When and How is a Subcontractor Bound by its Tender in a Bid Depository System?

The process by which subcontractors’ tenders are accepted in a bid depository is fundamental to the efficacy of that system.  If that process does not effectively bind the subcontractors, then the subcontractors will be able to unilaterally withdraw their bids later.  The British Columbia Supreme Court addressed this issue in its recent decision in Civil Construction Co Ltd v. Advance Steel Structure Inc.

This case required the court to unscramble the “Contract A – Contract B” legal structure created by the Supreme Court of Canada in Ontario v. Ron Engineering & Construction (Eastern) Ltd, [1981] 1 SCR 111 and apply it to the relationship between a contractor and subcontractor.  In Ron Engineering, a distinctly Canadian legal structure was created for contracts between the owner and the contractor in a bid depository system.  Under that structure, there are two contracts which are potentially formed in such a bidding system. The first contract, Contract A, is the contract formed by the submission of a bid. That contract is a judge-made creation arising from the wording of a bid depository system. It is based upon and regulates the bid system itself and requires the bidding contractor to leave its price in place for the duration of the bid and requires the owner to award the contract only to a compliant bidder. The second contract, Contract B, is the ultimate construction contract which may be entered into if the bidder is successful.

That process is workable at the owner-contractor level but becomes more difficult to apply at the contractor-subcontractor level.  Nevertheless, in Naylor Group Inc. v. Ellis-Don Construction Ltd, [2001] 2 SCR 943, the Supreme Court held that the same structure applies to the relationship between a contractor and subcontractor when the subcontractor files a bid in a bid depository system and the contractor carries that bid in its bid to the owner.

What Binds a Subcontractor to a Bid?

In Naylor v. Ellis-Don, it was the contractor, Ellis-Don, which refused to award the subcontract to the subcontractor, Naylor, whose bid it carried in its bid to the owner.  So the dispute dealt with whether the contractor was in breach of its obligations, not whether the subcontractor was.  The Supreme Court held that, by carrying the subcontractor’s bid in its own bid, a Contract A was created between the parties which “required the successful prime contractor to subcontract to the firms carried in the absence of a reasonable objection.”  (My emphasis added).

In the Ontario Court of Appeal, the result was stated somewhat differently.  There the Court of Appeal said: “Thus, unless the successful prime contractor has a reasonable objection to the subcontractor it has proposed, the prime contractor must communicate its acceptance of the subcontractor’s bid.” (Again, my emphasis added, for comparison purposes).

In Civil Construction v. Advanced Steel, it was the subcontractor that refused to adhere to its bid.  And it said that its bid had not been accepted by the contractor.  In these uncharted waters, what is the right result under the Ron Engineering structure, or is the structure being bent so out of shape that it cannot apply?  What event binds the subcontractor to its bid, a communicated acceptance or the filing of the contractor’s bid?

Civil Construction was a bidder as the general contractor in a tender by the City of Richmond, British Columbia for the construction of a drainage pump station upgrade.  Advanced submitted an unsolicited bid dated June 10, 2009 to Civil Construction for the structural steel subcontract work.  In its bid, Advanced stated that its bid was “valid for acceptance for the next 30 days and valid for delivery within 90 days after acceptance”.  Civil incorporated Advanced’s bid into its own bid dated June 10, 2009 to the City of Richmond.

On July 10, 2009, Civil was advised by the City that it was the successful bidder.  Civil’s project manager testified that, on that same day, he called each of the subcontractors, including Advanced, to advise them that they were named as sub trades in its tender submission.  On July 13, 2009, the City wrote to Civil to formally award the general contract on the project to Civil, and Civil wrote to Advanced on the same day to award it the structural steel subcontract.

Advanced refused to enter into the subcontract for two reasons:

First, it said that Civil’s acceptance on July 13, 2009 of Advanced’s bid of June 10, 2009 was outside the 30 days stipulated in that bid.

Second, it said that Civil’s acceptance of its bid contained conditions not set forth in its bid, and therefore amounted to a counter-offer, which Advanced refused to accept.

Civil proceeded to hire another structural steel subcontractor and sued Advanced for the extra cost of that subcontract.

The Court rejected both of Advanced’s arguments

First, it held that the relevant acceptance by Civil of Advanced’s bid occurred on June 10, 2009. That acceptance occurred by reason of Civil including Advanced’s bid in Civil’s own bid to the owner.  By doing so, Civil created the Contract A with Advanced under the bid depository system.

Under that system, the B.C. Court held that Advanced’s bid was accepted by Civil under Contract A once that bid was submitted by Civil as part of its bid to the owner.  Relying on previous decisions in the Supreme Court of Canada and Alberta, the Court held as follows:

“[C]ontract A is formed when a subcontractor tenders in response to a general contractor’s invitation and the general contractor incorporates that bid as part of its tender to the owner. Under contract A a subcontractor may not withdraw its tender for a set period and must enter contract B upon acceptance of its bid, which is when the general contractor’s bid with the subcontractor’s tender included is accepted by the owner.

The general contractor’s obligation to a subcontractor under contract A arises once the general contractor chooses to carry the subcontractor’s bid in its tender to the owner.

In return for the subcontractor being bound by its bid, the general contractor, upon acceptance of its bid, which includes the subcontractor’s bid, is obliged to enter into a construction subcontract B with the subcontractor.”

The Court accordingly held that, since Civil had included Advanced’s bid in its own bid on June 10, 2009, the relevant acceptance had occurred within the 30 days set forth in Advanced’s bid.  In effect, the Court interpreted the words “valid for acceptance” in Advances’ bid as meaning “valid for acceptance for Contract A, not Contract B”.  The Court did not refer to any communication of that acceptance by Civil to Advanced, or any necessity for such a communication.

Second the Court also held that Civil’s purported addition of further work in the subcontract was not permissible under the Contract A system.  Therefore, Civil and Advanced were bound to enter into a Contract B that conformed to the bid, and the additional work specified by Civil was ineffective and Advanced was bound by a subcontract which did not include that additional work.  Accordingly, Advanced was liable in damages to Civil based upon that subcontact.

Two Disquieting Features:

While this decision is the common sense result of a bid depository system, it does have two disquieting features.

First, when the contractor includes the subcontractor’s bid in its tender to the owner, should the contractor be obliged to tell the subcontractor, at that time, that the latter’s bid is included in the contractor’s tender?

Normally, an acceptance only occurs when the acceptance is communicated to the offeror.  There could be many subcontractors who tender for the work.  If there is no communication from the contractor to the subcontractor when the contractor submits its bid, should the subcontractor be presumed to know that its bid is the one which has been accepted for inclusion in the general contractor’s bid?

As noted above, in Naylor v. Ellis-Don, the Ontario Court of Appeal said that the contractor “must communicate its acceptance of the subcontractor’s bid” to the subcontractor.  But what if it doesn’t?  Does that let the subcontractor off the hook?  And while the Supreme Court said in that case that Contract A “required the successful contractor to subcontract to the firm carried”, is the subcontractor similarly bound to proceed with the subcontract in the absence of an express and timely acceptance by the contractor?

The courts can, of course, create exceptions to the normal rule that an acceptance occurs when it is communicated to the offeror.  Those exceptions are based upon business efficacy and the presumed intent of the parties.  One such exception is the old rule that a posted acceptance is deemed to occur at the time of posting, not the time of receipt.

The Court Constructed a New Exception for Subcontractors

It appears that in the present case, the court constructed a new exception for subcontractors’ bids in the bid depository system.  According to this decision, the acceptance of a subcontractor’s bid for purposes of Contract A occurs when the contractor includes the subcontractor’s bid in its own bid, even though that is not communicated to the subcontractor.  The real question is whether that is a good rule, and if it is, whether the rule should be specifically set forth in the bid documents. Otherwise, it could be argued that the contractor should be required to notify the specific subcontractor whose bid has been included in the contractor’s bid to the owner, so that the subcontractor knows that its bid has been accepted for the purpose of Contract A.

