James’s 2021 Top Pick: B.C. – Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District – #565

My top pick for 2021 is Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7 [Wastech]. For most, Wastech’s primary importance relates to the common law duty of good faith in the exercise of contractual discretion. But for arbitration aficionados, another key aspect is what the Supreme Court of Canada’s concurring Justices said, and what the majority Justices declined to say, about the standard of review applicable to appeals from arbitral awards.

Background – The case concerned a contract dispute between Wastech, a waste transport/disposal company, and Metro, a statutory corporation administering waste disposal for the Metro Vancouver Regional District. The parties concluded a long-term contract under which Wastech would haul waste to three disposal facilities. Wastech’s compensation depended on: 1) which facility Metro directed it to use; and 2) the hauling distance. Metro retained sole discretion to decide what Wastech was to haul and where.

In 2011, Metro exercised its discretion to allocate waste in a way that seriously diminished Wastech’s profits. Pursuant to an arbitration agreement contained in the contract, Wastech commenced an arbitration seeking damages.

The arbitrator granted Wastech’s claim, finding Metro failed to exercise its contractual discretion in good faith. Specifically, he concluded that in making its waste allocation decisions, Metro failed to appropriately weigh Wastech’s contractual interests. The B.C. Supreme Court found the arbitrator erred in law since the duty of good faith’s application must have regard to the contract’s terms. In this case, the contract gave Metro total discretion on waste allocation. The Court also observed that, during negotiations, the parties considered and rejected a proposed term that would have constrained Metro’s discretion. The B.C. Court of Appeal dismissed the further appeal.

At the Supreme Court, all the Justices agreed the appeal should be dismissed. A six-member majority provided guidance on what it means to exercise contractual discretion in good faith—exercising the discretion in a manner consistent with its purpose. The three concurring Justices disagreed that the contract’s objective should guide the analysis. For them, contractual discretion is fenced in by the contract’s terms and the factual matrix, not extraneous notions of the contract’s purpose. Thus, a court should refrain from limiting a broadly worded discretion based on what the court thinks the contract’s ultimate objective is.

The arbitration standard of review issue – The B.C. Court of Appeal released its decision before the Supreme Court of Canada came out with its landmark decision in Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65 [Vavilov]. Depending on who one asks, the Supreme Court in Vavilov either clarified or revised the framework for judicial review of administrative action in Canada.

Broadly, Vavilov addressed two things: 1) how to identify the applicable standard of review (correctness or reasonableness); and 2) how to apply the reasonableness standard. On the first point, and most relevant for our purposes, Vavilov maintained the presumption that reasonableness applies. However, as the majority Justices explained, one way to rebut the presumption is demonstrating legislative intent that points to the correctness standard. The legislature may evince that intent by, among other things, including a statutory appeal right. When it does, it tells the court to “perform an appellate function with respect to that decision” (para. 36). This entails applying the appellate standard of review framework. The majority’s conclusion departs from the contextual approach prevailing under Dunsmuir v. New Brunswick, 2008 SCC 9 wherein a statutory appeal clause is only one among several factors relevant in identifying the applicable standard of review.

The domestic arbitration laws in eight of 10 provinces (Quebec and Newfoundland and Labrador being the exceptions) and all three territories contain provisions allowing appeals from arbitral awards on the merits, in one form or another. Before Vavilov, the Supreme Court’s decisions in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 [Sattva] and Teal Cedar Products Ltd. v. British Columbia, 2017 SCC 32[Teal] governed the standard of review issue. Those cases held that reasonableness applies to appeals from arbitral awards on questions of law, except constitutional questions and so-called questions of central importance to the legal system and outside the decision-maker’s expertise. Both cases came out of B.C. and concerned its domestic arbitration statute. Despite the diversity among the appeal provisions in the various statutes, courts around the country applied the Sattva/Teal standard of review holding to arbitration appeals in their jurisdictions.

