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Standard of Review of Arbitral Awards: The Lululemon Case Adds to the Uncertainty

7 minute read

The recent case of lululemon athletica canada inc. v Industrial Color Productions Inc., 2021 BCSC 15, raises two issues that will likely attract appellate interest:

  • the standard of review of an arbitral award on a set aside application where the issue is whether the arbitrator exceeded his jurisdiction:
    • is it correctness, based on the leading case Ontario Court of Appeal decision of United Mexican States v Cargill, Inc. 2011 ONCA 622; leave refused, [2011] S.C.C.A. No. 528?; or
    • is it reasonableness based upon the Supreme Court of Canada decision in Canada (Ministry of Citizenship and Immigration) v Vavilov, 2019 SCC 65?; and
  • the sufficiency of the arbitrator’s reasons in the award.

Lululemon applied to the British Columbia Supreme Court to set aside part of an arbitral award pursuant s. 34(2)(a)(iv) of the International Commercial Arbitration Act, R.S.B.C. 1996, c. 233 (“the Act”), which is virtually identical to Article 34(2)(a)(iv) of the UNCITRAL Model Law. The award required lululemon to pay $1,081,967 (USD) plus interest to Industrial Color Productions Inc. (ICP).

It claimed that the arbitrator went beyond the scope of the submission to arbitration in making an award on issues that were not pleaded by ICP.

Lululemon was not successful in its set aside application, and has sought leave to appeal to the British Columbia Court of Appeal.

 

The underlying dispute and decision of the arbitrator

On October 31, 2017, the parties entered into a Services Agreement pursuant to which ICP “provided production services for lululemon’s global e-commerce platforms” under successive “Statements of Work”.  The Services Agreement contained a term that the parties would submit any dispute arising under it to arbitration.  A dispute arose about the date when lululemon had a right to terminate ICP’s services.

The arbitrator found that lululemon had terminated the agreement before it was entitled to do so, and that IPC was entitled to damages resulting from the “premature termination of the Agreement”.

 

Standard of review of the arbitral award

Lululemon argued that the standard of review on a set aside application raising a true question of jurisdiction is correctness, based upon the 2011 Ontario Court of Appeal decision in Mexico v Cargill.

However, the court found that the standard of reasonableness, not correctness, will generally best serve “to preserve the autonomy of the forum selected by the parties and to minimize judicial intervention” on the following grounds:

  1. The British Columbia Court of Appeal decision of Quintette Coal Ltd. v Nippon Steel Corporation (1991), 50 B.C.L.R. (2d) 207 (C.A.); leave to appeal refused 50 B.C.L.R. (2d) xxvii, which held at para. 19:

….[T]his is the first case under the British Columbia Act in which a party to an international commercial arbitration seeks to set the award aside.  It is important to parties to future such arbitrations and to the integrity of the process itself that the court express its views on the degree of deference to be accorded to the decision of the arbitrators. The reasons advanced in the cases…for restraint in the exercise of judicial review are highly persuasive.  The “concerns of international comity, respect for the capacities of foreign and transnational tribunals, and sensitivity to the need of the international commercial system for predictability in the resolution of disputes”…are as compelling in this jurisdiction as they are in the United States or elsewhere.  It is meet therefore, as a matter of policy, to adopt a standard which seeks to preserve the autonomy of the forum selected by the parties and to minimize judicial intervention when reviewing international commercial awards… That is the standard to be applied in this case.

  1. As a matter of statutory interpretation, the fact that the arbitral tribunal may rule on its own jurisdiction under s. 16 of the Act “buttresses the use of reasonableness as the generally appropriate standard of review”.
  2. A reasonableness standard of review aligns with the general framework set forth by the Supreme Court of Canada in Vavilov.
  3. A dispute involving two commercial parties over the termination of a private contract is foundationally different than a claim for damages against a country under the North American Free Trade Agreement “engaging international multilateral trade agreement or treaty principles”, as was the case in Mexico v Cargill, which also counselled intervention by courts “only in rare circumstances where there is a true question of jurisdiction”.

Court’s analysis of the set aside application

Pursuant to s. 34(a)(2)(iv) of the Act, an award may be set aside by the British Columbia Supreme Court if:

(iv) the arbitral award deals with a dispute not contemplated by or not falling within the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration….

Because the parties did not agree on the terms of submission to arbitration, the court found that their pleadings frame the submission to arbitration. The court also found that lululemon’s interpretation of IPC’s statement of claim was too narrow, and the award did fall within the arbitrator’s authority.

 

Sufficiency of arbitrator’s reasons

Sections 30(1) and 31(1) of the Act provide that “the arbitral award must state the reasons for which it is based” and contemplate that reasons will be delivered with dispatch – “as quickly as possible”.

Even though the award did not specifically address lululemon’s position that the arbitrator lacked jurisdiction, the Court concluded: “I do not see (the requirement of reasons) as requiring the arbitrator to, so to speak, paint by numbers…” and further that:

[45] In the context of a private arbitration where the parties have agreed to the rules, the parties’ expectations as to the completeness of the arbitrator’s reasons is less than those of parties engaged in commercial litigation before a judge. In the case at bar, lululemon could readily deduce that the arbitrator rejected its pleadings argument based on the arbitrator’s reading of the pleadings…


Court’s conclusions

The court dismissed lululemon’s application to set aside the award.

It was not the role of the court to determine whether the arbitrator was correct or not in finding that he had the authority to make the award, but only to be satisfied that the finding was a reasonable one. The court found that “the pleadings can be said to engage the question of notice and the consequences of terminating the subject [Statement of Work] using lululemon’s notice of termination.”  Therefore, it could not be said that the arbitral award dealt with a dispute not contemplated by or not falling within the terms of submission to arbitration.

Finally, the rules to which the parties agreed in the arbitration clause in the Services Agreement stated that the parties…”waive irrevocably their right to any form of appeal, review, or recourse to any court or judicial authority, insofar as such waiver can validly be made…”  The court adopted the reasoning of the Ontario Superior Court of Justice in Popack v Lipzsyc, 2015 ONSC 3460, affirmed 2016 ONCA 135, which considered the comparable Ontario provision in the former Ontario International Commercial Arbitration Act, R.S.O. 1990, c. I.9. It held that this was a mandatory provision that could not be waived by the parties in their arbitration Ontario International Commercial Arbitration Act, R.S.O. 1990, c. I.9 agreement.

 

Case significance

This is just one of a growing list of cases which demonstrate the uncertainty in the case law concerning the standard of review to be applied by a court asked to review an arbitral award, whether by appeal, by set aside application, or otherwise.

Interestingly, the British Columbia Court of Appeal granted lululemon a stay of execution pending appeal (at 2021 BCCA 108). This required lululemon to meet a merits test, although the bar was quite low - lululemon was required only to show that the appeal was not frivolous or vexatious. The court stated that the question of the correct standard of review “from the type of arbitrator’s decision at issue in this case is unsettled at the appellate level, post-Vavilov and post-Wastech.”  Further, “the judge seemed influenced by general policy reason and, it could be argued, did not focus on the specific statutory provision giving rise to the review”.

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Lisa C. Munro, FCIArb, Q.Arb

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