For the moment, and based on this decision, contractors and subcontractors may proceed on the basis that if a subcontractor states a time for acceptance in its bid, then that statement will be taken to mean the time in which the contractor has to insert that bid into its own bid to the owner, that there is no need for the contractor to advise the subcontractor that that has occurred, and that it is up to the subcontractor to inquire, if it wishes to know, whether its bid has been included in the contractor’s bid.

Warning to Contractors:

The other question which is raised by this decision is whether a subcontractor can avoid this result by a more specific tender. Can the subcontractor specifically state in its bid that its offer of a construction contract (ie:  Contract B) must be accepted within a specific period of time, and a time period shorter than the contractor’s bid period?  In other words, could the subcontractor specifically state that its bid could only result in a construction contract if that construction contract is entered into within a specific period of time which is less than the bidding process allows?

The short answer is that such a bid is non-compliant with the bid depository system and Contract A under the Ron Engineering structure.  This answer follows from the requirement in Contract A that the subcontractor keep its bid open during the bid period and enter into Contract B on the terms set forth in the bid, that is, up to the time the contract is awarded and a reasonable time thereafter.  But if this is the right answer then contractors will have to be alert to ensure that any subcontractors’ bids they receive do not have such a short fuse in them, and if they do, to disqualify them from the bidding process.

Advanced may have intended to raise this question in the present case.  But the court did not answer the question by holding that Advanced’s bid was non-compliant with the terms of the bid.  Rather, it interpreted the word “valid for acceptance” in Advance’s bid to mean “valid for acceptance under Contract A”, and it arrived at that conclusion by reference to the bid depository system and Ron Engineering.  It will require a more specifically drafted subcontractor’s tender to raise the “non-compliant acceptance period” issue.

Construction Law – Subcontractors – Bid Depository System

Civil Construction Co Ltd v. Advance Steel Structure Inc., 2011 BCSC 1341

Thomas G. Heintzman O.C., Q.C.
November 13, 2011

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The Limitation Period Quagmire Between Litigation And Arbitration

The limitation period is a vexing issue to any party involved in a commercial dispute.  This truism applies even more to construction disputes because there are a variety of events that may trigger the beginning of the limitation period.  The limitation issue becomes even more vexing when the proceeding can be either:  by way of arbitration, by way of an action or by way of a counterclaim.  Add to that confusion a motion by one party to stay its own action in favour of arbitration.  How could any party know when the limitation period started?  That was the situation in Penn-Co construction v. Constance Lake First Nation.

The bottom line of this decision is that the limitation period is not stayed while the court sorts out whether the dispute should be resolved by court litigation or arbitration.

The Background

In June 2003, Penn-Co entered into a contract with Constance Lake to build a school on the reserve.  The work was to be completed by November 2004.  Constance Lake took possession of the school in February 2005.  Disputes remained between the parties about payment and the completion of the project.  In December 2005, Constance Lake served a notice alleging that Penn-Co was in default under the contract and gave Penn-Co five days to cure the default or provide a schedule to do so.  In May 2006, Constance Lake then served a Notice of Default on Penn-Co’s bonding company.  In September, 2006, Constance Lake served a notice on Penn-Co terminating the contract due to the inability or refusal of Penn-Co to perform the balance of the contract work.  In October, 2006, Constance Lake entered into a contract with another contractor for the “completion” of the contract.

In January 2007, Penn-Co started an action against Constance Lake for damages for breach of contract.  At the same time, Penn-Co brought a motion to stay its own action pending arbitration.  Constance Lake opposed the motion on the basis that the action should proceed, not an arbitration.  The motion was dismissed in September 2007, and Penn-Co’s appeal was dismissed by the Court of Appeal in November 2008.  In May, 2009, Constance Lake served a Statement of Defence and Counterclaim, but did not have it formally issued by the court.  In September 2009, Penn-Co served its Defence to Counterclaim, and in October 2009, Penn-Co issued a third party notice seeking contribution and indemnity from certain sub-trades in respect of the counterclaim.  In April 2010, Penn-Co delivered an amended Defence to Counterclaim asserting that the Counterclaim had been issued outside the two year limitation period in the Ontario Limitatios Act, 2002.  Penn-Co then brought a summary judgment motion to dismiss the Counterclaim.

The Decision

The motion judge held that the Counterclaim had been issued outside the limitation period and dismissed the Counterclaim.  There was no dispute that the limitation period commenced at the latest in September 2006 when Constance Lake terminated the contract.  Accordingly, the two year limitation period ended in September 2008, long before Constance Lake served its Counterclaim in May 2009.

Constance Lake’s argued that the limitation period was extended due to Penn-Co’s motion to stay its action in favour of arbitration.  Constance Lake argued that until that motion was dismissed there was every possibility that Penn-Co’s action would be stayed and that the dispute would be dealt with by arbitration, and that accordingly the limitation period did not start to run until November 2008 when the Court of Appeal dismissed Penn-Co’s appeal on that issue.  Constance Lake argued that Penn-Co’s motion either suspended the limitation period or amounted to a waiver of the running of the limitation period by Penn-Co.

Section 52(2) of the Ontario Arbitration Act, 1991 does provide that, if the court sets aside an arbitration award, terminates an arbitration or declares an arbitration to be invalid, then the court may order that the time period from the commencement of the arbitration to the date of the order shall be excluded from the limitation period.  Constance Lake argued that, by analogy, the period during Penn-Co’s stay motion should also be excluded from the limitation period.

The motion judge rejected that argument.  The court which had dismissed Penn-Co’s stay motion, and the Court of Appeal, had not done any of the things referred to in Section 52(2);  setting aside the arbitration award or terminating or declaring invalid the arbitration.  Nor was the present motion judge doing any of those things.

The motion judge also rejected the assertion that he had discretion to go beyond either section 52(2) of the Arbitration Act, 1991 or the Limitation Act and, by judicial interpretation, expand on the specific terms of either statute.  To do so would be contrary to the Limitation Act itself which contemplates that the provision of that statute are the only limitation periods to be applied, and would also be contrary to the previous directions of the Court of Appeal that any suspensions of the periods contained in the Limitation Act must be found in that Act itself or another statute, not in judge-made law.  

The motion judge also did not accept the argument that Penn-Co had waived the limitation period or that there was, effectively, an agreement between the parties to waive the limitation period.  At any time Constance Lake could have commenced an action, or could have issued a Counterclaim in Penn-Co’s action after it was issued in January 2007.  At no time did Penn-Co relinquish or waive its right to rely on the limitation period.

The Importance of Keeping Your Eye on The Limitation Period

This decision is, perhaps, more about not letting the opposition dazzle you with fancy procedures than it is about determining when a limitation period commences and ends.  In the absence of statutory authority or agreement to that effect, the notices to bonding companies, the commencement of proceedings by the other party, or motions or other fancy moves by the other side will not do anything to stop the limitation period from running for the other party’s claim.

In a construction project, there may be all sorts of opportunities to serve notices, give directions, make claims against bonding companies and even commence litigation which may confuse and confound the other party.  But those moves should not distract the other party into thinking that the limitation period is no longer an issue for its own claim.  It is.

In particular, if any time is taken up in deciding whether one party’s claim should proceed in court or by arbitration, that period of time does not extend the limitation period for the other party’s claim to be commenced.

So it is necessary to keep an eye on the limitation period from the beginning.  And certainly, after a party to a contract terminates that contract, or purports to do so, a big, solid mark and reminder should be made in the diary which alerts that party to commence court or arbitration proceedings within the limitation period after that date, no matter what the other party does.

Construction Law  –   Arbitration  –  Limitation Period:

Penn-Co construction v. Constance Lake First Nation, 2011 ONCS 5875

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

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Restitutionary Payment May Be Ordered For An “Ineffective” Construction Contract

Owners and contractors should always avoid undertaking a project without a contract.  But if they do build the project without a contract, the British Columbia Court of Appeal has recently recognized in Infinity Steel Inc. v. B & C Steel Erectors Inc. that the party which received the benefit of the work or supplies must pay a fair amount to the party which provided them.

