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Alberta Court Of Appeal Holds That A Court Action Is Not A Notice Of Arbitration

In previous articles I have warned readers about the dangers of the limitation period in relation to arbitration claims. You can look at my prior articles dated July 17, 2011, February 26, 2012 and August 26, 2012. These dangers are highlighted by the recent decision of the Alberta Court of Appeal in Lafarge Canada Inc. v. Edmonton (City). The court held that that a Statement of Claim in an action is not a notice of arbitration under an arbitration clause. This may mean that an arbitration claim subsequently commenced is outside the limitation period.

Background

Lafarge entered into a contract with the City to provide cement pipe for a light rail transit project. The City alleged that Lafarge had not delivered the pipe in a timely manner and it set off the delay costs against Lafarge’s invoices. The supply contract contained an arbitration clause which stated that “if any disputes arise under the Contract and the parties are not able to resolve it, the parties shall appoint a single arbitrator to conduct an arbitration in accordance with the Arbitration Act.”

On May 28, 2009, or about 22 months after the dispute arose, Lafarge and the City entered into a standstill agreement. That agreement provided that the limitation period did not run during the term of that agreement, that the parties could terminate that agreement and that if they did then the parties had 3 months to commence proceedings before the limitation period would apply. Lafarge terminated the standstill agreement on February 2, 2011 and commenced an action on February 11, 2011. The City served its Statement of Defence on March 14, 2011, the City pleading inter alia that the parties had agreed to submit any disputes arising under the contract to arbitration. In delivering the Statement of Defence, the City’s solicitor said: “I think arbitration may be mandatory but we [sic] happy to discuss future process”. In July 2012 Lafarge delivered its documents and the City said that it would move to stay the action on the basis of the arbitration clause, and also asserted that Lafarge’s claim was now statute barred. The City’s motion was not brought until June 2012.

Chamber Judge’s Decision

The chambers judge held that the Statement of Claim in the action was a sufficient notice of arbitration under s. 23 of the Alberta Arbitration Act. Section 23 states an arbitration may be commenced in any way recognized by law, including the following:

(a) a party to an arbitration agreement serves on the other parties notice to appoint or to participate in the appointment of an arbitrator under the agreement; and

(b) a party serves on the other parties a notice demanding arbitration under the arbitration agreement.

The judge therefore found that there were no limitations defence which applied and that the arbitration process had been sufficiently notified to the City by Lafarge in time under s. 23 of the Arbitration Act. The chambers judge held that in those circumstances it was unnecessary for him to address alternative issues concerning delay and attornment.

Alberta Court of Appeal’s Decision

The Alberta Court of Appeal reversed the chambers judge’s decision, holding that the Statement of Claim was not a notice of arbitration under section 23 of the Alberta Arbitration Act. The court held that to treat the Statement of Claim “as a form of notification of arbitration under s. 23 does not amount to giving a liberal reading to s. 23 of the Act but bursts its conceptual boundaries,” and that “to characterize what amounts to the opposite of notice to commence arbitration as being the same as notice to commence arbitration would take s. 23 outside the scope of predictable meaning.”

The Court declined to decide any issues arising from its decision, and in particular whether the City had attorned to the court’s jurisdiction or whether its delay precluded it from bringing the stay motion. The Alberta Court of Appeal returned the matter to the Court of Queen’s Bench to consider whether there should be a stay of the lawsuit in light of waiver, including attornment and delay in the stay application.

Discussion

As I have said in my prior articles, people tend to forget about limitation periods in respect of arbitration claims because they think they already have a contract so there must be an entitlement to assert an arbitration claim. Since there is no court office in which to start the arbitration claim, people tend to assume that there is no formality to the commencement of the arbitration claim. Not so. The provincial Arbitration Acts have very specific criteria about what amounts to the commencement of an arbitration claim. If those criteria are not met, then no arbitration claim has been commenced and the limitation period continues to run.

So, in the present case, Lafarge commenced an action within the limitation period stated in the standstill agreement but not an arbitration claim as defined in the Alberta Act. The Alberta Court of Appeal has held that the action did not amount to an arbitration claim. While Lafarge may be held entitled to continue with its action by reasons of the City’s waiver, attornment or delay, the Alberta Court of Appeal’s decision means that it has not commenced an arbitration claim so far as the limitation period is concerned.

The fairness of this decision could be questioned. If the City knew of the claim through the commencement of the action, should it thereafter be able to rely on a limitation period? Should the City be required to renounce a limitation defence in the arbitration when seeking a stay of the action? There are old cases holding that if a defendant seeks to stay an action on the ground that the courts of another country are the more convenient forum, then the defendant must give an undertaking not to raise a limitation defence in the other forum. Should this rule be adopted on motions to stay actions based upon an arbitration clause?

Some might object to this rule on the ground that it will encourage parties to commence actions in the face of arbitration clauses and then insist on a waiver of the limitation period in the arbitration. After all, so it goes, arbitration clauses are obvious and can and should be adhered to.

But such a rule does seem sensible. After all, an action is a perfectly proper way to commence a claim. In fact, outlawing a court action is contrary to public policy. It is only if the other party insists on the arbitration clause that arbitration becomes mandatory; if the other party does not, then the court action is perfectly proper. The commencement of the action tells the defendant that there is a claim. If the defendant invokes the arbitration clause, there is an element of fairness in requiring the defendant not to assert the limitation defence in the arbitration. Maybe the further proceedings in the Lafarge case will explore this issue.

See Heintzman and Goldsmith on Canadian Building Contracts (4^th ed.), chapter 10, parts 3, 5,6

Lafarge Canada Inc. v. Edmonton (City), 2013 ABCA

Arbitration – Limitation periods – Stay of action or arbitration – Building contracts – Public contracts – Alternative dispute resolution – Relation of arbitration to court proceedings

Thomas G. Heintzman O.C., Q.C., FCIArb January 12, 2014

www.heintzmanadr.com

www.constructionlawcanada.com

Can An Arbitrator Award Compound Interest?

In the recent decision in British Columbia v. Teal Cedar Products Ltd., the Supreme Court of Canada decided that compound interest could not be awarded in an arbitration arising from a statutory compensation regime. Under that regime, the arbitration was held pursuant to the British Columbia Commercial Arbitration Act (CAA), now the British Columbia Arbitration Act.

While this decision depended upon the specific provisions of the B.C. arbitral legislation, the decision raises the whole issue of whether compound interest can be awarded in arbitrations in Canada. The case raises the real possibility that, despite decisions to the contrary, interest cannot be awarded in arbitrations, at least in British Columbia.

Background

Teal’s annual allowable forestry cut was reduced in 1999, following the creation of a provincial park. In 2001, Teal commenced proceedings against the province claiming compensation for a partial expropriation. In 2002, the province enacted retroactive legislation, the Protected Areas Forests Compensation Act (PAFCA). That Act stated that the reduction in forestry cut did not amount to expropriation and directed that a claim for such a reduction should be asserted as a claim under the Forest Act, which in turn said that the claim was to be dealt with by arbitration under the CAA.

Teal commenced an arbitration claim. In the arbitration award in 2010, the arbitrator awarded Teal $6.3 million plus legal costs. The arbitrator also awarded compound interest in the amount of $2.2 million from the date of the reduction in Teal’s forestry cut in 1999 to the date of the award. The award of compound interest was upheld by the B.C. Supreme Court and Court of Appeal. The Supreme Court of Canada reversed the decision of the B.C. Court of Appeal and held that only simple interest is payable under the relevant B.C. legislation.

The Supreme Court’s decision

The Supreme Court’s decision depended upon the inter-relationship between the forestry legislation, section 28 of CAA and sections 1 and 7 of the B.C. Court Order Interest Act (COIA).

Section 28 of CAA states that:

“For the purposes of the Court Order Interest Act and the Interest Act (Canada), a sum directed to be paid by an award is a pecuniary judgment of the court.”

