Federal – Court of Appeal applies distinction between final offer arbitration and interest arbitration – #094

In Laurentian Pilotage Authority v. Pilotes du Saint-Laurent Central Inc., 2018 FCA 117, the Federal Court of Appeal restored an arbitrator’s choice between two final awards, noting that the lower court’s judicial review had effectively converted the parties’ final offer arbitration into interest arbitration. In restoring the award, the Court refreshed guidelines on conducting final offer arbitration and distinguished it from interest arbitration. The reasons also identify arguments – compelling in principle but unsuccessful on the particular facts – to disqualify final offers which purportedly contain terms and conditions in conflict with legislation or exceed a party’s capacity to contract.

A public entity established under the Pilotage Act, RSC 1985, c P-14, Laurentian Pilotage Authority (“Appellant”) is tasked with establishing, operating, maintaining and administering efficient pilotage service in designated areas of the St. Lawrence and Saguenay Rivers.  Pilotes du Saint-Laurent Central Inc. (“Respondent”) is the corporation through which pilots provide their services to Appellant on the St. Lawrence River

The Pilotage Act identifies those circumstances in which vessels on those rivers require a pilot and establishes how to retain a pilot through “a regime akin to a collective bargaining regime”.  Appellant and Respondent are required to negotiate service agreements containing detailed terms and conditions for retaining pilots.  They renegotiate those agreements periodically.  In case they cannot finalize their renegotiation by themselves, the Pilotage Act at section 15.1 stipulates final offer arbitration but only if the parties’ own agreement fails to stipulate a dispute resolution process.

In the last round, faced with a disagreement on the terms and conditions, the parties underwent final offer arbitration.  The arbitrator chose Respondent’s final offer.

Appellant challenged the award by way of judicial review.  The Federal Court in Laurentian Pilotage Authority v. Corporation des pilotes du Saint-Laurent central inc., 2016 FC 1413 overturned the award in part.  The Federal Court ordered that part of Respondent’s final offer be deleted and remitted the dispute to the arbitrator for redetermination based on that amended final offer by Respondent.

A key issue raised by Appellant was that two (2) issues contained in Respondent’s final offer could not be incorporated into a final agreement because they conflicted with the Laurentian Pilotage Authority Regulations, CRC, c 1268 (“Regulations”).

Appellant on appeal argued that the Federal Court erred by (a) not adopting Appellant’s final offer and (b) failing to conclude that Respondent’s offer was ultra vires.  In particular, it argued that Appellant was a statutory body with regulation-making authority and, as such, could not validly contract about issues that may be the subject of regulation.  Appellant further submitted that some of Respondent’s terms and conditions conflicted with sections of the Regulations and the Regulations had to take priority over the provisions of the service agreement.

Appellant argued that the arbitrator could not have accepted Respondent’s final offer because some of the terms and conditions in that final offer violated Appellant’s regulation-making authority in three (3) ways:

1) a public authority cannot bind itself via contract in respect of a matter that it is required to decide or has decided by regulation; (2) it cannot by contract agree to in future exercise its regulatory power in any particular fashion; and, (3) it cannot, without the requisite statutory authority, sub-delegate its regulation-making authority.

Though the arguments were compelling, on the facts the Court of Appeal held that the parties’ own conduct did not support Appellant’s arguments.   In earlier iterations of their service agreements, the parties had undertaken similar provisions and accepted that issues governed by the Regulations could be the subject of provisions in their service agreements.   See paras 71-72.

The Court granted the appeal, set aside the Federal Court judgment and dismissed Appellant’s judicial review of the arbitrator’s award.

The case also offers four (4) additional insights applicable to final offer arbitration.

First, arbitration practitioners benefit from comments the Court added at the close of its reasons after it had already resolved the appeal on other principled grounds.  Expressly recognizing that those comments constituted obiter, the Court prefaced its comments with an expression of its belief that “it is worthwhile to make a few comments about the remedy selected by the Federal Court to provide guidance in future cases”.

The Court stated distinctions between final offer arbitration and interest arbitration, included four (4) endorsements of academic articles on final offer arbitration and identified now the Federal Court decision converted the process from final offer arbitration to interest arbitration.

[79] Final offer selection arbitration – sometimes called baseball arbitration – is designed to force the parties to narrow the gap between them to the greatest extent possible as the arbitrator is tasked with assessing which offer is the more reasonable. If a party takes an unreasonable position on any outstanding issue, or advances a position that it cannot take under the legislation or agreement governing the arbitration, it risks losing everything. This, in turn, increases the likelihood of successful consensual settlements.

