Case Review: Urban Communications Inc. v. BCNET Networking Society, 2015 BCCA 297

When is contractual interpretation to be treated as a question of mixed fact and law and when should it be treated as a question of law? This is the question posed by Rothstein J. writing for the Court in Sattva Capital Corp v. Creston Moly Corporation, 2014 SCC 53.  The Supreme Court of Canada will face this question once again when it hears the appeal from the British Columbia Court of Appeal’s decision in Urban Communications Inc. v. BCNET Networking Society, 2015 BCCA 297 (leave granted February 18, 2016).

In Urban Communications, the Court of Appeal considered and applied Sattva to set aside the order of a chambers judge, made prior to Sattva, granting leave to appeal under section 31 of the Arbitration Act and allowing an appeal from an arbitral award interpreting the terms of an option clause in a contract. The Court of Appeal found that the central issue before the arbitrator was one of contractual interpretation that did not give rise to an extricable question of law, from which leave to appeal under section 31 of the Arbitration Act may be granted, but involved questions of mixed fact and law, from which no appeal lies.

The essential facts giving rise to the dispute in Urban Communications, supra may be summarized as follows:

In 2001, the parties entered an agreement (the ‘Agreement”) by which Urban Communications Inc. (“Urban”) leased fibre optic strands to BCNET Networking Society (“BCNET”).  The Agreement gave BCNET a form of lease, called an indefeasible right-to-use (“IRU”) over some, but not all, of the fibre optic strands for ten years ending on May 10, 2013, with an option to renew the Agreement and its IRU rights for the balance of the life of the fibres (Phase one).  Under Article 4.1 of the Agreement, the option to renew was exercisable upon at least six months’ written notice to Urban and $1.00 consideration for the renewal of the term.  Between 2001 and 2009, the parties amended the Agreement several times adding Phases two to seven.  Phases two to six had initial terms of ten years with various expiry dates between November 2012 and October 2015, and Phase seven had an initial term of 20 years with an expiry date in September 2029.

By letter dated July 18, 2011, counsel for BCNET, sought to exercise the renewal option over all seven phases and requested that Urban waive the six months’ notice requirement and accept a common renewal date for all seven Phases. The letter provided a paragraph indicating Urban’s assent with a space for an authorized signature.  BCNET did not include the $1.00 renewal fee with the letter.  Urban did not return the requested assent.

On August 1, 2012, Urban wrote to BCNET advising that the July 18, 2011 letter did not constitute a valid exercise of the option to renew and that the renewal period for Phases one and two had expired.

The Agreement provided that any disagreement or dispute between the parties would be determined by Arbitration. BCNET provide Notice of Arbitration seeking a declaration that it had validly exercised the renewal option under the Agreement.

The central issue before the arbitrator was whether BCNET had properly exercised its option to renew in accordance with the Agreement. That issue required the arbitrator to interpret the parties’ objective intention in Article 4.1 of the Agreement, and in particular the renewal requirements of at least six months’ written notice and $1.00 consideration, as well as the objective intention of BCNET in its July 18, 2011 letter.  The arbitrator concluded that by its July 18, 2011 letter, BCNET exercised the renewal option over all seven Phases unconditionally and that the proposed modification of the option (i.e., the waiver of the six months’ notice requirement and a common renewal date for all seven Phases) was tendered only after the making of a new bilateral contract.  He concluded the $1.00 payment for the renewal fee was not necessary and was not an indispensable term to be met in order to convert the unilateral option offer into a bilateral contract, that the original grant of the option was supported by ample consideration, and that the $1.00 consideration was intended to be only a nominal rent payment for the extended term.  In the alternative, if the July 18, letter was not an effective exercise of the option, the arbitrator held that Urban was estopped from relying on any defects in the letter.

Pursuant to section 31(1) of the Arbitration Act, a court may only grant leave to appeal on a question of law alone.  Out of more than 20 alleged errors of law in the application for leave to appeal, the chambers judge identified four as pure questions of law distinguishable from errors of contractual interpretation that could engage questions of mixed fact and law, namely that the arbitrator had erred by:

  1. Failing to follow the principle of contract law that a qualified acceptance of an offer is a counter offer;
  2. Ruling that an option offer is not extinguished by a counter-offer to vary the terms of the option offer;
  3. Failing to accept the parties’ agreement as to what was the required consideration and substituting its own view of alternate consideration;
  4. Ruling that an optionor has a duty to advise an optionee that a purported exercise of the option is ineffective.The chambers judge granted leave to appeal, assessed the merits of the appeal on a correctness standard and found that the arbitrator had made all four of the alleged errors of law. The judge allowed the appeal and amended the award.Following the judge’s order, and prior to the hearing of the appeal from that order by the Court of Appeal, the Supreme Court of Canada issued its decision in Sattva, supra, changing the legal landscape in which applications for leave to appeal and appeals from arbitral awards under section 31 of the Arbitration Act are determined. In summarizing Sattva, Smith, J.A., writing for the Court of Appeal, confirms that “[t]he historical approach in which issues of contractual interpretation were held to be questions of law is to be abandoned”, and that “[i]n considering an application for leave to appeal under s. 31(1) of the Act, a court must be ‘cautious in identifying extricable questions of law in disputes over contractual interpretation’ given the legislature’s intention to restrict such appeals’, although an extricable question of law may still arise from within what was initially characterized as a question of mixed fact and law”, including the application of the correct legal principle, failure to consider an element of a legal test, or failure to consider a relevant factor.