Sections 1 and 7 of COIA deal with prejudgment (section 1) and post judgment (section 7) interest which may be awarded by a court in British Columbia. Section 2(c) of that states that “the court must not award interest under section 1…on interest or on costs….” Section 7(2) says that “A pecuniary judgment bears simple interest…” and section 7(1) defines simple interest to be “an annual simple interest rate that is equal to the prime lending rate of the banker to the government.” Referring to those subsections, the Supreme Court concluded that “compound interest is prohibited”.

So in British Columbia, the Supreme Court appears to have concluded that only simple interest may be awarded by a court. The Supreme Court effectively held that this court-mandated regime is, by reason of section 28 of CAA, also mandated for arbitrations conducted under the CAA.

A number of submissions why this should not be so were advanced by Teal, all of which were rejected by the Supreme Court. One of Teal’s submissions was that the arbitrator could order compound interest as part of the substantive compensatory award, not as interest on that award. The Supreme Court rejected that submission, holding that it did not conform to the plain meaning and statutory history of the sections.

Teal also argued that section 22 of CAA provided that the rules of the British Columbia International Commercial Arbitration Centre (BCICAC) apply to arbitrations conducted under CAA, and that those rules permit arbitrators to award compound interest. The Supreme Court pointed out that section 22(3) of CAA states that if the rules of BCICAC are inconsistent with or contrary to the Act, then the Act prevails. The Supreme Court held that such an inconsistency arose between the provisions of CAA and the rules of BCICAC in relation to interest.

While the Supreme Court held that the statutory regime in British Columbia mandated simple interest for pre and post-award interest in arbitrations under B.C’s domestic arbitration statute, it stated that this regime may not exist in other provinces. The Court also made several comments indicating its view that compound interest awards are truer compensation for a pecuniary loss than simple interest. The Court said:

“There is no doubt that compound interest is a more accurate way of compensating parties for the time value of money….compound interest is no doubt a better measure of the true cost of the loss suffered by Teal….”

Discussion

This decision is somewhat surprising in light of the previous decisions about the authority of courts and arbitrators to award compound interest.

Many of the provincial statutes dealing with the power of the court to award interest state that interest on interest may not be awarded. Thus section 2(2)(b) of the Alberta Judgment Interest Act says that ”The court shall not award interest….on interest awarded under this Part,” and Section 128(4)(b) of the Ontario Courts of Justice Act states that “Interest shall not be awarded on interest” on judgments. Those sections seem to mirror sections 2(c) and 7(2) of the B.C. COIA.

Similarly, other provincial arbitration statutes also provide that interest under arbitral awards is to be in accordance with the court-mandated regime. Thus, section 54 (1) of the Alberta Arbitration Act says that an arbitral tribunal has the same power with respect to interest as the court has under the Judgment Interest Act. Similarly, section 57 of the Ontario Arbitration Act, 1991 says that “Sections 127 to 130 (prejudgment and post-judgment interest) of the Courts of Justice Act apply to an arbitration, with necessary modifications”, thereby adopting the regime in section 128(4)(b) excluding compound interest.

And yet, arbitral tribunals and courts have been held entitled to award compound interest, notwithstanding the apparent statutory prohibition. Thus in Alberta, in Alberta (Minister of Infrastructure) v. Nilsson, 2002 ABCA 283 it was held that an arbitral tribunal could award compound interest as part of the substantive award, that is, as part of the damages and by reason of the exercise of the court’s equitable jurisdiction, notwithstanding the statutory prohibition against compound interest.

Most noticeably, in Bank of America Canada v. Mutual Trust Co, [2002] 2 SCR 601, the Supreme Court of Canada dealt with the interest regime in the Ontario Courts of Justice Act. The court held that the Ontario court had jurisdiction to award compound interest notwithstanding the apparent prohibition in section 128(4)(b) of the Act against awarding interest upon interest. In arriving at that conclusion, the court relied upon Section 130 of that Act which allows a court, where it considers it just, to vary the interest rate or the time for which interest may be awarded. The court also relied upon subsections 128(4)(g) and 129(5) of that Act which excludes the court-mandated interest regime – and effectively allows a court to award interest – where interest is “payable by a right other than under this section”. The court held that the court’s common law power to award damages flows from the application of contract law and that subsections 128(4)(g) and 129(5) provide statutory authority to award compound pre‑and post‑judgment interest according to this common law power.

In the Teal Cedar decision, the Supreme Court did not refer to its prior decision in Bank of America Canada.

There appear to be two relevant differences between the interest regime in the B.C. COIA and the interest regimes in the Alberta Judgment Interest Act and the Ontario Courts of Justice Act.

First, the latter two statutes give the court the power to award a different rate of interest (Alberta, section 2(3); Ontario section 130(1)(b)).

Second, the latter two statutes give the court the power to award interest “where the payment of pre‑judgment interest is otherwise provided by law” (Alberta, section 2(2)(i); Ontario, section 128(4)(g) and 129(5)). As already noted, it was those subsections that were relied upon by the Supreme Court in the Bank of America Canada decision for the conclusion that the Ontario court did have power to award compound interest notwithstanding the apparent prohibition of compound interest in section 128(4)(b).

Those powers do not appear in the B.C. statute. The only apparent exception to the mandatory simple interest rate in the BC Act is “an agreement about interest between the parties”.

The apparent result is that, for both court and domestic arbitration proceedings in British Columbia, compound interest cannot be awarded, unless there is an agreement between the parties dealing with interest. There does not appear to be any basis to distinguish between court and arbitral proceedings as the domestic arbitration act adopts the court interest regime.

In other provinces which have interest statutes like those in Alberta and Ontario, compound interest can be awarded both by courts and by domestic arbitral tribunals.

So far as international commercial arbitration is concerned, the B.C. International Commercial Arbitration Act (ICAA) does not contain any provision relating to interest that is similar to that found in the CAA. Section 31(7) of the B.C. ICAA empowers the arbitral tribunal to award interest, unless the parties have agreed otherwise. But there is no reference to the rates or compounding of interest. Accordingly, international commercial arbitral tribunals in British Columbia appear to have a wider authority to award interest than domestic arbitral tribunals.

British Columbia v. Teal Cedar Products Ltd., 2013 SCC 51

Arbitration – Interest – Judgments and Awards

Thomas G. Heintzman O.C., Q.C., FCIArb December 1, 2013

www.heintzmanadr.com

www.constructionlawcanada.com

Arbitration awards interest judgments

Does The CCDC Dispute Resolution Clause Require Arbitration?

Most building contracts contain dispute resolution clauses which refer to arbitration. A dispute resolution clause can be mandatory – it can require arbitration – or it can be permissive – it can permit arbitration if all parties agree to arbitration when the dispute arises. One would think that the most important thing to make clear in a dispute resolution clause is whether arbitration is mandatory or not.

Yet, there has been some doubt whether the dispute resolution clause in the CCDC standard form construction contract makes arbitration mandatory or permissive. That is because the key wording in that clause contains the word “may”, which is typically a word that designates a permissive procedure, while the word “shall” designates a mandatory procedure.

The Ontario Superior Court of Justice recently addressed this issue in Bondfield Construction Co. v. London Police Services. The court held that the CCDC dispute resolution clause creates a mandatory obligation to arbitrate. The court accordingly stayed an action which had been bought in relation to the CCDC contract.

The Facts

In November 2007, Bondfield as general contractor entered into a contract with the London Police Services Board as owner for the renovation and expansion of the Board’s headquarters. The contract was in the standard form CCDC-2 Stipulated Price Contract. Paragraph 8.2.6 of that contract reads as follows:

“By giving a notice in writing to the other party not later than 10 working days after the date of termination of the mediated negotiations under para. 8.2.5, either party may refer the dispute to be finally resolved by arbitration under the latest edition of the Rules of Arbitration of CCDC 2 Construction Disputes. The arbitration shall be conducted in the jurisdiction of the Place of the Work.” (underlining added)

The work began in November 2007. Bondfield alleged that conduct of the Board delayed the completion of the project by 17 weeks. In May, 2008, Bondfield gave notice to the architectural consultant of its claim for delay. In January, 2009, the consultant recommended that the dispute be resolved pursuant to the contracts’ dispute resolution process.

