In AES Engineering Ltd. v. Khan, 2021 BCSC 1384, Justice Lamb found that the arbitrator’s determination that a restrictive covenant in a shareholders agreement was unenforceable for ambiguity did not raise an extricable error of law that would provide grounds for an appeal of the final award. The applicant argued that the arbitrator had committed errors of “legal methodology” in interpreting the restrictive covenant, including by applying the principles from the “lens” of an employment contract case. Justice Lamb ruled: “There is nothing to suggest that the arbitrator’s interpretation of the contract in this case is a question of law as opposed to the usual question of mixed law and fact. It is clear from the Award that the arbitrator’s finding of ambiguity turned on the specific wording of the restrictive covenant. There was no evidence before me to suggest that this form of restrictive covenant is a standard form clause such that there might be precedential value to the proper interpretation of the clause which might turn this issue into a question of law that would be appealable under s. 31(1) [of the former B.C. Arbitration Act. R.S.B.C 1996, c. 55]. Further, there is no indication on the face of the Award that the arbitrator considered an incorrect principle in finding the clause was ambiguous: he considered the “ordinary grammatical meaning of the words” and found the clause to be ambiguous. In short, the interpretation of the restrictive covenant in this case is a question of mixed law and fact.”
The respondents, Mohamed Khan and Philip O’Neil, were employees and shareholders of the petitioner, AES Engineering, which is an electrical engineering company. They left AES to start another company and carried on the same business. AES commenced an arbitration against the respondents on May 29, 2019. It alleged, among other things, that the respondents had breached the restrictive covenants in the AES shareholders agreement. The arbitrator issued a final award on November 12, 2019, dismissing all of AES’s claims. AES sought leave to appeal the award, including the arbitrator’s finding that the restrictive covenant in the shareholders agreement was unenforceable because it was ambiguous. AES claimed that the arbitrator had committed errors of “legal methodology” in reaching these conclusions.
It sought leave to appeal on the basis of the following alleged errors in the award:
a) An error in law in applying the principles of Shafron v KRG Insurance Broker (Western) Inc., 2009 SCC 6 [a case arising from an employment contact] to the particular relationship at issue in this case [a contract between shareholders];
b) An error in law in the failure to apply the fundamental principles of interpreting a restrictive covenant in the context of the entirety of the commercial contract or at all; and
c) An error in law in the failure to consider the language of the shareholders agreement at issue in this matter as a whole, or as required.
The leave application was made to the Supreme Court of British Columbia under s. 31 of the former British Columbia Arbitration Act. (As of September 1, 2020, that Act was replaced by the Arbitration Act, S.B.C. c.2, s. 72, which provides that leave applications are to be made to a justice of the Court of Appeal.)
Justice Lamb found that before leave would be granted, AES must establish that the proposed appeal involved an extricable question of law and that one of the three criteria listed in s. 31(2) of the Act was met: (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. AES relied primarily upon s. 31(2)(a), but also suggested that the legal issues that arise from the award were of general or public importance for those seeking to enforce restrictive covenants in a commercial rather than an employment context. Justice Lamb found that an appeal that has no chance of success will not meet the threshold of s. 31(2)(a). To meet that standard, the applicant must show that the legal issues have arguable merit – see Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 at para. 74.
AES described the arbitrator’s failure to consider the restrictive covenant in the context of a commercial contract as an “error in legal methodology” and argued that the arbitrator erred in law by viewing the shareholders agreement through an employment contract “lens” rather than through a commercial “lens”. Justice Lamb found that AES was seeking to re-argue the position it had advanced unsuccessfully before the arbitrator.
Justice Lamb found that the three alleged errors of law advanced by AES could be distilled down to the following: the arbitrator erred in the interpretation of the restrictive covenant and in the finding that the clause was ambiguous. The attempt to label these findings as questions of law that are reviewable on appeal mischaracterized the issue and misconstrued the award. In paragraphs 38 to 40, she pointed out, referring to Sattva, that the proper interpretation of a contract is generally a question of mixed fact and law:
 In Sattva, Justice Rothstein acknowledged that it may be possible to identify an extricable question of law from the interpretation of a contract, including “the application of an incorrect principle, the failure to consider a required element of a legal test, or the failure to consider a relevant factor”: at para. 53, quoting from King v. Operating Engineers Training Institute of Manitoba Inc., 2011 MBCA 80 at para. 21. However, Rothstein J. warned that courts should be cautious in identifying extricable questions of law in disputes over contractual interpretation, as they will be relatively rare. Justice Rothstein noted that “the goal of contractual interpretation, to ascertain the objective intentions of the parties, is inherently fact specific”: Sattva at para. 55.
 In Richmont Mines Inc. v. Teck Resources Limited, 2018 BCCA 452 at para. 65, a decision overturning an order granting leave to appeal from an arbitrator’s interpretation of a commercial contract, Justice D. Smith identified some of the limited circumstances in which leave might be justified:
 … Sattva and Teal Cedar state that contractual interpretation generally gives rise only to questions of mixed fact and law, not extricable questions of law. Nonetheless, an error in contractual interpretation can give rise to an extricable question of law in limited circumstances. Such circumstances include where the question would have precedential value or where the initial decision-maker considered an incorrect principle.
Justice Lamb dismissed all of AES’s grounds for leave to appeal on the basis that none of them raised an extricable error of law. The arbitrator’s interpretation of the restrictive covenant in the shareholders agreement did not turn on the nature of the contract or the “lens” through which the relationship is evaluated but rather on the ambiguity of the terms used in the clause itself. The arbitrator explained in the award that the extensive arguments made about why the interpretive lens of the commercial relationship rather than an employment relationship should be applied to the shareholders agreement did not arise because the clause itself was ambiguous and therefore unenforceable. The arbitrator’s finding of ambiguity was inherently fact specific.
In Sattva, the Supreme Court of Canada stated that “extricable errors of law” in contract interpretation cases will be very rare and include (but are not limited to): the application of an incorrect principle; the failure to consider a required element of a legal test; or the failure to consider a relevant factor. Subsequent case law shows the ingenuity of counsel in trying to identify “extricable errors of law”, either based upon the categories identified in Sattva or, as in this case, beyond them to an incorrect “legal methodology” or interpretive “lens”. For recent Arbitration Matters Case Notes on “extricable questions of law” see Ontario – arbitrator’s interpretation of settlement raises extricable question of law and jurisdictional issue – #370 and Québec – request for conciliation under statutory dispute resolution process qualifies as demand for arbitration – #507.