Federal – final offer arbitration characterized as “an intentionally high risk form of arbitration” – #260

Madam Justice Ann Marie McDonald in Canadian National Railway Company v. Gibraltar Mines Ltd, 2019 FC 1650 demonstrated that the “unique nature” of final offer arbitration distinguished it from “ordinary commercial arbitration” and informed expectations of procedural fairness.  The dissatisfied party objected to the administering institution’s decision to dismiss a preliminary application but provide reasons only after the arbitration concluded.  McDonald J. held that the decision was not part of the FOA process under challenge and did not affect the fairness of the process. McDonald J. also issued a permanent order declaring certain documents, created for the arbitration, to remain confidential.

Gibraltor Mines Ltd. (“Gibraltor”) and Canadian National Railway (“CN”) were bound by a June 2016 transportation agreement governing shipping rates and conditions (“Contract”). The Contract was set to expire in June 2018 but, despite renewal discussions and the exchange of offers/counter offers, Gibraltor and CN failed to agree to new terms.

The Federal Canada Transportation Act, SC 1996, c 10 (“CTA”) governed the Contract and provided for final offer arbitration (“FOA”) at section 161 et seq.  Under the CTA, a shipper, dissatisfied with the rate(s) charged/proposed to be charged by a carrier for the movement of goods, or with any of the conditions, may submit the matter in writing to the Canadian Transportation Agency (“Agency”) for FOA.  Such arbitrations are conducted by one (1) arbitrator or, if the shipper and the carrier agree, by a panel of three (3).

Once a submission to FOA is received by the Agency, the shipper and the carrier must submit to the Agency their final offers.  Then, within five (5) days of receipt by the Agency of those offers, the Agency is to refer their matter to arbitration. The arbitral decision is made by the selection of the final offer of either the shipper or the carrier.  Reasons are not required but, if all the parties to the arbitration request within thirty (30) days of the decision, the arbitrator shall give reasons.

On September 26, 2018, Gibraltor advised CN of its intention to request FOA and did so on October 10, 2018.  CN responded October 12, 2018 with a preliminary application to the Agency under section 162(1) to strike Gibraltor’s request (“Application”).  CN argued that (a) the matter was governed by a confidential contract between it and Gibraltor, (b) CN had not consented to having it be submitted to FOA and (c) the parties had already agreed to renewal terms, albeit not signed.

The Agency dismissed CN’s Application on November 2, 2018 but delivered reasons for doing so only on March 29, 2019.  By that time, the FOA had been concluded for three (3) months.

Parallel to or independent of the Agency’s handling of CN’s Application, the FOA proceeded: October 20, 2019 – CN and Gibraltar submitted their final offers to the Agency; October 23, 2018 – the Agency referred the matter to FOA; November 7, 2018 – CN and Gibraltar exchanged information in support of their final offers; December 3-6, 2018 – the FOA hearing took place; and, December 13, 2018 – FOA arbitrator selects Gibraltor’s final offer, without reasons.

Dissatisfied, CN sought judicial review on the basis of lack of procedural fairness.  It argued that, without knowing why the Agency dismissed its Application, it did not know the case it had to meet within the FOA process. It submitted that it would have proceeded differently during the FOA had it known the reasons for dismissal.

McDonald J. noted the parties’ agreement that the standard of review for procedural fairness was correctness, referring to Canadian Pacific Railway Company v. Canada (Attorney General), 2018 FCA 69 (CanLII), [2019] 1 FCR 121 para. 34.  See also Mission Institution v. Khela, 2014 SCC 24 (CanLII), [2014] 1 SCR 502 para. 79, Re: Sound v. Fitness Industry Council of Canada, 2014 FCA 48 para. 34 and Canada (Citizenship and Immigration) v. Khosa, 2009 SCC 12 (CanLII), [2009] 1 SCR 339 para. 43.

(i) waiver of objection – Gibraltor objected to CN raising procedural fairness, arguing that CN had failed to raise it during the FOA.  CN disputed this but also stated that it had no opportunity to raise procedural fairness during the FOA because it did not know the reasons.  McDonald agreed with CN.

[19] Considering the FOA statutory scheme, and the fact that CN did not have reasons from the Agency at the time of the FOA proceeding, I agree that CN did not realistically have an opportunity to raise this issue within the FOA process. Accordingly, in my view, CN is not now precluded from raising procedural fairness arguments.

(ii) procedural fairness – McDonald J. considered that CN and Gibraltor had undergone two (2) separate processes, though related to the same issues: the first with the Agency handling the Application; the second with the FOA arbitrator.  The informational disadvantage was common to all involved in the second.

As well, I would note that there is no suggestion that the Arbitrator had access to the reasons for the Agency’s decision.  In fact, no one involved in the FOA had the Agency’s reasons.  Therefore, all parties were working from what CN calls an “incomplete record.”

Because procedural fairness was “highly variable and contextual”, as affirmed in Canadian Pacific Railway Company v. Canada para. 40, McDonald J. explained that the context in which the FOA took place took on particular importance.

She turned attention to paras 27 and 35 of Canadian National Railway Company v. Western Canadian Coal Corporation, 2007 FC 371:

[27] The respondent’s argument is that the FOA process merely settles disputes of a private and commercial matter between the parties.  My view is that the unique nature of the FOA scheme imposed by law distinguishes it from ordinary commercial arbitration. This is not a situation in which the parties freely consent to settling their dispute by arbitration or to have the terms of their contract determined by the arbitrator. Instead, I would characterize the process as one in which a contract is, in effect, formed as soon as the matter is submitted by the shipper to the Agency for referral to FOA. At that point, the carrier is bound to the terms of whichever offer is selected by the arbitrator — an obligation imposed on it by statute. Canadian National Railway Company v. Gibraltar Mines Ltd., 2019 FC 1650 para. 35 cited at para. 35 by McDonald J. of her own decision.

