Written By Christopher Petrucci, Artem N. Barsukov, FCIArb, Chris Abtosway and Evan Hall

Over the last few years, there has been considerable uncertainty in Canada about the standard of review applicable to appeals from domestic arbitral awards. This uncertainty stemmed in large part from the conflicting views expressed by the Supreme Court of Canada in its decisions in Sattva Capital Corp v Creston Moly Corp, 2014 SCC 53 and Canada (Minister of Citizenship and Immigration) v Vavilov, 2019 SCC 65.

It was also not clear to what extent these conflicting views applied to international arbitration, where the remedy that lies against an award is an application to set aside, rather than an appeal on the merits. The British Columbia Court of Appeal has added some clarity to this uncertainty in its recent decision in lululemon Athletica Canada Inc. v Industrial Color Productions Inc, 2021 BCCA 428 [lululemon].

In lululemon, the Court confirmed that the standard of review that applies in the context of an application to set aside an international arbitral award based on a lack of jurisdiction of the arbitral tribunal is "correctness," and not "reasonableness." Under this standard, the Court may also consider new evidence in an application to set aside an international award and is not required to give deference to the tribunal's findings on the issue. This decision is in line with international arbitration practice in many jurisdictions, where set-aside applications are typically considered on a de novo basis.

Background

The dispute at issue in the lululemon decision arose after lululemon Athletica Canada Inc. (lululemon), elected to terminate a service agreement with Industrial Colour Productions Inc. (ICP) for photography production services without cause.

The parties were not able to agree on the amounts owing to ICP, and ICP commenced an international arbitration under the auspices of the International Centre for Dispute Resolution (ICDR), in accordance with the agreement.

In the arbitration, ICP took the position that lululemon purported to terminate the agreement without cause before it had the right to do so, and that ICP should be awarded general damages totaling the minimum amount of fees that it would have received if the agreement had been properly terminated (the Contract Minimum Claim). lululemon, for its part, argued that ICP's Contract Minimum Claim should be dismissed because it was not properly pleaded.

The arbitrator resolved the Contract Minimum Claim in ICP's favour, awarding ICP over one million dollars in damages. The arbitrator agreed that lululemon purported to terminate the agreement without cause during the initial term, before it had any right to do so.

The Chambers Judge Applies the Deferential Standard of Reasonableness

Following the arbitrator's decision, lululemon applied to the Supreme Court of British Columbia to have the award set aside on the basis that the Contract Minimum Claim was beyond the scope of the submission to arbitration. lululemon relied on section 34 of the International Commercial Arbitration Act, RSBC 1996, c 233 [ICAA], which permits a party to an international arbitration to apply to the court to set aside an arbitral award on a limited number of narrow grounds, including, as set out in section 34(2)(a)(iv), when "the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration." These grounds reflect the UNCITRAL Model Law on International Commercial Arbitration, which has been adopted in most international commercial arbitration legislation across Canada.

In response, ICP argued that lululemon ought to have raised its jurisdictional objection during the arbitration, as required by section 16 of the ICAA, and that, in any event, the Contract Minimum Claim had been properly raised in ICP's pleadings, bringing the issue within the jurisdiction of the arbitrator.

The Chambers Judge was required to decide what standard of review should apply to applications to set aside an arbitral award under section 34(2)(a)(iv) of the ICAA when it is argued that the arbitrator made a decision beyond the "scope of the submission" to arbitration. The Chambers Judge ultimately held that the deferential standard of review of reasonableness ought to apply, as it was more consistent with the important objectives of party autonomy and minimal judicial interference with arbitration, among other considerations.

Applying this standard of reasonableness, the Chambers Judge dismissed lululemon's application to set aside the award.

The Court Of Appeal Unanimously Applies the Non-Deferential Standard of Correctness

lululemon appealed the Chambers Judge's decision to the British Columbia Court of Appeal. In a unanimous decision, the Court of Appeal affirmed the Chambers Judge's decision to dismiss lululemon's application to set aside the award, but held that the Chambers Judge had applied the wrong standard of review in coming to this decision. The Court of Appeal held that the non-deferential standard or review of correctness was required under s. 34(2)(a)(iv) of the ICAA.

The Court of Appeal considered a number of factors in reaching this conclusion, including that:

• the Ontario Court of Appeal previously held that correctness is the proper standard of review for applications under an identical provision of the Ontario legislation;
• the ICCA expressly limits the court's interference in arbitrations by limiting the basis upon which an arbitral decision may be reviewed; applying the correctness standard of review would therefore not risk giving the court a broad scope for intervention in arbitral decisions;
• under s. 34(2)(a) of the ICAA, in an application to set aside an arbitral award, the applicant must "furnish proof" that one of the grounds for setting aside an award has been established, suggesting that a de novo hearing is required, which is more consistent with a correctness review;
• there is nothing in the ICAA that suggests dereference is owed to the arbitrator's own view of their jurisdiction;
• international consistency is desirable and required under s. 6 of the ICAA, and therefore it is important to consider the fact that courts in other Model Law jurisdictions have generally adopted a de novo [i.e., correctness] standard of judicial reconsideration in analogous proceedings; and
• leading Supreme Court of Canada decisions establishing the standard or review in administrative law decisions (Vavilov) and the standard of review on an appeal from a domestic commercial arbitration (Sattva) are not applicable to applications to set aside arbitral awards in Internarial Arbitrations on jurisdictional grounds.

Applying the standard of correctness, the Court of Appeal considered whether the Contract Minimum Claim was properly before the arbitrator. To make this decision, the Court noted that it was necessary to consider three sources: (1) the notice of request for arbitration; (2) the contract between the parties; and (3) the pleadings exchanged between the parties. 

The Court of Appeal held that while the Statement of Claim could have set out the Contract Minimum Claim more clearly, lululemon was sufficiently aware of the case to be met. As such, the Court found that the Contract Minimum Claim was properly before the arbitrator to decide and was not outside the scope of the submission to arbitration.

Takeaways

With both the Ontario and the British Columbia courts now applying the standard of correctness to jurisdictional challenges to international arbitration awards, there is a high probability that this approach will be adopted across Canada.

To ensure that an issue is properly within the jurisdiction of an arbitration, and to avoid having an arbitral award set aside due to jurisdictional defects, parties in arbitration proceedings should take extra care to draft their pleadings to include all claims and defences at issue and all damages and relief requested.

If, on the other hand, a party seeks to raise a jurisdictional objection, as a general rule, it should do so at the earliest possible opportunity. However, this may not preclude the party from raising a jurisdictional objection in set-aside proceedings before a domestic court if the jurisdictional issue was one that could not have been addressed during the arbitration.

The decision in lululemon also clarifies that the standard of review applicable to administrative law decisions and appeals from domestic arbitral awards does not apply to set-aside applications in the context of international arbitration. This should help clear much of the confusion created in the aftermath of the Vavilov decision.

It will be interesting to see whether the standard of correctness holding in lululemon will be expanded to other grounds to set aside international arbitration awards.  International arbitration practitioners will no doubt follow this potential development closely. If you have questions about this decision and how it may apply to your business, please contact the Bennett Jones International Arbitration group and we would be pleased to discuss it.

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