COURT OF APPEAL FOR BRITISH COLUMBIA
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Citation: |
Hayes Forest Services Limited v. Weyerhaeuser Company Limited, |
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2008 BCCA 31 |
Date: 20080124
Docket: CA034652
Between:
Hayes Forest Services Limited
Respondent
(Petitioner)
And
Weyerhaeuser Company Limited
Appellant
(Respondent)
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Before: |
The Honourable Mr. Justice Low |
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The Honourable Mr. Justice Lowry |
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The Honourable Mr. Justice Chiasson |
| J. Hunter, Q.C. and K.M. Stephens |
Counsel for the Appellant |
| C.F. Willms and K.A. Grist |
Counsel for the Respondent |
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Place and Date of Hearing: |
Vancouver, British Columbia |
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5 November 2007 |
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Place and Date of Judgment: |
Vancouver, British Columbia |
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24 January 2008 |
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Written Reasons by: |
| The Honourable Mr. Justice Chiasson |
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Concurred in by: |
| The
Honourable Mr. Justice Low |
Reasons for Judgment of the Honourable Mr. Justice Chiasson:
Introduction
[1] Commercial arbitration is a private dispute resolution process designed to enable parties to deal with disputes efficiently, effectively and economically. In this case, applicable legislation is the Commercial Arbitration Act, R.S.B.C. 1996, c. 55 (the “Act”). Although the Act provides in s. 14 that arbitral awards are “final and binding on all parties”, s. 31 gives parties a right to appeal to the court “any question of law arising out of the award”, either by agreement or with leave of the court. Section 32 contains a limited privative clause.
[2] The parties expressed clearly their intention to resolve disputes efficiently and effectively by agreeing to arbitrate before a single arbitrator to be selected from an agreed list of named persons. The arbitrator was required to deliver an award within 30 days of his appointment. An award was delivered on 10 June 2005. This appeal from the decision of Mr. Justice Cullen setting aside the award was heard on 5 November 2007, over two years after the award was made. His reasons are found at 2006 BCSC 1783, 24 B.C.L.R. (4th) 291.
[3] It is ironic and cause for thought that in recommending appeals be taken to the Supreme Court rather than the Court of Appeal, the Law Reform Commission of British Columbia had this to say in its Report on Arbitration (Report 55) (Vancouver: Law Reform Commission of British Columbia, May 1982) at 78:
Despite the foregoing…we have decided that the Supreme Court is the more appropriate forum to hear in the first instance appeals from arbitration awards. Whatever advantages there may be in appeals direct to the Court of Appeal, there are also a number of disadvantages that, in our view, militate against that approach. One of the principal disadvantages is the time that it takes for a matter to come before the Court of Appeal. We understand that on average it now takes about three months before a matter can be heard in that Court. In contrast, a matter can be brought before a Chambers Judge of the Supreme Court in two or three weeks or sooner in cases of urgency….
[4] In my view, a core value of the arbitration process – the efficient and effective resolution of private disputes – has been lost in this case, in part, because rather than simply ensuring the rights of the parties were determined on sound legal principles, the court usurped the function of the arbitrator and exceeded the authority granted to it by s. 31 of the Act. The path to this error began with the questions for which leave to appeal was granted. This appeal engages a consideration of the role and scope of judicial review of arbitral awards under the Act. For the reasons that follow, I would allow this appeal and dismiss Hayes’ appeal from the arbitrator’s decision.
Background
[5] Weyerhaeuser Company Limited (“Weyerhaeuser” or “WCL”) and Hayes Forest Services Limited (“Hayes”) entered into a Timber Supply Execution Agreement made 2 January 2003. It contained a commitment to arbitrate. As noted, the process for selecting an arbitrator and the timing of the proceeding was specified. The parties agreed that the decision of the arbitrator would “be final and binding” on them. Hayes initiated arbitration. A hearing was held on 30, 31 May and 1 June 2005. The arbitrator’s award was delivered 10 June 2005. At the request of the parties, the arbitrator held a further hearing on 29 June 2005 and made a further ruling on 14 July 2005. Dissatisfied with the award, Hayes petitioned the court on 8 August 2005 for leave to appeal. The petition was amended on 22 March 2006 and leave was granted on 24 March 2006. The appeal was heard on 17 and 18 July 2006. The reasons of Cullen J. were pronounced 4 December 2006. Weyerhaeuser appealed to this Court on 12 December 2006.
[6] Weyerhaeuser is the holder of a Tree Farm Licence which included an inefficient operating area. The Agreement provides for Hayes to manage and perform timber harvesting in the operating area. Hayes is paid its actual audited costs and a percentage of a “gain”, which is defined as “the cost improvements and quality improvements made by Hayes”. Simplistically, the gain is the amount by which agreed Baseline Costs exceed actual costs. The lower the actual costs, the higher the gain.
[7] The core of the dispute is the accounting treatment of planning, engineering, road building (other than Capital Roads) and other forest development costs in the calculation of the gain. It is the position of Weyerhaeuser that such costs should be expensed in the year in which they are incurred. Hayes contends that such costs should be expensed when the timber for which such costs are incurred is harvested and they can be carried in “inventory” until then. The effect of Hayes’ position is to reduce the actual costs for the year and thereby increase the gain. The arbitrator rejected Hayes’ position. He also held the parties settled all outstanding 2003 issues, a conclusion which Hayes challenged.
The leave to appeal decision
[8] Hayes proposed three questions:
1. On a true consideration of s. 11. 4(a) of the TSE, must Hayes expense all planning, engineering, road building (other than capital roads) and other forest development costs which result from a material change in volume of timber accessible and ready for logging in the year in which they are incurred? (This is referred to as the accounting treatment issue.)
2. In the alternative, if on a true construction of s. 11 4(a) of the TSE, Hayes is required to expense all development inventory, planning, engineering, road building other than capital roads and the other forest development costs which result from a material change in volume of timber accessible and ready for logging in the year in which they are incurred, on a true construction of Explanatory Note 2 to Schedule 7 of the TSE, should a significant or material change in these costs be administered or handled as a prescribed event under the TSE? (This is referred to as the prescribed event issue.)
3. In determining that the 2003 settlement entitled Hayes to payment of actual audited costs of $73.49 per cubic metre rather than $75.02 per cubic metre, did the arbitrator act on a view of the facts which could not be reasonably entertained? (That is the settlement issue.)
[9] In her judgment (indexed as 2006 BCSC 2045) Madam Justice Brown identified as the first issue whether the questions were questions of law.
[10] Weyerhaeuser asserted that the questions proposed by Hayes were “highly infused with findings of fact” and were questions of mixed fact and law for which leave to appeal could not be granted. After referring to Macmillan Bloedel v. British Columbia Hydro and Power Authority (1992), 98 D.L.R. (4th) 492, 72 B.C.L.R. (2d) 273 (C.A.) and Glaswegian Enterprises Inc. v. Tel Mobility Cellular Inc. (1997), 101 B.C.A.C. 62, 49 B.C.L.R. (3d) 317, Brown J. stated in paras. 13 - 14:
Here, the arbitrator made reference to a good deal of the evidence in interpreting the contract. However, that does not detract from the essential question. As Madam Justice Southin said in B.C. v. Surrey School District, [2005] B.C.C.A. 106. “A question of construction of a written agreement is, of course, a question of law.”