In June, 2010, Bondfield invited the Board to enter into a dispute resolution process involving an “independent third party” to avoid lengthy litigation. In July, 2010, the Board replied that it wanted to follow the contract’s dispute resolution clause and asked the consultant to deal with the Board’s deficiency claims, which the consultant did in October 2010. In November 2010 Bondfield wrote a “dispute” to the consultant’s report and suggested that a project mediator be appointed, and the Board then suggested a person to be the mediator.

In June 2011, Bondfield delivered a claims brief to the Board which referred the brief to the consultant for a report. In July, 2011 the Board’s lawyers said that they hoped for an answer on the claim from the Board by the middle of that summer. On July 29, 2011, this action was commenced. The Board delivered its defence in November 2011 and in that pleading alleged that the action was commenced outside the Ontario 2-year limitation period. Bondfield then brought a motion to stay its own action on the ground that arbitration was mandatory under the dispute resolution clause in the CCDC contract. The Board resisted the motion on the ground that the action commenced by Bondfield was the preferable procedure to resolve the dispute.

The Decision

The Ontario Superior Court held that arbitration was mandatory under the CCDC-2 contract and stayed the action by Bondfield. The court referred to prior decision in Brock University v. Stucor Construction Ltd. (2002), 33 CLR (3d) 182 ( Ont. S.C.J.) as being on point on the same clause. In that case, the owner sought a stay of a mechanics’ lien action brought by the contractor on the basis of the dispute resolution clause in the CCDC-2 contract between the parties, and the court granted the stay. The court also referred to the decisions in Automatic Systems Inc. v. E.S. Fox Limited [1995] O.J. No. 461 [Gen. Div.]; Merit Sinclair Developments v. O.R. Haemet Sephardic School, [1998] O.J. No. 5225[Gen. Div.] and Atyscope Richmond Corp. v. Vanbots Construction Corp., [2001] O.J. No. 638 (S.C.J.) as evidencing the same approach.

The court held that the arbitrator should deal with all the objections raised by the Board, with respect to whether the dispute fell within Article 8.2 of the CCDC contract, the alleged dilatory pursuit of its remedies by Bondfield and the limitation period, and otherwise.

The court also concluded that, in bringing the application to stay its own action, Bondfield was entitled to rely upon Article 8.2 of the contract and section 106 of the Courts of Justice Act . The normal route to a stay an action brought in the face of an arbitration clause is Section 7 of the Arbitration Act, but that section was unavailable to Bondfield since it only allowed “another party”, not the party bringing the action, to seek a stay of the action. However, section 106 of the Courts of Justice Act permitted the court to stay the action and it was available to Bondfield since it was available to “any person, whether or not a party” to the action. The court also noted that the alleged dilatory pursuit of its remedies by Bondfield might be answered by Article 1.3.2 of the CCDC contract which states that “ No action or failure to act by the Owner, Consultant, or Contractor shall constitute a waiver of any right or duty afforded any of them under the Contract, nor shall any such action or failure to act constitute an approval of or acquiescence in any breach there under, except as may be specifically agreed in writing.”

Discussion

Reading this decision, one would conclude that the mandatory effect of the dispute resolution provision, Article 8, in the CCDC-2 contract has been definitively determined. Perhaps it has, but not yet by an appellate court. While the principle in this decision may well be upheld by an appellate court, there are several issues which are lurking under the surface which have not yet been addressed by the courts.

The first has to do with the words “may” and “shall” in Article 8. As noted above, the pivotal clause in Article 8 is clause 8.2.6. That clause says that “either party may refer the dispute to be finally resolved by arbitration….” Normally the word “may” means that arbitration is permissive, and there are many cases holding that “may” in an arbitration clause means that arbitration is not required.

Moreover, the word “may” in Article 8.2.6 stands in stark contrast to the word “shall” in virtually all the prior clauses within Article 8.2. Thus, Article 8 8.2.1 says that “the parties shall appoint a project mediator…”. Article 8.2.2 says that a “party shall be conclusively deemed to have accepted a finding of the Consultant…” unless certain steps are taken. Article 8.2.3 says that the “parties shall make all reasonable efforts to resolve their dispute…” Article 8.2.4 says that “the parties shall request the Project Mediator to assist the parties to reach agreement….” Article 8.2.5 says that if the dispute is not resolved within 10 working says, then the “Project Mediator shall terminate the mediated negotiations….” And then Article 8.2.6 uses the word “may”.

Normally one would think that by using a different word in Article 8.2.6, the parties intended a different meaning, and the normal difference between “shall” and “may” is that the latter is permissive. One would think that some analysis or reasoning of the use of those words would be necessary to arrive at the conclusion that arbitration is mandatory.

It is true that Article 8.1.1 starts with mandatory wording: “ Differences between the parties to the Contract as to the interpretation, application or administration of the Contract….shall be settled in accordance with the requirements of Part 8…” So there is a mandatory requirement to use the procedures in Article 8.2. But that leaves open the questions: What are those procedures? And do they include mandatory or permissive mediation?

The second issue left open for discussion is the actual workings of Article 8.2.6. It seems fairly clear that, even if Article 8.2.6 does permit one party to refer the dispute to arbitration, that party can only do so “within 10 days after the termination of mediated negotiations…” If neither party does so, then Article 8.2.7 says that “the arbitration agreement under paragraph 8.2.6 is not binding on the parties… and the parties may refer the unresolved dispute to the courts…”

So Articles 8.2.6 and 8.2.7 appear to create an opt-in regime in which one party may force the other party to arbitrate, but must do so within 10 days of the termination of the mediated negotiations. Exactly why the CCDC contract created an opt-in arbitration regime is unclear, but that is the regime that is apparently intended. And the concept of an opt-in arbitration regime gives sense to the word “may” in Article 8.2.6, since it means that either party may, but need not, refer the matter to arbitration; if either party does then the arbitration agreement is binding; but if either party does not, then the arbitration agreement is not binding.

But if that is the meaning of the arbitration regime in Article 8.2 of CCDC-2, then how does it apply to the facts in this case? The mediation procedures referred to in Article 8.2.1 to 8.2.5 have tight timeframes, none of which were observed in this instance. Unless the consultant was the “project mediator” which does not seem to have been the case, the mediation procedures never occurred. The “termination of the mediated negotiation” referred to in Article 8.2.6 never happened, so the 10 Working Days in which either party could refer the matter to arbitration never occurred.

What does all of this mean? At least two results seem possible. The first could be that the procedures under Article 8.2 are mandatory and a precondition to any substantive rights to litigate arising. If this is so, then the limitation period never started running and the parties have to “go back to GO” and start all over again, right back at mediation under Article 8.2.1. Article 8.2.1 says that if the parties neglect to appoint a project mediator within 20 days of signing the contract, then the mediator shall be appointed within 10 days of one of the parties making that request. Are the parties back at that point in the process? And does the court have the power to appoint a mediator if the parties do not agree on one? Or is Article 8.2 an agreement “to have an independent third party resolve the claim…” within section 11(1) of the Ontario Limitations Act, 2002 so that the limitation period does not start running until the attempted resolution process is terminated or one party terminates or withdraws from the agreement? Or does that section only apply to agreements made after the dispute arises?

The other result could be that, since the mediation procedures weren’t used, then the normal procedural and limitation rules are applicable. In this case, it would seem that the opt-in arbitration regime has not been used and therefore recourse to the courts is permissible. Does this mean that the limitation period is running in the meantime? That result may have serious repercussions in terms of the limitation period and the lengthy time that had transpired since Bondfield first gave notice of its delay claim in 2008. This case highlights, once again, the limitation dangers inherent in mediation and arbitration clauses.

These questions may not be debated publicly in this proceeding since the court has ordered that the action be stayed and the dispute dealt with by arbitration. But in some future case, an appellate court may have to address exactly what Article 8.2 of CCDC-2 means and what are the consequences of not following the regime set forth in that article.

See Heintzman and Goldsmith on Canadian Building Contracts, 4^th ed., chapter 10, parts 1, 4 and 6

Bondfield Construction Co. v. London Police Services, 2013 ONSC 4719

Arbitration – mediation – building contracts – obligation to arbitrate – limitations

Thomas G. Heintzman O.C., Q.C., FCIArb September 2, 2013

www.heintzmanadr.com

Arbitration Building Contracts mediation clauses

When Is A Commercial Arbitration Decision Unreasonable?

