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.

 

 

Alberta Court Issues Wide-Ranging Judgment on Settlement and Mediation of Arbitrations

In Pinder v. Woodrow, the Alberta Court of Queen’s Bench recently issued a judgment addressing a number of arbitration and mediation issues. The judgment arose from a settlement that in turn arose from a mediation conducted during the course of the arbitral hearing. As a result, the court dealt with a number of issues that are not frequently addressed in arbitration law. In particular, the judgment of the court dealt with the formalities –or lack thereof- that should be met in conducting a mediation and concluding a settlement during an arbitration. In Canada, there are two regimes relating to whether arbitrators may act as mediators. So this decision, while it involved a matrimonial dispute, is of interest to all those engaged in arbitral law.

Background

The parties entered into an arbitration agreement to deal with a number of matrimonial issues.  The agreement was subject to the Alberta Arbitration Act (the Act).  The agreement stated that the arbitration award would be delivered within 30 days of the close of the hearing “subject to any reasonable delay due to unforeseen circumstances.” The award was to be in writing and to set out the facts found by the arbitrator, apply the relevant law and the determination of the issues in dispute. The agreement provided for an appeal to the Court of Queen’s Bench on a question of law, or with leave of the Court on a finding of fact involving a material misapprehension of the evidence.

While evidence was being given during the hearing, the parties entered into settlement discussions. The Arbitrator acted as the mediator with the agreement of the parties. The parties reached a settlement agreement. Both parties, through their counsel, advised on the record that they were in agreement with the terms of the Settlement Agreement as a final settlement. The Arbitrator submitted his final statement of account three days later.

The settlement agreement was set out in a document entitled “Settlement Terms”. It was signed by the Arbitrator, both of the parties, together with their respective counsel. It included a term that any dispute involving the content of the agreement was to be referred to the Arbitrator for binding determination.

The parties then acted in accordance with that document. The husband commenced paying child support, the wife transferred property to the husband. The husband made repeated demands that the wife comply with all aspects of that document.

Two months after the document was signed, the wife’s counsel applied to the arbitrator for relief, taking the position that the arbitration had been adjourned and that it was still open to the arbitrator to continue the arbitration and issue a final award. The wife alleged that the arbitration had not been formally concluded and that it was still open to the parties to reach a full and final settlement, that the settlement document was not an Arbitral Award within the meaning of the arbitration agreement or the Act, that errors were made during the process that necessitated a remedy; and that the arbitrator retained jurisdiction to deal with these matters.

Counsel for the parties appeared before the arbitrator. After that appearance, the arbitrator issued a written decision in which he stated that the settlement agreement was his final award and he refused to grant any relief to the wife.  The next day, the wife filed an application appealing the arbitrator’s decision of the prior day.

Decision of the Court

The judge hearing the application made a number of decisions:

  1. Reasons for Decision in a Settlement: The requirement, in s. 36 of the Act – that an arbitrator give reasons for decision – does not apply when the parties settle the dispute during the arbitration.
  1. Ingredients of an Arbitral Decision: The settlement agreement complied with the other requirements of s. 38 of the Act, namely that it be signed by the Arbitrator, and indicate the date and place where it was made. The settlement document should be examined in conjunction with the executed Certificates of Independent Legal Advice, the Matrimonial Property Act acknowledgements signed by both parties and their counsel, the attachments to the agreement, and the content of the record from December 13, 2013 in which the parties confirmed their agreement with the settlement. In totality, those documents set forth the date of the settlement agreement and the place where it was made.
  1. Settlement Document may be an Arbitral Decision: The fact that the document was entitled “Settlement Terms” and was not referred to as an arbitration award was of no significance. “It was, in fact, an arbitral award and treated by all concerned as such until a much later date, well after the expiration of the 30 day appeal period…Further, there is nothing in the Act or the agreement which prescribes the form of an arbitration award, just that it comply with the requirements of s. 38.”
  1. Natural Justice, Fairness and Equal Treatment: While the wife was not present during some portions of the hearing, her counsel was present. Accordingly there was no breach of the rules of natural justice nor did the process result in either unfair or unequal treatment of the wife.
  1. Process for converting from Arbitration to Mediation: The conduct of the parties during the hearing – leading to the mediation – was sufficient to satisfy the requirements of s. 35(1) of the Act relating to the conversion of the arbitration to a mediation.

Subsection 35(1) says: “The members of an arbitral tribunal may, if the parties consent, use mediation, conciliation or similar techniques during the arbitration to encourage settlement of the matters in dispute.” (emphasis added)

The parties’ conduct during the arbitral hearing was a sufficient “consent” by the parties to convert the arbitration into a mediation. The court held that there was no need for that process to be “explicit, formal, on the record and take place in advance of the conversion of the process.” The Act contains no ‘formula or “recipe”’ for that consent, and that is “consistent with the overall objective of the legislation – to provide a flexible mechanism to litigants that potentially assists them in the resolution of their dispute outside of the formal court process….Both parties were represented by experienced counsel throughout the process. From their agreement to submit this matter to arbitration, the parties must be assumed, in the absence of any evidence to the contrary, to have understood the flexible nature of the process, including that the process could shift from one mode of dispute resolution to another as circumstances dictated.”

The judge did say that “it would have been preferable if the transcript had recorded the proceedings that led the parties and the Arbitrator to shift from arbitration mode to mediation mode.” However, there was no evidence indicating a lack of consent, and there was “very explicit agreement of both parties that is contained on the record at the conclusion of the proceedings.” On the whole record, the judge was satisfied that the parties had consented to shifting from an arbitration to mediation and that the requirements of s. 35 were met.

  1. Time to Appeal: The wife’s appeal was outside the 30-day period in the Act for an appeal to be brought. The settlement document was a valid arbitration award within the meaning of s. 38 of the Act. Once the 30-day period expired after the release of that document, then the arbitrator no longer had jurisdiction over the dispute. Neither the Act nor the agreement between the parties allowed for an extension of the 30-day period. The arbitrator’s later decision which dismissed the wife’s application to re-open the matter was of no legal significance or consequence, even though it was entitled “Arbitration Award”.

Discussion

This decision will be a useful reference anytime settlement discussions occur during an arbitration, and anytime the parties consider engaging in mediation during an arbitration.

The first issue is: how should the parties and the arbitrator record the process by which a settlement is reached during an arbitration?

Section 35(1) of the Alberta Arbitration Act says that “the members of an arbitral tribunal may, if the parties consent, use mediation, conciliation or similar techniques during the arbitration to encourage settlement of the matters in dispute.” (emphasis added) And subsection (2) then says that “after the members of an arbitral tribunal use a technique referred to in subsection (1), they may resume their roles as arbitrators without disqualification.” These subsections state the premise behind section 36 and the policy behind the Alberta Act, namely, that members of the arbitral tribunal may mediate the dispute if the parties consent, and then if the mediation is unsuccessful, they may revert to their position as members of the arbitral tribunal.

This policy position is quite different than that in some other provincial arbitration statutes. Thus, the Ontario Arbitration Act, 1991 states as follows: “The members of an arbitral tribunal shall not conduct any part of an arbitration as a mediation or conciliation process or other similar process that might compromise or appear to compromise the arbitral tribunal’s ability to decide the dispute impartially.”

