COURT OF APPEAL FOR ONTARIO
CITATION: Alectra Utilities Corporation v. Solar Power Network Inc., 2019 ONCA 254
DATE: 20190402
DOCKET: C65868 and M49635
Hourigan, Benotto and Huscroft JJ.A.
BETWEEN
Alectra Utilities Corporation
Applicant (Respondent)
and
Solar Power Network Inc.
Respondent (Appellant)
Heard: February 22, 2019
On appeal from the order of Justice Herman J. Wilton-Siegel of the Superior Court of Justice, dated August 17, 2018.
Huscroft J.A.:
OVERVIEW
[1] The parties agreed to arbitrate their contractual dispute under the Arbitration Act, 1991, S. O. 1991, C. 17 (“the Arbitration Act, 1991” or “the Act”). Following a seven-day hearing, the arbitrator found that Alectra Utilities Corp. (the respondent) unlawfully terminated its contract with the Solar Power Network Inc. (the appellant) and awarded $12.3 million in damages.
[2] The arbitrator’s award was supposed to be final: the parties chose not to establish a right of appeal on any basis from the arbitrator’s award. The respondent brought an application to set aside the arbitrator’s award under s. 46(1)3 of the Arbitration Act, 1991, arguing that it was made in excess of the arbitrator’s jurisdiction. The application judge accepted this argument and set aside the award.
[3] As I will explain, the application judge erred in doing so. The arbitrator’s award must be reinstated.
[4] I would allow the appeal for the reasons that follow.
BACKGROUND
The Facts
[5] The facts in this matter may be stated briefly. A fuller recitation of the facts is found in paras. 2-13 of the application judge’s decision. The relevant contractual provisions are set out in an appendix to this decision.
[6] The parties entered into a purchase and management agreement (the “PAMA”) pursuant to which the respondent was to finance the construction of solar power projects. The projects were to be developed and operated by the appellant pursuant to a provincial program known as the Feed in Tariff program (“the FIT program”). The appellant would apply for contracts from the Ontario government and would earn income by receiving revenue on account of construction and operational and maintenance services, in addition to a share of residual profits.
[7] On June 29, 2016, the parties were awarded 69 contracts in the fourth round of the FIT program. The respondent proposed to purchase the appellant’s interest in the venture and negotiations went on during the summer of 2016. No agreement was reached. On September 14, 2016 the respondent issued a “Defunct Project Notice” in respect of all 69 contracts, purportedly exercising its discretion to end the agreement. Delivery of the Defunct Project Notice had the effect of terminating the parties’ relationship, thus depriving the appellant of the value of the contracts that they had been awarded.
[8] The appellant invoked the arbitration clause in the PAMA, challenging the respondent’s right to deliver the Defunct Project Notice and seeking $19.5 million in damages for lost profit for the alleged breach of the PAMA. The respondent counterclaimed for recovery of amounts paid to the appellant.
The arbitrator’s decision
[9] The arbitrator found that although the respondent had the ability to deliver a Defunct Project Notice “in its sole discretion” under the PAMA, that discretion had to be exercised in good faith. The respondent could not rely on the allegation that certain conditions precedent could not be satisfied because it had not fulfilled its obligation to use commercially reasonable efforts to finalize the required documents. The arbitrator found, further, that the respondent’s statement that the economic return was insufficient was not an honest one, as no attempt had been made to calculate the rate of return, and that the respondent’s assertion that it did not wish to develop the projects was untrue in light of its ongoing negotiations to purchase the appellant’s interest in the projects.
[10] The arbitrator rejected the respondent’s argument that the appellant was barred by the terms of the PAMA from claiming lost profits as damages. Article 5 of the PAMA required each party to indemnify the other with respect to breaches of covenants, but also provided that the indemnifier shall not be liable for damages for lost profit. The arbitrator found that the appellant’s claim was not for breach of a covenant – it was for improper exercise of the right to issue Defunct Project Notice. The arbitrator concluded that he could award lost profits because the resolution process for indemnity claims under the PAMA was separate from the arbitration process, which contemplated the award of damages without regard to the more limited conception of damages that applied in the indemnity claims resolution process. The arbitrator awarded the appellant $12,337,655 in damages plus interest.
