When Is A Mediation Agreement Enforceable?

One of the most difficult issues in the law of alternative dispute resolution is whether a mediation clause creates an enforceable obligation.  That issue has an impact on related issues and rights.  If a party gets the issue wrong, it may miss a limitation period or affect its right to rely upon an arbitration or exclusive jurisdiction clause.

In recent articles I have discussed two recent decisions of the Ontario Court of Appeal in which that court apparently arrived at conflicting decisions about whether a mediation clause created an enforceable obligation.  The English Court of Appeal considered this issue in its recent decision in Sulamerica CIA Nacional de Seugros S.A. v. Enesa Enenharia S.A..

The Sulamerica decision is more famous for its holding that the law applicable to an arbitration clause is the law of the place that the parties designate as the seat of the arbitration, not the law that they designate as the law of the contract.  But hidden in the back of the decision is another important conclusion, namely, that a mediation clause is not valid unless it contains sufficient minimum details to make it enforceable.

In Sulamerica, the enforceability of the mediation clause affected whether the insurer had properly commenced arbitration proceedings. The insurance contract provided that the law applicable to the contract was the law of Brazil and that the courts of Brazil were the exclusive jurisdiction for the proceedings relating to the contract. In addition, the contract contained an arbitration clause, condition 12 of General Conditions of the contract, which stated that the seat of the arbitration was London, U.K..

The insurers gave notice of arbitration, asserting that the insured’s claim was not covered by the contract. The insured commenced an action in Brazil for an order that the insurers were not entitled to submit the dispute to arbitration and obtained an injunction restraining the insurers from commencing an arbitration proceeding. The insurers then applied to the court in the U.K. for an order restraining the insured from continuing with the proceedings in Brazil.

The insured said that the law of Brazil governed the arbitration clause and that by the law of Brazil, its participation in the arbitration was voluntary, not mandatory. The insurers said that the law of England applied to the arbitration clause and that under English law, arbitration was the exclusive remedy to determine the dispute, that the jurisdiction of the arbitral tribunal was mandatory not voluntary, and that the insured would be bound by the decision of the arbitral tribunal.

The English judge of first instance held that English law applied to the arbitration clause and issued an injunction against the further prosecution of the Brazilian action by the insured, and the English Court of Appeal upheld that decision.  In doing so, the Court of Appeal may be seen as resolving a conflict of decisions in the English courts.  The result appears to be that, absent other evidence or factors, then in the face of a contest between the law of the contract and the law of the seat of the arbitration as to which law governs the arbitration clause , the latter will win out.

That part of the Sulamerica decision has been well discussed by the commentators. But there is another part of the decision which could be equally important.

Condition 11 of the insurance contract – the one immediately prior to the arbitration clause- required the parties to mediate before proceeding to arbitration. The insurer had not sought to mediate prior to instituting arbitration. The insured submitted that the mediation and arbitration clauses were part of a single dispute resolution regime, that mediation was a condition precedent to arbitration under that regime and, accordingly, the arbitration proceeding was premature and should be dismissed on that ground alone.

Condition 11 of the contract contained five paragraphs and some 31 lines, so it was not a “bare-bones” provision. It did not prescribe any particular mediation process, but it did clearly state that “the parties undertake that, prior to a reference to arbitration, they will seek to have the dispute resolved amicably by arbitration.” The clause contained an elaborate provision relating to confidentiality, stated the means by which the mediation could be terminated and stipulated a 90 day period for the mediation to be conducted from the date that one party started the mediation. The clause dealt with the sharing of the costs of the mediation. All in all, not a bad mediation clause.

But not good enough to be enforceable, according to the Court of Appeal.  It dismissed the insured’s submission on the ground that the mediation clause was not sufficiently precise to be enforced. It held as follows:

“…condition 11 does not set out any defined mediation process, nor does it refer to the procedure of a specific mediation provider. The first paragraph contains merely an undertaking to seek to have the dispute resolved amicably by mediation. No provision is made for the process by which that is to be undertaken and none of the succeeding paragraphs touch that question.  I agree with the judge, therefore, that condition 11 is not apt to create an obligation to commence or participate in a mediation process. The most that might be said is that it imposes on any party who is contemplating referring a dispute to arbitration an obligation to invite the other to join in an ad hoc mediation, but the content of even such a limited obligation is so uncertain as to render it impossible of enforcement in the absence of some defined mediation process.”

The Court of Appeal also rejected the insured’s argument that, at the very least, the insurer was required to show that, as a matter of fact, it had satisfied condition 11.  The court held that if “mediation is not defined with sufficient certainty, the condition cannot constitute a legally effective precondition to arbitration.”

This conclusion raises a number of difficulties:

First, mediation is usually considered to be a consensual process requiring no agreement on process. If that is so, it is difficult to see why certainty of process is an essential element for its validity.  In Sulamerica, the English Court of Appeal has applied to the details of the mediation process the certainty requirements found in the law of contract which relate to the making of a contract. Is that necessary or appropriate? If the mediation process is voluntary, why is the agreement to mediate not sufficient?  If a party does not want to mediate, it can immediately state that position and the mediation may be at an end, but why should the parties not be obliged to at least take that step without further agreement on the process?

There is an ongoing debate, at least in North America, about the effort that a party to a mediation agreement must demonstrate before it has complied with a duty to mediate. Some say none; some say that there must be at least some good faith effort to mediate. But the Court of Appeal appears to pre-empt that debate by requiring that the details of the mediation process must be sufficiently clear from the beginning before any obligation to mediate can come into being.

Second, it seems unlikely that most mediation clauses satisfy the “sufficient certainty” requirement established by the Court of Appeal.  In order to do so, it is likely that the mediation agreement will have to refer the mediation to an arbitral or mediation institute. Agreements to engage in ad hoc mediation may, almost by definition, be unenforceable since those sorts of agreements usually leave the parties with the flexibility to choose the mediator and the “style” and procedures adopted by a particular mediator. Even mediation institutions will have to review their rules to ensure that they are “sufficiently certain”.

Third, different courts may have different views on this issue.  Those views may have a dramatic impact on limitation periods.  If an obligation to mediate arises, then the limitation period may well be extended.

As I noted in my article dated July 17, 2011 the Ontario Court of Appeal held in L-3 Communication Spar Aerospace Limited v. CAE Inc that an enforceable obligation to mediate had arisen in that case and accordingly the cause of action did not accrue and the limitation period did not start to run until the mediation was over.

In L-3 Communications, the agreement in question contained no details about the mediation process.  It simply stated that when the parties “had not agreed” then they could proceed to arbitration.  The Ontario Court of Appeal found that was sufficient to create a duty to mediate so that the cause of action did not accrue and the limitation period did not start to run until that occurred.  Had the Ontario Court of Appeal applied the logic of the English Court of Appeal in Sulamerica, presumably it would have concluded that there was no enforceable mediation clause, and the plaintiff’s cause of action accrued once the conditions for liability had occurred without any necessity for those conditions to include mediation.

As I noted in my article dated May 5, 2012, in another decision of the Ontario Court of Appeal, Federation Insurance Co. of Canada v. Markel Insurance Co of Canada, that court held in 2012 that wording similar to that considered in the L-3 Communications decision did not give rise to an enforceable obligation to mediate.  The result in Federation Insurance appears to be different than the decision in L-3 Communications and more consistent with the decision in Sulamerica. 

All of the above may leave those drafting agreements wondering about what exactly to put into a mediation agreement to make it binding.  It may leave those suing to enforce rights under those agreements wondering whether to first start an action or mediate.  The decision to sue or mediate first may, like in Sulamerica, simply affect or delay the determination of which tribunal – court or arbitrator – is the proper tribunal. But more troubling is the limitation problem.

Making the decision to mediate, and not to commence the action, may result in the limitation period being missed.  With this risk, a party may be well advised to “sue first and mediate later”, unless the opposing party agrees to extend the limitation period in the meantime.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th edition, Chapter 10, part 6

Sulamerica CIA Nacional de Seugros S.A. v. Enesa Enenharia S.A., [2012]EWCA Civ. 648

Arbitration – Mediation – Enforceable Agreement – Choice of Law – Choice of Forum – Limitations – Insurance

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                       July 5, 2012

www.constructionlawcanada.com

www.heintzmanadr.com

May a Contractor Sue a Subcontractor When It Agreed With The Owner To Obtain Project Insurance?

One of the most difficult issues in Canadian construction law is the impact of insurance on claims between owners, contractors and subcontractors.

