In Mann v. Grewal, 2023 BCCA 88, the BC Court of Appeal upheld the judgment below (1) finding an extricable error of law in the sole arbitrator’s interpretation of a settlement agreement, and (2) amending the award rather than remitting it to the arbitrator. The Arbitrator’s error of law was that he failed to interpret the agreement at the center of the dispute and – in effect – re-wrote the parties’ agreement.
The settlement – This case has its origins in a 2015 settlement between former partners in business and real estate ventures: Messrs. Sukhwinder Grewal, Amarjit Mann, and Navtej Bain. The settlement resulted from a mediation to resolve the separation of Grewal’s interests from those of Mann and Bain.
The parties did not dispute the settlement’s provisions requiring Grewal to transfer his shares and relinquish all claims to any interest in the parties’ joint businesses and properties, other than a piece of real property in Gibsons, BC. The settlement addressed the disposition of the Gibsons property, including a formula for adjusting amounts payable based on whether the parties’ interests in the Gibsons property were worth more or less than $2 million as of October 30, 2015.
The arbitration – The Arbitrator – who had also mediated the settlement – was appointed to arbitrate a dispute that arose about the value of the Gibsons property. He appointed an appraiser, who valued the entire Gibsons property at $4.04 million as of October 30, 2015. Accordingly, Bain, Mann, and Grewal’s combined share of 43.3% was valued at $1,750,666.34. The other fractional owners were not involved in this dispute.
Grewal argued that the formula in clause 4 of the settlement agreement entitled him to an additional payment of $249,333.34 – the difference between the value of the parties’ combined interest and $2 million.
Mann and Bain claimed to own, with Grewal, 50% of the Gibsons property, worth $2.02 million under the valuation commissioned by the arbitrator. They argued that the clause 4 formula required a deduction of $20,000 from the money payable to Grewal under the settlement.
In a further wrinkle, as the arbitration proceeded the Gibsons property was sold in June 2017 for $7.98 million. The sale proceeds were distributed to non-disputing owners, and the balance of about $3.4 million attributable to the interests of Grewal, Mann, and Bains was paid into trust pending the outcome of the arbitration. The parties to the arbitration agreed that $2 million of the trust money was payable to Grewal, but disagreed on the remaining $1.4 million.
After a hearing on December 2, 2019, the Arbitrator rendered an award on May 15, 2020. The Court of Appeal reproduced pertinent extracts of the award at para. 24 of its judgment. In sum, the award:
- interpreted the settlement agreement to have provided for a total payment to Grewal of $20.6 million “in property and cash. Of that sum, $18.6 million was to be paid in three installments. The remaining $2.0 million was to come from the sale of the Gibsons property. That much is clear from the wording of [clause] 4.”; and
- ordered the trust balance of $1.4 million to be paid to Mann and Bain.
The B.C. Supreme Court appeal – Grewal sought and obtained leave to appeal the award. The appeal proceeded under Section 31 of the former Arbitration Act, R.S.B.C. 1996, c. 55 because the arbitration had commenced before the revised Arbitration Act, SBC 2020, c 2 came into force on September 1, 2020.
Arbitration Matters covered the appeal before Justice Iyer of the BC Supreme Court in Case Note 611 – BC Appeal of award granted; arbitrator re-wrote parties’ contract. That case note links to coverage of other many episodes in the case, including Grewal’s leave application and the effort of Mann and Bain to appeal the decision to grant leave.
Justice Iyer identified her task at para. 16: “The question before me is whether, assessed on a reasonableness standard, the Award interprets the contract or creates a new one.” She concluded that the Arbitrator, in the framing of Teal Cedar Products Ltd. v. British Columbia, 2017 SCC 32 (“Teal Cedar“) at para. 4, committed an error of law by interpreting the factual matrix in isolation from the words of the contract.
The B.C. Court of Appeal – On the standard of review, Justice Iyer below concluded that because the Supreme Court of Canada has not yet expressly overruled Teal Cedar, it remained binding on her. In Teal Cedar, the Supreme Court applied the reasonableness standard to an appeal of an arbitration award under Section 31 of BC’s former Arbitration Act, which also applied in this case.
For the Court of Appeal, Justice Skolrood declined, at paras. 36-37, to reach this question because it had not been fully argued and would not affect the outcome of the appeal.
On the issue of the merits of the appeal, the Court of Appeal identified, at para. 33, two questions before it: did Justice Iyer err (1) in her interpretation of the settlement agreement, or (2) in failing to remit the matter to the arbitrator.
As to the first, the Court noted that the scope of appellate relief from a domestic arbitration award is narrow and restricted to extricable errors of law. Citing Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, Justice Skolrood explained, at para. 40, that this limited scope “will often serve to immunize questions of contractual interpretation from appellate review.” That is because contract interpretation generally involves issues of mixed law and fact. However, Justice Skolrood also pointed out that an extricable error of law may occur where contract interpretation strays from the text of the agreement so far that it “effectively create[s] a new agreement between the parties.” See Sattva, at para. 57; Teal Cedar, at paras. 4, 63-64.
In this case, the Court of Appeal found, at para. 48, that the award was “based upon three fundamental errors made by the arbitrator in his interpretation of the [settlement].” The errors mirrored the questions on which leave to appeal had been granted, noted in para. 25 of the judgment.
The first error was the Arbitrator’s finding that Grewal was to be paid a total of $20.6 million under the settlement, with $2 million coming from the sale of the Gibsons property (paras 11-12 of the award). The Court of Appeal agreed with the judgment below that this conclusion was not grounded in the text of the settlement and had instead “created a new contract.”
