Court finds arbitrator relied on inadmissible subjective intentions of party to contract

Decision confirms evidence from pre-contract negotiations are generally inadmissible, says lawyer.

Court finds arbitrator relied on inadmissible subjective intentions of party to contract
Scott Bower is a partner at Bennett Jones LLP and his practice focuses on corporate, commercial, securities and energy litigation matters.

The Alberta Court of Appeal has quashed a labour arbitrator’s decision in a dispute concerning the admissible evidence of the surrounding circumstances of a contract and the inadmissible evidence of the subjective intentions of contracting parties.

In Alberta Union of Provincial Employees v Alberta Health Services, 2020 ABCA 4, the Court of Appeal found the arbitrator had ventured too far into the realm of subjective intention by using evidence from the pre-contract negotiations.

Scott Bower, a litigator at Bennett Jones LLP in Calgary, says the decision is helpful in confirming that pre-contract negotiations are generally inadmissible in interpreting a contract and that subjective intentions are always inadmissible.

“It's quite tough for lawyers and judges to be able to draw the line between what surrounding circumstances, which you're allowed to do, and evidence of subjective intentions that you're not allowed to put in. And it does seem like there's a divergence, almost from judge to judge, on what that is,” says Bower, who did not act in the case.

In AUPE v. AHS, the union and its employer had disagreed over the meaning of the term “operational restructuring.”

The dispute arose after the AHS initiated a cost-savings program called Operational Best Practises in 2015. In that year and the next, the AHS made presentations about the program before union leaders and told them that “no unionized employees would lose employment” in the cost-cutting program. In the fall of 2016, the unions sought to formalize that promise and began mediated collective bargaining sessions.

On Nov. 5, 2016, the AUPE and the AHS agreed on a letter of understanding that “there will be no involuntary loss of employment” and employees would “remain whole.” But instead of using the term “Operational Best Practices,” the letter of understanding the parties agreed to referred to “Operational Restructuring.”

In January 2017, the AHS announced to AUPE that it would lay off 14 licensed practical nurses and 20 nursing aides. According to the court’s decision, it “was undisputed” that these layoffs were not part of the OBP program. But the union argued that the layoffs were counter to the letter of understanding, and the matter was referred to an arbitrator.

The arbitrator’s decision came in April 2017. The arbitrator found the term “operational restructuring” ambiguous and looked at the text of the letter, evidence of the surrounding circumstances and the parties’ negotiations. The arbitrator concluded the letter intended only to apply to the OBP program and did not apply more broadly to just any company restructuring, including the nurse layoffs. The AUPE filed for judicial review and the judge dismissed the case on the basis the arbitrator’s decision was reasonable.

The case then went before Justices Brian O’Ferrall, Ritu Khullar and Kevin Feehan of the Alberta Court of Appeal. The appeal court looked at the arbitrator’s interpretation of “operational restructuring” and whether the arbitrator properly applied the law on contractual interpretation from the 2014 Supreme Court of Canada decision in Sattva Capital Corp. v. Creston Moly Corp.

The union argued the arbitrator had “unreasonably and selectively relied on the subjective intention of the parties” to narrow the “otherwise expansive” term of operational restructuring.

In light of Sattva, in interpreting contracts courts are “required” to consider the “surrounding circumstances” known to parties at the time the contract was made, said the Court of Appeal. But not all circumstances are admissible. According to Sattva, the courts are confined to the “objective background facts … knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting.” Outside the border of admissible surrounding circumstances are the “subjective intentions” of the parties.

The Court of Appeal said “subjective intentions” are inadmissible because they are irrelevant, and hearing evidence on them is a waste of time. If parties did not have divergent subjective intentions regarding the contract there would likely not be a dispute to be litigated.

Ultimately, the court found the arbitrator went too far in analyzing the surrounding circumstances of the contract by referring in his decision to communications made between the parties during their negotiations, and thus relied on that party’s subjective intention. The court therefore quashed the arbitrator’s decision and remitted the grievance back to the parties.

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