Ontario – court’s contractual interpretation confirms arbitrator’s jurisdiction to hear dispute but not award lost profits – #117

Mr. Justice Herman J. Wilton-Siegel in Alectra Utilities Corporation v. Solar Power Network Inc., 2018 ONSC 4926 determined that addressing jurisdictional issues required contractual interpretation. Recognizing that the former required a correctness standard while the latter required a reasonableness standard, and preferring reasonableness, he deemed it unnecessary to settle on either. His contractual interpretation led him to conclude that the arbitrator was reasonable to assert he had jurisdiction to hear the dispute but unreasonable when he deemed inapplicable a limit on recovery of lost profits. Under section 46(1)3 of Ontario’s Arbitration Act, 1991, SO 1991, c 17, the award’s grant of lost profits qualified as going beyond the scope of the contract and was set aside as “a dispute that the arbitration agreement does not cover or contains a decision on a matter that is beyond the scope of the agreement.

Solar Power Network Inc. (“SPN”) and PowerStream Inc., a predecessor of Alectra Utilities Corporation (“Alectra”), entered into an October 25, 2018 agreement (“PAMA”) to collaborate in contracts to be awarded under Ontario’s Feed-in Tariff Programme (“FIT Programme”).

A Feed-In Tariff (“FIT”) Programme is “a policy mechanism designed to accelerate investment in renewable energy technologies. It achieves this by offering long-term contracts to renewable energy producers, typically based on the cost of generation of each technology. Rather than pay an equal amount for energy, however generated, technologies such as wind power and solar PV, for instance, are awarded a lower per-kWh price, while technologies such as tidal power are offered a higher price, reflecting costs that are higher at the moment.” See more on Feed-in Tariff and also at Independent Electricity System Operator.

Under the PAMA, SPN and Alectra agreed that: (a) SPN would both apply for the FIT Programme contracts in Alectra’s name and develop/operate the sites; (b) Alectra would finance and own the projects. In all, SPN and Alectra were awarded 69 contracts for sites covered by their PAMA.

The parties began negotiating for Alectra’s acquisition of SPN’s interest in projects for which they had been awarded FIT Programme contracts. Negotiations stalled and Alectra delivered a September 14, 2016 notice under section 2.3(3) of the PAMA announcing that it deemed all the projects as “defunct”, a term defined in the PAMA. Section 2.3(3) allowed Alectra to send that notice “in its sole discretion”. That notice, called the “Alectra Defunct Project Notice” (“ADP Notice”), gave three (3) reasons, each of which appeared in section 2.3(3):

(a) one or more of the conditions precedent set forth in the PAMA had not been satisfied;
(b) PowerStream was not satisfied that the projects could generate an economic return sufficient for PowerStream to achieve certain targets; and,
(c) PowerStream has determined that it did not wish to develop the projects.

The PAMA included a detailed arbitration agreement at section 7. SPN responded to Alectra’s delivery of the ADP Notice by serving a November 2, 2017 Notice of Arbitration in which SPN alleged improper delivery of the ADP Notice and claimed $29.5 million in damages. Alectra served a November 29, 2017 Statement of Defence and Counterclaim. SPN completed the pleadings by serving a December 5, 2017 Rely and Statement of Defence to Counterclaim.

The arbitration was held between January 24 and February 5, 2018. By February 23, 2018 award, the arbitrator dismissed Alectra’s Counterclaim, granted SPN’s claim and ordered Alectra to pay SPN $12,337.655.00 plus interest and costs (the “Award”). An outline of the Award’s reasoning and key conclusions appear at paragraphs 14-24 of Wilton-Siegel J.’s reasons.

Alectra applied under section 46(1)3 of the Arbitration Act to set aside the Award. SPN applied under section 50 to recognize and enforce it.

Alectra argued that the applicable standard of review is correctness because the question on appeal involved an arbitrator’s jurisdiction, a question of law. Alectra relied on Smyth v. Perth and Smiths Falls District Hospital, 2008 ONCA 794 and MJS Recycling Inc. v. Shane Homes Limited, 2011 ABCA 221.

SPN countered, arguing that the applicable standard of review is reasonableness because the question on appeal involved contractual interpretation, a question of mixed fact and law, subject to circumstances in which there is an extricable question of law. SPN relied on Sattva Capital Corp. v. Creston Moly Corp., [2014] 2 SCR 633, 2014 SCC 53, paras 50 and 53.

Wilton-Spiegel J. noted that both of Alectra’s authorities issued after Dunsmuir v. New Brunswick, [2008] 1 SCR 190, 2008 SCC 9 but before Alberta (Information and Privacy Commissioner) v. Alberta Teachers’ Association, [2011] 3 SCR 654, 2011 SCC 61.