This may not be a novel proposition.  But what is novel is that the courts now recognize this situation as an “ineffective transaction” which falls within a discrete category of unjust enrichment.

Background Information:

Infinity made a tender bid to the general contactor, Bird Construction, for the supply and erection of the structural steel for the Search and Rescue Hanger at the Canadian Forces Base in Comox, British Columbia.  Infinity entered into discussions with B & C for that company to erect the steel.  The companies exchanged written documents which they thought constituted the contract, but each of them had a different view of the price and other elements of the contract. When the job was over 90% finished, Infinity terminated its relationship with B & C and had another erector finish the work.  Litigation ensued and it was Infinity’s position that, in determining the fair amount to be paid to B & C, the amount which it paid the replacement erector had to be taken into account.

The trial judge found that the parties had not agreed on the fundamental elements of the contract.  Accordingly, he was unable to order a contractual remedy, either by way of damages for breach of contract if a price for the contract had been agreed upon, or by way of contractual quantum meruit if no price had been agreed upon.  The judge held that a remedy in restitution was available in these circumstances and awarded compensation to B & C.  Infinity appealed arguing that the trial judge had not taken into consideration the amount that it had paid to complete the erection after B & C was no longer on the job.

There are two interesting aspects of the decision of the B.C. Court of Appeal which largely upheld the trial judge’s decision.

First, the Court of Appeal held that this situation constituted an “ineffective transaction” which, under a recent decision of the Supreme Court of Canada, was a distinct ground for restitutionary compensation.  It said: “[I]t is now firmly established that a claim alleging unjust retention of a benefit conferred in an ineffective transaction is a discrete category of the doctrine of unjust enrichment, which may attract a personal monetary remedy (Kerr v. Baranow, 2011 SCC 10 (CanLII), 2011 SCC 10 at para. 31) and that remedy must match, as best it can, the extent of the enrichment unjustly retained by the defendant (at para. 73)”.

Kerr v. Baranow was a family law case, not a construction law case.  That case was not about an ineffective contract and the statement at para 31 in the Supreme Court’s judgment had nothing to do with the merits of that case. The Supreme Court simply said, in a part of a sentence dealing generally with the circumstances in which a remedy in unjust enrichment may be ordered, that such a remedy could be awarded in a case of an “ineffective contract”.

Moreover, it is not clear from the decision in Kerr v. Baranow what amounts to an “ineffective transaction.”  One might have thought that the Supreme Court was thinking of dealings which are otherwise contracts but ineffective as contracts for legal reasons, such as the Statute of Frauds or lack of consideration.  When the parties simply fail to negotiate a contract, as happened in Infinity Steel v. B & C Steel Erectors, is this an “ineffective” transaction?  The B.C. Court of Appeal has held that it is.

While this result may come out of left field so far as construction law is concerned, it is a good one for that branch of the law.  It recognizes that an “ineffective transaction” constitutes a comprehensive classification to which the principles of unjust enrichment may be applied.  It should not matter whether the contract failed for legal or factual reasons.  If one party received a benefit, then the other party should pay for it.  Once the benefit is accepted, then the only question is the amount that the benefitted party should pay, and if the parties cannot agree on the amount, then the court will have to fix it.   For those propositions, we can now refer to this decision as authority.

The second interesting aspect of the Court of Appeal’s decision is its completely open-ended approach to assessing the appropriate compensation.  Again, taking a leaf from the decision in Kerr v. Baranow, the Court rejected any formulistic approach. The Court held that, once a trial judge rejects a contractual remedy and finds unjust enrichment, the trial judge’s task is “to determine what measure is appropriate to remedy the unjust enrichment in all the circumstances of the case. ….. in the light of Kerr, the appropriate measure for restitutionary quantum meruit is to be selected to meet the circumstances of the particular case.  Important factors will include but not be limited to, the course of dealings between the parties, any estimates obtained, the costs incurred, the scope of work, the actual work done, the market value of the services provided.”

These are sweeping considerations which will give the Court an unfettered power to award the amount of compensation that is fair in all the circumstances.

So far as the amount to which B & C was entitled for the work it had done, the Court of Appeal held that the trial judge had taken into account the cost of completion by the replacement contractor, and apart from a slight adjustment it upheld the award of the trial judge.

In the result, this decision of the British Columbia Court of Appeal provides a comprehensive basis for a court in Canada to assess equitable compensation if a construction contract is ineffective for any reason.

Construction law   –  Restitution   –   Quantum Meruit  –   Ineffective Transaction: 

Infinity Steel Inc. v. B & C Steel Erectors Inc., 2011 BCCA 215

Thomas G. Heintzman O.C., Q.C.                                                                                                   October 30, 2011

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Ontario’s Highest Court Upholds NAFTA Arbitration Against Mexico

The Ontario Court of Appeal has just released an important decision upholding an arbitration award under NAFTA against Mexico.  This decision shows that Canadian courts will be reluctant to interfere on jurisdictional grounds with the remedial decisions of international commercial arbitrations.

In The United Mexican States v. Cargill, Incorporated, Mexico opposed the recognition in Ontario of an award by an international commercial arbitration tribunal relating to Mexico’s protection of its refined sugar industry.  Cargill had established a business in which its wholly-owned Mexican subsidiary distributed HFCS, a low-cost substitute for caned sugar.  Cargill’s Mexican subsidiary imported HFCS from Cargill’s U.S.’s plants, and sold it to Mexican customers.  Mexico enacted a number of prohibitions which were found by the arbitration tribunal to constitute breaches of NAFTA.  As a result of those prohibitions, Cargill shut down a number of its HFCS plants and distribution centres in the U.S.A.

Cargill claimed damages for both the “downstream losses” that its Mexican subsidiary suffered, and also the “upstream losses” which it suffered by reason of the closing down of its U.S. production and distribution facilities.  The arbitral tribunal awarded damages on both accounts.  In particular, in relation to the damages suffered by reason of the impact on Cargill’s U.S. plants and distribution centres, the arbitral tribunal found that those damages were caused by the prohibitions implemented by Mexico.

Since the seat of the arbitration was in Toronto, Ontario, Mexico challenged the damage award in the Ontario Superior Court.  Its position was that the arbitral tribunal had no jurisdiction to award the “upstream” damages, and its position was supported by the governments of the U.S.A. and Canada as intervenors.

Mexico argued that under Chapter 11 of NAFTA, Cargill could only recover losses as an “investor” in relation to its “investment” in Mexico.  Accordingly, Mexico argued that Cargill had no right to recover, and the arbitral tribunal had no jurisdiction to award, damages to Cargill as a U.S. producer and exporter of its product to Mexico.  The tribunal held that Cargill was an “investor”, that it had made an “investment”, that Mexico had adopted a prohibited measure and that everything else related to the measure of damages.  The tribunal found that there were no express or necessarily implied limitations on the scope and nature of the damages that could be awarded by it.

Mexico’s submissions were rejected by both the Superior Court judge who heard the initial application and the Court of Appeal.  The Court of Appeal went through a lengthy consideration of the standard of review to be applied, and basically held that if the issue was one of jurisdiction, the standard of review was “correctness”.  Having said that, the Court stated that this standard only applied in the rare case of a true jurisdictional dispute, and that a very narrow view should be taken of what amounted to a jurisdictional dispute in the case of international commercial arbitrations.

The Court of Appeal’s conclusion:

The Court of Appeal held that the arbitral tribunal had not exceeded its jurisdiction.  It arrived at that conclusion through a number of concessions by Mexico and other conclusions, such as:   Mexico’s concession that damage suffered by an investor is not limited to damage suffered in the country where the investment is located; and no territorial limitation for damages or the occurrence of damages is contained in NAFTA.