There are two levels to the issue:

What is the impact of a clause in the building contract by which one party agrees to obtain insurance?

And what is the impact of the terms of the insurance itself?

Decisions of the Supreme Court of Canada and provincial appellate courts make it clear that insurance clauses and insurance policies can bar claims between the parties engaged in a building project.  Those decisions adopt two principles:

 First, the insurance regime relating to a building project should benefit all the parties to the project, so that each party does not have to go through the duplicative and expensive process of obtaining insurance for the same risk.

Second, the fundamental insurance law rule is that an insurer cannot pay a claim under a policy, say by the owner, and then bring a subrogated claim against a party that is a named or unnamed insured under the policy, say against the contractor.  But while the principles seem clear, the effect of a specific clause or policy remains unclear.

In Castonguay Construction (2000) Ltd. v. Commonwealth Plywood Co. Ltd, the Ontario Superior Court of Justice applied these principles to a new situation.  In this case, a subcontractor (or consultant to the contractor) sought to rely upon the insurance clause in the main contract between the owner and the contractor.  It did so in a motion to dismiss an action against it by the contractor.  While the court dismissed the motion, there are a number of fascinating issues raised by the subcontractor’s reliance upon the insurance clause in the main contract to which it was not a party.

The Background Facts

As the general contractor, Castonguay entered into a contract with Commonwealth for the expansion of a warehouse owned by Commonwealth.  At the end of the project, Castonguay sued for the holdback and Commonwealth counterclaimed for alleged deficiencies. Castonguay then issued a third party claim against Zenix which had provided engineering consulting services to Castonguay on the project, alleging that any fault with the construction was due to Zenix’s faulty design.

In the main contract between Commonwealth and Castonguay, Castonguay had agreed to obtain “wrap-up” liability insurance which was expressly to cover the “Contractor’s Consultant” as an unnamed insured and was to “preclude subrogation claims by the insurer against anyone insured thereunder.”

The main contract also required Castonguay to obtain comprehensive general liability insurance, which was to include coverage for damages to property, including blanket contractual and cross liability coverage. The CGL policy contained exclusions for improper material, workmanship and design.

In fact, Castonguay didn’t read the main contract and didn’t obtain this insurance.  But it did have a CGL policy of its own, and that policy had “Contractor’s Edge” coverage which provided coverage, subject to exceptions relating to defective materials and workmanship.  Castonguay’s insurer was defending it under this insurance policy.

Zenix brought a motion to dismiss Castonguay’s third party claim against it.  It made two submissions:

First, Zenix submitted that, in light of the total circumstances it was entitled to the benefit of Castonguay’s CGL and Contractor’s Edge policy even though Zenix was not named as an insured in those policies.

Second, Zenix said that it was entitled to the benefit of Castonguay’s obligation in the main contract with Commonwealth to obtain insurance.  Because of that obligation in the main contract, Zenix said that Castonguay was prohibited from asserting any claim against it.

The Decision

The motion judge dismissed Zenix’s motion.  What is not entirely clear is why he did so.  On the one hand, he could have said that the action had some apparent merit and that the insurance issues were too complicated to be dealt with by way of motion.  At some points in his reasons, the motion judge appears to be saying that.  But he went on to deliver sixteen pages of reasons which contain some very pointed comments about the insurance clause and policy issues.

The motion judge dismissed the motion for two reasons:

First, he was not satisfied that the “wrap-up” or CGL insurance which Castonguay should have obtained under the main contract would have applied to Castonguay’s claim against Zenix in the present case.  He referred to various exclusions in that sort of insurance which might well apply to the claim against Zenix.  He noted that there was no evidence that the provision of insurance, and the terms in the main contract relating to insurance, had been discussed in the negotiations leading up to the Castonguay-Zenix contract. In the result, he was not prepared to find that there was an implied term, in the contract between Castonguay and Zenix, that Zenix was entitled to the benefit of the insurance that Castonguay actually obtained or ought to have obtained.

Second, he declined to find that Castonguay was a third party entitled to rely on the insurance provisions in the main contract. He was unwilling to analogize a subcontractor or consultant on a construction project to an employee or tenant entitled to the insurance protection of the employer or landlord. In the result, he concluded that the “law of privity does not provide for a principled exception that should extend to the circumstances of this case.”

The Implications of this Decision

On one level, this decision is simply a pleadings decision in which the motions judge has held that the claim should proceed further.  On this basis, it would demand little attention.

But the decision does reveal some fascinating tensions in two recently judge-made rules:

the Rule providing a defense based upon insurance clauses and policies;

and the Rule relating to third party beneficiaries.

The third party beneficiary rule requires that, before a party can gain the protection or benefit of a contract to which it is not a party, it must prove that:

1.  The parties to the contract intended to extend the contractual rights or protection in question to the third party; and

2. The activities performed by the third party are the very activities coming within the scope of       the contract.

In the present case, the motion judge held that it was not plain and obvious to him that these conditions were satisfied. He examined the terms of the main contract and the terms of “wrap-up” policies and held that it was not clear that either the terms of those sort of policies, or the third party beneficiary rule, applied to Castonguay’s claim against Zenix.  He concluded his decision by saying: “In the absence of any evidence of express terms in the subcontract between Castonguay and Zenix contemplating a waiver of liability, it is not plain and obvious that the Third Party Claim cannot succeed.”

So in this case, this issue will have to be finally decided at trial.  For the moment, the decision must be read that there is a possibility that the consultant/subcontractor may be able to rely on the insurance provisions in the main contract.

Clearly, there are some good policy reasons for the subcontractor or consultant to have the protection of the insurance regime put in place under the main contract.  Those policy reasons have been repeatedly stated by the courts as they have developed the rule precluding claims in the face of insurance clauses. Those rules have not depended upon the negotiations or dealings between the third party and a contracting party, but upon all of the circumstances.  Nor are those negotiations or dealings relevant to the two components of the third party beneficiary rule (the “intention to benefit” and the “very activities”). Thus, if Castonguay had taken out the insurance called for in the main contract, and if a claim had been made by either the owner or Castonguay against Zenix, then it is hard to see why Zenix would not fall within the third party beneficiary rule.

If this is so, then two very interesting issues emerge.

First, does the third party beneficiary rule apply at all if the party to the contract has failed to perform its contractual duty?  Can a third party rely on a breach of a contract to which it is not even a party?  In this case, was Zenix entitled to rely on a breach by Castonguay of its contractual obligation to Commonwealth to obtain insurance? It certainly seems to be a stretch of the third party beneficiary rule to allow a third party to rely upon a breach of a contract to which it is not a party.

Second, was it necessary to consider the terms of the policies to decide the motion?  Castongauy and Zenix apparently argued the motion on the basis that it was.  But wasn’t the real issue whether Zenix was entitled at all to the benefit of the insurance which Castonguay ought to have placed?  If Zenix was, then judgment to that effect might have been granted. If judgment to that effect was granted, then there would simply be a coverage dispute as to whether Castonguay’s claim fell with the coverage.  That dispute might be no different than Castonguay’s own claim for coverage.

A resolution of the motion in this fashion seems possible if Castonguay had taken out the required insurance, but difficult or impossible when it had not and the court was required to surmise or guess at what that insurance coverage might have been.  In the result, the Castonguay decision does not answer the question of whether a subcontractor or other third party may rely upon the insurance clause in the main contract if the insurance policies are in fact taken out in compliance with that clause.

Another interesting aspect of the Castonguay decision is that there is no reference to the main contract being incorporated into the subcontract or consultant’s contract.  If there had been such incorporation, then the insurance clauses in the main contract might have been directly relied upon by Zenix.

In the result, we will have to await the trial in this action, or further decisions, to resolve the degree to which those engaged in construction projects can rely upon insurance clauses in contracts to which they are not a party, or insurance policies taken out by the parties to those contracts.

Building Contract  –  Third Party Rights  –   Subcontractor   –   Consultant – Insurance

Castonguay Construction (2000) Ltd. v. Commonwealth Plywood Co. Ltd, 2012 ONSC 3487

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                        June 24, 2012

www.heintzmanadr.com

www.constructionlawcanada.com

 

Condominium Unit Owners Can Claim Common Elements Relief

Construction projects involve many participants and each of those participants may have a claim against other participants.  Developers, immediate and subsequent purchasers, contractor and subcontractors, consultants: they are all potential plaintiffs.

So one of the main issues in construction law is:  who can be a plaintiff against what defendant and for what relief?