Canadian courts will generally over-rule a decision of a domestic arbitral tribunal only if the decision is “unreasonable.” What does this word mean? Is the standard of “unreasonableness” different in a commercial arbitration than, say, in a labour or employment arbitration? If the arbitral award is found to fall within the bounds of reasonableness by the judge who hears the motion to over-rule it, how can an appellate court then say that the decision is “unreasonable”?

These questions are raised by the recent decision of the Newfoundland and Labrador Court of Appeal in St. John’s (City) v. Newfoundland Power Inc. The Court of Appeal allowed an appeal and set aside the decision of the arbitral tribunal under a long term power lease, even though the judge who first heard the motion to set aside the arbitral decision upheld the decision as reasonable. When one judge had found that the arbitral decision was reasonable, how did the Court of Appeal arrive at the decision that it was unreasonable?

Background

The arbitration arose under a long term lease between the City of St. John’s and Newfoundland Power. The lease was for the use of the Mobile River. Clause 1 of the lease permitted the City to terminate the lease upon:

“payment to the Company of the value of all works and erections constructed or provided by the Company within and without the Mobile River watershed subsequent to the date of this Lease for the primary purpose of developing the waters of Mobile provided such works and erections are in use by the Company for that primary purpose at the time notice of termination of the Lease is given by the Council and also at the time of termination of the said Lease…” (emphasis added)

The meaning of the underlined words was the source of the contention. Newfoundland Power said that they meant that, on termination of the lease, the City was required to pay for the on-going value of its operating business in the Mobile River watershed as the time of the termination, including the value that it derived from the use of the river which it leased from the City. The City said that, on termination of the lease, it was only required to pay for the physical works and erections which Newfoundland Power had constructed and nothing more.

The lease had been previously amended to delete the words “aggregate cost of works and erections … less depreciation” and replace them with the words “value of all works and erections … in use.”

The Arbitral Decision

The majority of the arbitral tribunal decided in favour of Newfoundland Power and held that the City was obliged to pay the full amount of the value of Newfoundland Power’s business in the Mobile River watershed.

The majority held that this interpretation followed from the concluding words of clause 1 of the Lease. Those words contained a proviso which referred to another right of the City under section 29 of the governing statute (the St. John’s Street Railway Act), namely, the right to purchase the assets and business of Newfoundland Power. Under that right, the City was obliged to pay for the “value of the said undertaking, plant, property, assets and rights of the Company.”

The majority held that the reason for the reference to section 29 of the Act within clause 1 was to provide guidance to the appraisers in making valuation when the City terminated the lease. The majority stated that “the wording of Clause 1 of the Lease as amended ties the termination process to the concepts expressed in Section 29 of the St. John’s Street Railway Act”. Accordingly, the majority of the arbitral tribunal concluded that, upon termination of Newfoundland Power’s rights, (rather than the purchase of Newfoundland Power’s business), the valuation of Newfoundland Power’s undertaking must take into account the “assets” and “rights” of the Company as they were explicitly referred to in section 29.

With respect to the meaning of the word “value” in the lease, the majority of the arbitral tribunal referred to dictionary meanings and concluded that the ordinary meaning of “value” did not mean “depreciated cost”. The majority referred to the fact that clause 1 of the lease had been amended to remove the words “aggregate cost of works and erections… less depreciation” and had replaced those words with the words “value of all works and erections”. From this amendment, the majority concluded that the appraisal process would be incorrectly conducted if it applied “cost less depreciation”. Due to the amendment, the word “value” could not mean “cost less depreciation.”

Privative Clauses

In the present case, two privative clauses applied to the decision of the arbitral tribunal. One was contained in clause 1 of the lease itself. That clause stated that “the award of any two such arbitrators shall be final and binding between the parties”. The other was in section 36 of the Arbitration Act, RSNL 1990, c. A-14 which states that “the award made by arbitrators or an umpire is final and binding on the parties and persons claiming under them.”

Standard of Review

Newfoundland and Labrador has not adopted the Uniform Law Conference’s Uniform Arbitration Act. That Uniform Act provides for a right of appeal if leave is granted by the provincial superior court from a decision of an arbitral tribunal. The Uniform Act has been adopted in most of the Canadian provinces, but not in Newfoundland and Labrador. Therefore, the only remedy to overturn the decision of an arbitral tribunal in Newfoundland and Labrador is an application for judicial review.

Both the judge hearing the original application and the Court of Appeal held that the proper standard of judicial review was set forth in the decision of the Supreme Court of Canada in Dunsmuir v. New Brunswick, [2008] 1 S.C.R. 190. Under Dunsmuir, there are only two standards of judicial review: correctness and reasonableness. There are two steps in determining which standard of review applies. The first step in the Dunsmuir analysis is to determine whether the courts have already established an appropriate standard of review for the particular tribunal whose decision was being reviewed. Both courts agreed that no appropriate standard of judicial review had been established for this arbitral tribunal.

The next step in the Dunsmuir analysis is the “contextual analysis” in which the following factors are considered:

(1) the presence or absence of a privative clause;

(2) the purposes of the tribunal;

(3) the nature of the question at issue; and

(4) the expertise of the tribunal.

The Court of Appeal agreed with the application judge that when these factors were applied to the arbitral tribunal in the present case, the proper standard of review was reasonableness. That is, the arbitral decision should only be set aside if it was unreasonable.

The Court of Appeal then considered how the reasonableness standard should be applied. It referred to the decision of the Supreme Court of Canada in Newfoundland and Labrador Nurses’ Union v. Newfoundland and Labrador (Treasury Board), [2011] 3 S.C.R. 708. It held that this decision had clarified that the adequacy of reasons is not a “stand-alone basis for quashing a decision.” Courts are not required, as it said, to “undertake two discrete analyses – one for the reasons and a separate one for the result.” The Court of Appeal noted Justice Abella’s statement in the Newfoundland and Labrador Nurses’ Union decision that:

“even if the reasons in fact given do not seem wholly adequate to support the decision, the court must first seek to supplement them before it seeks to subvert them. For if it is right that among the reasons for deference are the appointment of the tribunal and not the court as the front line adjudicator, the tribunal’s proximity to the dispute, its expertise, etc, then it is also the case that its decision should be presumed to be correct even if its reasons are in some respects defective.”

The Newfoundland and Labrador Court of Appeal then stated its duty in applying the Dunsmuir test as follows:

“This Court must therefore determine whether the reasons meet the standard of ‘justification, transparency and intelligibility’. Even if the reasoning is in some respects flawed, this Court must determine whether the outcome is acceptable as being defensible in respect of the facts and the law by examining any alternative arguments which could have been made.” (emphasis added)

Decision of the Court of Appeal

The Court of Appeal said the following in starting its analysis:

“In this case, however, I am satisfied that the majority made a number of errors in its reasoning process which led to a result that is not reasonable and supportable given the wording of the lease and the context in which it was negotiated. The outcome is not defensible as a possible, acceptable outcome, given the commercial context in which the lease was to be interpreted and applied.”

The Court of Appeal held that the majority of the arbitral tribunal had made two fundamental errors in the interpretation of clause 1 of the lease. The first error arose from the majority applying the valuation provision relating to the purchase of the business of Newfoundland Power. That provision had no application when the valuation related to the termination of the lease.

The Court of Appeal said:

“What was to be valued varied significantly depending on whether the City acquired the electrical generating plant by purchase pursuant to section 29 or by termination of the lease. If the City terminated the lease after forty-seven years it had to pay the value of the “works and erections … in use”. If the City exercised its right to purchase the Company as a going concern under section 29 of the St. John’s Street Railway Act, which it could do during the forty-seven year term of the Lease, it had to pay the value of the “undertaking, plant, property, assets and rights”….

Intuitively, the different bases of valuation make sense. If the City terminated the lease, Newfoundland Power would no longer have the right to use the water or the land on which the works and erections sat. In other words, its franchise would be terminated….

