Ontario – Vavilov does not overrule Teal Cedar or Sattva Capital – #302

In Ontario First Nations (2008) Limited Partnership v. Ontario Lottery And Gaming Corporation, 2020 ONSC 1516, Mr. Justice Glenn A. Hainey held that Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65 does not refer to either Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 (CanLII), [2014] 2 SCR 633 or Teal Cedar Products Ltd. v. British Columbia, 2017 SCC 32 (CanLII), [2017] 1 SCR 688 and that it is not reasonable to conclude that the Supreme Court meant to overrule its own decisions without making any reference to them or to the area of law to which they relate.

The decision involved Ontario First Nations (2008) Limited Partnership (“OFNLP”), Ontario Lottery and Gaming Corporation (“OLG”) and Her Majesty the Queen in Right of Ontario (“Ontario”) and their dispute over a February 19, 2008 Gaming Revenue Sharing and Financial Agreement (“GRSFA”).  Hainey J. briefly explained the nature of OLG and OFNLP.

[7] OLG is a Crown corporation that conducts and manages lottery schemes in Ontario on behalf of the provincial government. OLG operates pursuant to an exemption to the Criminal Code’s prohibition of gaming and betting in Canada. OLG’s profits are paid to Ontario and are the largest source of non-tax revenue for the Province.

[8] OFNLP is a limited partnership of 132 of the First Nations in Ontario. It was established in 2008 to receive revenue from OLG under the GRSFA and to distribute that revenue to First Nations in Ontario in order to advance their growth and capacity in respect of education, health, economic, cultural and community development.”

Hainey J. first set out the origins of the GRSFA.  At paras 9-22, Hainey J. set out how different disputes prompted the parties to undertake two (2) rounds of negotiations and at para. 23 identified key provisions of the GRSFA.  The OFNLP was created to receive and distribute the funds received under the GRSFA.

Negotiations included agreement on the base elements comprising provincial revenues earned from gaming operations and to be shared with First Nations.

(i) gaming revenues from lotteries, slots and table games (“GR”);

(ii) revenues from non-gaming activities ancillary to the conduct and management of this gaming (“NGR”); and

(iii) the retail value of accommodation, food and beverage services and other services provided to gaming patrons on a complimentary basis (“Comps”).

Following a strategic business review of its operations, OLG decided to transfer risk and responsibility for non-gaming amenities and revenues at land-based gaming sites to private sector operators and, in exchange, grant the latter 100% of NGR and Comps.  OFNLP’s attempts to obtain information and documents from OLG were treated as freedom of information requests in regard to which OFNLP received limited disclosure.  Of the information disclosed, none referred to the transfer of NGR and Comps to private operators.  As well, Ontario failed to appoint an OFNLP representative to OLG’s Board of Directors despite (i) the clear obligation in the GRSFA to do so and (ii) OFNLP presenting qualified candidates.

OFNLP initiated arbitration to enforce Ontario’s obligation to appoint an OFNLP representative to OLG’s Board of Directors (“First Award”).

[28] Ultimately, OFNLP initiated arbitration proceedings to compel Ontario to comply with its obligation under the GRSFA to appoint an OFNLP representative to OLG’s Board of Directors. (“Board Appointment Arbitration”) The arbitration panel, composed of three retired judges of the Ontario Superior Court of Justice (Justices Chadwick, Killeen and Lane), unanimously held that Ontario had breached the GRSFA in bad faith. According to the arbitration panel, the breach was “egregious” and exhibited “an odour of moral failure.” The breach was held by the arbitration panel to be inconsistent with the honour of the Crown doctrine”.

The parties were involved in second arbitration. In a majority decision, a three (3) member arbitration panel issued a decision in favour of OFNLP confirming OLG and Ontario to share 1.7% of three (3) separate revenue streams which existed when the GRSFA was signed (“Award”).  Hainey J. heard appeals by Ontario and OLG against that Award.

Incorporating determinations of fact made in the second arbitration by the majority in its Award, Hainey J. noted the following:

– Ontario’s breach of the GRSFA by failing to make the board appointment was ongoing throughout the period of OLG’s strategic business review and meant that OFNLP did not have a representative within OLG positioned to specifically consider the effect of OLG’s modernization on First Nations when the OLG Board voted to approve the changes;

– OLG decided internally by early 2013 that it would cease sharing NGR and Comps with First Nations, resulting in a decrease in OFNLP’s payments under the GRSFA, but did not disclose its plan to OFNLP;

– the provincial Ministry responsible for administering the GRSFA, Ministry of Indigenous Relations and Reconciliation (“MIRR”), was not advised the OLG had decided to no longer share the NGR and Comps with First Nations;

–  First Nations learned only in June 2016 that OLG had stopped sharing NGR and Comps. The information was disclosed in a note to the 2016 audited Gross Revenues Statement required under the GRSFA but not drawn to OFNLP’s attention by either OLG or Ontario.

As mentioned, OFNLP initiated a second arbitration from which issued the Award.  That Award (a) held that OLG’s and Ontario’s conduct breached the GRSFA and (b) ordered an accounting and payment by OLG of the 1.7% annual share of the NGR and Comps for a particular time period.  The majority held:

226. In this arbitration, no one contests OLG’s right to modernize. The resulting growth in GR benefits both OLG and First Nations. However, OFNLP’s contractual rights concerning NGR and Comps remain. They were not traded for a share of the increased GR. In short, while OLG has the right to modernize the COSA sites, that does not give it the right to shed its obligations to OFNLP”.

The majority referred to, but did not rely on, the doctrine of the honour of the Crown, only concluding that it provided moral support for the result.

Both Ontario and OLG appealed the Award under Ontario’s Arbitration Act, 1991, SO 1991, c 17. Their respective grounds are set out at paras 52-54 and 55-60.