The arbitrator may have erred in his interpretation of the contract, as the petitioner argues, by failing to give effect to portions of the contract. He may have relied inappropriately on the factual matrix, rather than the words of the contract. That the arbitrator looked to the background facts in interpreting the contract does not make interpreting the contract necessarily a question of mixed fact and law, preventing an appeal from an arbitrator’s decision.
[11] In the result, Brown J. concluded that leave should be granted on the questions proposed by Hayes. Weyerhaeuser did not take steps to appeal that decision.
The Chambers decision on the appeal
[12] Mr. Justice Cullen set out a number of provisions of the Agreement. They included:
1.1 Definitions. […]
(a) “Actual Audited Costs” for a particular Year means:
(i) the actual audited costs incurred directly or properly allocated to the Franklin Operation by Hayes for such year calculated on a consistent basis Year to Year in accordance with GAAP […]
[…]
(c) “Baseline Costs” for the Year 2003 will be equal to $76.75 per cubic meter harvested (being the baseline cost or actual experienced costs in TFL 44 for the 21-month period ending September 30, 2002, plus the three month forecast for the period to end December 31, 2002 [...]) […]
[…]
(o) “Development Inventory” means the inventory of planning, Engineering, roads and infrastructure in the Operating Area from time to time as described in Section 11.4;
[…]
(z) “GAAP” means generally accepted accounting principles adopted for use in Canada by the Canadian Institute of Chartered Accountants, consistently applied;
[…]
(oo) “Prescribed Event” means:
(i) a material event outside the control of Hayes; [...]
[...]
1.2 Purpose and Interpretation. The purpose of this Agreement is to enable Hayes to use its expertise in forestry planning and timber harvesting to improve the efficiency and cost of operations in the Operating Area such that Weyerhaeuser will realize a cost savings for logs delivered to Weyerhaeuser by Hayes from the Operating Area as compared to the Baseline Cost […]
[...]
(b) this Agreement will be applied and interpreted by the Parties from time to time with a view to achieving the foregoing purpose;
[...]
1.9 Schedules. The following are the Schedules to this Agreement and form part of the Agreement:
[...]
Schedule 7 Sample Development Inventory Advance Calculations;
[...]
Schedule 7
to Timber Supply Execution Agreement
Sample Development Inventory Advance Calculation
(Section 11.4)
Explanatory Notes
1. All calculation examples in Schedule 7 are prepared for the purpose of generating a monthly working capital advance for Hayes and only for that purpose.
2. Development costs related to development such as planning and engineering (Section 11.4(a)). Significant or material change, on an annual basis will be dealt with as a Prescribed Event. All development costs incurred in the year, will be expensed in the same year as is the current Weyerhaeuser Standard Accounting Practice. For further clarity, this is the same method utilized in Baseline Cost calculation. [….]
[13] I refer at length to Mr. Justice Cullen’s review of the arbitral award as it concerned the accounting treatment of development costs in order to place into context the questions and to illustrate the judge’s analysis of this issue:
[20] The core of the dispute between the parties stems from the provisions of ss. 10.4 and 11.4 and Explanatory Note 2 of Schedule 7 to the TSE. These provisions raise the issue of whether certain costs incurred by Hayes in planning, engineering and spur road building, are properly accounted for as inventory or as costs under the TSE using GAAP principles applied consistently, or whether they are to be treated as a Prescribed Event adjusting the baseline costs. The Arbitrator framed the issue before him thus:
The central issue is simply this: Weyerha[e]user says expenditures for spur roads and planning and engineering are to be treated as costs and expensed in the year the particular work is done. Hayes on the other hand says expenditures for the work should be recorded as inventory until the work bears fruit, or in other words, until some later time when the logs which are linked to the work in question are ready for market.
This question of accounting would seem unimportant to a casual observer, but it has led to a difference in the parties’ positions for 2003 and 2004, totalling more than $5 million.
Although not explicitly stated, it is clear the Arbitrator accepted that under the inventory system when taken out of inventory and treated as expenses, the planning, engineering and spur road building costs would be included in the actual audited costs for the year to determine what cost gain, if any, was created for that year and there would be a reconciliation of any advances.
[21] As explained by the Arbitrator, Hayes’ primary position before him was that pursuant to s. 11.4(a), costs related to such development should not be expensed until the year in which the harvesting to which they are linked takes place, and thus the costs are analogous to reserves.
[22] Hayes’ alternative position was that even if the costs for planning, engineering and spur road building are actual audited costs because they must be expensed in the year in which they are incurred, it would make no difference to the cost gain because the costs should be dealt with as a Prescribed Event under s. 10.4 which would increase the baseline costs accordingly and maintain the same cost gain. In that argument, Hayes relied on Note 2 of Schedule 7 which provides as follows:
Development costs related to development such as planning and engineering (s. 11.4(a)). Significant or material change, on an annual basis will be dealt with as a Prescribed Event. All development costs incurred in the year will be expensed in the same year as is the current Weyerha[e]user standard accounting practice. For further clarity, this is the same method utilized in the baseline costs calculation.
(i) Inventory or Costs
[23] In rejecting Hayes’ primary submission that expenditures for planning, engineering and spur road building should be treated as inventory rather than contemporary expenses, the Arbitrator took the view that such an interpretation was incongruent with the parties’ intention and with commercial efficacy, or good business sense.
[24] The Arbitrator pointed to the baseline costs which he described as serving as the yardstick by which to measure Hayes’ performance under the TSE and noted that it was by comparing the baseline costs with the costs expended by Hayes “going forward” that establish the basis of remuneration for Hayes and the cost to WCL. The Arbitrator regarded it as “a central point” that when establishing the baseline costs, the parties accepted that the costs of spur roads and planning and engineering were costs which were expensed when they were incurred, as opposed to being dealt with as inventory. He concluded that it was critical for there to be consistency between the accounting treatment used to create the baseline cost and how Hayes’ performance going forward is to be measured. He concluded that there was no evidence of a change in the treatment of development of engineering, planning and road building which would justify a departure from what he described as “the baseline principles” which included treating those costs as expenses rather than inventory. The Arbitrator found that the evidence “taken as a whole” led to the conclusion that the parties intended that such development costs would be expensed rather than treated as inventory.
[25] In coming to his conclusion, the Arbitrator noted that Weyerha[e]user has always expensed spur road and planning and engineering costs in the year they were incurred, and as well that there was evidence before him that it is common, although not universal, within the industry to expense such items in the year they were incurred. He also noted that the planning and roads which were provided to Hayes at the commencement of the TSE by WCL were valued at zero, having already been expensed, and he noted that there was no provision in the contract upon its termination for WCL to purchase any planning and engineering and spur road inventory from Hayes, which he found further supported the position that those costs were to be expensed, not inventoried.
[26] It was the Arbitrator’s view that the definition of GAAP included in the TSE, which referenced consistent application “compelled him to look at the practice of Weyerha[e]user and a number of other forest companies” to establish what that consistent application meant. It was his view that the preponderance of the evidence established that the application of GAAP favoured expensing such costs in the year they were incurred, rather than treating them as inventory. He concluded that Hayes bore the onus of proof, not only because it was the claimant in the arbitration, but because it was seeking to prove a change from the status quo. He concluded that there was no evidence that the parties had committed to a changed accounting treatment and that the consistency analysis under GAAP supported Weyerha[e]user’s position and not that of Hayes. He found particular support for WCL’s position in the fact that Hayes agreed to employ Weyerha[e]user’s accounting treatment in creating the baseline costs and he concluded that it made no sense that Hayes would have been given the power to build up inventory, lower its costs, and increase the gain unilaterally by “banking spur roads and planning and engineering in the manner that it proposes.”
