Ontario – once court finds arbitrator acted within jurisdiction, it cannot consider merits in exercise of that jurisdiction – #184

Ontario’s Court of Appeal held in Alectra Utilities Corporation v. Solar Power Network Inc., 2019 ONCA 254 that, under section 46(1)3 of the Arbitration Act, 1991, SO 1991, c 17, once a court satisfies itself that an arbitrator had jurisdiction to resolve a particular dispute, absent a right of appeal, the court has no authority to delve into the merits of the award and review its for reasonableness.  The Court held that a jurisdictional question must be answered correctly but “neither requires nor authorizes review of the substance of an arbitrator’s award”.

The arbitral award under consideration resolved a dispute stemming from an October 25, 2018 agreement (“PAMA”) entered into by Solar Power Network Inc. (“SPN”) and PowerStream Inc., a predecessor of Alectra Utilities Corporation (“Alectra”).  The PAMA involved the parties’ agreement to collaborate in contracts to be awarded under Ontario’s Feed-in Tariff Programme (“FIT Programme”).  Following a hearing, the arbitrator issued an award (“Award”) in which he determined that Alectra had unlawfully terminated the PAMA and awarded SPN $12.3 million in damages.

The facts of the case and a summary of the reasoning in first instance appear in a prior Arbitration Matters note – “Ontario court’s contractual interpretation confirms arbitrator’s jurisdiction to hear dispute but not award lost profits”.

Alectra applied to the Superior Court to set aside the Award under section 46(1)3 of the Arbitration Act.  The application judge in Alectra Utilities Corporation v. Solar Power Network Inc., 2018 ONSC 4926 granted the application.  Determining that addressing jurisdictional issues required contractual interpretation, the judge recognized that the jurisdictional issues required a correctness standard while the contractual interpretation required a reasonableness standard. 

Though the judge preferred a reasonableness standard, he deemed it unnecessary to settle on either. Rather, his contractual interpretation led him to conclude that the arbitrator was (i) reasonable to assert he had jurisdiction to hear the dispute but (ii) unreasonable when the arbitrator deemed inapplicable a limit on recovery of lost profits. The judge considered that the Award’s grant of lost profits qualified as going beyond the scope of the contract under section 46(3) of the Arbitration Act 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.

SPN appealed, arguing that the judge had failed to “appreciate the distinction between narrow review on a true question of jurisdiction and a broader review on the merits”.  This failure led the judge into a review on the merits and to substitute his interpretation of the PAMA for that of the arbitrator.  Doing so “had the effect of converting a limited review on a question of true jurisdiction into an appeal on a question of mixed fact and law”.

Alectra argued that determining the arbitrator’s jurisdiction “had the effect of converting a limited review on a question of true jurisdiction into an appeal on a question of mixed fact and law”.  Undertaking that interpretation does not result in converting the jurisdictional inquiry into a merits review.  Alectra’s argued drew on Mexico v. Cargill, Incorporated, 2011 ONCA 622 for the proper approach in determining whether an award exceeds the jurisdiction and its argument echoes para. 51 of that decision:

“[51] While the respondent advocates for review under art. 34(2)(a)(iii) on a reasonableness standard, as found by the application judge, in my view a reasonableness standard inevitably leads to a review of the merits of the decision. Any time the court reviews on the reasonableness standard, it undertakes an in-depth analysis of the reasoning and decision of the tribunal in order to decide whether the result was a reasonable one. That may include a review in the form of an exercise determining whether findings of fact made by the tribunal were reasonable. Once a court enters into a reasonableness review, it is effectively considering the merits of the tribunal’s decision and deciding whether that decision is acceptable because it is reasonable, not because it was made within the jurisdiction of the tribunal.

The Court of Appeal considered the role of the courts under the Arbitration Act, remarking that appeals from awards “are neither required nor routine”.   Unless the parties exercise their freedom to provide or deny appeals on questions of law, fact or mixed fact and law, the courts’ role is limited.  Faced with the parties omission to provide for an appeal, an appeal to the courts is only on leave for questions of law and then only if the court is satisfied that the question is important enough and determining it will significantly affect the parties’ rights.

