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

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

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

Background

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

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

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

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

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

The Saskatchewan Court of Appeal’s decision

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Discussion

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

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

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

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

Arbitration – Multiplicity of proceedings – Staying court action or arbitration

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

www.heintzmanadr.com

www.constructionlawcanada.com

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

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

The Extras/Changed Circumstances clause

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

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

The contractor’s dealings with the engineer:

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

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

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

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

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

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

Reasons of the Ontario Court of Appeal

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

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

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

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

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

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

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

Discussion

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Divisional Court dismissed this argument as follows:

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

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

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

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

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

www.heintzmanadr.com

www.constructionlawcanada.com

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

Should The Interpretation Of A Standard Form Contract Be Reviewed According To A Standard Of Legal Correctness?

Construction and builders liens

In its decision in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, the Supreme Court of Canada held that the interpretation of a contract should have regard to the facts surrounding the making of the contract. For this reason, the review by a court of an arbitrator‘s decision interpreting the contract should not proceed on the basis that it involves a question of law alone. Rather, the decision must be reviewed on the basis that it involves a question of mixed fact and law.

However, this approach has recently been called into question in the case of standard form contracts. In three decisions, the Ontario Court of Appeal has held that a review of a decision interpreting a standard form contract involves a question of law, not a question of mixed fact and law: MacDonald v. Chicago Title Insurance Company of Canada, 2015 ONCA 842; Monk v. Farmer’s Mutual Insurance Company (Lindsay), 2015 ONCA 911; Daverne v. John Switzer Fuels, 2015, ONCA 919. In Ross-Clair v. Canada (Attorney General), 2016 CarswellOnt 3854, 2016 ONCA 205, 265 A.C.W.S. (3d) 289, the Court of Appeal also applied the legal correctness standard, and while it acknowledged that it could do so if the contract in question was a standard form contract, it preferred to apply that standard for reasons related to the Superior Court judge’s failure to consider the whole contract.

In MacDonald, the Ontario Court of Appeal explained why a standard of legal correctness should be applied to the review of a decision interpreting a standard form contract:

  1. The parties do not negotiate standard form contracts. Accordingly, a search for the intention of the parties in the surrounding circumstances is “illusory”, or a “mere legal fiction”.
  2. The interpretation of a standard form contract is significant to more than the immediate parties to the contract. The interpretation is important to all persons who are using that standard form. It is “untenable” for the contract to have one meaning for one set of parties who use it and another meaning for another set.
  3. The precedential value of a decision interpreting the contract is also of importance to all persons using the same standard form. Conversely, it is unacceptable for the contract to be given one interpretation by one judge or arbitrator and another interpretation by another judge or arbitrator.

The decisions in Monk, Daverne and Ross-Clair referred to the MacDonald decision.

In another earlier decision, however, the Ontario Court of Appeal held, applying Sattva, that the interpretation of an insurance contract is a matter of mixed fact and law: OSPCA v. Sovereign General Insurance Company, 2015 ONCA 702. That approach has been followed by the Quebec Court of Appeal with respect to the interpretation of a CGL insurance policy, relying on both the Sattva and OSPCA decisions.

Discussion

Each of these four cases involved, first, a decision by a Superior Court Judge interpreting an insurance contract (or in Ross-Clair, a construction contract with the federal government), and then a decision of the Court of Appeal reviewing that lower court decision. It is noteworthy that in OSPCA, in which a “mixed fact and law” approach was applied, the Court of Appeal dismissed the appeal. In Macdonald, Monk, Daverne and Ross-Clair, where the stricter “matter of law” approach was applied, the Court of Appeal reversed the lower court decision. In the reasons in the last four cases, the prior OSPCA decision was not referred to. One could conclude that the different approach was material in arriving at the different conclusions in these cases.

The Monk case involved an issue that is of considerable interest to the building industry. The question was whether the “faulty material or workmanship” exclusion in an owner’s insurance policy excluded, not just the cost of making good the faulty material or workmanship of the contractor doing work on the owner’s building, but also the damages resulting from that faulty material or workmanship. This distinction between “faulty material or workmanship” itself, and “resulting damage”, is a recurring issue under the Builders’ Risk policies used in the construction industry. Interesting, in Monk, the Superior Court judge held that the resulting damage was excluded by the faulty material or workmanship exclusion, while the Court of Appeal held that it was not.

The Ross-Clair decision involved a construction contract with the federal government. The Superior Court judge held that the contractor had submitted a proper claim for extras which was required to be considered by the engineer. The Court of Appeal reversed, holding that the contractor’s claim was invalid because it did not provide sufficient particulars.

It would seem that the approach of the Ontario Court of Appeal in these last four cases has broad application to contracts in the building industry. Thus the CCDC contracts which are often used between owners and contracts appear to fall within the sort of standard form contracts that the Court of Appeal was discussing.

Whether these decisions establish new rules of contract interpretation and court review remains to be seen. If they do, then, there will be two separate sets of rules: one applicable to negotiated contracts, and the other applicable to standard form contracts. Whether this is a good idea will have to be addressed by the courts in the future.

On the other hand, it may be that, since the contracts were in a standard form and there were no negotiations or other relevant surrounding circumstances, these cases involved the exception to the normal “mixed fact and law” approach to the interpretations of contracts, namely that the interpretation involves an “extricable question of law”. In Sattva, the Supreme Court of Canada held that if such an “extricable question of law” does arise from the initial decision, then the interpretation of the contract, and the review by a court, is strictly a matter of law, and not a matter of mixed fact and law. If so, then these Ontario Court of Appeal decisions do not create a new rule applicable to standard form contracts. Rather, standard form contracts fit under the Sattva decision. However, while the Court of Appeal in MacDonald referred to the “extricable question of law” exception contained in Sattva, it did not base its decision on it. Nor did the Court of Appeal in the other cases adopt that approach.

Another possibility is that the Sattva decision applies to the review of arbitral decisions and these Ontario Court of Appeal decisions apply to the review of lower court decisions. In MacDonald, the Court of Appeal alluded to that distinction but considered that, nevertheless, the guidance in Sattva “must be heeded”. And in the OSPCA decision, the court expressly applied Sattva to the review of lower court decision interpreting a contract.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapters 2 part 3, 11 part 11 and 14 part 3(b)(ii)

Interpretation of contracts –Review of decisions interpreting contracts –insurance– standard form contracts

Thomas G. Heintzman O.C., Q.C., FCIArb                               June 12, 2016

www.heintzmanadr.com

www.constructionlawcanada.com

 

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

Unlicensed Architect Cannot File A Legal Hypothec: Quebec Court of Appeal

In Urbacon Architecture inc. c. Urbacon Buildings Group Corp., the Quebec Court of Appeal has recently held that an architectural firm that was unlicensed in the Province of Quebec is not entitled to file a legal hypothec, the Quebec law equivalent of a construction or builders lien. The court so found notwithstanding the cross-Canada reciprocal arrangements that allow architectural firms from one province to become licenced in another. It so held because the architectural firm, which was registered in Ontario, had not taken the steps to become licensed in Quebec. This decision raises issues about the status of the unlicensed architects and other professions under the construction and lien legislation in other provinces or under building contracts generally.

Background  

Urbacon Architecture was an architectural firm that was licensed to practice architecture in Ontario. It did not employ any Quebec architects but its sole shareholder had been licensed in Quebec between 1968 and 1984.

Urbacon Buildings entered into a contract with Bell Canada for the design and construction of a building. The principal of Urbacon Buildings was the son of the principal of Urbacon Architecture. Originally the building was to be built in the Ottawa region, but finally the building was built in Gatineau, Quebec. That building contract stipulated that Urbacon Architecture would be the consultant.

In the preliminary stages of the project, Urbacon Architecture prepared architectural, structural, electrical and mechanical drawings. The drawings were then approved by architectural and engineering firms in the province of Quebec.