[27] The Arbitrator also found that the “Purpose and Interpretation” section of the TSE supported WCL’s position because, he found, it would be artificial to say that Weyerha[e]user obtained cost savings by no longer expensing spur roads and planning and engineering work because it would in fact increase Weyerha[e]user’s costs, not reduce them which would be contrary to the clear intent and purpose of the contract as set out in s. 1.2.
[28] Regarding the definition of “actual audited costs” as “those incurred directly or properly allocated … calculated on a consistent basis in accordance with GAAP”, the Arbitrator found that to mean that spur road building, planning and engineering needed to be consistently treated to establish Hayes’ actual audited costs. It was his view that s. 11.4, because it referred to planning, engineering and roadwork that has not been expensed in accordance with GAAP, did not refer to the work at issue because historically, and in the baseline period, such expenditures were expensed in accordance with GAAP. [Emphasis in original.]
[29] Finally, the Arbitrator noted that Schedule 7 to s. 11.4 explicitly stated that “all development costs incurred in the year will be expensed in the same year as is the current Weyerha[e]user standard accounting practice” ie. he found explicit support for WCL’s position in that Explanatory Note.
[30] The Arbitrator’s determination of the issue is set out in his June 10, 2005, ruling in paras. 8 – 10 inclusive as follows:
The parties, at the initiative of Hayes, jointly determined the initial Baseline Costs. The Baseline Costs serve as the yardstick by which to measure Hayes’ performance under the TSE. They were prepared taking into account Weyerhaeuser’s costs, partly actual and partly forecast, of logging this area in 2001 and 2002. The Baseline Costs measure Hayes’ performance by comparing the costs expended by Hayes going forward with the costs expended by Weyerhaeuser in the last two years pre-dating the TSE. Hayes’ performance as against the Baseline Costs in turn directly affects the “Gain” or financial improvements made by Hayes, and the TSE provides mechanisms for sharing the Gain as between Hayes and Weyerhaeuser from year to year.
A central point for purposes of this Award is that both parties, in preparing the Baseline Costs, treated the costs of spur roads and planning and engineering as costs expensed when they were incurred, as opposed to being recorded as inventory. When it is kept in mind that Baseline Costs are intended to serve as the yardstick for measuring Hayes’ performance throughout the life of the TSE, one sees how important it is that there be consistency between how the Baseline Costs were created and how Hayes’ performance is measured going forward. There is no dispute as to the importance of the Baseline Costs and the reason for calculating them. Nonetheless, Hayes says that the parties somehow agreed that spur roads, planning and engineering would be expensed in calculating the Baseline Costs, but sometimes treated as inventory thereafter. Such a departure from what I am going to call the “Baseline principles” might be possible, but there would have to be convincing evidence of such a change if it was intended, and I see no such evidence here.
To the contrary, the evidence taken as a whole leads to the conclusion that the parties intended for 2003 and 2004 that spur roads and planning and engineering would be expensed and not treated as inventory. (There is no dispute as to the governing legal principles. The intention of the parties is learned from what they said to one another and did with the other’s knowledge at the relevant time.) There is no dispute that Weyerhaeuser has always expensed spur roads and planning and engineering. There is no dispute that all the data Weyerhaeuser made available to Hayes for creating the Baseline Costs expensed these items. Nor can there be any reasonable dispute that it is common although not universal practice within the industry to expense these items. I note that when Hayes acquired assets from Weyerhaeuser in preparation for operating under the TSE, spur roads installed and planning and engineering work handed over by Weyerhaeuser were valued at zero. Hayes in other words paid nothing for this work, when it would and did pay for assets such as logging equipment. This point determines nothing, but it does serve to corroborate the treatment of this work as a cost.
(ii) Prescribed Event
[31] In regards to Hayes’ alternative submission, that the expenses should be dealt with as a Prescribed Event and used to adjust the baseline costs upward, thus offsetting the increase in the actual audited costs occasioned by expensing the development costs in the year in which they were incurred, the Arbitrator held that a Prescribed Event, as defined in s. 1.1 of the TSE “clearly cannot apply to the spur road and planning and engineering work by Hayes that forms the subject of this dispute.” He reasoned thus at paras. 24 and 25 of his ruling of June 10, 2005:
Finally, I address the submission of Hayes that even if the costs in question are Actual Audited Costs, it makes no difference because the Baseline Costs should be increased correspondingly as a Prescribed Event. This argument is linked to section 11.4 of the TSE, addressing advances for Development Inventory, and to Schedule 7, Explanatory Note 2. That Note provides in part that: “Significant or material change, on an annual basis will be dealt with as a Prescribed Event.”
However, a Prescribed Event is defined in section 1.1 of the TSE such that it clearly cannot apply to the spur road and planning and engineering work by Hayes which forms the subject of this dispute. Having reference to the definition, such work was not a material event outside the control of Hayes or a material change in the manner of Hayes performing its services. In any event, the balance of Explanatory Note 2 in Schedule 7, quoted earlier in this Award, at paragraph 19, makes very clear the parties’ intention that all development costs incurred in a year will be expensed in the same year, as was done in creating the Baseline Costs. [Emphasis in original.]
[14] The judge discussed applicable legal principles in paras. 57 – 61. I provide a summary of them:
· the goal is to discover, objectively, the intention of the parties at the time the contract was made; the language of the agreement is the most significant tool; only where the words, viewed objectively in the context of the surrounding circumstances, bear two or more reasonable meanings will the court consider extraneous evidence: Gilchrist v. Western Star Trucks Inc., 2000 BCCA 70, 73 B.C.L.R. (3d) 102 at paras. 17 - 18;
· a contract must be viewed as a whole and, where possible, effect must be given to all its terms unless an interpretation giving a reasonable construction cannot be found: B.G. Checo International Ltd. v. B.C. Hydro and Power Authority, [1993] 1 S.C.R. 12 at 23-24;
· the factual matrix, which is the background of relevant facts that clearly must have been known to the parties, can throw light on the parties’ intentions: Glaswegian Enterprises Inc. v. B.C. Tel Mobility Cellular Inc. (1997), 101 B.C.A.C. 62, 49 B.C.L.R. (3d) 317 at para. 18;
· the words of a contract must not be overwhelmed by a contextual analysis; the meaning of the words is the meaning most consistent with commercial reality and the whole of the contract: Black Swan Gold Mines Ltd. v. Gold Belt Resources Ltd. (1996), 78 B.C.A.C. 193, 25 B.C.L.R. (3d) 285 at para. 19; Glaswegian at para. 20.
[15] He summarized the law in para. 62:
[…] in Group Eight Investments v. Taddei, 2005 BCCA [489] the court quoted Robin J.A. in Scanlon v. Castlepoint Development Corp. (1992), 99 D.L.R. 4th 153 (Ont. C.A.) at p. 179 as providing a clear summary of the principles of contract interpretation at play in the commercial context:
The agreement with which we are concerned is a negotiated commercial document which should be construed in accordance with sound commercial principles and good business sense. To the extent that it is possible to do so, it should be construed as a whole and effect should be given to all of its provisions. The provisions should be read, not as standing alone, but in light of the agreement as a whole and the other provisions thereof.
[16] The judge concluded in para. 65 “the Arbitrator did fall into error by considering evidence of how [Weyerhaeuser] and other forest industry companies treat planning, engineering and road building costs outside a contract such as the [Agreement]”.
