One challenge facing a party to an arbitration clause is preserving a claim against the running of the limitation period. Starting the wrong claim may mean that the claim will be dismissed. That is now apparent from the recent decision of the Alberta Court of Appeal in A.G. Clark Holdings Ltd. v. HOOPP Realty Inc..

In an earlier decision, A.G. Clark Holdings Ltd. v. HOOPP Realty Inc., 2013 ABCA 101 (Alta. C.A., the Alberta Court of Appeal had held that the arbitration clause in this A.G. Clarke-HOOPP agreement was a mandatory arbitration clause and had set the matter back to the Queen’s Bench court.  The matter came back to the Court of Appeal after the chambers judge dismissed the action because arbitration of the dispute was mandatory and the limitation period for arbitrating the dispute had expired before any party had taken steps to commence arbitration.

Second Decision of the Alberta Court of Appeal

In this second decision of the Court of Appeal, the court dismissed HOOPP’s appeal for two reasons:

First, it confirmed its decision in Babcock & Wilcox Canada Ltd. v. Agrium Inc. (2005), 42 C.L.R. (3d) 197, 2005 CarswellAlta 208 to the effect that, if the parties have agreed that they must arbitrate a dispute, but instead of issuing a notice of arbitration within the limitation period for arbitration one party issues a statement of claim, then the court must dismiss the action.

Subsection 7(2) of the Alberta Arbitration Act allows the court authority to refuse a stay of an action which is started when the contract contains an arbitration clause. One of the grounds for not staying the action is found in clause (d) which applies if the defendant has unduly delayed in the bringing of the motion to stay the action, as HOOPP accrete had occurred in this case.

Effectively, the Court of Appeal held that, if the action is started in the face of a mandatory arbitration clause and the limitation period for commencing an arbitration has expired, then the discretion to stay the action no longer exists because the alternative of proceeding by way of arbitration no longer exists.  The Court of Appeal said that to allow the court to have a continuing discretion to permit the action to proceed would “render s 51(1) of the Arbitration Act and s 3(1) of the Limitations Act meaningless in the circumstances. It would have the effect of allowing a court to indefinitely extend a limitation period expressly set forth in the Limitations Act. In our view, that was not the intention of the legislature.”

Second, the Court of Appeal held that, in any event, there was no undue delay in the bringing of the motion to stay the action.

Discussion

This decision confirms that, at least in Alberta, the court has no discretion to permit an action to proceed once the limitation period expires and there is an effective and applicable mandatory arbitration clause in the contract. This means that a party must, at the very least, commence an arbitration if the contract contains an arbitration clause.

There are at least two further issues that arise

First, it seems that a party with such a claim may be advised to commence an action as well. The claimant cannot be sure that the respondent will agree that the claim falls within the arbitration clause. If the court or arbitral tribunal later holds that the claim falls outside the arbitration clause, then the claimant may then be out of time to commence an action.   The claimant may be better advised to at least start an action in addition to an arbitration and let the action be stayed pending the arbitration proceeding and the confirmation of the jurisdiction of the arbitral tribunal.

The second issue is whether the decision in this case applies to the other discretionary grounds in section 7(2) of the Alberta Arbitration Act. Those other grounds include: one of the parties to the arbitration agreement was under a legal incapacity when the arbitration agreement was made (clause (a)), the arbitration agreement is invalid (b), the subject matter is incapable of being arbitrated (c), or the matter in dispute is a proper one for default or summary judgment (e).

It is hard to see how the court’s decision in the present case applies to those situations.  So far as clauses (a) to (c), if those facts exist then the arbitration agreement should not or cannot be enforced. Yet, the discretion to stay surely must be operative even if the limitation period has expired if the claim cannot properly be arbitrated, due to the arbitration agreement being invalid or the claim being incapable of being arbitrated or a party being under a disability.

As to (e), the present decision appears to remove the discretionary power to refuse a stay if default or summary judgment could be granted and the arbitral claim is barred by the limitation period. Yet, on its face that clause does not prohibit a plaintiff proceeding with a default of summary judgment even if a limitation period to commence an arbitration has expired.

Perhaps the Court of Appeal is saying that in all these circumstances subsection 7(2) requires that the arbitral tribunal and not the court should decide the issues raised in subsection 7(2) once the limitation period for the claim expires. If so, the question is whether the legislature intended the arbitral tribunal to make those decisions when they were stated in this subsection as being matters to be considered by the court.

Finally, let’s consider subsection 7(5).  That subsection permits the court to allow the action to proceed in part if the arbitration agreement deals with part of the claim and it is reasonable allow another part to proceed in court. If the limitation period for the arbitral claim has expired, does that affect the court’s discretion? Can the court include within the action the arbitral part which can no longer be arbitrated due to the expiry of the limitation period?

Until these questions are resolved, it seems best to commence both an arbitral proceeding and an action, and to do so well within any arguable limitation period.

A.G. Clark Holdings Ltd. v. HOOPP Realty Inc., 2014 CarswellAlta 37, 2014 ABCA 20

Arbitration – Limitation periods – Stay of action or arbitration – Building contracts  – Alternative dispute resolution  –                                                                                                                         

Thomas G. Heintzman O.C., Q.C., FCIArb                                           February 25, 2014