Due to its dis-satisfaction with the work that had been done, Urbacon Buildings terminated its dealings with Urbacon Architecture. Urbacon Architecture demanded payment for its work from Bell Canada, and when it was not paid it filed a legal hypothec in the province of Quebec. Urbacon Buildings applied to the Quebec Superior Court for an order setting aside the legal hypothec and that order was granted. The Court of Appeal upheld that decision.

Articles 2724 (2) and 2726 of the Quebec Civil Code

Articles 2724(2) and 2726 of the Quebec Civil Code read as follows:

  1. 2724. Only the following claims may give rise to a legal hypothec:

(2) claims of persons having taken part in the construction or renovation of an immovable;

  1. 2726. A legal hypothec in favour of the persons having taken part in the construction or renovation of an immovable may not charge any other immovable. It exists only in favour of the architect, engineer, supplier of materials, workman and contractor or subcontractor in proportion to the work requested by the owner of the immovable, or to the materials or services supplied or prepared by them for the work. It is not necessary to publish a legal hypothec for it to exist.

In the application of these articles, Urbacon Architecture argued that the court should have regard to the reciprocity agreement between the architectural profession in Quebec and those in other provinces of Canada, known as the l’Accord sur le commerce intérieur and the l’Accord de commerce et de coopération entre le Québec et l’Ontario.

Decision of the Quebec Court of Appeal

The Court of Appeal held that the statutory regulation of the architectural profession in Quebec is for the protection of the public and a matter of public order. Articles 2724 and 2726 contain extraordinary protections for architects and others to recover their fees and other amounts due to them in respect of a building project. Accordingly, those articles should be strictly interpreted. If unregistered firms could use those provisions to recover their fees, then the protection of the public would be undermined. For these reasons, the word “architect” in Article 2726 should be interpreted to refer only to a firm that is registered as an architectural firm in Quebec.

The court did not accept the argument of Urbacon Architecture based upon the interprovincial accords between the architectural professions in Canada. The court did not agree that the licensing of a non-Quebec firm under those accords was simply an “administrative” formality.” Rather, having failed to register as an architectural firm in Quebec, Urbacon Architecture, and any other non-Quebec firm that did not become licenced in the province of Quebec, was simply not entitled to the benefits accorded to the architectural profession in Quebec, including Articles 2724 and 2726.

Discussion

Two aspect of this decision are notable.

First, in its decision the Court of Appeal did not refer to two more recent decisions of the Supreme Court of Canada dealing with the issue of illegality of contracts. The most recent Supreme Court decision that the Court of Appeal considered was the 2001 decision in Fortin v. Chretien. Since then, the Supreme Court has decided KRG Insurance Brokers (Western) Inc. v. Shafron, [2009] 1 S.C.R. 157 and Transport North American Express Inc. v. New Solutions Financial Corp., [2004] 1S.C.R. 249. In those decisions, the Supreme Court has tended to alleviate against the harshness of the traditional doctrine of illegality of contracts. Presumably, the Quebec Court of Appeal considered that those cases from common law provinces did not affect its interpretation of articles of the Quebec Civil Code or the particular amendments to the statutes relating to building contracts and legal hypothecs in Quebec.

Perhaps, also, the Court of Appeal was of the view that the present case did not deal with the alleged illegality of a contract –but rather the alleged unenforceability of a statutory right or privilege. But the Court of Appeal did refer to and rely upon Fortin v. Chretien, which was concerned with the alleged illegality of a contract made by a non-licensed person (a former lawyer). The Court of Appeal did not analyze the exact inter-relationship, if any, between the doctrine of illegality of contracts, and the unenforceability of statutory rights and privileges.

Second, one wonders about the limits and application of this decision. Will it be applied to construction and builders lien statutes outside Quebec, so as to invalidate liens filed by professionals, or indeed any firm, that are not properly licensed in the applicable province? Could it have an effect upon building contracts, so that if a professional firm is not registered in the applicable province, then its functions as “architect” or “engineer” under a contract will be invalidated if the firm is not properly registered?

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 1, part 3(c) and chapter 16, part 4(a)(i()II.

Urbacon Architecture inc. c. Urbacon Buildings Group Corp., 2016 CarswellQue 2972, 2016 QCCA 620

Building contracts –legal hypothecs, and construction and builders liens –illegality

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

www.heintzmanadr.com

www.constructionlawcanada.com

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

 

Ontario Court Of Appeal Upholds Decision In Popack v. Lipszyc Re: UNICTRAL Model Law

In my article on April 24, 2016, I commented upon the important decision of the Ontario Superior Court in Popack v. Lipszyc, 2015 CarswellOnt 8001, 2015 ONSC 3460. That decision has been recently upheld by the Ontario Court of Appeal.

The Court of Appeal did not address the various legal issues dealt with in my article on April 24, 2016. Rather, the Court of Appeal decided the appeal by reviewing the Superior Court’s discretion to set aside the arbitral award. The Court of Appeal held as follows:

  1. The Superior Court has a discretion, not a duty, to set aside an arbitral award if the award contravenes the UNCITRAL Model Law or the Ontario International Commercial Arbitration Act (ICAA).
  1. In exercising this discretion, there is no bright line test to determine whether an arbitral award should or should not be set aside.
  1. In exercising her discretion, the Superior Court judge was entitled to take into account the conduct of the parties and the effect of setting aside the award. In her decision, the Superior Court judge considered: that the party now complaining to the court about the award corresponded with the arbitral tribunal during its deliberations, without telling the other party, and did not expressly object to the tribunal undertaking activity of which it now complained; and the fact that a witness had died since the arbitration hearing and would not be available for a re-hearing if the arbitral award was set aside. The Court of Appeal held that the Superior Court judge was entitled to consider those matters in exercising her discretion.
  1. The Superior Court judge was not obliged to put the complaining parties’ arguments, or these other factors, into separate compartments relating to each Article of the Model Law relied upon by the applicant. Rather, the court was entitled to look at the matter from an overall perspective. The Court of Appeal said:

“I do not see how the outcome of that balancing exercise can depend on the specific label placed on the procedural error giving rise to the Article 34(2) complaint. For example, characterizing the procedural failure as a breach of Ontario “public policy” if it could be so characterized, would not, in my view, automatically make the breach more serious or tip the scale in favour of setting aside the award. Whatever label is placed on the procedural error, and whichever subsection of Article 34(2) is invoked, the essential question remains the same — what did the procedural error do to the reliability of the result, or to the fairness, or the appearance of the fairness of the process?….The application judge made no error in choosing not to give separate consideration to each of the provisions of Article 34 advanced on behalf of Mr. Popack.” (emphasis added)

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 11, parts 3(d), 6 and 11(b).

Popack v. Lipszyc, 2016 CarswellOnt 2243, 2016 ONCA 135

Arbitration – International Commercial Arbitration – review of arbitral award – discretion to set aside an arbitral award

Thomas G. Heintzman O.C., Q.C., FCIArb                                     May 18, 2016

www.constructionlawcanada.com

www.heintzmanadr.com

General Lien Provision Inapplicable If Main Contract So Provides: Ontario Court Of Appeal

A construction and builders lien claimant may, in some circumstances, file a general lien. The general lien allows the claimant to claim a lien over a number of properties to which it has supplied services or materials.

Section 20(2) of the Ontario Construction Lien Act (the Act), unlike the lien statutes in other provinces, enables the parties to contract out of the general lien provisions. But the question remains: who may contract out of those provision: the owner and the contractor with whom the owner contracts, or the contractor and a subcontractor or supplier? And if it’s the former, is that contract binding on the subcontractor or supplier?

The Ontario Court of Appeal has recently answered these questions in Yorkwest Plumbing Supply Inc. v. Nortown Plumbing (1998) Ltd.. The Court of Appeal held that the owner and general contractor may contract out of the general lien provisions, and their agreement is binding on the subcontractor or supplier.