[17] He stated in para. 67 the “accounting treatment the parties accepted as valid in the baseline period which was used to calculate the baseline cost” was relevant and “resonates with the definition of ‘factual matrix’”. He concluded the fact there was no material change in development costs during the baseline period was “factual matrix evidence” that “would add some understanding of the parties’ intention in including a term in the [Agreement] apparently to deal with circumstances in which there is a material change”. [Emphasis in original.]
[18] In para. 68 the judge asserted the proper evidence the arbitrator should have considered was the fact the parties used Weyerhaeuser’s accounting treatment of development costs when there was no material change. This, he stated, is the factual context in which various provisions of the Agreement should be read.
[19] The judge dealt with “Prescribed Event” in paras. 73 - 74:
Furthermore, by introducing the element of a “Prescribed Event”, Note 2 appears to address significant or material changes in s. 11.4(a) costs on an annual basis in a way that would raise WCL’s costs while not reducing Hayes’ gain share. In my view, if the words in Note 2 “significant or material change on an annual basis will be dealt with as a Prescribed Event” are read in light of their natural and ordinary meaning, it would result in such costs being deemed a Prescribed Event. I come to this conclusion because in my view it would make no sense to read the words “will be dealt with as”, as engaging the definition of Prescribed Event in s. 1.1(oo) as to do so would render the words of Explanatory Note 2 superfluous. In my view, the only meaning attributable to those words is the definition advanced by the plaintiff, that is, “handled as” or “administered as”. Clearly, if an event falls within the definition of a Prescribed Event, there is no need to provide that it will be dealt with as such, as that would follow by the operation of s. 10.4(b) of the TSE.
Thus, if Explanatory Note 2 is given effect to, it would lead to an apparent conflict in the terms of the TSE. The conflict would arise between those terms providing for an integrated inventory system under which adjustment payments are made according to whether inventory goes up or down, and Note 2, which takes 11.4(a) development costs “resulting from a material change in volume of timber accessible and ready for logging that has not been expensed in accordance with GAAP” out of the inventory advance scheme. Further, if given effect to, Note 2 would deem significant or material change to such costs to be a Prescribed Event necessitating an adjustment to the baseline costs. If that were to happen, WCL’s costs would increase without a corresponding reduction in Hayes’ gain share.
[Emphasis in original.]
[20] It was the judge’s view that Explanatory Note 2 in Schedule 7 appears to contemplate an accounting treatment in conflict with the inventory system established for infrastructure and Capital Roads (at paras. 70 - 72). He concluded in para. 77 “Explanatory Note 2 cannot be found to have any effect” and in para. 78 “construing the contract this way recognizes what is evident from the factual matrix: in the baseline period there were no s. 11.4(a) costs incurred from a material change in volume of timber accessible and ready for logging that had not been expensed in accordance with GAAP”. He found that his approach provided “symmetry […] between Hayes’ costs and the cost gain […]” (at para. 79).
[21] In para. 81, the judge stated it was not inconsistent with good business sense for Weyerhaeuser to carry the burden of development costs until timber was harvested and held in para. 83 that the arbitrator had erred in concluding on a true construction of s. 11.4(a) Hayes must expense development costs “which result from a material change in volume of timber accessible and ready for logging in the year in which they are incurred”.
[22] Although it is not apparent on its face, the third question on which leave was granted concerned an alleged settlement of issues related to 2003. The arbitrator held at para. 23 of his award “agreement was reached with respect to planning for 2003 in the total and final amount of $350,000”. He was asked to state what amendments were required to the Special Purposes Report for 2003 as a result of his award. He stated in para. 6 of his Ruling on Motions Brought After the Award:
My finding in the Award that there was a final settlement regarding planning costs for 2003 was intended to resolve this issue, and I do not accede to Hayes’ argument that the 2003 Report should be amended as Hayes proposes.
[23] Mr. Justice Cullen looked at the evidence of the parties concerning per cubic metre costs figures and observed at para. 93 “it would not make good business sense for Hayes to settle on the basis determined by the Arbitrator”. He then stated “the Arbitrator’s conclusion on this point amounts to an error of law and cannot be sustained”.
[24] The judge expressed the results of the appeal in para. 95 as follows:
In the result, therefore, I make the following orders:
1. A declaration that on a true construction of s. 11.4(a) of the Timber Supply Execution Agreement between Hayes Forest Services Limited and Weyerhaeuser Company Limited dated January 2, 2003, Hayes is not required to expense all planning, engineering, road building (other than capital roads) and other forest development costs, which result from a material change in volume of timber accessible and ready for logging in the year in which they are incurred;
2. A declaration that in determining that the 2003 settlement entitled Hayes to the payment of the actual audited costs of $73.49 per cubic metre rather than $75.02 per cubic metre, the Arbitrator acted on a view of the facts which could not reasonably be entertained;
3. An order setting aside the award and the further award;
4. An order remitting the matter to the Arbitrator.
Positions of the parties
[25] Weyerhaeuser contends that the judge erred by reweighing the evidence and by making a finding of fact not made by the arbitrator and not available on the evidence. It asserts the judge should have given meaning to all terms of the Agreement and erred by concluding that Note 2 in Schedule 7 has no effect. Weyerhaeuser states the judge misinterpreted the Agreement by failing to conclude that Hayes was obliged to expense development costs fully in the year in which they are incurred and in holding Note 2 in Schedule 7 required a deemed Prescribed Event regardless of whether it was under the control of Hayes. Finally, in Weyerhaeuser’s view the judge erred by quashing the 2003 settlement “when the only issue before the Court was whether the Actual Audited Costs for 2003 to be used for the purposes of that settlement were $75.02/m3 rather than $73.49/m3”.
[26] Hayes states the issues on appeal are whether the judge erred holding the arbitrator was wrong in law construing the provisions of the Agreement dealing with the accounting treatment of development inventory and whether the judge erred quashing the arbitrator’s determination there was an “agreement finding 2003 Actual Audited Costs at $73.49/m3”.
Discussion
Framework of analysis
[27] Some arbitration legislation limits court intervention to assisting the arbitral process and to recognizing and enforcing awards. An example is the International Commercial Arbitration Act, R.S.B.C. 1996, c. 233. It applies only to international arbitrations. The Commercial Arbitration Act applies to all other commercial arbitrations in the Province. The two acts were passed at essentially the same time, the spring of 1986.
[28] Parties to domestic disputes, which generally apply the law of British Columbia, may seek the assistance of the court to ensure their disputes are determined on correct legal principles. That is the role served by the ability to appeal a domestic arbitration award. International disputes often apply a substantive law different from that of the forum. In addition, international parties often are reluctant to submit to the jurisdiction of a foreign court merely because the place of arbitration is there. Non-court supervision is seen as a positive feature of arbitration legislation applicable to international disputes.
[29] The limited right of appeal in the Commercial Arbitration Act flowed out of recommendations in the 1982 Report on Arbitration of the Law Reform Commission of British Columbia that led to the adoption of the Act in 1986. The appeal right arose out of the need to eliminate the case-stated procedure, which allowed the arbitrator to consult the court on a question of law while retaining jurisdiction and out of a concern with the court’s jurisdiction to correct errors of law on the face of the record.
[30] Although the Commission made no clear distinction between domestic and international arbitration, it did recognize that English legislation gave some consideration to the difference.