The Court concluded: “It is up to the tribunal to make findings of fact, apply the facts to the definitions, and determine whether, in any particular case, the claimed damages fall within the defined criteria.”

In particular, the Court held as follows;

“The only issue is whether the tribunal was correct in its determination that it had jurisdiction to decide the scope of damages suffered by Cargill by applying the criteria set out in the relevant articles of Chapter 11, and that there is no language in Chapter 11, or as agreed by the NAFTA Parties, that imposes a territorial limitation on those damages.  Once the court concludes that the tribunal made no error in its assumption of jurisdiction, the court does not go on to review the entire analysis to decide if the result was reasonable.”

Clearly, this decision is of great importance to arbitrations under NAFTA.  It is also of general importance under the UNCITRAL Model Law.  The Model Law was incorporated into Ontario law in the International Commercial Arbitration Act .

Everything is, of course, in the eyes of the beholder and depends upon the perspective from which one looks at the matter.  To the governments of Mexico, U.S.A. and Canada, the award of damages for activity in another country could not be the basis of a claim as an “investor” in the offending country.  From their perspective, damage was a jurisdictional issue.

But NAFTA does not quite say that loss in another country is a forbidden element of recovery. And from the perspective of the injured party, damage in the country of origin may well be a source of damage arising from an investment in the offending country.  In the absence of specific language in NAFTA removing such damage from the loss which the complainant may recover, the Court of Appeal was not able to say that the arbitral tribunal had made a jurisdictional error in awarding those damages.

There are at least three lessons to be learned from this decision:

First, Canadian courts will be very reluctant to interfere with the decisions of international commercial arbitrations.  This reluctance is due to the evident respect for those tribunals which legislatures have accorded to them.

Second, absent specific language excluding the jurisdiction of the arbitral tribunal, a Canadian court is unlikely to infer a limitation.

Third, it is very unlikely that a Canadian court will find that arbitral decisions relating to damages or other remedies contain jurisdictional error.  Once the arbitral tribunal has jurisdiction to deal with the merits of the dispute, it will require specific limitations on the tribunal’s jurisdiction for the remedial powers of the tribunal to be circumscribed.

Arbitration  –   International Arbitration  –   Enforcement-Remedies  –  Damages

The United Mexican States v. Cargill, Incorporated 2011 ONCA 622

Thomas G. Heintzman , O.C., Q.C.                                                                                                  October 14, 2011

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An Owner Owes No Duty Of Care To A Subcontractor In A Bid Depository System

The Newfoundland and Labrador Court of Appeal has recently held that an owner does not owe a duty of care to a subcontractor arising from the normal operation of a bid depository system: Defence Construction (1951) Limited v. Air-Tite Sheet Metal Limited.

The Background:

The owner, Defence Construction, a wholly owned subsidiary of the government of Canada, entered into a contract with N. M. Dobbin Limited for the construction of an aircraft hanger in Labrador.  Dobbin in turn entered into a subcontract with Air-Tite for the installation of the heating system.  Those contracts were awarded through a bid depository system. The heating system was designed by Shawmont Newfoundland Design Associates.

The heating system did not work properly.  As a result, Dobbin terminated Air-Tite’s subcontract and retained another company to perform corrective work.  Later, it was determined that the fault was due to the negligent design of Shawmont, not the defective work of Air-Tite.

Defence Construction sued Shawmont and Dobbin for damages and Dobbin commenced third party proceedings against Air-Tite.  In a separate action, Air-Tite sued Dobbin and Defence Construction for damages as a result of the wrongful termination of Air-Tite’s contract with Dobbin and the failure of Dobbin to award the corrective work to Air-Tite.

The Trial:

The trial judge held that Shawmont had been negligent in the design of the air conditioning system and awarded damages in favour of Defence Construction against Shawmont.  The trial judge dismissed Defence Construction’s claim against Dobbin on the ground that Dobbin had followed the Shawmont design and had not itself been negligent.

The trial judge also held that Defence Construction was negligent in the supervision of the contract between Dobbin and Air-Tite and awarded Air-Tite damages against Dobbin and Defence Construction.  The negligence alleged against Defence Construction was that it granted permission to Dobbin to terminate the sub-contract to Air-Tite and award the corrective work to the third party without taking reasonable care to inquire as to whether the failings in the heating system were due to the fault of Air-Tite.

The Court of Appeal:

The Newfoundland and Labrador Court of Appeal allowed the appeal so far as Air-Tite’s claim in negligence against Defence Construction.  Applying the decision of the Supreme Court of Canada in Design Services Ltd. v. Canada, [2008] 1 S.C.R. 737, the Court held that the owner, Defence Construction, owed no duty of care to the subcontractor Air-Tite.

The Court held that subcontractors do not fall within a recognized category of persons to whom a duty of care in negligence is owed by owners.  Nor were there good policy reasons to create a new category of persons, namely subcontractors, to which owners owed a duty of care.

Main Contract Creates No Duty Of Care

Air-Tite relied upon a provision in the main contract between Defence Construction and Dobbin (Article 4.6) which prohibited Dobbin from changing the subcontractor without the permission of Defence Construction.

The terms of the main contract were incorporated into the contract between Air-Tite and Dobbin.  The trial judge had held that Article 4.6 created a duty of care between Defence Construction, as owner, and Air-Tite, as subcontractor, requring Defence Construction to use reasonable care in consenting to Dobbin terminating the subcontract with Air-Tite and replacing it with another subcontractor.

The Court of Appeal rejected this proposition.  The Court of Appeal held that the terms of the main contract could not, by themselves, create a duty of care by the owner to the subcontractor. Rather those terms were the “means for Defence Construction to oversee the manner in which Dobbin executed its part of the bargain.”  These considerations worked against, not for, a conclusion that the main contract created proximity of relationship between the owner and the subcontractor.  In the Court’s view, Air-Tite’s arguments were an attempt “to shift responsibility for Dobbin’s wrongful termination of its contract with Air-Tite to Defence Construction when the latter was not privy to the subcontract.”

Bid Depository System Creates No Duty Of Care

The Court of Appeal also rejected that Air-Tite’s submission that a duty of fairness arose from the tender process and created a duty of care from the owner to the subcontractor.

As the Court said:

“While such a duty of fairness may have been a general expectation of Air Tite, there is no basis on which to conclude that Defence Construction and Air-Tite had a relationship that, as between those parties, created expectations or reliance which would impose the duties suggested by Air-Tite on Defence Construction.”

Nor could the bid depository system, without more, establish subcontractors as a new class of persons to whom owners owe a duty of care, particularly in relation to the alleged wrongful termination by the contractor.

The Court continued:

“This is not a situation that fits within or is analogous to a relationship previously recognized as imposing a duty of care between the parties.  Neither is it a situation where a new duty of care should be established.”

Damages For Breach Of The Subcontract

The Court of Appeal also dismissed Dobbins appeal from the trial judgment holding it liable to Air-Tite for not retaining Air-Tite to perform the additional remedial work.  The Court held that Air-Tite had no right to be awarded that work as Dobbin’s contractual right to make changes in the work encompassed the right to assign the remedial work to another subcontractor and not Air-Tite.  Nevertheless, the Court held that Dobbin had wrongfully terminated the subcontract and that, had that not occurred, Air-Tite “would have been retained to do the work that was contracted” to the third party.

This latter conclusion is open to question.  The amount of damages to be awarded for breach of contract is not based upon the probabilities of what the defendant “would have done” but upon what the defendant was entitled to do.  Even if Dobbin wrongfully terminated the subcontract, its liability for damages cannot be greater than the amount it would have had to pay Air-Tite had it acted in accordance with the subcontract:  Hamilton v. Open Window Baker Ltd., [2004] 1 S.C.R. 303.  Accordingly, if Dobbin was entitled to award the additional work to another subcontractor – as the court found – then it should not have been liable to Air-Tite based upon whether or not it might have or would have awarded the additional work to Air-Tite.

