An International Commercial Arbitral Award Is Enforced Even Though It Provided No Reasons

In Canada, the obligation of a tribunal to give reasons has become one of the hallmarks of justice.  But do arbitrators have an obligation to give reasons?  Not if the parties agree that no such reasons need be given and the arbitration is an international commercial arbitration conducted pursuant to the UNCITRAL Model Law.  That is what the Ontario Superior court recently decided in Activ Financial Systems, Inc. v. Orbixa Management Services Inc.

In its 2002 decision in Sheppard and its 2003 decision in Dunsmuir, the Supreme Court of Canada has placed the obligation to give reasons at the very heart of a fair decision-making process.  As I said in my blog of January 23, 2012, the Supreme Court has effectively held that a court’s decision should be set aside for legal error if the reasons are totally inadequate.  Without adequate reasons, the person who loses does not know why.

But in the field of arbitration, some principles are not immutable.  Subject to the governing law, the parties can agree to waive the protections that the law provides.  In the field of international commercial arbitration, they can waive the obligation of the arbitral tribunal to deliver reasons.

Background Information:

The dispute in the present case arose under a software license agreement.  Activ claimed payment for software license fees during a period in which Orbixa said the agreement had been terminated.  The question was whether the agreement had been so terminated or had continued by virtue of automatic renewal, and whether a liquidated damages clause applied.

Article 31(2) of the UNCITRAL Model Law as appended to the Ontario International Commercial Arbitration Act (ICAA) provides that “the award shall state… the reasons upon which it is based, unless the parties have agreed that no reasons are to be given or the award is an award on agreed terms under article 30.”  The license agreement was governed by New York law and it provided for arbitration in New York under the Commercial Arbitration Rules of the American Arbitration Association.  Those Rules state that the “arbitrator need not render a reasoned award unless the parties request such an award in writing prior to appointment of the arbitrator or unless the arbitrator determines that a reasoned award is appropriate.”

Prior to the arbitration, the parties agreed that no reasons need be given by the tribunal.  The tribunal rendered a decision in Activ’s favour without reasons.  Activ obtained a judgment of the New York court enforcing the award.  Activ then came to Ontario to enforce the award. Orbixa opposed that enforcement on three grounds, among others.

First, Orbitza said the award was unenforceable since it contained no reasons.  Based on Article 31(2) of the Model Law appended to the ICAA, Perell J held that the award should be enforced in Ontario despite the absence of reasons.  He held, however, that before doing so the Court must “fairly determine…that the arbitration award did not deal with a dispute beyond the terms of the submission and that the award was not contrary to the public policy of Ontario.”  Justice Perell concluded that these conditions were satisfied in the present case.

Second, Orbitza said that the award could no longer be enforced as such since it had been rendered into a judgment of the New York Courts.  Justice Perell dismissed this objection, holding that the award still remained enforceable under the ICAA in Ontario even If the award was also enforced  in New York.

Justice Perell did agree with a third submission made by Orbitza.  Activ sought to enforce the judgment under the common law, and not pursuant to the ICAA.  Indeed, Activ first commenced its application without relying on that Act.  Justice Perell allowed Activ to amend its application to also rely on the ICAA and, as noted, enforced the award under that Act.  But he accepted Orbitza’s position that, once the ICAA was enacted, international commercial arbitration awards may only be enforced under that Act and not at common law. In his view, “it would be a source of unnecessary confusion and unnecessary expense to have two enforcement mechanisms.”

Justice Perell concluded “as a matter of statutory interpretation that it was the intention of the Legislature to introduce a complete code about the enforcement of foreign arbitration awards under the International Commercial Arbitration Act.”

The first basis for the decision raises an interesting contrast with domestic arbitral awards.  Under section 38 of the Ontario Arbitration Act, 1991, the award “shall state the reasons on which it is based” unless it is a consent award. Section 3 of that Act does not list Section 38 as one of the sections which the parties cannot vary or exclude.  Accordingly, one would think that the parties can contract out of Section 38.

The Contrast Between The Model Law and ICAA

On the other hand, Sections 3 and 38 do not expressly provide that the parties can agree that no reasons need be delivered by the tribunal.  In this respect, there could not be a starker contrast between the Model Law and the ICAA.  With this contrast in two statutes dealing with arbitration, a party opposing the enforcement of a domestic award given without reasons could argue that, in contrast to international commercial arbitral awards, the legislature made a clear choice that domestic arbitral awards must be delivered with reasons.

Moreover, Section 38 expressly states that consent awards are an exception to the obligation to give reasons.  That exception suggests that the legislature thought about the issue and provided for that exception and did not provide for an exception for “no reasons” decisions.

In support of those arguments is Section 3 of the Arbitration Act, 1991.  Section 3 says that the parties cannot exclude Section 19.  Section 19 states that “in an arbitration, the parties shall be treated equally and fairly.”  Dunsmuir and Sheppard stand for the principle that reasons for decision are an essential ingredient in the fairness of a decision-making process.

Does that mean that the parties to a domestic arbitration cannot waive the provisions of Section 38?  That argument will face the fact that Section 3 does not refer to Section 38 as an obligation which the parties cannot exclude.  And if the parties agree that no reasons need be given, then it seems difficult to argue that the absence of reasons is unfair.

See Heintzman and Goldsmith on Canadian Building Contracts (4th ed.), Chapter 10, part 3.

Arbitration  –   Absence of Reasons  –  Enforcement

Activ Financial Systems, Inc. v. Orbixa Management Services Inc., 2011 ONSC 7286

 Thomas G. Heintzman O.C., Q.C.                                                                                  February 1, 2012

www.heintzmanadr.com
www.constructionlawcanada.com

Can A Contractor Use Its Own Mistakes To Withdraw Its Bid?

A contractors’ worst nightmare is making a mistake in a tender and being stuck with a low bid.  The next worse nightmare is submitting a winning bid but one which contains errors which arguably make the bid non-compliant.

What happens when both occur?  Can the contractor get out of its low bid by its own errors?  That is the issue that the Manitoba Court of Queen’s Bench recently dealt with in Manitoba Eastern Star Chalet Inc. v. Dominion Construction Co Inc.

The Supreme Court of Canada has revolutionized the law of tender by its Contract A/Contract B regime for tenders.  Under that regime, Contract A is the contract formed by the contractor submitting a tender in response to the owner’s invitation to tender, and Contract B is the subsequent construction contract awarded by the owner.  Contract A converts what appear to be unilateral acts in the tender process into an enforceable contract.

The courts will typically imply terms into Contract A.  Thus, the owner will generally have an implied duty not to accept a non-compliant bid absent a term in the invitation to tender to the contrary.  The contractor will have a duty not to withdraw its bid during the period stated in the invitation for the owner to accept a bid.

But what happens when the contractor’s bid is allegedly non-compliant due to the contractor’s own faulty bid, and the contractor wants to withdraw it because it is seriously underpriced?  Can the contractor do so?  The Manitoba Queen’s Bench has said No, unless the non-compliance is clear from the face of the bid.  In its decision, the Court has provided an extensive and useful analysis of the law on this subject.

The Background

Dominion was one of three bidders on an extension to a seniors housing complex being constructed by Manitoba Eastern Star Chalet.  Dominion’s bid was more than $600,000 under the next bid on a project worth about $2.5 to $3 million, or about 25% under the next bidder.

When it was notified that its bid was accepted, Dominion sought to withdraw the bid on two grounds.

First, that it had failed to provide a resolution of its board of directors authorizing the signatory to the bid to sign it.