The statutory provisions

Section 20 of the Act states as follows:

  1. (1) Where an owner enters into a single contract for improvements on more than one premises of the owner, any person supplying services or materials under that contract, or under a subcontract under that contract, may choose to have the person’s lien follow the form of the contract and be a general lien against each of those premises for the price of all services and materials the person supplied to all the premises.

(2) Subsection (1) does not apply and no general lien arises under or in respect of a contract that provides in writing that liens shall arise and expire on a lot-by-lot basis.(underlining added)

The Background

Nortown entered into contracts with two owners to carry out plumbing work on houses being built on subdivisions owned by each owner. Each contract stated that liens under the Act were to arise and expire on a lot-by-lot basis. One of the contacts also stated that for the purposes of the Act, “each individual unit (lot or building) on which the Contractor performs Contract Work shall be considered as comprising a separate contract.”

Yorkwest contracted with Nortown to supply plumbing equipment to each project. The agreement was oral and that agreement did not address any matter relating to Yorkwest’s entitlement to a general lien nor did the parties have any discussions about that matter.

Yorkwest registered a general lien against each subdivision within the applicable time from its last supply of materials to each project. Yorkwest did not allocate the amount of materials it had supplied to the individual lots in the subdivisions, but rather claimed the full amount owing to it by Nortown against the remaining, unsold lots of each project.

Nortown became insolvent. The owners paid the amount of liens into court and discharged the liens, and then sought summary judgment dismissing the lien claim on the basis that Yorkwest was not entitled to a general lien because the owners’ contracts with Nortown stated that all liens were to arise and expire on a lot-by-lot basis. Both the motion judge and the Divisional court agreed with the owners, and the issue was then appealed to the Court of Appeal.

Decision of the Ontario Court of Appeal

The Court of Appeal agreed with the courts below for the following reasons:

  1. The legislative history of the sub-section (2) demonstrated that the sub-section was adopted to address problems that owners had faced in obtaining mortgage financing, due to the general lien section. The legislative history showed that the intent of the sub-section was to allow the owner, and the contractor with whom the owner contracted, to agree that the general lien provision would not apply. That intention could not be achieved unless it was that agreement, not a subcontract or supply agreement, which was the operative agreement under both sub-section (1) and (2).
  1. On a plain reading of the two sub-sections, the “contract” in s. 20(2) must be the contract between the owner and the contractor. The Court of Appeal said:

“That is because it is only that contract that can be the “single contract” referred to in s. 20(1), which allows the general lien to arise and to be applicable to each of the premises for the price of all services and materials that the lien claimant provided to all of the premises. Because s. 20(2) provides that no general lien arises “under or in respect of” the “lot-by-lot” contract with the owner of the multiple lots, no one who claims a lien under that contract or in respect of that contract can claim a general lien.”

  1. Giving effect to Yorktown’s submission would re-create the mischief that s. 20(2) was intended to address. It would allow the subcontractor or supplier to file a general lien even if the owner and contractor had opted out of the general lien provision. It would therefore force the general lien’s impact onto the remaining lots held by the owner, thereby adversely impacting the owner’s financing.
  1. It was not unfair to impose this result on subcontractors and suppliers because they were capable of using, s. 39(1)(1) of the Act to ask the owner or contractor whether their contract provides in writing that liens will arise and expire on a lot-by-lot basis.

The Court of Appeal refused to grant the alternative relief sought by Yorktown.

First, Yorktown asked that its general lien be treated as excessive liens under section 35 of the Act. The Court of Appeal said that to do so would undermine sub-section 20(2). It would allow the subcontractor to achieve the very result that the amendment was intended to prevent.

Yorktown also asked for its claim against the owners to be amended to include claims for unjust enrichment and quantum meruit. The Court of Appeal refused to permit this amendment due to the wording of section 55 of the Act. That section permits a line claimant to also make a claim for breach of contract. Yorktown made no such contract claim against the owners. Moreover, section 55 does not mention claims in unjust enrichment or quantum meruit, so that section cannot be used to join those sorts of claims in the lien action. The Act was intended to provide a summary means for dealing with lien claims, and introducing equitable claims into lien actions would not promote that objective.

Discussion

Normally, lien statutes are interpreted as having the legislative purpose of protecting lien claimants. In this case, however, the amendment to section 20 of the Ontario Act was demonstrably enacted for the protection of the owner and to facilitate financing by the owner. With that purpose in mind, an interpretation that undermined that purpose was not acceptable.

This decision also shows that, while the court will generously protect the lien claimant’s fundamental rights enshrined in the Act, it will restrictively interpret the Act at the edges so as not to interfere with the rights of other parties. Here, once the interpretation of sub-section 20(2) showed that the general lien was not available, the court was not willing to use the procedural provisions of the Act to protect the lien claimant. Since this was the first time that the court had considered whether subcontractors and suppliers had to agree to a waiver of the general lien provision, the court might have, on a one-time basis, allowed the liens to be treated as excessive liens. But the court was not willing to make that accommodation.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 16, part 4(e)

Yorkwest Plumbing Supply Inc. v. Nortown Plumbing (1998) Ltd., 2016 CarswellOnt 6411, 2016 ONCA 305

Building contracts – construction and builders liens – general lien – amendment of lien claim – combining lien claim with unjust enrichment claim

Thomas G. Heintzman O.C., Q.C., FCIArb                                     May 8, 2016

www.heintzmanadr.com

www.constructionlawcanada.com

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

 

 

Can The Parties Contract Out Of The UNCITRAL Model Law?

The Model Law of the United Nations Commission on International Trade Law (UNCITRAL) applies to international commercial arbitration agreements and awards. The Model Law has been adopted in all the provinces and territories of Canada, For instance, the Model Law has been adopted in the Ontario International Commercial Arbitration Act (ICCA).

Under article 34 of the Model Law, the court of the seat of the arbitration may set aside the award of the arbitral tribunal in certain circumstances. In Popack v. Lipszyc, the Ontario Superior Court of Justice recently dealt with two questions arising under the Model Law.

First, can the parties contract out of the Model Law, and in particular article 34?

Second, does the court have a discretion to not set aside the award even if a breach of the Model Law has occurred? The court answered No to the first question and Yes to the second question, and in the exercise of its discretion declined to set aside the award.

In answering these questions, the court did not rely on any prior decisions as authoritative, so its decision appears to be a matter of first impression. Moreover, the decision on the first question appears to be contrary to another decision of the Ontario Superior Court in Noble China Inc. v. Lei (1998), 42 O.R. (3d) 69 (Ont. Gen. Div. [Commercial List]). For this reason, it is hoped that the first question will soon be considered by appellate courts in Canada.

The issues raised in this case are important due to the increasing application of the UNCITRAL Model Law in today’s shrinking commercial world. More and more construction, procurement and other business contracts involve parties from different countries. Because they do, those contracts are governed by the Model Law in those jurisdictions like Canada, which has adopted that Law. Accordingly, the parties to those contracts and their advisors must understand how the Model Law applies to arbitration under those contracts.

Background

The dispute arose between two businessmen, Mr. Popack and Mr. Lipszyc, one from Toronto and one from New York and their respective companies. Their arbitration agreement referred any dispute between them to a Rabbinical Court in New York. That Rabbinical Court, and in particular a Rabbi Schwei, dealt with the dispute for a while. Then, as a result of various events, the parties agreed that the dispute would be dealt with by a second Rabbinical Court in New York (the Arbitral Tribunal).

The arbitral agreement under which the second Rabbinical court was appointed stated that: the arbitrators did not need to explain to anyone the reasons for their decision; the decision of the Arbitral Tribunal was not open for appeal either in any religious court or any secular court; and the arbitrators had jurisdiction regarding disputes after the award including motions due to “judicial error, new evidence, etc., … to the extent permitted by law.”

