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Recent Decisions of Canadian Courts affecting Arbitration Law and Practice February 2015 edition Igor Ellyn, QC, CS, FCIArb. Chartered Arbitrator, Mediator, Legal Counsel Certified Specialist in Civil Litigation Chair, Chartered Institute of Arbitrators, Toronto Chapter Lauren E. Lackie Barrister and Solicitor Business Litigation & Arbitration Lawyers Avocats en litiges et arbitrages commerciaux 20 Queen Street West, Suite 3000 Toronto, Ontario M5H 3R3 T 416-365-3700 F 416-368-2982 www.ellynlaw.com © 2015 Igor Ellyn, QC May not be reproduced without written permission. ELLYN LAW LLP www.ellynlaw.com 1

Recent Decisions of Canadian Courts affecting Arbitration Law and Practice

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Recent Decisions of Canadian Courts affecting Arbitration Law and Practice

February 2015 edition

Igor Ellyn, QC, CS, FCIArb. Chartered Arbitrator, Mediator, Legal Counsel

Certified Specialist in Civil Litigation

Chair, Chartered Institute of Arbitrators, Toronto Chapter

Lauren E. Lackie Barrister and Solicitor

Business Litigation & Arbitration Lawyers

Avocats en litiges et arbitrages commerciaux

20 Queen Street West, Suite 3000 Toronto, Ontario M5H 3R3

T 416-365-3700 F 416-368-2982 www.ellynlaw.com

© 2015 Igor Ellyn, QC May not be reproduced without written permission.

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Important Developments in Arbitration Law and Procedure

• Sattva Capital Corp. v Creston Moly Corp., 2014 SCC 53

• Contract interpretation is a mixed question of fact and law. Arbitration appeals on questions of law alone will rarely occur.

• Ottawa v. The Coliseum Inc., 2014 ONSC 3838

• Sattva does not exclude arbitral appeals where errors of law are found.

• 90 George Street Ltd. v. Ottawa-Carleton Standard, 2015 ONSC 336

• Sattva is distinguishable in Condominium Act arbitration appeals.

• Toronto Standard Condo Corp. 2130 v York Bremner Dev. Ltd. 2014 ONCA 809

• There is no appeal from an order appointing an arbitrator. • An arbitrator should determine the scope his/her jurisdiction.

• Board of Regents of Victoria Univ. v. GE Canada Real Estate Equity, 2014 ONSC 7435

• On appeal, the case was remitted to the same arbitral tribunal for re-hearing

• Sociedade-de-Fomento Industrial v. Pakistan Steel Mills Ltd. 2014 BCCA 205

• Will the Court grant a Mareva Injunction to enforce an arbitral award?

• T. Films S.A. v. Cinemavault Releasing International Inc., 2015 ONSC 6608

• Creditor may use oppression remedy to enforce arbitration award.

• Alfred Wegener Institute v. ALCI Aviation Ltd., 2014 ONCA 398

• Recognition of Arbitration Award not set aside for lack of certification.

• Sistem Mühendislik A.S. v. Kyrgyz Republic, 2014 ONCA 576

• Stay of enforcement of Arbitration Award pending appeal on equitable ownership

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Sattva Capital Corp. v Creston Moly Corp., 2014 SCC 53 August 1, 2014

Contract interpretation is a mixed question of fact and law. Arbitration appeals on questions of law alone will rarely occur .

• The Supreme Court’s recent decision in Sattva will greatly limit appeals from commercial arbitration awards involving contract interpretation. Prior to Sattva, an error in contract interpretation was considered a question of law.

• One commentator noted that Sattva “is literally a textbook or checklist for the interpretation of contracts and the review of arbitration decisions.”

• The SCC has now decided that the historical approach of treating contractual interpretation as a question of law should be abandoned.

• Sattva will make it more difficult to succeed on motions for leave to appeal from a domestic arbitral award. In most cases, appellant’s counsel will be unable to isolate a question of law which can be extricated from the factual matrix and surrounding circumstances of the case.

• The case turned on the arbitrator’s interpretation of the date when shares of Creston should be valued to determine the amount of a finder’s fee payable to Sattva. The agreement called for a finder’s fee to be paid in Creston shares.