Standard of review – Hainey J. addressed the role of Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65 which issued after the parties had argued their appeals before him.  He requested the parties to provide submissions on its applicability to the standard of review he must apply to the Award.

[64] OLG and Ontario submit that the Supreme Court’s decision in Vavilov establishes that appeals of commercial arbitration decisions should now be reviewed using an appellate standard of review. They argue that because I am sitting as an appellate court under the Arbitration Act, an appellate standard of review applies to this appeal. In other words, according to OLG and Ontario, questions of law should be reviewed on a “correctness” standard and questions of fact and mixed fact and law should be reviewed on a “palpable and overriding error” standard of review”.

Hainey J. resisted this approach, underlining that the appeals before him were not brought pursuant to a statutory right of appeal but by virtue of section 9.2 of the parties’ agreement to arbitrate contained in the GRSFA.

The award of any arbitration shall be appealable by the parties to the appropriate Ontario court on questions of law, or questions of mixed fact and law, including, without limitation, matters of process and procedure”.

Ontario submitted Allstate Insurance Company v. Her Majesty the Queen, 2020 ONSC 830 as precedent and support for its argument. Hainey J. disagreed that it applied, pointing out that the decision involved an appeal from an insurance arbitration that was statutorily mandated.  See the Arbitration Matters note “Vavilov standard applies to statutory insurance arbitration but not private commercial arbitration”.

OFNLP argued that Vavilov did not alter the standard of review applicable to commercial arbitration awards.  It noted that the Supreme Court of Canada had issued two (2) leading decisions applicable to commercial arbitration and neither were overturned by Vavilov.  See Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 (CanLII), [2014] 2 SCR 633 and Teal Cedar Products Ltd. v. British Columbia, 2017 SCC 32 (CanLII), [2017] 1 SCR 688.

Hainey J. agreed with OFNLP.  First, he pointed out that Vavilov issued without any mention by the Supreme Court of its own leading and recent case law on commercial arbitration.

[71] The Supreme Court of Canada’s comprehensive decision in Vavilov does not refer to the court’s previous decisions in either Sattva or Teal Cedar. It is not reasonable to conclude that the Supreme Court meant to overrule these important decisions without making any reference to them or to the area of law to which they relate”.

Second, he explained the reasoning which animated the result in Vavilov, thereby distinguishing from the appeals against commercial arbitration awards.

[72] Further, as a matter of legal principle it is appropriate that Vavilov does not apply to commercial arbitrations. The administrative law standard of review established in Vavilov derives from constitutional considerations that justify deference by the judiciary to the legislature. This principle does not apply to commercial arbitrations. The standard of review for commercial arbitrations is guided by commercial considerations about respect for the decision-makers chosen by the parties.  As a result, deference is justified by the parties’ contractual intent. It is for this reason that Rothstein J. identified the key differences between administrative decisions and arbitral awards in Sattva and concluded that the judicial review framework for administrative decisions is not applicable in the commercial arbitration context”.

Hainey J. then completed his reasons not to apply Vavilov to commercial arbitration by pointing to the recent reasoning and result in Cove Contracting Ltd v. Condominium Corporation No 012 5598 (Ravine Park), 2020 ABQB 106 paras 10-12.  See the Arbitration Matters note “Alberta & Manitoba – courts take different paths to different outcomes following same S.C.C. case”.

Hainey J.’s analysis supported his conclusion that (a) the standard of review applicable to the majority’s contractual interpretation of the GRSFA and to the damage award was reasonableness and (b) the standard of review applicable to the majority’s approach to the honour of the Crown doctrine was correctness in light of its constitutional implications.  He also included his analysis of the first issue, (a), subject to a correctness standard in case he was incorrect in determining that a standard of reasonableness applied.

Issue 1 – was the majority’s contractual interpretation of the GRSFA unreasonable – paras 78-102

Hainey J. concluded that the majority’s contractual interpretation was not unreasonable and that it was correct.  As well, he dismissed arguments relating to improper use of testimony as parole evidence. Instead, he accepted that the majority’s use of evidence of discussions amongst individuals who negotiated the GRSFA as only constituting “objective evidence of the shared understanding of already settled contract language”. He determined that the evidence was admissible for its limited purpose. “I am satisfied that this evidence was admissible to demonstrate the objective mutual intent of the parties and the background facts at the time the GRSFA was executed”.

Issue 2 – Did the majority err in concluding that the honour of the Crown doctrine applies to the GRSFA and in using it to support their contractual interpretation – paras 103-113

Hainey J. concluded that the majority did not err in deciding that the GRSFA engaged the honour of the Crown doctrine and their conclusion was correct. Hainey J. added that the majority made it clear in its reasons that the honour of the Crown doctrine did not impact their ultimate interpretation of the GRSFA, which they reached without resort to this doctrine. Even if the GRSFA did not engage the honour of the Crown doctrine, the majority’s interpretation of the GRSFA was still reasonable and the reference to the doctrine was obiter dictum.  For more on the honour of the Crown, see Manitoba Metis Federation Inc. v. Canada (Attorney General), 2013 SCC 14 (CanLII), [2013] 1 SCR 623.

Issue 3 – Was the Majority’s Order for Damages Unreasonable – paras 114-122

Hainey J. determined that the majority’s conclusion was reasonable. “It is justified, transparent and intelligible and it clearly falls within a range of defensible outcomes”. He further held that the majority’s order for damages was a correct interpretation.

For those reasons, Hainey J. dismissed the appeals.

urbitral note – First, Vavilov did not change the standard of review applicable to commercial arbitration awards.

Second, the GRSFA stemmed from disputes identified at para. 9 which were subject to different dispute resolution processes including litigation, arbitration and negotiated settlement.