This issue becomes more complicated with condominiums, and in particular the common elements in the condominium building.  The developer may have sold units to purchasers, but generally speaking it is the condominium corporation that is responsible for, and can sue for relief relating to, the common elements.  Can the purchaser of a condominium unit sue the developer for relief in respect of the common elements?  In 1420041 Ontario Inc. v. 1 King West Inc., the Court of Appeal for Ontario has recently answered Yes to this question, provided that the relief is directly related to the unit owner’s enjoyment of his or her unit.

The Background

The numbered company purchased eight units in a condominium complex to be constructed by 1 King West in Toronto.  The purchase contract provided for the exterior doors, windows and walls of the units to be installed in a way to meet the specific requirements of the numbered company, even though those elements were part of the common elements of the building.

After occupancy became available, the numbered company sued for damages relating to the faulty installation of these and other elements in the units it had purchased.  The condominium corporation also sued for damages relating to the common elements. It brought the action on behalf of itself and the individual unit holders, including the numbered company, and the action was against the developer, construction manager, general contractor, architect and engineers. The numbered company did not opt out of that action. The condominium corporation settled that action.

The developer brought a motion to stay or dismiss the numbered company’s action relating to the common elements, on the basis that only the condominium corporation could assert any claim relating to the common elements.  While the Divisional Court agreed with the developer, the Court of Appeal reversed that decision and held that the numbered company had the status to bring its claim relating to the common issues.

The Decision

The dispute largely turned on the meaning to be given to section 23(1) of the Ontario Condominium Act, 1998 (the Act). That section states that the condominium corporation “may”, on its own behalf and on behalf of unit owners, commence, maintain or settle an action relating to the common elements or the individual condominium units, and may do so even though it is not a party to the contract in respect of which the action is brought.

The Court of Appeal held that section 23(1) of the Act does not deprive the condominium unit holder from suing for relief relating to the common elements.  The purpose, history and permissive language of that sub-section did not support a legislative intent to take away the unit holder’s claim.  Even though the Act created a proprietary regime in which the condominium corporation has a dominant role, that regime does not eliminate the contractual regime arising from the contract made by each unit purchaser with the developer.

Moreover, the logic of the developer’s position would be that the unit holder has no claim even with respect to the unit itself, since section 23(1) says that the condominium corporation has the right to sue both in respect of the individual units and the common elements. This latter proposition was absurd, in the Court’s view.

The Court of Appeal held that, unless the Act explicitly takes away the contractual right of the condominium unit holder, the Act should not be interpreted to do so. Since section 23(1) contained no such express language, the Court held that the enactment did not have this effect.

The Court also held that the authority of the condominium corporation to bring its own action would not lead to a multiplicity of proceedings since the corporation’s action would necessarily be in relation to what the Court called a “problem that affects the condominium community as a whole.”  The individual unit holder’s action would have to be “to pursue a remedy that is contractually unique to the unit or that deals with some other unit-specific wrong raising a discrete issue relating to common elements immediately pertaining to the unit.”

The Court also held that the condominium unit holder would not effectively make a double recovery – one through the condominium corporation and the other in its own action.  The recovery by the corporation would only be for its own claim, not for the unit holders’ claims, since the wording of section 23 makes it clear that it is only the corporation’s interest that the corporation can recover by way of judgment.  If there was any risk of double recovery, the court could deal with that issue by staying the unit holder’s claim to that extent.

Conclusions

There are at least three conclusions or concerns that arise from this decision.

First, this decision contains a firm statement by the Court of Appeal that contractual rights will not be annulled by statutory regimes in the absence of clear language to that effect. Since building contracts are surrounded by statutory regimes – such as construction lien and building code legislation – it is well that the Court of Appeal has re-emphasized this principle.

Second, this decision will necessarily give rise to a very careful analysis of claims in respect of common elements.  Will it be difficult or impossible to separate claims that are “unique to the unit” or “unit specific” as opposed to those that pertain to the condominium “community” as a whole?  One can foresee that there may be multiple motions, at the time of pleadings or by way of summary judgment, to sort out the two sorts of claims.  In addition, when a settlement is made, either by the condominium corporation or the unit holder, then care will have to be taken to determine exactly what is being settled and paid for.

Finally, the decision makes no mention of the “class action” aspect of this dispute.  The condominium corporation’s action was on behalf of unit holders, as well as itself.  The numbered company unit holder did not opt out of the condominium corporation’s action.  The condominium corporation settled that action as it was entitled to do. Should the numbered company have opted out of the action, or have done something at the time of the settlement?  Apparently not, because the corporation’s claim and settlement was only in respect to the “community’s” claim in respect of the common elements, not the unit holder’s “unique” claim.

If this is so, then the right of the condominium corporation to bring an action on behalf of unit holders may be quite different than the class action regime contained in the Ontario Class Proceedings Act, 1992.  The latter regime contains certification and settlement approval procedures intended to govern and protect the rights of class members.  Now that it is established that both condominium corporations and condominium unit holders have claims in respect of the common elements, similar rules and protections may have to be adopted by the parties to condominium litigation.

Building Contract   –  Claim for Damages   –  Condominium   –   Common Elements

1420041 Ontario Inc. v. 1 King West Inc, 2012 ONCA 249

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                         June 21, 2012

www.heintzmanadr.com

www.constructioncanada.com

 

Does An Interim Lender To A Construction Project Owe A Duty of Care?

Construction projects don’t often proceed without a lender. And often there is an interim lender which provides financing pending the advancement of funds by the final lender. In this circumstance, two questions arise:

First:  Does the interim lender owe a duty of care to the owner or purchaser of the project?

Second:  If the interim lender makes representations to the owner or purchaser, does that lender owe a duty to make those representations carefully?

In Condominium Corporation No. 0321365 v MCAP Financial Corporation, the Alberta Court of Appeal recently answered Yes to the first question, but Maybe to the second question.

The MCAP decision is important because different answers were given to these two questions. The different answers highlight the difference between the duties of a lender, acting strictly as a lender, and the duties which a lender may assume if it makes representations to the owner or purchasers.

The answers to these questions become even more problematic when the interim lender receives vital information about the safety of the construction, or if the interim lender or its agents are arguably performing statutory duties. Can the lender ignore the impending safety risks? Can it ignore the potential application of statutory duties? If the lender receives vital information about the safety of the structures and makes representations to third parties about those matters, does it assume a duty of care which it would not otherwise have?

Background Facts

MCAP was the interim lender to a condominium construction project in Fort McMurray, Alberta. MCAP provided interim construction financing to the developer of the project.

The commitment letter between MCAP and the developer of the project stated that a soils test report by a professional engineer would be provided, demonstrating that the proposed construction and site improvements of the project were feasible under existing soil conditions. The commitment letter also required the lender’s cost consultant to verify the costs of the condominium project.

The commitment letter stated that, prior to the initial advance a project and budget review report would confirm that project has been designed in accordance with a geotechnical engineer’s report, and that all requests by the developer for advances would include an inspection certificate from the lender’s cost consultant confirming that the work to date was in accordance with the plans and specifications. The commitment letter also stated that if actual costs exceeded the budgeted and approved costs, then the developer would contribute the excess before receiving any further advances.

MCAP retained a cost consultant and parts of the commitment letter were attached to the contract between MCAP and the cost consultant. Effectively, the key provisions of the contract between MCAP and the developer were mirrored in the contract between MCAP and the cost consultant. The purchaser alleged that MCAP’s cost consultant was the “cost consultant” of the developer under section 14 of the Alberta Condominium Property Act (the Act). The purchasers accordingly argued that MCAP and its consultant had statutory duties with respect to certifying the cost to complete the project before funds were released to the developer.

In 2002, conversations occurred between a consultant acting for the purchasers of the condominium units and MCAP. According to the purchasers, in those conversations MCAP represented to the purchasers’ consultant that the terms and conditions of the commitment letter would be enforced for the benefit of the purchasers of units in the condominium project and that MCAP’s cost consultant would be the “cost consultant” under the Act.

In September 2001, the purchaser’s consultant wrote letters to MCAP’s cost consultants, copying MCAP, and set out various alleged serious deficiencies in the design and construction of the condominium project, including suspected Alberta Building Code, development permit and contractual deficiencies. It was the purchasers’ position that these letters signalled grave concerns that the units and related common property in the project were not in fact substantially completed as contemplated by the Act. The purchasers said that the suspected construction and design deficiencies required that statutory holdbacks be maintained to cover these deficiencies.