The applications
[11] The appellant brought an application to enforce the arbitrator’s award under s. 50 of the Arbitration Act, 1991. The respondent brought an application to set aside the award, relying in particular on s. 46(1)3 of the Act. That subsection provides that the court may set aside an arbitration award if:
The award deals with a dispute that the arbitration agreement does not cover or contains a decision on a matter that is beyond the scope of the agreement.
The application judge’s decision
[12] The application judge noted that the PAMA provided that there was to be no appeal from the determination of an arbitrator to the court. However, he described the issues raised on the application as jurisdictional in nature and stated that interpretation of the PAMA was necessary in order to resolve them. The application judge considered the standard of review under s. 46(1)3. Although he was inclined to the view that the appropriate standard was reasonableness rather than correctness, he found it unnecessary to determine the matter because he would reach the same decision regardless of which standard applied.
[13] The application judge found that the arbitrator did not exceed his jurisdiction in concluding that the agreement imposed a duty of good faith on the respondent’s exercise of its discretion to issue a Defunct Project Notice. The arbitrator was required to interpret the relevant provision of the PAMA (s. 2.8) in order to determine whether he had jurisdiction to hear the issue, and his interpretation was not only reasonable but also correct.
[14] However, the application judge concluded that the arbitrator’s determination that he could award damages for loss of profits was unreasonable because it was based on two unreasonable findings. First, the arbitrator unreasonably found that the limitation on damages in s. 5.3(3) of the PAMA did not limit his authority to award damages under the arbitration agreement set out in s.7.1. Second, the arbitrator unreasonably found that the appellant’s claim for breach of the duty of good faith was not a breach of a covenant within s. 5(2) of the PAMA. The application judge outlined his conclusion at paras. 62 and 63 as follows:
[T]he arbitrator’s interpretation of the PAMA to the effect that PowerStream’s [a predecessor of Alectra’s] actions did not constitute a breach of a covenant described by section 5.2(b) of the PAMA to which the provisions of section 5.3(3) applied was unreasonable. Under the PAMA, SPN’s claim falls squarely within the provisions of section 5.2(b) as a claim based on a breach of a covenant on the part of PowerStream contained in the PAMA. While such claim is arbitrable under Article 7, as there is no separate dispute resolution process for claims asserted under sections 5.4 and 5.8, it is subject to the monetary limitations in section 5.3(3).
Accordingly, I conclude that the arbitrator lacked the jurisdiction under the PAMA to award SPN damages for its loss of profits. I therefore also conclude that, in awarding such damages, the arbitrator made a decision on a matter that was beyond the scope of the PAMA for the purposes of s. 46(1)3 of the Act.
The positions of the parties
[15] The appellant’s principal argument focuses on s. 46(1)3 of the Arbitration Act, 1991, which the appellant says permits intervention by the courts only on jurisdictional issues. The court has to be satisfied as a threshold matter that an application to set aside an award raises a “true question of jurisdiction,” which according to the appellant arises only if the arbitrator exceeds the limits of his decision-making authority.
[16] The application judge erred, the appellant says, by failing to appreciate the distinction between narrow review on a true question of jurisdiction and a broader review on the merits. As a result, the application judge launched into a review of the merits of the arbitrator’s decision and ended up impermissibly substituting his interpretation of the agreement for that of the arbitrator. This, according to the appellant, 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, an error the appellant submits is dispositive of the appeal.
[17] The respondent says that determining an arbitrator’s jurisdiction necessarily involves contractual interpretation because the contract is the source of an arbitrator’s jurisdiction. The fact that contractual interpretation is required in order to determine a question of jurisdiction does not turn the inquiry into a review of the arbitrator’s decision on the merits.
[18] The respondent relies on the decision of this court in Mexico v. Cargill, Incorporated, 2011 ONCA 622 (CanLII), 107 O.R. (3d) 528, for the proposition that the arbitrator had to correctly identify the jurisdictional limits on his ability to award damages. In that case, at para. 52, the court set out the “proper approach” in determining whether an arbitration award goes beyond the scope of a tribunal’s jurisdiction as involving three questions, which the respondent paraphrased as follows:
- a)What was the issue that the arbitral tribunal decided?
- b)Was that issue within the submission to arbitration?
- c)Is there anything in the arbitration agreement, properly interpreted, that precluded the tribunal from making the award?
[19] The respondent says that, “properly interpreted”, the arbitration agreement in this case was subject to other provisions of the PAMA that not only precluded the arbitrator from determining a dispute arising out of the delivery of a Defunct Project Notice (s. 2.3(8)), but also precluded the award of damages for lost profits in any event (s. 5.3(3)).