However, section 3 of the Ontario Act says that, except with respect to certain specific sections, the parties may contract out of the Act. Section 35 and the section dealing with appeals (section 45 in the Ontario Act) are not listed in section 3, so the parties may contract out of them. In addition, under the Ontario Act, the parties could still engage in settlement discussions and mediation: the only prohibition (unless the parties otherwise agree) is that the members of the arbitral tribunal cannot be the mediators.

[This distinction in policy choices is expressly contained in the Uniform Arbitration Act of the Uniform Law Conference of Canada. Section 35 of the Uniform Act contains an Option A and an Option B. Option A is the one chosen by Alberta. Option B is that chosen by Ontario. The Commentary to Section 35 states:

“Enacting jurisdictions may choose either to allow the arbitrators to practise mediation and conciliation or to forbid them from doing so. The Uniform International Commercial Arbitration Act allows the arbitrators to engage in mediation on the consent of the parties. The present statute provides for a single consent at the beginning of mediation, without a separate consent when the arbitrator goes back to arbitrating, the mediation presumably having failed. The reason for eliminating the double consent found in the international statute was to prevent a party from subverting an arbitration in bad faith at the end of mediation, by refusing consent to return to arbitration. The reason for forbidding a change of role is that a mediator or conciliator may learn things from one party in confidence that he or she may not disclose to the other parties. Knowing this information might be perceived to prevent a judicial disposition of the case on the merits if the person then returns to arbitration.”]

Section 36 of the Alberta Arbitration Act then says that “If the parties settle the matters in dispute during arbitration, the arbitral tribunal shall terminate the arbitration and shall record the settlement in the form of an award.” As noted above, section 38(1) says that “An award shall be made in writing and, except in the case of an award made under section 36, shall state the reasons on which it is based.” (emphasis added).

So it is seems clear that a settlement during an arbitration should be recorded in something called “Award”, even though most litigation counsel might consider a settlement agreement to be an agreement between the parties, not an “award” of the tribunal. It also seems clear from section 38(1) that the settlement “Award” will not contain reasons, and the judge so concluded.

Sub-sections 38(2)-(4) of the Alberta Act say that: an award shall “indicate the place where and the date on which it is made” and “be dated and signed by all the members of the arbitral tribunal, or by a majority of them if an explanation of the omission of the other signatures is included”; and that “a copy of an award shall be served on each party.” (emphasis added) In these subsections, there is no exception for settlements under section 36. So, while one may wonder why these requirements should apply to a settlement, it seems that they do and that they must be met even if the “award” is a settlement.

Under sections 36-38 of the Ontario Act, these requirements apply to a settlement “Award”, even though the members of the arbitral tribunal cannot be the mediator.

The court in the present case demonstrated flexibility in considering all the surrounding facts in order to ensure that the technical requirements of section 38(2)-(4) are met. However, arbitrators and arbitral parties should be aware of these requirements – date, place, signature, service. These requirements should be addressed in the document which the arbitral tribunal issues as its “award” or in some other formal documentation, so that other documents or the surrounding circumstances do not have to be relied upon to provide those elements.

The second issue is: how should the parties’ consent to mediation during the arbitration be evidenced?

In the present case, the judge was satisfied by all of the surrounding evidence – and particularly the documentation after the settlement was made – that the parties had consented. But the judge did say that it would have been better if the “conversion” from arbitration to mediation had been recorded in the transcript of the hearing before the mediation commenced, and possibly in some formal Consent signed by the parties at that time. So counsel and arbitral tribunals in the future might be well advised to adhere to this advice in the future.

Should these requirements, and the same approach to them, apply if the members of the arbitral tribunal cannot be the mediator, as in Ontario (unless the parties contract out of section 35 of the Ontario Act)? Could one argue for a more lax – or stricter – regime when the mediator is a separate person? We will have to await a further decision on that point.

A third issue may be raised by this decision: if the wife’s application to the court related to the conduct or legal issues arising from her application to the arbitrator the day before (what might be called the “re-hearing application”), would it have been out of time?

In the present case, the wife appears to have been complaining about issues that related back to the matters leading up to the settlement. She does not appear to have been complaining about the specific events or legalities of her re-hearing application the day before to the arbitrator. In this situation, the arbitrator and the court found that her application was out of time. But if she had been asserting that her re-hearing application had not been properly dealt with, how should the court have dealt with the timing issue? Did the arbitrator’s disposition of her re-hearing application amount to an arbitral award from which judicial review or an appeal would lie? Does the Act provide any relief in respect of such an application? The present decision did not have to answer those questions.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed. Chapter 11

Pinder v. Woodrow, 2015 CarswellAlta 2182, 2015 ABQB 750

Arbitration – mediation – settlement – re-hearing application – appeal and review of arbitral awards

Thomas G. Heintzman O.C., Q.C., FCIArb                                   January 24, 2016

 

Can Conduct Relating To A Mediation Lead To A Higher Costs Award?

In Ross v. Bacchus, the Ontario Court of Appeal recently set aside an order of the trial judge awarding a higher level of costs because of the defendant’s conduct at the mediation. This decision emphasizes that, absent proof of bad faith, courts will be reluctant, at least in Ontario, to impose costs awards relating to the conduct of parties during settlement discussions.

The decision also opens up interesting questions about how participation in mediation and settlement discussion may be proven and how a standing offer to settle affects the court’s decision about the reasonableness of a party’s conduct at mediation.

Background

In a personal injury case arising from a traffic accident, the jury awarded the plaintiff $248,000 and the judge ordered costs in favour of the plaintiff in the amount of $217,000. That costs award included $60,000 because the trial judge found that the defendant’s insurer had failed to attempt to settle the claim as expeditiously as possible, and had refused to participate in the mediation of the claim, as required by sections 258.5 and 258.6 of the Ontario Insurance Act. Those sections provide that a trial judge can take the insurer’s failure to perform those obligations into consideration when awarding costs.

The action was started in September 2010. The defendant’s insurer offered to settle for $40,000 in August 2011 and withdrew the offer in March 2012. About three weeks before the trial in November 2013, the plaintiff offered to settle for $94,065 plus prejudgment interest and costs and, for the first time, offered to participate in mediation. The defendant then offered to settle for $30,000 plus interest and costs and to participate in a half-day mediation, but counsel for the defendant stated that the insurers were “not interested” in settling the case. The plaintiff responded with an offer to settle for $79,065 plus prejudgment interest and costs.

A half-day mediation occurred four days before trial. After the six day trial and the jury’s award of $248,000, the trial judge ordered costs in favour of the plaintiff on a partial indemnity basis up to the plaintiff’s pre-trial offer and substantial indemnity costs after that offer. The trial judge awarded an additional $60,000 in costs in favour of the plaintiff by reason of the failure of the defendant’s insurer to comply with sections 258.5(5) and 258.6(2) of the Ontario Insurance Act.