The Court noted that Alectra and SPN were “sophisticated commercial parties represented by counsel” and had chosen arbitration over litigation without appeal. Citing the parties’ agreement to arbitrate which provided for no appeals, the Court was blunt.

[22]   There is no ambiguity here: there is no appeal to the court, period. The arbitrator’s determination is final and binding.

The Court reproduced the limited list of authorized interventions provided at section 46(1) of the Arbitration Act and observed that the list “in general, not concerned with the substance of the parties’ dispute”.  The Court emphasized that a court’s authority to set aside an award “depends on the mandate the arbitration agreement confers on the arbitrator to resolve a particular dispute”.

[27]   In short, s. 46(1)3 requires that arbitrators act within the bounds of the authority granted by the arbitration agreement pursuant to which they are appointed – no less, but no more. Section 46(1)3 is not an alternate appeal route and must not be treated as such.

The Court recorded Alectra’s and SPN’s agreement that section 46(1)3 is for “true” jurisdictional error but also acknowledged their disagreement on what that error is and how to establish it.  This was not peculiar to those parties. “There should be no surprise in this. The difficulty in identifying jurisdictional error is well known.”  The Court also noted that jurisdiction is in the eye of the beholder.  “The same matter can be characterized as jurisdictional or non-jurisdictional depending on whether one seeks to intervene or defer.

Despite identifying the difficulty parties and courts have in distinguishing between an error that is jurisdictional in nature and an error made within that jurisdiction, the Court sided with SPN’s approach.

[32]   The respondent says that the arbitrator had no jurisdiction to award damages for lost profits because the arbitrator’s authority was limited by the terms of the PAMA, which precluded liability for such damages. The appellant says that the arbitration agreement gave the arbitrator jurisdiction to interpret and apply the terms of the PAMA, so whether any terms of the PAMA precluded damages for lost profits was for the arbitrator to determine.

[33]   The problem with the respondent’s argument is plain: given that an arbitrator’s authority stems from the agreement pursuant to which he or she is appointed, any unreasonable or mistaken interpretation of that agreement could be characterized as resulting in an excess or loss of jurisdiction. On this approach, arbitration awards that are not subject to appeal would, nevertheless, be vulnerable to being set aside for jurisdictional error. In effect, arbitrators would have only the jurisdiction to make awards that are reasonable or correct.

[34]   This is not the law in Ontario. The role of courts in addressing claims of jurisdictional error in the context of private arbitration is far more limited than the respondent would have it.

At paras 35-44, the Court applied its analysis to the application judge’s reasoning and held that the judge’s approach was mistaken.

The Court determined that the judge had a narrow task: to find either that the Award dealt with a matter not covered by the arbitration agreement or included a decision on a matter beyond its scope. The Court reproduced the key to the judge’s analysis and held that the approach failed “to recognize the distinction between having jurisdiction to award damages and making an error in the exercise of that jurisdiction.”  The judge’s mistake was to proceed on the basis that the arbitrator’s jurisdiction depended on his proper interpretation of other sections of the PAMA and not the more narrow consideration of whether the arbitrator had jurisdiction to interpret the PAMA.

[41]   Once the application judge concluded that the arbitrator acted within the authority conferred upon him by the arbitration agreement, his task was at an end. It was for the arbitrator, not the court, to interpret and apply the substantive provisions of the PAMA, and it is of no moment whether the arbitrator did so reasonably or unreasonably, correctly or incorrectly. The decision was the arbitrator’s to make. The application judge’s conclusion that the arbitrator’s interpretation of the agreement was both unreasonable and incorrect had the effect of converting s. 46(1)3 into an appeal on a mixed question of fact and law – an appeal the parties deliberately chose not to establish.

Referring to Smyth v.  Perth and Smiths Falls District Hospital, 2008 ONCA 794, para 17, the Court reiterated that section 46(1)3 “neither requires nor authorizes review of the substance of an arbitrator’s award”. The Court allowed the appeal, reinstated the Award, with costs against Alectra in both instances.

urbitral note – The Supreme Court of Canada on November 7, 2019 dismissed the application for leave to appeal, docket no. 38665.

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