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Sattva Capital Corp. v Creston Moly Corp. #2

• Writing the unanimous judgment of a 7-judge Supreme Court panel, Rothstein J. held that “contractual interpretation involves issues of mixed fact and law as it is an exercise in which the principles of contractual interpretation are applied to the words of the written contract, considered in the light of the factual matrix.”

• The Court noted that only rarely will a question of law be completely isolated from an analysis of the facts of the case. Courts should exercise caution when attempting to isolate a question of law in a dispute over the proper interpretation of a contract.

• The Ontario Arbitration Act, 1991, SO 1991, c 17, s.45, has a very similar appeal provision to the BC Arbitration Act. Unless the arbitration agreement specifically provides for appeals on questions of law or on mixed questions of fact and law, leave should only be granted if the court is satisfied that (a) the importance to the parties of the matters at stake in the arbitration justifies an appeal; and (b) determination of the question of law at issue will significantly affect the rights of the parties.

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Sattva Capital Corp. v Creston Moly Corp. #3

• Toronto Arbitrator Thomas Heintzman suggests that Sattva “goes into the first drawer of the Contract and Arbitration tool boxes with a big red sticker on it.” He identifies ten points that the SCC decided:

• A contract should be interpreted in light of the surrounding circumstances and the parol evidence rule does not apply to exclude them.

• The interpretation of a contract is a question of mixed fact and law, not a question of law.

• Leave cannot be granted to appeal the interpretation of a contract by an arbitral tribunal award if the test for granting leave is “a question of law”.

• The test for leave to appeal is “arguable merit”. This test is met if “the issue raised by the applicant cannot be dismissed through a preliminary examination of the question of law.”

• The court has a residual discretion not to grant leave to appeal based on 1) the conduct of the parties; 2) existence of alternative remedies; 3) undue delay; and 4) the urgent need for a final answer.

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Sattva Capital Corp. v Creston Moly Corp. #4

• The exercise of discretion should be reviewed by an appellate court with deference to the judge of first instance.

• The review of an arbitral decision is not by way of judicial review applicable to administrative tribunals.

• The Dunsmuir test as to the standard of review for appeals from administrative tribunals may be helpful to the review of arbitral awards.

• The Court may supplement the reasons of the arbitral tribunal.

• The leave to appeal decision is not binding in subsequent hearings.

• If leave is granted, the standard of review is reasonableness. In other words, if the arbitrator’s award is not reasonable, it cannot stand. Where a specific error of law can be identified in the arbitrator’s decision, the decision, will probably not be reasonable and leave to appeal may be granted. Those cases will be rarer than before Sattva.

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Sattva Capital Corp. v Creston Moly Corp. #5

• Most contract interpretation appeal issues are, as the SCC held, mixed questions of fact and law. The growth of commercial arbitration was fostered by the desire for confidentiality, speedy resolution and finality.

• If a protracted appellate process follows the arbitral award, many of the benefits of arbitration are compromised. Sattva is a positive development for finality of an arbitration award without appellate intervention except where the award is unreasonable.

• In light of this decision, counsel may have to recommend revisions to existing arbitration agreements to permit appeals without leave on mixed questions of fact and law. Counsel will also have to take Sattva into account when advising about new arbitration clauses. The advice will be driven by balancing the desire for finality against the benefits of scrutiny of the arbitrator’s award by an appellate court.

• Arbitrators Kenneth Glasner and William Horton argue that Sattva renders most arbitration appeals unnecessary or even pointless. (http://tinyurl.com/noycpp8)

• However, as will be seen shortly, there are already two decisions in Ontario, which distinguish or limit the application of Sattva.

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Ottawa v. The Coliseum Inc., 2014 ONSC 3838September 9, 2014

Sattva does not exclude arbitral appeals where errors of law are found.

• This was the first case which referred to the SCC decision in Sattva. The dispute concerned the implementation of a settlement agreement as to the construction of a dome over Frank Clair Stadium in Ottawa. The dispute was submitted to arbitration. The arbitrator held that the City breached the settlement agreement and awarded damages of $2.4 million.

