On August 30, 2017 the Newfoundland and Labrador Supreme Court Trial Division released its decision in Newfoundland and Labrador v ExxonMobil Canada Properties et al, dismissing the Province’s application to set aside an arbitral award.[1]

The arbitral award, delivered in December of 2015 by a panel of three arbitrators (the “Award”), confirmed the deductibility for royalty calculation purposes of certain operating insurance costs individually acquired by certain oil companies with an interest in the Hibernia Project.[2]

The Court dismissed the Province’s set-aside application and affirmed the Award on the basis that: (1) the parties had deliberately contracted out of the set-aside provisions in the provinces’ Arbitration Act;[3] and (2) the parties’ agreement already established a clear procedure for reviewing the arbitral award. In this decision, Stack J. writes at length about party autonomy as it relates to contracting out, primarily finding that “sophisticated entities…do not require the aid of the Court to protect them from their own decisions”.[4]

Background

The Hibernia Project is the largest petroleum extraction project undertaken offshore of Newfoundland and Labrador. Three principal agreements govern it:

  • the Hibernia Project Royalty Agreement (the “HRA”), which governs the calculation and payment of royalties by the project owners to the Province;
  • the Hibernia Project Allocation Agreement (the “Allocation Agreement”), an agreement between the project owners and the Province which included an arbitration agreement as well as an arbitration code based on the UNCITRAL Model Law 1985; and
  • Hibernia Ownership and Unanimous Shareholders Agreement (the “HOUSA”), to which the Province is not a party.

The HRA established a three-tier royalty scale on which royalties are paid by each project owner to the Province. The second tier of the scale becomes payable when certain defined cumulative revenues equal defined cumulative costs (the net royalty payout). To calculate when it will reach net royalty payout, a project owner is permitted under the HRA to deduct certain costs (resource project eligible costs or RPECs) from its revenue.

The RPECs must satisfy certain criteria under the HRA, including being charged to a joint account established under HOUSA. Premiums for insurance required to be carried by project owners were a permissible exception to the joint account requirement under the HRA.

The project owners disputed in arbitration proceedings the Province’s redetermination under the HRA that certain operating insurance costs incurred by the project owners did not qualify as RPECs. The arbitral tribunal unanimously found in favour of the project owners, concluding that the project owners’ operating insurance costs qualified as RPECs.

The Decision

The Province brought an application under section 14 of the Arbitration Act, RSNL 1990 to set aside the award on the grounds that:

  • the award was improperly procured in accordance with section 14 of the Arbitration Act, and
  • the award dealt with a dispute not contemplated by or falling within the terms of the submission to arbitration, or contained decisions on matters beyond the scope of the submission to arbitration, in accordance with art 34(2)(a)(iii) of the Arbitration Code as set out in the Allocation Agreement.

The court affirmed the Award and held that the parties had deliberately contracted out of section 14 of the Arbitration Act, and art 34 of the Arbitration Code (as set out in the Allocation Agreement) established the method of review available to a dissatisfied party.

Section 14 of the Arbitration Act provides that the court may set an award aside where an arbitrator has misconducted themselves, or an arbitration or award has been improperly procured. In contrast, Art. 34(2)(a)(iii) of the Arbitration Code provides that an arbitral award may be set aside by the court only if:

…the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the award which contains decisions on matters not submitted to arbitration may be set aside.

The court agreed that although parties have significant latitude to modify procedure, they cannot entirely oust the inherent jurisdiction of the court to review arbitral awards. The Allocation Agreement complied with this because the Arbitration Code still provided for court review of arbitral awards. The court was satisfied that permitting parties to agree to their own scope of review for their private dispute resolution in a manner that does not unduly infringe upon the court’s inherent jurisdiction was in keeping with the objects of the Arbitration Act, particularly so for sophisticated entities contracting commercially.

Significance

This decision illustrates that parties can not only choose to arbitrate, and the process by which their arbitration will be conducted, rather they can also establish the process by which review of the resulting arbitral decision may occur.

While this is always subject to the overriding local legislation pursuant to which any arbitration is conducted, and so long as the corresponding inherent jurisdiction of the courts is adequately preserved, it seems that the parties’ selection of a review process can include the extent of the permissible scope of review. What will be particularly interesting is whether this can be extended one step further and include to some degree the standard of review.

It appears the key factors to the courts respecting the parties’ choices, as reflected in their agreements, include whether the subject matter of the contract was commercial in nature, the level of sophistication of the parties and the degree to which their legal advisors were involved in relation to their agreements.

In this case, the parties were sophisticated entities that either were aware, or ought to have been aware, of the full implications of the commercial contractual language they signed, including the arbitration process they selected via the Arbitration Code in their Allocation Agreement, which established the scope of review applicable to any award via Art. 34 contained therein.

This adoption was a clear and unequivocal choice made by well-advised sophisticated parties, with the full knowledge of its effect, and evidenced an unequivocal intention to substitute the Model Law scope in place of that contained in the Arbitration Act.

[1] Newfoundland and Labrador v ExxonMobil Canada Properties, [2017] NJ No 313, 2017 NLTD(G) 147 [Newfoundland v Exxon Mobile].

[2] Newfoundland v Exxon Mobile, supra, at para 1.

[3] Arbitration Act, RSNL 1990, c. A-14 at s. 14.

[4] Newfoundland v Exxon Mobile, supra, at para 71.