The arbitral hearing commenced in January 2011 and continued intermittently until March of 2013.  The proceedings were not recorded and no transcript of the evidence was prepared. As a result, there were disputes about what actually transpired during the hearing. The Award issued in September 2013 ordered that $400,000 be paid to the applicants by the respondents. No reasons for decision were given.

After release of the Award, Mr. Popack was told by the Arbitral Tribunal that it had met with Rabbi Schwei on July 8, 2013 regarding the dispute. The parties were not notified that the Arbitral Tribunal was going to, and did, meet with Rabbi Schwei, and they were not present at that meeting. The length of the meeting was estimated at between 1.3 and 4 hours.

Mr. Popack initially acknowledged that he had heard a rumour about the meeting shortly after it took place in July, before the Award was released. The extent to which the possibility of a meeting between the Arbitral Tribunal and Rabbi Schwei had been discussed during the arbitral hearing was a matter of controversy. On July 15, 2013, after the meeting between the Arbitral Tribunal and Rabbi Schwei, Mr. Popack’s representative, Rabbi Fried, wrote to the Arbitral Tribunal. He mentioned a rumour about the meeting with Rabbi Schwei, discussed the potential subject matter of Rabbi Schwei’s testimony at the private meeting and made submissions and provided factual information about that subject matter and said that Rabbi Schwei’s testimony was worthless. The letter also provided suggested language for the hoped-for result of the arbitration and other commentary. Rabbi Fried’s letter did not make an unqualified request for a hearing if the rumour was true and requested was that “if the Rabbinical Court considers Rabbi Schwei’s testimony (which was without our knowledge)” there should be a tribunal hearing about it. Rabbi Fried’s letter was not copied to the other side and there was no response to that letter by the Arbitral Tribunal.

The application to set aside the award was commenced by Mr. Popack and his companies in November 2013, seeking relief as a result of the meeting with Rabbi Schwei. Mr. Lipszyc then contacted the secretary to the Arbitral Tribunal and asked the secretary of the Arbitral Tribunal to write a letter about the matter.

On March 13, 2014, the Arbitral Tribunal issued a letter. Unlike the other written communications from the Arbitral Tribunal, which were in Hebrew, this letter was in English. The applicants submitted that the letter was effectively written to the court. It said, inter alia, the following:

“During the [hearing], in the presence of all parties and counsel, [Mr. Lipszyc] requested from us to meet with [Rabbi Schwei]. We granted his request and no party objected to our decision, or requested the opportunity to be present at the meeting that the Beth Din will schedule with [Rabbi Schwei]. Had any party requested to be present at the meeting with [Rabbi Schwei], we would have granted the parties request…..Although we met with [Rabbi Schwei], we confirm that the ruling and final order we issued would have been the same, even if the Beth Din meeting with [Rabbi Schwei] had not occurred….we received a fax from Rabbi S. Fried (Popack’s Rabbinical advisor) requesting, that if Bais Din will take into consideration any evidence they heard from [Rabbi Schwei], his party (Popack) is requesting a hearing with Bais Din. Accordingly since the meeting with [Rabbi Schwei] didn’t make any change in our ruling, a hearing was unnecessary. The Bais Din proceeded to issue the Final Order.”

In their application, the applicants asserted that the meeting with Rabbi Schwei violated:

Article 34(2)(a)(iv) of the Model Law which permits the court to set aside the arbitral award if the party making the application to the court “was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case”;

Article 34(2)(a)(ii) of the Model Law which permits the court to set aside the award if the applicant to the court “was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case”;

Article 34(2)(b)(ii) of the Model Law which permits the court to set aside the award if it conflicts with the “public policy of this State [in this case, Ontario].”

In support of these assertions the applicants submitted that the arbitral award violated:

Article 18 of the Model Law which requires that ‘[t]he parties shall be treated with equality and each party shall be given a full opportunity of presenting his case”;

Article 24 which stipulates that [t]he parties shall be given sufficient advance notice of any hearing and of any meeting of the arbitral tribunal for the purposes of inspection of goods, other property or documents, and that “[a]ll statements, documents or other information supplied to the arbitral tribunal by one party shall be communicated to the other party” and that “any expert report or evidentiary document on which the arbitral tribunal may rely in making its decision shall be communicated to the parties.”

Decision of the Ontario Superior Court

Justice Matheson of the Ontario Superior Court of Justice stated that there was no issue that the Arbitral Tribunal was an international tribunal seated in Ontario under the ICAA. She held that “ICAA and Model Law recognize the autonomy of parties to craft an adjudicative process of their own choosing, subject to limited exceptions.” She also held that “[b]road deference and respect must be accorded to decisions made by arbitral tribunals pursuant to the Model Law” relying on Corporacion Transnacional de Inversiones S.A. de C.V. v. STET International S.p.A., [1999] O.J. No. 3573 (Ont. S.C.J. [Commercial List]) at para. 22, aff’d [2000] O.J. No. 3408 (Ont. C.A.).

There were two issues to be decided:

  1. whether the parties had contracted out of Article 34 of the ICAA, precluding all access to the courts; and
  2. whether the meeting of the Arbitral Tribunal with Rabbi Schwei justified setting aside the award on any of the grounds submitted by the applicants.

Contracting out of Article 34

Justice Matheson held that the parties had not effectively contracted out of right to seek an order setting aside the arbitral award, provided by Article 34 of the Model Law. The decision in Noble was not authority for the proposition that the parties may contract out of Article 34. Justice Matheson’s view was that, while the Court in Noble China did state, in obiter dicta, that Article 34 is not mandatory, the findings in the rest of its decision were “all different ways of showing that parties cannot effectively contract out of Article 34 for all purposes.” Justice Matheson noted that the respondents conceded that “there are mandatory provisions in the ICAA, two of which are relied upon here. If parties can contract out of Article 34 for all purposes, there would be no jurisdiction for a court to set aside an award as a remedy for breach of these admittedly mandatory provisions.”

Justice Matheson found that none of the alleged acts of contracting out of Article 34 had that effect. The provision in the arbitration agreement that the award is not open for appeal in any religious or secular court did not address the parties’ right to seek to have the award set aside. Nor did the parties contract out of Article 34 by agreeing in the arbitration agreement’s that the Arbitral Tribunal had jurisdiction to hear disputes about interpretation of the award, compliance of the parties or re-argument due to claims of a judicial error or new evidence. None of those matters were raised in the present case. Nor was the application to set aside the arbitral award barred by the provision in the arbitration agreement that precluded a “claim” in court without permission of the Rabbinical Court, which had not been obtained. Read in the context of the ICAA, a “claim” was a substantive claim, not a claim to challenge and set aside the award.

Justice Matheson concluded this part of her reason by saying the following:

“I therefore conclude that the Arbitration Agreement does not exclude the provisions in Article 34 that the applicants seek to invoke. However, even if it purported to do so, it would not be effective in regard to either the mandatory provisions of the ICAA or any conflict with public policy….” (underlining added)

Accordingly, Justice Matheson seems to have held that, while she performed an analysis of whether the arbitration agreement had excluded the operation of Article 34, that analysis was unnecessary because the parties were incapable of contracting out of Article 34, at least so far as the enforcement of the “mandatory” provisions of ICCA and public policy.

