Supreme Court of Canada Holds: Court May Dismiss Action Based On An International Commercial Agreement Even After The Defendant Files A Defence

A very recent decision of the Supreme Court of Canada has held that a court may properly dismiss an action arising from an international commercial agreement, even after the defendant has filed a Statement of Defence:  Momentous.ca Corp. v. Canadian American Association of Professional Baseball Ltd.  This decision is important since the contracts in issue contained both a forum selection clause and an arbitration clause, and the consequence of the filing of the Statement of Defence is not the same for each of those clauses.

In holding that the action could be dismissed after the filing of a Statement of Defence, the Supreme Court effectively applied the law applicable to forum selection clauses, not the law applicable to international commercial arbitrations.

Background Facts

The decision of the Supreme Court is very short and does not refer to the background facts.  The decisions of the Ontario Court of Appeal and Ontario Superior Court of Justice set forth the facts, as do the factums in the Supreme Court.

The plaintiffs/appellants were all Ontario companies.  Except for the City of Ottawa and one other respondent, the respondents were all non-Ontario parties and resided or carried on business in the United States.

In 2008, the appellants entered into a letter agreement with the respondent Wolff whereby the appellant Rapidz Sports acquired an interest in a company controlled by Wolff which had leased the rights to membership in the Can-Am League, a baseball league operating in the USA and Canada.  Under this letter agreement, the appellant Rapidz Sport agreed to manage and operate a professional baseball team in Ottawa.

The appellants signed two agreements governing Rapidz Baseball’s entry into the Can-Am League:  a lease agreement and a League affiliation agreement.  These agreements required that disputes be arbitrated and enforced in the courts of North Carolina.  The plaintiffs also agreed to abide by the League’s by-laws.  Those bylaws contained an internal dispute resolution process requiring that any dispute between a member and the League be heard by the League’s board of directors, provided for appeal rights and stated that the dispute and appeal process “shall be the exclusive and sole remedy of all the parties thereto.”

In the 2008 season, Rapidz Baseball lost money and by September, it had ceased operations.  It asked to withdraw from the League voluntarily because of financial hardship.

The Prior and Present Proceedings

In late September 2008, the Board of the League dismissed Rapidz Baseball’s application for voluntary withdrawal.   After a hearing, the Board terminated the team’s membership.  Rapidz Baseball’s appeal from the Board’s decision was dismissed for failure to file the appeal bond required by the by-laws.  The League then called on Rapidz Baseball’s $200,000 letter of credit.

The League then brought a motion in the North Carolina General Court of Justice to confirm the Board’s “arbitration award”.  Rapidz Baseball brought a motion to dismiss the League’s motion.  The League’s motion was granted, Rapidz’s motion was dismissed, and these decisions were upheld by the North Carolina Court of Appeals.

In November 2008, Wolff made a demand on two of the appellants, Momentous and Zip respectively, for the former’s guarantee of his shareholder’s loan to one of the companies and for the latter’s indemnification for the stadium rent for 2008.  When payment was not forthcoming, Wolff sued Momentous and Zip in the North Carolina courts.  Momentous and Zip brought motions to dismiss Wolff’s actions on the basis of lack of personal jurisdiction in North Carolina.  Their motions were granted.

In August 2009, Wolff sued in Ontario for the same relief that he had sought in North Carolina.  That action was stayed pending the completion of the motion to dismiss the appellants’ action.

In January 2009, the appellants commenced the present action in Ontario alleging breach of contract and various economic torts.  The Can-Am defendants and Wolff delivered Statements of Defence, defending the action on the merits and also relying on the arbitration and choice of forum provisions in the lease agreement, League affiliation agreement and League by-laws.  The City of Ottawa delivered a notice of intent to defend.

The Can-Am League and its principals then brought a motion to dismiss the appellants’ action under Rule 21.01(3) (a) of the Rules of Civil Procedure.  They submitted that the Ontario court had no jurisdiction over the subject matter of the action.  They said that the choice of forum and arbitration clauses in the League’s by-laws and in the agreements signed by the plaintiffs required that all disputes with the League be resolved in the state of North Carolina and were subject to arbitration.  The motion judge agreed and granted the motion and dismissed the plaintiffs’ whole action.  That decision was upheld by the Ontario Court of Appeal and the Supreme Court of Canada.

Decisions of the Courts based upon the Forum Selection Clause

Each level of court held that the issue should be determined by the law applicable to forum selection clauses.  The law in Canada entitles a defendant to move to dismiss an action if the action is brought contrary to a clause in a contract which requires the action to be brought in another forum.  The case law in Canada allows that motion to dismiss to be brought even after a Statement of Defence is filed.  Accordingly, each level of court held that the defendants were entitled to bring their motion to dismiss even after they had filed a Statement of Defence.  None of the three levels of courts expressly considered whether the action could be dismissed after the Statement of Defence was delivered based solely on the arbitration clause.

Logically, if the court could dismiss the action based on either the forum selection or the arbitration clause, then the one clause which permitted such dismissal seems sufficient.  The case is important for that point alone, even though none of the courts expressly stated it.  The necessary result appears to be that a defendant is entitled to a dismissal of an action based upon a forum selection clause even in the presence of an arbitration which, by itself, might not lead to the same result.

Interestingly, however, each level of court referred to the arbitration clause as being a “forum selection” clause.  Thus, the motion judge referred to “the forum selection clause, including the arbitration clause….”  The Supreme Court of Canada said that it agreed with the Court of Appeal’s decision dismissing the action “because the parties had agreed to arbitrate and litigate disputes in another forum.”

Potential Application of the Act, the Model Law and Article 8(1)

None of the three levels of court considered the motion to dismiss based on the arbitration clause itself.  It is interesting to consider the motion from that standpoint since the result may have been entirely different, due to the application of the Ontario International Commercial Arbitration Act (the Act) and the Model Law adopted by the Act.

Was the Arbitration “International”?

Section 1 of the Model Law states that an agreement is “international” if it meets one of the listed criteria:

  • The parties have their places of business in different States at the time they enter into the agreement, or
  • The place of the arbitration is outside of the State where the parties have their place of business, or
  • The place of performance or the place where the subject matter of the dispute is connected is outside of the State in which the parties have their places of business.

Many of the facts referred to above appear to bring the arbitration clause at issue in the Momentous action within the Act.

Did Article 8(1) of the Model Law apply?

Article 8(1) of the Model Law states as follows:

“A court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.”

This article, accordingly, draws a clear time line for objecting to an action being brought in contravention of an arbitration agreement.  If the objection is made by the defendant before its first statement on the substance of the dispute, the action must be stayed and the parties must be referred to arbitration.  But the article does not expressly state what is to be done if the objection is brought later, and whether the delivery of a defence amounts to a waiver of the arbitration agreement.

This article is in contrast to section 7 of the domestic arbitration statute in Ontario, the Arbitration Act, 1991.  That section states that while generally speaking a motion to stay or dismiss an action on the basis of an arbitration agreement shall be granted, the court may refuse to stay the action if the motion is brought with “undue delay.”  No distinction is made between a motion to stay or dismiss the action brought before of after the delivery of the Statement of Defence.  This subsection has been interpreted to mean that pleading does not amount to a waiver of the arbitration agreement.

