Multiplicity Of Litigation Is Not A Sufficient Reason To Stay An Arbitration

The Saskatchewan Court of Appeal has recently released an interesting decision dealing with arbitration and court proceedings arising from a construction contract. In Saskatchewan Power Corp. v. Alberici Western Constructors, Ltd., 2016 CarswellSask 186, 2016, the court held that the arbitration clause of the main contract between the owner and the contractor should be enforced even though there was court litigation involving subcontractors. Accordingly, the Court of Appeal upheld the stay of the court action, even though the action had originally been commenced by the same party which now wanted it stayed, the contractor.

In the course of its decision, the Saskatchewan Court of Appeal set forth a number of principles that will be useful to remember when, as may often happen in construction disputes, arbitration and court proceeds are commenced among the various parties involved in the building project.

Background

Saskatchewan Power (the owner), entered a construction contract with the Alberici Western and Balzers Canada, (the contractor) (AB Western). The contract contained an arbitration clause. AB Western entered into a number of subcontracts. The relevant subcontracts required, in the event that there were disputes between the parties to the subcontract, that the subcontractors participate in arbitration with the owner or delay the subcontract dispute resolution process until the dispute resolution procedures under the main contract were completed.

AB Western serve a notice of arbitration under the main contract with the owner and, as a matter of caution, issued a statement of claim as well. AB Western said that it intended to proceed with the arbitration and had only commenced the action in case there were any issues falling outside the arbitration and to protect against limitation issues. In the action against SaskPower, AB Western also joined two subcontractors as defendants.

SaskPower served a Defence and counterclaim in AB Western’s action. SaskPower asserted that third-party claims falling outside the scope of the arbitration clause would have to be pursued through the courts, with the result that there would be a multiplicity of proceedings if the arbitration proceeded.

AB Western applied to stay its own court action so the arbitration could proceed. SaskPower applied to stay the arbitration on the ground that the arbitration would result in multiplicity of proceedings. SaskPower said that there were as many as 15 separate entities that might be involved in the litigation, and that all the disputes should be decided in the one court action.

The application judge agreed with AB Western’s position, stayed the action commenced by AB Western and dismissed SaskPower’s application to stay the arbitration. SaskPower appealed and the Saskatchewan court of Appeal dismissed the appeal.

The Saskatchewan Court of Appeal’s decision

There are many elements to the Court of Appeal’s decision. It may be easiest to set them forth in numerical propositions:

  1. The Court of Appeal held that AB Western’s application to stay the action was the most relevant application because if it were dismissed, the arbitration would be stayed automatically. As the court said:

“…as per s. 8(4) of the Arbitration Act, no arbitration of a dispute may be commenced if a court refuses to stay litigation relating to a matter subject to arbitration. In other words, if the stay of AB Western’s action ordered by the Chambers judge is set aside, then SaskPower does not have to be concerned about its application to stay the arbitration. The arbitration will be stayed automatically by virtue of s. 8(4).”

  1. Section 8 of the Saskatchewan Arbitration Act did not preclude the application being made by AB Western to stay its own action. Section 8 says that a motion to stay an action brought by one party to an arbitration agreement may be made “on the motion of another party to the arbitration agreement.” (underlining added) While this wording might seem to preclude AB Western from seeking to stay its own action, it was entitled to bring its application under section 37 of the Saskatchewan Queen’s Bench Act which states as follows:

“37(1) Nothing in this Act prevents a judge from directing a stay of proceedings in any action or matter before the court if the judge considers it appropriate.

(2) Any person, whether a party or not to an action or matter, may apply to the court for a stay of proceedings, either generally or to the extent that may be necessary for the purposes of justice, if the person may be entitled to enforce a judgment, rule or order, and the proceedings in the action or matter or a part of the proceedings may have been taken contrary to that judgment, rule or order.

(3) On an application pursuant to subsection (2), a judge shall make any order that the judge considers appropriate.

  1. In considering the exercise of the discretion under section 37, the Court of Appeal    agreed with the application judge:

– that the factors in section 8 of the Arbitration Act were “helpful, if not mandatory.”

– that the two step approach to the stay application set out in Ontario Justice Lederer’s 2004 decision in Farris v. Staubach Ontario Inc. was not necessarily applicable. The two Saskatchewan cases that had referred to Farris did not hold it up “as being descriptive of the only way the merits of an application for a stay can be assessed” and one of those decisions questioned its applicability to a motion to stay a party’s own action.