In late September 2003, a number of the purchases of the condominium units were completed and the developer received payment of the purchase prices. That money was used by the developer to reduce the loan from MCAP. In the closings, the developer’s lawyers gave undertakings about maintaining holdbacks pursuant to section 14 of the Act. In those undertakings, the developer’s lawyers referred to MCAP’s cost consultant as the developer’s costs consultant.

The purchasers and the condominium corporation then sued the developer and MCAP for damages. They alleged that the condominium was a disaster and was sinking into the ground due to numerous construction faults including the failure of the footings, improper compaction of fill and excessive moisture. The purchasers alleged that MCAP owed them a duty of care and had breached it by its failure and that of its cost consultant to take any steps to address the safety concerns of which they were well aware. The purchasers also alleged that MCAP had made negligent misrepresentations by effectively telling the purchasers that MCAP would enforce the commitment letter and that MCAP’s cost consultant would perform the duties of the “cost consultant” under the Act, and then failing to do either.

MCAP brought a motion to dismiss the action against it, asserting that it owed no duty of care to the purchasers, and that it owed no duty with respect to the statements which it or its cost consultant had allegedly made to the purchasers. The motion judge agreed with MCAP and dismissed the action against it. The purchasers then appealed.

The Decision

The Court of Appeal agreed that, apart from any duty arising from representations made by it, MCAP owed no general duty of care to the purchasers. The Court held that the purchasers’ assertion of such a duty failed on virtually every account.

First, the lender was entitled to waive defaults and give extensions in its own interest, and the existence of a duty to the purchasers would contradict that entitlement.

Second, the class of persons to whom the alleged duty was owed was indefinite as the circumstances relating to each purchaser could be different and the units could be “flipped”, making unfeasible for MCAP to consult with the class to which it allegedly owed a duty.

Third, the business interests of MCAP and the purchasers might well be different.

Fourth, the commitment letter was between MCAP and the developer and, as third parties to that letter, the purchasers had no legal rights in that letter.

Finally, policy reasons dictated that no such duty was owed. As the Court said: “The deleterious effects that recognizing this novel duty of care would have on commerce and the financial industry and in turn economic development are obvious.”

However, the Court of Appeal held that the purchasers had a potential claim against MCAP arising from negligent misrepresentation. The Court reversed the motion judge’s decision on this issue and directed that the action proceed to trial.

The Court held that the purchasers had a viable claim that MCAP had impliedly represented that it would enforce the commitment letter and that it had retained a cost consultant which would perform the duties of a “cost consultant” under the Act, and that MCAP had done neither. The Court of Appeal held that, on a disputed evidentiary record, the motion judge was not entitled to make factual findings as to the existence and scope of any alleged representations made by MCAP, the existence of any special relationship between MCAP and the purchasers and whether the purchasers reasonably relied on any statements of MCAP. Those were factual matters that must go to trial.

The Court of Appeal distinguished the two torts as follows:

“I agree that an interim lender owes no duty of care to purchasers of units in a project it is financing to ensure that the project it is financing is completed in accordance with the lending agreement. I have explained why that is so earlier. However, the court cannot use the absence of a duty of care based on a lender-purchaser relationship to determine whether the specific facts and circumstances of a particular case created or gave rise to a special relationship between the lender and purchasers and a corresponding duty of care sufficient to ground an action in negligent misrepresentation.”

The Court noted that the British Columbia Court of Appeal had held that, in the particular circumstances of that case, a lender did owe a duty to a third party not to make negligent misrepresentations and was liable to that third party.

The Court of Appeal also held that the other claims against MCAP should also proceed to trial. Those claims were based on knowing assistance in a breach of trust by the developer and unjust enrichment. MCAP had accepted the monies paid from the developer. Those monies were paid to the developer by the purchasers and were trust funds under the Act. MCAP received payment at the very time that the costs consultants under the Act should, arguably, have ensured that those monies were set aside to properly complete the project and correct the deficiencies. In these circumstances, the Court held that there were arguable claims of knowing assistance in breach of trust and unjust enrichment.

Conclusion

Even though the decision in MCAP arose on a summary judgment motion, it demonstrates the pitfalls which may face a lender to a building project. These pitfalls are magnified if the lender learns of facts which raise real concerns about the safety of the project or building, and if there are statutory duties relating to the project. Since building projects are subject to a number of statutory regimes, including construction lien and building code legislation, the role of the lender may not be a happy one.

This decision should alert lenders to a variety of potential claims that can be made against them. Indeed, the claims asserted in the MCAP action are a good shopping list to consider, both for project lenders and purchasers and owners of allegedly defective buildings.

Two precautions for lenders arise from the decision:

First, be very circumspect in any dealings with third parties to a lending agreement and avoid any conduct which could be construed as a representation to the third parties or the assumption of statutory duties.

Second, be aware of the trust fund legislation applicable to monies held by a borrower, and be very careful in accepting monies which may be trust fund monies.

Condominium Corporation No. 0321365 v MCAP Financial Corporation, 2012 ABCA 26

Building Contracts – Consultants – Negligence and Negligent Misrepresentations – Knowing Assistance – Unjust Enrichment

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                         June 20, 2012

www.heintzmanadr.com

www.constructionlawcanada.com

 

How Many Times Can A Contractor Sue The Owner Under The Same Construction Contract?

Can a contractor bring several claims against the owner arising from the same building contract?  Multiple proceedings arising from the same contract certainly seem like a waste of time and money.

And even if the contractor can do so, can those claims be asserted first in arbitration and then in court litigation?  Once again, different proceedings before different tribunals seem abusive.

The Alberta Court of Appeal recently held that multiple proceedings by the contractor are justified in some circumstances.  In Hnataik v. Assured Developments Ltd, the Court held that the contractor could sue the owner after bringing an arbitration claim against the owner.  The Court allowed the court claim to proceed because that claim was different than the claim in the prior arbitration and was not reasonably known to the contractor at the time when the pleadings were delivered and evidence was led in the arbitration.

The Background

 The Hnatiuks hired Assured to build them a new house.  In 2004, the Hnatiuks sued Assured alleging a fireplace problem and other related problems. Assured brought a motion to stay the action, asserting that the claim must be arbitrated under the provincial New Home Warranty Program. The motion was not heard and the parties proceeded straight to arbitration, and the action was left in abeyance.

After the evidence was heard and during the final argument in the arbitration, the Hnatiuks became aware of mould problems in the house.   On May 15, 2006, the arbitrator rendered his decision in the Hnatiuks’ favour.

On May 29, 2006 the Hnatiuks commenced a new action based on the mould problem.  Assured delivered a Statement of Defence asserting that the Hnatiuks were obliged to arbitrate their claim and then brought a motion to stay the action but did not proceed with that motion. The Hnatuiks’ action proceeded through discovery to trial.  At the opening of trial, the trial judge raised the issue of whether the action was barred by the prior arbitration.  He decided that it was and dismissed the action based on res judicata and abuse of process.  On appeal, the Court of Appeal reversed that decision.

The Court of Appeal decided that res judicata and related doctrines did not apply for three reasons.

First, the subject matter of the arbitration claim (faulty fireplace and related issues) was not the same as the subsequent court action (mould). On this basis, the Court held that “res judicata is not made out.”  The Court said that:

“causes of action are specific…If someone sues over a particular breach of contract and then later the defendant commits a second but different breach of contract, nothing forbids a second suit over that new breach….If a building contractor twice sets fires in the same building, working under the same ongoing maintenance contract, would that be the same cause of action?  Even if the fires were five years apart?  Surely not.”

Second, issue estoppel did not apply because the issue decided in the arbitration (relating to a faulty fireplace) was not the same as the issue in the subsequent action (mould).  The Court of Appeal said: “[Assured] seems not to suggest any arbitration finding contrary to some significant fact now alleged by the plaintiffs. It lists other claims, but they are plainly different. ”

Third, the Court of Appeal held that, while res judicata and related doctrines would preclude the Hnatiuks from bringing an action based on a claim which they ought to have asserted in the arbitration, there was no evidence that established that they ought to have included the mould claim in the prior arbitration.  That issue required the Court to analyze the arbitration proceedings. The Court said the following:

“The trial judge found that the plaintiffs probably saw mould by the close of argument in the arbitration.  But there is no evidence that its extent, cause or significance could be reasonably appreciated then…..It may be that the arbitrator could have consented to stop the arbitration, add new envelope items to the submission, hold a new hearing on them and then adjudicate on all items.  But the parties agreed he did not have to.”