Discretion to Refuse a Remedy

Justice Matheson found that the meeting by the Arbitral Tribunal with Rabbi Schwei “was a breach of the Arbitration Agreement and satisfies the prerequisites for potential relief under Article 34(2)(a)(iv).” Nevertheless, she held that the court’s power to set aside the award should not be exercised in this case for a number of reasons:

  1. Seriousness of the breach: The seriousness of the breach of the Model law or public policy was relevant to the exercise of the court’s discretion to set aside the award. In Justice Matheson’s view, the Arbitral Tribunal had not gone off on a frolic of its own to interview a witness. Rabbi Schwei was not a third party witness but a former adjudicator. Both parties had discussed the arbitral tribunal and the possibility of interviewing Rabbi Schwei and neither party had opposed that step being taken.
  1. Parties’ procedural choices: The parties disagreed about the discussions they had had with the Arbitral Tribunal about the interviewing of Rabbi Schwei, and about the extent to which the Arbitral Tribunal may have been led to believe that the parties consented to such an interview. However, the parties had chosen to have no transcript of the proceedings. Justice Matheson held that, while the absence of a transcript “does not excuse the failure to comply with the notice obligations, the circumstances of the request could have left the Arbitral Tribunal with the impression that they were empowered to proceed as they did.” In addition, the parties had decided not to require the Arbitral Tribunal to issue reasons for decision. As a result, Justice Matheson said that “when considering whether the evidence of Rabbi Schwei might have caused some prejudice to the applicants, I must observe that these parties agreed to arbitration without either a transcript or reasons for decision. While they were free to do so, both sides must accept the consequence that I have little information upon which to conclude that Rabbi Schwei’s evidence might have prejudiced either side. I accept the possibility of prejudice for both sides, but cannot practically go further.”
  1. Serious prejudice if the Award was set aside: Justice Matheson considered two sorts of prejudice that would arise if the award was set aside. First, the hearing would have to be held again, and eight weeks of hearing and the very expensive costs of that hearing wold be thrown away. Justice Matheson did not consider that type of prejudice to be “especially significant.” Second, a material witness – Mr. Popack’s father – had died and there was no record of his evidence. Justice Matheson considered that this fact amounted to incurable prejudice.
  1. Applicants’ own procedural conduct: Justice Matheson referred to the fact that, after the rumour about the meeting with Rabbi Schwei, Rabbi Fried’s letter to the Arbitral Tribunal only made a qualified request for a hearing “if” the Arbitral Tribunal was going to consider the evidence they had received. As well, Justice Matheson noted that “Rabbi Fried’s letter made ex parte submissions to the Arbitral Tribunal about matters relating to Rabbi Schwei and the arbitration, which also raises fairness issues.” While she ruled that Rabbi Fried’s letter did not disentitle the applicants to relief, “it augurs against granting the application.”
  1. Evidence from the Arbitral Tribunal: Justice Matheson accepted the letter from the Arbitral Tribunal as evidence, stating that she had “taken the potential frailties of this communication into account in exercising my discretion.” At the very least, the letter made it evident that there was no point in referring the dispute back to the Tribunal as the applicants requested.

Taking those factors into consideration, Justice Matheson concluded as follows:

“The breach by the Arbitral Tribunal, although significant, must be weighed against the other relevant factors discussed above including the actual prejudice that will result if the Award is set aside. Taking everything into consideration in the exercise of my discretion, I conclude that this is not an appropriate case to set aside the Award.”

Discussion

There are many aspects of this interesting decision to be discussed. Two issues will be addressed in this article.

Contracting out of the Model Law

One important issue is whether the parties to an international commercial arbitration can opt out of the provisions of the Model law. As she set out the facts and her initial discussion of the issues, Justice Matheson appears to contemplate that the parties can do so, because she undertakes an analysis of the arbitration agreement and the parties conduct, and then concludes that the parties did not agree to waive the provisions of the Model Law. But then at the end of this part of her decision, she appears to conclude that the parties cannot contract out of the “mandatory provisions” of the Model Law, and the “public policy”. She does not define which articles of the Model Law she is referring to. But she appears to clearly include Article 34 within those non-waivable provisions, on the sensible ground that if Article 34 could be waived then there would be no remedy for the breach of the other provisions of the Model Law.

With respect to Justice Matheson, the decision by Justice Lax In Re Noble China does appear to have directly held that the parties can contract out of the Model law, and in particular Article 34 of that Law. In her decision, Justice Lax said the following:

“In summary, Article 34 is not a mandatory provision of the Model Law. Parties may therefore agree to exclude any rights they may otherwise have to apply to set aside an award under this Article. They may do so as long as their agreement does not conflict with a mandatory provision of the Model Law. The arbitration agreement here does not conflict with any mandatory provision of the Model Law, nor does it confer powers on the arbitration tribunal which is in conflict with Ontario public policy. Noble’s motion to dismiss or permanently stay the Lei application is therefore granted.

Accordingly, it was on the very basis that the parties could and did contract out of the Model Law, and in particular Article 34, that Justice Lax dismissed the motion to set aside the award.

With these two decisions being in apparent conflict on this important issue, it is to be hoped that an appellate court will review this issue soon. My own view is that the better argument is that the parties to an international commercial arbitration cannot contract out of the provisions of the Model Law, other than certain specific articles, which the Model law states are waivable by the parties. The following are my reasons for this view.

The first is that the Model Law does expressly state in numerous articles that the parties can otherwise agree. Thus, Articles 3(1), 10(1), 11(2), 13(1), 17, 19(1), 21, 23(2), 24(1), 25, 28(1)-(3), 29, 31(2), 33(1). 33(1)(b) and 33(32) expressly state that the Article applies “unless the parties agree otherwise” or that the “parties are free to agree upon” other provisions, or words to the same effect. Article 4 refers to ‘‘a provision of this Law from which the parties may derogate”, and requires a party to make a timely complaint about the non-compliance, failing which that party is deemed to waive the objection. The words ‘‘unless the parties agree otherwise”, “the parties are free to agree” and “may derogate” imply that the parties may not agree otherwise or derogate from other provisions. Having stated in about 18 separate Article and sub-Articles that the parties may “otherwise agree” or are “free to agree upon” other provisions, it seems that the drafters thought they had stated which Articles and sub-Articles were non-mandatory and had thereby delineated between the mandatory and non-mandatory sections, and most unlikely they would have intended that the parties could contract out of the other provisions. If that is not so, and if the line between the two is not drawn by reference to those Articles and sub-Articles, then no clear line between the mandatory and non-mandatory Articles is apparent.

Second, a comparison to the Ontario domestic Arbitration Act, 1991 (AA) is in order. Section 3 of that Act specifically lists the section of the Act that the parties cannot waive. Section 46, which provides that the parties can apply to court to set aside the arbitral award, is one of the sections that is listed. So the parties cannot contract out of section 46 of the domestic arbitral statute – comparable to Article 34 of the Model Law. Both the AA and ICAA deal with the same subject matter – arbitration – and it seems unlikely that the Ontario legislature would provide that the parties cannot contract out of access to the courts to challenge domestic arbitration awards, but can do so in relation to international commercial arbitration awards. Similarly, it seems unlikely that having specified the provisions of the domestic statute that the parties cannot contract out of, the same legislature would intend that the parties can contract out any provisions of ICCA without that ever being mentioned.

In Noble China, Justice Lax examined these two arguments and arrived at a contrary view. In her view, the legislature could have stated in ICCA that certain articles were mandatory as it had done in the domestic Act, but did not do so. The failure of either the Model Law or ICCA to state that Article 34 was mandatory was sufficient to conclude that it was not mandatory. She rejected the argument that the words “unless otherwise agreed by the parties” or “the parties are free to agree” in some Articles meant that the other Articles were mandatory. In her view, to accept that argument would be to:

“ignore the Commentary to which recourse may be had as an aid in interpretation. It makes clear that the ‘Magna Carta’ of the Model Law and its most important provision is Article 19. By it, the parties make their own agreement, constrained only by the mandatory provisions of the Model Law which are listed in the Commentary and which each contain explicit mandatory language. This, in my view, is the structure of the Model Law and the approach to be taken in its interpretation.”

