ONTARIO – Arbitration – Standard of Review – The standard of review on an appeal from an arbitral award on a question of law or a mixed question of fact and law is reasonableness. The reasonableness standard is highly deferential to the arbitrator, but the arbitrator is required to decide disputes in accordance with binding precedent and it must reveal that the decision was not based on an irrational chain of analysis.

ONTARIO – Contracts – Doctrine of Frustration – There can be no frustration of a contract if the supervening event results from the voluntary act of one of the parties or if the possibility of such event arising during the term of the agreement was contemplated by the parties. It is wrong in law and unreasonable for an arbitrator to hold that the analysis of whether the supervening event was “foreseen” is not a requirement or necessary factor in finding frustration of a contract.

Taseko Mines Limited v. Franco-Nevada Corporation
2023 ONSC 2055 (April 17, 2023)
Ontario Superior Court of Justice (Penny J.)

The Respondent (“Franco”) appealed from a commercial arbitration award which found that an agreement between Franco and Taseko concerning the development of a gold mine in British Columbia had been frustrated. (para. 1)

Penny J. held that the arbitrator’s declaration that the agreement had been frustrated was unreasonable and set aside the award. (para. 8)

Background

The case related to a 2010 metal purchase agreement under which Taseko agreed to sell Franco a portion of the gold extracted from the proposed Prosperity gold mine at a pre-determined price for a period of 40 years in consideration of Franco’s commitment to provide a cash payment deposit of US$350 million. (para. 2)

Federal approval for the proposed mining development had been repeatedly denied in part as a result of indigenous land claims. The Supreme Court of Canada denied leave to appeal from Taseko’s unsuccessful claim for judicial review of the government’s refusal to permit the development of the mine. (para. 3)

In January 2021, Taseko claimed that the government’s refusal to issue environmental approvals had frustrated the agreement and issued an arbitration notice for a declaration to that effect. In an April 5, 2022 award, the arbitrator held that the agreement was frustrated. The arbitration agreement permitted an appeal from the arbitrator’s award on a question of law or a mixed question of fact and law. (paras. 13-15)

Analysis

Standard of Review: Reasonableness

Relying on Creston Moly Corp. v. Sattva Capital Corp., 2014 SCC 53 at paras. 105–106. Penny J. noted that “reasonableness is a highly deferential standard concerned mostly with the existence of justification, transparency and intelligibility within the decision-making process [and] also with whether the decision falls within a range of possible, acceptable outcomes which are defensible in respect of the facts and law”. (para. 46)

The Court further noted that “the role of courts in these circumstances is to refrain from deciding the issue themselves. Accordingly, a court applying the reasonableness standard does not ask what decision it would have made in place of that of the decision maker of first instance, attempt to ascertain the ‘range’ of possible conclusions that would have been open to the decision maker, conduct a de novo analysis or seek to determine the ‘correct’ solution to the problem.” (para. 50)

Referring to Interfor Corporation v. Mackenzie Sawmill Ltd., 2022 BCCA 228 at paras. 76-79, Justice Penny held that determining whether a particular contract has been frustrated by a particular event involves a “highly fact-driven exercise” rooted in “findings concerning the foundation or fundamental purpose of the contract”, which must be “focused on the contract that is alleged to have been frustrated”. The deference owed to the decisionmaker at first instance is enhanced where the decisionmaker heard live testimony and made critical determinations about the surrounding circumstances and the fundamental purpose, root or foundation of the agreement on the strength of that evidence. (para. 51)

The Arbitrator erred by not following binding precedent

The Court noted that in Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65, paras 111–112, the majority of the Supreme Court of Canada held that assessing whether a decisionmaker has appropriately followed binding precedent is part of the reasonableness analysis. (para. 52)

Arbitrator failed to correctly apply the Ontario law as to frustration of a contract

In a detailed analysis, Penny J. held that the arbitrator’s decision was unreasonable because it failed to undertake the proper legal analysis as defined under Ontario law (para. 80) and the arbitrator’s conclusions were wrong in law. (para. 66) In support of that finding, the Court referred to the following:

• The arbitrator relied on decisions of the SCC in Peter Kiewit Sons’ Co. v. Eakins Construction Ltd., 1960 CanLII 37 (“Kiewit”) and the ONCA in Capital Quality Homes Ltd. v. Colwyn Construction Ltd., 1975 CanLII 726 for their conclusion that consideration of whether a supervening event was “foreseen” is not a requirement or necessary factor in finding frustration of a contract. ( 58)
• However, in Kiewit, Judson J. adopted as a correct statement of the law a 1956 House of Lords quote that “frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract.” ( 58)
• The Court referred to cases which held that “there can be no frustration if the supervening event results from the voluntary act of one of the parties or if the possibility of such event arising during the term of the agreement was contemplated by the parties and provided for in the agreement.” (emphasis added) ( 61)
• The arbitrator concluded that whether the supervening event was “foreseen” was not part of the test articulated by the SCC in Naylor Group Inc. v. Ellis-Don Construction Ltd., 2001 SCC 58, (“Naylor”) and that Binnie J.’s decision in that case “did not turn” on that determination, implying that the reference to “foreseen” was mere surplusage or obiter dicta (at para. 104). Later in their decision (at para. 135), the arbitrator referred to Justice Binnie’s conclusion, quoted above, as containing a “passing reference” to the OLRB outcome having been foreseen but that conclusion was also unsupportable. ( 65-66)
• The arbitrator rejected three controversial decisions of the ONCA, which stood for the proposition that “a contract is not frustrated if the supervening event results from a voluntary act of one of the parties or if the parties contemplated the supervening event at the time of contracting and provided for, or deliberately chose not to provide for, the event in the contract”, namely: ( 69-75)
  • Bang v. Sebastian, 2018 ONSC 6226, aff’d 2019 ONCA 50;
  • Perkins v. Sheikhtavi, 2019 ONCA 925
  • Fram Elgin Mills 90 Inc. v. Romandale Farms Limited, 2021 ONCA 201
• The SCC in Naylor, and the ONCA in Perkins and Fram, have stated unequivocally that foreseeability is a key element in the frustration analysis . This is because, whether an event was reasonably foreseen is important, if not necessary, in determining whether performance has become something radically different from what was agreed to in the contract. ( 82)
• It was unreasonable for the arbitrator to conclude that the agreement made no provision for the risk that federal environmental permits might be refused. To the contrary, it is incontrovertible that the agreement did make provision for the parties’ rights and obligations in the event of final failure to obtain federal approval. ( 85)
• It is not the function of the court (or arbitrator) to rewrite a contract for the parties nor is it the court’s (or the arbitrator’s) role to relieve one of the parties against the consequences of an improvident contract: Pacific National Investments Ltd. v. Victoria, 2004 SCC 75, 31. However, by finding the agreement had been frustrated and relieving Taseko of the burden of the agreement that it entered into with Franco, this is exactly what the arbitrator did. (para. 88)
• There were other inconsistencies in the arbitrator’s recitation of the facts reasoning, which Penny J. discusses at 89-99.Relying on Vavilov, 102-103, Penny J. held: “To be reasonable, a decision must be based on reasoning that is both rational and logical. It follows that a failure in this respect may lead a reviewing court to conclude that a decision must be set aside. While reasonableness review is not a ‘line-by-line treasure hunt for error’, the reviewing court must be able to trace the decision maker’s reasoning without encountering any fatal flaws in its overarching logic. A decision will be unreasonable if the reasons for it fail to reveal a rational chain of analysis or if they reveal that the decision was based on an irrational chain of analysis.” (para. 106)