Federal – successful offer in all-or-nothing final offer arbitration can include agreement to arbitrate – #392

In Canadian National Railway Company v. Gibraltar Mines Ltd., 2020 FC 1034, Mr. Justice Michael D. Manson held that, in final offer arbitration, the absence of reasons in a decision qualified the decision as reasonable and correct.  Though one party objected to the other’s final offer including an agreement to arbitrate, Manson J. held that the arbitrator had to accept either offer “in its entirety” based on which offer the arbitrator considered more reasonable.  Final offer arbitration’s “all-or-nothing” approach prevents an arbitrator from extracting reasonable terms from one offer for inclusion in the other and the Canada Transportation Act, SC 1996, c 10 prohibited the arbitrator from explaining the choice made.

Since 2004, Gibraltar Mines Ltd. (“Respondent”) engaged Canadian National Railway Company (“Applicant”) by series of confidential contracts to ship by rail Respondent’s metal concentrates from a mine in South-central B.C. to a North Vancouver, B.C. terminal.  Despite earlier success in negotiating their own terms on renewal, the parties were unable to agree on terms at the expiry of term in June 2018. Applicant and Respondent therefore engaged in final offer arbitration (“FOA”) pursuant to section 159 et seq. of the Canada Transportation Act, SC 1996, c 10 “CTA”).

Section 161(1)  A shipper who is dissatisfied with the rate or rates charged or proposed to be charged by a carrier for the movement of goods, or with any of the conditions associated with the movement of goods, may, if the matter cannot be resolved between the shipper and the carrier, submit the matter in writing to the Agency for a final offer arbitration to be conducted by one arbitrator or, if the shipper and the carrier agree, by a panel of three arbitrators”.

Section 165(1) identifies the essence of the decision which results from the summary FOA procedure set out in the CTA: “The decision of the arbitrator in conducting a final offer arbitration shall be the selection by the arbitrator of the final offer of either the shipper or the carrier”.

The arbitrator’s decision must be in writing but section 165(4) states that “[n]o reasons shall be set out in the decision of the arbitrator”.

Their respective offers included and differed on freight rates, the nature of the service standard, penalty/incentive schemes and a dispute resolution clause. Applicant’s final offer included no mention of a dispute resolution clause.  Respondent’s included the following provision:

All disputes, controversies and claims directly or indirectly arising out of or in relation to the interpretation, construction, performance, or breach of this final offer will be submitted for arbitration under section 36.2 of the Canada Transportation Act. The arbitration will be conducted in accordance with the Canadian Transportation Agency’s Sample Rules of Procedure for Arbitrations under Section 36.2 of the Canada Transportation Act. The place of arbitration will be Vancouver, British Columbia, unless otherwise determined by the arbitrator appointed under section 36.2”.

Applicant’s decision to include the agreement to arbitrate prompted objections from Respondent.  The arbitrator invoked the process under section 162(2) and advised the parties that he proposed to seek the “administrative, technical and legal assistance” of the Canadian Transportation Agency (“Agency”) on the issue of the dispute resolution clause proposed by Respondent it is final offer.

Despite objection from Applicant, and after submitting his communication to the Agency in draft form to the parties for comment, the Arbitrator did seek the Agency’s comments.  The Agency responded and its comments are excerpted at para. 10 of the reasons.   With reference to section 36.2(1), the Agency observed the following.

As you may know, the Agency cannot be compelled to accept any case under this provision. Any application will be reviewed by the Agency, at the time of submission. The Agency’s jurisdiction is limited by statute, and as such, it can only hear matters that fall within the parameters of its enabling legislation”.

Following receipt of the Agency’s reply and receipt of the materials authorized by the CTA for the purpose of an FOA hearing, the arbitrator conducted a hearing from January 20-24, 2020 and then issued a January 28, 2020 six (6) page decision (“Decision”) which chose Respondent’s final offer.

Applicant sought judicial review of the decision.  Its application raised three (3) issues:

(i) Did the Arbitrator improperly ask the Agency for its opinion on its jurisdiction under section 36.2 of the CTA, pursuant to subsection 162(2) of the CTA?

(ii) Was the Arbitrator’s selection of the Respondent’s final offer unreasonable because it contained the Arbitration Clause?

(iii) Did the Arbitrator err by releasing “reasons” for his Decision, contrary to subsection 165(4) of the CTA?

