Alberta Court Applies Principles Of Contract Interpretation And Limitations To A Client-Consultant Contract

In the recently released decision in Riddell Kurczaba Architecture Engineering Interior Design Ltd v. Governors of the University of Calgary, 2018 CarswellAlta 10, 2018 ABQB 11, the Alberta Court of Queen’s Bench applied three potential aids to the interpretation to a client-consultant contract: contra proferentem; post-contract conduct; and estoppel. The court also applied the limitation period to a claim for a percentage-based fee.

The Interpretation and Limitations Issues

After the project was finished, the architects asserted that, on a proper interpretation of the client-consultant agreement, the fee should have been paid on a percentage basis, not a fixed fee basis. The architect relied upon the principle of contractual interpretation known as contra proferentem since the client (the University) had prepared the six drafts of the agreement. The owner asserted that the fee was a fixed fee, and also said that the contract should be interpreted in light of the parties’ actual performance of the contract and that the consultant was estopped from asserting that the fee was based on a percentage of the cost of construction.

The owner also asserted that the consultant’s claim was barred by the limitation period since more than two years had expired from the time when, if the consultant was correct, the fee would have amounted to more than the consultant was paid under the contract and the consultant knew or should have known that the owner was in breach of the contract.

Contra Proferentem

The Alberta court held that there was very little, if any, place for the application of the contra proferentem rule in the present circumstances:

“Where an ambiguity arises in respect of a matter that has been specifically flagged for future negotiation between two sophisticated parties, it should be resolved through the usual principles of contractual interpretation. This includes have regard to the factual matrix and, in some limited circumstances, post-contract conduct that might assist in determining the objective of the parties. The doctrine of contra proferentem has very limited utility or application in that analysis.”

Post-contractual conduct

During the performance of the contract, the parties proceeded on the basis that the fee was a fixed fee, not a percentage fee, but that the consultant was entitled to extra payment for work done in relation to change orders. The Alberta Court held that, in interpreting the contract, it was proper to look at this post-contractual in arriving at the proper interpretation of the contract, particularly when the conduct was consistently and unambiguously in favour of one interpretation:

“…..Such post-contract conduct is not properly considered as part of the factual matrix bearing on the intention of the parties at the time the contract was entered into. It may be considered, however, in the resolution of ambiguity in the contractual language used: Shewchuk v Blackmount Capital Inc., 2016 ONCA 9123 at 41….A cautionary approach is required where evidence of such subsequent conduct is used for the purpose of divining intention. It must generally be given limited weight, but “will have greater weight if it is unequivocal in the sense of being consistent with only one of the two alternative interpretations that generated the ambiguity triggering its admissibility”: Shewchuk at para 54. In this case, the language used in each of the six Change Orders signed by the parties during the project is both consistent and unequivocal in treating the work done by RKA as being part of the basic services. The language is also consistent with being compensated through adjustments to the “Fee for Service” under Section 1 of Schedule C to the Service Agreement.” (underlining added)

Estoppel

For the same reason, the Alberta court held that, by conducting itself throughout the project on the basis that the fee was payable on a fixed basis, the consultant was now estopped from asserting the contrary:

“…..it is reasonable to infer from the evidence that, had RKA refused to approve and sign-off on the Change Orders as worded, there would have been, at minimum, a discussion and negotiation of how RKA should be compensated, having regard for the wording of Article 4.3.2 and the fee negotiation contemplated in respect of fees for “Additional Services.” By RKA acquiescing in the Change Order process as implemented, only to assert its entitlement to additional fees well after conclusion of the project, the University was deprived of that negotiation (or termination) opportunity to its detriment…… Accordingly, had I accepted the position of RKA regarding the proper interpretation of the Service Agreement, I would have nonetheless found them to be estopped from claiming damages for breach of the Service Agreement.”

The Limitation Period

The Alberta Court held that the consultant’s claim was barred by the Alberta two year limitation period. If the consultant was correct that the contract provided for a fee based on a percentage of the cost of construction, then during the course of the project it would have been apparent to the consultant that the cost of construction had much exceeded the projected cost and that the consultant was owed a much higher fee than was being paid to it. More than two years passed from that point in time before the consultant made its claim.

The consultant asserted that the fee was not truly payable until its legal entitlement to percentage-based compensation was known, which it asserted was not known until the building was complete and the construction costs were known with certainty.

The Alberta court accepted the owner’s submissions:

“The $21,000,000.00 in “Construction Cost” (including contingency) set out in Schedule C of the Service Agreement was exceeded at an early stage. By this time, which was approximately January 2009, 75% of “Total Service Fee” had already been billed. It is also clear that RKA was being paid for ongoing work, excluding the separately negotiated FFE Agreement, pursuant to a series of Change Orders purporting to contain add-ons to the basic services fee described in Section 1 of Schedule C…..Accordingly, the essential facts supporting a breach of contract under RKA’s interpretation of the Service Agreement were probably known as early as March 23, 2009. These facts were certainly known when the post-project reconciliation of amounts paid to RKA, as against amounts owing under the contract, was done in March 2010. Accordingly, if RKA is correct in its interpretation of the Service Agreement, and is not estopped from claiming a breach, it would nonetheless have been out of time pursuant to the Limitations Act.”

The Merits Of The Claim

The court reviewed what it described as the “poorly drafted” and “confusing and ambiguous language” of the contract. Thus, the RFP for the contract stated that the “fees will be based as a percentage (%) of the total construction budget” and the heading to Article 4.3 of the contract stated that the fee was a “Percentage-Based Fee”. However, article 4.3.2 stated: “For greater certainty, the Fee for Services as set out in Schedule C is a fixed fee, and there will be no adjustments to the fee in the event of changes in Construction Cost due to inflation. The fee will only be adjusted in the event and in accordance with an approved Change Order which changes the Scope of Work and results in an upward adjustment in the Construction Cost or Contract Time.” Schedule C to the contract stated: “(a) Fixed Base Fee…”

After sifting through all this inconsistent language, the Alberta court held that the contract provided for a fixed fee, not a percentage fee based upon the cost of construction. The court also held that the consultant was entitled to extra fees in relation to work done on the change orders:

“Article 4.3.2 shows that the parties intended that the fee for services be a fixed fee….. Although poorly drafted, Article 4.3.2 also shows that, on an objective basis, the parties intended that compensation for basic services in respect of changes to the scope of work being done, as opposed to “Additional Services,” are to be governed by Article 4.3 and the corresponding provisions of Schedule C…..The language used by the parties in Article 4.3.2 allows the University to exercise a measure of cost control by reviewing and approving Change Orders, and to adjust the base fee for services through the Change Order process. Section 1.3(a) of Schedule D of the Service Agreement includes, as “Additional Services,” revising or providing additional drawings, specifications, or other documents “caused by instructions inconsistent with instructions or written approvals previously given by the owners, including revisions made necessary by adjustments in the Owner’s program or Project Budget….The better view, however, is that the inclusion of services associated with a scope of work change in Article 4.3.2 was intended to bring them within the ambit of services compensable through adjustment to the fixed base fee as set out in Section 1 of Schedule C.”

Accordingly, the court dismissed the consultant’s claim for further fees based on a percentage of the cost of construction.

Discussion

It is not often that one construction law case deals with a number of contract interpretation principles and the limitation period. This decision will be a useful guide to those principles for application in similar circumstances.

The court was strongly influenced by the fact that, throughout the project, the consultant participated in the calculation and payment of the fee on a fixed fee basis, and did not suggest, until the project was well over, that the fee should have been paid on a percentage basis. Clearly there is a lesson for consultants here: be up front about the basis for the fee, and don’t try to assert a different basis after the fact.

The court’s conclusion on the limitations issue might be contentious. Under section 3(1) of the Alberta Limitation Acts, the limitation period starts to run when the claimant knew or ought to have known that: (i) injury for which the claimant seeks a remedial order had occurred, (ii) that the injury was attributable to conduct of the defendant, and that the injury, assuming liability on the part of the defendant, warrants bringing a proceeding.

Accordingly, the limitation period only commences when the cause of action arises and (not or) the claimant knows or ought to know that it has a claim. In other words, the fact that the claimant knows or ought to know that the defendant’s conduct amounts to a breach of contract, and that the claimant will have a claim, does not start the limitation period unless the time for the obligation to be performed has arrived and an accrued cause of action exists (unless the claimant treats the defendant’s conduct as an anticipatory breach of contract and terminates the contract forthwith).

If the fee in this case was payable by installments, and each instalment was itself legally due and payable during the project at the stipulated time or event, then the limitation period for each payment then arose. But if, on the proper construction of the contract, the fee was one fee only earned on the completion of the project, although payable during the project by way of part-payments, then the limitation period would only arise when the fee was fully earned. And even in the first case, the limitation period would only expire payment by payment, and would not expire for those payments payable less than two years before the action was commenced.

The Alberta court did not discuss when the cause of action for the fee payments arose. In its view, the essential question was: “when the facts giving rise to the claimed breach were known or discoverable.” It further stated: “The $21,000,000.00 in “Construction Cost” (including contingency) set out in Schedule C of the Service Agreement was exceeded at an early stage. By this time, which was approximately January 2009, 75% of “Total Service Fee” had already been billed.” It appears to have assumed that the obligation to pay had by then arisen. If that assumption is correct, then the court’s conclusion is correct. If the obligation to pay had not yet arisen, even though the clamant had submitted interim bills, then the court’s conclusion may not be correct. In addition, if any of the client’s payment obligations fell within two years of the commencement of the action, then the action may have been timely with respect to those payment obligations.

All of which is to say that the parties to a building contract that take a long time to perform should be careful about limitation periods that may arise during the contract. A building contracts is usually considered to be “entire”, “dependent” or “whole” contract, under which the obligations are not independent but dependent on one another, and not fulfilled until entirely fulfilled. However, the part payment obligations under a building contract are usually considered to be severable and presently enforceable as to each payment. This is how the Alberta court considered the payments under this consultant’s agreement. The issue may be disputable under another building or consultant’s contract.

See Heintzman and Goldsmith on Canadian Building Contracts (5th ed.), chapter 1, part 3(f), chapter 2, parts 2(3)(f), 2(4)(iii) and chapter 9, part 3(a).

