Can An Arbitration Award Be Set Aside For Unreasonableness?

If an arbitration agreement states that there is to be no appeal from the award under the agreement, can a party seek judicial review on the ground that the award is unreasonable?

In Dunsmuir v. New Brunswick, [2008] 1 S.C.R. 190, the Supreme Court of Canada set out a comprehensive analysis for the judicial review of the decisions of administrative tribunals. The Court held that there are two tests for determining the legal validity of the decisions of those tribunals: correctness and reasonableness. Generally speaking, the Court held that an administrative tribunal cannot, by legal error, assume a jurisdiction it does not have. True questions of statutory jurisdiction must be correctly decided by the tribunal, and therefore may be reviewed on the basis of correctness. All other decisions will not be set aside unless they are unreasonable, with the degree of deference being shown to the tribunal's decision depending on the nature of the decision (the "Dunsmuir test").

Is the unreasonableness test a proper one to apply to an arbitral award when the parties have agreed that there shall be no appeals from the award? That is the question that was raised in the recent case of Parmalat Canada Inc. v. Ontario Teachers' Pension Plan Board. While the court did not refer to or address this issue in its decision, this case provides a good opportunity to discuss whether the Dunsmuir test should apply to the review of an award under a commercial arbitration agreement.

Factual Background

During 2003 to 2005, Parmalat Canada refinanced itself to avoid default on its financial obligations. Its predicament arose from the financial collapse of its Italian parent. Parmalat Canada entered into a Credit Agreement with Ontario Teachers' Pension Plan Board (Teachers) whereby Teachers provided $530 million in financing to Parmalat Canada.

One of the agreements which Parmalat Canda and Teacher entered into was a Liquidity Payment Agreement ("LPA"). Under the LPA, Parmalat Canada agreed to pay Teachers a Liquidity Payment equal to 10 per cent of the value of Parmalat Canada if a Liquidity Event occurred within seven years of the closing of the Credit Agreement. That closing occurred on June 29, 2004. The definition of Liquidity Event included an "Indirect Change of Control" which included "any Person or Persons, acting jointly and in concert, acquiring, directly or indirectly, ....securities or the right to vote securities of Parmalat Italy carrying any number of votes where thereafter a majority of the board of directors of Parmalat Italy are nominees of such Person or Persons."

On June 28, 2011, or one day before the seventh anniversary of the closing of the Credit Agreement, a slate of director nominated by Group Lactalis S.A. was elected to the board of directors of Parmalat Italy. In March 2011, Lactalis had acquired 28.97 % of the shares of Parmalat Italy. That purchase enabled Lactalis to elect its slate of directors, who were elected on June 28, 2011.

The Arbitration

Teachers then commenced an arbitration asserting that a Liquidity Event had occurred and that Parmalat Canada was required to pay the Liquidity Payment to Teachers. Teachers relied upon the plain language of the agreement and asserted that, under that language, a Liquidity event had occurred and the Liquidity Payment was due to it.

Parmalat Canada took the position that a significant liquidity or realization of value must result from any transaction for it to qualify as a Liquidity Event. It argued that there must be a value realization and/or liquidity, which in turn would fund the Liquidity Payment, for a Liquidity Event to have occurred.

The Arbitrator found that the acquiring shareholder Lactalis, being able to elect its slate of directors on June 28, 2011, thereby gained control of Parmalat Italy. The Arbitrator applied the plain reading of the agreement and concluded that a Liquidity Event had occurred. Under the LPA, the decision of the Arbitrator was final and binding with no appeal.

Does Dunsmuir Apply?

Parmalat Canada applied to the Superior Court to set aside the arbitrator's award under section...