DISCUSSION
The role of the court under the Arbitration Act, 1991
[20] The starting point in exercising the court’s role under the Arbitration Act, 1991 is the recognition that appeals from private arbitration decisions are neither required nor routine. Section 45 of the Act makes clear that the parties are free to establish or to preclude an appeal to the court on a question of law, fact, or a mixed question of law and fact. If the arbitration agreement is silent on this point, an appeal to the court on a question of law lies only with leave, which may be granted only if the court is satisfied that the matter is sufficiently important to justify an appeal and that determination of the question of law at issue will significantly affect the rights of the parties.
[21] In this case the parties – sophisticated commercial parties represented by counsel – chose not only to resolve their contractual dispute by arbitration rather than litigation, but also to preclude appeals to the court. Section 7.8(1) of the PAMA provides as follows:
There shall be no appeal from the determination of the arbitrator to any court. Judgment upon any award rendered by the Arbitrator may be entered in any court having jurisdiction thereof.
[22] There is no ambiguity here: there is no appeal to the court, period. The arbitrator’s determination is final and binding.
[23] Accordingly, the only basis for the respondent to challenge the award was under s. 46(1) of the Arbitration Act, 1991, which authorizes the court to set aside an arbitration award on the limited and specific grounds it enumerates. A court may set aside an arbitration award if:
- A party entered into the arbitration agreement while under a legal incapacity.
- The arbitration agreement is invalid or has ceased to exist.
- The award deals with a dispute that the arbitration agreement does not cover or contains a decision on a matter that is beyond the scope of the agreement.
- The composition of the arbitral tribunal was not in accordance with the arbitration agreement or, if the agreement did not deal with that matter, was not in accordance with this Act.
- The subject-matter of the dispute is not capable of being the subject of arbitration under Ontario law.
- The applicant was not treated equally and fairly, was not given an opportunity to present a case or to respond to another party’s case, or was not given proper notice of the arbitration or of the appointment of an arbitrator.
- The procedures followed in the arbitration did not comply with this Act.
- An arbitrator has committed a corrupt or fraudulent act or there is a reasonable apprehension of bias.
- The award was obtained by fraud.
- The award is a family arbitration award that is not enforceable under the Family Law Act.
[24] These grounds for setting aside an arbitration award are, in general, not concerned with the substance of the parties’ dispute. They concern issues such as the establishment and composition of the arbitration tribunal, compliance with Ontario law, and the requirements of procedural fairness.
[25] Although the court cannot apply s. 46(1)3 without having regard to an arbitrator’s decision, the court’s authority to set aside an arbitration award under that subsection depends on the mandate the arbitration agreement confers on the arbitrator to resolve a particular dispute. In order to succeed on an application to set aside an arbitration award, an applicant must establish either that the award deals with a dispute that the arbitration agreement does not cover or contains a decision on a matter that is beyond the scope of the arbitration agreement.
[26] For example, if an arbitration agreement provides that an arbitrator shall resolve a particular question and the arbitrator does so, the court has no authority to set aside the award on the basis that the arbitrator’s decision is unreasonable or incorrect. If, however, in the course of resolving the particular question remitted the arbitrator asks and answers an additional second question, the award may be set aside – not because the arbitrator’s answer to the second question is unreasonable or incorrect, but because the arbitrator had no authority to reach any conclusion on the second question at all.
[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 concept of jurisdiction
[28] The parties agree that s. 46(1)3 allows review for jurisdictional error – “true” jurisdictional error, as they describe it – but they disagree on what jurisdictional error is and how it is properly established. There should be no surprise in this. The difficulty in identifying jurisdictional error is well known.
[29] Jurisdictional error has a long and controversial history in Canadian administrative law that need not be recounted here. Suffice it to say that, historically, the courts often exercised their judicial review authority to interfere in matters that were committed by the legislature to determination by administrative tribunals. In C.U.P.E. v. N.B. Liquor Corporation, 1979 CanLII 23 (SCC), [1979] 2 S.C.R. 227 at p. 233, Dickson J. admonished courts not to do so:
The question of what is and is not jurisdictional is often very difficult to determine. The courts, in my view, should not be alert to brand as jurisdictional, and therefore subject to broader curial review, that which may be doubtfully so.
