Newfoundland and Labrador Supreme Court tests UNCITRAL Model Law as substitute for court review of award

The Newfoundland and Labrador Supreme Court, Trial Division, provided a precedent-setting analysis of arbitration parties’ ability to contract out of legislated court review of a commercial arbitration award.  At the same time, Mr. Justice Robert P. Stack in his August 30, 2017 reasoning in Newfoundland and Labrador v. ExxonMobil Canada Properties, 2017 CanLII 56724, also tested the UNCITRAL Model Law on International Commercial Arbitrations, 1985, U.N. Doc. A/40/17 (1985, Ann. I) (“UNCITRAL Model Law”) as a substitute for that review. 

Stack J.’s decision stemmed from an application by the province of Newfoundland and Labrador (the “Province”)  under section 14 of its own Arbitration Act, RSNL 1990, c A-14 to set aside an arbitral award.  The Province asserted that the award (a) had been improperly procured; and, 

(b) dealt with a dispute not contemplated by or falling within the terms of the submission to arbitration, or contained decisions on matters beyond the scope of the submission to arbitrate. 

The Province’s application referenced both its own Arbitration Act as well as an elaborate Arbitration Code.  The latter was excerpted only in part in the court decision but was accurately described as being “based on” the UNCITRAL Model Law.  Both excerpts of the Arbitration Code, articles 28 and 34, appear to be word-for-word reproductions of two articles in the UNCITRAL Model Law bearing the same numbering.  Because of their similarity with articles 28 and 34 of the UNCITRAL Model Law, the two articles of the Arbitration Code need not be reproduced here.  Readers can access the UNCITRAL Model Law instead for those two articles key to the decision. 

The arbitration award dealt with a dispute stemming from a contractual relationship between the Province and ten (10) oil companies (the “Project Owners”) having interests in the Hibernia offshore petroleum extraction project (“Hibernia Project”).  Worth a reported $5.9 billion to construct, the Hibernia Project prompted the parties to seek insurance coverage for the construction and the operation phases.  The parties’ contracts allowed the Project Owners to deduct the insurance costs from revenues in order to calculate royalties. 

In 2001, a committee of Project Owners recommended to the Hibernia Project’s executive committee (“HEC”) that each of the Project Owners individually obtain its own operating insurance, an approach compliant with industry practice for offshore projects.  In 2002, HEC approved that recommended coverage acquisition approach.  In 2011, the Province declined to accept those insurance costs as valid deductions against revenue.  It claimed that such insurance costs did not qualify as resource project eligible costs.  The Province’s position was not only long-coming but at odds with the actual benefit it realized by the Project Owners’ successful efforts to source less costly coverage individually: 

[20In acquiring operating insurance on an individual basis, the Project Owners were able to take advantage of cost savings by integrating the operating insurance for the Hibernia Project into their individual corporate insurance programs. The cost savings associated with individually acquired operating insurance inured to the benefit of both the Province and the Project Owners, consistent with the cost-benefit analysis conducted by Mr. Sharp. 

Unsatisfied with the Province’s approach, the Project Owners issued a notice of arbitration and three arbitrators were appointed: Mr. J. Brian Casey, appointed by the Project Owners; the Honourable Colin L. Campbell, Q.C., appointed by the Province; and, the Honourable Warren K. Winkler Q.C., appointed by the latter two as chair of the Tribunal.  Once the Tribunal was formed, the Project Owners applied to bifurcate the arbitration they had initiated and a threshold issue was identified which was then divided into two questions: 

(a)    does the parties’ contract authorize the HEC to direct the Project Owners to individually acquire stand-alone operating insurance; and, 

(b)   were the Project Owners directed by the HEC to individually acquire operating insurance on a stand-alone basis pursuant to the parties’ contract? 

Stack J. characterized the first question as contract interpretation and the second question as factual. In its award, the Tribunal held that: 

(a) as a matter of contract interpretation, the parties’ contract authorizes the Project Owners to individually acquire operating insurance; and, 

(b) as a fact, the HEC directed the Project Owners to acquire individually operating insurance. 

The very first paragraph of the reasons for judgment points ahead to where Stack J. would arrive as he began to explain his take on the Province’s application to set aside the arbitration award.   

(1) In December of 2015, a tribunal of three eminent jurists delivered an arbitration award consisting of 76 pages of model justification, transparency, and intelligibility in a matter involving the parties to this proceeding (the “Award”).” (my underlining added) 

His appreciation of the quality of the Tribunal’s award remained constant the further he analyzed its work product.  Stack J. wrote that:  

[36] After a careful analysis of the relevant contracts in accordance with well-established principles of contract interpretation and following a careful assessment of the evidence before it, the Tribunal found unanimously in favour of the Project Owners in respect of both questions it had to consider, leading to its conclusion that “project owner acquired operating insurance costs” were permitted by the (parties’ contract), were directed pursuant to the third paragraph of clause 18.1.2 of the (parties’ contract), and therefore qualified as RPECs for the purposes of clause 29.7 of (another of the parties’ contracts) (Award at paragraph 317). 