Section 7(2).4 of the present Ontario domestic may in turn be contrasted with the old law in the prior Ontario Arbitrations Act, which had stood for decades.  That Act stated that, if the defendant brought a motion to stay the action based upon an arbitration agreement, and did so “before delivering any pleading or taking any other step in the proceeding”, then the court had the discretionary power to stay the action.  The Act did not expressly state that the failure to bring the motion before pleading or taking a step in the action amounted to waiver of the submission to arbitration, but the Act was so interpreted.  Indeed, asking for particulars was held to amount to such a waiver.

Accordingly, it would seem that it is arguable that the filing a Statement of Defence does amount to a waiver of the arbitration agreement under article 8(1) of the Model Law.  That argument would be supported by the contrast to the present domestic Act, and by reference to the prior domestic Act under which, in the presence of arguably similar wording, such a pleading was held to be a waiver.

That argument might also be supported by reference to section 9(3) of the UK Arbitration Act, 1996.  That Act incorporates the Model Law, but not exactly because it applies to both domestic and international arbitrations.  Section 9(3) states that an application to stay an action based upon an arbitration agreement may not be made by a defendant “after he has taken any steps in those proceedings to answer the substantive claim.”  This sub-section apparently reflects the English understanding that the Model Law requires the stay motion to be made before a defence is delivered.  If there is some advantage to consistent applications or interpretations by Canadian, English and other courts of the regime relating to stay motions based upon arbitration agreements, then a consideration by a Canadian court of section 9(3) of the UK Act might be helpful.

If the Canadian courts should hold that the filing of a Statement of Defence is not itself a waiver of the arbitration agreement under article 8(1) of the Model Law, and that the courts have a remaining power to stay the action, then several interesting issues might arise.  First, is the power mandatory (as it is if the stay motion is made before pleading): must the stay be granted?  Or is it discretionary?  And if it is discretionary, then how is the discretion to be exercised?

If the power is discretionary, the plaintiffs/appellants in the Momentous case had a very unsympathetic case.  They had agreed to contractual provisions requiring arbitration of any disputes, and requiring court proceedings to occur, in North Carolina.  They had appeared in the arbitration proceedings in North Carolina.  They had participated in the review of the arbitration decision by two levels of court in North Carolina.  After all that, it would seem only fair that they not be permitted to raise in Ontario the very issues that had been determined in the arbitration and by the courts in North Carolina.

In these circumstances, the respondents had a strong basis to argue that the discretion ought to be exercised in their favour.  In addition, they had a strong factual record to argue that article 8(1) of the Model Law should be interpreted so as to leave discretion with the courts to stay an action after a Statement of Defence is filed.  They could well argue that such an interpretation is the correct one because even after a Statement of Defense is filed, the court should have a remaining discretion to stay the action and not allow the plaintiffs to escape the consequences of their agreements and procedural steps as arguably had occurred in this case.

The courts in the Momentous case based their decisions entirely on the forum selection issue.  As a result, they did not determine whether the arbitration clause in issue was an “international” arbitration under Article 1.  Nor did they determine the effect of Article 8(1), of the Model Law.  We will have to await another international commercial arbitration case to see which way the debate on those Articles will go.

Arbitration   –   International Commercial Arbitration   –   Stay Motion   –   Alleged Waiver of Arbitration Agreement

Momentous.ca Corp. v. Canadian American Association of Professional Baseball Ltd., 2012 SCC 9

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                     April 10, 2012

www.heintzmanadr.com

www.constructionlawcanada.com

When Is The Main Building Contract Incorporated By Reference Into The Subcontract?

Most standard form building contracts provide for the incorporation of the main contract into the subcontract.  For instance, GC 3.7.1 of the CCDC 2 Stipulated Price Contract requires the contractor to incorporate the terms of that contract into all agreements with subcontractors and suppliers.  But what effect does an Incorporation by Reference clause in the subcontract have?  In 1510610 Ontario Inc. v. Man-Shield (NOW) Construction Inc, the Ontario Superior Court recently held that it does not mean that an obligation to post security for lien claims contained in the main contract is incorporated into the subcontract.

The Background

The main contract between the owner and Man-Shield required Man-Shield to post security for and discharge any liens that were registered.  Man-Shield entered into a subcontract with 1510610.  The subcontract referred to the main contract as “forming or by reference made a part of this Subcontract, insofar as applicable, generally or specifically, to the labour and materials to be furnished and work to be performed under this Subcontract.”  The subcontract stated that, in the event of any discrepancy between the subcontract and the main contract, the terms and conditions of the subcontract were to apply.

Man-Shield had asked 1510610 to sign a subcontract which contained an express provision requiring 1510610 to post security if its sub-trades liened the project, and 1510610 had refused to execute that contract.

When liens were filed by, among others, a sub-trade of 1510610, the owner demanded that Man-Shield provide security and discharge those liens, and Man-Shield did so.  Man-Shield then applied to the court for an order requiring 1510610 to take over this responsibility and post security to replace the security provided by Man-Shield with respect to the lien filed by the sub-trade of 1510610.  The Ontario court dismissed that application.

The Ontario court held that “the extent to which the terms of a principal contract are incorporated by reference into a subcontract is a question of construction of the subcontract.  The mere existence of an incorporation by reference clause in the subcontract did not automatically incorporate everything in the main contract.”

The court held that, for such a significant obligation as providing security for liens to be incorporated into the subcontract, more precise language was necessary.  In arriving at this conclusion, the court particularly relied upon the fact that 1510610 had been requested, and had refused, to execute a contract containing just such an obligation; and the fact that the incorporation by reference provision was prefaced with the words “insofar as applicable, generally or specifically to the labour and materials to be furnished and work to be performed under this Subcontract.”  In light of these facts, the court was not satisfied that the parties intended the lien security obligation in the main contract to be incorporated into the subcontract.

This decision highlights the need for parties to building contracts to carefully consider what they intend by an Incorporation by Reference clause.  These clauses are dangerous for subcontractors because they may impose unforeseen obligations arising from the main contract which they had no part in negotiating.  Courts have been sensitive to this issue and have been reluctant to apply these clauses, holus bolus.  This reluctance is clearest when the subject matter is not directly related to the physical prosecution of the work.  In other circumstances, the courts may insist upon objective proof that the parties really intended such incorporation.  The Man-Shield decision is just a recent example of that reluctance.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed., Chapter 7, Part 1

Construction Contracts   –   Subcontracts   –   Interpretation  –   Incorporation by Reference

1510610 Ontario Inc. v. Man-Shield (NOW) Construction Inc, 2012 ONSC 302

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                        April 4, 2012

www.heintzmanadr.com
www.constructionlawcanada.com

Can You Change Horses When Appealing From An Arbitration Decision?

Arbitration and court proceedings may be different, but can a party substantially change its position when it appeals from an arbitration award to the court?  At the very least, it seems like questionable strategy to do so.  The British Columbia Court of Appeal held that the appellant could not do so in VIH Aviation Group Ltd v. CHC Helicopter LLC.

The Background

VIH asserted the right to terminate a joint venture between the parties.  CHC referred the matter to arbitration.  The arbitral tribunal held that the termination was invalid and that the joint venture agreement continued in force.  VIH sought leave to appeal from that decision.  Leave to appeal was denied by the BC Supreme Court and that decision was upheld by the BC Court of Appeal.

VIH had asserted the right to terminate the joint venture because it said that CHC had gone through a corporate re-organization that constituted the sale or transfer of all or substantially all of its assets.  VIH said that such a sale or transfer triggered its right to terminate the joint venture agreement under a specific term of that agreement.