• The City sought leave to appeal under s. 45 (1) of the Arbitration Act on the basis of three questions of law in the interpretation of the Minutes of Settlement, namely:

• The Arbitrator ignored the principle according to which an agreement to agree is unenforceable;

• The Arbitrator failed to have regard to the principle of contractual interpretation according to which general language must yield to specific language; and

• The Arbitrator erred in speculating on what Coliseum’s intentions must have been in entering into the Minutes, rather than determining the mutual and objective intentions of the parties as expressed in the words of the contract.

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Ottawa v. The Coliseum Inc., 2014 ONSC 3838 #2

• To address the SCC’s decision in Sattva, the judge noted that while the SCC urged caution in identifying extricable questions of law in disputes over contractual interpretation, it nonetheless identified that legal errors made in the course of contractual interpretation do exist and include “the application of an incorrect principle, the failure to consider a required element of a legal test, or the failure to consider a relevant factor.” (para. 36)

• The judge further noted that analysis of the arbitrator’s alleged errors was potentially decisive to the outcome of the arbitration. The judge found that the City’s position that the arbitrator’s decision was at least unreasonable had arguable merit, and granted leave to appeal on that basis, and held that the standard of review was reasonableness.

• The judge then held that the arbitrator made errors of law in the interpretation of Minutes of Settlement and in the doctrine of waiver and estoppel. The arbitral award was set aside.

• In this case, the motion for leave to appeal was filed before Sattva was released. The Court permitted additional argument to address the effect of the SCC’s decision before releasing the decision. In essence, the threshold for seeking leave to appeal changed in the middle of the appeal process. It remains to be seen whether this factor had any impact on the decision.

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90 George Street Ltd. v. Ottawa-Carleton Standard, 2015 ONSC 336January 16, 2015

Sattva is distinguishable in Condominium Act arbitration appeals

• This was an appeal from an arbitrator under s. 13(2) of Ontario Condominium Act, which provides that budget disputes between the declarant and the condominium corporation must first be submitted to mediation, and if no settlement is reached, to arbitration. The issue in this arbitration was a budget shortfall of $115,000.

• The declarant appealed under s. 45(1) of Arbitration Act, which limits appeals to questions of law.

• The court distinguished Condominium Act arbitrations from the commercial arbitrations considered in Sattva, where the parties are presumed to have commercial knowledge and have equal bargaining power. In a dispute between a declarant and a condominium corporation, there may often be an imbalance of expertise and bargaining power.

• This imbalance is reflected in the statutory purpose of the Condominium Act, namely, to provide consumer protection, as well as predictability and certainty to those purchasing a condominium, enabling them to make informed financial decisions. This applies to condominium corporations, whose members are owners of the condominium units.

• Therefore, the Court granted leave to an appeal under the Condominium Act on which the standard of review is correctness, should be granted.

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Toronto Standard Condominium Corp. No. 2130 v. York Bremner Developments Ltd. 2014 ONCA 809

November 5, 2014There is no appeal from an order appointing an arbitrator.

An arbitrator should determine the scope his/her jurisdiction.

• Section 10(1) of the Ontario Arbitration Act permits the Court to appoint an arbitrator where the arbitration agreement does not provide an appointment procedure or where one of the parties refuses to appoint an arbitrator within 7 days of receiving notice of appointment.

• Section 10(2) provides that there is no appeal from an order appointing an arbitrator under s. 10(1).

• In this case, respondent did not respond to the notice because it claimed that none of the issues raised in the notice were within the jurisdiction of the arbitrator.

• The motions judge held that it was for the arbitrator to determine the scope of his/her jurisdiction and made the appointment, relying on Dancap Productions Inc. v. Key Brand Entertainment, 2009 ONCA 135 , for the principle that “[a] court will decline to have the arbitrator determine his or her jurisdiction only when it is clear or obvious that there is no jurisdiction.”

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Toronto Standard Condo Corp. 2130 v. York Bremner Dev. Ltd. 2014 ONCA 809 #2

• On appeal from the motion judge’s decision appointing the arbitrator, the ONCA quashed the appeal on the basis of s. 10(2).

• The ONCA noted that if the arbitrator made errors of law or exceeded his jurisdiction, there were remedies under the Arbitrations Act.