Justice Lax concluded her analysis of Article 34 as follows:

 “As can be seen, Article 34 does not contain any of the familiar mandatory language…… Lei argues that the requirement of a full opportunity to present one’s case and equality of treatment are mandatory provisions of the Model Law under Article 18 and that violation of them constitute grounds for setting aside an award. I accept this. Lei further argues that since the parties may not derogate from those fundamental principles in an arbitration agreement, it necessarily follows that they may not derogate from the only means under the Model Law for enforcing those principles. I accept the first part of this proposition, but I do not accept the second….In this case, the arbitration agreement does not contain a waiver of the right to resist recognition and enforcement of the award as did the agreement in Food Services. However, there is waiver of the right to bring an application to set aside the award. In my opinion, the court should give effect to this. This is consistent with the philosophy and structure of the Model Law, indeed with its ‘Magna Carta’. The parties make their own agreements, so long as they do not derogate from its mandatory provisions. Article 34 is not such a provision.”

Third, the Model Law was prepared for adoption by the statute law, and enforced by the courts, of countries around the world. It seems likely that the drafters intended that the Model Law would be uniformly enforced in every country which adopted the Law since uniformity of application is the basis for one State being willing to enforce awards made in another State. It seems very unlikely that the drafters intended to leave open the possibility that the courts in one country could hold that the parties can contract out of the Model Law while the courts of another country could hold that the parties cannot, while the courts in a further country could hold that the parties are able to contract out of some provisions but not others. But that might be the result if the courts of a signatory country held that the provisions of the contract are waivable, since there is no court with world-wide jurisdiction to ensure that only one result is the right one. Only if the Model law is interpreted to mean that its provisions cannot be waived or amended, except where that is expressly stated in the Law, can uniformity of application between all signatory states be accomplished.

Fourth, in common law jurisdictions at least, prohibiting access to the courts is contrary to public policy. And as Justice Matheson noted, if Article 34 could be waived, then all of the other provisions of the Model Law could not be enforced. However, this is an argument that Justice Lax in Noble China implicitly rejected.

While none of these points, except the fourth, were referred to by Justice Matheson, she did conclude that the parties to an international commercial arbitration agreement have “the autonomy …to craft an adjudicative process of their own choosing, subject to limited exceptions”, and that Article 34 fell within the mandatory exceptions. However, it is submitted that the better way to state this proposition is the other way around: the Model Law is mandatory subject to approximately 18 situations in which the parties may otherwise agree.

But whether this proposition is a correct statement of the law must, in view of the apparent conflict between the Noble China and Popack decisions, await the decision of an appellate court. The issue of whether one can contract out of the Model Law is obviously of great importance to international commercial arbitrations. It may also impact the acceptability of Ontario as a place for those arbitrations to be held.

In this latter regard, those interested in how contracting out of the Model law has been dealt with in other countries may wish to examine, through Google, the history of Section 21 of the Australian International Arbitration Act. The following is what I understand to be the history of that section. Up to July 6, 2010, Section 21 of that Act apparently allowed the parties to opt out of the Model Law. Then, case law and controversy developed about the meaning and effect of that section and the impact of the section on the acceptability of Australia as a place for international commercial arbitrations. In the International Arbitration Amendment Act 2010, section 21 was amended to provide that if the Model Law applies to an arbitration, then the law of a State or Territory does not apply to the arbitration. I understand that the amended section effectively forbids contracting out of the Model Law. That amended section is similar, for instance, to section 2(b) of the Ontario Arbitration Act, 1991 which states that that Act applies to an arbitration under an arbitration agreement unless ICCA applies to that arbitration.

Discretion To Refuse A Remedy

Justice Matheson’s decision provides a useful checklist of some factors that are relevant to the exercise of the court’s discretion to set aside an arbitral award. Some of these factors may be controversial – such as receiving the letter from the Arbitral Tribunal – and others may be out of the parties’ control – such as the seriousness of the breach of the arbitral agreement, Model Law or rules of natural justice.

But the procedural choices made by the parties are very much in their control. And Justice Matheson’s treatment of these choices is very interesting. In effect, she held that if the parties choose not to record the proceedings and choose not to have the arbitral tribunal deliver a reasoned decision, then they are forcefully stating that the arbitral process is final, unless there is something egregious that occurs during the arbitration. And that is because, by their choices, the parties are depriving a reviewing court of elementary tools to judge the fairness and correctness of the process and the award, and are ensuring that the evidence is not preserved for use in a re-hearing. By their choices, they have demonstrated that they are really trusting the arbitral tribunal to arrive at the right result.

Often, for the sake of expedition and expense, the parties to an arbitration may do without a transcript of the evidence. Sometimes but infrequently, they may do without a reasoned award. But when deciding to opt out of these elementary protections for procedural fairness and substantive correctness, the parties should expect a less welcome reception from the court if they later challenge the award.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 11, parts 3(d), 6 and 11(b).

Popack v. Lipszyc, 2015 CarswellOnt 8001, 2015 ONSC 3460

Arbitration – International Commercial Arbitration – review of arbitral award – contracting out of the Model Law – discretion to set aside an arbitral award

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

www.heintzmanadr.com

www.constructionlawcanada.com

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

 

Sattva Limits The Court’s Power To Review Arbitral Award Relating To The Exercise Of An Option; B.C. Court of Appeal

The courts of British Columbia have recently wrestled with the question whether they can review the award of an arbitrator dealing with the exercise of an option. In Urban Communications Inc. v. BCNET Networking Society, the arbitrator and a single judge of the B.C. Supreme Court arrived at diametrically opposite conclusions as to whether the option had been validly exercised. For this reason the judge of the B.C. Supreme Court set aside the arbitrator’s decision.

However, relying on the recent decision of the Supreme Court of Canada in Sattva Capital Corp. v. Creston Moly Corp. [2014] 2 S.C.R. 633, the B.C. Court of Appeal held that the review of the arbitrator’s decision involved matters of both fact and law, and not just matters of law. Since the B.C. Arbitration Act requires that that there be an issue of law before an appeal from an arbitrator’s award may be allowed, the Court of Appeal held that no appeal lay from the arbitrator’s decision in this case. Accordingly, the Court of Appeal set aside the decision of the judge of the B.C. Supreme Court and restored the arbitrator’s decision.

While the logic of the Court of Appeal’s decision is apparent, the result is that the courts did not deal with some fundamental issues relating to the exercise of options. The Urban decision may be a poster child for both sides of the debate about the wisdom of the restrictive appeal regime introduced by Sattva. Those in favour of this regime will see the Urban decision as a demonstration that courts should stay out of the matter if the arbitrator has made a factual or legal determination. Those in favour of more court review of arbitral awards will see the Urban decision as an impediment to the determination of fundamental legal issues by the court system and an interference with the development of the common law.

Background

Section 31 of the Arbitration Act of British Columbia permits an appeal to a judge of the B.C. Supreme Court if a question of law is involved, or the parties consent to the appeal.

Under an agreement made in 2001, Urban leased fibre optic strands to BCNET for a ten-year period. The agreement contained an option to renew “exercisable upon at least six (6) months written notice by [BCNET] to [Urban]. The consideration to be paid for the renewal term will be the sum of $1.00, and other than the consideration to be paid, such renewal will be on the same terms and conditions as this Agreement. …” The Agreement required that any disagreement or dispute between the parties be determined by arbitration.

In July 2011, counsel for BCNET wrote to Urban, stating inter alia, the following;

“Pursuant to section 4.1 and 4.2 of the [Agreement], BCNET hereby exercises its option to renew the [Agreement] and its IRU rights with respect to the IRU Fibres, including all Access Cables, New Segments and New Fibre Builds constructed or commissioned pursuant to the [Agreement]…., BCNET also hereby request that Urban waive the six months’ notice requirement set out in section 4.1 and accept the renewal effective July 23, 2011….

We trust that you will find the above proposal acceptable and ask that you indicate Urban’s assent by signing on the signature line provided below. Upon receiving your assent, we will tender the necessary consideration in accordance with section 4.1 of the [Agreement].”