(a) Standard of review – Applicant and Respondent disagreed on the applicable standard of review, arguing respectively for a standard of correctness or reasonableness.  In light of the statutory nature of the dispute resolution process, Manson J. applied the standards in Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65.  At para. 19, he identified the standards applicable to each of the questions and held that the standard of reasonableness applied.  That said, para. 20 Manson J. explained that his decision would not change if he applied the standard of correctness with respect to the procedural fairness issue.

(b) Jurisdiction – At paras 21-26, Manson J. determined that he, and not the Federal Court of Appeal, had jurisdiction to hear Applicant’s application for judicial review and that he had jurisdiction under sections 18 and 18.1 of the Federal Courts Act, RSC 1985, c F-7 and the three (3) prong test under ITO-Int’l Terminal Operators v. Miida Electronics, 1986 CanLII 91 (SCC), [1986] 1 SCR 752.

(c) “Abdicating decision-making role” – Manson J. dismissed Applicant’s argument that, in seeking the Agency’s views on its jurisdiction under section 36.3 of the CTA, the arbitrator had “abdicated” his decision-making authority.

[34] I find that the Arbitrator’s request does not amount to an act of sub-delegation. The Arbitrator clarified consistently throughout the record that he was not bound to the views of the Agency, including in his request to the Agency itself. The Arbitrator referred only to the Agency’s opinion as a useful “data point”. The Arbitrator issued a Decision, exercising his authority under subsection 165(1) of the CTA to select the final offer of the Respondent. In relation to the Agency’s opinion, the Arbitrator noted in his Decision at paragraph 21 that the Agency did not opine on whether a dispute within the scope of the Arbitration Clause would in fact fall within the Agency’s jurisdiction under section 36.2 of the CTA. In these circumstances, I am not convinced the Arbitrator sub-delegated his authority or relied on the response received from the Agency in any event. As such, any opinion of the Agency was of no moment for the decision to be made”.

(d) Selection of Respondent’s final offer – Manson J. introduced the FOA regime as “a mechanism to neutrally resolve contract disputes between a railway company and a shipper” and referred to the earlier Canadian National Railway Company v. Western Canadian Coal Corporation, 2007 FC 371 which reiterated the description of FOA as “an intentionally high risk form of arbitration”. He identified the essence of FOA at para. 32.

It is an all-or-nothing approach. The Arbitrator must select the final offer of either the shipper or the railway company (CTA, s 165(1)). The Arbitrator cannot extract reasonable terms from one offer for inclusion in the other”[.] 

Referring back to a decision which focused on a constitutional challenge to the FOA provisions in an earlier iteration of the CTA, Manson J. referred to Canadian National Railway Co. v. Canada (National Transportation Agency), 1995 CanLII 3538 (FCA), [1996] 1 FC 355 which, in addressing the constitutionality of the Federal legislation’s application to commercial contracts spoke to the nature  of FOA.

The final offer arbitration provisions of the [National Transportation Act, 1987 [R.S.C., 1985 (3rd Supp.), c. 28] establish a method of determining rates in special instances and, as such, are an integral part of the whole legislative scheme chosen by Parliament to regulate freight rates in the new economic and commercial context now prevailing in Canada. They are specifically addressed to disputes relating to rates or conditions associated with the movement of goods, issues that are integral to the operation of the railways. The quick, simple and out-of-court settlement of those disputes, with indirect involvement of the Agency, is no doubt a means, and an important one, to achieve the object and purpose of the new National Transportation Act, 1987 which, as stated in more detail in section 3 [as am. by S.C. 1992, c. 21, s. 33] thereof, is aimed, in effect, at rendering the railway industry, in particular, more efficient and more competitive, and the transportation system, generally, more economical”.

Manson J. underlined the ‘one or the other’ approach to FOA, noting at para. 46 that the legislation required the arbitrator to accept the final offer of either the shipper or the carrier “in its entirety” based on which he considered more reasonable.

The Arbitrator may well have agreed that the Arbitration Clause is unenforceable, but nevertheless concluded that this alone did not render the Respondent’s final offer incapable of acceptance”.

Manson J. also held that his role was not to second guess the weight the arbitrator may have given to different elements of the offers.

The Applicant’s request of this Court is seeking that particular weight be placed on the enforceability of the Arbitration Clause. This is not the role of this Court on review. Nothing on the record before the Court suggests that the enforceability of the Arbitration clause is a legal constraint or an overriding consideration in the Arbitrator’s selection process”.