[30] But this proved easier said than done, and the concept of jurisdiction has continued to bedevil Canadian law despite Dickson J.’s admonition. That is so because, as Lord Denning explained in Pearlman v Keepers and Governors of Harrow School, [1978] EWCA Civ 5, the distinction between an error that is jurisdictional in nature – which justifies judicial intervention – and an error made within jurisdiction – which does not – is so fine as to be manipulable. The same matter can be characterized as jurisdictional or non-jurisdictional depending on whether one seeks to intervene or defer.
[31] So it is here.
[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.
The application judge erred in setting aside the arbitrator’s award
[35] In order to set aside the arbitrator’s award, the application judge was required to find either that the award dealt with a matter not covered by the arbitration agreement or included a decision on a matter beyond the scope of the agreement. Interpretation of the arbitration agreement, set out in s. 7 of the PAMA, was key to applying s. 46(1)3.
[36] Section 7.1 provides as follows:
Subject to and in accordance with the provisions of this Article 7, any and all differences, disputes, claims or controversies between the Vendor and the Purchaser arising out of or in any way connected with this Agreement, whether arising before or after the expiration or termination of this Agreement, and including, its negotiation, execution, delivery, enforceability, performance, breach, discharge, interpretation and construction, existence, validity and any damages resulting therefrom or the rights, privileges, duties and obligations of the parties under or in relation to this Agreement (including any dispute as to whether an issue is arbitrable) (a “Dispute”) shall be resolved [sic] the manner described in this Article 7. (emphasis added)
[37] The terms of s.7.1 are broad and general in nature, and make clear that the arbitrator had the authority to resolve “any and all differences …arising out of or in any way connected with” the agreement, “including … performance, breach … and any damages resulting therefrom”.
[38] Despite the broad wording of the arbitration agreement in s. 7.1, the application judge proceeded on the basis that the arbitrator’s jurisdiction depended upon the proper interpretation of sections 2 and 5 of the PAMA. The application judge stated, at para. 54, that: “jurisdiction exists only to the extent that such an award would not contravene any other provision of the PAMA.”
[39] With respect, this is a mistake. It is exactly the problem I outlined above: it is a conclusion that an arbitration award that is not subject to appeal must be set aside because, in essence, the arbitrator had only the jurisdiction to make an award that is reasonable or correct. This mistake renders the application judge’s decision interpreting and applying s. 46(1)3 indistinguishable from the sort of decision that might have been made if the arbitrator’s decision had been subject to a right of appeal. It fails to recognize the distinction between having jurisdiction to award damages and making an error in the exercise of that jurisdiction.
[40] Neither s. 2 nor s. 5 of the PAMA limited the scope of the arbitrator’s authority in the manner contemplated by s. 46(1)3. The arbitrator did exactly what he was authorized to do by the terms of the arbitration agreement: he resolved the parties’ dispute concerning the alleged breach of their agreement and awarded damages.
[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.
[42] The application judge’s approach is not mandated by this court’s decision in Cargill, an arbitration under the North American Free Trade Agreement. That case concerned international arbitration, rather than arbitration under the Arbitration Act, 1991, and the court was at pains to emphasize that in determining jurisdictional questions “the court is to avoid a review of the merits” (at para. 53) – the very thing the court failed to do in this case.
[43] It is important to emphasize that s. 46(1)3 allows only for limited review for jurisdictional error. As this court said in Smyth v. Perth and Smiths Falls District Hospital, 2008 ONCA 794 (CanLII), 92 O.R. (3d) 656, at para. 17, s. 46(1)3 sets out a jurisdictional question that must be answered correctly. It neither requires nor authorizes review of the substance of an arbitrator’s award.
[44] For greater certainty I would add this: once the jurisdictional question is answered, in the absence of a right of appeal pursuant to s. 45 the court has no authority to go on to review the arbitrator’s award for reasonableness. Smyth is not to be read as authority to the contrary. The basis for the court’s decision is not set out and its comments must be regarded as obiter.
CONCLUSION
[45] I would allow the appeal and reinstate the arbitrator’s award.
[46] The appellant is entitled to costs on the appeal, including the leave motion, in the agreed amount of $25,000, and costs of $20,000 on the application, both amounts inclusive of taxes and disbursements.
Released: April 2, 2019 (“C.W.H.”)
“Grant Huscroft J.A.”
“I agree. C.W. Hourigan J.A.”
“I agree. M.L. Benotto J.A.”