[31] The Commission noted that the case-stated procedure was much criticized as increasing the cost and inefficiency of arbitration and had this to say at 72:
Although arbitrations are intended to provide a less expensive and less cumbersome method of resolving disputes than litigation in the courts, the setting aside of an award can sometimes make arbitration a more costly and a less satisfactory procedure than litigation. It can also make a mockery of the two principal objectives of arbitration, namely early finality and a determination outside the courts.
[32] The Commission observed that the review process in which a court may set aside an award for an error of law on the face of the award “has been criticized for over a century” (at 73) and stated at 74:
The criticism of the judicial supervision and review of arbitration awards seems to divide into three main areas.
1. Judicial supervision and review may rob the arbitration process of its early finalty.
2. As a matter of principle, parties who have constituted their own tribunal should be bound by its decision, for better or worse.
3. The availability of judicial review is fortuitous in the sense that it depends not on the nature or extent of the alleged injustice but on the technical questions of what constitutes the face of the award, and whether the arbitrator has chosen to set out his reasons therein.
The first two criticisms are essentially policy issues that can only be answered in terms of competing policy considerations. While we do not question the validity of these criticisms, we believe that some form of judicial supervision over arbitration awards is salutary. Justice, in our view, should not be subordinated to considerations of speed and convenience. Simply because parties have chosen one forum in preference to another for the resolution of a dispute between them should not carry with it the implication that the parties have waived their rights to have that dispute resolved in accordance with the law and widely accepted legal norms of conduct.
[33] The Commission noted England abolished both procedures in 1979 and replaced them with a limited right of appeal. At p. 76 the Commission recommended adopting a limited right of appeal. The Legislature accepted this recommendation, but opted to establish a different regime for international commercial arbitration and provided no right of appeal in the International Commercial Arbitration Act.
[34] It is important to recognize and respect the boundaries of the limited right of appeal that is enshrined in the Commercial Arbitration Act.
[35] Under the pre-1986 law, the court’s ability to intervene to correct an error of law on the face of the record was limited to questions of law that were not the specific question put to the arbitral tribunal. That is not the case under the current Act (Sandbar Construction Ltd. v. Pacific Parkland Properties Inc. (1994), 40 B.C.A.C. 194, 87 B.C.L.R. (2d) 145 (C.A.) at 153).
[36] This seemingly broader scope of review must be undertaken bearing in mind the Legislature’s intention to limit court intervention, as reflected in a 1992 amendment to the Act: “[i]n matters governed by this Act […] a court must not intervene except as provided for in this Act” and recognizing the policy of the 1986 legislation – to facilitate the effective arbitration of commercial disputes – as was stated when the bill first was introduced in the Legislature. In B.C.I.T. (Student Association v. B.C.I.T., 2000 BCCA 496, 80 B.C.L.R. (3d) 266, this Court moved to avoid limiting the discretion of judges considering leave applications and broadened the threshold inquiry into the merits. In words prophetic of this appeal, the Court commented in para. 14 on the legislative intention:
It is well accepted that one objective of the new Act was to foster arbitration as an alternative dispute mechanism by, amongst other measures, discouraging appeals of arbitration awards to courts. There has been a sense that under the old Act, arbitration was infrequently utilized because it was seen as merely adding one more layer of litigation to the court process of trial and appeal. [....]
[37] With this background in mind, it is essential to ensure that leave is granted only on questions of law and that those questions are defined clearly.
The questions
[38] Questions one and two seek “a true construction of s. 11.4(a)” and are grounded on a comment of Southin J.A. in para. 42 in British Columbia v. Surrey School District No. 36 (Surrey), 2005 BCCA 106, 252 D.L.R. (4th) 430: “[a] question of construction of a written instrument is, of course, a question of law”. The case concerned the granting of leave to appeal an arbitration award. Madam Justice Southin was writing in dissent, although the majority proceeded on the basis that the questions before the chambers judge were questions of law (at para. 7). Madam Justice Southin referred to no authority when making her observation. It likely was unnecessary in the context of the case before her.
[39] Support for the comment of Southin J.A. can be found in Domtar Inc. v. Belkin Inc. (1989), 62 D.L.R. (4th) 530, 39 B.C.L.R. (2d) 257 (C.A.) [cited to B.C.L.R.], wherein Lambert J.A. had this to say at 261- 262:
The questions in this case do not look like questions of law. They are questions about what the parties agreed upon. The decision about what the parties agreed upon involves the construction of what the written agreement said. Is that a question of law? In Pioneer Shipping Ltd. v. BTP Tioxide Ltd.; The Nema, [1982] A.C. 724, [1981] 3 W.L.R. 292, [1981] 2 All E.R. 1030, Lord Diplock, for the House of Lords, said this, at p.1035:
The answer must depend on the true construction of the agreement between the parties; and in English jurisprudence, as a legacy of the system of trial by juries who might not all be literate, the construction of a written agreement, even between private parties, became classified as a question of law. ... A lawyer nurtured in a jurisdiction that did not owe its origin to the common law of England would not regard it as a question of law at all. ... Nevertheless, despite the disappearance of juries, literate or illiterate, in civil cases in England, it is far too late to change the technical classification of the ascertainment of the meaning of a written contract between private parties as being ‘a question of law’ for the purposes of judicial review of awards of arbitrators or decisions of administrative tribunals from which an appeal to a court of justice is restricted by statute to an appeal on a question of law.
In Kelantan Govt. v. Duff Dev. Co., [1923] AC. 395 (H.L.), Viscount Cave, in a much quoted passage at p. 409, said this: “no doubt a question of construction is (generally speaking) a question of law.” The passage containing that statement has been quoted with approval by the Supreme Court of Canada in Bell Can. v. O.P.E.I.U., Loc. 131, [1974] 1 S.C.R. 335, 37 D.L.R. (3d) 561; and in Volvo Can. Ltd. v. U.A.W., Loc. 720, [1980] 1 S.C.R. 178 [additional citations omitted].
I propose, therefore, to regard the two remaining questions in this case, which are both questions about alleged errors in construction of the agreement between the parties, as being questions of law.
[40] Other relevant authority includes Petty v. Telus Corp., 2002 BCCA 135, 164 B.C.A.C. 152 and MacDougall v. MacDougall (2005), 262 D.L.R. (4th) 120, 205 O.A.C. 216 (C.A.).
[41] In Petty, this Court dealt with the issue stating at para. 14:
The construction of a contract is a question of mixed fact and law. The question is what the parties intended by the language of the agreement, viewed objectively, in the circumstances in which the agreement was made. A.G. Guest (ed.) Chitty on Contracts (28th ed.), Vol. I (London: Sweet & Maxwell 1999) summarizes the proper approach for the court this way:
12-043 Intention of the parties. The task of ascertaining the intention of the parties must be approached objectively: the question is not what one or other of the parties meant or understood by the words used, but "the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract." The cardinal presumption is that the parties have intended what they have in fact said, so that their words must be construed as they stand. That is to say the meaning of the document or of a particular part of it is to be sought in the document itself. "One must consider the meaning of the words used, not what one may guess to be the intention of the parties". However, this is not to say that the meaning of the words in a written document must be ascertained by reference to the words of the document alone. In the modern law, the courts will, in principle, look at all the circumstances surrounding the making of the contract which would assist in determining how the language of the document would have been understood by a reasonable man.
. . .
12-046 Law and fact. The construction of written instruments is a question of mixed law and fact. The expression "construction" as applied to a document includes two things: first, the meaning of the words; and, secondly, their legal effect, or the effect which is to be given to them. Construction becomes a question of law as soon as the true meaning of the words in which an instrument has been expressed and the surrounding circumstances, if any, have been ascertained as facts. However, the meaning of an ordinary English word, of technical or commercial terms and of latent ambiguities, and the discovery of the surrounding circumstances (when they are relevant) are questions of fact.