The Court of Appeal also noted that including the mould claim might cause real problems under the provincial scheme in which claim was being arbitrated:

Adding a whole new set of claims to the arbitration could be troublesome to the arbitrator.  There would be money problems. The New Home Warranty Program….calls for a time estimate, and for a deposit toward the arbitrator’s fees….And of course it calls for pleadings… And there would be time problems in adding a large new claim at a later stage.  The program imposes a 30-day time limit after conclusion of the hearing for the arbitrator to deliver his award and account.  The power to amend the award is narrow…. So adding a big new claim to the arbitration, after the end of the evidence would be difficult.  It might well not be possible without the consent of both parties. The defendant builder never suggested that it would have consented, and indeed hints that it would not have.”

In colourful words, the Court of Appeal then said:

“We cannot see any advantage in trying to hitch such a trailer to that van, especially as it is probable that the trailer would have been far bigger and slower than the van.”

The Court of Appeal then drew a line in the sand, saying that the time for a new issue to be raised in the arbitration was at the time of pleadings or at the latest, at the close of evidence. In the present circumstances, there was no basis to conclude that the Hnatiuks ought to have raised the mould issue by either of those stages of the arbitration.

So far as abuse of process, the Court of Appeal held that the application of that doctrine required that the questions in both proceedings be the same; and/or that the plaintiffs’ second action be in the nature of misconduct, lack of diligence or harassment.  The Court found none of those ingredients in the present case.

Finally, the Court of Appeal held that Assured had waived or acquiesced in the second claim being brought by way of action and not by arbitration.  While Assured pleaded that the second claim ought to have been included in the prior arbitration and served a motion to stay that action, it did not proceed with that motion and fully participated in the action.  The Court of Appeal held that Assured had “plainly” waived its right to arbitration and attorned to the jurisdiction of the court.  Moreover, under section 7 of the Alberta Arbitration Act (the Act), the court’s duty to stay the action based on an arbitration agreement does not apply if the defendant’s stay motion is “brought with undue delay.”  Here, Assured never in fact brought such a motion and the raising of the arbitration issue at trial amounted to “gross” delay.

Observations

This decision raises many issues relating to whether contractors can bring multiple claims against owners arising out of the same building project.  Contractors may want to tuck this decision away and rely on it in a variety of situations because, on its face, the decision could countenance multiple claims by contractors before multiple adjudicators arising from the same building contract.

However, a wise reading of this decision would give it a narrow application, and indeed raise serious issues for contractors.  If the issue raised in the second proceeding is the same as the issue raised in the first proceeding, then the contractor may not be able to raise the same issue in two proceedings.  If the same factual issue arises twice during a building project under the same contract, then the decision in the first proceeding may bind the parties if a second proceeding is commenced, and the contractor may be obliged to make every effort to bring the second claim within the first proceeding.

Clearly, there are two inter-related factors at work here: how similar are the two issues; and how much did the contractor know about the second issue when the first issue was being adjudicated.  In this case, the Court of Appeal found that these issues were at one extreme end of the spectrum: the two issues were very different, and the contractor knew little or nothing about the second issue when the first issue was being arbitrated .  If these factors were different, then the contractor could well be barred by the determination in the first proceeding.

Two other aspects of the decision of the Court of Appeal’s decision do raise questions.

First, the Court said that “it is far from clear” that res judicata is as readily applied to arbitral decisions as to court decisions, and that in any event “the court has a discretion not to find or enforce res judicata flowing from a tribunal’s decision.”  These remarks will be troubling to all those who maintain that the arbitral regime is not a second-class dispute resolution system and that the arbitration process should be fully supported by judicial decisions.

Second, the builder’s reliance on section 7 of the Act and “undue delay” raises the question of the proper purpose of that section.  Its apparent purpose is to deal with an existing and future proceedings and to permit a court proceeding to go forward if a stay motion is not brought expeditiously.  It seems to have nothing to do with past proceedings and the application of res judicata and related principles arising from a past decision.  Put in another way, if res judicata does apply but the question is whether those principles can be waived and have been waived, then that question does not seem to be answered by resorting to section 7.

In the result, the Hnatiuk decision contains a potpourri of issues that contractors and owners may resort to when multiple proceedings arise from the same building contract.  The decision provides us with circumstances in which multiple claims by the contractor were allowed.  It also provides a useful spectrum of conduct or events which may influence or determine whether multiple claims will be permitted in the future.  And it raises questions about how supportive the courts will be in giving effect to arbitral decisions based upon res judicata and related principles.

Hnatiuk v. Assured Developments Ltd.                                                                                                                                                                 

 Building contracts  –  arbitration  –  stay of arbitration  –  res judicata

 
Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                 June 10, 2012
 www.constructionlawcanada.com
www.heintzmanadr.com

 

What Are The Limits Of Competence-Competence For Arbitral Tribunals?

Competence-competence is now a foundational principle of the modern law of arbitration.  According to that principle, an arbitral tribunal is competent to decide its own competence.  In other words, the tribunal has jurisdiction to decide its own jurisdiction.  That principle demands, in turn, that the arbitral tribunal, and not the court, should in the first instance decide the tribunal’s competence.

The competence-competence principle is now embedded in most arbitration statutes.  In Ontario, section 17(1) of the Ontario Arbitration Act, 1991 (the “Act”) states that the arbitral tribunal may rule on its own jurisdiction to conduct the arbitration and in that connection to rule on objections with respect to the existence or validity of the arbitration agreement.

Are there any limits to the competence-competence principle?

One limit to the competence-competence principle has recently been explored by the Ontario Court of Appeal in Shaw Satellite G.P. v. Pieckenhagen. That Court held that, at the very least, the party seeking to apply that principle must admit that it is a party to the arbitration agreement.  Failing that admission, the principle does not apply and the other party may proceed with a court action.  That decision raises the general question of what admissions a party must make about the arbitral tribunal’s jurisdiction before that party may rely on the competence-competence principle.

The background

Shaw provides television programming through satellites.  The defendants are owners of apartment buildings.  Shaw alleged that the defendants had used fictitious names and addresses to subscribe for satellite delivery of TV programs and had then re-broadcast the programs to tenants of the apartment buildings.  The programming subscription agreements prohibited any rebroadcasting, reproduction or retransmission.  Those agreements also contained in an arbitration clause.

Shaw brought an action in the Ontario Superior Court alleging fraud and other illegal activities and sought injunctive and related relief against the defendants.  The defendants brought a motion to stay the action and asserted that the dispute must be arbitrated under the arbitration clause in the agreements in which the customer subscribed for satellite television service.  However, the defendants did not assert, and refused to admit, that they were parties to the subscriber agreements or the arbitration clauses in those agreements. On that basis, the motion judge dismissed their motion and the Court of Appeal upheld that decision.

The decision

The Court of Appeal said that it was “incumbent on [the defendants] to indicate to the court that they are parties to and are bound by the Agreement to invoke s. 7(1).  To hold otherwise would enable them to take the position before an arbitrator that they are not parties to the Agreement which in our view would be entirely inappropriate.”  In effect, the Court would not allow the defendants to put everyone, including the arbitrator and the courts, through the useless exercise of staying the action, only to have the defendants go before the arbitrator and assert that the arbitrator had no jurisdiction because the defendants were not parties to the arbitration agreement.

Parties vs Matters

The motion judge had also decided the motion on another ground.  Shaw’s action was against twenty other defendants who were not alleged by Shaw to be parties to the subscriber accounts.  So while the claims against three of the defendants might arguably be governed by arbitration clauses in the subscriber agreements, the claims against the other defendants clearly were not.

The motion judge applied sub-section 7(5) of the Act which gave the motion judge discretion to grant a partial stay of the action in respect of “matters” falling within the arbitration clause and permit the action to proceed with respect to “other matters” not covered by the arbitration agreement.  The sub-section does not refer to “parties” not bound by the arbitration agreement, nor does it expressly refer to staying the entire action.  The motion judge effectively decided that “parties” and “matters” were the same thing and concluded that granting a partial stay would result in a multiplicity of proceedings that was unreasonable in the circumstances. The Court of Appeal declined to interfere with the exercise of that discretion by the motion judge.

This decision raises three important points:

First, it identifies a specific circumstance in which the competence-competence principle will not be applied: namely, if the moving party does not admit that it is a party to the arbitration agreement.  On its face, this is a common sense result which avoids the use of the principle by a party which is not really seeking in good faith to have the dispute resolved by the arbitral tribunal. Indeed, sub-section 7(1) of the Act clearly states that a motion to stay the action must be brought by “another party to the arbitration agreement”.  The purpose of the competence-competence principle and the wording of sub-section 7(1) combine to demonstrate that the principle should not be used by a party which does not admit that it is bound by the arbitration agreement.