Before the arbitral tribunal, both VIH and CHC took the position that the term ought to be interpreted to require the arbitral tribunal to determine whether the re-organization had, in a “qualitative” way, changed the nature of CHC’s business.  The real issue before that tribunal was whether one should look at the integral nature of CHC’s assets and business (as VIH submitted) or the ability of CHC to fulfil its obligations under the agreement (as CHC submitted).  The arbitral tribunal accepted CHC’s view of this issue, and held that the transfer of assets to CHC’s subsidiary and affiliate did not interfere with its ability to carry out its obligations under the agreement.

In seeking leave to appeal from the BC Supreme Court, VIH took the position that the term in the joint venture agreement should be interpreted in accordance with its plain meaning.  Basically, it said that there was no need to resort to a “qualitative” analysis:  there was either a “sale or transfer” or there wasn’t, and the arbitral tribunal erred in applying the “qualitative” test and holding that there had not been a sale.

The Decision

The BC Supreme Court held that, on a motion for leave to appeal from an arbitral award, a party should not be able to change its position, and on that ground it refused leave to appeal.  The BC Court of Appeal agreed with that view for a number of reasons.

The Court of Appeal noted that there must be an issue of law before leave could be granted under section 31(2) (a) of the BC Commercial Arbitration Act.  It also acknowledged that the application of an improper principle of interpretation to a contract is an error of law.

However, if a party could create an issue of law by asserting one legal principle to the arbitral tribunal and another to the court, that would create mischief.  As the judge of the BC Supreme Court said:  “during the arbitration the petitioners in fact urged on the arbitrators that they were required to follow the very approach that is now criticized by the petitioners as wrong in law.”  The Court of Appeal held that the court correctly exercised its discretion not to permit VIH to raise a point of law for appeal by changing its legal position.

The Court of Appeal said that, even in a motion seeking leave to appeal from one court level to another, the judge hearing that motion normally ought not to allow an inconsistent position to be the basis for the appeal.  It is one thing to argue a new position.  It is another thing to argue a completely inconsistent position and to assert that the lower court erred in adopting the very position asserted by the would-be appellant in the lower court.

The Court of Appeal said that this principle is even more important in a motion for leave to appeal from an arbitral award.  It said:  “Where parties have deliberately preferred arbitration as the method for resolving disputes, it is to be expected that they will fully argue their cases in that forum.” In the Court’s view, “allowing a party to change positions too readily on an arbitration appeal risks subverting the goals of the arbitration process, which is designed to be expeditious and provide finality.”

This decision is a welcome clarification of the power of a court to grant leave to appeal from an arbitral award.  That power does not exist in all jurisdictions.  In Canada, it exists in British Columbia and in those provinces which have adopted the Uniform Arbitration Act of the Uniform Law Conference (Alberta, Saskatchewan, Manitoba, Ontario, New Brunswick and Nova Scotia).  That right to obtain leave to appeal is considered by some to allow the court system to intrude into the arbitration process.

But the VIH decision discounts that fear on two bases:

First, the BC Court of Appeal has affirmed that there is a residual discretion not to grant leave to appeal even if the would-be appellant meets the strict terms of the section permitting leave to appeal.

Second, that court affirmed that the residual discretion can be exercised by considering whether granting leave to appeal supports or subverts the goals of the arbitration process.  If consistently applied, that principle will go a long way toward both upholding the integrity of arbitration and protecting it from unnecessary incursions by the court system.

Potential Impact on “As-of-Right” Appeals

The VIH decision may also raise an interesting issue if a party has a right to appeal to the courts from an arbitration decision.  Such a right exists in Prince Edward Island if the arbitration agreement so provides.  Other provinces have adopted the provision in the Uniform Arbitration Act of the Uniform Law Conference of Canada allowing the parties to insert a right of appeal (and not just appeal with leave) into their arbitration agreements.  Alberta, Saskatchewan, Manitoba, Ontario, New Brunswick and Nova Scotia have adopted that provision.

If a party has a right of appeal, should the appeal court allow the appellant to assert a position before the appeal court that is contrary to the position it asserted before the arbitral tribunal?  Should the appeal court treat the matter as though it were an appeal from another court?  Or does the appeal court have a discretionary power to dismiss the appeal because, to do otherwise, would subvert the arbitration process?  For an answer to those questions, we must wait for a party to be brave or unwise enough to change its position in an as-of-right appeal from an arbitration decision.

Arbitration   –   Appeal   –   Change of Position

VIH Aviation Group Ltd v. CHC Helicopter LLC, 2012 BCCA 125

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                               April 10, 2012

www.heintzmanadr.com

www.constructionlawcanada.com

Decision Holding That Demolition Is Not An Improvement Is Reversed

In my article dated December 11, 2011, I reported on a decision of the British Columbia Supreme Court holding that demolition is not an “improvement” for the purposes of the B.C. Builders Lien Act (the Act).  That decision has since been reversed by the B.C. Court of Appeal.  It was not reversed on the merits, but only on the basis that the B.C. Supreme Court did not have jurisdiction to make the order:  West Fraser Mills. Ltd v. BKB Construction Ltd. 

The Facts of the Case

As my earlier article reported, BKB and its subcontractor had filed builders’ liens against West Fraser’s property when they were not paid in full for their work in removing machinery from the property.  West Fraser had shut down its paper mill in Kitimat, B.C. and sold the paper machinery separately from the land.   Under the agreement by which West Fraser sold the machinery, the buyer was obliged to remove the equipment.  The buyer hired BKB to remove the machinery and BKB hired a subcontractor to assist in the removal.  BKB and its subcontractor were not paid in full by the buyer and so filed their builder’s liens.

The B.C. Supreme Court held that the removal of the machinery was not an improvement of the land.   Demolition work may be an improvement, it said, if undertaken as part of a project to create an altered structure, but work to preserve the value of removed or salvaged material which does not benefit the landowner qua landowner is not an improvement within the Act.

The B.C. Court of Appeal reversed this decision on the basis that the court had no jurisdiction to strike out the lien under sections 24 and 25 of the Act.  The Court of Appeal held that those sections were not intended to permit the court to rule on the merits of the liens or to grant summary judgment on the merits.  West Fraser did not contend that the lien was filed out of time or against the wrong property or had been satisfied by payment or litigated to conclusion.  Indeed, a lien action had not even been commenced.

The only provision in those sections under which the lien could be struck out was section 25(2) (b) on a showing that the lien claim was scandalous, frivolous or vexatious.  The Court of Appeal held that this test could not be met because it was at least arguable that the liens were valid, and not plain and obvious that they were invalid.  These sections could not be used to determine whether the liens had been proven, which is what the Supreme Court judge had done.

In the Court of Appeal, BKB argued that West Fraser had refused to produce the documents which might show the reason why West Fraser sold the equipment separately from the land, and had the equipment removed.  Those documents might show, BKB argued, that the removal work was an improvement to the land, having regard to West Fraser’s future  intended use of the building and the land.  The Court of Appeal said that this argument had “some merit.”

As a result, the issue of whether demolition can be an “improvement” under the Act has not yet been determined.  The B.C. Court of Appeal’s decision appears to support the conclusion that, at least in some circumstances, it can.  As in all things, the first chapter was not the end of the story, and we will have to wait for the next episode.