Second, that its bid failed to refer to Structural Addendum #4 included in the tender documents.

Dominion said that these items were required by the invitation to tender, and therefore its bid was non-compliant and incapable of acceptance by the owner.  Admittedly, it was Dominion’s own fault that these items were omitted, but Dominion maintained that the Contract A regime applicable to tenders precluded the owner from accepting its bid.

The trial judge rejected Dominion’s position.  In the course of his reasons, he examined the Contract A/Contract B law, all the way from the 1981 decision of the Supreme Court of Canada in Ron Engineering up to its 2007 decision in Double N Earthmovers.   The trial judge agreed that, unless the invitation to tender states otherwise, Contract A requires the owner to only accept a compliant bid.  Therefore, if Dominion’s bid was truly non-compliant under Contract A, then the owner could not accept it and Dominion could withdraw it, even if that non-compliance was entirely due to Dominion’s fault.

The trial judge noted that an attempt by a contractor to withdraw its bid based on non-compliance due to its own fault gives rise to “mischief” which “effectively reward[s] a bidder who has made a mistake in its bid, but then can utilize its non-compliance for the purposes of not honouring a contract.”  Nevertheless, the court held that logic and previously decided cases led to the conclusion that a contractor can do exactly that, if the circumstances permit it to do so.

However, the court held that the circumstances did not permit Dominion to withdraw its bid.  As to Structural Addendum #4, the court held that it was effectively included in Dominion’s bid, when the whole bid was properly read.  In the alternative, the order of precedence in the contract documents overcame any error arising from the absence of this addendum.

In addition, the amount of the cost of this addendum was insignificant in relation to the total cost of the project.  In the result, Dominion’s bid was substantially compliant with the invitation to tender with respect to this issue.

As to the failure of Dominion to file with its tender a corporate resolution authorizing the signatory to sign the bid, the court found that Dominion had never done so in any bid, even when the invitation to tender required such a resolution.  The person signing the bid for Dominion had authority to sign the bid and that person intended to sign and submit the tender on behalf of Dominion.  Dominion’s corporate seal was affixed to the tender. The Instructions to Bidders stated that a non-compliant bid could be accepted at the discretion of the owner.  Even giving that discretion a narrow scope, the trial judge held that the non-compliance was not substantial and fell within the owner’s discretion to accept it.

The trial judge also found that the amount by which Dominion’s bid was less than the next bid was not a matter which ought to have alerted the owner to any non-compliance or other reason not to accept the bid.  Any mathematical error in Dominion’s bid was not apparent on the face of the bid.  The trial judge held that “the divergence in the bid numbers did not raise the need for an investigation into the reasons, nor was there a duty to do so”.

At the end of the reasons, the trial judge returned to the issue of whether Dominion was entitled to rely on its own fault to escape its bid.  As noted above, early in the reasons, the trial judge held that, based on logic and previously case law, a contractor should be able to do so.  But at the end of the reasons, the trial judge said:

“If there is any error in my analysis or my findings, I am satisfied that such an error would be sufficiently small that it is incumbent on the court to protect the integrity of the tendering process by not allowing Dominion to point to these alleged incidents of non-compliance to resile itself from a bid which it fully intended when it was submitted to be compliant, to be binding, and to be accepted.”

This statement is strong evidence of the inclination of courts to ensure that the tendering process is not undermined by the faulty and unfair conduct of either the owner or the bidders.  If a bidder asserts that it may escape the consequences of its own faulty bid due to non-compliance, then the court will scrutinize the alleged non-compliance very, very carefully.  The court will place a high burden on the bidder to demonstrate that the non-compliance is so material and substantial as to be a true non-compliance and one not falling within the discretion of the owner to accept non-compliant bids, however that discretion is expressed in the tender documents.

This decision is useful in three other respects:

First, it contains a very helpful collection of the cases that deal with whether a contractor has a right to withdraw from its own faulty bid due to non-compliance.

Second, it addresses two circumstances in which this court held that the non-compliance was not substantial: failure to include reference to drawings (and the impact of the contractual order-of-preference provision on that failure), and the failure to provide a corporate resolution authorizing the execution of the bid.  Anyone dealing with circumstances like these may look to this case for assistance.

Third, the decision effectively assumes, or holds albeit in obiter in the final result, that a bidding contractor may withdraw such a bid.  It is, accordingly, an important update on that principle.

This decision does not address the situation that might arise if the contractor purposefully or recklessly puts a material non-compliant term into its bid, to protect itself from a possible mistake in its bid and hoping to negotiate around that non-compliance if it is awarded the contract. Whether a contractor would ever be so reckless as to do so is another matter.  Whether a contractor could rely on that sort of non-compliance will await another day.

Tenders  –  Non-Compliance  –  Withdrawal of Bid

Manitoba Eastern Star Chalet Inc. v. Dominion Construction Co Inc., 2011 MBQB 320.

Thomas G. Heintzman O.C., Q.C.                                                                                  January 25, 2012

www.heintzmanadr.com
www.constructionlawcanada.com

How Correct Does An Arbitrator Have To Be?

What margin of error does an arbitrator have?  Should an arbitral tribunal’s decision be set aside if it is legally incorrect?  Or should a wider deference be shown, so that a decision will only be set aside if it is unreasonable, or perverse?

And how detailed does an arbitral decision have to be? Can it be struck down if the reasons are not adequate?

There are older appellate decisions which addressed these issues in the arbitration context.  In recent years, however, a seismic shift has occurred in administrative law relating to these issues as a result of decisions of the Supreme Court of Canada.  Do the same principles apply to the review of arbitral decisions?

In its 2003 decision in Dunsmuir, the Supreme Court of Canada collapsed the various standards of review which apply to administrative tribunals into two standards.

Decisions must be correct if they truly relate to the jurisdiction of the tribunal, or relate to general questions of law about which the tribunal has no particular expertise.  If they are of that nature, then they will be set aside if they are not correct (the “correctness” standard).  All other decisions of administrative tribunals will only be set aside if, in all the circumstances, they are unreasonable (the “reasonableness” standard).

In its 2002 decision in Sheppard, the Supreme Court held that a court’s decision should be set aside for legal error if the reasons are totally inadequate.  Without adequate reasons, the person who loses does not know why.  Nor does the appeal court have a proper basis to review the original decision without adequate reasons. The “adequacy of reasons” provides a second and related basis for reviewing a decision of an inferior court or tribunal.

In two recent decisions, the Supreme Court applied the Dunsmuir and Sheppard principles to arbitral tribunals.  While both decisions relate to labour arbitrations, there is every reason to expect that the same principles will apply to commercial arbitrations.

In Nor-Man Regional Health Authority v. Manitoba Association of Health Care Professionals, the Supreme Court upheld an arbitrator’s decision in which the arbitrator had applied the principle of estoppel.  The arbitrator found that the company had breached the collective agreement.  However, he held that the union was estopped from complaining about that breach because it had failed to raise any complaint about the same conduct, and the same interpretation of the collective agreement, by the company over a 20 year period and numerous collective agreements.

The Supreme Court held that the arbitrator’s decision should be reviewed on the standard of reasonableness, not correctness, for three reasons:

First, labour arbitration decisions are normally reviewed on the reasonableness standard.

Second, the principle of estoppel is well known to labour law and highly suited to the ongoing relationships between management and its employees.

Third, (and most importantly for general arbitration law), the Supreme Court held that an arbitrator’s application of common law principles must not always meet the correctness standard.  An arbitrator’s decision applying general principles of law will only be reviewed on that standard if the decision raises legal issues “both of central importance to the legal system as a whole and outside the adjudicator’s specialized area of expertise.”  In the present circumstances, the arbitrator’s reliance on estoppel did not fall in that category.