The Important Issue:  No duty of care by an owner to a tendering subcontract

The first point in this decision is of considerable importance.  The Newfoundland and Labrador Court of Appeal has held that, as a matter of principle, a bid depository system does not create a duty of care by the owner in favour of the subcontractor.  This decision extends and solidifies the decision by the Supreme Court of Canada in Design Services.  In the latter case, the subcontractor was given the option to join a joint venture with the contractor.  The Supreme Court of Canada held that, in that circumstance and when the subcontractor did not take up that option, there could be no duty of care between the subcontractor and the owner.

The decision of the Newfoundland and Labrador Court of Appeal shows that the principle in Design Services is of general application.  In the absence of specific facts giving rise to a special relationship, an owner has no duty of care to a subcontractor arising from a bid depository system.

Construction Law –  Duty of Owner to Subcontractor – Tendering

 Defence Construction (1951) Limited v. Air-Tite Sheet Metal Limited, 2011 NLCA 67

Thomas G. Heintzman, O.C., Q.C.                                                                                                     October 14, 2011

www.constructionlawcanada.com
www.heintzmanadr.com

A Contractor’s Construction Errors May Be Covered By A General Liability Policy

In two recent decisions, courts in Ontario and British Columbia have held that negligence during construction (or manufacturing) may be covered by general liability policies even though the damage is part of the construction (or the product sold):
California Kitchens & Bath Ltd. v. AXA Canada Inc. and Bulldog Bag Ltd. v. AXA Pacific Insurance Company

In these decisions, the courts have followed and applied the landmark decision of the Supreme Court of Canada in Progressive Homes Ltd. v Lombard General Insurance Company of Canada, [2010] 2 S.C.R. 245.  The Progressive Homes decision was discussed in my blog of January 16, 2011.

In Progressive Homes, the Supreme Court of Canada rejected the long-standing position of insurers that the claims by owners arising from the negligence in construction by contractors may not be covered by CGL insurance.

The insurance industry asserted that general liability insurance is not designed to be a performance bond and that if contractors wished to be insured against claims by owners for their own negligence during construction, then that would convert the insurance into a performance bond.

‘Plain Meaning’ In a CGL Policy Defined by Supreme Court

The Supreme Court looked at the plain meaning of the words in a CGL policy and held that, as long as the damages arose from an accident or other non-intended event, then the plain meaning of the policy applied, whether or not the damages arose from the contractor’s negligence and even though the damage was to part of the building constructed by the contractor.  The Supreme Court held that the insured was arguably covered by the policy, and therefore, Lombard had a duty to defend the contractor.

These principles have now been applied by the Ontario Superior Court in California Kitchens with respect to the duty to defend, and by the British Columbia Court of Appeal in Bulldog Bag with respect to the duty to indemnify.  In both cases, the courts were dealing with general liability policies issued by the AXA group of insurers.

In California Kitchens, the contractor was sued by a homeowner in respect of the mis-design and installation by the contractor of a kitchen in the plaintiff’s home.  The contractor asserted that AXA was obliged to defend it under a general liability policy.  The policy provided insurance for bodily injury and property damage.  ‘Occurrence” was defined to mean an “accident”.  The policy contained exclusions for the Named Insured’s work and for loss incurred by the Named Insured for the repair, replacement etc. of the Named Insured’s work because of known or suspected defects or deficiencies.

AXA argued that the policy did not include the defective design of the kitchen by the contractor, or otherwise the policy would become a performance bond.  This was the standard argument of CGL insurers before the Lombard decision.

The court held that the plaintiff’s claim for loss of use of the plaintiff’s home while the kitchen was being repaired was property damage under the policy.  The court rejected AXA’s argument that the claim was really a contract claim and was therefore not covered by the policy.

The Court said:

“If this argument prevailed, it would eliminate virtually all coverage.  What work is not performed pursuant to a contract?  It is the negligence in the performance of the work by California Kitchens that is the true nature of the claim.  There is no claim in contract in the pleading and no basis for questioning the true nature of the claim.”

The court also held that the “Named Insured’s work” exclusion did not apply because the claim asserted that the deficient work was performed by sub-contractors, not the Named Insured, the contractor.

In Bulldog Bag, Bulldog Bag sold bags to its customer Sure-Gro.  Sure-Gro used the bags to supply bagged soil to Canadian Tire.  The bags were printed by a printer for Bulldog.  Because of the defective printing, the printing became illegible.  Bulldog Bag compensated Sur-Gro for the cost of retrieving and re-bagging the soil being sold to Canadian Tire, and made a claim on its CGL policy for this loss.  Bulldog Bag did not make a claim for the cost of replacing its own bags.

The policy defined “Occurrence” as meaning “… property damage neither expected nor intended by the Insured”, which is a similar definition to “accidental” in the California Kitchens case.

The exclusions included property damage to “goods or products manufactured or sold by the Insured”; or “work done by or on behalf of the Insured where the cause of the occurrence is a defect in such work, but this exclusion shall only apply to that part of such work that is defective”:   or loss of use of property that had not been physically injured or destroyed resulting from “a delay in or lack of performance by or on behalf of the Insured of any contract or agreement.”

The reasoning in the Progressive Homes case

The B.C. Court of Appeal applied the reasoning in Progressive Homes and held that there was coverage for Bulldog Bag’s claim and that the exclusions did not apply.  The court started with AXA’s concession that Bulldog Bag’s claim arose from “property damage” because Bulldog’s bags had been ‘injured’ by the faulty printing and Sure-Gro lost the use of them.  AXA also conceded that the faulty workmanship that resulted in the defective bags qualified as an “accident” or “occurrence” within the meaning of the policy.

However, AXA asserted that the costs of removing the soil from the defective packaging and disposing of that packaging fell within the exclusions in the policy.  It further asserted that the decision in Progressive Homes had not altered the basic nature of CGL policies, which did not include the costs arising from repairing or replacing the insured’s defective work and products.

The Appeal Court’s Decision

The Court of Appeal rejected AXA’s submissions. The Court held that the exceptions in the policy barred a claim for damage to Bulldog Bag’s own bags.  (In light of the California Kitchen case, one may question this conclusion since the damage was caused by Bulldog Bag’s sub-contractor, the printer, and not by Bulldog Bag itself).  However, the court held that the exclusions  did not bar a claim for compensation for the costs which Sure-Gro incurred in separating those bags from its products, repackaging the product in different bags, and salvaging the “old” product some months later.

The Court further held that, in any event, and even before Progressive Homes, the “own product” exclusion did not apply to loss incurred by the insured’s customer as a result of defects in the insured’s own product.  In addition, the Court held that the “own work and product” exception in this policy did not apply to resulting damage, but only to property damage to the goods supplied by the insured.

Progressive Homes Has Had a Profound Impact on General Liability Policies

These two decisions are the first evidence of the profound impact on general liability policies of the Progressive Homes decision of the Supreme Court of Canada.  The Supreme court’s decision has meant that the initial coverage of those policies will be read broadly, and may  possibly include damage from one part of a building or product to another, and damage arising from the insured’s fault.  As the decision in California Kitchens shows, those possibilities are very significant, and almost determinative, when it comes to the duty to defend since all the insured must show is the possibility that the claim falls within the policy.

The impact of the decision in Progressive Homes on the coverage for indemnity may be even more significant, as the Bullfrog Bag decision demonstrates.  By widening the potential interpretation of coverage, and narrowing the potential interpretation of the exceptions, the burden on the insurer is substantially increased.  As the drafter of the policy, the insurer will face the contra proferentem rule so far as initial coverage is concerned.  And if it relies on the exceptions, then the rule that exceptions must be narrowly construed will apply.

Once the Supreme Court held that CGL policies could apply to a contractor’s own negligence and could apply to damage from one part of a building or product to another, the whole ambit of a CGL policy was substantially clarified to the benefit of the insured.