• The ONCA also distinguished its decision in Brennan v. Dole 2005 CanLII 33122 (ON CA), where “. . .an appeal from a court order appointing an arbitrator was allowed because this court held that the purported arbitration agreement was not enforceable by the respondents against the appellants.”

• The principle that an arbitrator must determine his/her own jurisdiction is central to most arbitration legislation and arbitration rules. Its roots are in the “kompetenz-kompetenz” principle in European arbitration. “Kompetenz” in German and “compétence” in French mean “jurisdiction”.

• These principles have been accepted in Canadian statute law and jurisprudence. See ICAA, Model Law, Art. 16 (1) and Ontario Arbitration Act, 1991, s. 17(1); Unifund Assurance Co. v. ICBC 2003 SCC 40, paras. 35-36 and Smith Estate v. National Money Mart Company, 2008 CanLII 27479 (ON SC) para. 191.

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Board of Regents of Victoria University v. GE Canada Real Estate Equity, 2014 ONSC 7435

December 23, 2014On appeal, the case was remitted to the same arbitral tribunal for re-hearing

• This case involves a 100-year lease of two parcels of lands in downtown Toronto owned by the university, on which office buildings, apartments and stores are built. The lease required the rent to be re-set every 20 years based on the fair market value of the land.

• There were disagreements about about the applicable concept of valuation. Should the land be valued as if it were vacant land or having regard to the structures built on it? Should the fact that there is a long ground lease be taken into account in determining value? Is it relevant that the ground tenant could build condominiums on leased land?

• This was the second time arbitration was required to determine the value. In 1991, there was an arbitration and two lengthy rounds of litigation.

• The current arbitral panel issued a split award in 2012, for which leave to appeal was sought. Justice Wilton-Siegel conducts a very detailed analysis of the facts and the relevant jurisprudence, including Revenue Properties Co. v. Victoria University (1993) 101 DLR 4th 172 (Div. Ct.), which was the appeal from the 1991 arbitration.

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Board of Regents of Victoria University v. GE Canada Real Estate Equity, 2014 ONSC 7435

• The Court concludes that while most of the Majority Arbitral Award is correct, there were some errors in analysis of the valuation principles.

• Further arbitration was required to correct these errors. The Court concludes that the the same arbitral panel should be reconvened to hear the case and to value of the lands on the basis determined by the Court.

• There was no basis to presume that either party would be prejudiced by the same arbitral panel re-hearing the case. These arbitrators, all experienced and one of them a former associate chief justice, were familiar with the case. If there were any prejudice, this could be raised after the second hearing.

• This case raises legal issues which are more complicated than most commercial arbitrations. Both parties have deep pockets and there is a lot at stake. However, the right of appeal from the arbitral award generated years of additional litigation. The cost of resolving this issue was greatly increased as a result of the appeals. It will still take years to resolve.

• When the dust finally settles, the result may not be much different than what the arbitrators decided three years ago, before a lot more money was spent.

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Sociedade-de-Fomento Industrial v.Pakistan Steel Mills Ltd. 2014 BCCA 205

June 2, 2014 (Leave to appeal dismissed -2014 CanLII 76858 SCC)Will the Court grant a Mareva injunction to enforce an arbitral award?

• One of the most important enforcement mechanisms in international commercial arbitration is the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

• When the New York Convention is ratified and adopted by local legislation, the local court should recognize and enforce an international arbitration award on the same basis as a domestic award.

• In this decision, the BCCA held that BC, which ratified the NY Convention, could issue a Mareva injunction to aid in enforcement of an arbitral award despite the fact that neither party or the award had any substantial connection with BC. The only connection was that the Respondent had exigible BC revenue or assets.

• An Indian company obtained a final arbitral award for $9 million made outside BC. The Respondent, a Pakistan company, refused to pay. When the Applicant determined that the Respondent was receiving a shipment of coal from Vancouver, it sought a Mareva injunction to prevent the shipment from leaving the port until it could enforce its arbitral award.

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Sociedade-de-Fomento Industrial v.Pakistan Steel Mills Ltd. 2014 BCCA 205 - #2

• Unlike BC and several other provinces, there is no statute in Ontario incorporating the NY Convention but its main elements are incorporated in the International Commercial Arbitration Act, specifically in Articles 34-36, as part of the UNCITRAL Model Law.