BCNET did not include payment of the $1.00 renewal fee with this letter. Urban did not return the requested written assent sought in the letter. In August 2012, Urban wrote to BCNET advising that the July 18, 2011 letter did not constitute a valid exercise of the option to renew and that the renewal period for Phases one and two had expired. BCNET then replied, stating that, in its view, the option to renew had been properly exercised as the agreement was silent on when the $1.00 renewal fee had to be paid and did not require its payment as a condition of the renewal. BCNET enclosed a cheque for $1.00, which Urban rejected.

In September 2012, by Notice of Arbitration BCNET applied for a declaration that it had validly exercised the renewal option under the Agreement. The hearing commenced in early October 2012.

In November 2012, BCNET sent another letter to Urban purporting to exercise its option to renew. BCNET’s position was that it had exercised the option in its July 2011 letter, but had decided to exercise the option again out of an abundance of caution.

The arbitrator issued his award on January 3, 2013, upholding BCNET’s position that the option had been properly exercised. Urban sought leave to appeal to the British Columbia Supreme Court. On all grounds, the judge of the B.C. Supreme Court held that the option had not been properly exercised, allowed the appeal and set aside the award of the arbitrator.

Issues In The Arbitration And The Appeal To The B.C. Supreme Court

The only issue in the arbitration and the appeal was whether the option in the agreement had been properly exercised. However, there were four sub-issues upon which the arbitrator and the B.C. Supreme Court disagreed.

  1. Did BCNET exercise the option conditionally? If so, is a conditional exercise an invalid exercise of an option?

Urban had contended that the letter was consistent only with a conditional exercise (or qualified acceptance) of the option as it contained a proposed modification of the agreement and was, therefore, effectively a counter-offer. The arbitrator examined the evidence and concluded that by its July 2011 letter, BCNET had validly exercised the renewal option. He held that the first part of the letter was “a perfectly clear exercise of the option” and that any proposed modification of the option was mentioned in the letter only after the making of a new bilateral contract by the exercise of the option.

The application judge held that a qualified acceptance of an offer constitutes a counter-offer. The judge’s reading of the July 2011 letter was that it sought to amend the option and was not unconditional or absolute. Accordingly, the letter was a qualified acceptance of the option that constituted a counter-offer. The judge therefore held that the July 2011 letter was an ineffective exercise of, and extinguished, the option.

  1. Did BCNET’s failure to enclose $1.00 with its July 2011 letter invalidate its exercise of the option?

The arbitrator held that it was not necessary for BCNET to enclose a $1.00 payment for the renewal fee because: (i) the original grant of the option was supported by ample consideration; and (ii) a valid exercise of the option included an obligation by Urban to give BCNET the use of the fibres and an obligation by BCNET to pay money to Urban for their maintenance. Therefore, the $1.00 consideration was only a nominal rent payment for the extended term and its non-payment did not invalidate the exercise of the option.

The judge concluded that the plain and ordinary reading of the agreement required $1.00 to exercise the renewal option. He held that the $1.00 payment had to be tendered with the purported exercise of the option. Otherwise, an indeterminate date would lead to uncertainly and make no commercial sense.

  1. Was Urban estopped from asserting that the option was not validly exercised?

The arbitrator held that, if BCNET had defectively exercised its option under the Agreement, Urban was estopped from relying on those defects because: (i) it knew from the 2011 letter that BCNET intended to exercise the option; and (ii) knowing this intention, Urban chose to remain silent in the hope that the alleged defects would not come to BCNET’s attention until after the option expired.

The application judge held that, as between the two commercial parties, there was no legal obligation on Urban to advise BCNET that its purported exercise of the option was defective. Accordingly, Urban was not estopped from asserting the invalidity of the July 2011 exercise of the option.

  1. If BCNET had defectively exercised the option in July 2011, did that preclude BCNET from thereafter exercising the option, so that the purported exercise of the option in November 2012 was invalid?

The arbitrator held that, even if was not validly accepted in July 2011, the option remained a standing offer and could not be withdrawn, and was still open for acceptance in November 2012. He held that an optionor is bound by its option agreement and could only avoid its obligations under the option contract if there were legal or factual grounds for it to avoid the option contract itself, which there were not.

The application judge held that, as a result of his finding that the invalid exercise of the option in July 2011 had extinguished the option, the option could not be accepted by BCNET in November 2012.

Decision of the B.C. Court of Appeal

The B.C. Court of Appeal only felt it was necessary to deal with the first issue. In commenting on this part of the arbitrator’s decision, the B.C. Court of Appeal said:

“The arbitrator was of the view that the words of the contractual documents offered more than one potential meaning. He applied the legal principles on contractual interpretation…to determine the parties’ objective intention with respect to the requirements in Article 4.1 of the Agreement, and then to determine the objective intention of BCNET in its July 18, 2011 letter. He considered the objective meaning of the words of these documents in the context in which they were made and all of the surrounding circumstances. Based on his application of the legal principles for contractual interpretation and his findings of fact from the evidence, he concluded that: (i) BCNET’s July 18, 2011 letter was a clear unconditional notice of its intention to exercise the renewal option over all seven Phases, which created a new bilateral contract between the parties; and (ii) only thereafter did BCNET propose to modify that contract by having all of the renewal terms run from the same date. Sattva mandates that these findings must be accorded deference and, absent an extricable error of law of the kind identified in para. 53 of Sattva, are not reviewable under s. 31 of the Act….”

The B.C. Court of Appeal concluded as follows:

“….the arbitrator’s finding that BCNET had unconditionally exercised its option under the Agreement ends the dispute. The arbitrator’s interpretation of the Agreement and the July 18, 2011 letter was open to him to make. His interpretation of those contractual documents does not raise a pure question of law and therefore is not reviewable. It also renders moot the remaining issues raised by Urban….(underlining added)

The court also said that, even under the pre-Sattva regime, leave to appeal the arbitrator’s decision should not have been granted:

“There was no consensus between the parties on the meaning of the words in the contractual documents. The arbitrator had to determine the true meaning of the words in the context and surrounding circumstances in which they were written. This engaged questions of mixed fact and law, which are not reviewable under s. 31(1) of the Act.”

Discussion

There can be two views of this decision, depending on whether one is in favour of, or against, the supervision of arbitral awards by the courts. Those who are against such supervision, and applaud the decision of the Supreme Court of Canada in Sattva, will applaud this decision as well. Arbitrators should be left to decide the meaning of contracts and to interpret letters between the parties exercising rights under those contracts and courts should not prolong the process by examining into further legal issues when issues of contract interpretation and fact have been decided, rightly or wrongly, by the arbitral tribunal.

Others will be concerned that the absence of court supervision will mean that the common law will not develop as it has in the past. Here, an arbitrator and superior court judge disagreed on some fundamental legal principles relating to the exercise of options. It is not healthy for the law to be uncertain and for fundamental legal principles to be controversial. The role of the courts, and in particular appellate courts, is to clarify and develop the law, and not to cut off that process.

Whatever one’s view of this issue is, the first view is now the law in Canada. As a result, the real supervision will be by appellate courts over the trial division, not by the trial division over arbitrators. The supervision by the appellate court depends upon whether, in the words from Sattva, there is or is not an “extricable question of law from within what was initially characterized as a question of mixed fact and law.” In the present case, the application judge held that there was; the Court of Appeal held that there was not.

On this issue, the B.C. Court of Appeal did not grant any apparent deference to the application judge’s decision, despite his express finding that there was an “extricable question of law” to be determined. On its reading of the arbitral award, the Court of Appeal simply held that “Urban cannot establish a pure question of law arising from the arbitrator’s interpretation of Article 4.1 of the Agreement and the July 18, 2011 letter.”

Contrast this decision with the B.C. Court of Appeal’s decision in Teal Cedar Products Ltd. v. British Columbia, 2015 BCCA 263, 2015 CarswellBC 1550. I reviewed that decision in my article dated July 7, 2015. In that case the B.C. Supreme Court declined to set aside the decision of an arbitral tribunal because that decision involved issues of mixed fact and law, applying Sattva. Then, the B.C. Court of Appeal reversed that decision, holding that the arbitrator’s interpretation of the applicable statute raised an “extricable question of law.”