Insurance policy – Contracts – Duty to Defend – Duty to Indemnify – Construction Law

California Kitchens & Bath Ltd. v. AXA Canada Inc., 2010 ONSC 6125;
Bulldog Bag Ltd. v. AXA Pacific Insurance Company, 2011 BCCA 178

Thomas G. Heintzman O.C., Q.C.                                                                                              October 6, 2011

www.heintzmanadr.com
www.constructionlawcanada.com

When Is An Arbitration Award An Enforceable Judgment?

When you enter into an arbitration agreement, do you think about whether the arbitration process results in an enforceable judgment?  You should.

The award that you receive at the end of the arbitration process isn’t a judgment and can’t be immediately enforced as a judgment.  That is what the U.K. Court of Appeal recently held in Mobile Telesystems Finance SA v Nomihold Securities Inc.

Nomihold obtained an arbitration award in London, U.K. which Mobile Telesystems (MTSF) did not appeal or otherwise challenge.  Without notifying MTFS, Nomihold then applied to the English court to enforce the award, and was granted an order enforcing the award, subject to MTFS’ right to bring a motion to set aside that order (the “initial order”).  In effect, Nomihold was granted a provisional judgment, but subject to it being set aside.  MTFS in fact brought such a motion, seeking to set aside the initial order.

The Freezing Order:  A Mareva Injunction

The initial order also contained an order freezing MTFS’ assets pending the disposition of  MTFS’s motion to set aside the order.  Consistent with the normal practice, the freezing order stated that it did not apply to transactions carried on by MTFS in the ordinary course of business. The freezing order that the court granted Nomihold was in the nature of what the English courts call a Mareva injunction.

A Mareva injunction may be issued by a court before judgment to restrain a defendant from dissipating its assets. However, a Mareva injunction is an extraordinary remedy and only granted when there is some real fear that the defendant is about to purposefully denude itself of assets to avoid paying any judgment which the plaintiff might obtain.

Previously, MTFS had issued $400 million in Notes which required it to make half yearly interest payments to the noteholders.  If the “ordinary course” exception was removed, then MTFS could not make those interest payments and would be in default to the noteholders.

After the initial order, a further order was granted removing the “ordinary course” exception. MTFS appealed the order removing the “ordinary course” exception.  In deciding whether the “ordinary course” exception was properly removed, the Court of Appeal was obliged to consider the effect of the arbitration award, and in particular whether it was a “judgment.”

Was The Arbitral Award A Judgment Or Not?

If the arbitral award was not a judgment, and if a judgment would only come into being after the motion to set aside the initial order was determined, then that initial order was in the nature of a pre-judgment order which, according to the usual practice, should not interfere with the defendant carrying on its normal business.

If, however, the arbitration award was effectively a judgment, then the initial order was more like an order enforcing a judgment, in which case the plaintiff was entitled to use the court’s enforcement process to execute upon the judgment, and the defendant was no longer entitled to delay payment of the claim of Nomihold.

The Arbitral Award Was Not A Judgment

The Court of Appeal held that the arbitration award was not a judgment and that therefore the lower court judge was wrong to treat that award or the initial order as a judgment and remove the “ordinary course” exception on that basis.  The Court of Appeal said:

“The circumstance that Nomihold has in its favour an unchallenged award does not in my view mean that MTSF should for all purposes be treated as a judgment debtor.  If there is a judgment of the court…it is not presently enforceable……[F]or present purposes the touchstone is enforcement or perhaps the availability of enforcement….[W]hilst the freezing order can be said to be granted in aid of execution it cannot currently be said to be a remedy designed to effect execution, since execution is unavailable.  In any event that is not the nature of a freezing order. It remains a freezing order designed to prevent the dissipation of assets with the object or effect of denying Nomihold satisfaction of its contractual claim.”

The Court of Appeal also stated that, whether or not an arbitration award should be treated as a judgment for other purposes, it should not permit the party holding that award to use that award to prevent other creditors of the respondent from being paid in the ordinary course, until the award was fully converted into a judgment of the court:

“Thus both as a matter of principle and on authority it seems to me that a freezing order granted in aid of enforcement of an arbitration award ought ordinarily to contain an ordinary course of business exception. There is no basis upon which one contractual claimant should be able to prevent the satisfaction of the claims of others in a similar position. I am not satisfied that the circumstance that Nomihold is also in the sense described a judgment creditor should lead to any different conclusion.”

This decision demonstrates the difference between a judgment in a court action and an arbitral award.  The award is only enforceable as a judgment once it has been rendered into a judgment of the court.  Until then, the judgment execution process of the court is not available to the claimant.  While the court may still grant extra-ordinary injunctive relief to protect the claimant from the respondent hiding or dissipating its assets, the court will likely look at the issue in the context of a pre-judgment proceeding, not the execution of a judgment.

In most cases, obtaining a court order to enforce the arbitral award may be a simple matter.  Indeed, the modern domestic and international commercial arbitration statutes severely limit the grounds to resist the conversion of an arbitral award into a court judgment.  But in some cases, there may be costs and timing issues in obtaining the court judgment which may be crucial.

The present case reminds us that an arbitral award is not a court judgment and we should consider this distinction when deciding whether to enter into an arbitration agreement.

Arbitration – Enforcing the Award – Freezing Orders – Mareva Injunction

Mobile Telesystems Finance SA v Nomihold Securities Inc.

 

 

Mary Carter Decision Upheld By The Supreme Court Of Canada

In my article of April 2011, I reported about the decision in Aecon Buildings v. Stephenson Engineering Limited.  In that decision, the Ontario Court of Appeal stayed an owner’s claim because of the non-disclosure of a Mary Carter agreement. The Supreme Court of Canada has recently dismissed an application for leave to appeal from that decision.  Accordingly, the ruling by the Court of Appeal will stand as good law across Canada on this issue.

Background to the Supreme Court’s Decision:

The City of Brampton had been sued by Aecon.  The City then sued the consultant, blaming it for the problem giving rise to Aecon’s claim. In turn, the consultant claimed over against the sub-consultant.

Before instituting its claim against the consultant, the City had effectively settled the claim against it by Aecon.  This sort of settlement, in which the settling parties continue as parties to the action, is known as a Mary Carter agreement.  The City did not disclose to the consultant that it had previously settled with Aecon. The City proceeded with its claim over against the consultant within the context of an apparently continuing claim against it by Aecon. The settlement agreement was only disclosed when it was discovered by the consultant who then demanded that it be produced.

The Ontario Court of Appeal held that the non-disclosure of the settlement agreement was an abuse of process and stayed the City’s claim against the consultant.  As a consequence, the claim by the consultant against the sub-consultant was also stayed.

The City of Brampton sought leave to appeal to the Supreme Court of Canada from the decision of the Ontario Court of Appeal.  On June 30, 2011, the Supreme Court dismissed the application.  As is usual, the Supreme Court gave no reason for its decision.

However, this is one of the rare occasions in which the reasoning of the Supreme Court can be discerned.  That is because of a decision which the Court released on June 23, 2011:  Aecon Buildings, a Division of Aecon Construction Group Inc. v. Stephenson Engineering Limited, 2011 SCC 33.

In that decision, a panel of the Court denied a motion of the City to admit further evidence about the importance of the proposed appeal.  The City wanted that evidence before the Court due to a requirement in section 43 of the Supreme Court of Canada Act that any application for leave to appeal in a civil case must demonstrate that the proposed appeal raises a matter of public importance.

The City’s proposed evidence consisted of a number of articles written about the Court of Appeal’s decision.  In those articles, the authors spoke about the importance of that decision to the ongoing conduct of actions in which Mary Carter agreements are made.  However, the Supreme Court held that the articles did not address an issue of real importance.  It said: “Here, however, the issues are straightforward.  Must the Mary Carter-type agreement be disclosed immediately and if it isn’t what are the consequences?”