• BC also has a Court Jurisdiction and Proceedings Transfer Act, which articulates factors which establish a presumed real and substantial connection between BC and the parties or the case, to enable the Court to determine jurisdiction.

• Section 10(k) of the CJPTA provides that a real and substantial connection is presumed in a proceeding to enforce an arbitral award made outside BC. There is no CJPTA in Ontario but the SCC’s decision in Club Resorts Ltd. v. Van Breda, 2012 SCC 17, sets out the principles for the assumption of jurisdiction by Ontario courts against ex juris defendants.

• The BCCA in Pakistan Steel Mills allowed an appeal from an order setting aside a Mareva injunction. The motions judge’s order was based on the Applicant’s failure to disclose that the arbitral award could have been enforced in Pakistan and that this factor was relevant because of the limited connection of either party to BC.

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Sociedade-de-Fomento Industrial v.Pakistan Steel Mills Ltd. 2014 BCCA 205 - #3

• BCCA adopted a more “relaxed” approach to the issue of a Mareva injunction as a mechanism to restrain a defendant from moving assets to prevent execution of an arbitration award which would soon be enforced. Fraud by the debtor need not be shown, nor does the asset sought to be restrained have to be the only recourse for execution.

• The importance of this case is that the BCCA held that the recognition and enforcement of a foreign arbitral award is akin to a domestic judgment in terms of the other remedies which the Court can impose,

• The overarching factor in granting a Mareva injunction is whether doing so achieves a balance of justice and convenience between the parties.

• BCCA held that a court should consider the following factors in assessing whether case a reasonable one for the granting of a Mareva injunction:

• the merits of the claim must be very strong. Where the claim is for enforcement of foreign arbitral award, they are approaching certainty, given the limited grounds upon which the claim could be defended;

• the assets are about to leave the jurisdiction;

• the debtor refuses to pay the award over many months after the award;

• damage to a third party can be alleviated by a secured or fortified undertaking.

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T. Films S.A. v. Cinemavault Releasing International Inc., 2015 ONSC 6608

Jan 12, 2015Creditor may use oppression remedy to enforce arbitration award

• An arbitration award has little value until it is enforced. The mechanism for enforcement can be more difficult than obtaining the award itself.

• This recent decision addresses the availability of the oppression remedy under s. 248 of the Ontario Business Corporations Act (“OBCA”) to a creditor to enforce the result of an arbitration award.

• A contract involving three film production companies in Europe and a film distributor in Canada called for arbitration in the event of dispute. The applicants claimed that the Canadian distributor breached the agreement and commenced arbitration. The arbitrator was duly appointed but the distributor refused to pay the arbitrator’s fee.

• The arbitrator awarded $496,000. The applicant enforced the award under the International Commercial Arbitration Act, which embodies the New York Convention. However, the enforcement process falls short directing payment of the arbitral award. It just makes the award a judgment of the Ontario Court.

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T. Films S.A. v. Cinemavault Releasing International Inc., 2015 ONSC 6608 - #2

• By the time of the judgment, the respondent CRI had no assets and was no longer being operated. Its assets, business and employees were transferred by its shareholder to affiliated corporations without valuable consideration.

• The Court held that no plausible, valid business reason was advanced for the reorganization CRI’s business. The only reasonable conclusion was that it was done to thwart payment of the arbitration award.

• The Court concluded that the principal shareholder used these companies interchangeably to achieve whatever ends he considered desirable at the time.

• On the basis of the jurisprudence, it was not open to him to treat his corporations’ contractual and financial obligations like an elaborate shell game where, unless the pea happens to sit under the shell selected by a creditor, the principals and his companies are judgment proof.

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Alfred Wegener Institute v. ALCI Aviation Ltd., 2014 ONCA 398May 14, 2014

Recognition of Arbitration Award not set aside for lack of certification

• Foreign arbitral awards are recognized and enforced in Ontario under the International Commercial Arbitration Act, R.S.O., 1990, C. I.9. ICAA Art. 35(2) provides that the party relying on an award or applying for its enforcement shall supply the duly authenticated original award or a duly certified copy thereof.

• This case was arose from an application for recognition and enforcement of a German arbitral award. The Award was given in the absence of the Respondent, which failed to appear at the arbitration hearing.