The reasoning covers many issues of interest to commercial arbitration practitioners.  The most compelling issue though is whether arbitration parties can contract out of legislation governing court review of their arbitration awards and, if so, to what extent?    

Stack J. noted that he knew of no court decision in Newfoundland and Labrador that addressed the parties’ ability to agree to the scope of review in a case in which the Arbitration Act applies. Given the sophistication of the parties to the court application and the importance of the issues before the court, one can also assume that the parties did not find any court decision either after diligent searching.  Stack J.’s decision is therefore an important precedent. 

The Province argued that the parties could not contract out of the Arbitration Act and that, even if they could, they had not.  The Project Owners countered that the court should enforce the parties’ agreement because that agreement is clear, is not prohibited by the Arbitration Act, is permissible under the common law, and is not contrary to public policy.  

While both parties agreed that is impermissible to completely contract out of the court’s inherent jurisdiction to review decisions of inferior tribunals, the parties disagreed on whether that meant the glass was left half full or half empty.  The parties approached the analysis from opposite ends: 

The Project Owners say that because the Arbitration Act does not prohibit limiting the scope of review and it is not contrary to public policy, the scope of review agreed to by all parties should be honoured by the Court. The Province, on the other hand, asserts that where parties may contract out of the Arbitration Act is specifically addressed in certain provisions leading to the necessary inference that where contracting out is not expressly permitted, it is prohibited.”  

Stack J. did caution that there was one principle he did not have to decide.  That principle whether the court’s jurisdiction can be entirely excluded by private agreement.  The principle did not arise in the case because the parties’ Arbitration Code did provide for court review of the arbitral award.  The review agreed to by the parties was equivalent to article 34 of the UNCITRAL Model Law.   

Stack J. agreed with the Project Owners. 

[50] I am satisfied that the adoption by the parties of article 34 of the Arbitration Code is not contrary to the Arbitration Act. The Arbitration Act was enacted to provide parameters for the private resolution of disputes. Among its objects is the protection of the Court’s inherent jurisdiction to review the decisions of inferior tribunals. Permitting parties to agree to their own scope review for their private dispute resolution in a manner that does not unduly infringe upon the Court’s inherent jurisdiction is in keeping with the attainment of the objects of the Arbitration Act in accordance with its true meaning. This is especially so for sophisticated entities contracting commercially. 

In arriving at his agreement with the Project Owners, Stack J. observed that the parties’ agreement was clear enough to deliberately exclude review under section 14 of the Arbitration Act and was not against public policy.  The parties were sophisticated and made their choice with “full knowledge of its effect and evidences an unequivocal intention to substitute the (Arbitration) Code scope of review for the Arbitration Act scope of review.”  He also held that the agreement achieved a necessary balance.  

[67] I agree with the Project Owners that the parties’ agreement balances the policy issues at play. First, it accords with the recognized policy values of restricting court intervention in commercial arbitrations. Second, it preserves the Court’s ability to set aside awards in circumstances of excess of jurisdiction and breach of procedural fairness. 

In an important nod to the scholarly work done on the subject in Alberta, Stack J. paused in his reasoning to specifically refer to and adopt a principle proposed in an authority submitted by the Project Owners, namely the 2013 Final Report of the Alberta Law Reform Institute.  The ALRI’s work underlined the value of curtailing judicial intervention in arbitration proceedings.  The ALRI suggested a novel way to consider parties’ attempts to limit court review, proposing that “arbitration is really a substitute for the parties’ own ability to agree and is not simply based on a transference or denial of court power … Therefore, restricting court intervention should not be viewed as a negative action but a positive reinforcement of the principle of party control. 

The decision contains much more for arbitration practitioners and is recommended reading for its consideration of what might constitute “misconduct” under the Arbitration Act.  Though not necessary to the disposition of the Province’s application given the central reasoning on opting out of the legislated court review, Stack J. still provided a section 14 analysis sought by the Province.  The decision also, at paragraphs 100-119, addresses and dismisses the Province’s argument that the Tribunal exceeded its jurisdiction: “In short, therefore, this is a case of a party attempting to convert dissatisfaction with the Tribunal’s interpretation into a matter of jurisdiction and then seeking to re-litigate the merits of the case (in the words of Conway, J. in Attorney General of Canada v. Mobil Investments Canada Inc. et al., at paragraphs 47 and 51). 

Because the parties’ Arbitration Code appears to be a reproduction of the UNICTRAL Model Law, the decision also serves as a thinly-dressed analysis of whether parties can opt out of legislation in favour of the UNCITRAL Model Law.  The reasoning will no doubt surface again in other cases dealing with parties’ attempts to limit court review.  This case benefited from the robust wording of the UNCITRAL Model Law on which the Arbitration Code was based.