[35] Final offer arbitration has been described as “an intentionally high risk form of arbitration” that encourages settlement and tempers final positions. The arbitration resolves isolated disputes over rates to be charged by a carrier for a period of one year when the parties are unable to agree. The arbitrator’s task is to select the more reasonable of the two offers submitted. As is indicated in paragraph 165(6)(a) of the Act, the arbitrator’s decision is intended to bring finality to the dispute. The limited duration of the decision’s binding effect on the parties is closely linked to the limited timeframe within which the arbitration process occurs.  The issue raised by the applicant is whether, by virtue of this limited timeframe, the arbitration regime unlawfully deprives the applicant of an adequate opportunity to prepare and present its case.

McDonald J. observed that five (5) non-exhaustive factors inform the content and degree of procedural fairness: (1) nature of decision being made; (2) nature of statutory scheme; (3) importance of decision to individuals affected, (4) legitimate expectations of the parties, and, (5) choice of procedures.  See Baker v. Canada (Minister of Citizenship and Immigration), 1999 CanLII 699 (SCC), [1999] 2 SCR 817 paras 23-26.

McDonald J. held that the clear wording of section 162(1) of the CTA provided “a full answer” to CN’s claim of procedural unfairness.

162 (1) Notwithstanding any application filed with the Agency by a carrier in respect of a matter, within five days after final offers are received under subsection 161.1(1), the Agency shall refer the matter for arbitration.

She declined to speculate on the Agency’s reasons for dismissing the Application and said that the reasons were “irrelevant”.  McDonald J. also underlined that CN sought review of the FOA arbitrator’s decision only and therefore “it is not appropriate for the Court to also consider the impact of the failure of the Agency to provide its reasons under a separate process”.

Having engaged in “an intentionally high-risk form of arbitration” which had a relatively short-term impact on CN, McDonald J. concluded that there was no procedural unfairness.

(iii) confidentiality of documents – Prior to closing her reasons, McDonald J. also granted CN’s application to keep certain documents confidential, listing them in a schedule to her reasons.  Those documents appear to have been created for and during the FOA process. See paras 41-46.  She did so not only because CN’s request met the two-part test in Sierra Club of Canada v. Canada (Minister of Finance), 2002 SCC 41 (CanLII), [2002] 2 SCR 522, and complied with Rule 152(1) of the Federal Courts Rules, SOR/98-106, but also because the FOA process provides for confidentiality.

urbitral note – First, McDonald J.’s distinction between – and resulting importance of – the different functions of the Agency and the FOA arbitrator can well be applied to arbitrations in which an administering institution has a preliminary screening role. 

Applying McDonald J.’s approach by analogy, and provided the institution’s rules follow a similar, clear distinction between functions, a party appealing an award ought to consider whether it objection to a decision taken by the institution ought to be raised more explicitly during the arbitration and added on appeal.  Doing the former might be pointless if the arbitral panel has no actual or effective jurisdiction to re-consider decisions taken by the institution.  Doing the former might raise the necessity to include the institution as a party to any such appeal.

Second, the acknowledgement that correctness as the applicable standard draws with it a fair amount of judicial comment regarding how ‘correct’ must ‘correct’ be.  In Re: Sound v. Fitness Industry Council of Canada, relied on by McDonald J., the Court did qualify the correctness standard as the “black-letter rule” but that procedural fairness is more “nuanced” and the decision-maker enjoys “considerable discretion”.

[36] However, the standard of review applicable to an allegation of procedural unfairness concerning the content of the duty in a particular context, and whether it has been breached, is more nuanced.  The content of the duty of fairness is variable because it applies to a wide range of administrative action, actors, statutory regimes, and public programs, with differing impacts on individuals. Flexibility is necessary to ensure that individuals can participate in a meaningful way in the administrative process and that public bodies are not subject to procedural obligations that would prejudice the public interest in effective and efficient public decision-making. 

[37] In the absence of statutory provisions to the contrary, administrative decision-makers enjoy considerable discretion in determining their own procedure, including aspects that fall within the scope of procedural fairness: Prassad v. Canada (Minister of Employment and Immigration), 1989 CanLII 131 (SCC), [1989] 1 S.C.R. 560 at 568-569 (Prassad). These procedural aspects include: whether the “hearing” will be oral or in writing, a request for an adjournment is granted, or representation by a lawyer is permitted; and the extent to which cross-examination will be allowed or information in the possession of the decision-maker must be disclosed. Context and circumstances will dictate the breadth of the decision-maker’s discretion on any of these procedural issues, and whether a breach of the duty of fairness occurred.

McDonald J. clearly held that, in the circumstances before her, CN challenged a decision by the Agency in the context of judicial review of the FOA arbitrator’s decision.  Not only did the legislation separate the two (2) decision makers but it also clearly set up a prompt process by which the parties had to engage.

Third, the Court relied in part of the legislation providing for the confidentiality of the arbitral process and supported the Court carrying that confidentiality forward into its own process.

See the earlier decisions, Canadian National Railway Company v. Gibraltar Mines Ltd., 2019 FC 225 and Canadian National Railway Company v. Gibraltar Mines Ltd., 2019 FC 963, which held that the original confidentiality is not carried forward automatically when a party appeals an award to the court. See the Arbitration Matters note “confidentiality of arbitration must be re-established independently on appeal to court