Here, Newfoundland Power and the City entered into a lease from the City with an express right of termination after forty-seven years upon three years notice with a compensation formula in favor of Newfoundland Power limited to the value of works and erections in use at the end of the lease to be valued by three arbitrators. There would be no other compensation based on a going concern or otherwise because of the express language set out in the amended clause 1 of the lease dated, October 21, 1949…..

The majority’s holding that the closing portion of clause 1 supported the contention that the valuation which occurs on the termination of the lease must be consistent with the valuation that occurs upon the City exercising its rights under section 29 was unsupportable and unreasonable and ignores the specific nature of the franchise rights granted by the City to Newfoundland Power.”

The Court of Appeal also held that the majority of the arbitral tribunal had erred in its interpretation of the word “value.” It effectively said that the majority had ignored the fact that what was to be valued was “the works and erections in use”, not the business. It said:

“The words “works and erections” generally refer to physical assets, a fact noted by the minority arbitrator. While the addition of the words “in use” could connote an intention that the City would be taking over an operating facility, read in the context of the discussion above, it is clear that the words “in use” did not intend to transform the valuation from one including only physical assets into one including all associated rights and intangible property. Their inclusion was meant only to identify which physical assets are to be valued, i.e. only those which are in use.

This interpretation is commercially sensible. Presumably, the words “in use” were added so that structures which were no longer necessary or functioning for the purpose of electrical power generation, would not be included in the assessment of value. Newfoundland Power is to be paid for the value of only those physical assets which it was using to generate electrical power at the time of notice and termination. These are the only structures of value that it is losing upon termination of the lease.

The Court of Appeal held that the majority of the arbitral tribunal had erred by relying so heavily on the changed definition of “value” in the lease. In the court’s view, the amendment inserted into the lease “one method of valuation with the broader concept of ‘value’, which included as a possible interpretation the original method of valuation….The effect of the amendment, from a stand point of reasonableness, would appear to be intended to give greater flexibility to the arbitrators in determining which method of valuation is appropriate upon termination of the lease of those works and erections that are in use and are to be valued.”

The Court of Appeal then considered what result flowed from its conclusions, particularly in light of the finding by the application judge to the contrary. It said the following:

“The errors identified in the reasoning process of the majority of the arbitrators led to a decision which is unreasonable and unsupportable based upon the wording of the lease and the context in which the agreement was made. Therefore, the applications judge erred by finding that the decision of the majority was reasonable and within the range of possible outcomes.”

The Court of Appeal accordingly allowed the appeal and referred the matter back to the arbitral tribunal to be determined in accordance with the analysis in the Court of Appeal’s decision.

Discussion

This decision appears to reflect a tendency by the courts to review commercial agreements on a stricter basis than other agreements. In the case of commercial agreements, the courts have at their disposal long-standing and well known principles of contractual interpretation. When the arbitral decision offends one or more of those principles, then a court can conclude that the decision is “unreasonable”.

Two of the best known principles of contractual interpretation are the rule prohibiting reference to irrelevant considerations and the parole evidence rule. Once the Court of Appeal concluded that the valuation principles applicable to the purchase of Newfoundland Power’s business were irrelevant to the valuation arising from the termination of the lease, then it was almost inevitable that it would conclude that the arbitral decision was unreasonable. When, in addition, the court concluded that the prior versions of clause 1 were not helpful in arriving at the proper interpretation of that clause, then its inclination to interfere was likely greater. The only expertise brought by the arbitral tribunal to the process of interpreting the lease was legal expertise, and the court, which is comfortable with interpreting commercial agreements and rightly considers itself expert in doing so, undoubtedly felt that it should have little reluctance in setting the tribunal’s award aside.

This decision will be of interest to those involved in disputes involving the interpretation of construction and procurement agreements. Those disputes often involve loaded words such as “value” and the dispute may revolve around whether certain factors are relevant or irrelevant in the interpretation process, or whether the negotiations or prior drafts of the agreement should be looked at. If one party to a construction dispute believes that the arbitration tribunal got the interpretation wrong, then the decision in St. John’s v. Newfoundland Power will be a useful decision in support of an application for judicial review.

Another view of this decision may be that courts are far too ready to set aside arbitral decisions. Those with this view will see this decision as exactly the kind of case in which the court improperly intervened on a valuation matter that was at the heart of what the arbitral tribunal was asked to decide.

As a footnote to this decision, one could consider how it would have been decided if the arbitration in question was an international commercial arbitration, not a domestic arbitration, and the Model Law attached to the International Commercial Arbitration Act of Newfoundland and Labrador had applied. That Act is similar to the many provincial statutes which adopt the UNCITRAL Model Law across Canada. Article 34 of the Model Law states the grounds upon which there may be recourse against an arbitral decision. Those grounds include:

incapacity by a party
invalidity of the agreement
lack of notice
the arbitral tribunal deciding a dispute or matter falling outside the terms of the arbitration agreement
the wrong composition of the tribunal or
the determination by the tribunal of a matter which is incapable of being arbitrated, or contrary to public policy.

None of those grounds appear to include an error of law made by an international commercial arbitration tribunal within its prima facie jurisdiction. If that is so, then this decision highlights the wider authority that international commercial arbitration tribunals have than domestic tribunals. It also highlights the broader supervisory authority that provincial superior courts have over domestic arbitrations than over international commercial arbitration tribunals. The Model Law appears to contemplate that international commercial arbitration tribunals may make errors of law within their jurisdiction and that Law gives the courts no express authority to set aside such errors. This being the case, it may be doubtful that the Dunsmuir analysis has any application to international commercial arbitration.

With respect to domestic arbitration tribunals, however, Canadian law contemplates that provincial superior courts have authority to set aside errors of law made by domestic arbitration tribunals based upon the standards of “correctness” and “reasonableness” stated in Dunsmuir. If the decision in St. John’s v. Newfoundland Power tends to show that the courts apply a higher degree of scrutiny to legal error by commercial than to other types of arbitration, then it may be ironical that that there is no judicial review for error of law made in international commercial arbitrations.

See Heintzman and Goldsmith on Canadian Building Contracts, 4^th ed, chapter 10

St. John’s (City) v. Newfoundland Power Inc., 2013 NLCA 21

Arbitration – Standard of Review – Error of Law – Reasonableness – Contracts -Interpretation

Thomas G. Heintzman O.C., Q.C., FCIArb August 1, 2013

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Arbitration Contracts error of law reasonableness standard of review

May An Order Dismissing A Stay Motion Be Appealed?

In Canada, there has been a controversy about appeals from stay motion decisions in the context of arbitration clauses. The issue is whether a decision of a motion judge denying the stay of an action, when the moving party relies on an arbitration agreement, may be appealed to the Court of Appeal. The controversy arises from a sub-section found in the Uniform Arbitration Act drafted by the Uniform Law Conference of Canada and adopted in many Canadian provinces.

In Hopkins v. Ventura Custom Homes Ltd., the Manitoba Court of Appeal has recently held that such a motion judge’s decision may be appealed if that decision is based upon the motion judge finding that arbitration agreement does not apply to the dispute. This decision is consistent with earlier decisions of the Courts of Appeal of New Brunswick, Ontario and Alberta. These decisions appear to now consistently hold that an appeal is not statutorily barred if the motion judge’s decision to deny the stay is based upon a determination that the arbi

appeal Arbitration jurisdiction of appellate court stay motion

When Does An Arbitration Clause Require Arbitration?

Whether an arbitration agreement requires, or only permits, arbitration is a continuing issue under arbitration law. In building contracts, this issue often arises when the agreement states that arbitration will follow mediation or the involvement of the consultant on the project. The questions that can arise is whether arbitration is mandatory if mediation or the consultant’s involvement does not occur.

This issue was recently considered by the Alberta Court of Appeal in A.G. Clark Holdings Ltd. v HOOPP Realty Inc. In that case, the Alberta Court of Queen’s Bench had concluded that, since the dispute had not been dealt with by the consultant, the parties could proceed to litigation in court, and that arbitration was not mandatory. The Court of Appeal reversed and held that arbitration was mandatory.