In Newfoundland and Labrador Nurses Union v. Newfoundland and Labrador (Treasury Board), the Supreme Court upheld a labour arbitrator’s award relating to the calculation of vacation benefits.  That decision was attacked on the basis that it was unreasonable due to the paucity of reasoning in the award.  The Supreme Court applied the Dunsmuir/Sheppard principles and adopted a wide scope of reasonableness, both as to the deference to be shown to the arbitrator and the necessity for detailed reasons.  The Court held that:

The arbitrator’s decision should not be scrutinized by the court separately for adequacy of reasons and reasonableness of result.  These two ingredients are inter-related.  The court’s review process “is a more organic exercise – the reasons must be read together with the outcome and serve the purpose of showing whether the result falls within a range of possible outcomes.”

The arbitrator’s reasons need not include “all the arguments, statutory provisions, jurisprudence or other details the reviewing judge would have preferred.”  Nor need they include “an explicit finding on each constituent element, however subordinate, leading to the final conclusion.”

The reviewing court should not seek to subvert the arbitrator’s decision but supplement them by logic and reasonable inference.

The issue of adequacy of reasons cannot be boot-strapped into the standard of correctness by being labelled a matter going to procedural fairness and therefore a matter of law:  “Any challenge to the reasoning/results of the decision should therefore be made within the reasonableness analysis.”

While these decisions relate to awards of labour arbitrators, the principles they adopt are readily applicable to commercial arbitrations.  They will be particularly important in protecting a decision of a commercial arbitral tribunal from court review when it is alleged that the decision:

does not deal with all issues raised by the complaining party;

or erroneously decides or applies general principles of law;

or is unfair or outside the bounds of reasonableness.

On all these grounds, the Nor-Man and the Newfoundland and Labrador Nurses Union decisions of the Supreme Court will provide powerful support to the party seeking to uphold the award.

Nor-Man Regional Health Authority v. Manitoba Association of Health Care Professionals,  2011 SCC 59;

Newfoundland and Labrador Nurses Union v. Newfoundland and Labrador (Treasury Board) 2011 SCC 62

Arbitration – estoppel – standard of review – adequacy of reasons – challenging arbitral award

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

www.constructionlawcanada.com
www.heintzmanadr.com

What Amounts to Good Faith Conduct or Repudiation on Construction Projects?

Last week we discussed joint ventures in construction projects.  That issue arose from the important recent decision of the Prince Edward Island Court of Appeal in WCI Waste Conversion Inc. v. ADI International In. 

In this article, we will examine two further issues raised by that decision:

One, the duties of good faith and fiduciary duties in a construction project; and

Two, the degree to which conduct must be wrongful before it will amount to repudiation entitling the other party to terminate a construction contract.

The Background

To refresh our memory from my article last week, in June 2000, a PEI Crown Corporation, Island Waste Management Corporation (“IWMC”), issued a Request for Proposals for the design, construction and operation of a central composting facility to serve the province of Prince Edward Island.  WCI approached ADI about making a proposal together.  The ultimate Proposal was submitted in March 2001 by ADI and it stated that it was prepared by both companies.  In July 2001, IWMC awarded the contract to ADI, with WCI shown as a sub-contractor.

In May 2001, ADI and WCI entered into a Memorandum of Understanding (“MOU”).  They entered into a further MOU in August 2001 after the contract had been awarded by IWMC to ADI.  A provision of the August MOU stated that, while ADI would be the prime contractor and WCI the subcontractor, the actual working relationship between them would be based upon the general principles of a joint venture agreement.  The majority of the Court of Appeal held that this provision resulted in the parties being joint venturers, not independent contractors.

Under ADI’s contract with IWMC, ADI was to enter into a five year operating contract with IWMC, and under the MOU, ADI was to enter into a five year subcontract with WCI under which WCI was to be the operator.

In its Substantial Performance letter dated October 7, 2001, IWMC accepted ADI’s application for Substantial Performance effective October 1, 2001.  In accepting Substantial Performance, IWMC stated that its concerns about throughput performance were to be addressed by the date of Total Performance, which was to occur on February 1, 2003.  As a result, both ADI and WCI had until February 1, 2003 to demonstrate throughput performance.  Moreover, the majority of the Court of Appeal concluded that, based upon its conduct leading up to the Substantial Performance letter, ADI effectively viewed WCI’s performance with respect to throughput performance as being a deficiency, and not conduct which repudiated WCI’s obligations under the contract.

On November 26, 2002, ADI gave notice to WCI that it was in default of its obligations and gave a five day “cure” notice to WCI.  By letter dated November 29, 2001, WCI denied that it was in default and restated its commitment to improve the throughput performance of the project.  By letter dated December 4, 2002, ADI terminated the contractual relationship between the parties.

Repudiation and Termination

The trial judge held that, as of the date of ADI’s termination of the contract, WCI had not repudiated the contract, and therefore ADI’s termination was unlawful.  This finding was upheld by the majority of the Court of Appeal.  There are several aspects of its conclusions that are important.

First, the majority of the Court of Appeal held that the “cure” notice could not be given by ADI if WCI was not then in default.  Since WCI had until February 2003 to ensure that throughput performance was met, WCI was not in breach of any obligations as of November 26, 2002 when ADI delivered its “cure” notice, and December 4, 2002 when it terminated the contract. The Court of Appeal stated its affirmation of the trial judge’s conclusion as follows:

“The trial judge was entitled to find, as he did that WCI did not by its words or conduct repudiate; that, in any event, the time for correction of the deficiencies in question was not exhausted; and, in the circumstances of the status of the deficiencies, ADI did not show that WCI was incapable of performing its part of the contract.”

This is a very useful check list for a contractor contemplating termination of a subcontractor, particularly when deciding to give or act upon a “cure” notice.  First, by its words or conduct, has the subcontractor really repudiated its obligations?  Second, has the time for performance of the obligations in question really been exhausted?  And third, is the subcontractor really incapable of performing its contract?   And for good measure, can I prove all these elements at a trial?

The second important aspect of the Court of Appeal’s decision is its affirmation of the principle that “when a contract provides a time within which the contract work must be completed, the contractor is entitled to the whole of that time for doing the work” relying on Goldsmith and Heintzman on Canadian Building Contracts (4th ed) at chapter 5, part 1(d).

Third, the trial judge and majority judgment in the Court of Appeal applied the principle of good faith performance of contractual obligations.  The trial judge held that ADI did not act in good faith in seeking approval of Substantial Completion on the basis of throughput performance being achieved by February 2003 and then turning around and terminating the contract with WCI based upon its deficiencies in relation to throughput performance before February 2003.  The Court of Appeal held that a contract must be performed in good faith, that this obligation involves performance within the reasonable expectations established by the contract, and that the trial judge was entitled to find that ADI’s “tactics and motivations” were inconsistent with a good faith exercise of its obligations and contractual duties to WCI.

Fourth, in examining the conduct and rights of ADI and WCI, the trial judge and Court of Appeal looked to the conduct and rights as between the owner, IWMC, and ADI.  Thus, IWMC had delivered no “cure” notice or termination notice to ADI in relation to throughput performance.  Why was ADI delivering such a notice to WCI?  At ADI’s request, IWMC had agreed that throughput performance would be established by the date of Total Performance.  Why was ADI not agreeing with WCI to the same date for performance?  Clearly, ADI’s inconsistent conduct or attitude was of crucial concern to the trial judge, and the Court of Appeal upheld the trial judge’s findings based on those concerns.