Four points emerge from the Court of Appeal’s decision over-turning the judgment of the trial judge:

  1. The statement by the defendant’s counsel before the mediation that the defendant’s insurer was “not interested in settlement” was not a sufficient basis to conclude that the insurer would not make a bona fide effort to settle at the mediation. Effectively, the Court of Appeal said that posturing of that sort is part of the litigation and settlement process:

“An insurer’s statement on the eve of trial that it is not prepared to settle a claim cannot be equated with an insurer’s failure to “attempt to settle the claim as expeditiously as possible.” Nor can an insurer who actually participates in a mediation be declared to have failed to participate simply because the insurer indicated prior to the mediation that it was not prepared to settle the claim. A clear statement of the insurer’s position going into the mediation, even a strong statement, does not preclude meaningful participation in a mediation….. The trial judge assumed that because the insurer’s counsel advised that his client was “not interested” in settling the case, the insurer’s subsequent participation in the mediation was “a sham.” The assumption was unwarranted. A firm position strongly put going into mediation does not preclude meaningful participation in the mediation.”

  1. The plaintiff did not tender any evidence that the defendant had not participated meaningfully in the mediation. In writing for the court, Justice Doherty ducked the question as to whether evidence about the conduct of the mediation would have been admissible. He said that this question “raises an interesting legal issue. I need not get into that issue.” Rather, the court held that the plaintiff’s position failed because there was no evidence on the issue:

“If the respondent wanted costs for the insurer’s failure to participate in the mediation, it was incumbent on the respondent to lead evidence establishing the failure to participate in the mediation. Had the respondent attempted to do so, the question of the impact of the settlement privilege on the admissibility of evidence relevant to the insurer’s participation in the mediation may have come front and centre. On this record, the trial judge’s finding that the insurer did not participate in the mediation fails, not because the settlement privilege cloaks the mediation in confidentiality, but because the factual finding of the trial judge has no support in the evidence.”

  1. The fact that the defendant’s insurer had made offers to settle which was of considerable importance to the Court of Appeal. It referred to this fact several times in its judgment:

“There is no evidence that the appellant’s insurer failed to attempt to settle this claim as expeditiously as possible. The appellant made an “all-in” offer to settle for $40,000 in August 2011, less than one year after the action was commenced……. In any event, the insurer had made a settlement offer which was not revoked before trial…..

  1. The Court of Appeal held that the trial judge’s finding about the insurer’s motivation in rejecting the plaintiff’s offer and proceeding to trial were unsupported and irrelevant:

“…the trial judge was also influenced by what he saw as the insurer’s attempt to intimidate the respondent by refusing to make a counteroffer after the respondent’s last offer. The trial judge described the insurer as risking a trial for the sake of $50,000, the difference between the two offers…..Insurers, like any other defendant, are entitled to take cases to trial. When an insurer rejects a plaintiff’s offer and proceeds to trial, the insurer risks both a higher damage award at trial and the imposition of substantial indemnity costs after the date of the rejected offer. Both risks came to pass in this case. The insurer paid a significant financial penalty for its decision to proceed to trial. The costs provisions in ss. 258.5 and 258.6 do not address those risks, but instead address the failure to meet the specific obligations identified in those provisions. The trial judge’s assumptions about the insurer’s motivation for rejecting the respondent’s offer and proceeding to trial had no relevance to the determination of whether augmented costs should be awarded under the Insurance Act provisions.”

Discussion

A number of lessons can be learned from this decision.

The first lesson is that a standing offer to settle can be powerful evidence of a bona fide intention to settle. So parties to litigation are well advised to make the best offer they can, if for no other reason than to avoid an order of costs based upon an unreasonable refusal to discuss settlement.

The second lesson is that it requires evidence to establish that a party has failed or refused to participate in mediation. This lesson may ultimately require a court to decide whether the conduct of a party at the mediation is admissible in evidence. It seems unlikely that such evidence will be admissible. Section 9 of the Ontario Commercial Mediation Act, 2010 states that mediations are confidential, unless the parties otherwise agree. The recent decision of the Supreme Court of Canada in Bombardier v Union Carbide emphasized the confidential nature of mediation, although it did find that, if a settlement is alleged to have been made during mediation, that fact can normally be proven.

The Bombardier v. Union Carbide case opens up the question of whether evidence of a total failure to mediate would be admissible. Say, the defendant attends the mediation with its insurer, and the insurer announces to the mediator: “We’re here but we decline to make or respond to any offer by the plaintiff or to engage in settlement discussions.” Would those facts be admission in evidence? There seems to be a powerful argument that they would be, and that the settlement privilege should not apply to a refusal to participate in settlement discussions. The mere fact that this conduct occurred in the mediation room rather than before the parties came to that room does not logically seem to make that conduct part of the mediation and preclude it from being proven. Rather, it would appear to be conduct which “preclude[s] meaningful participation in a mediation” as referred to by the Court of Appeal.

However, it seems unlikely that evidence about the conduct of a mediation itself, if a real mediation does commence, will be admissible in evidence. Accordingly, if a party does actually participate in mediation, it will be difficult to prove that it failed to do so in a bona fide manner, especially if it has made an offer to settle which was open until trial.

While this decision arose in the context of sections 285.5 and 285.6 of the Ontario Insurance Act, these issues could arise in any litigation or arbitration in which a party’s failure to make reasonable efforts to settle is an issue and, as a result, a higher amount of costs is sought by the other party.

See Heintzman and Goldsmith on Canadian Building Contracts (5th ed.), chapter 11, part 13(d).

Ross v. Bacchus, 2015 ONCA 347

Alternate Dispute Resolution – mediation – offer to settle – costs- insurance

Thomas G. Heintzman O.C., Q.C., FCIArb                                                   November 8, 2015

www.heintzmanadr.com

www.constructionlawcanada.com

A Mediation Obligation Is Enforceable Says The Ontario Court of Appeal

Is a person bound to mediate before commencing an action or arbitration if the contract or applicable statute requires mediation? Or should an obligation to mediate only become effective after an action or arbitration has been commenced? And if mediation is a pre-condition to suing or arbitrating, does the limitation period run before the mediation occurs?

In Madder v. South Easthope Mutual Insurance Co., the Ontario Court of Appeal recently held that if a statutory claims regime states that claimant must seek mediation of the dispute, then the claimant has no claim unless mediation has been attempted. The court also held that, under the applicable no fault insurance regime in question, the claimant had no claim unless the claimant had returned the funds already paid to her.

While this decision was made in the context of no fault automobile insurance legislation, it has real implications for all claims, particularly arbitration claims or claims involving the limitation period.

Background

In July, 2002, Ms. Madder was involved in a motor vehicle accident. She was insured by South Easthope under a no-fault policy for accident benefits governed by the Statutory Accident Benefits Schedule — Accidents on or after November 1, 1996, O. Reg. 403/96 (the “SABS”). She immediately applied for accident benefits pursuant to the SABS and in August, 2002, she began receiving income replacement benefits.

In April, 2003, South Easthope gave Ms. Madder notice that it was terminating the benefits claiming that Ms. Madder was able to resume her employment duties, and in May 2003 South Easthope stopped paying income replacement benefits to Ms. Madder.