The dispute resolution clause in question was a variant of that found in one of the standard forms of building contract used in the Canadian construction industry, namely, the CCDC 2 Stipulated Price contract. Accordingly, the Alberta Court of Appeal’s decision provides important insight into when and whether a dispute resolution clause similar to that found in the CCDC documents will be held to be mandatory or permissive.

Background

In 1999, Clark Builders and HOOPP had entered into a Design-Build Agreement. Under that agreement, Clark was to design and build a warehouse for HOOPP, the owner. The warehouse was built in 1999 and 2000. As a result of alleged deficiencies in construction, HOOPP commenced an action against Clark in 2002 alleging breach of contract and negligence.

Clark brought a motion to stay the action and require the claim to be dealt with by arbitration. The judge hearing the motion held that the dispute resolution clause in the agreement did not mandate arbitration, and so he dismissed Clark’s motion, and Clark appealed.

The dispute resolution clause in the building contract followed, to some extent, the wording in the standard form CCDC 2 Stipulated Price Contract. The clause in the contract stated as follows (with less relevant portions excluded, and the most relevant portions emphasized):

Part 8 Dispute Resolution

GC 8.1 AUTHORITY OF THE CONSULTANT

8.1.1. Differences between the parties to the Contract as to the interpretation, application, or administration of the Contract or any failure to agree where agreement between the parties is called for, collectively referred to as disputes, which are not resolved in the first instance by findings of the Consultant as provided in GC 2.1 – CONSULTANT, shall be settled in accordance with the requirements of Part 8 of the General Conditions – DISPUTE RESOLUTION. . . .

GC 8.2 NEGOTIATION, MEDIATION AND ARBITRATION. . .

8.2.3 The parties shall make all reasonable efforts to resolve their disputes by amicable negotiations and agree to provide, without prejudice, frank, candid and timely disclosure of relevant facts, information and documents to facilitate these negotiations.

8.2.4 After a period of 10 Working Days following receipt of a responding parties notice in writing of reply under paragraph 8.2.2, the parties shall request the Project Mediator to assist the parties to reach agreement on any unresolved disputes. The mediated negotiations shall be conducted in accordance with the latest edition of the Rules for Mediation of Construction Disputes …

8.2.5 If the dispute has not been resolved within ten (10) Working Days after the appointment of the Project Mediator either party may by notice to the other withdraw from the mediation process.

8.2.6 All disputes, claims and differences not settled as herein provided, arising out of or in connection with the Contract or in respect of any defined legal relationship associated with it or derived from it, shall be referred to and finally resolved by arbitration in accordance with the Alberta Arbitration Act. … [emphasis added]

During negotiation, the parties had discussed a form of dispute resolution clause that read as follows:

8.2.6 By giving notice in writing to the other party, not later than 10 Working Days after the date of termination of the mediated negotiations under paragraph 8.2.5, either party may refer the dispute to be finally resolved by arbitration … .

8.2.7 On expiration of the 10 Working Days, the arbitration agreement under paragraph 8.2.6 is not binding on the parties and, if a notice is not given under paragraph 8.2.6 within the required time, the parties may refer the unresolved dispute to the courts or to any other form of dispute resolution, including arbitration, which they have agreed to use. [emphasis added]

Those familiar with the CCDC 2 Stipulated Price Contract will recognize the latter wording as coming from General Condition 8.2 of that contract.

The Courts’ Decisions

The judge hearing the motion held that Part 8 of the agreement set out a series of steps which must be followed before the arbitration clause became applicable or mandatory. He found that only those disputes “which are not resolved in the first instance by findings of the Consultant” could proceed to the next steps in the process. Since the parties had not referred the dispute to the consultant, the judge held that the arbitration procedure had not been invoked and was not mandatory.

The Court of Appeal disagreed for two reasons:

First, that court found that the wording of Articles 8.1.1 and 8.2.6 were clear and required arbitration whether or not the parties had referred the dispute to the consultant. Article 8 contained a complete dispute resolution regime which did not require either party to refer the dispute to the consultant for it to be applicable.

Second, the Court of Appeal looked at the drafts of Article 8 and held that those drafts demonstrated that the parties had contemplated a permissive arbitration regime and had discarded it in favour of a mandatory regime. The court held that:

The notion of “Dispute Resolution” could, of course, encompass litigation, as was evident in the original form of the Agreement. The deliberate decision of the parties to remove reference to litigation from the dispute resolution provisions of the Agreement emphasizes that their mutual intention at the time of drafting was to refer disputes to arbitration rather than proceed to litigation. HOOPP’s current position, that it is entitled to bypass arbitration in favour of litigation, is coloured by that earlier decision.

The Court of Appeal effectively held that the dispute resolution clause allowed for two routes to mandatory arbitration, one after consideration by the consultant, and the other without the involvement of the consultant. In its view, this interpretation was “rational” from two aspects.

First, it recognized that allegations of negligence could not properly be dealt with by the consultant, but could be dealt with by arbitration.

Second, it allowed the parties to go through a mediation type process with the consultant if they wished to, but did not require them to do so before proceeding to arbitration.

How does this decision affect the interpretation of GC 8.2 of the CCDC 2 Stipulated Price Contract? Some might see that provision as an “opt-in” arbitration procedure. Under that view, arbitration is mandatory once one of the parties elects arbitration under GC 8.2.6, and the meaning of the word “may” in that clause means that one of the parties may choose, but is not required to choose, arbitration, but once chosen, arbitration is binding on both parties. The other view might be that the word “may” means that arbitration is entirely voluntary.

What does appear clear from GC 8.2.7 of CCDC 2 Stipulated Price Contract is that, if neither of the parties asks for arbitration within the 10 day period referred to in that clause, then either party can go to court. In the Clark v HOOPP case, the Alberta Court of Appeal held that, by their amended form of dispute relation, the parties had eliminated that choice and provided for arbitration to be the only form of dispute adjudication.

Another interesting aspect of the Court of Appeal’s decision is its conclusion that Clark was permitted to appeal the motion judge’s decision. Section 7 of the Alberta Arbitration Act states that the court shall stay an action brought in breach of an arbitration agreement, subject to certain exceptions. Sub-section 7(6) states that “There is no appeal from the court’s decision under this section.” The court held that this prohibition against appeal only applies when the merits of a stay motion are being considered. If the issue is whether the motion judge mis-interpreted his or her jurisdiction to make the stay decision, then the prohibition does not apply. The Court of Appeal held that this was the situation before it:

Only if that agreement contained a mandatory arbitration clause would s 7 of the Arbitration Act apply. The chambers judge concluded that the agreement did not contain such a clause and he did not, therefore, address the application of s 7 to these parties and this dispute. The chambers judge’s decision on that preliminary issue is subject to appeal.

Accordingly, since dispute resolution, properly interpreted, did give rise to a prohibition of a court action under section 7 of the Act, then there was a right of appeal from the motion judge’s erroneous determination of that issue.

See Heintzman and Goldsmith on Canadian Building Contracts, 4^th ed,, chapter 10, part 6

A.G. Clark Holdings Ltd. v HOOPP Realty Inc., 2013 ABCA 101.

Arbitration – Construction law – Mediation – Mandatory or Permissive arbitration – Stay of Arbitration Proceedings – Appeal from Stay Application

Thomas G. Heintzman O.C., Q.C., FCIArb June 9, 2013

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appeal from stay application Arbitration Construction Law mandatory or permissive arbitration Mediation stay of arbitration proceedings

Is A “May Arbitrate” Clause Mandatory Or Permissive?

What is the meaning of an arbitration clause which states that a dispute “may be determined by arbitration”? Does the clause mean that the arbitration process is permitted but not mandatory? Or does the word “may” mean that the parties do not have to have a dispute, but if they do, the arbitration clause applies?

In Durham (Regional Municipality) v. Oshawa (City), the court held that the word “may” in an arbitration clause makes the arbitration permissive and not enforceable. This conclusion is significant for building contracts which often use very similar wording.