Accordingly, in Ontario we now have a binding decision that a defendant which does not admit that it is a party to the arbitration agreement cannot rely on the competence-competence principle.

At another level, however, this issue was more nuanced that it might appear.  Clearly, the defendants did not want to admit that they were parties to the subscriber agreements.  If they had admitted that they were parties to the arbitration agreement, then they would effectively have acknowledged one of the major issues in dispute.  The questions were: could the defendant be forced to make this admission before relying on the competence-competence principle; and which is the proper tribunal to resolve the issue about whether the defendants were parties to the arbitration agreement and therefore the subscriber agreements, the court or the arbitral tribunal?

Sub-section 7(2) of the Act says that an arbitration clause shall, for the purpose of a ruling on jurisdiction, be treated as an independent agreement separate and apart from the agreement in which it is contained.  Therefore, arguably the arbitral tribunal is competent to decide who is a “party” to the main agreement.  In the net result, however, the wording of sub-section 7(1), the purpose behind the competence-competence principle and the waste of time and money in sending the dispute to the arbitral tribunal if the moving party did not admit that it was a party to the arbitration agreement, combined to make the moving party’s reliance on that principle unreasonable.

Second, this decision may reveal a broader question and a broader principle.   Can a party invoke the competence-competence principle if, for any other reason, it asserts that the arbitral tribunal does not have jurisdiction?  If not, then the competence-competence principle can only be invoked by a party that acknowledges, in all relevant respects, that the tribunal has jurisdiction.  If this is so, then the scope of the competence-competence principle may be substantially limited.

Thus, if the defendant in an action admits that he or she is a party to an arbitration clause, but asserts that the arbitral tribunal has no jurisdiction over the claim or part of the claim, can the defendant ask the court to stay the action so far as that claim or part of the claim is concerned?   Normally, one would answer Yes, because under the competence-competence and sub-section 7(1) of the Act, it is the arbitrator’s jurisdiction to first decide scope of the arbitration clause.  But what is the real difference between deciding whether the parties to the action are parties to the arbitration agreement and deciding whether the dispute falls within the arbitration agreement?  If the competence-competence principle does not apply to the first question, why does it apply to the second?

The Court of Appeal in the Shaw decision has held that the defendant seeking a stay of an action on the ground of an arbitration agreement must admit that it is a party to the arbitration agreement.  Should it not also require the defendant to admit that the dispute is governed by the arbitration agreement, at least so far as the portion of the claim that the defendant wants to have stayed and sent to arbitration? What is the point of sending the claim to the arbitral tribunal only to have the defendant assert before that tribunal that it has no jurisdiction over the claim or that part of the claim?

Third, the other issue decided by the Court of Appeal was not necessary for its decision and is likely not binding on other Ontario courts.  The decision expands the application of sub-section 7(5) of the Act to apply it to parties, not matters, falling outside the arbitration agreement.  The decision also permits the court to refuse a stay of the whole action on the ground that to do otherwise would involve a multiplicity of proceedings.

Without considering the total context in which it was made, the decision to permit the whole action to proceed might be seen to be contrary to a number of other decisions.  Generally speaking, Canadian courts have held that the mere fact that other defendants are sued in the action that are not bound by the arbitration agreement is no reason to refuse a stay of the claim against parties to that agreement that is within the arbitration agreement.  However, read in context, the decision can be readily understood as resulting from a combination of circumstances, including a moving party which did not admit that it was bound by the arbitration agreement and a large preponderance of defendants not bound by the arbitration agreement.

In the result the Shaw decision clarifies the competence-competence principle by requiring a party relying on that principle to admit that it is party to the arbitration agreement.  But it leaves open for debate the full scope of the principle and the admissions that must be made to invoke it.

Arbitration   –   Competence-Competence  –   Stay Motion  –   Parties and Subject Matter of Arbitration Agreement

Shaw Satellite G.P. v. Pieckenhagen, 2012 ONCA 192

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                      June 3, 2012

www.constructionlawcanada.com

www.heintzmanadr.com

Can An Agent Claim Damages As An Owner Under A Building Contract?

Agents of contractors and subcontractors often play a role and assert rights during construction projects. This is because contractors often use agents to perform the work, and construction lien legislation recognizes their right to assert a lien for the improvement of the land.

But agents of owners do not often assert rights under a building contract. Can they do so? And if they can, can they be sued as parties to the building contract?

These issues were recently addressed in the decision of the Nova Scotia Supreme Court in Ross v. Garnett. That court held that the agent could assert a claim for damage for breach of the building contract. This decision is significant because it could dramatically widen the scope of persons who can sue or be sued through the owner’s rights under a building contract.

The background

Ross entered into a contract with Garnett to purchase a log home kit manufactured by Riverbend and to have Garnett build the home. The home was built on a lot formerly owned by Ross but transferred by him to his mother shortly before the contract with Garnett was made. The transfer occurred because Ross’s mother could obtain mortgage financing and he could not. He paid all the mortgage payments, and the other expenses relating to the construction of the home. The lot was to be re-transferred to Ross once the mortgage was paid.

Ross claimed that the home kit and construction were defective and he sued Riverbend and Garnett. The defendants asserted that Ross had not suffered damage as he was not the owner of the lot. They brought a summary judgment motion to dismiss Ross’ claim.

The decision

The motion proceeded on the basis that Ross had entered into the contract with Garnett as agent for his mother. The motion judge concluded that a contract made by an agent can be enforced by and against the agent if the agent had a demonstrable intent to be personally bound by the contract and the other party elected to so deal with the agent. The motion judge concluded that Ross could not succeed in establishing those elements at trial. Ross’ own evidence demonstrated that he acted only as trustee and agent for his mother and did not intend to be personally bound by the contract.

However, the motion judge held that there was a second exception to the rule that an agent cannot sue on a contract made by the agent’s principal. Under this exception, the agent can sue on the contract if he has a “special interest” in the contract. A special interest could be shown if the agent has “some special property in the subject matter of the contract, or a lien upon it, or some special interest in the completion of the contract”, citing Fridman on The Law of Agency. The motion judge held that Ross had an arguable “special interest” in the contract between Ross’ mother and Garnett and therefore his claim could not be dismissed on a summary judgment motion.

The importance of this decision

This decision is important for those interested in building contracts because it has the potential to significantly widen the scope of the contracting parties on the owner’s side of the contract. The decision seems problematic from several standpoints.

First, the concept of “special interest” seems to be suitable to determine whether the agent has suffered damage, but it seems unsuitable to determine whether the agent is a party to the building contract. Without a “special interest” it would seem difficult for the agent to assert any loss. Combined with an initial entitlement to sue based upon a demonstrated intention to be a party to the contract from the inception, a “special interest” may provide the necessary loss which will give rise to a claim to damages. But it is more difficult to understand how a “special interest” can make the agent a party to the owner’s contract and entitle the agent to sue on that contact.

Second, if a “special interest” of an agent gives rise to a separate entitlement by the agent to enforce the building contract, then the contract should be as enforceable against the agent as by the agent. So the concept of “special interest” may create a whole new and dangerous basis of liability for owner’s agents.

Third, “special interest” appears to be an imprecise basis to create a pool of persons who have rights or obligations under a building contract. Who falls within the pool? Do the architects, engineers and consultants of the owner fall within it? Do they fall within it if they have an interest in the property? Do they have a “special interest” if they have a contingent interest in the success of the project, for example if the price of their services is influenced by the ultimate cost of the project? If so, is it advisable or inadvisable for a consultant to take an interest in the property or in the project, if that interest may allow rights to be asserted by or against the consultant under the building contract? And is it necessary for the contractor to inquire as to what agents of the owner have a “special interest” in the building contract?

The answer to these questions will await future cases about the rights or obligations of owners’ agents under building contracts.

Ross v. Garnett, 2012 NSSC 132

Building contract – consultants – enforcement – third parties

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                               May 20, 2012

www.heintzmanadr.com
www.constructionlawcanada.com

Arbitration Clause Is A Separate Enforceable Agreement

What happens when an arbitration clause is contained within a commercial agreement that one party says never came into existence or is unenforceable? And what if the dispute involves persons who are not parties to the commercial agreement? Is the arbitration clause still enforceable? Yes, the Ontario Court of Appeal recently said in Kolios v. Vranich.