In July 2003, before a DAC assessment could take place, and in exchange for a lump sum payment of $3,000, Ms. Madder signed a release in which she released South Easthope from any obligation to pay accident benefits.

The circumstances in which that release was signed were disputed. Ms. Madder said that South Easthope’s adjuster showed up at her apartment and convinced her to sign the release in exchange for the $3,000 and that she felt compelled to accept the settlement. According to South Easthope, Ms. Madder initiated the discussions due to her financial difficulties.

In April 2005, Ms. Madder commenced an action against South Easthope. In August, 2005 South Easthope advised Ms. Madder that she had a statutory obligation to repay the settlement funds received and to mediate the dispute through the Financial Services Commission of Ontario (“FSCO”) before commencing her action. In its defence, South Easthope pleaded that the action should be dismissed because, inter alia, Ms. Madder had not satisfied the statutory prerequisites to litigation.

Motion Judge’s Decision

Each side brought summary judgment motions. The motion judge dismissed Ms. Madder’s motion and granted South Easthope’s motion. The motion judge held that Ms. Madder was obligated to repay the settlement funds and proceed to mediation before she could commence litigation. The motion judge also held that Ms. Madder could not bring the claim as a stand-alone action not subject to the statutory requirements. Her claim was about her right to rescind the settlement agreement and claim accident benefits since the settlement date and such a claim was subject to the mandatory mediation provisions. Her claims of mental distress and bad faith were not independent causes of action but, rather, arose from South Easthope’s alleged breach of the insurance policy.

Court of Appeal’s Decision

The Court of Appeal held that Ms. Madder’s claims, whether asserted in an action or by way of FSCO arbitration, were subject to the statutory obligation to first seek mediation. “Without mediation”, the court said, “the court had no jurisdiction to hear the appellant’s claim.”

The court also held that, before Ms. Madder could assert a claim to rescind the settlement agreement, she was obliged to return any settlement moneys, pursuant to s. 9.1(7) of the automobile Insurance Regulation; and under s. 8.1(8) of the same Regulation she was not entitled to commence a mediation unless she returned the settlement funds.

The court held that Ms. Madder’s claims for conspiracy and bad faith also fell within the statutory regime and could not be asserted in the absence of Ms. Madder instituting mediation and returning the settlement funds.

Discussion

This decision raises, once again, the nature of an “obligation” to mediate. Is it an enforceable obligation, and is it a precondition to the existence of a cause of action? In this decision, the Court of Appeal has answered Yes to both of these questions. But is this the right legal and public policy result?

There is a body of law holding that an obligation to mediate is not an enforceable obligation because it is no more than an obligation to negotiate, which is too uncertain to constitute a legal obligation. The decision of the English Court of Appeal in Sulamerica CIA Nacional de Seugros S.A. v. Enesa Enenharia S.A., [2012]EWCA Civ. 648 is the leading decision to that effect. That decision was discussed in my article dated July 9, 2012 and this issue was also addressed in my articles dated July 27, 2014, Feb. 2013 and July 2014. However, in Madder v. South Easthope Mutual Insurance Co., the Ontario Court of Appeal has concluded, or proceeded on the assumption, that the obligation to mediate is enforceable and disentitles the claimant from commencing proceedings.

Even if the obligation to mediate is enforceable, what is the effect of that obligation? Does it mean that the claimant has no cause of action until mediation occurs, as the Court of Appeal has apparently found? Or does it mean that there is a cause of action but the court or arbitrator can stop it from being further prosecuted until the obligation to mediate is fulfilled? If this is second approach is adopted the result, then the action or arbitration is properly commenced but may be stayed pending a mediation.

There are a number of reason for questioning the approach adopted by the Court of Appeal. If mediation must be sought before a cause of action arises, then Ms. Madder’s cause of action remains suspended. The limitation period has not yet started to run because the mediation has not occurred. That means that Ms. Madder can now seek mediation and pay back the settlement money and go on with her claim. That approach allows actions or arbitrations to be continued long after the events in question have occurred. That, it could be argued, is not a good public policy result.

The other view of the matter is that the cause of action accrued when the insurer terminated payment. It was then that the claimant could start the action. Mediation is an element in the court’s or arbitrator’s jurisdiction to deal with the action, not a pre-condition to the existence of a cause of action. That view reflects the fact that mediation is part of, and not a precursor to, the court’s jurisdiction under the rules of civil procedure. That view would enable the court or arbitrator to stay the action until mediation occurs, if that is appropriate in all the circumstances.

If Ms. Madder, or another claimant, seeks to argue that the limitation period has not run until mediation has occurred, it will be interesting to see what decision the court arrives at. In the meantime, it will be important to pay close attention to a mediation obligation and the limitation period. Proceed with mediation if there is an obligation to do so, but be ready to commence an action or arbitration if the limitation period is expiring based on the events giving rise to the claim, even if the mediation hasn’t been completed.

Madder v. South Easthope Mutual Insurance Co., 2014 CarswellOnt 14500, 2014 ONCA 714

Mediation – Limitation Period – Commencement of proceedings

Thomas G. Heintzman O.C., Q.C., FCIArb                                 November 16, 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

The Supreme Court Of Canada Holds That A Mediation Agreement Doesn’t Preclude Proof That There Was Or Wasn’t A Settlement

The Supreme Court recently released its decision in Union Carbide Canada Inc. v. Bombardier Inc., 2014 SCC 35. In that decision, the Supreme Court dealt with two principles relating to mediations.

The first principle is that settlement discussions are inherently confidential and therefore privileged from disclosure.  This principle is not based on statute law. Rather, it was developed by the courts as part of the law of evidence and is called “settlement privilege.”  There is an exception to that principle. The privilege does not apply when there is a dispute as to whether a settlement was reached. In that case, the parties can lead evidence that is otherwise privileged to prove or disprove the existence of a settlement.

The second principle is that the parties can make an agreement about their mediation and the courts will enforce it.  They can agree that their mediation is entirely confidential. If they do, then neither party can lead evidence about those discussions even when there is a dispute about whether a settlement was reached.

In this important decision, the Supreme Court of Canada dealt with the intersection between those two principles. The court confirmed that the parties can, by agreement, over-ride the common law exception to the settlement privilege and agree that none of the discussions during mediation can be used to prove whether or not there is a settlement.  However, the court held that in the present case the parties had not done so and therefore evidence could be led about what happened at the mediation in order to prove or disprove whether a settlement had been arrived at and if it had, what the settlement was.

Background

Bombardier sued Union Carbide and Dow in Montreal.  Bombardier alleged that Union Carbide and Dow had supplied Bombardier with defective gasoline tanks for the personal watercraft Sea-Doos that Bombardier manufactures and sells. After pleadings were delivered the parties agreed to participate in mediation. The mediation agreement stated that: “Nothing which transpires in the Mediation will be alleged, referred to or sought to be put into evidence in any proceeding.” Both parties alleged that a settlement was reached at the mediation. Dow and Union Carbide said that the settlement was of the world-wide claims of Bombardier, while Bombardier said that the settlement only pertained to the claims in the Montreal action.