– that the application should be guided by the principles underlying the Arbitration Act.

Here, the Court of Appeal’s decision is notable:

“…most importantly, the Chambers judge was entirely correct to let himself be guided largely by the terms of the Arbitration Act in the situation here. The matter before him was not just any application for a stay. It was an application for a stay brought against the close background of the Arbitration Act and brought by a party to an arbitration agreement desirous of moving forward with that proceeding. In these circumstances, it was incumbent on the Chambers judge to ensure his decision fit coherently with both the spirit and the particulars of the Arbitration Act. It would have been a mistake for him to have done otherwise.” (underlining added)

  1. The Court of Appeal held that section 29 of the Queen’s Bench Act did not require a different result. Section 29 reads as follows:

29(1) The court shall grant to the parties to an action or matter all remedies to which the parties appear to be entitled with respect to any legal or equitable claims that they have properly brought forward so that:

(a) all issues in controversy between the parties are determined as completely and finally as possible; and

(b) a multiplicity of legal proceedings concerning the issues is avoided. (underlining added)

While SaskPower argued that section 29 mandated that the judge avoid the multiplicity of proceedings, the Court of Appeal disagreed. The section was directed to remedies, and was not a “generalized and free-standing directive to Queen’s Bench judges telling them, in all contexts, to do whatever is necessary to avoid or eliminate a multiplicity of proceeds.”

Moreover, Section 7 of the Arbitration Act contained the more specific legislative direction. That section states that “No court shall intervene in matters governed by this Act, except for the following purposes…” Multiplicity of proceedings is not one of those purposes. In this situation the particular set for the in section 7 should prevail over the general set forth in section 29. As the Court of Appeal said:

“In other words, notwithstanding s. 29, the Chambers judge’s assessment of the multiplicity of proceedings issue had to fit coherently with the dispute resolution architecture put in place by the Legislature through the terms of the Arbitration Act. As a result, his focus on that Act was entirely appropriate.”

  1. SaskPower relied upon sub-section 7(c) of the Arbitration Act, which states an exception to the “no court interference” rule contained in the initial words of the section. Sub-section 7(c) says that the court can interfere “”to prevent unequal or unfair treatment of parties to arbitration agreements.” SaskPower said that multiplicity of proceedings amounted to such “unfair treatment.” The Saskatchewan Court of Appeal disagreed. It held that sub-section 7(c) is directed toward procedural fairness of the arbitration itself, and with “maintaining the internal integrity of the arbitration process established by the parties.” The court added:

“As a result, a judicial intervention pursuant to s. 7(c) would not normally lead to a permanent stay of an arbitration in favour of proceedings in the courts. Rather, such an intervention would be aimed at dealing with the unequal or unfair treatment in question and getting the arbitral proceedings back on the rails. None of this fits easily with the argument advanced by SaskPower.”

  1. The Court of Appeal made particular reference to the UNCITRAL Model Law on International Commercial Arbitration. It held that while the Model Law did not contain a provision identical to section 7 of Saskatchewan’s domestic Arbitration Act, “nonetheless, the theme of the jurisprudence it has generated is of some assistance here.” After referring to section 8 of the Model law, the Court of Appeal said:

“Overall, the decisions dealing with Article 8 are to the effect that the prospect of a multiplicity of proceedings is not a valid reason for refusing to refer the parties to arbitration. Rather, the clear theme of the case law is that the risk of parallel or overlapping proceedings is not a basis for refusing to refer a dispute to arbitration for the simple reason that the Model Law does not identify it as such.”

  1. The Court of Appeal concluded its judgment with this important statement:

At the end of the day, the Arbitration Act is clear. When a claim comes within the terms of an arbitration agreement, a court “shall” stay the action with respect to that claim. The only exceptions are the limited ones enumerated in s. 8(2). This will doubtless sometimes create inefficiencies in resolving disputes where a contract does not include an appropriate multi-party arbitration clause. Costs might be duplicated. There could be a risk of inconsistent findings of fact or law. However, this is the inevitable and foreseeable consequence of the way the Arbitration Act is worded.