Justice Binnie answers the “importance” question:

Justice Binnie was a member of the panel and wrote the decision denying leave to admit this further evidence on the application.  He answered the “importance” question as follows:

“I think “immediate disclosure” is self-explanatory.  Its application in a particular case will be fact dependent.  Here, as stated, the applicant never did volunteer disclosure of the existence of the agreement to the parties or to the court. The Court of Appeal decided that in the circumstances a stay of proceedings was warranted.  The procedural point about how a party goes about disclosing the existence of such an agreement to the court (were they to decide to do so) is not something that raises a legal issue of public importance for this Court.”

As a further indication of the narrowness of the issue sought to be raised in its Court, the panel further observed:

“Nobody expresses any doubt that the rule stated by the Court of Appeal is consistent with its past authority, or suggests that the remedy for abuse of process was not, as a matter of law, available.”

While the panel of the Court said that “whether the rule itself raises a legal question of public importance is for the leave panel to decide,” the die had been cast in the Court’s decision on the motion to admit further evidence.  The court’s decision to dismiss the application for leave to appeal was a predictable result of the Court’s view of the narrowness and lack of importance of the issue.

As a result, the comments in my article of April 3, 2011 are now under-lined:

“This decision is a reminder of the drastic remedies available to the Courts if litigation is conducted unfairly” and the parties must be scrupulous to ensure that Mary Carter and other similar agreements affecting the conduct of litigation are immediately disclosed.

The irony, of course, is that the settlement of disputes is itself of public value, especially in the field of construction law.  Settlements allow the parties to reduce their risks and avoid the expenditure of money on litigation, and they save the public resources spent on courts.  Construction disputes frequently arise from good faith differences of opinion about the meaning of building contacts and about events during tenders and on the job site.  These differences are part of the cost of doing business and the parties owe it to themselves to make every reasonable effort to settle and not prolong their differences.

But if they do settle, then they owe a duty to the court system to disclose the settlement.  Otherwise, the justice system cannot properly function.  Since the judge has no independent power or authority to inquire into the events, the justice system depends upon the adversarial system to arrive at the just result.  If some of the apparent adversaries are no longer true adversaries, then that fact must be disclosed to the court.

Construction Law – Settlement – Agreement – Litigation – Champertous – Abuse of Process:

Aecon Buildings, A Division of Aecon Construction Group Inc. v. Stephenson Engineering Limited (SCC Judgments in Leave Applications, June 30, 2011, No. 34112)

Thomas G. Heintzman, O.C., Q.C.                                                                                                                           September 25, 2011

When Is An Arbitration An International Commercial Arbitration?

Is an arbitration between two domestic companies arising from a contract for a shipment between two foreign countries an “international commercial arbitration” for the purposes of the UNCITRAL Model Rules, particularly if the arbitral agreement requires arbitration in a foreign location?  And if it is, does the domestic court have any residual discretion to stay the arbitration and allow the court action to proceed?

Those are the important issues which the Superior court of Ontario faced in Star Tropical Import &Export Limited v. International Management Consortium Ltd.

The facts in this case raised a conflict between the court’s sense of fairness, and the rigidity and almost total absence of discretion in the Model Rules.  How should a court resolve this conflict?

The two agreements in question were made in Canada between two companies carrying on business in Ontario. The agreements provided for the receipt of sugar in Brazil and the delivery of the sugar in Ghana.  The first contract dated November 2006 required all disputes to be settled in Paris or Zurich by arbitration under ICC Rules. The second agreement dated April 2007 stated that it replaced the first agreement and provided for arbitration under the “Refined Sugar Association” rules.  Those rules stated that disputes were to be resolved by arbitration to be held in London, U.K.

Problems with the performance of these contracts ensued.  In October 2007, Star Tropical commenced an action in Ontario against International Project and one of its officers.  In November 2007, International Project wrote to Star Tropical stating its position that the dispute must be resolved by arbitration.  But International Project took no steps to commence arbitration, and delivered no Statement of Defence in the Ontario action.  It consented to several orders reviving the Ontario action when it was struck out for the failure of the parties to advance it.

In November 2010, three years after the action was commenced with no Statement of Defence having been delivered, International Project brought a motion to stay the Ontario action on the basis that the dispute was required to be resolved by arbitration.  In its motion, International Project relied upon the stay provisions of Ontario’s domestic Arbitration Act, 1991.  It did not rely on the Ontario International Commercial Arbitrations Act (ICAA) which incorporates the UNCITRAL Model Rules.

Article 1(3) of the UNCITRAL Model Law states that an arbitration is “international” if:

(a)     at the time of the conclusion of the agreement, the parties had their places of business in different states: or

(b)(i)  the place of arbitration determined in or pursuant to the agreement is outside the    state in which the parties have their places of business; or

(b)(ii)   the place where a substantial part of the commercial relationship is to be performed, or in which the subject matter of the dispute is most closely connected, is a place outside the state in which the parties have their places of business; or

(c)   the parties have agreed that the subject matter of the agreement relates to more than    one country.

The Master of the Ontario Superior Court noted that section 2(3) of ICAA states that, despite Article 1(3) (c) of the Model Code, an arbitration conducted in Ontario between parties having their place of business in Ontario is not international only because the parties have expressly agreed that the subject matter of the agreement relates to more than one country.   While the Master said that section 2(3) helped to answer the question before the court, he did not say how that subsection could apply to the provisions of Article 1(3) other than clause (c).

The court concluded that the agreements did not give rise to “international commercial arbitrations” to which the ICAA and the Model Law applied.  The reasons for so concluding are not entirely clear.  The court appears to have decided that Article 1(3) (a) did not apply since the parties were Ontario corporations.  The Ontario court was clearly concerned about sending two parties off to arbitrate in Europe when they were both located right in Ontario.  However, Article 1(3) (b) (i) apparently applied to the facts because the state where the arbitration was to be held (France or Switzerland, or the U.K. if the second agreement applied) was not the state where the parties carried on business (Ontario or Canada).

This result could be avoided if the court were to hold that, by repeatedly using the plural word “places” in the expression “places of business” in Article 1(3), the Model Rules only intended an arbitration to be “international” if the parties are located in different states.  This conclusion does not seem appropriate since Article 1)3)(a) deals specifically with that situation and therefore the disjunctive provisions of Article 1(3)(b) and (c)  are logically not restricted to that situation.

The court did not expressly address Article 1(3(b)(ii) which also apparently applied.  The receipt (in Brazil) or delivery (in Ghana) of the sugar seems to have been substantial parts of the commercial relationship between the parties.  The states where those activities were to occur were not states in which the parties carried on their business (Ontario, Canada).  Perhaps the court considered that, since there were two places of performance, neither place predominated.  However, Article 1(3) (b) (ii) says “a substantial part of the obligation” not “the substantial part”.  Thus, an agreement may be substantially performed in several places, only one of which need be different than the parties’ place of business.

The court may also have applied a principle analogous to the forum non conveniens rule that the plaintiff’s choice of forum should prevail unless there is some other clearly preferable forum.  But Article 1(3) does not contain that principle.

The court dismissed the application to stay.  In doing so, the court applied the Ontario Arbitration Act, 1991, not the ICAA.  Section 7(2) of the Ontario domestic arbitration statute gives the court a much broader discretion to dismiss the stay motion than does the ICAA, most particularly if the motion is brought with undue delay. That particular ground is not found in the ICAA.

The motion to stay was dismissed for three reasons:

First, the motion to stay was only brought under the domestic Act, not the ICAA.   While the Master himself raised the issue of the ICAA, he appears to have been satisfied, either that the ICAA did not apply due to the factors referred to above, or that since the motion was not brought under the ICAA then he was not obliged to apply that statute.  If so, then his decision will not be applicable in the next case if the stay motion is brought under the ICAA.

Second, the delay of International Project to proceed with the arbitration disentitled it to rely upon the refined sugar association rules and to a stay under section 7(2) of the Ontario Arbitration Act, 1991.  A real question is whether this issue of delay should have been dealt with by the arbitral tribunal or the court.

