True intentions: Court of Appeal rules arbitrators can correct mistakes in collective agreements

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Departing from a precedent set by it in 1972, the Ontario Court of Appeal has ruled that arbitrators have the jurisdiction to correct, or rectify, mistakes contained in collective agreements. This power exists even when a collective agreement specifies that an arbitrator shall not alter the terms of the agreement.

The case, Public Service Alliance of Canada v. NAV Canada (April 19, 2002), arose from the signing of an agreement which provided for a reduction of working hours from 40 to 37.5. The parties agreed orally that this reduction would result in no loss of compensation to employees, but there was no specific agreement on the formula by which the reduced hours with no loss of pay would be implemented.

The employer prepared pay scales for employees in an appendix to the collective agreement. When the agreement was signed, the employer implemented the new pay scales and began making retroactive payments to its employees. At that point, the employer discovered an error in its calculation of the pay scales contained in the appendix. When it corrected this error and made the retroactive payments in accordance with the revised scales, the union grieved. The employer responded by requesting that the arbitrator rectify the collective agreement to substitute its revised pay scales.

ARBITRATOR: EXPLICIT UNDERSTANDING, IMPLICIT TERMS

The arbitrator denied the union’s grievance, holding that the parties’ explicit understanding that the reduced hours would not result in reduced pay carried with it certain implicit components: that hourly rates would be increased by a factor of 40 over 37.5, and that these rates would be effective on the day the employees began working 37.5 hours. He found further that the parties must have understood that the new formula would not result in increased pay for the employees. As these implicit terms were not accurately reflected in the pay scales contained in the appendix, the arbitrator found that the employer had erred in its calculation, and granted the request for rectification.

The award was set aside by Divisional Court which held that, while the award may have made good labour relations sense, it was inconsistent with Ontario law, under which arbitrators had no jurisdiction to rectify collective agreements. The Divisional Court relied on the 1972 Ontario Court of Appeal decision in Re Metropolitan Toronto Board of Commissioners of Police and Metropolitan Toronto Police Association in making this ruling. In that case, the Court had ruled both that arbitrators had no inherent power to rectify collective agreements, and that the agreement in question prohibited rectification, as it expressly provided that the arbitrator could not alter or amend the contents of the agreement. The employer appealed.

COURT OF APPEAL: METRO POLICE “ATTENUATED” BY SUBSEQUENT DECISIONS

The Court of Appeal allowed the employer’s appeal and restored the arbitrator’s award. The Court noted that the facts of the PSAC case were substantially similar to those in Metro Police and that, normally, the Court would be bound to follow its 1972 precedent. However, it observed that much had changed in the area of labour law since 1972, and that the Supreme Court of Canada had significantly expanded the scope of arbitrators to resolve disputes:

    “[T]he authority of Metro Police has been attenuated by the Supreme Court’s subsequent pronouncements on the scope of the powers of arbitrators. Metro Police was premised upon the restrictive approach to an arbitrator’s remedial powers… . More recent decisions of [the Supreme Court of Canada] have concluded that arbitrators have exclusive jurisdiction to resolve disputes arising under a collective agreement and that, in resolving those disputes, arbitrators have the power and duty to apply “the law of the land”, both jurisprudential and statutory. One of the elements of the law of the land is the power to grant the remedy of rectification, and, in my view, the jurisprudence has now advanced to the point where arbitrators have the power to grant that remedy in adjudicating disputes arising out of a collective agreement.”

The Court held further that the fact that the collective agreement prohibited the arbitrator from altering the agreement did not bar him from applying the remedy of rectification. That remedy, the Court held, did not operate to alter the terms of the agreement but, rather, to correct a contract which had been mistakenly drawn up in order to make the terms of the contract reflect the true intentions of the parties. Therefore, the Court held, the arbitrator did not breach the agreement by rectifying the erroneous pay scales to reflect the parties’ true understanding of the new pay rate.

Having held that the arbitrator had the jurisdiction to rectify the collective agreement, the Court went on to rule that this was an appropriate case for the exercise of that jurisdiction. There was convincing evidence that the parties had agreed orally that hourly rates would be increased by a factor of 40 over 37.5, that the pay scales written into the agreement mistakenly did not reflect this understanding, and that the revised pay scales proposed by the employer accurately expressed the parties’ true agreement. Accordingly, the Court restored arbitrator’s award rectifying the agreement.

In Our View

The Court of Appeal adopted the preconditions for rectification set out by the Supreme Court of Canada in a decision released this year. These preconditions are designed to, in the Court’s words, “ensure that the remedy does not become an escape route for contracting parties seeking to get out of improvident bargains”. Accordingly, the party seeking to rectify a contract must:

  • show the existence and content of the inconsistent prior oral agreement,
  • show that the written document does not correspond with the prior oral agreement and that permitting the other party to take advantage of the mistake in the written document would be fraud or equivalent to fraud,
  • show the precise form in which the written instrument can be made to express the prior intention, and
  • establish all of these requirements on a standard of convincing proof.

For further information, please contact Jacques A. Emond at (613) 563-7660, Extension 224.