 Construction Law   –  Construction Liens  –   Removal of Equipment  –   Power of the Court to Strike Lien

West Fraser Mills. Ltd v. BKB Construction Ltd., 2012 BCCA 89

 Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                             April 4, 2012

www.heintzmanadr.com

www.constructionlawcanada.com
 

Conduct After An Arbitration Award May Nullify That Award

A party to a contract may terminate the contract and then start an arbitration to confirm the validity of the termination.  If the arbitral tribunal grants such a declaration, then that party better watch out that it doesn’t continue to treat the contract as still continuing.  If it does, it may waive the termination, and the arbitration will be for naught.  So held the Saskatchewan Court of Queen’s Bench in Subway Franchise System of Canada Ltd. v. Laich.  Clearly, this decision is of considerable importance in construction projects, franchise agreements or in other ongoing contractual relationships.

The Background

In 2003, Subway entered into a franchise agreement with Laich for a Subway store in La Ronge, Saskatchewan.  In 2009, Subway terminated the franchise agreement.  The franchise agreement contained an arbitration clause providing for the arbitration of disputes in Connecticut.  In May 2010, the arbitrator upheld the termination of the franchise agreement by Subway.

Subway then sought to enforce that award in Saskatchewan pursuant to the Saskatchewan International Commercial Arbitration Act (ICAA), and statues relating to landlord and tenant and enforcement of foreign judgments.  In 2011, the Saskatchewan Court held that the award would not be enforced because Subway had continued to treat the franchise agreement as outstanding after the arbitration award.

The Court held that Subway had met the requirements of the Model Law in the ICAA.  The Court also found that no objections to the award could be raised since no request for recourse against the award had been brought within the time specified in the Model Law.  Nevertheless, the Court held that the arbitral award was not enforceable because, after the award, both parties continued to operate pursuant to the provisions of the franchise agreement.  Laich continued to make all remittances and there was no change in the support given by Subway to the franchise operation.   Laich continued to pay the royalties due under the franchise agreement.  In what was undoubtedly a form letter, Subway wrote to Laich extending “congratulations on a job well done”.

The Saskatchewan Court found that, by its conduct, Subway had “waived the termination decision by the arbitrator as it continued to work with and support the respondent in a profitable partnership.”

The Court also refused to enforce the arbitral award for damages, being $250 per day during the period that Subway did not recover possession.  The Court refused to enforce this award because to do so would doubly compensate Subway which had, during that period, received the remittances and royalties from Laich.  The Court also dismissed Subway’s application for possession of the premises.

While this dispute may be viewed by some as a franchise dispute of little significance, the decision has an importance to construction projects and to other situations where ongoing contractual relationships may exist.

One of the parties may not be willing to take the risk of unilaterally forcing the other party off the site or out of the premises.  That party may need an arbitral (or court) decision approving its view that the other party has repudiated the contract and that it is entitled to terminate the contract.  During the period that the dispute is being dealt with by the tribunal, the innocent party will have to leave the other party in place and not disturb the contractual setting.

But the moment that the innocent party obtains such a decision, then according to the Saskatchewan Court, it must immediately stop dealing with the other party in the normal course.  It must refuse any further payments or benefits from the other party and treat the relationship as at an end.  Its failure to do so may eliminate every value that it secured from the arbitral award.

Three thoughts come to mind:

First, is this decision commercially unreasonable?  Is it consistent with modern electronic technology?  Should we expect a huge international commercial business to turn off all its normal termination procedures so that a tiny franchisee (or sub-contractor, or agency) does not slip through the termination machinery and continue to be treated as a compliant contracting party?  Even though some of us might answer No to these questions, we should expect a trial judge to be unsympathetic to the large organization in these circumstances.

Second, as a technical matter, this case may not strictly be about waiver.  The parties were apparently bound by the arbitrator’s decision that the franchise agreement had terminated due to the principles of res judicata.  Rather, the parties conduct may be seen as the re-establishment of their agreement.  By continuing to abide by the agreement, they made a new agreement.

Third, surely there are easy ways for an organization to address the problem.  It can send out a notice at the very beginning of the termination process (and better still, again immediately after the arbitration award) stating that no conduct on its behalf, including the acceptance of money, extension of services or correspondence on its behalf, shall be considered to be a waiver of its position that the agreement is terminated or a waiver of any rights under an arbitral or court award, and that if it accepts any monies from the other party it does not do so in recognition of any continuing contractual rights of the other party and holds those monies in trust to be dealt with in accordance with the arbitral decision.  That sort of letter should be a standard form in the termination documents of any contractor, franchisor or principal.

Once again, this decision is a wake-up call to everyone engaged in a dispute arising from an ongoing contract:

Don’t continue to treat the contract as ongoing after a decision confirming its termination.  If you do, then the contract may be revived and the decision may be worthless.

Arbitration   –   Enforcement   –   Waiver

Subway Franchise System of Canada Ltd. v. Laich, 2011 SKQB 249

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                       March 25, 2012

www.heintzmanadr.com
www.constructionlawcanada.com

What Mortgage Payments Are “Advances” That Have Priority Over Lien Claims?

A recurring issue for construction and builders liens is whether the liens have priority over mortgage advances.  One question which does not often arise is:  what sort of payments by a mortgagee do constitute “advances” under a mortgage?  In other words, what sort of payments by a mortgagee can even qualify for priority over lien holders?

A mortgagee may make payments for many reasons, but a lien holder may question whether the payment qualifies as an “advance” under the mortgage.  For example, when a mortgagee appoints a receiver and loans moneys to the receiver under new arrangements with the receiver, are those loans “advances” under the original mortgage?  Are those loans entitled to priority over existing registered lien holders?  The British Columbia Court of Appeal recently answered “No” to these two questions in Bank of Montreal v Peri Formwork Systems Inc.

 The background:

 The Bank was a mortgagee to the owners and developers of the project.  On June 21, 2009, it demanded payment of $29 million on the mortgage.  On July 21, 2009, the owners obtained an order under the Companies’ Creditors Arrangement Act (CCAA).  The order permitted the owner to borrow $2 million in Debtor-in Possession (DIP) financing from the Bank.  The order stated that the loan had priority over all other security interests including builders’ liens.

On July 28, 2009, Peri Formwork filed a builders’ lien.

In December 2009, the CCAA proceedings came to an end.  The monitor under the CCAA proceedings was then appointed as receiver of the borrowers.  Under the terms of the receivership order, the receiver was permitted to borrow up to $21 million from the Bank.  The terms of that loan had different terms than the original mortgage.

The receivership order stated that the receiver’s borrowings were to have priority over all other security interests or liens except builders liens filed prior to the date of the order which totaled about $2 million.  As to those liens, the order stated that the priority between the receiver’s borrowings and the prior liens would be determined in a separate hearing.

The Bank commenced foreclosure proceedings in December 2009.  Before the December 2009 receiving order, the monitor’s assessment was that, if the property was sold on an “as is” condition, there would be a substantial shortfall for the mortgagee, and that by continuing the construction, a substantially reduced shortfall would likely result.

In April 2010, a judge of the BC Supreme Court held that loans which the Bank proposed to advance to the receiver took priority over the prior liens.  This decision was reversed by the BC Court of Appeal.  That decision was based on three grounds:

First, the Court of Appeal held that the priority of the loans to the receiver could not be based on the CCAA proceedings and orders.  By the time of the mortgage and receivership proceedings, the CCAA proceedings had been “effectively terminated” and there was “no life remaining” in those proceedings.