Bombardier brought a motion to enforce the settlement and relied upon evidence about what had transpired at the mediation. Dow brought a motion to strike out the evidence about the events during the mediation.  The motion judge struck out that evidence on the ground that it was privilege from disclosure.  The Quebec Court of Appeal allowed the appeal and held that the evidence was admissible to prove whether or not a settlement had been made.  The Supreme Court of Canada upheld that decision.

The SCC decision 

In starting the discussion, the Supreme Court made two important points.

First, the court re-affirmed that there is a common law privilege relating to settlement discussions and that the privilege confers a duty of confidentiality upon those engaged in mediation. This may not be a surprising conclusion but it is an important one. It means that the subsequent discussion about whether events or discussion at a mediation may be proven in evidence starts with the presumption that they cannot. The Supreme Court gave a strong endorsement to the confidentiality of settlement discussions and mediation proceedings. The court said that settlement privilege “promotes honest and frank discussions between the parties, which can make it easier to reach a settlement” and that “encouraging settlements has been recognized as a priority in our overcrowded justice system, and settlement privilege has been adopted for that purpose.”

The exception to settlement privilege is consistent with the privilege. As the court said:  “A communication that has led to a settlement will cease to be privileged if disclosing it is necessary in order to prove the existence or the scope of the settlement. Once the parties have agreed on a settlement, the general interest of promoting settlements requires that they be able to prove the terms of their agreement….. The rule makes sense because it serves the same purpose as the privilege itself:  to promote settlements.”

Second, the Court affirmed that settlement privilege and its exception applies to mediations. The court noted that “a form of confidentiality is inherent in mediation in that the parties are typically discussing a settlement, which means that their communications are protected by the common law settlement privilege.” But the court also said that mediation agreements are subject to the law of contract, not just the law of evidence. That means “that parties can tailor their confidentiality requirements to exceed the scope of that privilege and, in the case of breach, avail themselves of a remedy in contract” and the reasons that parties may “want to protect information exchanged in the mediation process are not limited to litigation.”  The court noted that “mediation contracts often contain strongly worded confidentiality clauses that place limits on the disclosure of communications exchanged in the course of the mediation process. Such clauses have been upheld by courts, though not in a context in which the parties were trying to prove the existence of a settlement.”

The court then set about to apply these principles to the facts of the present case. The court said that, since there was a mediation agreement between the parties, “in principle, there is relatively little that can displace the intent of the parties once it is clearly established.” The real questions were twofold: had the parties agreed to over-rule the exception to the settlement privilege, and if they had, was such an agreement enforceable in the public interest?

The inquiry begins, the court said, with an interpretation of the contract and a determination of whether the parties agreed to a smaller or larger protection than the settlement privilege and its exception otherwise provides. Absent concerns such a fraud or illegality, the parties’ contract should be upheld. Here, the Supreme Court disagreed with the approach of the Quebec Court of Appeal which had placed greater emphasis on protecting the settlement privilege and its exception than on the agreement of the parties.    The Supreme Court held that “it is open to contracting parties to create their own rules with respect to confidentiality that entirely displace the common law settlement privilege.”

But the mere existence of a confidentiality clause, as in this case, does not displace the common law privilege and its exception because the clause and the privilege have different origins and possibly different purposes.  The court said that “the protection afforded by the privilege does not evaporate the moment the parties’ contract for confidentiality with respect to the mediation process, unless that is the contract’s intended effect.” The court noted that Article 9 of the Model Law on International Commercial Conciliation reflects this approach by providing that “Unless otherwise agreed by the parties, all information relating to the conciliation proceedings shall be kept confidential, except where disclosure is required under the law or for the purposes of implementation or enforcement of a settlement agreement.”

The court outlined two mechanisms to resolve the central conflict or tension between the confidentiality clause in the mediation agreement and the exception to the confidentiality privilege.

First, there is a presumption against ousting the exception.  The parties’ agreement must clearly demonstrate an intention to oust the exception before the parties will be precluded from tendering evidence to prove or disprove the existence of a settlement. As the court said:

“where an agreement could have the effect of preventing the application of a recognized exception to settlement privilege, its terms must be clear. It cannot be presumed that parties who have contracted for greater confidentiality in order to foster frank communications and thereby promote a settlement also intended to displace an exception to settlement privilege that serves the same purpose of promoting a settlement. Parties are free to do this, but they must do so clearly.”

Second, the parties may validly provide in their mediation agreement that a settlement agreement is only enforceable if made in writing, at least under Quebec law. The Court noted that article 14.4 of the Civil Code of Quebec allows for this approach by stipulating that “where a particular or solemn form is required as a necessary condition of formation of a contract, it shall be observed.” Whether in a common law province such an agreement would over-ride a subsequent oral settlement agreement has not yet been determined but it seems unlikely that the Supreme Court would countenance different regimes under the two legal systems.

The court then considered the nature of the mediation agreement in the present case and the circumstances in which it was made, to determine if the parties clearly bargained to remove the exception.  The court pointed to three circumstances indicating that they did not.

 First, the parties did not draft the mediation contract or the confidentiality clause contained in that contract. The draft contract was in a standard form prepared and provided by the mediator who provided the draft to the parties on the eve of the mediation. The parties did not amend that agreement in any way before signing it.

Second, there was no evidence that the parties thought they were deviating from the normal incidents of the settlement privilege, including the exception to that privilege.

Third, the written agreement itself disclosed no intention to exclude the exception to the settlement privilege.

In these circumstances the court concluded that the parties:

“had no reason to assume that they were signing away their ability to prove a settlement if necessary…. Absent an express provision to the contrary, I find it unreasonable to assume that parties who have agreed to mediation for the purpose of reaching a settlement would renounce their right to prove the terms of the settlement. Such a result would be illogical.”

Finally, the court observed that the exception to the settlement privilege was a “narrow one” and that on the final hearing of the motion the presiding judge would be empowered to exclude evidence that was not truly directed toward proving or disproving a settlement. In addition, either party might request a confidentiality order or for an order that the motion be held in camera, so that evidence on the motion would not be publicized, although the test to obtain those types of orders is a high one.

Discussion

There are three important lessons to be learned from this decision.

First, parties are entitled to agree in a mediation agreement that discussions during the mediation are not admissible to prove whether a settlement was made during the mediation. Whether it is wise to so agree is another matter but the Supreme Court of Canada has held that it is legally possible to do so.

Second, however, unless the mediation agreement says so expressly or by implication, a confidentiality clause in the agreement will not be interpreted to exclude the parties’ right to lead evidence about conduct during the mediation to prove whether or not a settlement was made.  Merely saying in the mediation agreement that nothing which occurs during the mediation may be put into evidence, or words to that effect, will not stop the parties from leading evidence about the alleged settlement.

Third, if you want to reduce the possibility of a mediation leading to a contested settlement, then state in the mediation agreement that only a written settlement agreement is enforceable.

Union Carbide Canada Inc. v. Bombardier Inc., 2014 SCC 35.

Mediation – Settlement Agreements –  Settlement Privilege – Confidentiality

Thomas G. Heintzman O.C., Q.C.                                                                                 May 19, 2014

www.heintzmanadr.com

www.constructionlawcanada.com

Does An Informal Agreement To Mediate Stop The Limitation Period From Running?