Since Vavilov, however, lower courts have split on whether the Supreme Court’s pronouncement in that case on legislative intent and statutory appeals effectively overruled (or overtook) Sattva/Teal, making the standard of review on appeals from arbitral awards correctness for pure legal questions. The only appellate decisions tackling the issue have come down on the side of correctness (Travelers Insurance Company of Canada v. CAA Insurance Company, 2020 ONCA 382; Northland Utilities (NWT) Limited v Hay River (Town of), 2021 NWTCA 1; TransAlta Corporation v Alberta (Utilities Commission), 2021 ABCA 232). On the other hand, superior courts in Ontario and Alberta have declined to apply the appellate reviewing framework and concluded Vavilov does not alter the law as set down in Sattva/Teal (Ontario First Nations (2008) Limited Partnership v. Ontario Lottery And Gaming Corporation, 2020 ONSC 1516 [OLG]; Cove Contracting Ltd v Condominium Corporation No 012 5598 (Ravine Park), 2020 ABQB 106).

By the time Wastech made its way to the Supreme Court of Canada, much of this case law had already come out. The majority Justices (Kasirer J. writing for Wagner C.J. and Abella, Moldaver, Karakatsanis and Martin JJ.) declined to answer the question, stating they “would leave for another day consideration of the effect, if any, of Vavilov on the standard of review principles articulated in Sattva and Teal Cedar” (para. 45).

The concurring Justices (Brown and Rowe JJ. writing for Côté J.) thought the question was ripe and that the Court “ought to provide guidance” (para. 117). They reasoned that Vavilov indeed changed the reviewing framework. This meant that courts should assess appeals from arbitral awards for correctness on questions of law and palpable and overriding error on questions of fact and mixed fact/law. Recognizing differences between review of commercial arbitral awards, on one hand, and administrative decisions, on the other, the concurring Justices found these differences insufficient to oust Vavilov’s rationale:

“[119] There are important differences between commercial arbitration and administrative decision‑making (Sattva, at para. 104). Those differences do not, however, affect the standard of review where the legislature has provided for a statutory right of appeal. Appellate standards of review apply as a matter of statutory interpretation. As this Court explained in Vavilov, “a legislative choice to enact a statutory right of appeal signals an intention to ascribe an appellate role to reviewing courts” (para. 39). This interpretive principle applies in similar manner to statutory rights of appeal from arbitral awards …

[120] Factors that justify deference to the arbitrator, notably respect for the parties’ decision in favour of alternative dispute resolution and selection of an appropriate decision‑maker, are not relevant to this interpretive exercise. What matters are the words chosen by the legislature, and giving effect to the intention incorporated within those words. Thus, where a statute provides for an “appeal” from an arbitration award, the standards in Housen apply. To this extent, Vavilov has displaced the reasoning in Sattva and Teal Cedar. Concluding otherwise would undermine the coherence of Vavilov and the principles expressed therein.”

The concurring Justices admonished the majority for “invit[ing] conflict and confusion” by refusing to answer the question (para. 122). For their part, the majority Justices made clear their silence should not be taken as agreement with the concurring Justices on this point (para. 46).

What now? Much ink has been spilt both judicially and extra-judicially (including by yours truly) on this point. Although the matter cannot be laid to rest until the Supreme Court addresses it head-on, the conflicting views are broadly as follows:

Appellate reviewing framework applies: There is no good reason to restrict Vavilov’s pronouncement on legislative intent, as expressed in the form of statutory appeal clauses, to administrative law. The presumption of consistent expression underpinning the Court’s reasoning in Vavilov on this point—“appeal” means “appeal”, which invokes the appellate reviewing framework—applies in the arbitration world. The arbitration context does not rebut the presumption. Rather, the parties’ decision to take advantage of the statutory appeal provision and “legislate” an appeal in their arbitration agreement strengthens its application.

Appellate reviewing framework does not apply: Vavilov is limited to the administrative law context. It does not mention Sattva or Teal, nor does it reference private arbitration at all. Sattva/Teal landed on reasonableness as the standard of review after considering one of the policies behind arbitration: parties who select arbitration seek efficient and final dispute resolution, and the court should stay out of the way to the extent possible. Administrative law, in contrast, invokes different policy concerns, including “constitutional considerations that justify deference by the judiciary to the legislature” (Wastech, para. 117, citing OLG, paras. 62-75).

Both positions are defensible. One might even say they are both reasonable. Ironically, it falls to the Supreme Court of Canada to determine which one is correct.

For an earlier case note on Wastech see: Supreme Court – for those SCC justices willing to consider it, Vavilov applies to private commercial arbitration where legislation provides for appeal – #420.

Arbitration Matters has released many notes dealing with some of the lower court post-Vavilov decisions on the subject. See for example: