Diorite Securities v. Trevali, 2019 ONSC 4225

CITATION: Diorite Securities v. Trevali, 2019 ONSC 4225

COURT FILE NO.: CV-19-00613797-00CL

DATE: 20190829

ONTARIO

SUPERIOR COURT OF JUSTICE

APPLICATION UNDER the Arbitration Act 1991 S. O. 1991, c. 17, pursuant to section (h) of the Net Profits Interest Agreement dated August 9, 1990

 

BETWEEN: )

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DIORITE SECURITIES LIMITED, as Trustee of THE FERN TRUST

Applicant

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TREVALI MINING (NEW BRUNSWICK) LTD.

Respondent

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Allan ColemanGeoffrey Grove and Eric Morgan, for the Applicant
Lara JacksonColin Pendrith and Kate Byers, for the Respondent
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) HEARD: June 4, 2019

L. A. PATTILLO J.:

Introduction

[1]              This is an application by Diorite Securities Limited, as Trustee of the Fern Trust (the “Applicant”) for leave to appeal from an arbitrationdecision dated November 26, 2018 (the “Award”) pursuant to s. 45 of the Arbitration Act, 1991, S.O. 1991, c. 17 (the “Act”).

Background

[2]              The Respondent, Trevali Mining (New Brunswick) Ltd. (the “Respondent”), is the current operator of an underground base-metal mine located near Bathurst, New Brunswick (the “Caribou Mine”) under a mineral lease granted by the Province of New Brunswick.

[3]              The Applicant owns a 10% net profits interest in the Caribou Mine, granted to it by a former lessee and evidenced by an instrument dated August 9, 1990 (the “NPI Agreement”).

[4]              Subsequent to the NPI Agreement, the ownership of the Caribou Mine changed hands a few times. The Respondent became the owner in 2012 and in July 2016 achieved commercial production at the Caribou Mine.

[5]              On November 17, 2016, the Respondent provided the Applicant with a Statement of Net Profits for the third quarter of 2016 as required by the NPI Agreement. The Statement set out a “Loss Pool” which was the Respondent’s estimate of the amount by which prior owners of the Caribou Mine had, or ought to have, impaired their respective carrying values of the Caribou Mine since 1990. The application of the Loss Pool to the net profits reduced the net profits to nil.

[6]              The Applicant objected to the Respondent’s approach to the calculation of net profit under the NPI Agreement and served Notice to Arbitrate in accordance with the NPI Agreement. Subsequently, the parties and the arbitrator agreed that the arbitration would proceed in two phases. Phase 1 would address the interpretation of the NPI Agreement and Phase 2 would address all other issues, including issues relating to the calculation of the Applicant’s net profit interest.

[7]              The Award is the arbitrator’s decision in respect of the issues raised by the parties regarding the interpretation of the NPI Agreement (Phase 1). It dealt specifically with the basis upon which “net profits” are to be calculated. The parties agreed that the two issues for determination by thearbitrator were:

1)      Whether only the expenses of the current owner of the Caribou Mine (the Respondent) were to be included in calculating the net profits for any accounting period for which the NPI Agreement requires a net profit calculation to be done; and

2)      Whether an impairment of the value of the Mine as an asset is ever deductible as an expense in calculating net profits under the NPI Agreement.

[8]               In detailed reasons following a hearing, the arbitrator concluded:

1)      The expenses to be included in calculating the net profits of the Caribou Mine are not limited to the expenses of the current owner, nor to expenses or expenditures of any accounting period in which the NPI Agreement requires a net profit calculation to be done; and

2)      An impairment of the value of the Caribou Mine as an asset is not deductible as an expense in calculating net profits under the NPI Agreement.

The Issues

[9]              The Applicant seeks leave to appeal only in respect of the arbitrator’s decision on the first issue. It submits that the arbitrator erred in law in the manner in which he interpreted the NPI Agreement giving rise to the following extricable questions of law:

  1. a)   The Arbitrator misapprehended and/or mischaracterized the legal nature of the net profit interest held by the Applicant;
  2. b)   The arbitrator ignored, discounted and/or misapprehended the language in paragraph (a) of the NPI Agreement requiring that, in calculating net profits, expenses be determined in accordance with GAAP and good mining practice applied on a consistent basis; and
  3. c)     The arbitrator otherwise failed to consider and/or apply one or more relevant principles of contractual interpretation and/or ignored evidence relevant to the application of those principles.

Preliminary Issue

[10]        The Respondent submits that the Application should be dismissed on the basis that the NPI Agreement does not permit an appeal from the Award on a question of law or otherwise.

[11]        At the time that the NPI Agreement was entered into in August 1990, the version of the Act that was inforce at the time (the Arbitration Act, R.S.O. 1980, c. 25) permitted no right of appeal whatsoever, whether on a question of law or otherwise.

[12]        The introduction of the Act in 1991 specifically permitted an appeal from an arbitration award to this court on a question of law, with leave which can only be granted if the court is satisfied that the importance to the parties of the matters at stake in the arbitration justify an appeal and a determination of the question of law at issue will significantly affect the rights of the parties (s. 45(1)). At the same time, parties to an arbitrationagreement could agree, either expressly or by implication, to exclude the provisions of s. 45 (s.3).

[13]        The arbitration clause in the NPI Agreement provides as follows:

(h) any dispute regarding the calculation or payment of net profits shall be settled pursuant to the terms of the Arbitration Act (Ontario) and the parties hereto agree to be bound by any decision reached pursuant to such arbitration.

[14]         The Respondent submits that the above arbitration provision in the NPI Agreement by its wording, is intended to exclude a right to appeal and accordingly, the right to appeal on a question of law under s. 45 does not apply.  In support of its submission, the Respondent relies on L.I.U.N.A., Local 183 v. Carpenters & Allied Workers, Local 27 (1997), 1997 CanLII 1429 (ON CA), 101 O.A.C. 230, 34 O.R. (3d) 472 (C.A.).

[15]         L.I.U.N.A., concerned circumstances similar to this case where the arbitration agreement in issue, which was silent with respect to an appeal, was entered into under the predecessor to the Act.  At paragraph 20 of the decision, Finlayson J., on behalf of the court, stated that the question of whether the arbitration agreement excluded a right to appeal is to be determined by an analysis of the language of the agreement together with the circumstances surrounding its making (the context). In concluding that the agreement in question excluded the right to appeal, the court discussed the effect of the words “final and binding” and concluded that they indicated that there would be no right of appeal.

[16]         Subsequent decisions have followed L.I.U.N.A. and held that the use of the words “final and binding” in an arbitration clause operate to implicitly exclude the right to appeal under s. 45 of the Act. See: Weisz v. Four Seasons Holdings Inc., 2010 ONSC 4456 (CanLII), 103 O.R. (3d) 783 (S.C.J.); Nasjjec Investments Ltd. v. Nuyork Investments Ltd., 2015 ONSC 4978 (CanLII) (S.C.J.).

[17]         Having regard to the wording of the NPI Agreement as a whole and the above arbitration clause specifically, I am unable to conclude that the intention of the parties to the NPI Agreement was that there would be no right of appeal. The NPI Agreement is brief and primarily deals with the calculation of net profits. The arbitration clause itself states only that the parties agree to be bound by any decision. In the absence of additional wording to indicate the decision is intended to be final, the agreement to be bound means no more in my view than the parties agree to abide by the decision.

[18]         Nor is there anything in the evidence concerning the circumstances surrounding the making of the NPI Agreement to indicate that it was the intention of the parties to exclude an appeal from any arbitration decision.

[19]         The Respondent relies on Bank of Nova Scotia v. Span West Farms Ltd., 2003 SKQB 306 (CanLII), a decision of the Court of Queens Bench for Saskatchewan which it submits is “on all fours” with this case. That case concerned a lease and the arbitration clause provided that if the parties could not agree on the renewal rent, it “shall be settled by the award of three arbitrators … and the award … shall be binding.” As with this case, the lease in question was entered into under a former Arbitration Act which contained no right of appeal. Subsequently, Saskatchewan introduced a new Arbitration Act, similar in wording to the Act.

[20]         The court in Span West Farms held that the wording of the clause and particularly the use of the words “settled” and “binding” did not have the same meaning as “final and binding”, and therefore did not abrogate the right of appeal. However, the court went on to conclude that the absence of the right to appeal in the arbitration provision should be read as an implicit waiver of the right of appeal pursuant to the current statute, given the provision in question was negotiated at a time when the old statute, which did not confer a right of appeal, was in place.

[21]         I decline to follow the Span West Farms decision. Apart from not being bound by it, I consider that the reasoning of the learned judge in that case to find an “implicit waiver” is contrary to the approach to determining the question of whether the parties to the agreement intended to exclude the right to appeal as set out in L.I.U.N.A.

[22]         It remains to consider the Applicant’s submissions that the arbitrator made an extricable error of law entitling it to leave to appeal.

[23]         In Creston Moly Corp. v. Sattva Capital Corp, 2014 SCC 53 (CanLII), [2014] 2 S.C.R 633, at paras. 50 to 55 and more recently in Teal Cedar Products Ltd. v. British Columbia, 2017 SCC 32 (CanLII), [2017] 1 S.C.R. 688, at paras. 45 and 65, the Supreme Court of Canada confirmed that generally speaking, questions of contractual interpretation are questions of mixed fact and law. While the court recognized that some aspects of contractual interpretation may give rise to extricable pure questions of law, it also cautioned that circumstances in which a question of law can be extricated from the interpretation process will be rare and will occur only where the decision-maker has applied an incorrect legal standard, failed to consider a required element of a legal test or similarly erred in principle with respect to the application of the law.

  1.                                       Did the arbitrator misapprehend and/or mischaracterize the legal nature of the NPI Agreement?

[24]        The Applicant submits that the arbitrator erred in law in misapprehending and/or mischaracterizing the legal nature of its net profit interest which led directly to the arbitrator’s conclusion that expenses of entities other than the Respondent are to be included in the net profit calculation. In particular, the Applicant submits that the arbitrator misinterpreted and/or mischaracterized Blue Note Mining Inc. v. Fern Trust (Trustee of)2008 NBQB 310 (CanLII), 337 N.B.R. (2d) 116, affirmed 2009 NBCA 17 (CanLII) (the “Rideout Decision”).

[25]        The Rideout Decision dealt with the issue of whether the NPI Agreement was binding on Blue Note Mining Ltd., a subsequent purchaser of the Caribou Mine. In the first instance, Mr. Justice G.S. Rideout of the New Brunswick Court of Queens Bench, Trial Division, held, that the NPI Agreement created an interest in land and was therefore binding on Blue Note.  At paragraph 35 of the decision, Justice Rideout stated, in part:

I am satisfied that the interest over which the NPI is applicable is an interest in land. It is dealing with a net profit arising from the mine itself; consequently, the NPI is carved out of an interest in land.

[26]        The Rideout Decision was upheld by the New Brunswick Court of Appeal.

[27]        In a subsequent decision of the Court of Queens Bench of New Brunswick, Re: Blue Note Caribou Mines Inc., 2010 NBQB 91 (CanLII), affirmed 2010 CanLII 42941 (NB CA), 2010CanLII 42941 (N.B.CA.), Blue Note Caribou Mines trustee in bankruptcy sought an order from the court enabling it to sell Blue Note’s real property, including the mining leases and mineral rights free and clear from any interest thereby extinguishing any liens against or interest in the property, including the Applicant’s interest under the NPI Agreement.

[28]        The issue for determination was whether pursuant to paragraph (f) of NPI Agreement which provided, among other things, that the net profit interest shall terminate upon any bankruptcy of East West Caribou Mines Limited, the original grantor of the net profit interest, or whether it applied to Blue Note, a successor and assign of Caribou.