It is not clear from these decisions how one is to identify an “extricable question of law”. In these decisions, the B.C. Court of Appeal did not identify the principle to apply in this exercise. Hopefully, appellate courts in Canada will develop those principles in the future. Otherwise, an application judge’s decision on this question will always be open to further appeal.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed. chapter 11, part 11(a)

Urban Communications Inc. v. BCNET Networking Society, [2016] 2 W.W.R. 298, 386 D.L.R. (4th) 284, 2015 CarswellBC 1785

Arbitration – appeal of arbitral award – extricable question of law – options – estoppel – consideration

Thomas G. Heintzman O.C., Q.C., FCIArb                                                        May 1, 2016

www.heintzmanadr.com

www.constructionlawcanada.com

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

When Does The Limitation Period Start When A Party Repudiates A Contract?

You might think that there is one answer to this question. But in Pickering Square Inc. v. Trillium College Inc., the Court of Appeal for Ontario recently reminded us that there are two answers, depending on whether the innocent party accepts the repudiation or not. If the repudiation is accepted, then the contract comes to an end and the limitation period starts to run for all claims under the contract. But if the innocent party does not accept the repudiation, then the contract continues and the repudiation may well constitute a continuing breach of contract. If that is so, then for each day of non-performance, the limitation period runs from that day.

Background

Pickering was the lessor and Trillium was the lessee under a lease of space in a shopping centre. In the lease, Trillium agreed to pay rent, to occupy the premises and to continuously operate its business as a vocational college, and to restore the premises at the expiry of the lease. Trillium gave notice to Pickering that it was vacating the premises and did so in December 2007. In June 2008, Pickering sued the appellant for rent arrears and payment under the lease for its failure to occupy the premises and to conduct its business continuously. The suit was settled in August 2008 and Trillium agreed to resume occupation of the leased premises. Trillium paid the rent for the remainder of the lease but it did not re-occupy the premises, did not conduct its business in those premises, and did not restore the premises at the end of the lease ended. After the lease expired, Pickering sued Trillium for breach of the lease.

Trillium brought a motion for summary judgment, arguing that Pickering’s claim was brought outside the two-year limitation period under s. 4 of the Ontario Limitations Act, 2002. The motion judge held that Trillium’s breach of the covenant to occupy the premises and operate its business continuously was of a continuing nature, such that each day of the breach gave rise to a fresh cause of action. As a result, only the claim relating to the breach occurring more than two years prior to commencement of the action ­­was barred by the Limitations Act, 2002.

The motion judge also held that Pickering’s claim for damages for breach of the covenant to restore the premises was not time barred. The obligation to restore arose when the lease expired on May 31, 2011, and Pickering’s action in February 16, 2012 was brought within two years of that date. .

The Appeal

Trillium argued that its breach of the covenant to operate its business continuously was complete on October 1, 2008, the first day it failed to resume occupation of the leased premises and operate its business. It submitted that each subsequent day that it failed to operate its business was not a separate breach and that each day of non-occupation did not give rise to a separate cause of action; rather, each such day constituted an instance of additional damages. Trillium submitted that a continuing breach of contract requires a succession or repetition of separate acts. In this case, it argued, there was a single act with continuing consequences and consequently, Pickering’s claim became statute-barred on October 1, 2010, two years after October 1, 2008 when Trillium failed to resume occupation and conduct its business, and long before Pickering commenced its action in February 2012.

The Ontario Court of Appeal rejected this submission. In doing so, the court differentiated between a repudiation of a contract which is accepted, in which case the contract comes to an end, and a repudiation of contract which is not accepted, in which case the contract remains in force. In the latter situation, the continuing failure of the repudiating party may amount to a continuing breach of contract. In that latter situation, the limitation period applies to each day of continuing breach. The limitation period expires on a rolling basis, so that once two years passes from a particular day then the limitation period for that day expires, but it has not yet expired for successive days and breaches.

The Ontario Court of Appeal explained the repudiation principle as follows:

“The election to cancel a contract as a result of a serious breach or repudiation brings a contract to an end and relieves the parties of any further obligations under it. The contract is not void ab initio: the innocent party may sue for damages for breach of the contract….By contrast, if the innocent party elects to affirm the contract despite the serious breach or repudiation, the contract remains in effect and the parties are required to perform their obligations under it. The innocent party retains the right to sue for past and future breaches…Pickering elected not to cancel the lease following Trillium’s October 1, 2008 breach. It affirmed the lease and, as a result, the parties were required to perform their obligations under it as they fell due….Trillium could have resumed performance of its obligations at any time prior to the end of the term of the lease by carrying on its business at the leased premises in accordance with the terms of the covenant. Had it done so, Pickering would have been required to accept Trillium’s performance and would have been unable to terminate the lease in the absence of a further serious breach or repudiation. Trillium would have been liable for damages from the date of its October 1, 2008 breach until the date it resumed the performance of its covenant obligations, but would not have incurred liability for breach of the lease beyond that date. Trillium chose not to resume its obligations at any point prior to the expiry of the lease.”

The Ontario Court of Appeal then explained the applicable limitations principle:

“In these circumstances, when did the two-year limitation period begin to run? It is clear that a cause of action accrues once damage has been incurred, even if the nature or the extent of the damages is not known….But accrual of a cause of action is not determinative for limitation purposes in the context of a continuing breach of contract and an election by the innocent party to affirm the contract. The motion judge properly concluded that a fresh cause of action accrued every day that breach continued – every day that Trillium failed to carry on its business in accordance with the covenant……The accrual of fresh causes of action has consequences for the innocent party as well as the party in breach of the contract. It sets the clock running for a new two-year limitation period. Pickering’s election to affirm rather than cancel the lease does not have the effect of postponing the date for discovery of the breach until expiry of the lease…..The limitation period in this case applied on a “rolling” basis……The two-year limitation period commenced each day a fresh cause of action accrued and ran two years from that date. Thus, Pickering was entitled to claim damages for breach of the covenant for the period going back two years from the commencement of its action on February 16, 2012 – the period that ran from February 16, 2010 until the lease expired on May 31, 2011.”

The Court of Appeal also upheld Pickering’s claim for repairs to be done at the end of the lease. Pickering was only claiming for breach of this covenant at the end of the lease, and not before. According, the limitation period for that breach arose in May 2011 when the lease expired, not in October 2008 when Trillium failed to resume occupation.

Discussion

This decision is a useful reminder of the distinction between an accepted and unaccepted repudiation of contract. The former brings the contract to an end. The latter does not, and as such has been described as something “writ upon water”. The fact that the contract remains in place is obviously important for the ongoing performance of the contract, as the obligation of performance remains in place on both sides of the contract. But as importantly, the limitation period continues to apply, on a rolling basis, to the breaches that occur after the unaccepted repudiation. And the Court of Appeal has held in this case that it does not require separate and positive acts by the defaulting party to occur for there to be continuing breaches of the contract. Rather, the failure to act and the omission of performance amount to continuing breaches of the contract.

There may be other implications of an unaccepted repudiation of the contract. It is not just the obligation of performance that continues. In addition, the parties remain entitled to exercise positive rights under the contract. Also, the performance of contracts with subcontractors and consultants, and the coverage and reporting obligations under insurance contacts and bonds, may be affected.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 8 part 8(b) and chapter 9 part 3.  

Pickering Square Inc. v. Trillium College Inc., 2016 ONCA 179

Contracts – repudiation – non-acceptance of repudiation – limitation period

Thomas G. Heintzman O.C., Q.C., FCIArb                                                 April 17, 2016  

www.heintzmanadr.com

www.constructionlawcanada.com