Riddell Kurczaba Architecture Engineering Interior Design Ltd v. Governors of the University of Calgary, 2018 CarswellAlta 10, 2018 ABQB 11

Building Contracts – Interpretation – Estoppel – Contra proferentem – Post-contract conduct – Limitation periods

Thomas G. Heintzman O.C., Q.C., LL.D. (Hon.)                     January 29, 2018  

www.heintzmanadr.com

www.constructionlawcanada.com

 

 

 

Contract Limitation Clause Precludes Contractor’s Claim Over Against Designer

The limitation periods which apply to construction claims are difficult to sort out at the best of times. They are even more complicated when the limitation period applies to a claim over for contribution or indemnity.

That situation arises when the owner sues the contractor and the contractor then seeks contribution or indemnity from another party involved in the construction project, say a subcontractor or designer. In this situation there are a number of building and consulting contracts in place and there can be a variety of contractual and statutory provisions that contain limitation provisions. The question may be: which provisions trump which?

In Weinbaum v. Weidberg, the Ontario Divisional Court recently held that the contractual limitation period in the contract between the owner and the consultant prevailed when the contractor sought contribution and indemnity from the designer. The contractual limitation period effectively trumped the statutory limitation period for making claims for contribution and indemnity. Since the contractual limitation period had expired, the statutory period was not applicable.

Background

Mr. and Mrs. Weinbaum entered into a contract with Makow Architects for the design and construction of their home. The contract contained a six-year limitation of liability running from substantial completion of the work, which occurred in late 1994.

In January 2010, the Weinbaums commenced an action for damages against Mr. Weidberg, the construction manager of the project. The Weinbaums alleged that they first discovered evidence of extensive water damage and mold growth in August of 2008. The Weinbaums did not sue the architects.

Then, Mr. Weidberg commenced a third party claim against Makow Architects and its principal, Stan Makow (the architects). The third party claim sought indemnity from the architects on the basis that their conduct caused or contributed to any damages suffered by the Weinbaums. Mr. Weidberg alleged that the architects failed to carry out their duties to the Weinbaums and did not assert an independent or contractual claim against the architects.

Statutory Regime

Section 18 of the Ontario Limitations Act, 2002 states as follows:

18.  (1)  For the purposes of subsection 5 (2) and section 15, in the case of a claim by one alleged wrongdoer against another for contribution and indemnity, the day on which the first alleged wrongdoer was served with the claim in respect of which contribution and indemnity is sought shall be deemed to be the day the act or omission on which that alleged wrongdoer’s claim is based took place. (underlining added)

As can be seen in the first underlined portion, Section 18(1) states that the subsection is “for the purpose of subsection 5(2) and 15.” So one has to understand those latter provisions, as well as section 4.

Under section 4, unless the Act provides otherwise, a proceeding “shall not be commenced after the second anniversary of the day on which the claim is discovered.” So Section 4 establishes the general two-year limitation period that starts on the discovery of the claim, not on the day of the wrongful act.

Section 5(1) then establishes a number of criteria for determining the date when the claim is discovered. Summarizing the subsection, that date is the date when the plaintiff first knew, or ought to have known, that damage has occurred which arose from an act or omission of the defendant for which a civil action was an appropriate remedy.

Section 5(2) then says that a person with a claim “shall be presumed to have known of the matters referred to in clause (1) (a) on the day the act or omission on which the claim is based took place, unless the contrary is proved.” So the plaintiff has the burden of showing that it first knew or ought to have known of the claim on a later date than when the act or omission took place.

Section 15 then sets an ultimate limitation period. That ultimate limitation period is the “15th anniversary of the day on which the act or omission on which the claim is based took place. “ Thus, even though the normal limitation period is based on the date of discovery, the ultimate limitation period is based on the date of wrongful conduct. That ultimate limitation period over-rides the normal limitation period so that, once the 15 years expires, the claim expires even if not discovered.

Motion Judge’s Decision

The Motion Judge held that section 18 of the Act was intended to alter the previous law of limitations applicable to claims for contribution and indemnity, and that all those claims now have a general two year limitation period running from there date when the person seeking contribution and indemnity is served with the Plaintiff’s claim. Accordingly, the Motion judge held that the third party claim was commenced within that limitation period.

Divisional Court’s Decision

The Divisional Court held that section 18 does not change the previous law with respect to contractual limitation periods. Under that law (as most notably held by the Supreme Court of Canada in Giffels Associates Ltd. v. Eastern Construction Co., [1978] 2 S.C.R. 1346), a claim over for contribution and indemnity cannot be made by a defendant against a third party if that third party is not liable to the plaintiff due to the expiry of a limitation period in the contract between the third party and the plaintiff.

The Divisional Court acknowledged that section 18 does over-rule statutory limitation periods, including sections 4 and 5 of the Limitations Act, 2012 itself and other statutory limitation periods (such as those governing the engineering and other professions). Nevertheless, the Divisional Court held that contractual limitation periods are not affected by section 18. In arriving at this conclusion, the Court referred to a number of decisions of the Ontario Court of Appeal which, in its view, indicated that section 18 did not apply to or over-rule contractual limitation periods. It also expressed the view that the policy of the law is to leave parties to make their own commercial contracts absent a reason to the contrary relating to consumer protection or the like.

Accordingly, the Divisional Court dismissed the contractor’s third party claim over against the architects.

Discussion

This decision is very important for the construction industry for three reasons.

First as already noted, building projects almost always involve a number of parties, and if something goes wrong then each party that is sued will almost invariably wish to claim over against one or more of the other parties involved in the project, asserting that those other parties are responsible, in whole or in part, for the loss or damage.

Second, building contracts often contain a limitation period that runs from a specific date or occurrence – usually substantial or final completion of the project. Thus, the CCDC contracts have a six-year limitation period running from substantial completion.

Third, damages arising from a construction project may be discovered many years after the project is completed. If the owner has a CCDC-type contract with its contractor, then the owner can’t sue the contractor once that limitation period expires. But under the discovery-based regime in the Ontario Limitations Act, 2002 – and in the limitation statutes of most Canadian provinces –the owner can bring an action against other parties involved in the building project until two years expires after the owner knew or ought to have known of the damage. That discovery may occur many years later. According to the decision in Weinbaum v. Weidberg, those parties are precluded from claiming over against the contractor.

For this reason, any party involved in a building project should be aware of the terms, and in particular the limitation term, of the other contracts under which other parties are providing work or materials to the project. It may seem presumptuous for one party to a construction project to ask to see the terms of all other contracts, and very unlikely that this will occur in practice. But the Divisional Court’s decision makes it advisable to do so.

Moreover, if a party is sued then that party must immediately assert any claims for contribution or indemnity. Any hesitation may result in the passage in the meantime of a limitation period in another contract applicable to the project. In Weinbaum v. Weidberg, the limitation period in the prime contract had long since passed so there was nothing that the contractor could do.

The whole problem arising in Weinbaum v. Weidberg is due to two factors.

First, different limitation periods are expressed to run from different dates: date of discovery, date of a wrongful act, and a specific date (such as substantial completion). Obviously, when there are different limitation periods, then they will expire at different times.

Second, courts have refused to synchronize these dates. In Weinbaum v. Weidberg, the Divisional Court could have synchronized the limitation periods by holding (as the Motion Judge did) that section 18 applied to all claims over for contribution and indemnity, including contractual claims.

The Divisional Court’s policy reason for its decision is open to debate. It held that the parties should enjoy the freedom to contract as they wish, including with respect of limitation periods. That approach may be suitable when one is dealing with parties to the same contract. They may wish to agree to a contractual limitation period for claims between themselves. That approach, however, seems more problematic when dealing with claims for contribution or indemnity. In that situation, the parties have not contracted with each other. They have both entered into contracts with other people to provide services or materials to the project. Thus, in Weinbaum v. Weidberg, the contractor and the architect each contracted with the owner, not with themselves. Is it fair that the terms in the contract between the owner and the architect should bar a claim over by the contractor against the architect, when the contractor is sued by the owner? Is that fair when the owner did not assert its claim against the contractor until limitation period for suing the architect had gone by? Maybe, but it doesn’t seem to have much to do with freedom of contract.

Another reason why the result in Weinbaum v. Weidberg appears unfair is that, generally speaking, the plaintiff can recover its full loss from the defendant even if the loss was partly caused by another party.  When a limitation period in a contract that the plaintiff has made with another party blocks a claim over by the defendant against that other party, perhaps the plaintiff should only be able to recover from the defendant the portion of the damage attributable to the defendant’s conduct.

The construction industry might be advised to consider whether the present regime relating to claims over for contribution or indemnity is a fair one, and to seek amendments to the Limitations Act, 2002 if that regime is considered to be unfair.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 9, part 3.

Weinbaum v. Weidberg, 2017 CarswellOnt 3205, 2017 ONSC 1040

Building Contracts – Limitation Periods – claims for contribution and indemnity

Thomas G. Heintzman O.C., Q.C., LL.D (Hon.), FCIArb                         April 16, 2017

www.heintzmanadr.com

www.constructionlawcanada.com

This article contains Mr. Heintzman’s personal views and does not constitute legal advice. For legal advice, legal counsel should be consulted.

 

Discovery Of Facts Following Mediation Impacts The Limitation Period: Ontario Court Of Appeal

In 625805 Ontario Ltd. v. Silverwood Flooring Inc., the Ontario Court of Appeal has recently held that the discovery of facts following a mediation had the effect of extending the limitation period. This decision has an important impact on the limitation period for all claims, and particularly claims arising from building projects, in which the facts relating to the claim may be gradually disclosed to the claimant.

Facts:

Henry Smith and his son Carl Smith were home builders who carried on business through the applicant 625805 Ontario Ltd (625). Tamar Royt carried on her business through Silverwood Flooring Inc. (“Silverwood”). Silverwood supplied hardwood flooring to building projects. In 2009, the parties entered into a Joint Venture Agreement (“JVA”) in order to sell and install hardwood flooring to building projects. The JVA provided that Silverwood would continue to engage in its hardwood flooring supply business with customers who were not referred to it by the Smiths. Ms. Royt was responsible for managing the JV and would receive a two percent management fee.

In March 2010, the Smiths secured a customer for the joint venture, being M5V Condominiums Project (the “M5V Project”). Ms. Royt confirmed that all open orders in the system up to and including April 30th 2010 would be shared “as per the agreement as well as M5V of course.” After that, the former partners to the JVA disagreed about their obligations and benefits from the M5V Project.