The minority judge agreed with this conclusion but would have directed a new trial related to the entitlement of ADI to terminate the operating contract with WCI at its sole discretion and whether it had done so in good faith.

All the judges of the Court of Appeal were firmly of the view that the issue of whether or not WCI had repudiated the contract and whether or not ADI had the right to terminate the contract based on repudiation, was to be determined on an objective basis.  The majority held that repudiating is “not lightly to be inferred from a party’s conduct”, and that, as the terminating party, ADI had the obligation to prove WCI’s repudiation and its entitlement to terminate.  Accordingly, there was no element of discretion or deference to be accorded to ADI’s decision to terminate.

In all respects, this decision of the PEI Court of Appeal provides a very useful survey of the issues which must be addressed by contractors and subcontractors when termination for repudiation is contemplated under a construction contract, particularly when a “cure” notice is involved.

Good Faith and Fiduciary Duties

The trial judge concluded that, by reason of the joint venture between them, the parties owed fiduciary duties to each other.  Both the majority and the minority of the Court of Appeal disagreed.  The majority held that a joint venture, unlike a partnership, does not necessarily give rise to fiduciary duties.  Without deciding if fiduciary duties did arise in this joint venture, the majority held that the material findings of the trial judge about the conduct of the parties and the legal consequences of that conduct could be supported without reference to fiduciary duties.

The minority judge found that it was unlikely that, in the circumstances of this case, fiduciary duties would arise.  The minority judge then considered whether the parties had an obligation to exercise their rights under the contract in good faith.  He concluded that there was no such obligation in relation to any of the provisions of the contract which did not involve discretion, and that there was in relation to those provisions that did involve discretion.  He then concluded that under the “cure notice” provision of the MOU, if AWI properly followed the notice provisions and WCI did not cure, then the MOU could be terminated without regard to issues of good faith.  However, he held that AWI’s right to terminate the operating agreement was unilateral and could be exercised “in its sole discretion”, provided it gave the required notice and paid the required termination fees.  In this circumstance, the minority judge concluded that AWI was required to act in good faith in giving a notice to terminate the operating agreement.

The concepts of a fiduciary duty and a duty of good faith are very different.  A fiduciary duty is a duty to act in the utmost good faith and in the other party’s best interest.  An obligation of good faith is not a fiduciary duty.  It is not the obligation to act in the utmost good faith and in other party’s best interest.  It is the obligation to act in accordance with the purpose of the contract and not to undermine its performance.

It is highly doubtful that a true fiduciary duty will arise during a construction project unless the parties call themselves partners.  The commercial setting for the project is not consistent with such an obligation.

On the other hand, it is hard to see why an obligation to act in good faith should not arise.  After all, that obligation simply requires a party not to act in bad faith, not to act for an ulterior motive, that is, a motive which is outside the purpose of the contract.

Making an obligation of good faith dependent upon the existence of discretion, as the minority judge did, is highly problematic.  The element of discretion is usually relevant to determining whether the duty is a fiduciary duty, not whether a duty of good faith exists.  If a cure notice is given properly on its face, but is given for an ulterior motive having nothing to do with the proper completion of the construction project, why should that sort of conduct be valid?  Why is the right to terminate the operating contract any more “unilateral” than the right to give a cure notice?  And if a party has a right to terminate “in its sole discretion”, then surely the real issue is whether that right is exercised for bona fide reasons consistent with the purpose of the contract.

In all these circumstances, good faith appears to be applicable to most of the obligations on a construction project.

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

Building Contracts   –   Good Faith   –   Fiduciary Duties   –   Repudiation  –  Cure Notice

WCI v. ADI, 2011 PECA 14 (CanLII)

Thomas G. Heintzman O.C., Q.C.                                                                          January 10, 2012

www.heintzmanadr.com                                                                                        constructionlawcanada.com

When Is A Building Contract A Joint Venture?

A difficult issue that may arise between contractors and subcontractors is the nature of their contractual relationship.  Are they:  independent contractors; or partners; or joint venturers; or employees one of the other?

In WCI Waste Conversion Inc. v. ADI International Inc, The Prince Edward Island Court of Appeal recently considered whether a contractor and subcontractor were actually in a joint venture relationship.  The decision is an important one as the majority and minority of the court approached the issue in a different way.

The Court also considered questions relating to the obligations of good faith, fiduciary duty and repudiation on a construction project.  The decision provides a useful insight into those issues as they apply to a construction project.

Those issues will be addressed in my next blog, but for now, let’s consider the question of when parties to a construction project may be in a joint venture.

The Background

In June 2000, a PEI Crown Corporation, Island Waste Management Corporation (“IWMC”), issued a Request for Proposals for the design, construction and operation of a central composting facility to serve the province of Prince Edward Island.  WCI approached ADI about making a proposal together.  The two companies submitted a Pre-Qualification Submission which was expressly made by those companies “in association” and as a “team”.  The ultimate Proposal was submitted in March 2001 by ADI and it stated that it was prepared by both companies.  In July 2001, IWMC awarded the contract to ADI, with WCI shown as a sub-contractor.

In May 2001, ADI and WCI entered into a Memorandum of Understanding (“MOU”).  They entered into a further MOU in August 2001 after the contract had been awarded by IWMC to ADI.  The key provision of the August MOU stated as follows:

It is agreed that ADI will be the prime contracting party, with WCI engaged as a sub-contractor.  ADI will provide the bonding and insurances as stipulated by the RFP. However, it is agreed that the actual working relationship will be based on the general principles of a joint venture agreement as summarized below.

In their correspondence with each other, ACI and WCI frequently referred to the bid as being “joint” and to the relationship as being a “joint venture”, but ADI insisted throughout that it was the prime contractor and carried the associated rights and risks.

Construction of the project was substantially completed by October 2002.  During the construction, the relationship between ADI and WCI deteriorated and ADI terminated the contract with WCI.

The Sub-Contract or Joint Venture Issue

The trial judge found that the contract between the parties included the two MOUs and the correspondence between the parties, at least so far as determining the relationship between the parties.  He held that, for the purposes of the relationship with IWMC, the parties were in a contractor-sub-contractor relationship, but between themselves they were parties to a joint venture relationship.

The  majority of the PEI Court of Appeal affirmed this finding.  A number of features of its reasoning are important.

First, the majority held that ADI could not rely on evidence outside the MOU to contradict the statement in the MOU that the relationship between the parties was a joint venture.

Second, the majority held that it was not necessary that WCI have an expectation of profit from the prime contract with IWMC for there to be a joint venture between the parties.  Even though WCI was only entitled to a fixed payment from ADI, and ADI was entitled to all the upside and subject to the downside of that prime contract, the parties were still entitled to call their agreement a joint venture agreement and thereby impose duties upon themselves consistent with a joint venture.

Third, the majority held that contractors and subcontractors are entitled to contract between themselves as joint venturers, and to contract with the owner on the basis that only one of them is the contractor and the other is a subcontractor.  The majority distinguished the case of Design Services v. R, [2008] 1SCR 737 in which a subcontractor asserted that it was in a contractual relationship with the owner based upon it really being part of a joint venture with the contractor.  The majority of the PEI Court of Appeal said that, in Design Services, the owner had issued no contract at all to the contractor but had issued the contract to another bidder:

“Canada awarded no construction contract to the contractor, Olympic.  Olympic didn’t enter into a subcontract with Design Services.  In the present case, WCI’s claim is between the contracting parties, inter se, where terms have been agreed and expressed by the parties.”