[42] The Ontario Court of Appeal in MacDougall referred to Petty in para. 28 and stated:
In Casurina, Feldman J.A. upheld the interpretation of a contract, finding that the trial judge had applied the proper principles of interpretation, including consideration of the whole of the contract and the purpose of the trust at issue. Relying on Petty v. Telus Corp. (2002), 164 B.C.A.C. 152, at para. 14, referring to Chitty on Contracts, 28th ed. (London: Sweet & Maxwell, 1999) at para. 12-046, she found "the construction of a written instrument is a question of mixed fact and law." (para. 34)
The Court continued in paras. 30 - 33:
To begin with, the trial judge must apply the proper principles of contract interpretation, including consideration of the clause in the context of the entirety of the contract. A failure to follow the proper principles, including a failure to apply a fundamental principle of interpretation, would be an error of law attracting review on the standard of correctness.
To the extent that this task of interpretation includes consideration of extrinsic evidence, or a determination of the factual matrix, the trial judge is involved in making a finding of fact, or drawing inferences from a finding of fact. Further, the trial judge's "interpretation of the evidence as a whole" is one involving factual or inferential determinations. See Amertek Inc. v. Canadian Commercial Corp. (2005), 200 O.A.C. 38, 256 D.L.R. (4th) 287, at para. 68. Such questions of fact are entitled to deference and are not to be overturned except in the case of palpable or overriding error, or its "functional equivalents": "clearly wrong", "unreasonable", and "not reasonably supported by the evidence". See H.L. v. Canada, [2005] 1 S.C.R. 401, 251 D.L.R. (4th) 604, at para. 110.
In interpreting the contract, the trial judge also applies the legal principles to the language of the contract in the context of the relevant facts and inferences. This requires the application of law to fact. This has been said to be a question of mixed fact and law. See Algoma Steel Inc. v. Union Gas Ltd. (2003), 63 O.R. (3d) 78 (C.A.), at paras. 19, 21; Amertek, supra, at para. 68.
Accordingly, in reviewing the trial judge's interpretation of a contract, the appellate court must first classify the question as one of fact, law, or mixed fact and law. If the question is an inextricable intertwining of both fact and law, the question can be said to be one of mixed fact and law. [….]
[43] Although Pioneer, Domtar and Surrey School District were cases involving arbitrations and Petty was not, I see no basis in principle or policy for characterizing the inquiry differently in that context. To repeat: “Construction becomes a question of law as soon as the true meaning of the words in which an instrument has been expressed and the surrounding circumstances, if any, have been ascertained as facts. […] the meaning of an ordinary English word, of technical or commercial terms and of latent ambiguities, and the discovery of the surrounding circumstances (when they are relevant) are questions of fact”.
[44] In my view, taken broadly, the construction of a contract often is a question of mixed fact and law. Insofar as the task narrowly is to determine the meaning of the words in the contract the matter may be a question of law as was stated in Domtar, but where the factual matrix of the contract is questioned, determining that matrix and its significance is a question of fact. Interpreting the language of the contract in the context of the factual matrix is a question of mixed fact and law.
[45] The problem in this case begins with questions one and two for which leave was granted. They pose a broad inquiry and do not identify the question of law concerning which the arbitrator is alleged to have erred. The appeal judge also did not separate the question or questions of law that properly may have been before him from a consideration of the factual determinations of the arbitrator which were not properly before him.
[46] The task of the arbitrator was to provide a true construction of s. 11.4(a) of the Agreement and Note 2 in Schedule 7 in order to determine whether Hayes was obliged to expense all planning, engineering, road building (other than Capital Roads) and other forest development costs in the year they were incurred. The mandate of the court was to ascertain whether the arbitrator made an error of law in making that determination not itself to make the determination. In my view, the questions inevitably drove the judge to do so.
Did the arbitrator err in law concluding Hayes must expense costs annually?
[47] I do not agree that the arbitrator erred by considering evidence of how Weyerhaeuser and other forest companies treated development costs. In its submission before the arbitrator, Hayes alleged Weyerhaeuser failed properly to follow GAAP. The treatment of development costs by other companies in the forest industry was relevant to a consideration of GAAP. In addition, the arbitrator was entitled to take into account Weyerhaeuser’s practice in considering the factual matrix in relation to Note 2 and the calculation of gain as related to Baseline Costs.
[48] Mr. Justice Cullen’s summary of Hayes’ submissions, as stated in paras. 63 - 64 of his reasons, illustrate the judge’s incursion into the factual domain of the arbitrator. In para. 63, the judge noted Hayes asserted the arbitrator erred by considering extrinsic evidence not relevant to a determination of the intentions of the parties and by failing to distinguish between the nature of costs incurred in the baseline period and those incurred during the period in dispute. The “extrinsic” evidence is particularized in para. 64 as Weyerhaeuser and others’ treatment of development costs.
[49] The judge asserted in para. 66 Weyerhaeuser and other forest companies “presumably use an accounting treatment that serves their economic interests” and suggested that considering their practices in the context of construing the contract “is analogous to eating an apple in order to infer the taste of an orange”. He continued in paras. 67 - 68:
On the other hand, clearly what accounting treatment the parties accepted as valid in the baseline period which was used to calculate the baseline cost has relevance and resonates with the definition of “factual matrix” established in Glaswegian (para. 18):
… the background of relevant facts that the parties must clearly have been taken to have known and to have had in mind when they composed the written text of their agreement.
It follows, as the petitioner contends, that evidence that during the baseline period there was no material change in engineering, planning and spur road building would be factual matrix evidence conducive to deepening an understanding of the parties’ intention in composing the contract. In my view, that factual matrix evidence would add some understanding of the parties’ intention in including a term in the TSE apparently to deal with circumstances in which there is a material change.
Thus, in my view, the proper evidence for the Arbitrator to have in mind in interpreting the terms of issue in this contract was the fact that the parties used WCL’s accounting treatment of planning, engineering and spur road building in the baseline period when there was no material change in volume or costs.
[Emphasis in original.]
[50] It is important to put the arbitrator’s consideration of forest industry practice into context. Referring to the arbitrator the judge stated in paras. 26 and 28:
It was the Arbitrator’s view that the definition of GAAP included in the TSE, which referenced consistent application “compelled him to look at the practice of Weyerha[e]user and a number of other forest companies” to establish what that consistent application meant. [….]
[….]
[….] It was his view that s. 11.4, because it referred to planning, engineering and roadwork that has not been expensed in accordance with GAAP, did not refer to the work at issue because historically, and in the baseline period, such expenditures were expensed in accordance with GAAP.
[Emphasis in original.]
[51] In my view, the arbitrator was entitled to take into account evidence of the accounting treatment of development costs in the forest industry and, considering the nature of costs clearly was a matter for the arbitrator. Whether he was right or wrong in that consideration is not a matter for review under the Act. In this case, it does not engage a question of law.
[52] After stating “the proper evidence for the Arbitrator to have in mind” was the absence of a material change in costs in the baseline period, the judge asserted in para. 69: “[i]t is in that factual context, that the provisions of s. 1.1(oo), s. 10.4(b), s. 11.4, 11.5 and Schedule 7 must be read [...]”.