Discussion

For those in favour of a court attitude that is supportive of arbitration, this decision will be a useful reference. The decision recognizes the necessity sometimes to start both arbitral and court proceedings as a matter of caution. It facilitates the termination of the court proceedings without penalizing the party who commenced both proceedings, and recognizes that the cases dealing with applications to stay court proceeding brought by a party seeking to avoid an arbitration agreement are less relevant to a stay motion brought by a party who commenced the action for safety sake and seeks to uphold the arbitration agreement.

The decision’s reference to the UNCITRAL Model Law is also interesting. Clearly, the Court of Appeal wished to harmonize the principles of domestic and international commercial arbitration.

See Heintzman and Goldsmith on Canadian Building Contracts, Chapter 11, part 8

Saskatchewan Power Corp. v. Alberici Western Constructors, Ltd., 2016 CarswellSask 186, 2016 SKCA 46

Arbitration – Multiplicity of proceedings – Staying court action or arbitration

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

www.heintzmanadr.com

www.constructionlawcanada.com

Contractor’s Claim For Extras And Changed Circumstances Held To Be Ineffective Due To Lack Of Particulars

In Ross-Clair v. Canada (Attorney General), the Ontario Court of Appeal has recently held that a contractor’s claim for extras and changed circumstances was ineffective because it contained inadequate particulars of the claim.

The Extras/Changed Circumstances clause

The changed circumstances clause in the construction contract stated in part as follows:

35.4 A written claim referred to in GC 35.3 shall contain a sufficient description of the facts and circumstances of the occurrence that is the subject of the claim to enable the Engineer to determine whether or not the claim is justified and the contractor shall supply such further and other information for that purpose as the Engineer requires from time to time.

The contractor’s dealings with the engineer:

The correspondence leading up to the court proceedings started with a letter from the contractor in December 2008 making a claim for extra time and extra compensation in the amount of about $1.5 million.  The owner replied stating that the contractor had provided inadequate particulars of its claim.

The parties met and then during 2009, the parties engaged in correspondence in which the contractor re-iterated its claim for extra time and compensation and the owner stated that insufficient particulars had been provided.  The contractor provided a description of the circumstances that, according to it, caused delay in completion of the construction and attached “Additional Costs Summary” listing subcontractors and the costs attributed to their work, but contained no other supporting documentation. The owner responded, saying that “once we have received additional information from you relating to the assumptions and factual background to your claim, we would suggest that we meet to discuss it, after which the Engineer will determine whether any portion of the claim is justified. Once the Engineer makes that determination, [the contractor] can consider the processes available under the [C]ontract for resolving disputes.”  The owner extended the time to complete the project to September 14, 2009, but without compensation and without prejudice to the owner’s right to contest the contractor’s entitlement to any time extension or compensation.

The correspondence continued into 2011 with the contractor now submitting a claim of about $2.2 million but providing no breakdown of the costs being claimed and the owner replying that the contractor’s letter “did not contain a sufficient level of detail.”  The owner asked for “documentation to substantiate each of your costs on the original [Claim] and the additional Claim] that you have referenced in your letter of April 2, 2011, with proof that the delays responsible for these additional costs were caused by [the owner]. Until this is received [the owner] will not be able to assess your entitlement to any additional compensation.”

The contractor’s work was certified by the engineer as complete in February 2012 and the contractor was not granted any further extension to the Contract.

In May 2013, the contractor provided the engineer with an expert report called “Analysis of Delays and Additional Costs”.

The contractor commenced an application for an order compelling the engineer to consider its claim for extra payment.  The Superior Court judge granted that order. The owner appealed and the Court of Appeal set aside that order and declared that the contractor’s claim for extra payment was barred by operation of the contract.

Reasons of the Ontario Court of Appeal

The Court of Appeal found that the contractor had not complied with the requirements relating to a claim for changed condition or extras for the following reasons:

  1. The General Conditions contained both a form requirement and a timing requirement. The form requirement meant that the claim must be in writing and “must contain a sufficient description of the facts and circumstances to enable the Engineer to make a decision as to whether the claim is justified.”
  2. If the contractor’s claim is for extras, the contractor must give written notice within 10 days of the occurrence giving rise to that claim.  Then, the contractor must submit a claim within 30 days of the date that a Final Certificate of Completion is issued.  GC 35.4 “provides an opportunity for the Engineer to request further information in support of the Claim and the contractor to respond to any such request”, and “expressly allows this process to continue beyond the date when the work is certified as being complete.”
  3. “The nature of the information required by [other portions of the General Conditions] provides additional context for the interpretation of GC 35.4”.  Those portions deal with how costs are determined prior to work being undertaken and state that, “in order to facilitate approval of a change, the contractor must submit a cost breakdown identifying, at a minimum, the costs of labour, plant, and material; each subcontract amount; and the amount of the percentage mark-up”.
  4. Both the Superior Court Judge and the Court of Appeal held that the contract established a “Code” under which, in the Court of Appeal’s words, “[the contractor] could seek payment for extras relating to changes in soil conditions, or neglect or delay by [the owner]”.  The Court of Appeal held that the Code “contemplates a process for dealing with a contractor’s claim for extras in which the Engineer has control sufficient that it can fulfill its obligation to determine whether a claim is justified. The Engineer receives the claim. The Engineer decides whether the information provided within the prescribed time frame is sufficient to determine if the claim is justified. If so, the Engineer decides the amount, if any, to be paid to the contractor — again, subject to arbitration. The Engineer fulfills this important role in the context of a Code that, in my view, depends on a highly specific informational component.” (underlining added)
  5. The Court of Appeal held that the contractor’s claim did not satisfy the requirements of the “Code” for the following reasons:a.    While the contractor must give notice of its claim within 10 days of the events giving rise to it, the extended time during which the contractor must submit its written claim contemplates that the claim will be a substantive claim, not just further notice of the claim.b.    In addition, the contractor was required to submit a cost breakdown identifying, at a minimum, the costs of labour, plant, and material; each subcontract amount; and the amount of the percentage mark-up, and the submission of detailed information if it was not possible to predetermine the price of a change.

    c.    The combined effect of these requirements was that, even though GC 35.4 did not state that a “detailed” claim must be submitted, that word must be read into that provision. The Court of Appeal said:

    “The language used in GC 35.4, interpreted in the context of the rest of the Code, leads me to conclude that even though the word “detailed” is not included in GC 35.4, the requirement that a contractor submit a claim in writing sufficient to enable the Engineer to determine whether the claim is justified cannot be interpreted in a manner other than that it must be supported by detailed information. Without detailed information, it is difficult to see how the Engineer would be able to make a decision as to the validity of a claim. In my view, such a decision requires “proof” that the claim is justified.”

    d.    The contractor’s letters “provided little if any support for the [$1.5 million] Claim. Among other things, the letters failed to include information relating to the nature and extent of [the owner’s] responsibility for the delay, to address whether compensation had already been paid on account of the extra expense or to explain whether the extra expense contained in the [$1.5 million] Claim fell within the classes of expenses compensable under GC 35.5 and GC 49 or GC 50, and, if so, in what amount.”

    e.    In addition, the contractor’s letters “were inconsistent and therefore confusing” in terms of the location where the extra work was said to be required.  Furthermore, the contractor’s cost summary “provided skeletal information listing the amounts attributed to various sub-contractors but no breakdown identifying, for example, the costs of labour, plant, and material or the amount of the percentage mark-up.”

    f.    Accordingly, the contractor’s claim lacked specificity, was confusing in terms of identifying the parts of the project affected by the delay, was accompanied by virtually no information in support of the extra work done and the costs associated with any such work, and therefore did not meet the requirements of GC 35.4

Discussion

This decision is of vital importance to contractors submitting claims for extras or changed circumstances under building contracts.  If the language of the contract could potentially be read as requiring the contractor to provide details of the claim, then the Court of Appeal has set a very high bar so far as those details are concerned.  Indeed, the contractor must determine if the word “detailed” may be read into the contract, as occurred in this case.  If that is a possibility, then those details must be provided.  This decision provides a virtual roadmap or check list to consult when developing the details for such a claim.

Those details are higher than are normally required for the commencement of a legal claim in court.  The rationale for that higher bar is both the wording of the building contract and the role of the engineer in scrutinizing the claim and rendering a decision about its validity.  The Court of Appeal considered that the engineer could only perform its function in a timely manner if those details were provided.