In December 2010, the Smiths commenced an application against Ms. Royt, 2219970 Ontario Inc., and another company. The application sought an accounting of the amounts owing by Ms. Royt and 2219970 Ontario Inc. to the Applicants under the JVA. Silverwood was not named as a defendant in the application because it was not a party to the JVA and the Smiths claimed they had no knowledge that Silverwood supplied hardwood flooring to the M5V Project.

Ms. Royt swore an affidavit in the application. During a cross-examination on her affidavit in January 2012, Ms. Royt testified that Silverwood, not the joint venture, had supplied the flooring for the M5V Project.  She also testified that the project made a profit, that she or Silverwood had received some of the proceeds from that project, but that it was less than 2 percent. While the Smiths then knew that Silverwood had supplied the flooring for the M5V Project, they did not join Silverwood as a respondent in the application.

In September 2015, the Smiths’ numbered company, 625, issued a statement of claim against Silverwood, Ms. Royt and John Doe seeking a declaration that the defendants have been unjustly enriched at the plaintiff’s expense and an accounting from the defendants as to the amount by which they have been unjustly enriched. After pleadings were delivered, in January 2016 Silverwood and Ms. Royt moved for summary judgment dismissing the action on the basis that the limitation period had expired before the action was commenced.

The motion judge dismissed the action on the basis that by 2012 the plaintiffs knew that Silverwood had made a profit on the M5V Project and had the means to explore the revenues from the M5V project and whether the JV would have made a profit on the project, so that by September 2015 the two year limitation period had expired.

Ontario Court of Appeal’s Decision

The Court of Appeal allowed the appeal. It held that the facts upon which the plaintiffs brought their 2015 action were not known to them until March 2015. The Court of Appeal said, in their pleadings and affidavits, the Smiths allege that:

  1. “in the cross-examination on her affidavit in January 2012, Ms. Royt lied about the profits made on the M5V Project”;
  1. “In or about March of 2015, following an unsuccessful mediationin the Commercial Court action, Royt disclosed to Henry Smith that contrary to her earlier evidence, Silverwood had in fact made at least $200,000 in profit in respect of the sale of flooring to M5V. She also told him that the representation she had made to him in 2009 regarding Silverwood’s overhead expenses was untrue in that it was significantly less than $40,000.00 per month. Royt made these admissions during the course of a meeting, following further unsuccessful settlement discussions, where Henry Smith again requested that the financial records relating to the sale of flooring to M5V be disclosed after Royt’s admissions that she lied during her 2011 testimony.”

The Court of Appeal held that in these circumstances the Smiths had not discovered their loss until March 2015:

  1. Since Ms. Royt had testified that the amount earned on the project was less than her management fee (in 2012), it was reasonable for the Smiths to understand that the JV had suffered no financial loss or damage. As the court said:

“In light of the two percent management fee to which Ms. Royt was entitled before profits could be distributed to the joint venture and Ms. Royt’s express statement that profit from the M5V Project was less than her management fee, the possibility that the Smiths had suffered damage from the M5V Project and that the damage was caused by the respondents was removed from the Smiths’ minds. Accordingly, this is not a case where a party knows that it has suffered a loss but does not know the extent of the loss….”

  1. This was not a case in which the Smiths knew or ought to have known that they or the JV had suffered damage in 2012. The court said:

“It is true that the Smiths could have disbelieved or doubted Ms. Royt’s answers and brought a motion to compel production of financial documentation and/or to add Silverwood as a party to the original application. I do not think this was necessary. Parties are entitled to accept that information testified to under oath is truthful and accurate….In these circumstances, the appellant “discovered” the potential “damage” that grounds its unjust enrichment claim when Ms. Royt told Henry Smith in 2015 that Silverwood made a profit of at least $200,000 on the M5V Project.”

Discussion

There are two interesting aspects of this decision.

First, the decision demonstrates how the evolving disclosure in civil litigation may extend the limitation period. Clearly, the Ontario Court of Appeal was not inclined to be generous to the defendants in the application of the limitation period, particularly when the plaintiffs alleged that the defendants had lied under oath about important matters relating to the limitation period. Nor, in these circumstances, was the court inclined to be technical about the discovery of damage, or the duty to take steps to explore that issue.

As a result, in building contract disputes, the parties will have to be vigilant about telling the truth in order not to allow the other party to assert that its non-disclosure caused the limitation period to be extended. Equally, parties should always consider whether new information disclosed after the project occurred has caused the extension of the limitation period.

Second, the other interesting aspect of this decision is the court’s reference to information disclosed after a mediation. If the information was disclosed as part of the mediation process, was that information admissible in evidence?

Section 9(1) of the Ontario Commercial Mediation Act, 2010 says that, subject to subsections (2) and (3), the following information is not “discoverable or admissible in evidence in arbitral, judicial or administrative proceedings.” That information includes “2. A document prepared solely for the purposes of the mediation; 3. Views expressed or suggestions made by a party during the mediation concerning a possible settlement of the dispute: 4. Statements or admissions made by a party during the mediation.

None of the exceptions in subsections (2) or (3) appear to apply in the present case. However, one exception which is potentially applicable is section 9(2)(a) which reads: “information referred to in subsection (1) may be admitted in evidence to the extent required, (a) by law.”

In this circumstance, the following questions appear to arise.

First, was the information in this case part of the mediation? How does one determine that issue? Following a mediation, should parties be careful in designating whether or not information is being provided as part of the mediation?

Second, if this information was disclosed during the mediation, could it still be admissible? Does the discoverability principal contained in the Limitations Act, 2002 trump the Commercial Mediation Act, or vice versa? If the plaintiff is entitled to rely on the discoverability principal in the Limitations Act, 2002, is the information obtained during mediation admissible “as required by law”?

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed. Chapter 9, part 3.

625805 Ontario Ltd. v. Silverwood Flooring Inc., 2017 CarswellOnt 1734, 2017 ONCA 125

Building contracts – limitation periods – mediation – discoverability

Thomas G. Heintzman O.C., Q.C., L.L.D. (Hon.), FCIArb                         March 12, 2017

www.heintzmanadr.com

www.constructionlawcanada.com

This article contains Mr. Heintzman’s personal views and does not constitute legal advice. For legal advice, legal counsel should be consulted.

 

 

Ontario Court Has No Power To Extend Period For Setting Aside A Domestic Arbitral Award

In R & G Draper Farms (Keswick) Ltd. v. 1758691 Ontario Inc., the Ontario Court of Appeal recently held that an Ontario court has no power to extend the time for an application to review or appeal from a domestic arbitration award. This is an important decision for anyone involved in arbitrations, especially in light of the short period for reviewing domestic arbitral awards found in most of the Arbitration Acts across Canada and the longer limitation period for seeking review of international commercial arbitration awards.

The Background

The dispute arose from contracts for the purchase and sale of carrots between two Ontario-based farming concerns. The parties submitted their disputes to the Fruit and Vegetable Dispute Resolution Corporation (DRC) for resolution in accordance with the DRC’s mediation and arbitration rules. The arbitrator awarded $58,507.42 to the respondent, ATV.

R & G applied to the Superior Court of Justice to set aside the arbitral award. That application and R& G’s appeal to the Ontario Court of Appeal were dismissed. Both courts held that the application had been commenced outside the 30 day period for applying to set aside an arbitral award under section 47 of the Ontario Arbitration Act, 1991. That Act, like those in many provinces in Canada, is modelled on the Uniform Arbitration Act prepared by the Uniform Law Conference for domestic arbitrations.

The limitation period for applying to set aside an award of an international commercial arbitration tribunal is much longer than that provided for in the Uniform Arbitration Act. Under Article 34 of the UNCITRAL Model Law attached to the International Commercial Arbitration Act of Ontario and similar statute in most other provinces, the period for bringing an application to set aside an arbitration governed by that Act is three months.

The Court of Appeal’s decision in R & G Draper Farms can be summarized as follows:

First: The arbitration was a domestic, not an international commercial, arbitration for the following reasons: both parties had their place of business in Ontario; the carrots were grown, sold by R & G to ATV; processed and resold to R & G in Ontario; the parties had not agreed that the subject-matter of the arbitration related to more than one country; and the dispute was arbitrated in Ontario.

While the DRC described itself and its mandate as international, and while the carrots were bought for shipment to a California customer, those elements did not make the arbitration international. ICAA’s definition of “international arbitration” does not turn on the reasons for or mandate of the organization administering the arbitration process, but rather on the location of the place of business of the parties, the location of the actual arbitration, the place where the obligations are performed and the place the subject matter of the arbitration is connected with. All of those elements were in Ontario.

Accordingly the limitation period in the domestic statute, not in the international statute, applied.

Second: Section 47 of the Arbitration Act, 1991 gave the court no power to extend the 30 day period for applying to set aside the arbitral award. There was no prior decision that supported such a power. Nor does the Act support a judicial discretion to extend the s.47 time period. In other sections of the Act, the relaxation of time periods is contemplated, but no such provision is made with respect to the 30-day time period in s.47.

Discussion

There are several reasons why this decision is important and of concern.

First, there seems to be no good reason to have different time periods for applying to set aside an arbitral award, one dealing with domestic arbitrations and the other with international arbitrations.

Second, a thirty-day period to set aside an arbitral award is quite short. The three month period prescribed under the UNCITRAL Model Law seems to provide a more realistic period in which to absorb the reasons of the arbitral award and make an informed decision about seeking to set it aside. Certainly the three month period in the Model Law is the internationally accepted time period for doing so and there seems to be no good reason to have a different one for domestic awards in Canada.

Finally, in British Columbia, the court has the power to extend the time period in the domestic arbitration statute, including the time to set aside or appeal an arbitral award (which is 60 days in British Columbia, not 30 days). Should the right to seek an extension of the period for setting aside an arbitral award be consistent across Canada?

R & G Draper Farms (Keswick) Ltd. v. 1758691 Ontario Inc. 2014 ONCA 278

Arbitration – Setting aside arbitral award – Limitation Periods

Thomas G. Heintzman O.C., Q.C., FCIArb                                           August 28, 2014

www.heintzmanadr.com

www.constructionlawcanada.com

 

English Courts Enforce An Obligation To Mediate And Negotiate

The articles on this site have often alerted the readers to the hidden dangers of mediation and negotiation clauses in construction contracts. The principle danger is that these sorts of clauses may be unenforceable, for two reasons.