The minority judge disagreed.  As to the clause in the MOU stating the parties’ relationship, the minority judge held that there was an inconsistency between the first and third sentences and that “the court was obligated to find an interpretation which would give meaning to both provisions that create the inconsistency.”

The minority judge then turned to the actual responsibilities and the actual entitlements to payment and profits to determine whether the relationship was really one of joint venture or one of contractor-subcontractor.  He found that ADI entered into a fixed price contract with IWMC in which WCI had no entitlement to profit, and that WCI entered into a fixed price contract for WCI to be paid a fixed price.  There was no sharing in profits under either arrangement.  ADI and WCI had separate activities for which they were responsible.  Each party entered into separate sub-contracts.  Neither party was vulnerable to the other.  In short, all the ingredients of the relationship indicated that there was no joint venture and that the parties were independent contractors.  According to the minority judge, the statement about a joint venture in the MOU:

“meant they would work in close cooperation with each other to carry out their specialized duties as contractor and subcontractor…. Reliance on joint venture was for purposes of facilitating the proper functioning of their working relationship as contractor and subcontractor…there is nothing in their contractual arrangements which would indicate they agreed to enter into a joint venture….The statement standing by itself in the contract did not make their legal relationship that of parties to a joint venture.”

This disagreement between the majority and minority reveals a fundamentally different approach to determining the legal relationship between the parties.

The majority held that, if the parties state in their agreement that they are joint venturers, then the court will hold them to that statement.

The minority held that the court may go behind that statement, at least if the parties also state that they have a contractor-subcontractor relationship so far as the owner is concerned; and the court may determine if the relationship between the parties is really one of joint venture and if it is not, then the parties’ statement about joint venture may be over-ridden.

This difference in opinion raises a number of questions:

First, if the parties wish to have a joint venture relationship between themselves, but also wish one of them to be the prime contractor and the other to be the subcontractor, can they legally do so?  If they can, how do they do so to ensure that the relationship is not disputed later?

The wording used by the parties in the key provision of the MOU seems as clear as possible, namely, that the parties wanted a joint venture arrangement between them, but recognized that one of them would be contractor and the other sub-contractor so far as the owner was concerned.  How could they have more clearly stated that intention?  Would it have been better to leave out reference to the “actual working relationship” being “based on” a joint venture agreement, and instead say that the “real legal relationship between the parties is that of joint venture”?   Or with this judicial precedent, can we now proceed on the basis that the words in this contract are sufficient in the future to create a joint venture between a contractor and subcontractor?

Second, which approach is better?  Should courts accept the parties’ statement as it is?  Or should they inquire into the actual relationship to see if it is one of joint venture?  In the employment setting, courts often determine whether the relationship is really one of employment or one of independent contractors, but there are real public policy reasons for doing so.  When the parties say that they are partners, should the court go behind that statement to see if they really are?  If they say that they have entered into a joint venture agreement, are there good public policy reasons for the court to go behind that statement?

These thoughts are enough for the moment.  In the next blog we will consider the approach of the PEI Court of Appeal to the following important issues:

…when do parties to a construction project owe duties of good faith or fiduciary duties to each other?

…and what misconduct on a construction project will be considered to be sufficiently serious that it amounts to repudiation entitling the other party to terminate the contract?

A very meaty decision indeed!

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

WCI v. ADI, 2011 PECA 14 (CanLII)

 Construction Law   –   Contractors and Subcontractors   –   Joint Venture

Thomas G. Heintzman O.C., Q.C.                                                                  January 7, 2012

www.constructionlawcanada.com
www.heintzmanadr.com

Does A Tender Give Rise To Liability For Negligent Misrepresentation Or Bad Faith?

Can an informal tender process which is not part of a bid depository system give rise to liability for negligent misrepresentation?

Can it give rise to liability for bad faith conduct?

In Oz Optics Limited v. Timbercom, Inc., the Ontario Court of Appeal recently answered Yes to the first question, and after agonizing over the second question, decided not to answer it.

The Background

Timbercom issued a purchase order to Oz for the purchase on consignment of manual optical products.  Those products were part of the equipment to be supplied by Timbercom to Lockheed Martin for installation into fighter aircraft.  Because Oz did not sign the purchase order the Court held that there was not a contract between the parties and dismissed Oz’s claim for payment for manual optical products not used by Timbercom.

Timbercom and Oz also had discussions about the supply by Oz of automated optical products to be similarly supplied by Timbercom to Lockheed Martin.  Timbercom repeatedly told Oz that Oz was the sole supplier and there was no competitive supplier.

Unknown to Oz, Timbercom obtained a competitive bid from another supplier.  Timbercom advised the competitor that its price was higher than another competitor’s price (being Oz), so the competitor reduced its price.  Timbercom gave no such competitive “heads-up” to Oz. Then, when Timbercom submitted the two bids to Lockheed Martin, it marked up Os’s bid by 72% but only marked up the competitor’s bid by 42%.  Lockheed Martin accepted the competitor’s bid, but its employee testified at trial that, had Oz’s bid been the only one, Oz’s bid would have been successful.

The Court of Appeal for Ontario held that Tibercom was liable to Oz for negligent misrepresentation.  The Court agreed with the trial judge that there was a special relationship between the parties concerning the statements made by Timbercom to Oz.  Timbercom’s statement that Oz was the sole supplier was a negligent misrepresentation, if not nearly fraudulent, the Court held.  The evidence established that Oz had relied upon that statement to its detriment, and that if Oz had been aware of a competitive bid, it would have acted differently by changing its delivery schedule which was the only element in its bid that was less advantageous than the competitor’s.

In view of its finding of liability for negligent misrepresentation, the Court of Appeal declined to decide whether Timbercom could be liable under a self-standing duty of good faith.  Such liability could arguably result from an inferred contract based on the whole process.  The Court noted that the process was not a bid depository system and therefore did not necessarily result in the Contract A – Contract B regime recognized by the Supreme Court of Canada in Ontario v. Ron Engineering, [1981] 1 SCR 111 and M.J.B. Enterprises Ltd v. Defense Construction (1951), [1999] 1 SCR 619.  Accordingly, a duty of good faith arising from a Contract A relating to the bidding process itself did not necessarily arise.

The Court of Appeal also noted that, in view of Martel Building Ltd v. Canada, [2000] 2 SCR 860 and similar cases, the pre-contractual negotiations leading to a tender does not create a general duty of care.  However, the Court said that, if a subcontractor is told that it is the sole supplier, then there is arguably a stronger basis to infer a duty of good faith when “the bidder is unknowingly considered a bidder among many.”

Having explored the legal and policy grounds for and against the existence of a duty of good faith in these circumstances, the Court of Appeal declined to decide the issue.  The finding of negligent misrepresentation was, in its view, a sufficient basis to dispose of the appeal.

Moreover, the Court was of the view that the torts of negligent misrepresentation and fraud are available to address misconduct during an informal bidding process.  Only if and when those torts were not sufficient to deal with liability should a court embark upon the difficult task of deciding if a self-standing duty of good faith arises in the circumstances of the particular tender.

This decision addresses one issue arising from informal tenders but leaves a big question mark around the other.  The Court of Appeal has held that, when an owner or contractor engages in a tender process and makes specific statements during the tender process, a special relationship exists between the parties and those statements can lead to liability for negligent misrepresentation or fraud.  So care must be taken about any statement contained in a call for tenders.  The person issuing the tender may try to avoid the special relationship by stating in the tender that there is no such relationship, but it is unlikely that exclusionary language will avoid liability particularly for fraudulent misrepresentations.