Wilton-Spiegel J. blended the two arguments, noting that solving the jurisdiction issue required contractual interpretation. “The exercise of addressing each of the jurisdictional issues raised in these proceedings requires, of necessity, the contractual interpretation of the PAMA. As such, I incline to the view that the appropriate standard of review is reasonableness based on Sattva Capital.” Wilton-Spiegel J. also considered that the reasons in Alberta Teachers’ Association, though issuing under a different legislative context, reinforced his conclusion.

Despite being inclined to accept reasonableness as the applicable standard by relying on Sattva Capital, Wilton-Siegel J. wrote that, “in the circumstances, it is not necessary to reach a conclusion on the issue for the reason that I would reach the determination herein regardless of whether the applicable standard is reasonableness or correctness”.

Wilton-Spiegel J. then examined the PAMA and the arbitrator’s analysis in order to determine whether the arbitrator’s grant of damages to compensate lost profits fell within or beyond the jurisdiction given to the arbitrator by the PAMA. Just prior to undertaking this two step analysis, Wilton-Spiegel J. set aside paragraphs 33-40 to address what he captioned as “Procedural Submissions of SPN”, a section preceding his other two-step analysis at paragraphs 41-68.

In the section “Procedural Submissions of SPN”, Wilton-Spiegel J. wrote that he disregarded a specific statement, made by the arbitrator in reaching his conclusions in his Award, that counsel for Alectra had conceded jurisdiction. In particular, the arbitrator stated in his Award that Alectra’s counsel had conceded that a particular but key section in the PAMA – section 2.3(8) – would not be available to Alectra if Alectra’s bad faith were proven. The introductory words to section 2.3(8) provided that “for greater certainty” the delivery of an ADP Notice shall not be subject to “dispute” by SPN.

The actual wording of the Award does not appear in the reasons and the full extent of what was said, or not said, also does not appear. Readers have only the following:

[33] In reaching his conclusion on the first jurisdictional issue, the arbitrator stated that former counsel for Alectra had conceded during argument that section 2.3(8) would not be available to it if bad faith were to be established on its part. The parties dispute the extent of this concession. Alectra says that the concession was made only in the context of a finding of an ad hoc fiduciary duty. SPN submits that the concession was more general and that, therefore, Alectra has conceded the arbitrator’s jurisdiction and cannot raise the issue on this application.

[34] With respect to Alectra’s alleged concession, which pertains specifically to the first jurisdictional issue, I cannot conclude on the evidence before the Court that the former counsel for Alectra made the general concession alleged by SPN notwithstanding the language of the arbitrator in the Award. It is just as likely that the concession was limited to the context of a concurrent finding of the existence of an ad hoc fiduciary duty. In any event, while the arbitrator makes reference to Alectra’s position, it is clear that he did not base his decision on the alleged general concession. For these reasons, I have disregarded this alleged concession in reaching the conclusions below.

The courts can and do overturn findings of fact when they are based on no facts. In this case, a controversy arose, post-award, regarding the extent of exchanges leading to the arbitrator’s statement confirming a concession. The facts, on which the arbitrator concluded that a concession was made, were in issue but not entirely absent and not entirely void of dispute over who said what. The arbitrator appeared to have made a determination, based on facts though disputed but not non-existent.

The court decision expressly “disregards” what should qualify as a finding of fact based on statements both parties acknowledged were made. Once the Award issued, the parties did, later, disagree on the scope of what was conceded but Wilton-Spiegel J. does not resolve that disagreement. Rather, determining that “it is clear that [the arbitrator] did not base his decision on the alleged general concession”, Wilton-Spiegel J. “disregarded this alleged concession” when reaching his own conclusions.

It is unclear the extent to which, if any, that the arbitrator’s approach to the contractual interpretation, as well as the parties’ own submissions, were tempered by the concession recorded by the arbitrator but later “disregarded”.

The balance of Wilton-Siegel J.’s analysis deals fully and squarely with the substance of the competing contractual interpretations. The analysis has limited application due to its reliance on the actual terms of the PAMA. The overall approach taken by Wilton-Spiegel J. in his analysis remains helpful to other arbitration practitioners and post-award challenges to jurisdiction.

Alectra argued that the arbitrator had no jurisdiction to hear an arbitration regarding the manner in which Alectra issued its ADP Notice. Alectra argued that section 2.3(3) of the PAMA allowed Alectra to issue the ADP Notice in “its sole discretion” and the PAMA stipulated that the “delivery” of the ADP Notice “shall not be subject to a dispute” by SPN. This limitation was important because, if the arbitrator had no jurisdiction to hear this type of dispute, he then had no jurisdiction to award damages to compensate for a breach covered by the dispute.

Wilton-Spiegel J. agreed with the arbitrator when the latter interpreted the PAMA as imposing a duty of good faith on the exercise of the right to send the ADP Notice under section 2.3(3). Not only did Wilton-Spiegel J. find that the arbitrator’s contractual interpretation was reasonable, he also agreed that it was correct.