The Decision had no reasons to suggest whether the arbitration clause proposed by Respondent was reasonable or not and Manson J. relied on the entirety of the record for his own determination of the reasonableness and correctness.  He concluded, at para. 49, that the Decision was not only reasonable but correct on this issue.

(e) Reasons – Manson J. held that the Decision may have had six (6) pages, but the contents did not qualify as “reasons” and therefore did not breach the provisions of the CTA for FOAs.  Rather, he considered the Decision as providing a description of the procedural steps in involved in the FOA process.

Manson J. held that the Decision did not misstate matters or Applicant’s position. Manson J. further held that the Decision was not unreasonable on this ground and was also correct.

[53] Upon reading the Decision, I find it does not provide a basis for the Arbitrator’s selection of the Respondent’s FOA. No information is included as to how the Arbitrator viewed the Arbitration Clause, nor how the enforceability of the Arbitration Clause was weighed in light of the other factors the Arbitrator had to consider”.

He referred back to Canadian National Railway Company v. Western Canadian Coal Corporation, 2007 FC 371 para. 52 of but paras 50-52 are helpful too regarding FOA’s “prohibition” against reasons.

[50] While there is no opportunity under the Act to appeal the arbitrator’s decision, as an administrative decision the decision is subject to judicial review. The applicant argues that the absence of reasons renders nugatory its opportunity to seek judicial review.

[51] It is evident to the Court that there are several reasons why the FOA regime dictates “no reasons”. First, the delivery of reasons may delay the decision, which under the Act must be rendered expeditiously. The purpose of the FOA is to resolve a contract dispute and impose binding conditions on the parties for a limited time period not exceeding one year.

[52] The FOA process is intended to bring certainty and finality to a contract dispute. Reasons invite applications for judicial review, which create uncertainty for a period of one year or more. The Court is satisfied that Parliament has provided for no reasons because:

1. the FOA process is intended to be expeditious, inexpensive, final and binding;

2. since the arbitrator cannot select a “reasonable” middle ground between the two offers or a compromise position, the arbitrator does not have to rationalize his decision. His decision is obvious, namely that the offer selected by the arbitrator is considered more reasonable than the other offer taking into account the relevant factors; and

3. the lack of reasons further encourages the parties to reach a negotiated contract settlement before FOA or at least to discipline the parties to temper their respective offers. The parties realize they have to make their offers as “reasonable” as possible in order to be selected”.

Manson J. dismissed the application for judicial review.

urbitral notes – First, for more on final offer arbitration, see the earlier Arbitration Matters note “Final offer arbitration characterized as “an intentionally high risk form of arbitration” regarding Madam Justice Ann Marie McDonald’s decision in Canadian National Railway Company v. Gibraltar Mines Ltd, 2019 FC 1650. McDonald J. demonstrated that the “unique nature” of final offer arbitration distinguished it from “ordinary commercial arbitration” and informed expectations of procedural fairness.  The dissatisfied party objected to the administering institution’s decision to dismiss a preliminary application but provide reasons only after the arbitration concluded.  McDonald J. held that the decision was not part of the FOA process under challenge and did not affect the fairness of the process. McDonald J. also issued a permanent order declaring certain documents, created for the arbitration, to remain confidential.

Second, regarding the confidentiality of the process, see the Arbitration Matters note “Confidentiality of arbitration must be re-established independently on appeal to court” regarding a pair of decisions from the Federal Court, Canadian National Railway Company v. Gibraltar Mines Ltd., 2019 FC 225 and Canadian National Railway Company v. Gibraltar Mines Ltd., 2019 FC 963.  In those cases, the court held that there is no general principle that confidentiality of arbitration proceedings carries over to court when a party appeals the arbitral award.  Even if confidentiality was imposed by statute for the purpose of the arbitration, absent specific wording in the statute, confidentiality does not automatically extend into the courts which are open and public.

Third, the title to section 165(4) is “Reasons not required”. That wordings appears to dispense with the need to provide reasons but not prohibit.  The actual text of the section is more emphatic, stating that “[n]o reasons shall be set out in the decision of the arbitrator”. 

Though section headings exist for ease of organizing sections in a statute, they are typically discounted.  In the present case, the interpretation given to the “shall” renders it a prohibition rather than a dispensation.  In the result, the Decision is, unlike other arbitral decision making, reasonable and correct specifically because it omitted the reasons justifying the result.  The interpretation of “shall” as being imperative is compliant with section 11 of the Interpretation Act, RSC 1985, c I-21.  See also sections 13 and 14 regarding preambles and marginal notes.

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