where the test is otherwise met: 1) the parties’ conduct; 2) existence of alternative remedies; 3) undue delay, if any; and 4) the urgent need for a final answer. This list could apply to appeals/leave applications in other Canadian jurisdictions as well. However, in jurisdictions that have adopted the Uniform Law Conference of Canada’s Uniform Arbitration Act (1990) (Alberta, Saskatchewan, Manitoba, Ontario New Brunswick and Nova Scotia), the undue delay factor is unlikely to be relevant. This is because those statutes contain a non-extendable 30-day time limit to appeal, or seek leave to appeal, commencing on the date the parties receive the award.
For a previous Arbitration Matters note addressing the Wastech case, see Supreme Court – for those SCC justices willing to consider it, Vavilov applies to private commercial arbitration where legislation provides for appeal – #420. For a previous note on Eisler, see B.C. – party not abandoning position made in written argument, despite counsel’s failure to object to arbitrator’s contrary understanding – #512.