Background

In December 2004, the Regional Municipality of Durham (the Region) passed a resolution relating to the jurisdiction over public transportation in the Region. The resolution transferred the jurisdiction over those facilities to the Region from City of Oshawa and certain lower-tiered municipalities which had previously had jurisdiction over them. The bylaw provided that the amount and future payment of exiting and unfunded liabilities was to be determined by negotiations between the region and the lower-tiered municipalities. It stated that “any matter not agreed to within three (3) months of the Effective Date [of the bylaw] may, at the request of the Region or a lower-level municipality, be determined by arbitration under the provisions of the Ontario Arbitration Act.”

There were some complicated issues to be resolved between the Region and the lower-tiered municipalities: the identity of the facilities to be transferred, the nature of the legal arrangements (sale or lease), and amount and nature of the unfunded liabilities relating to former transit employees. Up until late 2009, it was not known exactly which assets would be transferred.

In early April 2009, the Region settled the issue of the transferred costs and liabilities with all the other lower-tiered municipalities except Oshawa. On April 1, 2009 the Region requested arbitration. Oshawa asserted that, from the very beginning, it refused to accept responsibility for the unfunded liabilities. On April 21, 2009, Oshawa passed a resolution denying responsibility for the unfunded liabilities and refusing to proceed to arbitration. On March 22, 2011, the Region commenced an action against Oshawa for payment of those liabilities.

The Regions took the position that the two year limitation period commenced on April 21, 2009 when Ottawa passed its resolution denying responsibility for the unfunded liabilities. The Region said that it was on that date that it “discovered” that there was a dispute with Oshawa, and that its action on March 22, 2011 was commenced within the two year limitation period from that date.

Oshawa asserted that the limitation period commenced in March 2005 when the three month negotiation period expired after the Region’s bylaw and that the Region’s action was barred by the limitation period. In the alternative, Oshawa said that its refusal to accept responsibility for the unfunded liabilities was well known to the Region long before Oshawa’s resolution of April 21, 2009 and that the Region knew or should have known, long before Oshawa’s resolution, that Oshawa denied responsibility for those liabilities and that the limitation period was running.

The Decision

The court held that the Region’s bylaw did not create a mandatory obligation to arbitrate. The words “may…be determined by arbitration” only established a permissive arbitral regime in which either party could opt not to arbitrate. The court said:

“There is no decision that a permissive clause, in which parties “may” proceed to arbitration, triggers a limitation period. Had the limitation clause instead required the parties to attend arbitration after three months by using the word “shall”, it would have changed the complexion of Oshawa’s arguments.”

The court also held that the limitation period commenced when Oshawa passed a resolution denying liability for the unfunded obligations, not when the three month period expired after the Region’s bylaw was enacted. The parties had negotiated in good faith right up to April 2009, all apparently in good faith. The relevant financial statements, upon which a resolution of the issues between the municipalities could be resolved, were not available until April 2006. So the limitation period could not sensibly run from the expiry of the three month period after the Region’s bylaw was enacted . Since a municipality can only officially act by resolution, it was not until Oshawa’s resolution of April 21, 2009 that the Region could reasonably know, and therefore discover, that there was a dispute.

Comments

Whether an arbitration clause requires, or merely permits, arbitration is of crucial importance in any contract and, to no less an extent, in a building contract. How does this decision help us understand and apply arbitration clauses?

The Region’s bylaw used the word “shall” at least 15 times. It would seem that the arrangements instituted by the bylaw were mandatory, that the assets and liabilities were being transferred, with no going back. In those circumstances, what meaning should be given to “may”, at the request of the Region or a lower-tier municipality, be determined by arbitration”? Could the word “may” simply mean that the parties are not required to have a dispute? Did all the “shall”s in the bylaw mean that the regime itself was mandatory, but that disputes were not mandatory? Did it make sense that the municipalities would have two dispute resolution regimes (arbitration and an action) to resolve their disputes? Or does it make sense for an arbitration clause to be interpreted as permissive when that would mean that the Region had inserted an unenforceable clause into its bylaw?

This issue is of interest to construction law because wording of the same kind is found in building contracts . For example, GC 8.2 of the CCDC 2 Stipulated Price Contract is the dispute resolution clause in that contract. GC 8.2 has the word “shall” in it at least six times. But when it refers to arbitration, it says in GC 8.2.6 “either party may refer the dispute to be finally resolved by arbitration.” Other parts of GC 8.2 may make it clear that arbitration is mandatory if one party wants arbitration. But the use of the word “may” in the pivotal clause, 8.2.6 may confuse the issue if the decision in Durham v. Oshawa is strictly applied.

The decision in Durham v Oshawa may be more readily understood by considering whether the Region’s bylaw was an enforceable document as between the Region and Oshawa. If it was not, then the word “may” makes sense because a mandatory obligation could not be imposed on Oshawa. If this is the case, then this decision has no application to a contractual arbitration clause.

It is interesting that the Region did not press the point that the arbitration provision was mandatory. It had passed a resolution on April 1, 2009 that the dispute should proceed to arbitration. But when Oshawa passed a resolution on April 21, 2009 refusing to arbitrate, the Region did not try to force Oshawa to proceed with arbitration. Perhaps it did not do so because it was concerned that, on April 1, 2009, the two year limitation period had already passed since its 2004 bylaw and the three month period for negotiation. But having passed that resolution on April 1, 2009, it seems odd that it could later assert that the limitation period hadn’t even started to run.

There are some other interesting issues arising from this decision. But enough has been said to emphasize the point that limitation periods and arbitration clauses are a troublesome mixture.

Durham (Regional Municipality) v. Oshawa (City) (2012), 113 O.R. (3d) 54 (Ont. S.C.J.)

Construction Law – Arbitration – Limitation Periods

Thomas G. Heintzman O.C., Q.C., FCIArb April 20, 2013

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Arbitration Construction Law limitation periods

Who Decides If There Is An Appeal From A Court Order Requiring Arbitration: The Parties Or The Court?

One of the first issues that can arise in a dispute is whether arbitration or court proceedings must be pursued. The issue will often arise from a motion by a defendant in the action. The defendant will bring a motion to stay or dismiss the action on the basis that the dispute must be arbitrated.

What happens when one party wants to appeal the decision which grants the motion to stay or dismiss? Can the parties to the arbitration agreement agree beforehand that there shall, or shall not be, a right of appeal? That was the issue that Federal Court of Appeal recently considered in Murphy v. Amway Canada Corporation.

Interestingly, the Federal Court of Appeal held that, while the applicable arbitration legislation can preclude an appeal from that decision, the parties cannot, and that the court’s own statutory powers relating to appeals apply despite what the parties have agreed to. This decision could have wider ramifications relating to the parties’ ability to limit or expand the powers of courts relating to arbitration proceedings. According to this decision, the parties may have no right to do so.

Background

Amway is in the business of distributing home, personal care, beauty and health products. It does so through individual distributors who sell the products in their homes or through other persons they recruit. Mr Murphy was an Amway representative in British Columbia.

The agreement between Amway and Mr Murphy was called the Registration Agreement. The Registration Agreement contained a clause requiring any dispute between the parties to be arbitrated. The arbitration clause contained conflicting provisions relating to the arbitration. On the one hand it said that the Ontario Arbitration Act, 1991 was to govern the “interpretation, enforcement, and any proceedings in any federal or provincial court in Canada.” On the other hand, it said that Michigan law applied to the arbitration and that the “United States Arbitration Act shall govern the interpretation and enforcement of the arbitration rules and the arbitration proceedings.” The Rules of Conduct incorporated into the arbitration clause stated that the arbitration would be conducted under the procedures of JAMS (an American-based dispute resolution service) or the American Arbitration Association.

The Murphy v Amway decision:

The Murphy v. Amway decision is most famous for the ruling that a party to an arbitration agreement who asserts a claim under the Competition Act must bring the claim by way of arbitration, and cannot bring the claim in court. Accordingly, Mr. Murphy was precluded from bringing a class action asserting remedies under the Competition Act against Amway.

A judge of the Federal Court stayed Mr. Murphy’s action based upon the arbitration agreement contained in the agreement between Mr Murphy and Amway. Mr. Murphy appealed. A preliminary issue in the Federal Court of Appeal was whether Mr. Murphy had any right to appeal.