Mediation seems like apple juice:  no harm in taking it and it might do some good. But mediation has a trap: — the limitation period. If a party enters into mediation and lets the limitation period go by, then that’s real harm.

In a number of reported cases, one party to a mediation did exactly that because it entered into a mediation agreement that was not enforceable. When the other party mediated until the limitation period passed, the first party was left without a remedy. That is what happened in Federated Insurance Co of Canada v. Markel Insurance Co. of Canada, 2012 ONCA 218, 2012 CarswellOnt 4051 (Ont. C.A.).

Fortunately, there is protection for this situation in Ontario which is not well known. It is found in Section 11 of the Limitations Act, 2002. By reason of a recent decision of the Ontario Court of Appeal, that protection just improved.

In Sandro Steel Fabrication Ltd. v. Chiesa, the Ontario Court of Appeal held that section 11 applies whenever there is an agreement to appoint a mediator, whether the agreement is formal or informal.  That means that section 11 provides broad and practical protection against the expiry of the limitation period during mediation.

Section 11 states as follows:

“11.  (1)  If a person with a claim and a person against whom the 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 .”

Five aspects of this section should be noticed:

First, the section does not depend on a contract to mediate, only an agreement to mediate. So the section does not state that the agreement must meet the requirements of a contract, such as consideration, certainty of terms, etc. All there has to be is an agreement to mediate.

Second, and this is the point of the Santro decision, the agreement need not be in any particular form. It need not be a formal written agreement and it need not refer specifically to section 11. The respondent in the Sandro case asserted that section 11 could “only be triggered by express written agreement referencing the specific claim sought to be tolled and, in this case, the alleged agreement to mediate …was void for want of mutual intention to the agreement in all essential terms required by the law of contract.”

The Court of Appeal rejected that submission.  It held as follows:

“… the motions judge made a finding that there was an agreement to mediate the claim resulting from the collapse of the building which included the Sandro remediation damages. This finding is owed deference. Based on the evidence before him, this was a reasonable conclusion. As such, by virtue of s. 11(1) of the Limitations Act, 2002, the limitation period was suspended.”

The motion judge also held that section 11 applied even if there is ambiguity surrounding the existence of an agreement. The Court of Appeal was not prepared to endorse that view, but was satisfied that the motion judge had correctly held that there was an agreement to mediate.

Third, section 11 states with relative certainty the events which terminate the protection against the running of the limitation period. Each of the three events mentioned in sub-section 11 can be determined with objective certainty, and presumably it is the earliest of these events which ends the protection. Section 11 does not provide an uncertain event for the end to that protection, such as the termination of “good faith efforts” to settle as some mediation clauses do.

Fourth, section 11 does not terminate a mediation agreement, only the limitations protection of that agreement. So even if the obligation to mediate under the mediation clause continues, the protection against the running of the limitation clause does not. In these circumstances, once the protection under section 11 ends the party wishing to make a claim must commence the claim within the re-started limitation period even if the obligation to mediate continues.  For this reason, those drafting mediation clauses should use the termination language in section 11 so that there is not a disconnect between the obligation to mediate and the limitation period protection.

Fifth, section 11 provides protection that can be used whenever a decision to mediate is made. The protection does not have to be in the original contract under which the dispute arises, if there was such a contract. Indeed, section 11 could apply to a tort or other non-contractual claim. So section 11 is a convenient protection to use whenever a dispute exists which the parties wish to mediate.

The Sandro decision confirms that there is a safe harbour for mediation against the possibility of the limitation period expiring during the mediation. Any parties contemplating mediation should use this safe harbour carefully, by copying the wording of section 11 into the mediation agreement, or at least into a letter or email confirming the agreement to mediate:  “this confirms our agreement to have an independent third party resolve the claim or assist the parties in resolving it.”

The Santos and Federated Insurance decisions are two of the triumvirate of cases decided recently by the Ontario court of Appeal dealing with mediation and limitations. The third is L-3 Communication SPAR Aerospace Ltd. v. CAE Inc., 2010 ONSC 7133, 2010 CarswellOnt 10046 (Ont. S.C.J.), affirmed 2011 ONCA 435, 2011 CarswellOnt 4543 (Ont. C.A.).  In that case the Court of Appeal held that under the contract in question, mediation was a pre-condition to a cause of action arising, so the limitation period did not commence until the mediation was concluded. These three decisions provide an essential legal framework for the impact of mediation on the limitation period and vice versa.

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

Sandro Steel Fabrication Ltd. v. Chiesa, 2013 CarswellOnt 8520, 2013 ONCA 434.

mediation  –  building contracts  –  limitation period

Thomas G. Heintzman O.C., Q.C., FCIArb                                                               April 13, 2014

www.heintzmanadr.com

www.constructionlawcanada.com

When Does An Arbitration Clause Require Arbitration?

Whether an arbitration agreement requires, or only permits, arbitration is a continuing issue under arbitration law. In building contracts, this issue often arises when the agreement states that arbitration will follow mediation or the involvement of the consultant on the project. The questions that can arise is whether arbitration is mandatory if mediation or the consultant’s involvement does not occur.

This issue was recently considered by the Alberta Court of Appeal in A.G. Clark Holdings Ltd. v HOOPP Realty Inc.  In that case, the Alberta Court of Queen’s Bench had concluded that, since the dispute had not been dealt with by the consultant, the parties could proceed to litigation in court, and that arbitration was not mandatory. The Court of Appeal reversed and held that arbitration was mandatory.

The dispute resolution clause in question was a variant of that found in one of the standard forms of building contract used in the Canadian construction industry, namely, the CCDC 2 Stipulated Price contract.  Accordingly, the Alberta Court of Appeal’s decision provides important insight into when and whether a dispute resolution clause similar to that found in the CCDC documents will be held to be mandatory or permissive.

Background

In 1999, Clark Builders and HOOPP had entered into a Design-Build Agreement. Under that agreement, Clark was to design and build a warehouse for HOOPP, the owner. The warehouse was built in 1999 and 2000. As a result of alleged deficiencies in construction, HOOPP commenced an action against Clark in 2002 alleging breach of contract and negligence.

Clark brought a motion to stay the action and require the claim to be dealt with by arbitration. The judge hearing the motion held that the dispute resolution clause in the agreement did not mandate arbitration, and so he dismissed Clark’s motion, and Clark appealed.

The dispute resolution clause in the building contract followed, to some extent, the wording in the standard form CCDC 2 Stipulated Price Contract.  The clause in the contract stated as follows (with less relevant portions excluded, and the most relevant portions emphasized):

 Part 8 Dispute Resolution

GC 8.1 AUTHORITY OF THE CONSULTANT

8.1.1.  Differences between the parties to the Contract as to the interpretation, application, or administration of the Contract or any failure to agree where agreement between the parties is called for, collectively referred to as disputes, which are not resolved in the first instance by findings of the Consultant as provided in GC 2.1 – CONSULTANT, shall be settled in accordance with the requirements of Part 8 of the General Conditions – DISPUTE RESOLUTION. . . .