 [80] Final offer selection interest arbitration may be contrasted with the more traditional type of interest arbitration, under which the arbitrator is empowered to proceed on an issue-by-issue basis and is free to select the position of either party on any issue or to order something between the two or different from either party’s position on each issue in dispute. This type of arbitration has been criticized for undermining free collective bargaining, particularly in those sectors where resort to arbitration is known as a possible outcome at the outset of bargaining. In such circumstances, there is less incentive to seek compromise if further compromise could be imposed by an arbitrator. (See, for example, S.A. Bellan, “Final offer Selection: Two Canadian Case Studies and an American Digression” (1975), 13 Osgoode Hall L.J. 851 at pp. 871-873; James Robbins and Aminah Hanif, “Interest Arbitration in Ontario” (2015), 28 Can J. Admin. L. & Prac. 81 at pp. 83-84; Charles J. Morris, “The Role of Interest Arbitration in a Collective Bargaining System” (1976), 1 Indus. Rel. L.J. 427 at pp. 464-466; and Arnold M. Zack, “Final Offer Selection—Panacea or Pandora’s Box” (1974), 19 N.Y.L.F. 567 at p. 573).

 [81] In its remedial order, the Federal Court effectively turned a final offer selection process into the other type of arbitration as it removed the essential feature of final offer selection, namely the risk that a party will lose if its offer contains an impermissible or unreasonable component. A court should not make this sort of order as it wholly undermines the final offer selection process. Rather, in the event a court determines that it was unreasonable for a final offer selection arbitrator to have accepted one party’s offer, the only possible order is that the other party’s offer be accepted as final offer selection requires the rejection of the entirety of a party’s offer if it contains an objectionable provision.

Second, for its version of final offer arbitration, the Pilotage Act does not expressly stipulate that the arbitrator provide reasons. The process set out at section 15.2 is laconic at best.  In the present case, the arbitrator did explain his choice and, in doing so, assisted the Court to appreciate and endorse his choice.   The Court noted the arbitrator’s provision of reasons and commented on the practice in final offer arbitration to provide at least brief reasons supporting the choice made.

[26] After concluding that he possessed jurisdiction to consider the respondent’s offer, Arbitrator Michaud then moved on to address why he felt it ought to be selected, and as is typically done in cases of this nature, provided brief reasons for why he preferred the respondent’s offer.

Third, the Court included a helpful explanation of what it means to apply the standard of reasonableness. In its analysis at paras 43-64, the Court determined that the standard of review was reasonableness.  It further refined that determination, adding that the approach to reasonableness was not to decide what a court would believe was a reasonable result but, instead, take the arbitrator’s award and determine if it was reasonable.

[67] I disagree, and, contrary to the appellant’s approach, believe that the starting point for the reasonableness analysis must be a consideration of the Arbitrator’s award; the question is not how a court might interpret the provisions in issue, but, rather, whether the interpretation of the Arbitrator was a reasonable one. In evaluating this issue, we are, according to the Supreme Court, to consider both the reasons offered by the Arbitrator and the result reached to determine whether they are justified, transparent and intelligible and whether the result is a possible, acceptable outcome that is defensible in respect of the facts and applicable law: Dunsmuir [Dunsmuir v. New Brunswick, [2008] 1 SCR 190, 2008 SCC 9]  at para. 47. The criteria of intelligibility and transparency are concerned mostly with the reasons whereas justification and defensibility focus more on the result.

Providing reasons helped the Court in determining that the arbitrator’s choice was reasonable. The Court readily accepted that the arbitrator’s award met the criteria developed by the case law, namely that it was intelligible, transparent as well as justifiable and defensible.  See paras 68-69.

Fourth, despite the result on the facts, Appellant’s ultra vires arguments should still be considered by arbitration practitioners undertaking final offer arbitration.  It is conceivable that, when each final offer is considered as a bundle, an arbitrator may be prevented from choosing an otherwise valid offer if one or more terms and conditions violates legislation or exceeds one or both of the parties’ capacity to negotiate.  It would be more effective for the parties to signal and discuss this deficiency before the final offers are submitted to the arbitrator.  Doing so could avoid a successful and lengthy post-choice award obliging the parties to redo the final offer process again, in whole or in part.