The Background

The dispute arose from a shareholders agreement which contained an arbitration clause. Vranich commenced an action in the Ontario Superior Court and sued both parties to the shareholders agreement and other parties. Kolios moved to stay the action so far as the claim against parties to the shareholders’ agreement, asserting that that claim must be dealt with by arbitration. Vranich said that the parties had never reached an agreement on a schedule to the shareholders’ agreement relating to shareholders loans, and therefore had never reached an agreement on the whole agreement.

Section 7(1) of the Ontario Arbitrations Act, 1991 (the Act), provides that, subject to certain exceptions, if a party to an arbitration agreement commences a proceeding in respect of a matter to be submitted to arbitration, the court shall stay the action. The Ontario Superior Court dismissed an application to stay the action under this sub-section. The Ontario Court of Appeal allowed the appeal and stayed the action against the defendants who were parties to the shareholders agreement, and allowed the action to proceed against the defendants who were not parties to that agreement.

The Court of Appeal applied two sub-sections of the Act. Section 17(1) provides that the arbitral tribunal has authority to determine its own jurisdiction and in doing so, to rule on the validity or existence of the arbitration agreement. This sub-section introduces into Ontario law the now well-know principle of “competence-competence”, that is, that an arbitral tribunal is competent to decide its own competence.

The Court of Appeal also applied Section 17(2) which says that, if an arbitration agreement forms part of a main agreement, then the arbitration agreement shall be treated as an independent agreement for the purposes of a ruling on jurisdiction, even if the main agreement is invalid.

Based on these sub-sections, the Ontario Court of Appeal held that it was up to the arbitral tribunal to decide the question of the validity of the shareholders agreement, not the court. In so holding, the Court of Appeal noted that Vranich did not assert that the shareholders agreement was invalid or void ab initio.

Moreover, the fact that the action would proceed against other defendants did not disturb the Court of Appeal since those other defendants had not sought a stay. The Court of Appeal did not mention sub-section 7(5) of the Act but that sub-section expressly authorizes the court to stay that part of an action which is dealt with in an arbitration agreement, and allow to proceed to trial the balance of the action not covered by the arbitration agreement.

This decision of the Court of Appeal demonstrates the sea change that has taken place in Canada with respect to the stay of actions based upon arbitration agreements. A generation ago, a Canadian court would have had no hesitation in permitting an action to proceed when some of the allegations or some of the parties were not subject to the arbitration agreement. Three fundamental changes have occurred.

First, Section 7(1) uses the “shall” word and thereby mandates arbitration, unless very specific exceptions apply. The courts are reading those exceptions very narrowly. Before 1992, the Arbitration Acts of Ontario used the “may” word and gave the courts discretion to stay or not stay an action brought in the face of an arbitration clause. In those days, the courts were usually prepared to exercise that discretion in favour of the action proceeding and not the arbitration.

Second and as noted above, the Act now clearly addresses, in section 17, many of the former objections to arbitration and provides the arbitrator with the jurisdiction to determine them, even in the face of objections that the main agreement or the arbitration agreement is unenforceable or that the dispute involves persons who are not parties to the agreement. These sections effectively drive all disputes about the subject matter or its arbitrability back to the arbitral tribunal.

Third, the attitude of Canadian judges has fundamentally changed. Judges do not now consider that courts are the superior means of adjudicating disputes. Indeed, they recognize that courts have become so expensive and time-consuming that parties are well advised to go elsewhere to have their dispute resolved. And when they do, judges also now give great, indeed overriding, effect to the parties’ choice to go to arbitration, and are prepared to hold the parties to their bargain.

Further Questions

Some further question remains. How will arbitrators deal with the new authority which they have to determine their own jurisdiction? Will the future track record of arbitrators’ decisions demonstrate that arbitrators are making these jurisdictional decisions responsibly? Or will arbitrators tend to rule that they have jurisdiction, so that they can continue with the arbitration? Will the legislature’s decision to hand these jurisdictional disputes to arbitrators be justified, and will arbitrator’s jurisdictional disputes be upheld by the courts? And since arbitrator’s decisions are made privately and are unknown to the public unless challenged in court, how will the track record of arbitrators relating to jurisdictional matters be judged?

Only time and judges will tell. Ironically, it will take the decisions of judges, and a developed body of judicial decisions reviewing the jurisdictional decisions of arbitrators, to determine how well arbitrators are discharging their responsibility to determine their own authority.

Arbitration agreement – challenging arbitral award – enforcing –

Kolios v. Vranich, 2012 ONCA 269

Thomas G. Heintzman O.C., Q.C., FCIArb May 20, 2012

www.heintzmanadr.com

www.constructionlawcanada.com

No Appeals From An Arbitrator’s Interim Decision Unless It Is A Final Order

The Ontario Court of Appeal has recently considered whether any appeal may be taken from a decision of an arbitral tribunal which is made prior to the final award. The Court held that no such appeal may be taken from such a decision, except if the decision amounts to a “final” order.  The decision appears to leave open the possibility of appealing an arbitral decision if it amounts to a “final order” even if it is not the final award of the tribunal: Universal Settlements International Inc. v. Duscio.

The Background

The arbitration was between the shareholders of Universal, pursuant to a shareholders’ agreement.  The arbitration agreement provided that the arbitrator had authority to make all interim, interlocutory and final decisions.  During the arbitration, the arbitrator made an interim award permitting two shareholders to purchase the shares of two other shareholders.  The parties entered into an escrow agreement requiring that the purchasers pay $1 million into escrow pending the final disposition of the arbitration.

Then the sellers of the shares brought a motion asking for the release of $290,000 of the purchase monies in order to pay their lawyer and for living expenses. The motion was granted.

Later, the purchasers brought a motion for an order requiring the repayment of these monies on the ground that the sellers’ motion had been based on fraudulent evidence.  The arbitrator granted the repayment motion, and also granted the purchasers costs of the motion, but made no finding of fraud. The sellers took the position that the costs order was subject to the bankruptcy of one of the sellers, Mr. Duscio, absent a finding of fraud.  They asserted that the arbitrator had no jurisdiction to make such a costs order and launched an application for leave to appeal to the Superior Court from the arbitrator’s cost award.

In the meantime, the purchasers brought a motion to strike out the statement of defence of the sellers on the ground that the sellers had not paid the costs award. The sellers took the position that the arbitrator had no jurisdiction to enforce payment of the costs award because of Mr. Duscio’s bankruptcy. The arbitrator held that the statement of defence of the sellers should be struck out.  The sellers amended their court application to appeal from that order of the arbitrator.

The arbitrator then proceeded to hear the arbitration in the absence of the sellers.  He held that the sellers were in breach of their fiduciary duty and had converted Universal’s monies. The arbitrator awarded the purchasers $6.1 million including interest. The purchasers then amended their court application to appeal from that further decision of the arbitrator.

The Decision

The Court of Appeal held that, under the Ontario Arbitrations Act, 1991, the authority of the Superior Court to interfere with the arbitrator’s decisions was “strictly limited” to “those few circumstances” specifically referred to in that Act.  Applying that principle, the Court of Appeal held that there was no right of appeal from the arbitrator’s decisions ordering repayment and costs because those decisions were purely interlocutory and did not involve the final determination of the rights of the parties.

However, the Court held that the arbitrator’s decision striking out the statement of defence was appealable, not because it was made without jurisdiction, but because it was unfair and resulted in the sellers not being given an opportunity to present their case, contrary to Section 46(1).6 of the Act. The Court noted that an order striking out a statement of defence has been held in Ontario to be a final order, and is therefore appealable under the Act.

Similarly, the Court of Appeal held that the final arbitration decision made without notice to the sellers was appealable because it also was a final decision, and because it was unfair and occurred without the sellers having an opportunity to respond to the allegations made against them.

The Court of Appeal held that the arbitrator had erred in striking out the sellers’ statement of defence because of their failure to comply with the costs award when compliance was neither “possible nor lawful”, and when payment of the costs award would have amounted to a preference over other creditors in the bankrupt estate.

This decision re-affirms the insistence by Ontario courts that they will only interfere with arbitral proceedings if a ground to do so is specifically set forth in the applicable arbitration statute. That aspect of the decision is a welcome re-affirmation of the simplicity of the Ontario statutory regime applicable to arbitrations.  The decision recognizes that until the arbitration proceeding is finalized, the courts have no role to play.