GC 8.2 NEGOTIATION, MEDIATION AND ARBITRATION. . .

8.2.3 The parties shall make all reasonable efforts to resolve their disputes by amicable negotiations and agree to provide, without prejudice, frank, candid and timely disclosure of relevant facts, information and documents to facilitate these negotiations.

8.2.4 After a period of 10 Working Days following receipt of a responding parties notice in writing of reply under paragraph 8.2.2, the parties shall request the Project Mediator to assist the parties to reach agreement on any unresolved disputes. The mediated negotiations shall be conducted in accordance with the latest edition of the Rules for Mediation of Construction Disputes …

8.2.5 If the dispute has not been resolved within ten (10) Working Days after the appointment of the Project Mediator either party may by notice to the other withdraw from the mediation process.

8.2.6 All disputes, claims and differences not settled as herein provided, arising out of or in connection with the Contract or in respect of any defined legal relationship associated with it or derived from it, shall be referred to and finally resolved by arbitration in accordance with the Alberta Arbitration Act. … [emphasis added]

During negotiation, the parties had discussed a form of dispute resolution clause that read as follows:

8.2.6 By giving notice in writing to the other party, not later than 10 Working Days after the date of termination of the mediated negotiations under paragraph 8.2.5, either party may refer the dispute to be finally resolved by arbitration … .

8.2.7 On expiration of the 10 Working Days, the arbitration agreement under paragraph 8.2.6 is not binding on the parties and, if a notice is not given under paragraph 8.2.6 within the required time, the parties may refer the unresolved dispute to the courts or to any other form of dispute resolution, including arbitration, which they have agreed to use. [emphasis added]

Those familiar with the CCDC 2 Stipulated Price Contract will recognize the latter wording as coming from General Condition 8.2 of that contract.

The Courts’ Decisions

The judge hearing the motion held that Part 8 of the agreement set out a series of steps which must be followed before the arbitration clause became applicable or mandatory. He found that only those disputes “which are not resolved in the first instance by findings of the Consultant” could proceed to the next steps in the process. Since the parties had not referred the dispute to the consultant, the judge held that the arbitration procedure had not been invoked and was not mandatory.

The Court of Appeal disagreed for two reasons:

First, that court found that the wording of Articles 8.1.1 and 8.2.6 were clear and required arbitration whether or not the parties had referred the dispute to the consultant. Article 8 contained a complete dispute resolution regime which did not require either party to refer the dispute to the consultant for it to be applicable.

Second, the Court of Appeal looked at the drafts of Article 8 and held that those drafts demonstrated that the parties had contemplated a permissive arbitration regime and had discarded it in favour of a mandatory regime.  The court held that:

The notion of “Dispute Resolution” could, of course, encompass litigation, as was evident in the original form of the Agreement. The deliberate decision of the parties to remove reference to litigation from the dispute resolution provisions of the Agreement emphasizes that their mutual intention at the time of drafting was to refer disputes to arbitration rather than proceed to litigation. HOOPP’s current position, that it is entitled to bypass arbitration in favour of litigation, is coloured by that earlier decision.

The Court of Appeal effectively held that the dispute resolution clause allowed for two routes to mandatory arbitration, one after consideration by the consultant, and the other without the involvement of the consultant.  In its view, this interpretation was “rational” from two aspects.

First, it recognized that allegations of negligence could not properly be dealt with by the consultant, but could be dealt with by arbitration.

Second, it allowed the parties to go through a mediation type process with the consultant if they wished to, but did not require them to do so before proceeding to arbitration.

How does this decision affect the interpretation of GC 8.2 of the CCDC 2 Stipulated Price Contract? Some might see that provision as an “opt-in” arbitration procedure.  Under that view, arbitration is mandatory once one of the parties elects arbitration under GC 8.2.6, and the meaning of the word “may” in that clause means that one of the parties may choose, but is not required to choose, arbitration, but once chosen, arbitration is binding on both parties.  The other view might be that the word “may” means that arbitration is entirely voluntary.

What does appear clear from GC 8.2.7 of CCDC 2 Stipulated Price Contract is that, if neither of the parties asks for arbitration within the 10 day period referred to in that clause, then either party can go to court. In the Clark v HOOPP case, the Alberta Court of Appeal held that, by their amended form of dispute relation, the parties had eliminated that choice and provided for arbitration to be the only form of dispute adjudication.

Another interesting aspect of the Court of Appeal’s decision is its conclusion that Clark was permitted to appeal the motion judge’s decision. Section 7 of the Alberta Arbitration Act states that the court shall stay an action brought in breach of an arbitration agreement, subject to certain exceptions. Sub-section 7(6) states that “There is no appeal from the court’s decision under this section.” The court held that this prohibition against appeal only applies when the merits of a stay motion are being considered. If the issue is whether the motion judge mis-interpreted his or her jurisdiction to make the stay decision, then the prohibition does not apply.  The Court of Appeal held that this was the situation before it:

Only if that agreement contained a mandatory arbitration clause would s 7 of the Arbitration Act apply. The chambers judge concluded that the agreement did not contain such a clause and he did not, therefore, address the application of s 7 to these parties and this dispute. The chambers judge’s decision on that preliminary issue is subject to appeal.

Accordingly, since dispute resolution, properly interpreted, did give rise to a prohibition of a court action under section 7 of the Act, then there was a right of appeal from the motion judge’s erroneous determination of that issue.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed,, chapter 10, part 6

A.G. Clark Holdings Ltd. v HOOPP Realty Inc., 2013 ABCA 101.

Arbitration  –  Construction law  –  Mediation  –  Mandatory or Permissive arbitration  –  Stay of Arbitration Proceedings –  Appeal from Stay Application

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                 June 9, 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    

Is An Agreement To Mediate Enforceable?

A recurring issue in arbitration and construction law is whether an agreement to mediate is enforceable. That is because an arbitration or building contract may contain a clause imposing an obligation to mediate before arbitrating. If the agreement to mediate is enforceable, that likely has certain consequences.  The limitation period is likely not running and the arbitration cannot be commenced until the mediation is finished. The reverse is true if the mediation agreement is not enforceable.  And if it is uncertain which is the correct position, then the parties may be in a real quandary about whether they may or must commence the arbitration and ignore negotiation.

The English High Court recently considered this issue in Wah (Aka Alan Tang) & Anor v Grant Thornton International Ltd & Ors. The court upheld an arbitral decision that a clause requiring mediation was not enforceable.  Therefore, the arbitration was not premature.

What is interesting about the decision is that the court did not hold that mediation clauses are per se unenforceable. Rather the court held that such a clause must have one of two qualities to be enforceable.

Either the mediation clause must provide reasonable certainty as to the beginning, the ingredients and the end of the mediation process;

Or the subject matter of the mediation must be determinable by fairness or reasonableness so that the court can infer the necessary procedural ingredients.

Finding that the mediation clause in the Grant Thornton case satisfied neither criteria, the court upheld the arbitrator’s decision that the mediation clause was ineffective.

In the alternative, the court found that the period for the mediation had expired by the time that the arbitration started. Therefore, the arbitration was validly commenced.