The wording of the particular clause may be drafted in such a way as to create no enforceable agreement to mediate or negotiate.

Or the court may hold that an obligation to negotiate or mediate is too indefinite to enforce as a contractual obligation.

Two recent English decisions hold out the prospect that a clause in an existing contract requiring the parties to mediate or negotiate may be enforceable, at least for some purposes.

In Emirates Trading Agency LLC v Prime Mineral Exports Private Limited, the contract between the parties stated as follows:

“11.1 In case of any dispute or claim arising out of or in connection with or under this LTC … the Parties shall first seek to resolve the dispute or claim by friendly discussion….. If no solution can be arrived at in between the Parties for a continuous period of 4 (four) weeks then the non-defaulting party can invoke the arbitration clause and refer the disputes to arbitration.

11.2 All disputes arising out of or in connection with this LTC shall be finally resolved by arbitration in accordance with the Rules of Arbitration of the International Chamber of Commerce (“ICC”)….

The arbitrators held that clause 11.1 did not contain an enforceable obligation but that if it did, it had been complied with – and that the tribunal therefore had jurisdiction.

Mr. Justice Teare of the English High Court held that the obligation to undertake “friendly discussions” was enforceable. He held that friendly discussions to resolve the claim were “a condition precedent to the right to refer a claim to arbitration.” The clause did not require that those discussions continue for four weeks but that a period of four weeks must elapse from the commencement of friendly discussions before arbitration could be commenced.

Justice Tear distinguished other English cases which have held that an obligation to negotiate is not enforceable. He distinguished the leading English case holding that an agreement to negotiate is not enforceable – Walford v Miles, [1992] 2 AC 128 – on the basis that in that case there was no existing contract with an obligation to negotiate in it. In the present case, the obligation to undertake friendly discussions was in the parties’ binding and enforceable contract. He distinguished SulAmerica v Enesa Engenharis [2012] 1 Lloyd’s Reports 671on the basis that in that case, the obligation was to mediate, not have friendly discussions. In Justice Teare’s view, an obligation to mediate could well be unenforceable if the parties were unable to agree on the identity of the mediator or the mediation process. But he could see no good reason why an obligation in an existing contract to have friendly discussions before arbitration was not enforceable. He summarized his views as follows:

“The agreement is not incomplete; no term is missing. Nor is it uncertain; an obligation to seek to resolve a dispute by friendly discussions in good faith has an identifiable standard, namely, fair, honest and genuine discussions aimed at resolving a dispute. Difficulty of proving a breach in some cases should not be confused with a suggestion that the clause lacks certainty. In the context of a dispute resolution clause pursuant to which the parties have voluntarily accepted a restriction upon their freedom not to negotiate it is not appropriate to suggest that the obligation is inconsistent with the position of a negotiating party. Enforcement of such an agreement when found as part of a dispute resolution clause is in the public interest, first, because commercial men expect the court to enforce obligations which they have freely undertaken and, second, because the object of the agreement is to avoid what might otherwise be an expensive and time consuming arbitration.”

On the facts, he agreed with the arbitrator that such discussions had occurred.

In Garritt-Critchley v Ronnan, the English High court ordered the defendants to pay costs on an indemnity basis when the defendant accepted the claimants’ offer to settle during trial, but the defendant had failed to engage in mediation after repeated offers by the clamant to mediate during the action.

The four day trial took place in January, 2014. After the trial concluded and while judgment was reserved, the defendants sought the claimants’ agreement to accept out of time the claimants’ pre-trial offer to pay £10,000 and all of the claimants’ costs.

The claimants submitted that the court should order costs payable on a full indemnity basis, instead of the standard scale of costs. The court held that the action was based on questions of fact involving credibility and expert evidence and was a “classic matter” for mediation or negotiation. It described the action as follows:

“This was an action of a fairly typical kind where the allegation was whether a binding agreement had been made or not…. this was essentially a question of fact applying well-known contractual principles, in relation to a contract which did not itself require to be in writing. It therefore, was a very fact intensive and evidence intensive exercise where the court would have to judge the credibility of their witnesses and look at the importance or otherwise of contemporaneous documents and the commercial sense or otherwise of each side’s case. That is classically a case where both parties needed to engage in a risk analysis as to whether their side of the coin would be accepted or not…..The second aspect of this claim was that there was an obvious sliding scale of a compensatory award if the claimants succeeded. This was not an all or nothing case on quantum where the parties would have to agree that if liability was established the obvious amount of damages would be X. This was a case where the services of an expert, therefore a matter of opinion, was required, in order to see what the range of awards would be and as was apparent to me in the course of the trial and the points being taken, the range was really very considerable indeed…. That again is a classic matter where mediation should be considered because there is ample room for manoeuvre within the wide range of possible quantum scenarios.”

The defendants submitted two reasons why it had been justified in not mediating, both of which were rejected by the court.

First, the defendants said they reasonably believed that no settlement agreement would be reached. The court said that it was not “realistic for someone in the position of Mr. Ronnan to say that all the odds are so stacked in his favour that there is really no conceivable point in talking about settlement.” Moreover, “if that had been his view then it is surprising that no application for summary judgment was ever made, which it was not. Of course the reason why it was not is because there was evidence going both sides: both sides were relying on documents and the inferences which could or could not be reasonably drawn there from. So to say “extreme confidence”, does not, in my judgment, seem to be a reasonable position to take.”

Second, the court rejected the proposition that the “considerable dislike and mistrust between the parties” was such that mediation was bound to fail. The claimants had been willing to mediate from the beginning, and acrimony is just the sort of barrier to settlement that a skilled mediator can overcome.

Comments

Canadian courts have not yet determined whether an obligation to mediate or negotiate is enforceable. When they do, the decision in Emirates Trading will be useful to consider on three points whether the obligation should be enforced. According to the decision in this case, the obligation to mediate or negotiate should be enforced if:

1. The agreement is in an existing and enforceable contract;

2. The obligation is stated in common sense terms that a layman can understand; and

3. The obligation contains a reasonable time period during which it may be carried out,        not in the sense that the parties are bound to negotiate throughout that period, but that the period provides them with an opportunity to do so and comes to an end after a defined period so that the parties and the court may know that the period has come to an end.

The decision in Garritt-Critchley is significant for any jurisdiction, like most common law provinces and territories in Canada, which has a loser pay rule in which the court has a discretion to set a higher or lower cost order depending on the parties’ conduct. Under such a rule, the Garritt-Critchley decision says that, in setting the costs to be paid at the end of the proceeding, the court may take into account a party’s failure to negotiate or mediate, in the following circumstances:

  1. The nature of the dispute is such that there was no good reason not to negotiate;
  1. A party’s view that it had a very high probability of winning is no good reason not to negotiate, particularly if that party has not brought a summary judgment motion;
  1. An atmosphere of ill will between the parties or their counsel will not be a reason not to mediate.

Emirates Trading Agency LLC v Prime Mineral Exports Private Limited [2014] EWHC 2014

Garritt-Critchley v Ronnan [2014] EWHC 1774 (Ch)

Mediation – Negotiation – Enforceability – Costs – Limitation Periods – Certainty of Contract

Thomas G. Heintzman O.C., Q.C., FCIArb                                                           July 28, 2014

www.heintzmanadr.com

www.constructionlawcanada.com

Alberta Court Of Appeal Holds That A Court Action Is Not A Notice Of Arbitration

In previous articles I have warned readers about the dangers of the limitation period in relation to arbitration claims. You can look at my prior articles dated July 17, 2011, February 26, 2012 and August 26, 2012. These dangers are highlighted by the recent decision of the Alberta Court of Appeal in Lafarge Canada Inc. v. Edmonton (City).  The court held that that a Statement of Claim in an action is not a notice of arbitration under an arbitration clause. This may mean that an arbitration claim subsequently commenced is outside the limitation period.

Background

Lafarge entered into a contract with the City to provide cement pipe for a light rail transit project. The City alleged that Lafarge had not delivered the pipe in a timely manner and it set off the delay costs against Lafarge’s invoices. The supply contract contained an arbitration clause which stated that “if any disputes arise under the Contract and the parties are not able to resolve it, the parties shall appoint a single arbitrator to conduct an arbitration in accordance with the Arbitration Act.”

On May 28, 2009, or about 22 months after the dispute arose, Lafarge and the City entered into a standstill agreement.  That agreement provided that the limitation period did not run during the term of that agreement, that the parties could terminate that agreement and that if they did then the parties had 3 months to commence proceedings before the limitation period would apply. Lafarge terminated the standstill agreement on February 2, 2011 and commenced an action on February 11, 2011.  The City served its Statement of Defence on March 14, 2011, the City pleading inter alia that the parties had agreed to submit any disputes arising under the contract to arbitration. In delivering the Statement of Defence, the City’s solicitor said: “I think arbitration may be mandatory but we [sic] happy to discuss future process”. In July 2012 Lafarge delivered its documents and the City said that it would move to stay the action on the basis of the arbitration clause, and also asserted that Lafarge’s claim was now statute barred.  The City’s motion was not brought until June 2012.

Chamber Judge’s Decision

The chambers judge held that the Statement of Claim in the action was a sufficient notice of arbitration under s. 23 of the Alberta Arbitration Act. Section 23 states an arbitration may be commenced in any way recognized by law, including the following:

(a)   a party to an arbitration agreement serves on the other parties notice to appoint or to participate in the appointment of an arbitrator under the agreement; and

(b)   a party serves on the other parties a notice demanding arbitration under the arbitration agreement.

The judge therefore found that there were no limitations defence which applied and that the arbitration process had been sufficiently notified to the City by Lafarge in time under s. 23 of the Arbitration Act. The chambers judge held that in those circumstances it was unnecessary for him to address alternative issues concerning delay and attornment.

Alberta Court of Appeal’s Decision

The Alberta Court of Appeal reversed the chambers judge’s decision, holding that the Statement of Claim was not a notice of arbitration under section 23 of the Alberta Arbitration Act. The court held that to treat the Statement of Claim “as a form of notification of arbitration under s. 23 does not amount to giving a liberal reading to s. 23 of the Act but bursts its conceptual boundaries,” and that “to characterize what amounts to the opposite of notice to commence arbitration as being the same as notice to commence arbitration would take s. 23 outside the scope of predictable meaning.”

