Alberta Court Of Appeal Upholds The Dismissal Of A Claim Which Ought To Have Been Arbitrated

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

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

Second Decision of the Alberta Court of Appeal

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

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

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

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

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

Discussion

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

There are at least two further issues that arise

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

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

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

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

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

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

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

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

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

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

 

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

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

Background

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

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

Chamber Judge’s Decision

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

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

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

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

Alberta Court of Appeal’s Decision

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

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

Discussion

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

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

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

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

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

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

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

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

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

 www.heintzmanadr.com

www.constructionlawcanada.com