Second, the Court of Appeal held that there was no inherent jurisdiction of the court to accord priority to the Bank’s loans to the receiver that would over-rule the statutory scheme in the Builders Lien Act (the Act).

Third, the Court of Appeal held that the loans to the receiver could not qualify as “further advances under the mortgage” within the meaning of Section 32(5) of the Act.  The Court noted that Section 21 of the Act expressly gives priority to liens over “receiving orders”.  The Court held that Section 32(5) provides an exception to the priority in favour of lien holders over mortgage advances in Section 32(2).    The words in Section 32(5) had to be given a restrictive meaning, and an interpretation which gives effect to the purpose of the Act, which is to “to ensure that contractors and suppliers are paid for materials provided and for services rendered”.  Accordingly, those words only apply to an advance under the original mortgage.  The loans to the receiver were to be under different terms and were distinct loans, and accordingly were not “advances” made under the original mortgage.

Section 32(5) and (6) of the Act states that the mortgagee may apply to the court and obtain an order that its further advances are to be given priority over the registered liens, and that the court must make such an order if it finds that the advances will be applied to complete the improvement and will result in an increased value of the land at least equal to the amount of the proposed advances.  The Court of Appeal held that, in light of its decision that the loans to the receiver were not “advances”, it did not have to consider whether Section 32(6) applied.

While this decision was made in the context of loans to a receiver, it raises the much broader question about when monies paid by a mortgagee will be given priority over lien holders.  Generally speaking, the construction and builders lien Acts across Canada use the words “advance” and “in respect of” or “on account of” the mortgage.  For instance, section 78(4) of the Ontario Construction Lien Act refers to “any advance made in respect of that conveyance, mortgage or other agreement.”  Section 31 of the Manitoba Builders’ Lien Act refers to “payment or advances made on account of any conveyance or mortgage”  Section 23(2) of the Nova Scotia Builders’ Lien Act refers to “funds advanced in good faith”, without stating that the advance must be in respect of the mortgage, although that requirement may be assumed.

What may not be obvious in each case is whether the payment made by the mortgage is an “advance” and whether it is “in respect of” or under the mortgage.  If it is not, then according to the Peri Formwork decision, the payment will not obtain priority over competing lien claims.

Construction Liens   –   Priority   –    Mortgage advances  –  Receiver

Tags:    priority – foreclosure proceedings – receiver – lien – builders

Bank of Montreal v Peri Formwork Systems Inc., 2012 BCCA 4

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                       March 22, 2012

www.heintzmanadr.com 
www.constructionlawcanada.com
 

Can Money Paid Into Court Be Used To Discharge Other Liens?

When a contractor pays money into court to discharge a lien of a sub-contractor, can that money only be used to discharge that lien holder’s claim?  Or is it available to pay the liens of all eventual lien holders?  In Canadian Western Bank v. 702348 Alberta Ltd., the Alberta Court of Queen’s Bench recently decided that all lien holders have a claim to that money under the Alberta Builders Lien Act.  This may depend on the specific wording of the Alberta Act.  Indeed the Alberta Court recognized that the result is not the same in Saskatchewan.

The Alberta Court held that the 2007 decision of the Alberta Court of Appeal in Maple Raiders Inc. v Eagle Sheet Metal Inc. had decided the issue.  In Maple, the general contractor paid money into court to discharge the lien of a sub-sub contractor (the “lien discharge monies”).  The general contractor later applied to create a lien fund for all the claimants, under s.27(3) of the Alberta Act, to replace the previous monies paid into court, and to have the lien discharge monies incorporated into the lien fund.  The effect of incorporating the lien discharge monies into the lien fund was to diminish the sub-sub-contractor’s share from about $26,000 to $7,000.  The Alberta Court of Appeal upheld the lower court’s decision in Maple granting the contractor’s application.  It held that the principle that all lien holders are to be treated equally mandated the result.

The Alberta Court of Appeal in Maple held that the payment into court of the lien discharge monies did not make the owner liable for the full amount of those funds, but only such portion as the lien holders in total might be entitled.  Put another way, the payment into court did not make the owner liable for more money to the other lien holders.  That would be the effect if the original lien holder could keep the lien discharge monies solely for payment of its lien and prohibit the other lienholders from having access to those monies.

In Canadian Western Bank, the Alberta Court Queen’s Bench held that the same principles apply when the original lien claimant is a sub-contractor, not a sub-sub-contractor.  The lien claimant asserted that the decision in Maple should not apply since it was a sub-contractor and in a direct contractual relationship with the contractor which paid the money into court.  Since it had a direct contractual right to be paid by the contractor, the sub-contractor argued that the lien discharge monies were effectively security for its direct contractual claim.  The Alberta Court disagreed, holding that those monies stood in place of the land, for the benefit of all lienholders.

The Alberta Court acknowledged that the result might be different in another province.  It pointed to the Saskatchewan decision in Town-N-Country Plumbing & Heating (1985) Ltd. v Schmidt.  In that decision, the Saskatchewan Court of Appeal relied upon the Saskatchewan Act which provides that, when a lien holder’s lien is discharged by payment into court, the lien holder has a first charge upon those monies.  Accordingly, the Saskatchewan Court of Appeal held that the lien holder was entitled to those monies to the exclusion of other lien holders.  There is no similar “first charge” provision in the Alberta Act.

The construction, builders and similar lien statutes in Manitoba, New Brunswick, and Newfoundland and Labrador all state that the lien holders whose lien has been discharged by payment of money into court or by provisions of security has a first charge on that money or security.  Accordingly, in those provinces the result in Town-N-Country Plumbing & Heating appears to apply.  The legislation in other provinces does not state that the lien holder whose lien has been so discharged has a first charge on that money or security.  Accordingly, in those provinces the result in Canadian Western Bank appears to apply.  The usefulness of this disparity in legislative regimes seems doubtful.

Does the Canada Revenue Agency have a claim to the lien funds?

Another interesting aspect of the Canadian Western Bank decision is the claim by the Canada Revenue Agency (CRA) to the lien funds.  CRA claimed these moneys because the general contractor that paid them into court had not made the proper deductions and remittances to the CRA under the Income Tax Act (ITA).  CRA claimed that s.227(4) of the ITA imposed a trust in favour of Her Majesty on the lien fund in priority to that of the lien claimants.

This claim raised the issue:  who owns the trust funds in court:

–          the contractor (because it paid the moneys into court)

–          the owner (since those funds stand in place of the Lands)

–          or the lien holders?

The Court held that a trial on that issue must be held to determine “the issues upon which [the contractor] paid the moneys into court to clear [the owner’s] title to the land.” The decision to direct a trial of the issue seems unnecessary since the question appears to be a legal one and not dependent on the facts.  The sole purpose of the payment by the contractor into court was to release a claim against the owner’s land.  The money paid into court stands in place of any remaining claim against the owner’s land.  In these circumstances, the contractor’s claim to those funds appears more akin to a resulting trust than ownership.

In the result, a sub-contractor cannot be assured that it will ultimately receive the money paid into court to discharge its lien.  In some provinces, other lien claimants may have a right to those funds.  So may the CRA.

Can the sub-contractor improve its situation by making other arrangements? 