Third, Star Tropical’s claim against the officer of Project International could not be arbitrated.

The Master held that the claim against International Project and the claim against its officer should be heard together by the same tribunal.  Under section 7(5) of the Ontario Act, the court had discretion to allow the two claims to be heard together by dismissing the stay motion.

This third reason is problematic for a number of reasons.  It seems to provide an open invitation to a party to an arbitration agreement to include an officer of the other party as a defendant in an action, in order to avoid arbitration.  The ICAA does not provide an exception to its rules of mandatory arbitration in relation to this circumstance.

This decision represents a classic conflict between the court’s perception of fairness and the strict provisions of the Model Rules.  The Model Rules were expressly drafted to stipulate the specific rules under which an international commercial arbitration is to proceed.  If a motion to stay the action is brought before or at the time of the delivery of the Statement of Defence in the action, then Article 8 of the Model Rules requires the Court to stay the action unless the arbitral agreement is null and void, inoperative or incapable of being performed. As long as the stay motion is brought no later than the deliver of the Statement of Defence, then delay and even egregious delay in advancing the arbitration or bringing the stay motion is not mentioned in the Model Rules as a ground upon which the court can decline to stay the action and force the parties to proceed by way of arbitration.  Nor is the expense and delay of two domestic corporations being forced to arbitrate their dispute in a distant country. These omissions may seem illogical and unfair, but they appear to follow from the Model Rules and, now in Ontario, from the ICAA.

In these circumstances, it is difficult to see how the court can avoid the Model Rules by adopting a discretionary approach to the stay motion.  If the delay in seeking arbitration is to be a factor, that factor is one to be applied by the arbitral tribunal.  The arbitral tribunal can consider the delay and either accept jurisdiction if it decides that it should do so, or dismiss or stay the arbitration and send the dispute back to the court system.  Pursuant to Article 8(2) of the Model Rules, the court can allow this process to unfold by staying the stay motion pending a hearing before the arbitral tribunal.  The primary role of the arbitral tribunal in this situation is consistent with the competence-competence principle now applied by Canadian courts.

In the alternative, the court might apply its own procedural law to the stay motion, found in Ontario in the Courts of Justice Act and the Rules of Civil Procedure.  Both that Act and those Rules contain specific prohibitions against undue delay and in favour of expedition.  If the court were to apply those rules on a motion to stay, then the issue would be:  which should prevail, the ICAA and the Model Rules, or the Courts of Justice Act and the Rules of Civil Procedure?  That is an issue which was not addressed in this case.

Arbitration –  International Commercial Arbitration  –  Stay –  Competence-Competence

Star Tropical Import & Export Limited v. International Management Consortium Ltd., 2011 ONSC 4005 (CanLII)

Thomas G. Heintzman, O.C., Q.C.                                                                   September 18, 2011

www.heintzmanadr.com
www.constructionlawcanada.com

Can An Arbitrator Determine The Rights Of Non-Parties?

The Alberta Court of Appeal recently considered an arbitration award in which the arbitrator had decided the rights of non parties to the arbitration.  In MJS Recycling Inc. v. Shane Homes Limited, the Court held that the arbitrator had no authority to determine the rights of non-parties. The court set aside the award and remitted the matter back to the arbitrator for a determination in accordance with the court’s decision.  The process and logic applied by the Court provides a useful precedent for considering the powers of arbitrators and the courts when the rights of non parties are affected by an arbitral decision.

Shane was one of a number of builders that owned shares in MJS. MJS bought all of the shares in MJS owned by the builders. One of the elements of the purchase price was the builders’ agreement to use MJS for certain percentages of their waste management disposals for five years.

The share purchase agreement provided for arbitration of any disputes pursuant to the Arbitration Act of Alberta and stated that the arbitrator’s decision was final and binding and that there was no appeal on a matter of law or otherwise.

MJS alleged that Shane had failed to purchase the required amount of waste management contracts from MJS.  MJS stopped making payments to Shane under the share purchase agreement and commenced arbitration proceedings against Shane. Neither MJS nor Shane attempted to make the other builders parties to the arbitration.

The arbitrator held that, due to Shane’s failure to purchase the required percentage of waste management contracts, MJS was entitled to stop payments to all the builders and no longer owed monies to any of the builders. The arbitrator also held that MJS’s sole right was to be discharged from liability to all the builders and that MJS had no right to damages against Shane alone.

MJS brought an application to review the award. The Alberta Queen’s Bench judge held that the arbitrator had acted beyond his jurisdiction by making an award involving the rights of the non-party builders, but declined to grant any relief due to the “final and binding” and “no appeal” provisions of the share purchase agreement.

The Alberta Court of Appeal agreed that the arbitrator had acted without jurisdiction in rendering a decision which affected the rights of the non-party builders.  The Court of Appeal disagreed with the lower court’s view about the appropriate result of that finding, and held that the “final and binding” and “no appeal” provisions of the share purchase agreement did not preclude the court from setting aside the award based on jurisdictional error under section 45 of the Arbitration Act of Alberta, particularly since that section is excluded from those sections of that Act that the parties may contract out of. Once jurisdictional error was found, it followed that the court had power to set aside the award.  As the Court of Appeal said:

“It is difficult to conceive of any proper basis for allowing an award to stand that is beyond the scope of the arbitration agreement which is the foundation of an arbitrator’s jurisdiction.”

Having held that the arbitrator had acted without jurisdiction, the Court of Appeal held that (absent, presumably, disqualifying conduct of the applicant) the court was virtually obliged to grant MJS the appropriate remedy, which was to set the award aside and remit the matter to the arbitrator under section 45(8) of the Arbitration Act.  Remittal of the matter to the arbitrator was the appropriate order since the arbitrator had acted in excess of his jurisdiction which he admittedly had.  It would obviously not have been the appropriate court order if the arbitrator had no jurisdiction at all.

The way in which the Court of Appeal stated its decision to remit is interesting.  It did not tell the arbitrator how to make its award against Shane.  Rather, it stated its anticipation of the appropriate conduct of the arbitrator:

“In these circumstances, we are of the view that the matter should be remitted to the arbitrator so that he can craft a revised award within the scope of his powers. Specifically, we anticipate that his new award will reflect that MJS is only not responsible for payment to Shane …not to the other members of the Builders’ Group…..

Finally, we wish to make it clear that in remitting the matter to the arbitrator we do not intend to tie his hands with respect to the award to be made against Shane in this arbitration. We observe that his award was expressly made “subject to the Orders” therein which we have ruled exceeded his jurisdiction. It may well be that he will now see fit to grant other or further damages payable by Shane, or to grant other equitable relief, as a result of its breach.  The parties agreed to submit their dispute to arbitration and provided that the new award is within the arbitrator’s jurisdiction, we are inclined to the view of the chambers judge that they should “live with it.”

The Court of Appeal concluded its decision by remarking that, while one arbitration proceeding would have been preferable, MJS and Shane had not included the other builders in the arbitration.  Accordingly, any dispute between MJS and the other builders would have to be dealt with in a separate arbitration.

This is an important decision, not only in relation to the authority of arbitrators, but also the authority of the courts.  It reminds us that:

1.   A “no appeal” and “final and binding” clause in an arbitration agreement does not in any way apply to or affect the court’s jurisdiction to grant judicial review of an arbitration award on jurisdictional grounds;

2.    (Absent specific authority to do so) an arbitrator has no power to affect the rights of non-parties; and

3.   Once a court finds that the arbitrator has made a jurisdictional error, the court must grant an effective remedy, to set aside the award, and (if the arbitrator has authority) remit the matter to the arbitrator in accordance with the court’s decision.

Arbitration –  Non-parties  –  Setting aside award:

MJS Recycling Inc. v. Shane Homes Limited,2011 ABCA 221

Thomas G. Heintzman, O.C., Q.C.                                                                       September 11, 2011

www.heintzmanadr.com
www.constructionlawcanada.com