Arbitration offers a multitude of benefits that make it an appealing forum to settle commercial disputes. It allows parties to resolve their disputes in a manner that is intended to be fair, final, expeditious, and most importantly, private.
Despite these benefits, there is often a price to pay (pun intended). One such limitation is that arbitral awards are subject to very limited judicial oversight. An example of this limitation came to the fore in the recent decision by the British Columbia Court of Appeal in lululemon athletica canada inc. v. Industrial Color Productions Inc., 2021 BCCA 428.
In this case, lululemon athletica canada inc. (“lululemon”) appealed the chambers judge's dismissal of its application to set aside an award made by an arbitrator in favor of a former service provider, Industrial Color Productions Inc. ("ICP").
In 2017, lululemon and ICP entered a services agreement, whereby ICP would provide photography production services to lululemon under various statements of work, and lululemon was obliged to pay ICP per product.
The statement of work in question had an initial term which started on February 1, 2019, for a period of six months until July 31, 2019.
Two clauses in the relevant statement of work were applicable to termination:
- Under s. 12, the initial term was to automatically extend for consecutive 90-day terms unless either party provided written notice of termination prior to 75 days before the end of the initial term or the end of any extension.
- Under s. 13, after the initial term, either party could terminate the statements of work, without cause, on 75 days' written notice.
On May 13, 2019, lululemon gave written notice to ICP purporting to terminate the services agreement effective August 1, 2019, "pursuant to Section 13" of the statement of work. When the parties couldn’t agree whether amounts were owing by lululemon to ICP because of the termination, ICP commenced an arbitration with the International Centre for Dispute Resolution, in accordance with the services agreement.
In the arbitration, ICP argued that the notice of termination sent by lululemon was of no force and effect, as the initial terms of the statement of work ran until July 31, 2019, and s. 13 of the statement of work (pursuant to which termination was given), expressly provided that notice could only be given by either party, “… after the initial term.”
The arbitrator agreed with this analysis, issuing an arbitral award to the effect that lululemon’s notice of termination purported to end the services agreement “within”, rather than “after” the initial term, and awarded ICP damages of US $1,081,967 due to this premature termination.
lululemon applied under s. 34(2)(a)(iv) of the International Commercial Arbitration Act, R.S.B.C. 1996, c. 233 (“ICAA”) to set aside the arbitrator's award on the basis that it "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.”
The primary basis for this argument was that lululemon believed that ICP had not properly pleaded a claim for damages in the form it was awarded by the arbitrator, and accordingly the arbitrator exceeded his authority to make such an award.
The chambers judge began a lengthy analysis of the appropriate standard of review by acknowledging that the interpretation of the ICAA is guided by international considerations. The judge gave three main reasons for concluding the standard of review to be applied to applications under s. 34(2) (a)(iv) of the ICAA is “reasonableness” and in doing so, distinguished the present case from the decision in Mexico v. Cargill, Inc., 2011 ONCA 622, where the appropriate standard of review was found to be “correctness”.
Justice Marchand, in his judgment, was unable to agree with the chambers judge's conclusion on the standard of review. In his view, Cargill remains determinative on the standard of review for applications to set aside awards under s. 34(2)(a)(iv) of the ICAA (the wording of which is identical to its Ontario counterpart under which Cargill was decided). That standard of review is correctness.
In his analysis of Cargill, Justice Marchand recognized the challenge of navigating "the tension between the discouragement to courts to intervene on the one hand, and on the other, the court's statutory mandate to review for jurisdictional excess, ensuring that the tribunal correctly identified the limits of its decision-making authority." By adopting the more deferential reasonableness standard of review "would effectively nullify the purpose and intent of the review authority of the court" and inevitably draw the reviewing court into a review of the merits of the dispute.
As support for this analysis, Justice Marchand held that, “it is the legislation itself that significantly limits the scope for judicial intervention. The ICAA does not permit appeals from or judicial review of arbitral awards. Rather, it restricts judicial intervention to matters specifically identified in the legislation.” There was nothing in either s. 16 or s. 34 of the ICAA that required a reasonableness standard, on the contrary, the wording of these sections implied a de novo hearing be conducted by the reviewing judge, and therefore the correctness standard was to be applied.
Finally, no analysis on the requisite standard of review would be complete without considering the seminal cases of Sattva and Vavilov.
Justice Marchand ultimately found that neither case was helpful in determining the appropriate standard of review - Sattva establishes a reasonableness standard in an appeal from a domestic commercial arbitration but does not address the standard of review on applications to set aside domestic or international arbitral awards on jurisdictional grounds. Post-Sattva, the appropriate standard of review for such applications has been held to be correctness in both the domestic and international context. While Vavilov is the leading case on the standard of review in administrative law, it does not address the field of arbitration.
Although the Appeal Court disagreed with the chambers judge’s determination that a reasonableness standard should apply, when a correctness standard was applied, it reached the same conclusion and found that the arbitrator did not stray outside "the scope of the submission to arbitration". Accordingly, the chambers judge was correct to have dismissed lululemon's application to set aside the arbitrator's award.
This case confirms Cargill as the leading case for determining the appropriate standard of review when it comes to setting aside an international arbitral award on jurisdictional grounds. Except in these rare instances where true jurisdictional questions are raised and a “correctness” standard is applied, the decision of Sattva (at least for the time being) prescribes a more deferential approach by using the “reasonableness” standard.