The Court declined to decide any issues arising from its decision, and in particular whether the City had attorned to the court’s jurisdiction or whether its delay precluded it from bringing the stay motion. The Alberta Court of Appeal returned the matter to the Court of Queen’s Bench to consider whether there should be a stay of the lawsuit in light of waiver, including attornment and delay in the stay application.

Discussion

As I have said in my prior articles, people tend to forget about limitation periods in respect of arbitration claims because they think they already have a contract so there must be an entitlement to assert an arbitration claim. Since there is no court office in which to start the arbitration claim, people tend to assume that there is no formality to the commencement of the arbitration claim. Not so. The provincial Arbitration Acts have very specific criteria about what amounts to the commencement of an arbitration claim. If those criteria are not met, then no arbitration claim has been commenced and the limitation period continues to run.

So, in the present case, Lafarge commenced an action within the limitation period stated in the standstill agreement but not an arbitration claim as defined in the Alberta Act. The Alberta Court of Appeal has held that the action did not amount to an arbitration claim.  While Lafarge may be held entitled to continue with its action by reasons of the City’s waiver, attornment or delay, the Alberta Court of Appeal’s decision means that it has not commenced an arbitration claim so far as the limitation period is concerned.

The fairness of this decision could be questioned. If the City knew of the claim through the commencement of the action, should it thereafter be able to rely on a limitation period? Should the City be required to renounce a limitation defence in the arbitration when seeking a stay of the action?  There are old cases holding that if a defendant seeks to stay an action on the ground that the courts of another country are the more convenient forum, then the defendant must give an undertaking not to raise a limitation defence in the other forum. Should this rule be adopted on motions to stay actions based upon an arbitration clause?

Some might object to this rule on the ground that it will encourage parties to commence actions in the face of arbitration clauses and then insist on a waiver of the limitation period in the arbitration.  After all, so it goes, arbitration clauses are obvious and can and should be adhered to.

But such a rule does seem sensible. After all, an action is a perfectly proper way to commence a claim. In fact, outlawing a court action is contrary to public policy. It is only if the other party insists on the arbitration clause that arbitration becomes mandatory; if the other party does not, then the court action is perfectly proper. The commencement of the action tells the defendant that there is a claim.  If the defendant invokes the arbitration clause, there is an element of fairness in requiring the defendant not to assert the limitation defence in the arbitration. Maybe the further proceedings in the Lafarge case will explore this issue.

See Heintzman and Goldsmith on Canadian Building Contracts (4th ed.), chapter 10, parts 3, 5,6

Lafarge Canada Inc. v. Edmonton (City), 2013 ABCA

Arbitration –  Limitation periods – Stay of action or arbitration – Building contracts – Public contracts – Alternative dispute resolution  – Relation of arbitration to court proceedings

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                                     January 12, 2014

 www.heintzmanadr.com

www.constructionlawcanada.com

 

Is A “May Arbitrate” Clause Mandatory Or Permissive?

What is the meaning of an arbitration clause which states that a dispute “may be determined by arbitration”?   Does the clause mean that the arbitration process is permitted but not mandatory?  Or does the word “may” mean that the parties do not have to have a dispute, but if they do, the arbitration clause applies?

In Durham (Regional Municipality) v. Oshawa (City), the court held that the word “may” in an arbitration clause makes the arbitration permissive and not enforceable.  This conclusion is significant for building contracts which often use very similar wording.

Background

In December 2004, the Regional Municipality of Durham (the Region) passed a resolution relating to the jurisdiction over public transportation in the Region. The resolution transferred the jurisdiction over those facilities to the Region from City of Oshawa and certain lower-tiered municipalities which had previously had jurisdiction over them. The bylaw provided that the amount and future payment of exiting and unfunded liabilities was to be determined by negotiations between the region and the lower-tiered municipalities. It stated that “any matter not agreed to within three (3) months of the Effective Date [of the bylaw] may, at the request of the Region or a lower-level municipality, be determined by arbitration under the provisions of the Ontario Arbitration Act.”

There were some complicated issues to be resolved between the Region and the lower-tiered municipalities:  the identity of the facilities to be transferred, the nature of the legal arrangements (sale or lease), and amount and nature of the unfunded liabilities relating to former transit employees. Up until late 2009, it was not known exactly which assets would be transferred.

In early April 2009, the Region settled the issue of the transferred costs and liabilities with all the other lower-tiered municipalities except Oshawa.  On April 1, 2009 the Region requested arbitration. Oshawa asserted that, from the very beginning, it refused to accept responsibility for the unfunded liabilities. On April 21, 2009, Oshawa passed a resolution denying responsibility for the unfunded liabilities and refusing to proceed to arbitration.  On March 22, 2011, the Region commenced an action against Oshawa for payment of those liabilities.

The Regions took the position that the two year limitation period commenced on April 21, 2009 when Ottawa passed its resolution denying responsibility for the unfunded liabilities. The Region said that it was on that date that it “discovered” that there was a dispute with Oshawa, and that its action on March 22, 2011 was commenced within the two year limitation period from that date.

Oshawa asserted that the limitation period commenced in March 2005 when the three month negotiation period expired after the Region’s bylaw and that the Region’s action was barred by the limitation period. In the alternative, Oshawa said that its refusal to accept responsibility for the unfunded liabilities was well known to the Region long before Oshawa’s resolution of April 21, 2009 and that the Region knew or should have known, long before Oshawa’s resolution, that Oshawa denied responsibility for those liabilities and that the limitation period was running.

The Decision

The court held that the Region’s bylaw did not create a mandatory obligation to arbitrate. The words “may…be determined by arbitration” only established a permissive arbitral regime in which either party could opt not to arbitrate.  The court said:

“There is no decision that a permissive clause, in which parties “may” proceed to arbitration, triggers a limitation period. Had the limitation clause instead required  the parties to attend arbitration after three months by using the word “shall”, it would have changed the complexion of Oshawa’s arguments.”

The court also held that the limitation period commenced when Oshawa passed a resolution denying liability for the unfunded obligations, not when the three month period expired after the Region’s bylaw was enacted. The parties had negotiated in good faith right up to April 2009, all apparently in good faith. The relevant financial statements, upon which a resolution of the issues between the municipalities could be resolved, were not available until April 2006. So the limitation period could not sensibly run from the expiry of the three month period after the Region’s bylaw was enacted . Since a municipality can only officially act by resolution, it was not until Oshawa’s resolution of April 21, 2009 that the Region could reasonably know, and therefore discover, that there was a dispute.

Comments

Whether an arbitration clause requires, or merely permits, arbitration is of crucial importance in any contract and, to no less an extent, in a building contract. How does this decision help us understand and apply arbitration clauses?

The Region’s bylaw used the word “shall” at least 15 times.  It would seem that the arrangements instituted by the bylaw were mandatory, that the assets and liabilities were being transferred, with no going back. In those circumstances, what meaning should be given to “may”, at the request of the Region or a lower-tier municipality, be determined by arbitration”? Could the word “may” simply mean that the parties are not required to have a dispute?  Did all the “shall”s in the bylaw mean that the regime itself was mandatory, but that disputes were not mandatory? Did it make sense that the municipalities would have two dispute resolution regimes (arbitration and an action) to resolve their disputes?  Or does it make sense for an arbitration clause to be interpreted as permissive when that would mean that the Region had inserted an unenforceable clause into its bylaw?

This issue is of interest to construction law because wording of the same kind is found in building contracts . For example, GC 8.2 of the CCDC 2 Stipulated Price Contract is the dispute resolution clause in that contract.  GC 8.2 has the word “shall” in it at least six times.  But when it refers to arbitration, it says in GC 8.2.6 “either party may refer the dispute to be finally resolved by arbitration.” Other parts of GC 8.2 may make it clear that arbitration is mandatory if one party wants arbitration. But the use of the word “may” in the pivotal clause, 8.2.6 may confuse the issue if the decision in Durham v. Oshawa is strictly applied.

The decision in Durham v Oshawa may be more readily understood by considering whether the Region’s bylaw was an enforceable document as between the Region and Oshawa. If it was not, then the word “may” makes sense because a mandatory obligation could not be imposed on Oshawa.  If this is the case, then this decision has no application to a contractual arbitration clause.

It is interesting that the Region did not press the point that the arbitration provision was mandatory. It had passed a resolution on April 1, 2009 that the dispute should proceed to arbitration. But when Oshawa passed a resolution on April 21, 2009 refusing to arbitrate, the Region did not try to force Oshawa to proceed with arbitration. Perhaps it did not do so because it was concerned that, on April 1, 2009, the two year limitation period had already passed since its 2004 bylaw and the three month period for negotiation.  But having passed that resolution on April 1, 2009, it seems odd that it could later assert that the limitation period hadn’t even started to run.

There are some other interesting issues arising from this decision. But enough has been said to emphasize the point that limitation periods and arbitration clauses are a troublesome mixture.

Durham (Regional Municipality) v. Oshawa (City) (2012), 113 O.R. (3d) 54 (Ont. S.C.J.)

Construction Law  –  Arbitration  –   Limitation Periods

Thomas G. Heintzman O.C., Q.C.,  FCIArb                                                                                                                      April 20, 2013

www.heintzmanadr.com

www.constructionlawcanada.com

Does A Mediation Agreement Suspend The Limitation Period Or The Period To Set Down A Lien For Trial?

An agreement to mediate is often found in arbitration and building contracts. Yet, the impact of mediation upon court or arbitral proceedings is uncertain. Does an agreement to mediate mean that, until the mediation occurs, there is no cause of action and therefore there is no entitlement to commence arbitration or an action?  In that case, the limitation period would be effectively extended. In L-3 Communication Spar Aerospace Limited v. CAE Inc., 2010 ONSC 7133, 2011 ONCA 435, the Ontario Court of Appeal held that, until a contractual obligation to negotiate a compromise had been fulfilled or terminated, no cause of action arose and the limitation period was not running.   

Or is an agreement to mediate simply not enforceable because an agreement to negotiate is not enforceable? If this is the case, then the limitation period is running and either party can ignore the mediation agreement and go to court or commence arbitration. The Ontario Court of Appeal so held in Federation Insurance Co. of Canada v. Markel Insurance Co of Canada, 2012 ONCA 218.