Final and Interlocutory Orders

However, the decision does interject into arbitral jurisprudence in Ontario the debate about the distinction between “final” and “interlocutory” orders. The Court of Appeal has held that the reference in the Ontario Arbitrations Act, 1991 to “an award” means a “final award”, not an interlocutory or procedural award that decides interim issues leading to a final award.

The distinction between “final” and “interlocutory” orders has a long and, some might say, tortured, history in Ontario procedural law. It is the basis for distinguishing between orders in the court system that can be appealed without leave (being final orders) and those orders for which leave is required (being interlocutory orders).  It appears that the present decision may allow an arbitral decision to be appealed if it qualifies as being a “final” award, even if it is not the last decision of the arbitrator which finally decides the dispute.

Arbitral award – challenging arbitral award – enforcement – conduct of arbitration

Universal Settlements International Inc. v. Duscio:  2012 ONCA 215

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                 May 15, 2012

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Same Court, Different Results: When Does The Limitation Period Start For An Arbitration Claim?

When does the limitation period start for an arbitration claim?  Can the very making of the demand start the period running?  Yes, the Ontario Court of Appeal recently said in Federation Insurance Co. of Canada v. Markel Insurance Co of Canada. In so deciding, the Court of Appeal seems to have reached a conclusion which is contrary to another of its decisions in 2011.

While this decision was rendered in the context of automobile insurance, it may have wide implications for commercial arbitrations, especially under bonds or indemnity contracts.  The decision may mean that, in a wide variety of settings, the very demand by a claimant may start the limitation period running under an arbitration clause.  That is because, under the particular language of the contract in which the arbitration clause is found, the claim may be “discovered’ before or at the very time when the claim is made.  If that is so, then the claimant should start counting the very day it makes its claim.

The Background

Between April and May 2006, Federation paid statutory accident benefits (“SABS”) to its insured under an automobile policy arising from an accident which the insured had with another motorist.  Under Ontario Insurance law, Federation was entitled to recover the SABS from the other motorist’s insurer and made a request for payment from the other insurer.   More than two years later and having not been paid by Markel, Federation instituted an arbitration claim against the other insurer for payment.

The other insurer took the position that Federation’s claim was barred by Ontario’s two year limitation period.  The arbitrator agreed and dismissed Federation’s claim.  The arbitration award was upheld by the Ontario Superior Court and Court of Appeal.

The Court of Appeal held that Federation suffered a loss and had discovered that loss at the very time that it made a demand for payment from the other insurer.  It said:

[T]he first party insurer suffers a loss from the moment the second party insurer can be said to have failed to satisfy its legal obligation to satisfy the loss transfer claim… the first party insurer suffers a loss caused by the second party insurer’s omission in failing to satisfy the claim the day after the Request for Indemnification is made.

I cannot agree with the proposition that no loss is suffered until the second party insurer unequivocally denies the claim. That argument ignores the fact that once a valid request is made, the first party insurer is legally entitled to be indemnified and therefore suffers a loss each day it is out of pocket for the SABS paid to its insured. I note here that this conclusion is supported by the passage I have quoted at para. 9 from the FSCO bulletin for loss-transfer claims stating that loss-transfer claims are to be paid “promptly” upon receipt of a Request for Indemnification and that the relevant arbitral jurisprudence holds that where a first party insurer is successful in establishing a loss transfer claim, interest is payable from the date the claim was asserted.”

The Court of Appeal then considered the language in section 275(4) of the Ontario Insurance Act.   That sub-section stated that “If the insurers are unable to agree with respect to indemnification under this section, the dispute shall be resolved through arbitration under the Arbitration Act.”  (emphasis added)

The Court said that this sub-section did not require, as a precondition to the cause of action arising and the limitation period beginning to run, that the parties actually engage in discussions and actually be unable to agree.  The Court stated its decision on this point as follows:

“In my view, s. 275(4) does nothing more that stipulate that any disputes that cannot be otherwise resolved by the parties are to be resolved by arbitration rather than by litigation. Section 275(4) says: if you cannot agree, your claim is to be resolved by arbitration. It does not say: you must be able to demonstrate a failure to agree or a clear denial of your claim by the other insurer in order to commence arbitration.

I accept that the loss-transfer regime assumes that virtually all claims can and should be resolved by agreement. I accept as well that as a practical matter, insurers should be encouraged to discuss and negotiate claims. Moreover, as a practical matter, no insurer would proceed with arbitration unless it was apparent that an acceptable agreement could not be reached by negotiation. But that does not mean that as a matter of law, an insurer must be able to demonstrate a failure to agree or clear denial of the claim by the other insurer as a condition precedent to commencing a proceeding to enforce a claim for indemnification.”  (emphasis added)

Federation submitted that this approach to the arbitration clause was contrary to public policy on the ground that it would discourage negotiation and real efforts at settlement.  The Court of Appeal disagreed:

“I fully accept that parties should be discouraged from rushing to litigation or arbitration and encouraged to discuss and negotiate claims. In my view, when s. 5(1) (a) (iv) [of the Limitations Act, 2002] states that a claim is “discovered” only when “having regard to the nature of the injury, loss or damage, a proceeding would be an appropriate means to seek to remedy it”, the word “appropriate” must mean legally appropriate. To give “appropriate” an evaluative gloss, allowing a party to delay the commencement of  proceedings for some tactical or other reason beyond two years from the date the claim is fully ripened and requiring the court to assess to tone and tenor of communications in search of a clear denial would, in my opinion, inject an unacceptable element of  uncertainty into the law of limitation of actions.”

In this decision, the Court of Appeal arrived at a result which is contrary to the result in its 2011 decision in L-3 Communication Spar Aerospace Limited v. CAE Inc (which decision was not referred to in the Federation v. Markel decision, although one of the judges sat on both cases).

I dealt with the L-3 Communication decision in my article of July 17, 2011.  In that case, the contract provided for the dates for the delivery of data relating to a hardware and software aviation system.  The contract said that: “The price and other adjustments that are not agreed between the parties may be referred to arbitration”.  Based on that language and other language in the contract, the Court of Appeal held that the limitation period did not commence until the parties had undertaken negotiations and there had been a definite inability to agree on the price and other adjustments. The Court said:

The commercially reasonable interpretation is that a dispute over failure by SPAR to deliver information as required together with the cost consequences caused thereby is one that the parties were obliged to attempt to resolve between themselves. Failing agreement either party is entitled to take the dispute to arbitration

How can these two decisions be reconciled?

In L-3 Communications, the words “not agreed between the parties” were held to mean that the limitation period did not commence before a negotiation and absence of agreement occurred.  In Federation v. Markel, the words “unable to agree” were held not to require the parties to negotiate and be unable to reach an agreement, and not to delay the commencement of the limitation period.

It seems that the only way to reconcile the two cases is to examine the process leading up to the demand in each case.  In L-3 Communications, the parties were involved in a tender process and were in direct dealings and negotiations with each other over price and other adjustments.  The language of the tender documents contemplated real efforts to agree on price and adjustments.  So the Court of Appeal was able to conclude that the words “not agree” meant that the parties were obliged to engage in an actual process of negotiation leading to non-agreement, and until that process was concluded the claim did not arise in law and the limitation period did not begin.

In Federation v. Markel, there were no ongoing dealings between the parties, apart from one insurer’s demand that the other insurer indemnify it.  There was no prior contract, tender or other relationship between the parties.  The parties were simply insurers whose insureds had been involved in a motor vehicle accident.  In this circumstance, the Court of Appeal held that the words “unable to agree” did not signify that the parties had to go through an attempt to agree as a pre-condition to the existence of a legal entitlement to payment and the commencement of the limitation period.

These decisions demonstrate the danger lurking in limitation periods relating to contract claims in general, and to claims under arbitration clauses in particular.  While the general law of limitations will apply to those arbitral claims, the terms of the contract and the terms of the arbitration clause may fundamentally affect the question of when a legal right under the contract or arbitration clause comes into existence.

All the ingredients of the cause of action may have arisen when the party with the claim makes its demand.  The party with the claim may have discovered all those ingredients when it makes its claim.  If these ingredients are in place then, unless the arbitration clause very clearly suspends the limitation period during settlement or negotiation, it may be unwise to rely on a suspension of the limitation period during that period.  Prudence may demand that the claim be issued and negotiations come later.

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

Federation Insurance Co. of Canada v. Markel Insurance Co of Canada, 2012 CarswellOnt 4051, 2012 ONCA 218

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                            May 5, 2012

www.heintzmanadr.com

www.constructionlawcanada.com