Unanswered Questions

The unanswered questions are whether there is any need for a duty of good faith in an informal tender situation, and if there is, what the basis of that duty would be.  The need for a duty of good faith could exist in at least two situations:

First, if the plaintiff’s claim does not result from something stated by the party letting the tender, then the torts of negligent misrepresentation and fraud will not be available.  But if there has been no statement by that party, what other circumstance could properly give rise to a claim by the plaintiff, especially if there is no duty of care during the pre-tender process?

Second, the plaintiff may recover damages on a more favourable basis under contract law than tort law.  If so, the plaintiff may wish to recover damages for breach of an implied contractual duty of good faith and not for negligent misrepresentation.

If there is a need for the duty of good faith, what is its legal foundation?  Does any tender, no matter how informal, result in an inferred contract?  If so what are its terms?  An obligation on the parties to deal with each other in good faith cannot be the only term.  Would the court have to invent all the other terms, such as an obligation of the bidder to leave its bid open for some specified period, and if so what period, or the obligation of the party calling for the bid to accept only a complaint tender, and if so, complaint with what?  The uncertainties surrounding the proposed contract seem daunting.

The specific circumstances of the particular case will determine all these factors.  In one situation, the circumstances may arguably give rise to a special relationship even absent a specific misrepresentation; in another, no such circumstances may exist.  In one situation, the dealings between the parties may be sufficiently clear that a Contract A relating to the bidding process may be inferred; in another case, the uncertainty of those dealings may preclude the existence of a Contract A.

In any event, we have heard the alarm bell, but not heard the last word, on the duty of good faith in informal tenders.

Construction Law  –  Tenders   –  Negligent Misrepresentation  –  Duty of Good Faith

Oz Optics Limited v. Timbercom, Inc., 2011 ONCA 714

Thomas G. Heintzman O.C., Q.C.                                                                                              December 28, 2011

www.heintzmanadr.com
www.constructionlawcanada.com

Does The Removal Of Equipment Amount To An Improvement For Lien Purposes?

Update:  The decision of the BC Supreme Court in West Fraser Mills Ltd. v. BKB Construction Inc., referred to in this article has since been reversed by the BC Court of Appeal.  Please see my blog of April 7, 2012.  The decision of the BC Supreme Court may still be relevant if and when that court finally considers whether demolition amounts to an “improvement” under the BC Builders Lien Act.

An important issue for construction and builders liens is whether destroying or removing land, structure and equipment qualifies as an “improvement.”  Why shouldn’t it, if it benefits the owner?  After all, the land itself couldn’t care less.  It is the benefit to the owner of the land that an “improvement” is all about.

In West Fraser Mills Ltd. v. BKB Construction Inc., the British Columbia Supreme Court recently applied the traditional approach to this issue and held that the removal of equipment was not an improvement and did not give rise to a builders lien.  This decision is noteworthy in itself, but it also raises the question of whether the result would be different under a recent amendment to Ontario Construction Lien Act which specifically deals with the installation of equipment.

The Background

West Fraser shut down its paper mill in Kitimat, B.C.   It then sold the paper machinery separately from the land.  It did so, as the court found, in order to enhance the total proceeds that it received from the land and machinery although the removal of machinery lowered the value of 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 it in the removal.  BKB and its subcontractor were not paid in full by the buyer and filed a builders’ lien against West Fraser’s property.

The B.C. Supreme Court found that West Fraser was an “owner” under the B.C. Builders Lien Act since West Fraser held an estate or interest in the land and, through its sales contract with the buyer, had knowledge of and had given its consent to the work of removing the machinery.  In addition, the removal of the machinery directly benefitted West Fraser by enabling the sale of the machinery to occur on terms advantageous to it.

The Court also held that BKB and its subcontractor were both “subcontractors” under the Act. It said that:

“The Act does not require a direct contractual relationship between the respondents and West Fraser for liens to arise.  Additionally, it does not require contractual relationships between BKB or [its subcontractor] and any person engaged directly by West Fraser.”

However, the 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 Court held that the removal of the machinery fell into the latter category.  The land or buildings were not improved by the removal of the machinery nor was the removal incidental to a project to improve the land.

This decision is noteworthy on two accounts.

First, it is surprising that the court found that the value of the land was not improved by the removal of the machinery.  Surely the abandoned paper mill machinery detracted from the value of the land.  Otherwise, why did West Fraser require the buyer to remove it, and to do so at the buyer’s cost?  If the lien claimant proved that the market value of the land was increased by the removal of the machinery, would the result have been the same?

Second, would the result have been different under other provincial lien Acts?  Thus, the Ontario Construction Lien Act was amended in 2010 to broaden the definition of “improvement” to include “the installation of industrial, mechanical, electrical or other equipment on the land.”  Under the Ontario Act, the definition of “improvement” already included  the demolition or removal of any building, structure or works on the land.  The 2010 amendment was apparently intended to reverse the 2007 decision in Kennedy Electric Ltd. v. Rumble Automation Inc. (which, interestingly was not cited in the West Fraser decision).  In Kennedy Electric, the Ontario Court of Appeal held that the installation of large assembly-line equipment for the manufacture of truck frames was not an “improvement.”

By logic, the amendment to the Ontario Act should apply to the removal as much as the installation of equipment, but does it?  Is the equipment “building, structure and works on the land”?  It could be argued that it is not, because if it is, then there was no need to amend the Act in 2010, since the words “building, structure and works on the land” were already in the Act, and it was amended for the very reason that those words did not include “equipment.”  The part of the definition of “improvement” which refers to demotion or removal was not also amended to refer to “equipment”.

If the argument (that the installation of the equipment is within the Act but the removal is not) was successful, it would be unfortunate because the legislative purpose behind including the equipment seems so obviously applicable to the removal.  But making legislative intent clear is a challenge.

Construction Law  –  Construction Liens  –   Removal of Equipment:

West Fraser Mills Ltd. v. BKB Construction Inc. 2011 BCSC 1460

Thomas G. Heintzman O.C., Q.C.                                                                      December 4, 2011

www.heintzmanadr.com
www.constructionlawcanada.com

Remember Rainy Sky: The Commercially Sensible Interpretation Prevails

Every once in a while, an important decision comes along which should be put in your hip pocket so that it can be pulled out when needed.  Rainy Sky S.A. v. Kookmin Bank is such a decision.  In this decision, the U.K. Supreme Court (formerly the House of Lords) recently held that if there is a choice between interpretations of an agreement, the commercially sensible one should be adopted.

That principle may not be rocket science, but it is crucially important for two reasons.

First, the Supreme Court held this principle applies even if another interpretation is arguable.  The more commercially sensible interpretation will be selected whenever there is a contest over the meaning of a contract.

Second, this approach may make it more important to lay the groundwork for a sensible interpretation in the evidence.

Rainy Sky is an easy case to remember:  whenever the sky looks gloomy in a dispute, think of Rainy Sky!  It concerned a bond given by the Koomin Bank in relation to a shipbuilding construction contract.  The bond was given to protect the buyer in the event of the builder’s/seller’s default under the contract and obliged Koomin to pay “all such sums due to you under the Contract, between the buyer and the seller.”

The question was:   what “such sums” did the bond cover?  Did it cover only events such as the rejection by the buyer of the vessel, the cancellation or rescission of the contract by the buyer or the total loss of the vessel, all of which were specifically mentioned in the bond as events obliging the seller to repay the buyer?  Or did the bond also cover the insolvency of the seller?