The uncertainty about the enforceability of mediation agreements creates real dangers for those engaged in dispute resolution under arbitration and building contracts. Fortunately, in Ontario there may be at least a partial solution in section 11 (“section 11”) of the Limitations Act, 2002 of Ontario (“Limitations Act”). This solution is often forgotten but in the recent decision in Tribury v. Sandro, the court held that a mediation agreement, once made, does effectively stop the limitation period from running.

However, there are other dangers arising from mediation agreements and limitation and procedural periods.  The Tribury decision did not expressly determine whether the mediation agreement would suspend the limitation period even if it was not an enforceable agreement to mediate.  In addition, section 11 only applies to limitation periods prescribed under the Limitations Act.  Thus, in Tribury, the court did not apply section 11 to the two year period for setting a lien action down for trial under section 37 of the Construction Lien Act (“section 37”).  What is the effect of mediations on all the other procedural and limitation sections found in Ontario statutes?

Section 11(1) states as follows:

“ If a person with a claim and a person against whom a claim is made have agreed to have an independent third party resolve the claim or assist them in resolving it, the limitation periods established by sections 4 and 15 do not run from the date the agreement is made until,

(a) the date the claim is resolved;

(b) the date the attempted resolution process is terminated; or

(c) the date a party terminates or withdraws from the agreement.”

Background

Tribury was the general contractor on a construction project for Laurentian University.  Sandro was the structural steel subcontractor and Edward was Sandro’s structural steel consultant.  The project started in 2006 and ground to a halt in June 2007 due to the alleged failure of certain steel connections. Apparently, all parties accepted that the claims between the parties were “discovered” in June 2007 for the purposes of the Limitations Act. As will be seen later, one of the issues in the motions in question was whether some of the subsequent proceedings were brought within the basic two year limitation period set out in section 4 of the Ontario Limitations Act or, in effect, by June 2009.

In October 2008, Sandro commenced a construction lien claim against Tribury and Laurentian. The other issue in the motions in question was whether Sandro had set that lien claim down for trial within two years of that date as required by section 37 of the Construction Lien Act, or, in effect, by October 2010.

In December 2008, Tribury counterclaimed in Sandro’s lien action.  In April 2009, Tribury started its own action which was substantially the same as its counterclaim in Sandro’s lien action. While Tribury agreed to withdraw that counterclaim, the order dismissing the counterclaim was not made until November 2010.

The Mediation

In March 2009, Sandro suggested mediation to all parties. In April 2009, counsel for all the parties participated in a conference call and all the parties, with the exception of one party, agreed to participate in mediation. That agreement was confirmed by a letter from Tribury which suggested the names of mediators, proposed deadlines for the mediation briefs and confirmed the parties’ tentative consent to a cost sharing for the mediator’s fees. In July, 2009, Sandro delivered its mediation brief to Edward. In March, 2010 the parties chose a mediator. In August, 2010, a mediation date in November 2010, was scheduled.  On November 10, 2010, counsel for Edward advised the other parties that Edward was not prepared to mediate the “Sandro remediation costs”, namely the remediation costs which Sandro itself had incurred and was now claiming against Edward (as opposed to remediation claims being asserted by others against Sandro which Sandro claimed over against Edward). The mediation was cancelled.

The Impugned Proceedings

On December 3, 2010, Sandro issued a new Statement of Claim against Edward. On December 6, 2010, in Tribury’s 2009 action Sandro served a Statement of Defence, Crossclaim (against Edward) and Counterclaim (against Tribury).

The Motions

Edward then brought a motion to dismiss the December 2010 action and cross claim against it on the ground that the limitation period had expired.

Tribury bought a motion to dismiss Sandro’s lien action on the ground that it had not been set down within the two years period set forth in Section 37 of the Construction Lien Act. Section 37 requires that, within two years of the lien action that perfected the lien, an order must be made for the trial of an action in which the lien may be enforced, or an action in which the lien may be enforced must be set down for trial.  Otherwise, the lien action must be dismissed.

Tibury also sought an order dismissing Sandro’s December 2010 counterclaim on the basis that, by December 2010, the limitation period had expired for that counterclaim to be brought.

The Decision

1.      Section 11

So far as Sandro’s December 2010 claim and cross claim against Edward and its December 2010 counterclaim against Tribury, the Court held that the limitation period for commencing those claims was extended during the whole period from April 2009 to November 2010, and had not expired by the time that Sandro’s December 2010 claim, cross claim and counterclaim were commenced, by virtue of the mediation and the effect of section 11 of the Limitations Act.

First, the Court held that an agreement under section 11 did not have to specify that the limitation period was suspended until the conclusion of the mediation.  The suspension of the limitation period was effected by section 11 itself, without the parties having to say so. Their agreement to mediate, not any words agreeing to a suspension of the limitation period, caused the suspension.

The Court distinguished section 23(3) from section 11 of the Limitations Act. Sub-section 23(3) is the general provision allowing parties to agree to suspend or extend the limitation period.  That sub-section depends, for it to be activated, on the parties’ agreement to do exactly that, namely, suspend or extend the limitation period.  In contract, section 11 depends, for it to be activated, upon the parties’ agreement to mediate. If there is an agreement to mediate, it is section 11 which then suspends the limitation period. The Court said:

Edward has not convinced me that the agreement referred to in section 11 of the Limitations Act requires specific language suspending or extending applicable limitation periods for its efficacy. In my view, what is required is an agreement which is entered into after a dispute has arisen whereby the parties agree to have a third party assist in resolving the dispute, nothing more. In the case before the court, the parties entered into an agreement to mediate in response to a dispute which had arisen among them. They have therefore met the requisite test.

Whether there was an agreement to mediate was disputed. After reviewing the evidence, The Court held there was an agreement to mediate and that it included the Sandro remediation costs.  The Court found as follows:

The correspondence between the parties confirms their mutual intention to mediate the issues which arose following the failure of the steel connectors and I find that all parties decided to mediate these issues on the understanding that all outstanding damages issues would be mediated. Although the confirming letter did not specify which issues were to comprise the subject of the mediation, the agreement was open ended and not restricted in scope. There was a stated requirement in the letter confirming the mediation that both Sandro and Tribury submit damages briefs and there is no evidence that the parties intended that only some of the issues resulting from the failure of the steel connectors were to be mediated.

2.       Section 37

So far as Sandro’s lien claim, the Ontario Superior Court exercised its discretion to permit that claim to proceed as an ordinary contract claim, and struck out the lien itself on the ground that the action had not been set down within the two year period set forth in section 37. In so deciding, it did not consider whether the mediation, and section 11 of the Limitations Act, could extend the time set forth in section 37. Since section 11 only refers to limitation periods in the Limitation Act, the Court presumably thought that it was self-evident that section 11 did not apply to section 37.

Discussion

There is good news (with a condition), bad news and two warnings arising from this decision.

First the conditional good news.  If parties who are involved in a dispute agree to mediate, they thereby suspend the limitation period under section 11.  This is a power that is often forgotten. The parties are not necessarily faced with a “do or die” alternative between commencing the proceeding on the one hand, or mediating and potentially letting the limitation period run out on the other hand.  By reason of section 11, they are protected against the running of the limitation period by a proper mediation agreement.

The condition to the good news is this. In Tribury the Court held that the mediation agreement suspended the limitation period without inquiring whether the mediation agreement was an enforceable mediation agreement, so far as the obligation to mediate is concerned. That is, the Court did not consider whether the mediation agreement contained enough details to make it an enforceable agreement to mediate. There are many recent cases, particularly in the United Kingdom, holding that an agreement to mediate is not enforceable unless that agreement contains sufficient procedural details.

One explanation of the Tribury decision could be that it is not essential that mediation agreement be enforceable as such for it to activate section 11: a           mediation agreement is enforceable to suspend the limitation period by virtue of section 11, even if it does not compel the parties to mediate.

Another explanation is that this issue was simply not considered, and that it is open for another court to conclude that, unless the mediation agreement contains sufficient details, it does not activate section 11.

Second, the bad news. Sections 11 and 23 only refer to limitation periods contained in the Limitations Act. They do not refer to limitation periods in any other Act, including the Construction Lien Act.  For this reason, the parties cannot rely on sections 11 or 23 to extend by agreement the limitation periods for the commencement of a lien action or the statutory period for setting a lien action down for trial.

Nor do sections 11 or 23 apply to limitation periods, or periods for taking steps, in other statutes.  For example, the Arbitration Act, 1991 of Ontario contains a number of limitation periods. Section 52(1) of that Act says that limitation period for an arbitral claim is the same limitation period as for an action. So presumably, sections 11 and 23 should apply to arbitral claims.  Section 47of the Arbitration Act, 1991 establishes a 30 day period for commencing an appeal from an award or an application to set aside an award. Section 52(3) establishes a 2 year period for enforcing an award. Section 3 says that the contracting parties may agree to vary or exclude any provision of the Act, except certain specific mandatory sections.  Sections 47, 52 and 53 are not among the mandatory sections.  So the parties should be able to vary the limitation periods set forth in those sections.

Article 34(3) of the Model Law attached to the Ontario International Commercial Arbitration Act (“ICAA”) establishes a three month period for bringing an application to set aside an international commercial arbitral award.  Article 52(3) establishes a two year limitation period for commencing an application to enforce the award. The ICAA and the Model Law do not contain any express power to grant relief from, or contract out of, those articles.  While the two year enforcement period seems to be based on the two year general limitation period in the Limitations Act, it appears that the parties can vary the latter but not the former, unless a court were to find that parties can generally contract out of the ICAA .

Third –  two warnings:

First, the mediation agreement should be carefully documented. An exchange of correspondence should not be relied upon as that exchange may be subject to dispute and interpretation.  The dispute or disputes that fall within the mediation agreement should be specified. In the present case, Sandro was fortunate that the exchange of correspondence was interpreted by the Court to include all the issues between all the parties.

Second, in a construction lien action, attention should be paid to intersecting limitation and procedural periods, some of which may not be suspended by a mediation agreement. The same warning applies to any action or arbitration involving statutory limitation periods or periods for taking steps which could result in the proceeding being dismissed if not taken. In the present case, Sandro may have thought that the mediation agreement suspended all periods for taking procedural steps.  But it didn’t. It didn’t suspend the two year period for setting the lien action down for trial.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed., Chapter 6, introduction, and Chapter 10, part 6.

