In this case, the Supreme Court of Canada considered the distinction between arbitrators and courts with respect to awarding interest

26. November 2013 0

Administrative law – Decisions of administrative tribunals – Arbitration Board – Jurisdiction – Natural resources – Forestry – Timber licences – Government – Expropriation – Interest – Compound vs. simple interest – Judicial review – Compliance with legislation – Interpretation

British Columbia (Forests) v. Teal Cedar Products Ltd., [2013] S.C.J. No. 51, 2013 SCC 51, Supreme Court of Canada, October 4, 2013, LeBel, Fish, Rothstein, Cromwell, Moldaver, Karakatsanis and Wagner JJ.

Teal Cedar Products Ltd. (“Teal”) is a forestry company in British Columbia (the “Province”). Teal had a forest license to harvest timber in a particular area including the right to cut a certain amount of timber known as an allowable annual cut. In 1999, a provincial park was created and Teal’s allowable annual cut was reduced by the Province. Subsequently, Teal began legal action against the Province claiming compensation for the partial expropriation under the Forest Act. The Forest Act provided that in the event that parties could not agree as to the appropriate compensation, the dispute was to be resolved through arbitration under the Commercial Arbitration Act (the “CAA”). Compensation was not agreed upon and the parties proceeded to arbitration.

The arbitrator awarded Teal $6,350,000 plus legal costs. That award included interest at the prime rate compounded annually from the date in 1999 when the allowable annual cut was reduced to the date of the award, amounting to over $2.2 million in interest. The arbitrator concluded that compound interest could be awarded because it was not “proscribed by legislation”.

The Province appealed the arbitrator’s decision. The decision was upheld by the B.C. Supreme Court and B.C. Court of Appeal. The Province then appealed the Court’s decision to the Supreme Court of Canada. The remaining issue before the Supreme Court of Canada was the validity of the award for compound interest. More particularly, the issue was whether the arbitrator had the authority to award compound, as opposed to simple, interest to Teal to compensate the company for the time between the loss of its timber harvesting rights and the time of the arbitration award.

The Supreme Court of Canada allowed the Province’s appeal with costs throughout. The Court held that the statutory regime in the Province did not permit the arbitrator to make an award of compound interest and therefore the award was set aside and substituted with an award of simple interest.

In reaching its conclusion, the Court Order Interest Act (“COIA”) and its interaction with the CAA were considered which determined the outcome of the case. Essentially, the Court concluded that arbitrators operating under s.28 of the CAA cannot award compound interest because s.1 of the COIA requires that a pecuniary court judgment bear simple interest, and only simple interest. While s.28 of the CAA does not expressly deem an arbitrator to be a court, this is the necessary implication of stating that a sum directed to be paid by an arbitration award is “a pecuniary judgment of the court”. The Court found that given its ordinary meaning and legislative history, s.28 of the CAA requires arbitrators to apply the provisions of the COIA notwithstanding that compound interest is a more accurate way of compensating parties for the time-value money. This is because the legislature has not yet amended the COIA to remove the prohibition of interest on interest; therefore, simple interest remains the rule in the Province’s courts.

Additionally, the Court considered the arguments in respect of the compensation principle in expropriation cases and whether compound interest arbitration awards can be grounded in equity despite the COIA. The Court found that neither the principle of full compensation following an expropriation nor any equitable principle permitted the award of compound interest in this case.

Regarding the compensation principle in expropriation cases, Teal argued that the principle of full compensation applied such that compound interest must be awarded because the underlying claim was a type of expropriation. While courts presume that legislatures intend to provide full compensation for expropriations, this presumption can be rebutted by statutory provisions that demonstrate legislative intention to the contrary.  While the Court acknowledged that compound interest is “no doubt” a better measure of the true cost of the loss suffered by Teal, s. 28 of the CAA, as aforementioned, limits the interest on a sum directed to be paid by an award to simple interest. This limitation reflects legislative intention not to provide for compound interest as an aspect of full compensation.

Regarding whether compound interest arbitration awards can be grounded in equity despite the COIA, the Court noted that the arbitrator in this case did not have jurisdiction to consider equitable grounds for awarding compound interest. Under s.23 of the CAA, an arbitrator can only consider equitable grounds where the parties specifically agree. In this case, Teal and the Province did not agree to permit the arbitrator to deal with equitable grounds.

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