Applying Sattva to the appeal at hand, Smith J.A. writes:

[65]       The central issue for determination by the arbitrator was whether BCNET’s July 18, 2011 letter was a proper and valid exercise of its option under the Agreement. That issue required the arbitrator to determine the parties’ objective intention in Article 4.1 (in order to determine if BCNET had complied with its requirements) and BCNET’s objective intention in its July 18, 2011 letter. With respect to Article 4.1, the arbitrator had to determine: (i) whether the $1.00 renewal fee was an indispensable term to the exercise of the option; and (ii) whether the effective date for the notice of exercising the option was before or after its expiry. Both issues, in my respectful view, involved matters of contractual interpretation.

[66]         Sattva, at para. 55, confirms that questions of contractual interpretation generally involve questions of mixed fact and law, and absent an extricable legal error no appeal lies from the arbitrator’s interpretation. Questions of mixed fact and law “are questions about whether the facts satisfy the legal tests” [citations omitted].

[67]         The arbitrator was of the view that the words of the contractual documents offered more than one potential meaning. He applied the legal principles on contractual interpretation from Gilchrist to determine the parties’ objective intention with respect to the requirements in Article 4.1 of the Agreement, and then to determine the objective intention of BCNET in its July 18, 2011 letter. He considered the objective meaning of the words of these documents in the context in which they were made and all of the surrounding circumstances. Based on his application of the legal principles for contractual interpretation and his findings of fact from the evidence, he concluded that: (i) BCNET’s July 18, 2011 letter was a clear unconditional notice of its intention to exercise the renewal option over all seven Phases, which created a new bilateral contract between the parties; and (ii) only thereafter did BCNET propose to modify that contract by having all of the renewal terms run from the same date. Sattva mandates that these findings must be accorded deference and, absent an extricable error of law of the kind identified in para. 53 of Sattva, are not reviewable under s. 31 of the Act.

The Court essentially finds the arbitrator’s decision involved an interpretation of the Agreement which does not give rise to an extricable question of law, but involves questions of mixed fact and law. The interpretation of the Agreement was the arbitrator’s to make.  The arbitrator’s reasonable interpretation of the Agreement must be given deference.  So says Sattva.  Or does it?  Were the questions of law identified by the chambers judge pure questions of law?

Sattva says at paragraph [53]:

“…it may be possible to identify an extricable question of law from within what was initially characterized as a question of mixed fact and law [citation omitted]. Legal errors made in the course of contractual interpretation include “the application of an incorrect principle, the failure to consider a required element of a legal test, or the failure to consider a relevant factor” [citation omitted]. Moreover, there is no question that many other issues in contract law do engage substantive rules of law: the requirements for the formation of the contract, the capacity of the parties, the requirement that certain contracts be evidenced in writing, and so on.”

Sattva goes a long way toward taking contractual interpretation out of the scope of an error of law that may be appealed under section 31 of the Arbitration Act.  The Supreme Court of Canada says: “Contractual interpretation involves issues of mixed fact and law as it is an exercise in which the principles of contractual interpretation are applied to the words of the written contract, considered in light of the factual matrix”.  The Court points to the purpose of drawing a distinction between questions of law and questions of mixed fact and law “to limit the intervention of appellate courts to cases where the results can be expected to have an impact beyond the parties to a particular dispute.”  This approach conforms with the apparent legislative intent in enacting the Arbitration Act, and section 31 of that Act, to provide an effective and efficient terminate alternative process for the resolution of contractual disputes that are essentially limited to the interests of the particular parties.

While acknowledging it is not easy to say precisely where the line should be drawn between pure questions of law and questions of mixed fact and law, Sattva suggests that in most cases it should be sufficiently clear whether the dispute is over a general proposition that might qualify as a principle of law or over a particular set of circumstances.  The Court suggests that “[t]he legal obligations arising from a contract are, in most cases, limited to the interest of the particular parties.”  While agreeing “it may be possible to identify an extricable question of law from within what was initially charactierized as a question of mixed fact and law”, the Court says that “courts should be cautious in identifying extricable questions of law in disputes over contractual interpretation.”  The Court writes that “the goal of contractual interpretation, to ascertain the objective intentions of the parties, is inherently fact specific” and that “[t]he close relationship between the selection and application of principles of contractual interpretation and the construction ultimately given to the instrument means that the circumstances in which a question of law can be extricated from the interpretation process will be rare.”

In Urban Communications, the chambers judge found questions of law; the Court of Appeal said they were questions of mixed fact and law.  We will wait for some further clarity from the Supreme Court of Canada, hopefully as to how to tell the difference, and for the criteria that turn disputes over the interpretation of a contract from one that is “limited to the interest of the particular parties” to one that is about “a general proposition that might qualify as a question of law.”  Despite the Court’s suggestion in Sattva that “in most cases” the line should “be sufficiently clear”, as can be seen from Urban Communications, the distinction may not be so clear and will benefit from further clarification.

Author: Cheryl L. Vickers

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