Wilton-Spiegel J. noted that the parties had entered into the PAMA after Bhasin v. Hrynew, [2014] 3 SCR 494, 2014 SCC 71 and “were therefore well aware of the principles articulated in that decision to the extent they are novel”. He also noted that an earlier case, mentioned in Bhasin v. Hrynew and cited by the arbitrator in his decision, Mitsui & Co. (Canada) Ltd. v. Royal Bank of Canada, [1995] 2 SCR 187, 1995 CanLII 87, was “already well established in common law”.

[45] In these circumstances, I think that, if it had been intended that any dispute regarding an alleged bad faith exercise of a right under section 2.3(3) was to be insulated from any arbitration, the parties would have used more explicit language to exclude such dispute. Further, if as Alectra effectively suggests, the parties intended that PowerStream had an unqualified option to terminate its involvement by delivering a Defunct Project Notice, the parties would not have narrowed that option by stipulating the three specific grounds in section 2.3(3)(A)-(C) for its exercise and requiring PowerStream to assert reliance on one or more of such grounds in delivering such Notice.

The arbitrator made two (2) conclusions. First, he concluded that the dispute raised in SPN’s Notice of Arbitration was a dispute that was arbitrable under section 7 of the PAMA. Second, he concluded that in such an arbitration, he had the jurisdiction to award damages for lost profits.

Wilton-Spiegel J. only half-agreed with the arbitrator. On the first conclusion, he agreed that the dispute was arbitrable under section 7. On the second conclusion, he disagreed that the arbitrator had jurisdiction to award damages for loss of profits. Wilton-Spiegel J. therefor examined the second conclusion in detail. He identified that second conclusion as resting on two (2) specific findings. He addressed each in turn and held that those two (2) findings are unreasonable.

First finding – The arbitrator distinguished between the resolution procedure for breaches described in sections 5.4 and 5.8 of the PAMA and the resolution procedure for all other disputes. He concluded that disputes under sections 5.4 and 5.8 provisions were not subject to arbitration under section 7 and that all other disputes, including the dispute claimed by SPN, were subject to section 7 under which he as arbitrator had the authority to award damages for lost profits.

Wilton-Spiegel J. disagreed. His own interpretation of the PAMA, set out in paragraphs 49-54, lead him to conclude that sections 5.4 and 5.8 “stop short of providing a separate dispute resolution procedure”. Wilton-Spiegel J. did agree with the arbitrator that section 7 gave the arbitrator jurisdiction to award damages for lost profits in an arbitration under that section but determined that the jurisdiction under section 7 applied “only to the extent that such an award would not contravene any other provision of the PAMA.” Section 5.3(3) confirmed the parties’ agreement that the party in breach of a covenant would not be liable for “consequential, special, incidental or punitive damages, including damages for loss of profit or lost opportunity suffered by” the other party.

Wilton-Spiegel J. then ranked the application of section 7 vis-à-vis section 5.3(3). His contractual interpretation lead him to conclude that section 7 provided no jurisdiction to award profits if the parties had otherwise agreed to exclude them and that section 7 did not override the limiting provisions in section 5.3(3) in respect of disputes described in section 5.2. The more specific language in section 5.3(3) applied in respect of the claims described by section 5.2.

Because Wilton-Spiegel J. determined that the PAMA did not provide authority to award profits, as excluded by sections 5.2 and 5.3(3), he then held that the arbitrator’s conclusion to grant damages for lost profits was unreasonable and an excess of jurisdiction.

Second finding – Wilton-Spiegel J. agreed with the arbitrator’s earlier characterization of SPN’s claim for the purpose of determining that the arbitrator had jurisdiction. He ageed that SPN’s claim rested on an alleged breach by Alectra of an implied contractual obligation or covenant in the PAMA to act in good faith when exercising Alectra’s rights under section 2.3(3) to deliver the ADP Notice. He noted that the contractual duty of good faith does not create a free-standing obligation “existing outside of, or independently of, a contractual relationship”. The second finding rested on Wilton-Spiegel J.’s disagreement with the arbitrator’s second characterization of SPN’s claim for the purpose of qualifying it for recovery lost profits. He considered the arbitrator’s second characterization of SPN’s claim for the damage stage was inconsistent with the arbitrator’s earlier characterization of the same claim for the purpose of confirming his jurisdiction to hear the dispute.

Based on his first and second findings, Wilton-Siegel J. held that the arbitrator’s interpretation of the PAMA that Alectra’s delivery of the ADP Notice did not constitute a breach of a covenant in section 5.2(b) was unreasonable. He determined that SPN’s claim fell within the provisions of section 5.2(b) as a claim based on a breach of a covenant which, while arbitrable under section 7, was subject to the monetary limitations in section 5.3(3).

Based on the above, Wilton-Spiegel J. set aside the award of damages to SPN.