[53] Determining the proper evidence to have in mind is a factual inquiry. Unless an arbitrator makes an error in principle in such a determination, his conclusions are not appealable under the Act. In my view, the judge determined what evidence he thought should be taken into account in developing the factual matrix for the interpretation of the Agreement. That was a task of the arbitrator. Weighing the evidence and reaching factual conclusions based on it was within the arbitrator’s mandate and his conclusions were not reviewable under s. 31 of the Act.
[54] The judge interpreted the first sentence of Note 2 as requiring the costs in issue to be treated as a Prescribed Event. He said in para. 73: “[…] if the words in Note 2 ‘significant or material change on an annual basis will be dealt with as a Prescribed Event’ are read in light of their natural and ordinary meaning, it would result in such costs being deemed a Prescribed Event”. [Emphasis in original.] He continued “in my view it would make no sense to read the words ‘will be dealt with as’, as engaging the definition of Prescribed Event in s. 1.1(oo) as to do so would render the words of Explanatory Note 2 superfluous”. The judge also considered that Note 2 was not consistent with the sample calculations in Schedule 7 (at para. 72).
[55] In the result, the judge decided that effect should not be given to Note 2 (at para. 77).
[56] The arbitrator considered s. 11.4(a) and Note 2 in Schedule 7 as discrete and compatible.
[57] Section 11.4 deals with cash flow. Where in a month there is a material change in the volume of timber accessible and ready for logging, Hayes prepares a statement of the development inventory at hand that summarizes categories of costs, including planning, engineering, road building and other forest development costs. Hayes is reimbursed if the value exceeds the previous month and will pay Weyerhaeuser if the value has decreased.
[58] The arbitrator concluded that the words “will be dealt with as” embraced the contractual definition of “Prescribed Event”, which excludes matters in the control of Hayes. It appears to be common ground the development costs in issue were within the control of Hayes.
[59] The difference between the judge and the arbitrator is a consideration of the word “as”: the judge equated “as” with “like”; the arbitrator considered “as” to be “the same”. Neither interpretation is unreasonable. In my view, the judge preferred his reasonable interpretation over that of the arbitrator. He was not entitled to do so. In addition, as a matter of basic principle, an interpretation that gives life to all provisions of a contract must preferred over one that does not.
[60] By choosing his view of the first sentence in Note 2, the judge was driven to exclude the Note as inconsistent with s. 11.4. The arbitrator’s interpretation avoids that result and is consonant with the scheme of the Agreement.
[61] Pursuant to s. 10.4(b), the Baseline Costs are adjusted on an annual basis to account for Prescribed Events. Schedule 6 of the Agreement contains examples of Prescribed Events. Most, if not all, are matters outside the control of Hayes. Section 11.4(a) deals with monthly cash-flow arising out of development costs that result from a material change in the volume of timber accessible and ready for logging. Note 2 deals with matters on a yearly basis. The effect of the first sentence of Note 2 is that, annually, insofar as such costs are not under the control of Hayes, they will be used to adjust the Baseline Costs. The second sentence is very clear; it requires all development costs to be expensed in the year in which they are incurred.
[62] In my view, the language of the second sentence of Note 2 is unambiguous. It states the accounting treatment of development costs. It has nothing to do with cash flow. It also states “this is the same method utilized in Baseline Cost calculation”.
[63] The arbitrator concluded on the evidence and a consideration of the contract as a whole that consistency, GAAP and the plain language of the Agreement required Hayes to expense planning, engineering, road building (other than Capital Roads) and other forest development costs in the year in which they were incurred. In my view, he made no error of law reaching this conclusion.
[64] The second question is subsumed in the first. I would allow the appeal as it concerns both questions and dismiss Hayes’ appeal from the arbitral award based on them.
The settlement agreement
[65] The third question ostensibly deals with the settlement of issues concerning 2003. To place into context the judge’s conclusion, I set out paras. 32 – 34 of his reasons in which he addresses the arbitrator’s consideration of the issue:
(iii) The 2003 Settlement Agreement
The contention between the parties regarding the “2003 settlement” arose from an agreement signed by the parties on October 19, 2004, which showed an agreement to adjust the baseline cost figure for 2003 from $76.75 to $81.18. The increase in the baseline costs included amounts for inflation adjustment, helicopter adjustment, performance advisor, an amount for a shut down ($1,250,000) and $350,000 for planning. The parties’ positions in relation to the 2003 settlement were summarized by the petitioner in its memorandum of argument thus:
There was a dispute between Hayes and WCL as to what else was settled on October 19, 2004. Hayes position was that the parties agreed that Hayes would record all planning, Engineering, road building (other than Capital Roads) and other forest development costs which result from a material change in volume of timber accessible and ready for logging which was not expensed in 2003 as Development Inventory on the Special Purposes Report, with the parties reserving their rights to resolve whether this was correct for the future. Hayes prepared its Special Purposes Report based on its understanding of the Settlement Agreement and showed Actual Audited Costs at $73.49 per metre.
WCL’s position was that the parties agreed that Hayes would include all planning, Engineering, road building (other than Capital Roads) and other forest development costs incurred in 2003 as Actual Audited Costs in 2003 and did not agree that Hayes would record all planning, Engineering, road building (other than Capital Roads) and other forest development costs which result from a material change in volume of timber accessible and ready for logging which was not expensed in 2003 as Development Inventory on the Special Purposes Report. WCL’s evidence was that the Actual Audited Costs should have been $75.02 per metre.
In his June 10, 2005, ruling, the Arbitrator concluded as follows with respect to the issue of the settlement of 2003 planning costs:
The parties reached a settlement late in 2004 with respect to events in 2003. The parties differ on whether the settlement included resolution of the total amount for planning costs in 2003.
Note 4 to Hayes’ Special Purposes Report, for the year ended December 31, 2003, recognizes that on October 19, 2004, the parties reached a final agreement on adjustments to the original baseline totalling $4.43 per cubic meter. The cost of planning was one of the issues being discussed and as part of the settlement, $350,000 was attributed to planning. That is the agreement recorded in a one-page document in exhibit 2 at tab 26. Tab 25 of the same exhibit references other elements of the settlement for 2003, which serve to place the settlement evidenced at tab 26 in a larger context. The second document at tab 25 contains a reference to the “2003 Baseline Saw Off” which, according to that document, will result in a net amount of expense to Weyerhaeuser including $350,000 for planning.
Notwithstanding this evidence, Hayes asserts that there was express agreement with Weyerhaeuser that it could carry forward $1.3 million of planning costs, and that the reference in the documents to planning valued at $350,000 for 2003 was not intended to reflect settlement at that amount.
The testimony of the Weyerhaeuser witnesses is entirely consistent with the ordinary reading of these documents referenced above, which speak of the settlement for 2003 in unqualified terms. The Hayes position is contrary to what is recorded in the documents. When contemporary documents accord with the testimony of one side, it is difficult to accept the contrary position when, as here, there is no suggestion whatever of bad faith concerning what was recorded in the documents. My conclusion is that agreement was reached with respect to planning for 2003 in the total and final amount of $350,000. It is no answer for Hayes that the Special Purposes Report for the year ended December 31, 2003 treats planning (“development inventory”) as inventory totalling $1,365,533 because that was not sent to Weyerhaeuser until after the settlement agreement was reached.
