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Case Comment: Elk Valley Coal Partnership v. Westshore Terminals Ltd.
Published in the December 2008 issue of Transportation Notes - View Article
First, a brief update. In our edition of August, 2008, we reported on the decision of the Federal Court of Appeal in the case of Mazda v. Mitsui, a case involving section 46 of the Marine Liability Act. On December 4, 2008, the Supreme Court of Canada refused leave to appeal and accordingly the decision of the Federal Court of Appeal stands as the last word on the subject.
On the same day, December 4, 2008, the Supreme Court of Canada brought an end to a legal dispute arising out of a somewhat unconventional price adjustment clause in a contract between a coal producer and a terminal operator. The leave to appeal application of Elk Valley Coal Partnership (“Elk Valley”) was dismissed and an arbitrator’s judgment denying Elk Valley the ability to renegotiate the terms of a rate contract, between itself and Westshore Terminals Ltd. (“Westshore”), was reaffirmed.
Elk Valley is the owner and operator of a coal mine and Westshore operates a large coal export terminal where unloading, storage, and shiploading services were performed for producers. The rate contract which is the subject of the litigation sets out the terms on which these services were performed. In the summer of 2000, a time when coal prices were very low and coal producers subject to economic hardship, the parties renegotiated their rate agreement. The fixed rates charged by Westshore had become unsustainable for Elk Valley and the parties came to an agreement described as one “sharing pain and gain”. The rates charged by Westshore would be based on a sliding scale, tied to the price of coal in conjunction with an escalating fixed floor price. The latter would ensure that Westshore’s revenues did not dip below its actual costs.
At issue in the case was the application of a provision in the 2000 sliding scale rate agreement — a so-called reopener clause — which stated that either party could request a review of the rates within a certain time period and that if no agreement could be reached, the issue would be submitted to mediation and ultimately to arbitration. Specifically, this provision stated that an arbitrator could consider “whether the rates used to calculate the Charge have operated in a manner inconsistent with the original intention of the parties.”
As the BC Court of Appeal noted, this was a highly unusual provision. Generally, when courts or adjudicators are called upon to interpret a contract, they will only look to the terms of the contract and not to extraneous evidence of the intention of the parties, unless the court finds that the contract on its face can be interpreted in several reasonable ways. In this case, the very terms of the contract invited the arbitrator to determine whether the contract was operating in accordance with the original intention of the parties.
Elk Valley invoked this provision some years after the agreement came into effect and at a time when coal prices had dramatically risen. A rate of 9% of the coal price applied at that time, which was the highest percentage that could apply on the “sliding scale”. This rate was triggered when coal reached the price of $70 per tonne. The actual price, at the time of the dispute, had risen to $130 per tonne. Elk Valley argued that the contract was not meant to apply if coal prices shot up beyond the $50 to $70 price per tonne range that the industry was historically accustomed to. Elk Valley argued that this was beyond the reasonable expectation of the parties at the time that they entered into the agreement and that the contractual rates should be open to negotiation in accordance with the reopener clause. Westshore opposed revision of the rates, and argued that the parties’ intention was to avoid a situation where the rate structure was unaffordable. The reopener clause could not be invoked for any other purpose.
The arbitrator found that the reopener clause could not be used to address the sudden rise in the price of coal. While there may have been a presumption, based on historical trends, that the price of coal would fall within a certain range, that did not imply a common intention to renegotiate the rate should prices rise above that historic range. The arbitrator found that it was not the intention of the parties to put in place a cap on the rate. Rather, the agreement was chiefly concerned with whether the rates, and in particular the floor price, would be viable or economic for both parties.
In seeking leave to appeal the arbitrator’s decision, Elk Valley argued that the arbitrator had erred by wrongly restricting the scope of the reopener provision. The arbitrator also erred in his construction of intention and failed to recognize that there was an expectation regarding the price of coal which determined the choice of a percentage rate formula. Elk Valley also argued that the arbitrator had erred by looking outside of the contract and to the positions of the parties during the negotiation of the new agreement.
Elk Valley’s application was successful at the British Columbia Supreme Court. According to British Columbia’s Commercial Arbitration Act, an appeal from the decision of an arbitrator may be taken on a question of law if a court grants leave to appeal. The Court outlined principles governing such leave applications: (i) the importance of the result to the parties; (ii) the prevention a miscarriage of justice where the determination of a point of law is at issue; and (iii) the appropriateness of granting leave as an exercise of judicial discretion. The Court underlined that the merits of the appeal would also be a relevant consideration.
The BC Supreme Court found that, based on the amounts of money involved alone, leave to appeal should be granted; there would be “a substantial effect on the balance sheets of the respective parties.”
Further, the BC Supreme Court found that there was an error of law that went to the heart of the arbitrator’s decision. Namely, the Court held that the interpretation of the applicability of the reopener clause was a question of law. While some deference must be paid to the choice of the parties to refer the issue to arbitration, deference could not foreclose a court’s jurisdiction to grant leave to appeal in appropriate meritorious cases. The Court was persuaded that this was such a case.
The Court of Appeal, to which Westshore appealed, was not so persuaded. It took a much more deferential approach to the arbitrator’s findings.
First, the Court of Appeal rejected the argument that an arbitrator could not look to evidence of the negotiation between the parties. While the usual contractual interpretation rules state that interpretation must start with the wording of the contract (as well as end there if the contract is found to be unambiguous), in this case, the provision called for an examination of the intentions and expectations of the parties. The Court undertook a thorough review of the evidence of negotiations between the parties and pinpointed evidence that indicated that the main concern of the parties was to ensure that each would make a viable income from the agreement. Westshore was concerned that its costs would always be covered and Elk Valley was concerned that it could afford the rates charged, even when prices took a serious dip.
The Court was also emphatic that arbitration should be encouraged as a means of resolution in commercial disputes and therefore, that courts should accord deference to the decisions of arbitrators. In this case, the Court was satisfied that the arbitrator had not interpreted the clause too narrowly by holding that it was meant to address a situation where it would be uneconomic for both parties, because he did not rule out the possibility that this could occur even where prices unexpectedly rose (although both he and the Court were at a loss to articulate what such a situation would look like).
Furthermore, the Court underlined that, given the unique provision in the contract allowing the arbitrator to consider the intention of the parties, the issue was one of “mixed fact and law”. Therefore, the arbitrator was free to make findings of fact that should not be disturbed by the court. In particular, the Court endorsed the arbitrator’s finding that the parties did not contemplate, at the time the agreement was formed, that the rate should be capped in the event that coal prices should rise beyond the historical range.
Elk Valley Coal Partnership v. Westshore
Terminals Ltd
2006 BCSC 1526
2008 BCCA 154
2008 ONCA 789