The decision in Canadian Western Bank raises a further question. What if the order paying the money into court stated that the lien claimant has a first charge on those funds (following the Saskatchewan Act)?  What if the order said that the monies were to be held by the lien claimant, rather than paid into court, subject to the litigation to resolve the lien claim?  Can the court make such an order, or can parties make such an agreement, and deprive the other lien claimants of their claim to these monies?  If it is solely a matter of the parties’ intentions, as the Alberta Court appears to hold Canadian Western Bank, then the court or the parties might make such an arrangement. But if the matter is one of law, and the parties cannot contract out of the statutory regime, then neither the court nor the parties could deny the other lien claimants their share of the lien discharge monies.  In any event, it is unlikely that the contractor or owner would agree to that sort of arrangement.

As a result, when a lien holder’s claim is discharged by payment of monies into court, the lien holder’s claim to those monies will remain precarious depending on the provincial jurisdiction of the claim and, possibly, the terms upon which the monies are paid into court.

Construction Liens   –   Payment into Court   –   Priority of lien-claimants

Canadian Western Bank v. 702348 Alberta Ltd., 2012 ABQB 89

Thomas G. Heintzman O.C., Q.C., MCIArb                                                                                            March 13, 2012

www.heintzmanadr.com
www.constructionlawcanada.com

Tercon Contractors? The Latest Chapter

The 2010 decision of the Supreme Court of Canada in Tercon Contractors Ltd v. British Columbia (Transportation and Highways) is one of the most important recent Canadian decisions relating to contract law.  It has particular importance to building contracts.  Those interested in construction law are watching to see how Tercon will be applied in subsequent cases.  In the recent decision of the British Columbia Court of Appeal in Roy v. 1216393 Ontario Inc, we now have one of our first indications of where Tercon will go.

The facts behind Roy v. 1216393 Ontario Inc.

In Roy, the plaintiffs entered into an agreement to buy a building lot from the defendants for $184,700 and gave the defendants’ lawyer a deposit of $18,470.   The defendants had previously sold the lot to another party but neither the defendants nor their lawyer told that to the plaintiffs.  The other party sued for specific performance and this precluded the defendants from completing the sale to the plaintiffs.  So the plaintiffs sued the defendants and their lawyer for damages.

The agreement of purchase stated that if the agreement was not completed due to the vendor’s fault, then the sole remedy of the plaintiffs, the purchasers, was the payment to them of the deposit, as liquidated damages.  The Court of Appeal noted, “as the deposit monies came from the purchaser, it has the effect of being an exclusion of liability clause.”

The trial judge refused to apply this clause and awarded the plaintiffs $317,000 in damages against the defendants.  The trial judge held that the clause was unconscionable because “it permitted the vendor to walk away from the contract with no consequence, though the purchasers would face significant consequences on failure to comply with obligations imposed on them.  From the purchaser’s perspective, it would render the purported contract no contract at all.”

Harkening back to Tercon, the B.C. Court of Appeal noted that the dissenting judgment in the Supreme Court established three questions with respect to the enforcement of the exclusion clauses:

1.  Does the clause even apply to the circumstances in issue? If it does:

2.  Was the clause unconscionable at the time of the contract?   If not,

3.  Should enforcement of the exclusion clause be denied on grounds of public policy?

The exemption clause will not be applied if the answer to question (1) is No, or the answer to question (2) or( 3) is Yes.

The trial judge applied the second test and concluded that the clause in question was unconscionable.  But, the Court of Appeal said, the trial judge did not perform the proper analysis of unconscionability.  The Court of Appeal said that there are two elements to unconscionability;  inequality of bargaining power, and substantial unfairness.  The Court of Appeal said that the trial judge had only considered the “substantial unfairness” element, not the inequality of bargaining power element.

The Court of Appeal refused to make its own decision as to whether there was inequality of bargaining power between the parties.  It also refused to consider whether the fraud of the defendant or its lawyer invoked the third (“public policy”) element of the Tercon test or precluded the defendants from relying on the exclusion clause at all.  The Court sent those matters back for a re-hearing.

In the result, we can draw a number of conclusions about how appellate courts in Canada are likely to apply the three-part test developed by the dissenting judgment in Tercon.

First, this dissenting judgment was accepted by the B.C. Court of Appeal as establishing the law with respect to the enforcement of exclusion clauses.  This is so even though the majority judgment in Tercon decided the appeal based on the first issue, namely that the dispute did not fall within the exclusion clause at all.

Second, the B.C. Court of Appeal confirmed that the unconsionability element of this test has two elements:

inequality of bargaining power and substantial unfairness.

In the case of the tendering of building or construction contracts, it may be very difficult, if not impossible, to establish inequality of bargaining power.  As the minority judgment in Tercon said:

“While Tercon is not on the same level of power and authority as the Ministry, Tercon is a major contractor and is well able to look after itself in a commercial context.  It need not bid if it doesn’t like what is proposed.  There was no relevant imbalance in bargaining power.”

The B.C. Court of Appeal did not deal with the third element of the test, namely, whether the exclusion clause should be enforced having regard to public policy.  But the remarks of the minority in Tercon make it difficult to avoid an exclusion clause in the context of a tender of a construction project:

“No statute in British Columbia and no principle of the common law override their ability in this case to agree on a tendering process including a limitation or exclusion of remedies for breach of its rules.  A contractor who does not think it is in its business interest to bid on the terms offered is free to decline to participate.  As Donald J.A. pointed out, if enough contractors refuse to participate, the Ministry would be forced to change its approach.  So long as contractors are willing to bid on such terms, I do not think it is the court’s job to rescue them from the consequences of their decision to do so.”

In the result, the decision of the B.C. Court of Appeal in Roy confirms that a bidder under an invitation to tender a construction contract will have a real challenge in avoiding an exclusion clause in the tender, at least under the second and third elements of the dissenting judgment in Tercon.  The bidder will more likely avoid that clause by showing that it does not apply to the dispute in question at all.  Otherwise the bidder may have to take the whole matter back to the Supreme Court and argue that the three part test was not the rationale of the majority decision in Tercon and not part of Canadian law.

Another way of looking at the decisions in Tercon and Roy is to question whether the invitation to tender creates any enforceable rights at all.  If it contains an exclusion clause that gives no enforceable rights to the bidding contractor, then there may be no consideration for the contractor’s bid, and therefore no Contract A created by the tender.  If that is so, then the contractor’s bid is itself just an invitation to treat.  If the contractors bid is just an invitation to treat, then the owner’s “acceptance” is just an offer and the contractor is not obliged to leave its bid open or accept the owner’s “offer”.  That could be the result of an owner’s invitation to bid containing an exclusion clause which eliminates any risk or obligation of the owner.

See Heintzman and Goldsmith on Canadian Building Contracts (4th ed), chapter 1, part 1(f)

Building Contracts   –   Tenders  –   Exclusion Clause

Roy v. 1216393 Ontario Inc, 2011 BCCA 500

Thomas G. Heintzman O.C., Q.C.                                                                                          February 29, 2012

www.heintzmanadr.com
www.constructionlawcanada.com

An Insurance Clause Does Not Necessarily Bar A Claim By The Owner

When does an insurance clause in a construction contract bar a claim by the owner against the contractor?  Is it barred if the contract requires that the contractor obtain insurance and that the owner is to be named as an additional insured and that subrogation is waived against the owner?  That was the issue in the recent decision of the British Columbia Court of Appeal in Lafarge Canada Inc. v. JJM Construction Ltd.