In fact, the seller went bankrupt and failed to refund the advances paid by the buyer to the seller, and that event triggered Rainy Sky’s claim on the bond.  Rainy Sky asserted that the return of the advances was included as an obligation of Koomin under the bond.  Koomin asserted that the bond did not cover the seller’s insolvency, and that it covered only the specifically mentioned obligations of repayment contained in the construction contract.

The trial judge held that the bond covered the insolvency of the seller.  The Court of Appeal held that it did not, and that only the events of repayment specifically mentioned in the bond were covered by it. The UK Supreme Court restored the trial judgment.

The Supreme Court’s decision is a ringing endorsement of the reliability of commercial common sense as a touchstone to contract interpretation.  The Court adopted the following statement by the dissenting judge in the Court of Appeal:

“As the [trial] judge said, insolvency of the Builder was the situation for which the security of an advance payment bond was most likely to be needed….It defies commercial common sense to think that this, among all other such obligations, was the only one which the parties intended should not be secured.  Had the parties intended this surprising result I would have expected the contracts and the bonds to have spelt this out clearly but they do not do so.”

The Supreme Court re-iterated the principle stated by Lord Justice Hoffman in another case to the effect that “if the language is capable of more than one construction, it is not necessary to conclude that a particular construction would produce an absurd or irrational result before having regard to the commercial purpose of the agreement.”

The Court also referred to a previous decision of Lord Justice Longmore to the effect that “if a clause is capable of two meanings, it is quite possible that neither meaning will flout common sense, but that, in such a case, it is much more appropriate to adopt the more, rather than the less, commercial construction.”

The Supreme Court ended its judgment with the following statement:

“..the omission of the obligation to make such re-payment from the Bonds would flout common sense but it is not necessary to go so far…..of the two arguable constructions of paragraph (3) of the Bonds, the Buyers’ construction is to be preferred because it is consistent with the commercial purpose of the Bonds in a way in which the Bank’s construction is not.”

The court did not limit this principle to contracts in the nature of bonds and indemnities.  Rather, its pronouncement was clearly intended to relate to the general interpretation of contracts.  As such, it is of the highest persuasive authority in all common law countries.

The face of the judgment does not indicate that there was any expert or other evidence demonstrating the commercial common sense that the Supreme Court adopted.  So that sense of commercial reasonableness had to be derived from other sources.

In the Rainy Sky case, a primary source was the commercial skill and experience of the U.K. Supreme Court.  A court with that experience can make that judgment which other courts, even of high authority, may not be able to make if composed of judges who have not had extensive commercial experience.

If a judge or court does not have commercial experience, then that experience may have to be provided by expert or other testimony.  That circumstance may result in an unfortunate dispute between expert witnesses about what is “commercially sensible”.  That is a dispute which the Court of Appeal may have felt was undesirable.  The Court of Appeal also seemed unwilling to be the judge of what result amounted to commercial common sense when sophisticated parties had not themselves expressly stated that result in their contract.

In any event, we now have a judgment that we can rely upon for a crucial principle:  the commercially sensible interpretation of a contract prevails, even if another interpretation is arguable.

Construction Law  –  Interpretation of Building Contracts  –  Bonds:

Rainy Sky S.A. v. Kookmin Bank, [2011] UKSC 50

Thomas G. Heintzman O.C., Q.C.                                                                                                            December 3, 2011

www.heintzmanadr.com
www.constructionlawcanada.com

Can An Arbitration Claim Be Dismissed For Delay?

Does an arbitral tribunal have authority to dismiss an arbitration claim for want of prosecution?  Some arbitration statutes expressly state that a tribunal has the power to do so.  Absent such an express power, the British Columbia Court of Appeal has held that the tribunal has no inherent authority to do so:
Premium Brands Operating GP Inc. v. Turner Distribution systems Inc.

 
The Uniform Arbitration Act developed by the Uniform Law Conference of Canada confers, in section 27(4), an express power on the arbitral tribunal to dismiss an arbitration claim for want of prosecution.  That Uniform Act has been adopted in Alberta, Saskatchewan, Manitoba, Ontario, New Brunswick and Nova Scotia.  But in other provinces such as British Columbia, the Uniform Arbitration Act has not been adopted.

A power to dismiss for delay is not found in the UNCITRAL Model Law and in the International Commercial Arbitration statutes in Canada that have adopted the Model Law.  So this decision has wide importance for those arbitrations.

The Background

Premium Brands was the successor to companies which had contracted with Turner for the provision by Turner of warehouse and distribution services.  The contracts contained arbitration clauses.  Turner commenced arbitration in March 2000.  A hearing was held in June 2000 and an award was made in July 2000 in which the arbitrator ordered a further hearing into issues arising from his award.  Various proceedings occurred over the succeeding years until in 2009, Premium brought a motion to dismiss the arbitration for want of prosecution.

The arbitrator found that he had no authority to dismiss the claim for want of prosecution.  He held that Rule 34(2) of the B.C. Domestic Commercial Arbitration Rules did not apply.  That sub-rule authorized the arbitrator to dismiss the arbitration if he found that the proceedings had become “unnecessary or impossible.”  He found that there had been excessive delay which would have resulted in a dismissal of the proceedings for want of prosecution if he had the power to so order.  However, he held that it was not impossible to proceed with the arbitration.

The arbitrator’s decision was upheld by the British Columbia Supreme Court.  A further appeal was then brought to the British Columbia Court of Appeal, which dismissed the appeal.

Was justice denied because of the delay?

Premium’s principle argument was that the failure to prosecute the arbitration claim with reasonable dispatch resulted in a denial of natural justice.  It submitted that an arbitral tribunal has inherent jurisdiction to dismiss a claim if the proceedings amounted to a denial of natural justice.  In addition, it submitted that the powers of the arbitral tribunal were analogous to those of a court which has the power to dismiss for want of prosecution.

The British Columbia Court of Appeal noted that the arbitrator had found that it was not “impossible” to proceed with the arbitration.  The Court understood that finding to mean that it was not impossible to proceed in accordance with natural justice, even though the passage of time would have resulted in the dismissal of the proceeding for delay if the power to so dismiss had been given to the arbitrator.

 The Court of Appeal rejected Premium’s arguments for three reasons:

First, the bilateral obligations undertaken by the parties in an arbitration agreement are not similar to those undertaken by parties to a civil action in court.  In the latter case, the court is a state-operated dispute resolution system in which the defendant is obliged to participate by the plaintiff commencing the action.  Arbitration is a dispute system voluntarily adopted by both parties.

In this circumstance, the respondent in the arbitration cannot sit back and wait for the claimant to run out of time to prosecute the claim.  Rather, the respondent has the obligation to seek remedies from the arbitrator to move the proceeding along with reasonable dispatch.  If the respondent does so, the arbitrator can issue directions with respect to the delivery of pleadings, documents and a timely hearing.  If either party disobeys those directions, then the arbitrator has full power to dismiss the arbitration claim.  But if the respondent fails to utilize the arbitration process to which it agreed to seek such directions, the arbitrator has no jurisdiction to dismiss the arbitration for want of prosecution.

Second, the Court of Appeal distinguished the inherent power of the arbitrator to make orders that ensured that the arbitration occurred in a fair manner – what may be called procedural orders – from orders dismissing the arbitration claim on a self-standing basis.  The arbitral tribunal has inherent power to order that a party post security for costs, or to require parties to deliver pleadings or undertake various proceedings leading to a hearing.  The tribunal has authority to strike out a party’s claim or defence for failure to comply with those sorts of orders.   But if a party does not seek and obtain an order by the arbitral tribunal relating to the conduct of the arbitration which the other party disobeys, then the tribunal has no inherent authority to dismiss the arbitration claim.