[29]        In a lengthy decision in which he referred to the Rideout Decision, Mr. Justice Leger held that based on the plain and ordinary meaning of the words of the NPI Agreement as a whole and paragraph (f) in particular, the termination clause did not apply to Blue Note. (the “Leger Decision”)

[30]        At paragraph 52 of the Award, the arbitrator sets out at some length his interpretation of the “natural and ordinary meaning of the words used” in NPI Agreement “in the business context in which that agreement was entered into and applying the Rideout and Leger Decisions. In respect of the opening paragraph of the NPI Agreement, which grants “… a freely assignable 10% net profits interest in the mine known as the Caribou Mine located near Bathurst, New Brunswick.”, the arbitrator stated:

            The interest granted is in a physical property with a physical location. It is an interest that the Rideout Decision found to be an interest in land. It is not an interest in a corporation, legal person or juridical entity.

[31]        The Applicant submits that in law, the net profit interest is not, as the arbitrator stated, “an interest granted in a physical property with a physical location” but rather an interest in the profits derived by the lessee under M-246 (whoever that may be) from the exercise of its lease in any accounting period in respect of which such profits are required to be calculated under the NPI Agreement.

[32]        The Applicant relies on Mesa Operating Ltd. v. Amoco Canada Resources Ltd., 1994 ABCA 94 (CanLII), [1994] A.J. No. 201 (Alberta C.A.) and the statement at para. 46 of the decision that “An overriding royalty is carved out of the working interest. Thus the fortunes of that royalty holder track those of the working interest holder.”

[33]        All royalty agreements are unique: St. Andrew Goldfields Ltd. v. Newmont Canada Limited[2009] O.J. No. 3266 (ONSC) at para. 53. I do not consider that the statement in Mesa Operating represents a general legal standard. In any event, Mesa Operating is distinguishable from this case as it was considering the calculation of a gross royalty with no deduction for development expenses and did not engage issues as to whether the royalty in question ran with the land.

[34]        I agree with the Respondent that it is irrelevant whether the other party to a royalty agreement is entitled to extract minerals and earn profits from the property in question by virtue of a leasehold or some other interest.

[35]        As noted, Justice Rideout held that the NPI Agreement which dealt with a net profit arising from the Caribou Mine itself, carved out an interest in land. The Caribou Mine is a physical property with a physical location. In my view, the arbitrator did not misunderstand or mischaracterize the Ridout Decision.

[36]        The Applicant submits the arbitrator’s decision that the NPI Agreement provides that the calculation of the net profit interest is to be done by reference to the Caribou Mine’s revenues and expenses as opposed to those of the current owner is “untenable”. I disagree. The arbitrator’s conclusion that the Applicant’s right to profits under the NPI Agreement is vested in the land, and not merely the current owner is consistent with both the Ridout Decision and the plain reading of the NPI Agreement.

[37]        The Applicant further submits that the arbitrator erred in law by alluding generally to “numerous authorities” on which he apparently relied in reaching his decision without specifying the authorities or how they influenced his decision.

[38]        Having concluded his interpretation of the NPI Agreement at para. 52 of the Award based on the plain and ordinary meaning of the relevant words, the business context of the Agreement and the Rideout and Leger Decisions, the arbitrator noted at para. 53 that it was not necessary to address the bulk of the submissions made to him. He did, however, make some brief comments in respect of them including his comment that he made no reference to the “numerous authorities cited by both sides to the ‘usual’ interpretation of profit sharing and royalty arrangements in the mining industry.” He stated that no purpose would be served in comparing the language used in those cases with the language used in the NPI Agreement.

[39]        It is clear from the decision that the “numerous authorities” had no bearing on the arbitrator’s decision. Further, as noted in Sattva, at para. 48, the arbitrator was not required to refer to all the arguments, provisions or jurisprudence in the Award. In reviewing the entire decision, I do not consider the arbitrator made an extricable error of law by not addressing specifically the “numerous authorities” cited by both sides.

  1.                                      The arbitrator ignored, discounted and/or misapprehended the language in paragraph 1(a) of the NPI Agreement.