The Background

The contract in question was for the charter of barges by the owner, JJM, to the charterer, Lafarge, but the principles in question appear to be no different than in a construction contract. The contract placed the sole responsibility on Lafarge for the barges’ good condition during the term of the contract.  The contract contained “insurance clauses” which required Lafarge to maintain insurance on the barges with loss payable to JJM and also required that the insurance name JJM as an additional insured and expressly waive subrogation against JJM as the owner.

When the barges were returned to JJM at the end of the contract they were damaged.  JJM repaired the barges, made a claim under the insurance and then claimed against Lafarge for the additional costs that it incurred over the insurance recovery. The parties agreed to arbitrate the claim.

In the arbitration, Lafarge argued that the “insurance clauses” barred any claim against it.  It relied upon a series of decisions of the Supreme court of Canada (Agnew Surpass v. Cummer-Yonge, Ross Southward v. Pyrotech Products, T. Eaton v. Smith and Commonwealth Construction v. Imperial Oil) and various lower court decisions which applied the principles in those decisions.

In some of those cases, claims by owners against tenants and contractors were dismissed based upon insurance clauses in which the owner had agreed to obtain insurance covering the building or project.  In other cases, the owners’ claims were dismissed based upon clauses requiring the tenant or contractor to contribute to the insurance premiums incurred by the landlord.  In both cases, the courts held that these clauses effectively passed the risk of loss to the owner, even in the presence of a general duty placed on the tenant or contractor to repair and maintain the building or project.

The arbitrator agreed with JJM that the insurance clause in question did not protect Lafarge.  The arbitrator’s decision was upheld by the British Columbia Supreme Court and Court of Appeal.

The Court of Appeal held that the prior decisions relied upon by Lafarge did not apply to the present circumstances.  Those cases involved two situations.

The first situation is a claim by the party which undertook the obligation to insure the other party.  That was the situation in each of the Supreme Court of Canada cases in which the owner, expressly or impliedly, undertook to obtain insurance on the building or project, and then sued the tenant or contractor when there was damage to the building.  The obligation to insure was express if the lease or construction contract stated that the owner would insure the building or project.  The obligation to insure was implied if the lease stated that the tenant would contribute to the insurance maintained by the landlord.  In either situation, the courts held that the owner had assumed the risk of damage to the building and could not sue the tenant or contractor.

The second situation is a subrogated claim by an insurer of the owner.  The claim may be against a tenant or contractor which was a named or unnamed insured under the insurance policy taken out by the owner.  Or the claim may be against a tenant or contractor which the owner agreed to name as an insured party in the insurance policy to be taken out by the owner, but the owner failed to take out that insurance. In both cases, the courts have held that the insurer could not maintain such a claim.

Neither situation existed here.  In this case, the claim was by the owner but the owner had not contracted to take out insurance.  Rather, it was the charterer, Lafarge, which had contracted to take out the insurance, and insurance naming the owner as an insured party.  Here, the claim was not by the insurer but by JJM for its uninsured loss after giving full credit to Lafarge for all insurance proceeds it had received.

Lafarge argued that a wider principle applied.  Effectively Lafarge was seeking to broaden the first category, namely, the implied obligation to insure arising from a contribution made by a tenant or contractor to the owner’s insurance premiums.  Lafarge argued that this implied obligation is based upon the principle that any time a party pays for insurance under a contract relating to a project or building, all claims arising from that project or building must be made under the insurance policy, and that all other claims against that party are barred.

The Court of Appeal rejected that argument.  It pointed out that Lafarge had cited no cases that supported its argument.  It also noted that, in the first category of cases on which Lafarge relied, the party suing (usually the owner) was the party which had an express or implied obligation to obtain insurance for the benefit of the other party (usually the tenant or contractor) .  In the present case, the party suing (the owner, JJM) had not undertaken to obtain insurance.  To the contrary, the party suing was the beneficiary of the insurance to be obtained by the other party.  Effectively, Lafarge was arguing that JJM should be deprived of a remedy by the very insurance that Lafarge had agreed to obtain for JJM’s benefit.

The Court of Appeal concluded that the other cases cited by Lafarge were all based upon claims made by insurers and were based upon two principles of subrogation.

First, the insurer could not sue the other party (usually the tenant or contractor) because the other party was a named or unnamed beneficiary of the policy under which the insurer had paid.  Under well known principles of insurance law, an insurer cannot bring a subrogated claim against another party insured under the same policy.

Second, another well know principle of insurance law is that the insurer has no greater subrogation rights than its insured (usually the owner).  If the owner had contracted to obtain insurance for the building or project and to name the other party (usually the tenant or contractor) as an insured and had failed to do so, then the owner had accepted the risk of damage and the insurer could be in no better position than the owner when maintaining a subrogated claim.

The present case did not fall within those principles.  JJM had not contracted to obtain insurance and the claim was not a subrogated claim.

This decision by the British Columbia Court of Appeal is a good reminder that “insurance clauses” do not necessarily create a water-tight regime which precludes claims by one party  against the other under insurance contracts.  The water-tight regime may apply to, and exclude, claims by the party (or its insurer) which agrees, either expressly or by implication, to obtain insurance on the project for the benefit of the other party.  But, without more, it may not apply to and exclude claims against the party which agreed to put that insurance in place.

The business logic of this decision is also sound.  As the Court of Appeal pointed out, it was Lafarge which arranged for the insurance, together with the terms and the deductible that resulted in JJM’s insurance claim not being paid in full.  In this circumstance, it seems only fair that Lafarge bear the risk of any uninsured shortfall.

This conclusion may have several unsettling implications for a party taking out insurance for a construction project.

First, the party agreeing to take out insurance (Lafarge in this case) undoubtedly conferred a benefit on the owner (JJM).  Wasn’t the amount of rent paid by Lafarge for the barges likely reduced, in some measure, by the cost of that insurance and the benefit conferred on JJM?  If so, isn’t that benefit akin to the contribution made by a contractor or tenant to the owner’s insurance premiums?  And if that is so, should that fact not give rise to an implied duty on JJM to accept that insurance as its sole remedy?

Second, to the extent possible owners and contractors usually want to create a water-tight insurance regime in the construction contract.  Each of them wants to ensure that the insurance regime provides the only remedies available to the other party.  How can they accomplish that result?

Clearly, this case tells us that the insurance clause and the insurance itself is not sufficient, at least so far as claims against the party which agrees to take out the insurance.  What is sufficient?  Must the contract provide that the insurance is the sole remedy of either party?  Is there any other way to create that “water-tight” regime so far as claims against the party taking out the insurance?  This case will have owners and contractors scratching their heads to come up with an answer.

See Heintzman and Goldsmith on Canadian Building Contracts (4th ed.), Chapter 5, Part 3

Arbitration  –  Construction Contract   –   Insurance  –   Subrogation

Lafarge Canada Inc. v. JJM Construction Ltd., 2011 BCCA 453

Thomas G. Heintzman O.C., Q.C.                                                                                                     February 20, 2012

www.heintzmanadr.com

Playing Offence, Not Defence, In International Arbitrations

What is the best way to protect the authority of international commercial arbitrations?  Is a party obliged to “play defence” and not ask the courts of the seat of the arbitration to interfere until after arbitration proceedings are commenced?  Or can a party “play offense” and ask those courts to take jurisdiction before any arbitration proceedings begin?  That is the issue which the UK Court of Appeal addressed in AES-Ust-Kamenogorsk Hydropower Plant LLP v. Ust-Kamenogorsk Hydropower Plant JSC.