• The supporting affidavit on the enforcement application attached a true copy of the German arbitral award, showing the signatures of the arbitrators. On appeal from the enforcement order, the Respondents raised for the first time that the there was no certification of the arbitration award. In other words, the enforcement did not comply with Art. 35(2). No issue was raised as to the accuracy of the Arbitral Award.

• ONCA held that where no issue was raised before the application judge as to the form or the accuracy of the Arbitral Award, it was open to the judge to accept the affidavit evidence as duly certifying the document and meeting the requirements of article 35(2). On this basis, the appeal was dismissed.

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Sistem Mühendislik A.S. v. Kyrgyz Republic, 2014 ONCA 576August 7, 2014

Stay of enforcement of Arbitration Award pending appeal on equitable ownership

• As a result of an ICSID (International Center for Settlement of Investment Disputes) arbitration award, Sistem, a Turkish engineering firm, was entitled to recover $9 million plus interest and costs from Kyrgyz Republic.

• Kyrgyz Republic owns Kyrgyzaltyn JSC (“the Company”), which owns shares of Centerra Gold, a Canadian public corporation based in Toronto. An order for enforcement was made under the ICAA, and after much litigation and a Mareva Injunction, $11 million was paid into court out of Centerra dividends.

• The issue before the Court was whether Kyrgyz Republic had an equitable interest in Centerra shares owned by its subsidiary. The application judge held that it did. An ONCA judge was asked to stay enforcement of the order pending appeal.

• ONCA confirmed that there was no automatic stay of the order. However, as Sistem was a foreign company without assets in Canada, the balance of convenience favoured a stay pending disposition of the appeal.

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Table of References

• H.C. Alvarez, The Implementation of the New York Convention in Canada, (2008) 25(6) Journal of International Arbitration 669–679 http://tinyurl.com/n27zbeb

• R. Cuervo-Lorens and I. Ellyn, ed. The Ontario Arbitrator, Newsletter of the Toronto Chapter, Chartered Institute of Arbitrators, Summer 2014 http://tinyurl.com/nqcqvxw

• K. Glasner and W. Horton, Appealing Arbitration: SCC reversal changes test for award reviews while raising questions as to their necessity, http://tinyurl.com/noycpp8

• G.R. Hall, A blockbuster decision in contractual interpretation, http://tinyurl.com/k8rtycl

• T. Heintzman, Arbitration Award Enforced Through The Oppression Remedy http://tinyurl.com/pwb3g6p

• T. Heintzman, No Appeal From Order Appointing An Arbitrator: Ontario Court Of Appeal, http://tinyurl.com/oxg8lvz

• T. Heintzman, The Supreme Court Of Canada Proclaims 10 Rules For The Interpretation Of Contracts And The Review Of Arbitration Awards, http://tinyurl.com/o7ber6t

• R. Howie, T. O’Leary, M. Schafler, Recent Decisions on Arbitral Jurisdiction: Stay and Appeal Issues, http://tinyurl.com/k9bda6h

• J. Speigel, The danger of interpreting a contract in a vacuum, http://tinyurl.com/oqdbpns

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Title• The Supreme Court of Canada’s decision in Sattva is the jurisprudential

highlight of arbitration law in Canada during the last year. However, it will take a few years to determine its real impact on arbitration appeals.

• As our case review demonstrates, arbitration continues to generate litigation and interesting law on numerous fronts, including issues relating to appeals, procedure, substantive law, recognition, enforcement and execution.

• Business people will continue to resort to arbitration because, despite its imperfections, commercial arbitration offers many procedural benefits over traditional litigation in the courts.

• However, resort to the courts is still necessary for oversight, recognition, enforcement and execution of arbitral awards.

• A thorough understanding of applicable arbitration statutes and procedures enables counsel and arbitrators to navigate effectively in this growing area.

• I express my thanks and appreciation to my colleagues, Lauren Lackie and Belinda Schubert, who assisted in the review of the cases discussed in these slides. I also thank my colleague, Tom Heintzman, OC. QC, whose online reviews of many of these cases was very instructive.

Thank you for your attention.

Igor Ellyn

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Concluding ThoughtsArbitration is here to stay. It’s important to “get with the program”.