Alternative dispute resolution is increasingly being used for settling disputes. As a practical matter, it is now virtually impossible to appeal most arbitral findings, making it clear that claims resolution through arbitration proceedings can entail much greater risk for insurers than traditional litigation.

Alternative dispute resolution (ADR) mechanisms, such as mandatory mediation or binding arbitration, are appearing with increasing frequency as an alternative to the traditional litigation process for settling disputes. ADR clauses are frequently found in commercial contracts and standard-form consumer agreements, and all Canadian Construction Documents Committee (CCDC) standard-form construction contracts contain some form of ADR mechanism. As well, some insurance policies will have ADR clauses that can be invoked with respect to coverage disputes.

Given the proliferation of ADR clauses in many standard-form contracts, it is not unusual for an insurer to find itself defending a claim in the context of an ADR procedure as opposed to traditional litigation in the civil courts. In addition, from time to time, insurers may agree to submit disputes between themselves and other insurers — for example, disputes regarding overlapping coverage or which of several policies is primary — to an ADR process than litigating the matter in the courts.

ADR Commonly Used

Perhaps the most common type of ADR is arbitration, where the parties agree to submit their dispute to a neutral decision-maker or panel. The ADR clause in the agreement may make arbitration mandatory or permissive, as well as define the scope of disputes that can be submitted to arbitration, the form the arbitration will take, the number of arbitrators and the procedural rules that will apply.

In cases where the parties have agreed to mandatory binding arbitration for all disputes relating to, or arising out of, an agreement or its performance, any litigation commenced in the civil courts may be stayed in favour of the arbitration.

Rights of appeal

One of the most significant ways that the private arbitration process differs from traditional litigation is with respect to rights of appeal. While the parties to an arbitration clause can, in theory, define the extent of any rights of appeal by express agreement, in practical terms, the right to appeal from an arbitrator is typically much more limited than the right to appeal from a decision in the civil courts. Most provinces have legislation that places limits on appeals from arbitral awards — typically only "questions of law" are subject to appeal.

What constitutes a "question of law" has been the subject of much judicial commentary. However, a number of recent cases (including one from the Supreme Court of Canada) appear to have settled the law on this issue. The effect of these decisions has been to place significant limitations on any rights of appeal from arbitral decisions. Given that insurers may find themselves defending claims in the context of arbitrations with increasing frequency, this is an important factor for consideration in the underwriting process.

Creston Moly v. Sattva Capital

On August 1, 2014, the Supreme Court of Canada issued reasons for judgment in Creston Moly Corp. v. Sattva Capital Corp., a case with a somewhat tortured procedural history. The underlying dispute related to an agreement between Creston Moly and Sattva Capital, which required the former to pay the latter a finder's fee in relation to the purchase of a mining property.

A dispute arose with respect to the interpretation of the finder's fee provisions in the agreement, and the parties submitted the matter to binding arbitration. The arbitrator awarded Sattva Capital damages of over $4 million.

Creston Moly then appealed to the Supreme Court of British Columbia for leave to appeal the arbitration award, as required by the legislation. The court concluded that the leave application did not raise a question of law, and dismissed the application. British Columbia's Court of Appeal disagreed, however, and granted leave to appeal the award.

The Supreme Court of British Columbia then heard the appeal on the merits. Creston Moly's appeal was dismissed, however, as the court concluded the arbitrator had correctly interpreted the finder's fee provision. Creston Moly again appealed to the province's Court of Appeal, and was successful.

Sattva Capital then appealed to the Supreme Court of Canada, and argued not only was the decision on the merits incorrect, but leave to appeal should not have been granted in the first place.

Canada's high court agreed with Sattva Capital, concluding that leave to appeal should not have been granted and that the arbitral award should be re-instated. The Supreme Court of Canada found that the interpretation of the parties' agreement did not constitute a question of law, but rather was a question of mixed fact and law, and, thus, not subject to appeal.

The court held that contractual interpretation is an exercise in construing the words of a contract in light of the factual matrix, and that the historical approach in which issues of contractual interpretation were considered questions of law should be abandoned.

Significantly, while the court stated that it might be possible to identify a discrete question of law in a contractual interpretation case, such circumstances would be very rare. The court also went on to comment that even if a discrete question of law could be identified, the arbitrator's decision would be reviewable on a more deferential "reasonableness" standard, except in certain very specific circumstances involving constitutional questions or questions of central importance to the legal system as a whole.

Urban Communications v. BCNET Networking Society

This high level of judicial deference to the decisions of private arbitrators was again underlined in the 2015 decision of British Columbia's Court of Appeal in Urban Communications Inc. v. BCNET Networking Society.

Urban Communications and BCNET were parties to a leasing agreement for the use of fibre optics. A dispute arose over whether or not BCNET had properly exercised a renewal option, which was submitted to arbitration. The arbitrator concluded that BCNET had validly exercised the option.

Urban Communications obtained leave to appeal the award and, on appeal, a judge of the Supreme Court of British Columbia found that the arbitrator had erred in law, and varied the award accordingly. BCNET then appealed to British Columbia's Court of Appeal, taking the position that leave to appeal should not have been granted.

The Court of Appeal allowed BCNET's appeal and restored the arbitrator's award. The court noted that Sattva had changed the approach to be taken both on leave to appeal applications and on considerations of the merits of appeal, and confirmed that questions of contractual interpretation almost always involved questions of mixed fact and law (that is, whether or not the facts satisfy the legal tests).

The Court of Appeal applied the legal principles established in Sattva and found that Urban Communications could not establish a pure question of law arising from the arbitrator's interpretation of the agreement and the letter exercising the renewal option. As such, there could be no appeal from the arbitrator's interpretation.

Much-Needed Guidance 

Many have welcomed these decisions as providing much-needed guidance on the issue of when an appeal may be taken from an arbitration decision. The practical effect of this shift in the law, however, is that appeals from arbitrations will only be available in very limited circumstances. In other words, where a dispute is submitted to arbitration, the arbitrator's decision will effectively be final.

This will be an important consideration in cases where an insured's claim is being adjudicated in a private arbitration, as opposed to the civil courts.

Arbitrations often do not provide for the same kind of pre-hearing discovery procedures that are available in civil litigation. Rules of evidence may be more relaxed and hearings may proceed in a more informal manner. Many aspects of the process, including substantive issues such as how costs will be awarded, are left entirely within the discretion of the arbitrator.

When one adds the fact that it is now virtually impossible, as a practical matter, to appeal most arbitral findings, it becomes clear that the resolution of claims through arbitration proceedings can entail much greater risk for insurers than traditional litigation.

Insurers will want to be mindful of these trends when dealing with insureds who frequently make use of standard-form contracts containing ADR clauses, or who are otherwise subject to some sort of ADR process, as insurers may find themselves defending claims in a process with limited procedural protections and no right of appeal. Similarly, insurers contemplating submitting coverage disputes to arbitration (or providing for such mechanisms in policy language), will need to be comfortable with the risk of an adverse finding which will effectively be immune from appeal or review.

This article was originally published in Canadian Underwriter, April 2016 edition, p.40-43. You can view the digital edition here. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.