The Background

The dispute related to a 20 year concession agreement between the owner and operator of a hydro-electric facility in Kazakhstan.  The original owner was the Republic of Kazakhstan.  Both the original owner and the original operator had assigned their interests to companies to which each of them was related and those companies were the parties to this English proceeding.  The companies were both Kazakhstan companies and the concession agreement was governed by Kazakhstan law.

The concession agreement contained an arbitration clause which was governed by English law.  It provided that all disputes were to be settled by ICC arbitration to be conducted in London, England.

The owner had brought previous litigation in the Kazakhstan court.  In that litigation, the Kazakhstan Supreme Court held that the arbitration clause was unenforceable under Kazakhstan law.  The operator appeared in the Kazakhstan court to contest the jurisdiction of that court.  When that court held that it had jurisdiction, the operator made submissions on the merits but at all times it contested the jurisdiction of the Kazakhstan courts.

The operator brought an application in the UK courts for a declaration that any claim arising out of the concession agreement (except tariff matters) had to be determined in accordance with the arbitration clause of that agreement.  It also sought an injunction restraining the owner from bringing any such proceedings in the Kazakhstan courts.  At the time of the application, there was no court of arbitration proceeding in existence or contemplated under the concession agreement.  The UK court of first instance granted the declaration but not the injunction and the owner appealed.

The “Just and Equitable” Principle

The UK Court of Appeal upheld the jurisdiction of the UK courts to hear the application and grant the declaration.  It did not do so based upon the general UK arbitration statute, the Arbitration Act, 1996 (the “1996 Act”).  It held that section 44 of the 1996 Act only allowed the court to grant interim injunctions in the case of urgency, or with the tribunal’s or the parties’ agreement.  None of those circumstances existed in the present case. Indeed, the operator conceded that it could not rely on section 44 in the present circumstances.

Instead, the operator relied upon the general declaratory jurisdiction of English courts found in section 37 of the Senior Courts Act.  That section authorized the court to grant an injunction if it is “just and equitable” to do so.  This authority is also found in section 101 of the Ontario Courts of Justice Act and in the judicature or procedural statutes of most common law jurisdictions.  Accordingly, the decision in Kamenogorsk is of general application in Canada and elsewhere.

One would have thought that the legislature’s policy and intention regarding anti-suit injunctions or declarations to enforce arbitration clauses would be found in the arbitration home statute, in this case the 1996 Act.  That statute did not authorize the English court to take jurisdiction to grant an anti-suit injunction or declaration in these circumstances.  If that is so, why should the court reach out to the general authority of the court to grant the declaration?

Two Reasons for “Playing Offence”

The UK Court of Appeal gave two reasons for taking jurisdiction:

First, the UK courts would, sooner or later, have to deal with the jurisdictional issue.  Accordingly, it should do so in the absence of an existing or threatened arbitral proceeding, and notwithstanding the “competence-competence” principle which appears to direct a contrary conclusion.

Second, the profound policy of UK law is to uphold arbitration proceedings.  None of the surrounding circumstances displaced the application of that policy.

The “sooner or later” principle was stated by Lord Justice Rix as follows:

“This analysis, in my respectful opinion, usefully underscores the wider picture about the autonomy of the parties and the jurisdiction of arbitrators with power to investigate their own jurisdiction: namely that, sooner or later, the question of substantive jurisdiction is likely to come before the court.  Where parties differ as to a matter as fundamental as whether they have agreed any contract, or any contract containing an arbitration clause, it is most unlikely that one or other of them will rest content with the decision of arbitrators as to either their jurisdiction or as to the parties’ rights. For one or other party is saying that there is simply no agreement that arbitrators can resolve their disputes. In such circumstances, the issue of jurisdiction is likely to come before the courts sooner or later, and when it does, it will have to be decided by the court from first principles and in the light of facts which, whatever the investigation by the arbitrators, are yet to be determined on the evidence by the court.”  (underlining added)

This reasoning is based on the profound and dynamic relationship between an arbitral tribunal and the courts of the seat of the arbitration.  The “competence-competence” principle usually means that the arbitral tribunal should be the first to exercise its jurisdiction.  Yet, ironically, it is not wrong for the court of the seat of the arbitration to first assume jurisdiction and issue such a declaration because the court’s exercise of that power is in aid of the arbitral tribunal exercising its authority and because, one way or another, the jurisdictional issue must come back to the court of the seat of the arbitration if one party objects to that jurisdiction.

Accordingly, Lord Justice Rix said:

I do not with respect agree …that it is in all circumstances necessary for a party who wishes to raise with the court an issue of the effectiveness of an arbitration clause first to commence an arbitration…. In my judgment, at any rate in a case where no arbitration has been commenced and none is intended to be commenced, but a party goes to court to ask it to protect its interest in a right to have its disputes settled in accordance with its arbitration agreement, it is open to the court to consider whether, and how best, if at all, to protect such a right to arbitrate. Whether it will assist a claimant at all, and if so, how, is a matter for its discretion: but it would to my mind be an error of principle and good sense for the court to rule that as a matter of jurisdiction, or even as a matter of the principled exercise of its discretion, it has no possible role in the protection and support of arbitration agreements in such a context.

The second principle is that the UK courts will uphold the arbitral regime against virtually all other incursions into that regime.  It is on this basis that the Court of Appeal ended its analysis:

In those circumstances, it is hard, in my judgment, to see any reason why, as a matter of jurisdiction, there should be any difficulty about the English court providing a remedy to preserve and support the right of the operator to arbitrate.. …The demand that the operator commence an arbitration solely in order to put before an arbitral tribunal an issue of substantive jurisdiction which it is to be presumed the owner would repudiate, very probably by standing aloof from the arbitration, and which, in all practical terms, could only be definitively settled by the court, seems to me to be far-fetched and unrealistic, to be creative of unnecessary expense and delay, and to put the operator under unnecessary risk that further proceedings in the Kazakhstan courts would be to its prejudice, as well as to the prejudice of the agreed process of arbitration.  None of that promotes any of the principles upon which the [Aribration Act] 1996 is founded, as set out in its section 1.  It would seem to me to be the antithesis of the principles of that Act for this court, in such circumstances, to refuse, as a matter of jurisdiction or principle, a request for assistance in the form of an anti-suit injunction.

Pro-Actively Protecting the Arbitral Regime

This judgment is a ringing endorsement of the entitlement of the courts of the seat of the arbitration to take matters into their own hands to preserve and protect the arbitral regime.  Perhaps the fact that London is the seat of many international arbitrations is a strong motive for the UK courts to adopt such a policy.  But the 1996 English Act is based on the principles of the UNCITRAL Model Law.  So the policy should be equally applicable to other common law jurisdictions.

Clearly, if the courts of countries which are not the seat of the arbitration “play offence” and issue conflicting declarations and injunctions, it would play havoc with the arbitration regime. There must be one and only one court system which exercises this supervisory “sooner or later” jurisdiction, and that is the court system of the seat of the arbitration.  For those who need the pro-active intervention of that court system to protect an arbitral regime, the Kamenogorsk decision is a powerful pronouncement.

Arbitration  –  International Commercial Arbitration  –  Declaratory Relief  –  Jurisdiction of the Court

AES-Ust-Kamenogorsk Hydropower Plant LLP v. Ust-Kamenogorsk Hydropower Plant JSC [2011] EWCA Civ 647

Thomas G. Heintzman O.C., Q.C.                                                                          February 12, 2012

www.heintzmanadr.com

www.constructionlawcanada.com