Third, the power of a court to dismiss for want of prosecution arises from the specific statute and rules of civil procedure governing the court.  Some arbitration statutes also confer that power on the arbitral tribunals governed by those statutes.  In the absence of an express power being given by statute or the parties in their arbitration agreement, the Court of Appeal held that the arbitral tribunal has no implied power to dismiss the proceeding.

For three reasons this decision is of wider importance than arbitral practice in British Columbia:

 First, its reasoning will apply to domestic arbitrations in other jurisdictions which, like British Columbia, have not expressly given arbitrators the power to dismiss for delay.

Second and most importantly, its reasoning applies to international commercial arbitration statutes.  Those statutes adopt the UNCITRAL Model Law and do not generally incorporate an express power to dismiss for delay.  Thus, Chapters V and VI of the Ontario International Commercial Arbitration Act do not contain an express power to dismiss for delay.  Rather, Section 32(3) states that the arbitral tribunal has authority to dismiss if the conduct of the proceeding has become “unnecessary or impossible.”  This wording is the same as Article 32(2)(c) of the UNCITRAL Model Law.  The wording is also the same as Rule 34(3) of the B.C. Domestic Commercial Arbitration Rules.  Accordingly, the reasoning of the B.C. Court of Appeal will be directly applicable to any suggestion that an international commercial arbitral tribunal has an inherent authority to dismiss for delay.

Third, this decision is a reminder that an arbitrator does not have any substantive powers except those which the governing statute and the arbitration agreement confer on it.  This means that, before entering into an arbitration agreement and before selecting the law to apply to it, the parties must carefully review the proposed agreement and the proposed governing law in order to ensure that the powers that they want the arbitrator to have, or not have, are clearly understood beforehand.  Otherwise, they will not be inferred or implied into the powers of the arbitrator later.

Arbitration  –  Powers of the Arbitral Tribunal  –  Dismissal for Delay:

Premium Brands Operating GP Inc. v. Turner Distribution Systems Inc. 2011 BCCA 75

Thomas G. Heintzman O.C., Q.C.                                                           November 26, 2011

www.heintzmanadr.com
www.constructionlawcanada.com

Which Dispute Resolution System Applies – Construction Lien or Arbitration?

Courts have difficulty reconciling the rights of parties to arbitration when there are construction liens, cross claims, counterclaims and third party rights involved.  How can arbitration, which is a bilateral dispute resolution system, resolve those disparate rights?  And what appeal rights are there for the parties who are dissatisfied with a judge’s conclusion that the dispute does not fall within the arbitration clause?  The New Brunswick Court of Appeal recently addressed those questions in SNC-SNAM, G.P. a partnership between SNC Lavelin Inc and Snamprogetti Canada Inc. v. Opron Maritimes Construction Ltd.

The Background

SNC-SNAM was the general contractor at a construction project at the Canaport LNG Terminal in Saint John, New Brunswick.  SNC-SNAM granted a sub-contract to Opron which contained an arbitration clause.  Liens were filed by sub-subcontractors to Opron.  Opron filed a claim over for contribution or indemnity in respect of those lien claims against SNC-SNAM.  In addition, Opron filed its own action against SNC-SNAM.

SNC-SNAM applied for a stay of both claims of Opron based upon section 36 of the New Brunswick Arbitration Act which requires that all claims subject to an arbitration clause be arbitrated.  The application was dismissed on the grounds that the claims involved sub-subcontractors and accordingly the claims should be dealt with in court and not arbitrated.  In addition, the judge held that the mechanics lien trial could and should dispose of all claims relating to the mechanics’ liens.  SNC-SNAM appealed that decision to the New Brunswick Court of Appeal.

The Issues

The first issue was whether any appeal could be brought in light of sub-section 7(6) of the New Brunswick Arbitration Act.  That sub-section says that, “there is no appeal from the court’s decision” under section 7 of the Act.  The Court of Appeal held that it had jurisdiction to hear the appeal.  It followed appellate decisions in Ontario and Manitoba in concluding that sub-section 7(6) only applied if the judge hearing the application held that the dispute fell within the arbitration clause and resolved the stay issue on that basis. The sub-section did not apply if the application judge held that the dispute fell outside the arbitration clause.

The Court of Appeal agreed with the application judge’s interpretation of the New Brunswick Mechanics’ Lien Act, and his conclusion that the mechanics lien trial judge has the authority to deal with counterclaims, cross claims and third party claims.  Even though the Act does not expressly make a statement to that effect (unlike Ontario’s), the Act was amended in 1992 to state that the lien is to be enforced “according to the ordinary procedures” of the court.  Under those ordinary procedures, a court has the authority to deal with all such claims.  In light of that amendment, older decisions in New Brunswick holding that counterclaims could not be asserted in a mechanics’ lien action were no longer good authority.  The proper rule is that all counterclaims, cross claims and third party claims can be dealt with in a mechanics’ lien action, if the court determines that, in justice and fairness, they should be.

The Court of Appeal declined to decide whether the mandatory provisions of section 36 of the Arbitration Act required the arbitration of this dispute.  The facts had changed and the arguments before the Court of Appeal were different than they had been in the court below, making it apparent that the decision of the Court of Queen’s Bench was in error.  In all the circumstances, the Court of Appeal sent the matter back to the Court of Queen’s Bench for a re-hearing.

This decision allows us to take stalk of the legal issues relating to arbitrations and construction and mechanics liens.

The first issue concerns the right to appeal a judge’s decision on a motion to stay an action in the face of an arbitration clause.  At first glance, it seems lop-sided for the Court of Appeal to hold that the application judge’s decision may be appealed if he finds that the dispute falls outside the arbitration clause but not appealed if he finds that it falls within that clause.

However, that disparity can be rationalized by the structure of the Arbitration Act.  That structure mandates that in the presence of an arbitration clause, any claim must be arbitrated, and the statutory language then goes on to deal with the powers and discretion of the court in that setting.  If a court decides that the claim falls outside the arbitration clause, then the whole structure is avoided and it is reasonable for an appellate court to resolve the correctness of that decision.

This conclusion may be helpful to courts and parties elsewhere in the world which are wrestling with similar “no appeal” provisions in their arbitration statutes.

The second issue concerns the discretion of the application judge in the face of an arbitration clause and disparate rights arising from mechanics’ or construction liens.  Some courts have held that the judge has discretion not to stay the action in the face of such other claims.  However, most courts have held that, since the adoption of the modern arbitration statutes and their mandatory direction that an action be stayed if there is an applicable arbitration clause, the claims between the parties to that clause must be stayed even if they arise from mechanics’ or construction liens and even if there are other related claims between the parties or other parties.

The Court of Appeal might have resolved this latter issue and settled the principle in light of the modern New Brunswick Arbitration Act.  Owners and construction contractors need to know whether their disputes will be resolved by arbitration, by mechanics’ or construction lien actions.

Instead the Court chose to have that issue first resolved by the Queen’s Bench division.    Hopefully, appellate courts in Canada and indeed the Supreme Court of Canada will soon settle this tension between these two important dispute resolution systems:  arbitration and mechanics’ and construction liens.

Arbitration  –  Building Contracts  –  Construction Liens:

SNC-SNAM, G.P. a partnership between SNC Lavelin Inc and Snamprogetti Canada Inc. v. Opron Maritimes Construction Ltd., 2011 NBCA 60

Thomas G. Heintzman O.C., Q.C.                                                                        November 20, 2011

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