[40]        The Applicant submits that interpreting the NPI Agreement, the arbitrator erred in law in failing to apply the principle of contract interpretation which requires the court to interpret the contract as a whole and avoid an interpretation that does not give effect to all of the terms or renders one or more of the terms ineffective.

[41]        Specifically, the Applicant submits that the arbitrator discounted and ignored the term in the NPI Agreement relating to generally accepted accounting principles (“GAAP”) and ignored the expert evidence adduced by both parties relating to GAAP.

[42]        The NPI Agreement states in paragraph (a) that it is to be determined “in accordance with generally accepted accounting principles … applied on a consistent basis.”

[43]        It is clear from the Award that the arbitrator did not fail to consider or misapply the specific principle of contract interpretation relied on by the Applicant nor did he ignore the expert evidence concerning GAAP. Rather, the arbitrator expressly took into account the principles of contractual interpretation (including the principle relied upon by the Applicant, Award, para. 46). Further, he specifically addressed the provision concerning GAAP in the NPI Agreement and concluded, based on his interpretation of the NPI Agreement that “the expert evidence relating to GAAP and IFRS rules as they apply to financial statements of companies is irrelevant.” (Award, para. 58.)

[44]        In paragraph 52 of the Award, where the arbitrator deals in chart form with his interpretation of the NPI Agreement based on the natural and ordinary meaning of the words, in respect of the words “in accordance with generally accepted accounting principles” in the NPI Agreement, thearbitrator explains his reasons why GAAP is not needed to interpret or apply the NPI Agreement as follows:

GAAP, as the words in the acronym imply, provides a common set of standards for approaching accounting issues and presentations. It is clear from the evidence of both Raza and Zastre [the experts], that GAAP does not override specific contractual arrangements. Even if that were not the case, the mention of GAAP in paragraph (a) of the NPI would not override the provisions of paragraph (b).

The arbitrator then goes on to set out the different ways in which both the Applicant and the Respondent sought to have GAAP contribute to the interpretation of the NPI Agreement “in ways which would alter the express language of the agreement.” He then concludes:

In my view, neither GAAP nor IFRS are needed in order to interpret or apply the NPI Agreement, exactly as it is written, in relation to the particular issues which need to be decided in Phase 1 of the arbitration.

[45]        Further, the arbitrator’s decision that he need not be guided by GAAP – which is an accounting standard engaged by the witnesses before him and not a legal standard – is a question of mixed fact and law and does not constitute an extricable error of law.

                          iii.            Whether the arbitrator otherwise failed to consider and/or apply one or more relevant principles of contractual interpretation and/or ignored evidence relevant to the application of those principles.

[46]        The Applicant submits that the arbitrator otherwise failed to consider and/or apply one or more relevant principles of contractual interpretation and/or ignored evidence relevant to the application of those principles.

[47]        The Applicant submits that in interpreting the NPI Agreement, the arbitrator “failed to give meaning to express language” in the NPI Agreement and interpreted it “in a fashion that creates commercial absurdities”. In support, the Applicant points to four brief excerpts from the Award which it submits are “inconsistent” with the arbitrator’s conclusion or “superfluous” to it.

[48]        In my view, the Applicant’s allegations do not implicate the legal standard or test applied by the arbitrator in interpreting the NPI Agreement and accordingly do not amount to an extricable error of law. The submissions engage the issue of how the arbitrator applied the principles of contractual interpretation (a question of mixed fact and law) and not whether the arbitrator applied the proper principles (a question of law).

[49]        In reaching his conclusion, the arbitrator set out and applied, correctly, in my view, the relevant principles of contract interpretation, specifically that the contract should be interpreted as a whole, in a manner that gives meaning to all of its terms and which avoids an interpretation that would render one of the terms ineffective.

[50]        For the above reasons, therefore, the Application is dismissed.

[51]        The Respondent is entitled to its costs of the Application. At the end of the hearing, counsel agreed that a fair and reasonable amount for costs was $20,000 in total. I agree. Accordingly, costs to the Respondent, fixed at $20,000 in total.

L.A. Pattillo J.