Tribury v. Sandro, 2013 ONSC 658

Construction Law  –   Building Contracts   –   Construction and Builders Liens  – Arbitration  –  Mediation  –  Limitation Periods

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                                     February 24, 2013

www.heintzmanadr.com

www.constructionlawcanada.com    

Six Points To Consider Before Commencing An Arbitration

On October 10, 2012, I gave a speech at an Advocates’ Society program.  The program was  entitled Arbitration is the New Black.  My presentation focused on seven issues which should be addressed when a party is contemplating the commencement of an arbitration.

Starting the arbitration seems like the easiest thing in the world.  After all, the parties already have an arbitration agreement which provides for the arbitration.  So what is the big deal?

That approach can lead to real problems.  The commencement of arbitration is as important a step in the proceeding as the commencement of an action in court.  In fact, it’s more important because in the case of arbitration, there is no court in which to issue the initiating document.  Therefore, no court official determines that the document initiating the arbitration is proper.  The party starting the arbitration may be lulled into a false sense of security by the arbitration agreement and may be unaware of the formalities and the choices that are inherent in the arbitral process.

Here are Seven Points to Consider before Commencing an Arbitration:

1.      The limitation period

Some may think that the arbitration is not subject to limitation periods. It is. A limitation period for an arbitral claim may be established in two ways.

First, the arbitration agreement may itself contain a limitation period.  For example, insurance policies often contain limitation periods.  If the period is missed, the claim may be lost.

Second, an arbitral claim will be governed by the general law of limitation of actions.  In Ontario, section 52(1) of the domestic Arbitration Act, 1991 provides that the law with respect to limitation periods applies to an arbitration as if the arbitration were an action and the claim made in the arbitration were a cause of action.  Section 4 of the Ontario Limitations Act, 2002 establishes a general limitation period of two years from the date of discovery of the claim. So, unless another statutory limitation period applies, a domestic arbitral claim governed by Ontario law must be commenced within two years of the discovery of the claim.

As far as international commercial arbitrations are concerned, the Ontario International Commercial Arbitration Act (ICAA) does not establish a limitation period for the commencement of an arbitral claim nor refer to a general limitation period.  If the arbitral claim is subject to Ontario law, then the Ontario Limitations Act, 2002 will presumably apply. There may be arguments about which limitation law applies to a claim in an international commercial arbitration.  The law of the place of the arbitration or the substantive law applicable to the contract are two candidates and the debate may be resolved differently by the courts in different jurisdictions.  So the limitation issue may have to be considered carefully in international commercial arbitrations.

Before leaving the limitation issue, it is well to remember that there is a limitation issue at the other end of the arbitration proceeding, namely, the limitation period for the enforcement of the award. For domestic arbitrations, section 52(3) of the Ontario Arbitration Act, 1991 provides that an application to enforce the award must be made within two years of the date that the applicant receives the award.

The Ontario ICAA does not contain a limitation period for the enforcement of the award. The general two year general limitation period in Ontario Limitations Act, 2002 will presumably apply if the award is sought to be enforced in Ontario.  In Yugraneft Corp. v. Rexx Management Corp., [2010] 1 SCR 649, the Supreme Court of Canada held that Alberta’s general two year limitation period applied to the enforcement in Alberta of an international commercial arbitration award made in Russia. Alberta had no limitation period that specifically applied to international arbitrations.  The Supreme Court held that the application for enforcement of the foreign arbitral award was an application for a “remedial order” within the meaning of the Alberta limitation statute, and therefore subject to the two year limitation period together with the discoverability rule.  It was not a judgment or court order subject to the 10 year period.

The mediation period

 A contract containing an arbitration clause may also contain a mediation clause.  The mediation clause may affect the commencement of the arbitration in two ways.

First, the mediation may be a precondition to the commencement of the arbitration.  If it is, the arbitration may be premature if mediation is not undertaken.  However, the mediation clause may be a permissible procedure, not a required procedure.  In this case, the failure or refusal of the parties, or one of them, to participate in mediation will not be a bar to the commencement of the claim.

Second, and as a corollary to the first point, if the mediation is, or is not, conducted, the limitation period can be affected.  If mediation is a requirement then the limitation period will not commence until the mediation is completed.  If the mediation is not required, then the limitation period will be running while the parties are fussing about mediation.

These issues were dealt with by the Ontario Court of Appeal recently in L-3 Communications Spar Aerospace Limited v. CAE Inc., 2011 ONCA 435, 2010 ONSC 4133, (reviewed by me in www.heintzmanadr.com, July 17, 2011) and Federation Insurance Co of Canada v. Markt Insurance Co of Canada, 2012 ONCA 218 (reviewed by me in www.heintzmanadr.com, May 5, 2012).

In the first case, mediation was held to be required.  Therefore, the cause of action did not accrue until the mediation was conducted, and therefore the action was still commenced in time.  In the second case, mediation was held not to be required.  Accordingly, the limitation period was running during the mediation and had expired by the time that the arbitration was commenced.

In Ontario, section 11 of the Limitations Act, 2002 provides that the limitation period does not run during any period in which the parties have agreed to have an independent third party resolve the claim or assist them in resolving it. The section does not necessarily avoid the issue of whether there was an agreement to mediate and whether that agreement requires mandatory mediation.

A further complicating factor is whether the mediation agreement is enforceable.  In Sulamerica CIA Nacional De Seguros SA & Ors v Enesa Engenharia SA & Ors [2012] EWCA Civ 638 (which I reviewed in www.heintzmanadr.com, July 5, 2012) the English Court of Appeal held that a mediation clause is not enforceable unless the clause contains a minimum amount of procedural certainty.  The Ontario Court of Appeal’s decisions referred to above did not consider this issue. We can expect some party to assert in the future that the mediation agreement was not enforceable and therefore the limitation period was running during the mediation and expired before the arbitral claim was commenced.

 2.      The Commencement of Arbitration

The claimant in the arbitration must make sure that it uses the proper document and procedure to start the arbitration.  If it does not, then no arbitration will have been commenced and the limitation period may expire in the meantime.

Section 23 of the Ontario Arbitration Act, 1991 states three ways in which an arbitration may be commenced:

first, by serving a notice to appoint or participate in appointment of the arbitrator

second, by serving a notice requiring another party to appoint the arbitrator and

third by serving a notice demanding arbitration

Under article 21 of the Model Law attached to the Ontario ICAA, the arbitral proceeding is commenced by a request for that dispute to be referred to arbitration being received by the respondent.

The decision of the Ontario Court of Appeal in Penn-Co Canada (2003) Ltd. V. Constance Lake First Nation, 2012 ONCA 430; (reviewed by me in www.heintzmanadr.com, August 27, 2012) is a reminder of the importance of serving the right document.  One of the parties had undertaken a good deal of activity relating to the arbitration, including the commencement of court proceedings.  But the Court of Appeal held that it had not served a document qualifying as the commencement of the arbitration. Its later attempt to do so was served outside the limitation period.

3.      Objection to Jurisdiction

An objection to jurisdiction must be made on a timely basis. Under section 17(3) of the domestic Ontario Arbitration Act, 1991, the objection must be made no later than the beginning of the hearing, or if there is no hearing, no later than the first occasion on which the party submits a statement to the tribunal.  In addition, the objection to jurisdiction must be made as soon as the jurisdictional matter is raised, although the tribunal has the authority to consider a later objection if it considers the delay to be justified.

Under Article 16(2) of the Model Law attached to the Ontario ICAA, a plea that the arbitral tribunal does not have jurisdiction must be raised no later than the submission of the statement of defence, and a plea that the arbitral tribunal is exceeding the scope of its authority must be raised as soon as the matter alleged to be beyond the scope of its authority is raised during the arbitral proceedings. The arbitral tribunal has authority to admit a later plea if it considers the delay justified.

These time limits are not necessarily the same. In particular, the claimant should be aware of the requirement in the Ontario ICAA to raise a pre-existing jurisdictional objection at time of the delivery of the Statement of Defence.

4.      Appointing the arbitral tribunal

a.      Need for speedy appointment

Before the arbitral tribunal is appointed, there is no way to determine anything within the arbitration.  The respondent cannot be compelled to deliver a defence.  An order that the proceeding has been validly commenced cannot be obtained, and other interlocutory matters cannot be dealt with. So appointing the arbitral tribunal is a key step in the arbitration.

Under section 10 of the domestic Ontario Arbitration Act, 1991, if the parties disagree about the identity of the single arbitrator or the chair of the arbitral tribunal, the Ontario Superior Court has power to appoint the tribunal. If the Ontario ICAA applies, then under article 11(4) of the Model Law attached to that statute, the Ontario Superior Court has a similar power to appoint the arbitral tribunal.

If the arbitration is held under the auspices of one of the arbitration institutions (such as the LCIA, ICC or BCICAC), then those organizations will appoint the arbitral tribunal, subject to the input of the parties as their rules may allow. An advantage of these arbitral institutions is that their appointment process may avoid lengthy court proceedings to appoint the arbitral tribunal. A disadvantage may be the lesser input of the parties into the selection of the tribunal.

b.      Discussions with the potential arbitrators

Selecting an appropriate arbitrator or chair of the arbitral tribunal will obviously be important. Identifying and avoiding conflicts of interest of arbitrators is equally important. For this reason, there may be legitimate reasons to write to or speak with a candidate for appointment.

However, these contacts are fraught with peril as they may create circumstances that themselves give rise to an appearance of bias. Thus, if the candidate is asked his opinion about the merits of the dispute, that conversation could well prejudice the candidate’s appointment.

The Chartered Institute of Arbitrators has guidelines about this process which are very helpful. They may be viewed on the Institute’s website: www.ciarb.org.

 

 c.   Agreement Appointing Arbitrators

If the arbitrators are appointed by way of agreement, the negotiation of that agreement is a good opportunity to address issues which were not dealt with in the arbitration agreement.  With a dispute now in existence, arrangements can be put in place to ensure that the arbitration is conducted cost effectively.

Those arrangements may include: the rules of procedure, so that rules appropriate for the specific hearing are used, not the rules of court; the confidentiality of the arbitration; and choice of law.