Background

The claimants were two partners in a Hong Kong partnership, JBPB.  That partnership was a member of the international Grant Thornton organization.  JBPB was removed as a member of the international Grant Thornton organization. The claimants sought to invoke the mediation provisions of the international Grant Thornton agreement before going to arbitration. The partnership agreement contained a two stage mediation procedure involving the Chief Executive Officer and Executive committee.   The English High Court summarized those procedures as follows:

Section 14.3(a) requires that the dispute or difference should be referred to the Chief  Executive with a view to him attempting amicably to resolve that dispute or difference by amicable conciliation of an informal nature;

Section 14.3(b) prescribes that the Chief Executive shall attempt to resolve the dispute or difference in an amicable fashion within one month after receipt of a request that he should do so;

Section 14.3(c) prescribes that if the dispute or difference is not by then resolved it should be referred to a three-person Panel selected by the Board (none of whom is associated with or in any other way related to the member Firm(s) who are parties to the dispute), it being provided that the Panel is to have up to one further month to resolve the dispute or difference.

The international agreement stated that, until the Panel determined that it could not resolve the dispute or one month passed after the reference of the dispute to that Panel, “no party may commence any arbitration procedures in accordance with this Agreement.”

It is interesting to note that the CEO recused himself from the mediation process on the ground that he had been involved in the decision to remove JBPB. In addition, nobody volunteered to be members of the three member board. These facts did not expressly figure in the decisions of the  arbitral tribunal or court. The Grant Thornton international organization and the other partners of JBPB did not object to the arbitral tribunal proceeding with the arbitration without the mediation procedures in the partnership agreement being utilized.

Arbitral and Court Decisions

The claimants took the position before the arbitral tribunal and the court that participating in the mediation process was a condition precedent to arbitration and that, since there had been no mediation, the arbitration was premature and the arbitral tribunal had no jurisdiction to proceed with it. The arbitral tribunal held that the mediation clause did not preclude the tribunal from proceeding with the arbitration.  That decision was upheld by the court.

The court held that an agreement to negotiate in good faith, without more, is unenforceable, even if that agreement is contained within an agreement that is otherwise enforceable. But this is the beginning, not the end of the debate.  The court will “strain to give effect” to a mediation agreement.

The court outlines two ways in which a mediation agreement may be effective.

First, the subject matter of the mediation may be one that can be objectively determined, and if it is, then the mediation agreement may be enforceable:

“For that purpose it may imply criteria or supply machinery sufficient to enable the Court to determine both what process is to be followed and when and how, without the necessity for further agreement, the process is to be treated as successful, exhausted or properly terminated. The Court will especially readily imply criteria or machinery in the context of a stipulation for agreement of a fair and reasonable price.”

The court found that the decision in Petromec Inc and others v Petroleo Brasileiro SA Petrobras and others, [2005] EWCA Civ 891 could be explained on that basis. There, the English Court of Appeal stated that a provision requiring negotiation in good faith with respect to the cost of equipment was enforceable.  In Grant Thornton, the court said that a mediation agreement dealing with that sort of matter may be enforceable, but that was not the nature of the mediation agreement and dispute in the present case.

The second approach is to determine whether the mediation process is sufficiently clear to give rise to an enforceable agreement. But the court said that the issue is not just the clarity of the procedures, but the clarity of the end of those procedures:

The Court has been in the past, and will be, astute to consider each case on its own terms. The test is not whether a clause is a valid provision for a recognised process of ADR: it is whether the obligations and/or negative injunctions it imposes are sufficiently clear and certain to be given legal effect.

The Court set forth a three step process for making this determination:

“the test is whether the provision prescribes, without the need for further agreement, (a) a sufficiently certain and unequivocal commitment to commence a process (b) from which may be discerned what steps each party is required to take to put the process in place and which is (c) sufficiently clearly defined to enable the Court to determine objectively (i) what under that process is the minimum required of the parties to the dispute in terms of their participation in it and (ii) when or how the process will be exhausted or properly terminable without breach.”

The court concluded that the Grant Thornton partnership agreement did not satisfy these criteria:

“I have reached the clear conclusion that Section 14.3 is too equivocal in terms of the process required and too nebulous in terms of the content of the parties’ respective obligations to be given legal effect as an enforceable condition precedent to arbitration. In particular, I accept that the omission to give any guidance as to the quality or nature of the attempts to be made to resolve a dispute or difference renders the Court unable to determine or direct compliance with the provisions of Section 14.3(a), (b) and (c).”

The Court also rejected the suggestion that the mediation process could indefinitely postpone arbitration if the two steps in that process never occurred. The court said that it was not “realistic to suppose the parties to have intended that the Board or panel members could indefinitely postpone the right to arbitration.” Accordingly, the court held that, in the alternative, the mediation clause did not prevent a party to the partnership agreement from commencing any arbitration procedures after the time limits set for the in the mediation agreement. The arbitration in question started well after that time frame.

Discussion

The Grant Thornton decision holds that a mediation agreement is enforceable, if properly drafted. This decision is useful because it advances the debate on this issue to a further level. For the clause to be enforceable, Grant Thornton says that the clause must be one of two kinds.

Either the mediation agreement must set out a process that has a reasonably certain commencement, procedural ingredients and ending.  Or the mediation agreement must deal with a dispute over some matter of fairness or reasonableness which allows the court to infer reasonable procedural elements. Furthermore, in order to ensure that the mediation clause does not hold up dispute resolution in court or arbitration, the mediation clause should have a reasonably prompt “drop dead date.”

The court’s remarks about secondalternative, namely a mediation to determine a matter on the basis of fair and reasonableness, raise difficult issues. Must the mediation agreement itself state that it deals with the fairness of something, such as price? Or if the specific mediation is in fact about some matter of fairness or reasonableness, is that sufficient to infer the necessary procedural ingredients to validate the mediation agreement, or its application in the particular case? If it is the latter, then the validity of the mediation agreement will be determined on a case by case basis.  A mediation clause which may or may not be valid, depending on the issue being mediated, may be an unsatisfactory sort of mediation agreement.

In prior articles I have dealt with Ontario decisions dealing with the enforceability of the duty to mediate.  In an article on July 17, 2011, I reviewed the decision in L-3 Communication Spar Aerospace Limited v. CAE Inc., 2010 ONSC 7133 in which the Ontario Court of Appeal held that, in that case, there was a legally enforceable duty to mediate.  In an article on May 5, 2012, I reviewed the same court’s decision in Federation Insurance Co. of Canada v. Markel Insurance Co of Canada,, 2012 ONCA 218 in which it was held that the mediation clause in that case was not enforceable and that in the meantime the limitation period had expired.  Clearly, the law relating to the enforcement of mediation clauses remains a matter of considerable importance.

See Heintzman and Goldsmith on Canadian Building Contracts (4th ed.), Chapter10, part 6

Wah (Aka Alan Tang) & Anor v Grant Thornton International Ltd & Ors [2012] EWHC 3198

Mediation  –  Validity of Mediation Agreement  –  Uncertainty  –  Duty to Mediate  -Commencement of Arbitration