One can wonder whether the bar has been raised too high in this decision.  The Court of Appeal has set a very high standard relating to the materials to be submitted for the consultant’s review, by reading the word “detailed” into the requirements of a claim, and by holding that the claim procedure entailed a “highly specific informational component” involving “proof” that the claim is justified.  Is this standard of proof suitable at that stage of the claim, or more suitable for the later arbitration of the dispute?

In the alternative, should the contractor be allowed to amend the claim to provide details after the time limit for delivering the claim has expired, as long as no prejudice has been suffered?  That is the normal course in court proceedings. It would be extremely rare for a court action to be dismissed for lack of particulars.  The plaintiff would almost always be given the right to amend the claim to provide further particulars.

This decision goes in the drawer of important decisions, to be pulled out when a claim for extras or changed circumstances is being considered.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 6, part 9(d)

Ross-Clair v. Canada (Attorney General), 2016 CarswellOnt 3854, 2016 ONCA 205, 265 A.C.W.S. (3d) 289
Extras and changed circumstances –particulars of claims for extra payment under building contracts –

Thomas G. Heintzman O.C., Q.C.,FCIArb
July 10, 2016
www.heintzmanadr.com
www.constructionlawcanada.com

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

Ontario Divisional Court clarifies the Trust Fund Obligation Under The Construction Lien Act

In Robert Nicholson Construction Co. v. Edgecon Construction Inc., 2016 CarswellOnt 8345, 2016 ONSC 3107, the Ontario Divisional Court decided two matters of importance under the trust fund sections (sections 7-13) of the Ontario Construction Lien Act.

First, the court held that a subcontractor cannot assert a trust fund claim against the owner under the Ontario lien statute. That is because the trust fund obligation is only owed to a person in a contractual relationship with the person alleged to have that obligation. Thus, the owner owes the trust fund obligation to the contractor, and the contractor to the subcontractor. But the owner in this case did not owe such a duty to the subcontractor who was asserting the claim. As the court said:

“In other words, the Respondent concedes that the motion judge erred in law when he found that a subcontractor could be a beneficiary of the statutory trust fund created under s. 7(1) of the Act, as the wording of that section is clear; the owner’s trust fund exists “for the benefit of the contractor”. Under s. 8 of the Act, a separate and distinct trust obligation is imposed on contractors and subcontractors, the beneficiaries of which are other subcontractors (Colautti Construction Ltd. V. Ashcroft Developments Inc. et al, 2011 ONCA 359 (C.A.) at para. 73).

Since this decision was based upon a concession of the subcontractor, it may not have great weight, but it does apply the Ontario Court of Appeal’s decision in the Calautti case. In the latter case, the claim was by the owner against the contractor based upon the trust fund section, which seems like a non-starter from the beginning.

Most but not all of the provincial lien statutes provide that the beneficiaries of the trust fund obligation are the persons contracting at the next lowest level in the payment pyramid with the person owing a trust fund obligation. Under the New Brunswick lien statute, however, the beneficiaries are not limited to those persons who have a contract with the person owing a trust fund obligation, and include any persons providing services and materials to the improvement.

Second, the court addressed the subcontractor’s argument that the owner controlled the contractor because it paid the contractor. Section 13 of the Ontario Act says that any person who “has effective control of a corporation or its relevant activities” is also liable for a breach of the trust fund obligation by that corporation. As the court said, the subcontractor alleged that because the owner “had control over sending the general contractors the money they were entitled to, the [owner] had effective control of one of the general contractors’ “relevant activities”. As put by the [subcontractor], since the [owner] “held the purse strings”, they had “effective control”.”

The Divisional Court dismissed this argument as follows:

To allow this argument to succeed would mean that every owner is potentially liable under this section. Furthermore, in construction projects that are financed by lending institutions, the payments to general contractors can come directly from those lending institutions. According to the Respondent’s argument, those lending institutions could also be exposed to liability under s. 13…..It would be an absurd reading of the Act to find that someone who makes payments to a corporation has control over one of the payee corporation’s “relevant activities”, for the purpose of meeting the first precondition for liability under s. 13.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 16, parts 6(i) and (v)

Robert Nicholson Construction Co. v. Edgecon Construction Inc., 2016 CarswellOnt 8345, 2016 ONSC 3107

Construction Liens – Trust Fund obligation –beneficiaries of trust fund – effective control of contractor

Thomas G. Heintzman O.C., Q.C., FCIArb                            June 29, 2016

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.