5.      The First Pre-Hearing Meeting

A significant advantage of arbitration is that it allows the parties to use a process which is suitable for the actual dispute and which will ensure that the dispute is resolved in a cost- effective manner. The time to start that process is the first meeting with the arbitral tribunal.

At the first meeting, the following procedures can be settled:

The schedule of all events and the date of the final hearing
The nature and dates for the exchange of pleadings
The scheduling of motions
The scope of documentary production and agreement on joint books of exhibits
Limits on discovery, or elimination of discovery
Preliminary lists of witnesses, including experts
The arbitration hearing briefs
The number of days of hearing

At the end of the first pre-hearing meeting, the arbitral tribunal can issue a Procedural and Schedule Order dealing with all these matters.

In order to obtain the maximum buy-in to this process, the parties should be present in person at the first pre-hearing meeting.

6.      Interim Relief

Finally, before the arbitration is commenced, consideration should be given to the necessity to obtain interim relief.

Various factors may relate to that relief: whether the relief must be obtained against third parties; whether the opposing party will likely refuse to obey an order granting the relief; and whether the relief must be enforced outside the jurisdiction of the court or the place of the arbitration.

No simple answer can be given about whether it is better to obtain interim relief from the court or the arbitral tribunal, but an informed decision should be made about that issue. Some of the factors that may be considered include the following:

  1. If the motion for interim relief is made to the superior court, then there will be no arguments about the limits of the court’s jurisdiction since the court has plenary powers. There may be a debate about whether the arbitral tribunal has the jurisdiction to grant the particular interim relief which is being sought.

Article 17 of the Model Law attached to the Ontario ICAA says that unless otherwise agreed by the parties, the arbitral tribunal may order such interim measure of protection as the arbitral tribunal may consider necessary in respect of the subject-matter of the dispute, and appropriate security be provided in connection with that measure. Section 18(1) of the Ontario Arbitration Act, 1991 says that an arbitral tribunal may make an order for the detention, preservation or inspection of property and documents that are the subject of the arbitration or as to which a question may arise in the arbitration, and may order that security be provided in that connection.  These provisions do not purport to give the arbitral tribunal unlimited interim powers. Therefore, the respondent to the motion may assert that the arbitral tribunal does not have jurisdiction to grant the particular interim relief claimed on the motion.

2.  If it is likely that the opposite party will abide by the order and the parties simply need a preliminary ruling on a matter, and if a faster hearing can be obtained before the arbitral tribunal than before a court, then the motion likely should be brought to the arbitral tribunal.

3.  If the order must be enforced against third parties, then a motion to the court may be more appropriate because an arbitral award is not enforceable against third parties.  In Farah v. Sauvageau Holdings Inc., 2011 ONSC 1819 it was held that an arbitrator did not have authority to grant a mareva injunction against a third party. However, it still may be necessary to first obtain an order against the opposing party from the arbitral tribunal, to show that the arbitral remedy has been exhausted and that the opposing party is bound by that order.

4.  If the order must be enforced out of the jurisdiction of the place of the arbitral tribunal, a court motion may be more appropriate in order to obtain an order that another court will enforce.  An interim arbitral order which is not a final award of the arbitral tribunal may not be enforceable outside the place of the arbitration. While section 9 of the Ontario ICAA says that an order of the arbitral tribunal for an interim measure of protection is subject to the provisions of the Model Law as if it were an award, a court in another jurisdiction may not consider it to be so.  So the law of the place of the arbitration and the place where the interim order of the arbitral tribunal will have to be enforced must be considered to determine whether the interim award will be enforceable.

Commencing an arbitration is not a simple process. There are at least seven matters to consider before doing so. By thinking about them beforehand, the claimant can be ready to bring the claim to a successful conclusion, at least from a procedural standpoint.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed., chapter 10.

Arbitration  –  Commencement  –  Appointment of Arbitrators   –  Limitation Periods  –  Mediation- Jurisdiction  –  Interim Relief

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                               November 18, 2012

www.constructionlawcanada.com

www.heintzmanadr.com

When Does An Arbitral Limitation Period Commence?

An arbitration is usually considered to be a less formal type of dispute resolution than court litigation.  For this reason it may be thought that less formal rules about limitation periods apply to arbitrations.

If you had this impression, then the recent decision of the Ontario Court of Appeal in Penn-Co Construction Canada (2003) Ltd. v. Constance Lake First Nation will quickly disabuse you of that view.  Just like a court action, unless an arbitration is started within the appropriate limitation period, the right to commence the arbitration claim will be lost. The issue may be trickier in an arbitration than in a court action since, unlike in a court action, there is no court office in which to issue the arbitration claim.  But it is still the same question: was the proceeding commenced within the limitation period?

The appeal to the Court of Appeal in the Penn-Co case was from a 2011 decision of the Ontario Superior Court.  I commented on that decision in my article of November 6, 2011.

The Legal Background

In Ontario, there are two enactments that are relevant to the limitation period for an arbitration claim.

First, the Limitations Act, 2002 says that the general limitation period in Ontario is two years from the discovery of the facts giving rise to the claim. Section 52(1) of the Ontario Arbitrations Act, 1991 (the Act) says that “the law with respect to limitation periods applies to an arbitration as if the arbitration were an action and a claim made in the arbitration were a cause of action.” So, an arbitration must be commenced within two years of the date that the would-be applicant first had knowledge of the facts giving rise to its claim.

Second, section 23 of the Act says that an arbitration may be commenced “in any wayincluding three particular ways:

A party to the arbitration agreement serving on the other parties to that agreement a notice to appoint or to participate in the appointment of an arbitrator under the agreement;

If a third party has the power to appoint an arbitrator, serving a notice on that third party to exercise that power, and serving the other parties with that notice;

A party serving on the other parties a notice demanding arbitration under the agreement.  (emphasis added by the Court of Appeal)

As a result, the limitation issue in the Penn-Co case was whether Constance Lake took one of these three steps before the limitation period expired.

The Background Facts

In 2003, the parties signed a standard form building contract for the construction by Penn-Co of a school for Constance Lake.  The contract contained a three-step process for resolving disputes: negotiations involving the consultant, mediation and arbitration.  By the summer of 2005, there were several alleged deficiencies in Penn-Co’s work that were the subject matter of dispute.  In December 2005, Constance Lake served a cure notice on Penn-Co. Penn-Co’s counsel responded by asking for mediation.  Then, on January 20, 2006, counsel for Constance Lake suggested that the parties dispense with the provisions under their contract and proceed directly with arbitration under an amended form of the CCDC 40 Rules for Arbitration of Construction Disputes. In response, Penn-Co’s counsel suggested that the parties proceed with a neutral third party “peer review”. However, the parties could not agree upon the terms of the peer review and by mid-2006 that process was abandoned.

In June 2007, Penn-Co commenced an action against Constance Lake.  In response, in May 2009 Constance Lake instituted a counterclaim in that action.  That counterclaim was instituted more than two years after December 2005 when, as acknowledged in its own cure notice, Constance Lake had knowledge of its claim against Penn-Co.  Penn-Co brought a motion to dismiss the counterclaim on the ground that the counterclaim was barred by the limitation period.

The Superior Court judge had held that the counterclaim was barred, and the Court of Appeal agreed.  It held that the letter of January 16, 2006 did not commence an arbitration.  It said that that this letter, and the other correspondence between the parties, amounted to “mere proposals for an arbitration agreement” and not a notice under the existing arbitration agreement which satisfied section 23 of the Act. The Court of Appeal held that the “parties failed to commence an arbitration under the building contract or any other agreement.”  Accordingly, the limitation period to do so had expired.

In these circumstances, the Court of Appeal also held that section 52(2) of the Act had no application. That sub-section gives powers to the court when it sets aside an arbitration award or terminates an arbitration or declares an arbitration to be invalid. In those circumstances, the court may order that the “period from the commencement of the arbitration to the date of the order” is to be excluded from the computation of time for limitation purposes. The Court of Appeal held that, if no arbitration was commenced, then this sub-section had no application.

Finally, the Court of Appeal held that Penn-Co was not estopped by its conduct from relying on the limitation period. None of the elements of estoppel were present.  There was no evidence that Penn-Co gave any assurance or representation that it would not rely on the limitation period, or that Constance Lake relied upon any such assurance.

Discussion

This decision is a good reminder that an arbitration is a formal proceeding and must be formally commenced. But this decision does not answer the question of what exactly such a formal commencement might encompass.

Section 23 of the Act says that an arbitration may be commenced “in any way recognized by law”.  That is just about as broad a definition as could be drafted.  One wonders what the limit of that definition might be, apart from the examples given in the section.  The legislature has said that a notice demanding arbitration is sufficient.  If that is so, and if that is included within but is not exhaustive of the definition, then something less than such a notice may amount to a commencement. The Court of Appeal has said that proposing arbitration under some other procedure or regime is not sufficient, at least until that regime is agreed to. But exactly what can amount to a “commencement” of an arbitration less than a notice of arbitration is left uncertain.

Several lessons can be learned from this decision.

One is that, before a party suggests alternatives to the arbitration agreement that is already in place, that party should first give notice of arbitration under that agreement.  Then, other dispute resolution solutions can be proposed.

The second lesson is that the institution by one party of mediation or arbitration does not protect the other party.  In the present case, Penn-Co instituted the mediation provisions of the building contract.  Whether the commencement of mediation proceedings stops the limitation period from running is open to question.  As I have commented upon in previous articles, the Ontario Court of Appeal has issued two decisions on this issue which arrived at contradictory results.  But the commencement of mediation proceedings by one party will not likely stop the running of the limitation period against the other party.

Finally, the limitation issue may not entirely deprive Constance Lake of its cause of action.  It may still be able to rely upon that cause of action by way of defence and setoff against the claim by Penn-Co.  The limitation statutes bar the commencement of a claim but not the reliance on the cause of action in any other way.

See Heintzman & Goldsmith on Canadian Building Contracts (4th ed.) at Chapter 10, part 6

Penn-Co Construction Canada (2003) Ltd. v. Constance Lake First Nation, 2012 ONCA 430

Building Contract  –  Arbitration  –  Limitation Periods  –  Commencement of Arbitration

Thomas G. Heintzman O.C., Q.C., FCIArb                                                            August 27, 2012

www.constructionlawcanada.com

www.heintzmanadr.com