In his July 14, 2005, ruling in response to Hayes’ motion for clarification, the Arbitrator said the following at para. 6:
Turning to the requests of Hayes, I am first asked to advise what amendments to the Special Purposes Report for 2003 are necessary to reflect the Award. This issue was addressed in paragraph 13 of Weyerhaeuser’s Statement of Defence and paragraph 6 of Hayes’ Reply. My finding in the Award that there was a final settlement regarding planning costs for 2003 was intended to resolve this issue, and I do not accede to Hayes’ argument that the 2003 Report should be amended as Hayes proposes.
[66] The judge addressed the issue as follows in paras. 84 – 93:
There is no dispute between the parties that the October 19, 2004, settlement agreement established an adjusted baseline cost of $81.18 in part by identifying s. 11.4(a) development costs amounting to $350,000 as a Prescribed Event. On the issue between the parties whether the sum of $1,365,533 attributed to planning costs for 2003 could be carried forward (Hayes’ position) or not (WCL’s position), the Arbitrator found it could not. His conclusion was that:
Agreement was reached with respect to planning for 2003 in the total and final amount of $350,000. It is no answer for Hayes that the Special Purposes Report for the year ended December 31, 2003 treats planning (“development inventory”) as inventory totalling $1,365,533 because that was not sent to (WCL) until after the settlement was reached.
There was evidence that WCL had copies of Hayes’ draft financial statements which showed the costs as fully expensed totalling $1,365,533. There was also evidence that after the agreement was signed, WCL anticipated that it would pay $75.02 per cubic metre for actual audited costs based in part on Hayes’ expenditure of the $1,365,533 for development costs.
Following the Arbitrator’s June 10, 2005, award, he was asked by Hayes “to advise what amendments to the Special Purposes Report for 2003 are necessary to reflect the award”.
The Arbitrator ruled as follows in his July 14, 2004 award:
My finding in the Award that there was a final settlement regarding planning costs for 2003 was intended to resolve this issue, and I do not accede to Hayes’ argument that the 2003 Report should be amended as Hayes proposes.
In the result, therefore, Hayes was not entitled to remuneration of the $1,365,533 as actual audited costs, but received the benefit of the $350,000 adjustment to the baseline costs negotiated in the October 19, 2004, agreement and received one-half the cost gain corresponding to the exclusion of $1,365,533 from the actual audited costs.
The respondent argued that the Arbitrator’s ruling did not amount to “a determination as to the quantum of Hayes’ entitlement to actual audited costs for 2003”. Instead, the respondent argued, the Arbitrator ruled that Hayes’ planning costs could not be carried forward as part of the October 2004 settlement. The respondent further argued that the Arbitrator was not asked by Hayes in the arbitration to make a determination of Hayes’ entitlement to actual audited costs for 2003, or that the 2003 Special Purposes Report should be reissued.
The respondent contended that “the argument on leave” does not relate to a question of law “arising out of the award” and therefore cannot be considered by this court under s. 31(1) of the CAA citing McEwan and Herbst, Commercial Arbitration in Canada, looseleaf (Aurora, Ontario: Canada Law Book, 2006) p. 10-76:
An issue which arises “after the arbitration” and was not before the arbitrators cannot form the basis for any question of law arising from the award; it cannot be said they committed an error in law in failing to consider it. If the alleged point of law is not dealt with in the award, it cannot be said that the question of law arises out of the award.
The petitioner on the other hand contended that the issue which the Arbitrator decided in relation to the 2003 actual audited costs was before him in the motion for clarification resulting in the award of July 14, 2006, in which the petitioner sought clarification as to “what amendments to the Special Purposes Report for 2003 are necessary to reflect the award.”
In my view, the effect of the Arbitrator’s ruling on the petitioner’s motion for clarification reflects an acceptance that it was an issue before him for disposition. He treated his determination of the issue of the 2003 agreement as finally dispositive of the issue of the question of Hayes’ entitlement to actual audited costs for 2003. In my view, therefore, as determined by Brown J., in granting leave, the argument relates to a question of law “arising out of the award”.
It appears that the Arbitrator had evidence before him that WCL regarded the appropriate actual audited costs figure to be $75.02 per cubic metre on the footing that the development costs at issue could not be treated as inventory. There was also evidence that, at the time of the settlement, WCL had Hayes’ unaudited financial statements showing the figure at issue as a cost rather than inventory. No where was there evidence at the time of the agreement that the parties contemplated actual audited costs of less than $75.02 per cubic metre if Hayes did not carry forward its development costs. Indeed, it would not make good business sense for Hayes to settle on the basis determined by the Arbitrator. Rather, Hayes would be further ahead simply by treating the $1,365,533 as actual audited costs for remuneration instead of receiving one-half that amount as its cost gain share and $350,000 through an adjustment to the baseline costs. That settlement would disadvantage Hayes from what it would receive on WCL’s position by an amount in excess of $300,000. I conclude, therefore, that the Arbitrator’s conclusion on this point amounts to an error of law and cannot be sustained.
[67] I state again the question on which leave to appeal was granted by Madam Justice Brown:
In determining that the 2003 settlement entitled Hayes to payment of actual audited costs of $73.49 per cubic metre rather than $75.02 per cubic metre, did the arbitrator act on a view of the facts which could not be reasonably entertained?
[68] This question addresses one result of the arbitrator’s award – the effective per cubic metre costs. His award does not deal with that result as such. He concluded that the parties reached an agreement “with respect to planning for 2003 in the total and final amount of $350,000 paid to Hayes”. The judge concluded that such a settlement would not make good business sense for Hayes and that it “would disadvantage Hayes”. On this basis, he held the arbitrator’s conclusion amounted to an error of law. In my view, the judge was wrong to do so.
[69] The issue, as decided by the arbitrator, was whether there was a settlement. He had before him evidence concerning the cubic metre costs proposed by Hayes, the costs expended and a document that he considered reflected the arrangement between the parties. Whether the settlement made good business sense was a factor the arbitrator was entitled to take into account in determining whether the settlement had been made, along with all other relevant evidence that bore on the subject. If there were no evidence to sustain his conclusion or if his conclusion was not reasonably supportable on the available evidence, the judge could have concluded the arbitrator made an error in law, but the judge was not entitled to substitute his view of good business sense or to consider the weight to be given to evidence concerning Hayes’ anticipated per cubic metre costs.
[70] Hayes contends there was no evidence to support the arbitrator’s conclusion of a settlement and in argument referred to the cross-examination of Messrs. Lyons and Colemen. An examination of their testimony-in-chief shows there was evidence on which the arbitrator could have reached his conclusion.
[71] Mr. Lyon testified the parties came to a settlement on production, market curtailment and a strike and “came to a settlement on inventory, development inventory costing”. He confirmed the issue between the parties was Hayes’ wanting to inventory the costs and Weyerhaeuser’s opposition to that. It was Weyerhaeuser’s objective to “[p]ut it behind us with this settlement for 2003”. He described the agreement as a “saw-off settlement”. Mr. Coleman testified that he would not have signed the agreement if he were not to have believed “that 2003 was resolved in its entirety”. In addition, there were documents to which the arbitrator referred as supporting his conclusion.
[72] In my view, the question presented for appeal drew the parties and the judge into a factual inquiry. It stated no question of law and the judge did not identify the question of law that might have been imbedded in it. There was evidence on which the arbitrator could have reached the conclusion he did. I cannot conclude the arbitrator made an error of law deciding the parties settled all outstanding 2003 issues.
[73] I would allow this appeal and dismiss Hayes’ appeal of the arbitrator’s award.
“The Honourable Mr. Justice Chiasson”
I agree:
“The Honourable Mr. Justice Low”
I agree:
“The Honourable Mr. Justice Lowry”