The Arbitrator’s second error was his finding that Grewal was not entitled to the balance of funds over $2 million deposited into trust on the sale of the Gibsons property in 2017. The Court of Appeal found, at para. 49, that “[n]othing” in the text of the settlement supported the Arbitrator’s order to disburse the $1.4 million held in trust to Mann and Bain. Rather, those funds “represent Mr. Grewal’s return on an asset that he had received from Mr. Mann and Mr. Bains” in the settlement.
The third error was the Arbitrator’s use of the Gibsons property’s value upon its sale in June 2017, rather than October 30, 2015. The Court agreed, at para. 50, that this was “inconsistent with the clear intention of the parties at the time the [settlement] was reached to complete the separation of their interest by June 30, 2016, and the arbitrator’s own instruction to the appraiser to value the Gibsons Property as of October 30, 2015.”
Having found an extricable error of law in the award the Court of Appeal allowed the appeal. Section 31(4)(b) of the applicable statute provided Justice Iyer with a choice of remedies. Justice Iyer opted to amend the award to provide for the remaining sale proceeds held in trust to be paid to Grewal, rather than to remit it to the arbitrator for further proceedings.
Mann and Bain argued that Justice Iyer had failed to consider the option of remitting the award to the arbitrator. The Court of Appeal, though, found no basis for disturbing Justice Iyer’s choice.
First, on the standard of review: another case, another punt on the effect of Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65. The judgment helpfully canvasses the BC Court of Appeal’s previous punts in Nolin v. Ramirez, 2020 BCCA 274 at paras. 30–39; Escape 101 Ventures Inc. v. March of Dimes Canada, 2022 BCCA 294 at paras. 99–101; and Spirit Bay Developments Limited Partnership v. Scala Developments Consultants Ltd., 2022 BCCA 407 at para. 58. At least in BC, we will have to wait for a case that turns on the assessment of the standard of review.
Second, Grewal is consistent with the BC Court of Appeal’s relative willingness to find extricable errors of law in appeals of domestic arbitration awards on contract interpretation issues – a phenomenon also observed in March of Dimes under BC’s new Arbitration Act. For more on March of Dimes, see Case Note 662: B.C. – Material misapprehension of evidence is an extricable error of law.
In Teal Cedar, the Supreme Court of Canada, at para. 65, stated the test for identifying an extricable error of law in contract interpretation: “To extricate a question of law based on the alleged error of having overwhelmed the contract, a reviewing court must be satisfied that the decision-maker interpreted the factual matrix isolated from the words of the contract; an approach which could effectively create a new agreement.” Teal Cedar also admonished that “a question of law premised on the failure to apply the principle that the factual matrix must not be interpreted in isolation from the words of the contract will be very difficult to extricate in practice.” (emphasis added)
Sattva and Teal Cedar provide a crack of hope for parties disappointed by a domestic arbitration award. Hope springs eternal, though, and the crack appears wider in BC than elsewhere. In the March 2023 issue of The Canadian Journal of Commercial Arbitration, our own Lisa Munro co-authored an article observing that BC’s expansive approach in March of Dimes contrasts with the narrow approach of the Court of Appeal for Ontario. The authors argue that Ontario’s approach is preferable.
For the BC Court of Appeal, Justice Skolrood acknowledged, at para. 46, the judicial tightrope walk required to distinguish reviewable from unreviewable treatment of contracts by arbitrators: “this is not a case in which the judge was faced with two competing interpretations of the Settlement Agreement and simply chose her own over that of the arbitrator. Rather, as the judge found, the arbitrator’s interpretation was not grounded in the language of the Settlement Agreement and, as such, the Award was unreasonable.”
But what does “not grounded in the language” mean? The BC courts concluded that the Grewal award interpreted the settlement incorrectly, but was the award’s interpretation “isolated from the words of the settlement”?
Extracts of the award, at para 24 of the Court of Appeal’s judgment, show that the Arbitrator:
- Made conclusions about the meaning of paragraph 4 of the settlement: “The remaining $2.0 million was to come from the sale of the Gibsons property. That much is clear from the wording of paragraph 4. … The Gibsons transfer to Grewal was not a stand-alone transaction. In fact the parties carefully considered the wording that went into paragraph 4.”
- Made findings of fact about the parties’ intentions in the settlement: “If I were to accede to Grewal’s argument, the total purchase price would exceed $20.6 million. That clearly was not the intention of the parties.”
The result demonstrates the courts’ obvious unease about allowing the Arbitrator’s award to stand. However, the points above show that the Arbitrator’s award, right or wrong, was made by reference to the text of the settlement.
The line between unreviewable contract interpretation and reviewable error in failing to apply the law of contract interpretation is, at best, blurry. At worst, the approach demonstrated in Grewal could provide a hook for appellate intervention in arbitration that eviscerates constraints imposed by legislation and the Supreme Court. At least in the arbitration context, the role of the courts is, as Lisa and her co-authors observed at pp. 152-153 of their article, “not to be roving righters of wrongs, but rather to be guardians of party autonomy, the arbitration agreement, the arbitral process it gave rise to, and the integrity of the law.” In other words, fidelity to legislative and jurisprudential constraints means that courts must resist the temptation to read into Sattva and Teal Cedar a license to correct awards under the guise of extricating questions of law, even if the result is difficult to stomach.
Agreeing to arbitration entails both advantages and risks, including the risk of error in contract interpretation. That is a feature chosen by the parties. It is also one that parties can proactively mitigate, including by careful drafting of the arbitration agreement, the use of institutional rules, and careful selection of counsel and arbitrators.