Amway argued that Mr. Murphy had no right of appeal from the decision of the Federal Court because, by virtue of the parties’ agreement, the Ontario Arbitration Act, 1991 applied. Section 7 of that Act provides for a party to an action bringing a motion to stay an action based upon an arbitration agreement. Sub-section 7(6) states that “there is no appeal from the court’s decision.” Accordingly, Amway argued that the parties had incorporated sub-section 7(6) into their agreement and that subsection precluded Mr. Murphy from appealing.

The Federal Court of Appeal rejected Amway’s submission and held that Mr. Murphy was entitled to appeal. It held that the Ontario Arbitration Act, 1991 did not apply to the Registration Agreement as a matter of statute law. It said: “Simply put, we are not bound by the term of that statute.” It so held presumably because the Registration Agreement related to an Amway representative located in British Columbia and a distribution agreement to be performed in British Columbia, and not agreements made in Ontario. The Federal Court of Appeal accordingly held that the Ontario Arbitration Act, 1991 only applied by way of agreement, that is, by being incorporated into the Registration Agreement.

The Federal Court of Appeal further held that, simply as an agreement, the arbitration clause in Registration Agreement could not over-ride the Federal Courts Act. That Act provides for an appeal to the Federal Court of Appeal from decisions of the Federal Court. In that situation, the Federal Court of Appeal held that the Federal Courts Act applied and was not ousted by the parties.

The Federal Court of Appeal distinguished the present situation from that found in a number of provincial trial and appellate courts decisions in which the court had applied sub-section 7(6), or the comparable section in other provinces. In those cases, sub-section 7(6) applied directly to the proceedings because the arbitration was governed by that provincial law. Here, the Ontario Arbitration Act, 1991 apparently had no application qua statute.

The Federal Court of Appeal also distinguished the decision in Halterm Ltd v. Canada, [1984] F.C.J. No 541. In that case the parties had effectively appointed the Federal Court trial division as the arbitrator of their dispute. In that situation, they were permitted to make a binding and effective agreement that there would be no appeal.

In the result, the Federal Court of Appeal held that the parties had not and could not agree there was no appeal from the judge’s order granting the stay. The Court proceeded to hear the appeal, but dismissed the appeal on the ground that the Federal Court had properly held that the dispute must be determined by arbitration.

Discussion

This decision raises the very interesting public policy issue of where the limits of agreement are in respect of court procedures generally and specifically in relation to arbitration proceedings.

There are a number of sections in the Ontario Arbitration Act, 1991 that state that there is “no appeal” or limited rights of appeal:

section 7(6) – no appeals with respect to a court decision to stay the action in favour of arbitration;

section 10(2) – no appeals with respect to the court’s appointment of the arbitral tribunal;

section 15(6) – right of appeal only by a removed arbitrator or party with respect to a court decision to remove an arbitrator;

section 16(4) – no appeal from court order appointing a replacement arbitrator; section 17(9) – no appeal from a court order dealing with a jurisdictional objection.

None of these prohibitions on appeals (and particularly the one found in sub-section 7(6) of the Ontario Act) are found in the British Columbia Commercial Arbitration Act. This may be the reason why Amway relied upon the Ontario Act.

These prohibitions on appeal exist alongside the provisions in the Courts of Justice Act and the Rules of Civil Procedure contemplating appeals from the same judges to courts of appeal. Nevertheless, the latter provisions have been found to be inoperative in the face of the specific prohibition on appeals found in the Arbitration Act, 1991.

Section 3 of the Ontario Arbitration Act, 1991 says that “the parties to an arbitration agreement may agree, expressly or by implication, to vary or exclude any provision of this Act except” certain specific sections. None of those non-waivable sections include any of the sections precluding appeals. In that situation may the parties agree that there is an appeal? Presumably the argument would be that the parties cannot create by an agreement an appeal to the courts; and that only the legislature can do that.

If that is so, and if the parties cannot contract in to an appeal, then should the parties be able to contract out of an appeal? Should they be able to contract out of the right in section 45 to seek leave to appeal? Section 45 is not one of the sections that the parties are precluded from waiving and the case law appears to support the entitlement of the parties to contract out of this statutory right to seek leave to appeal. But if a party can do so, should it also be entitled to contract out of the prohibition against appeals in the other sections?

These sections are, of course, one step closer to the arbitration than the situation in Murphy v. Amway. There, the appeal concerned an appeal from one Federal Court judge to the Court of Appeal, that is, an appeal within the court system itself. So the argument that the parties should not be able to contract out of the appeal rights found in the court statutes may have greater weight. Nevertheless, without citing any authority, the Federal Court of Appeal held that no such agreement can be made, even if the prohibition on appeal is exactly what is found in provincial arbitration statutes. Since the prohibition on appeals is found in provincial statutes, it is hard to say that such a prohibition is contrary to general public policy. The argument must be made entirely on the basis that the parties cannot, in advance, contract into or out of the provisions of the court system. For example, just as they cannot contract about what are the grounds for appeal to the Federal Court of Appeal (or the Supreme Court of Canada) will be between them, they cannot contract that there will be no such appeal.

The Ontario International Commercial Arbitration Act (ICAA) and the Model Law attached to that statute do not contain any prohibitions on appeals or any right to contract out of the statute. It is interesting to speculate why this is so, in light of the contrasting provisions in the domestic statute. So far as appeals are concerned, one might conclude that, being an international law intended to be adopted in many countries, the Model Law does not deal with rights of appeal, leaving each country to sort that matter out. In the case of Ontario, however, the effect is to leave wide open rights of appeal in many cases in which there would be no appeal under the domestic statute. So far as contracting out, ICAA and the Model Law are written in a fashion that makes it appear that they are public policy and that the parties cannot contract out of them.

All of the above, and the decision in Murphy v. Amway, may make us re-think the legal principles underlying the waiver or creation of rights relating to appeals and arbitration proceedings. Is the right to waive or create such rights based on contract law, administrative law, public policy or what, and why?

See Heintzman and Goldsmith on Canadian Building Contracts, 4^th ed., chapter 10

Murphy v. Amway Canada Corporation, 2013 FCA 38

Arbitration – Stay of court proceedings – appeals –

Thomas G. Heintzman O.C., Q.C., FCIArb March 10, 2013

www.constructionlawcanada.com

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Appeals Arbitration stay of court proceedings

Does A Mediation Agreement Suspend The Limitation Period Or The Period To Set Down A Lien For Trial?

An agreement to mediate is often found in arbitration and building contracts. Yet, the impact of mediation upon court or arbitral proceedings is uncertain. Does an agreement to mediate mean that, until the mediation occurs, there is no cause of action and therefore there is no entitlement to commence arbitration or an action? In that case, the limitation period would be effectively extended. In L-3 Communication Spar Aerospace Limited v. CAE Inc., 2010 ONSC 7133, 2011 ONCA 435, the Ontario Court of Appeal held that, until a contractual obligation to negotiate a compromise had been fulfilled or terminated, no cause of action arose and the limitation period was not running.

Or is an agreement to mediate simply not enforceable because an agreement to negotiate is not enforceable? If this is the case, then the limitation period is running and either party can ignore the mediation agreement and go to court or commence arbitration. The Ontario Court of Appeal so held in Federation Insurance Co. of Canada v. Markel Insurance Co of Canada, 2012 ONCA 218.

The uncertainty about the enforceability of mediation agreements creates real dangers for those engaged in dispute resolution under arbitration and building contracts. Fortunately, in Ontario there may be at least a partial solution in section 11 (“section 11”) of the Limitations Act, 2002 of Ontario (“Limitations Act”). This solution is often forgotten but in the recent decision in Tribury v. Sandro, the court held that a mediation agreement, once made, does effectively stop the limitation period from running.

However, there are other dangers arising from mediation agreements and limitation and procedural periods. The Tribury decision did not expressly determine whether the mediation agreement would suspend the limitation period even if it was not an enforceable agreement to mediate. In addition, section 11 only applies to limitation periods prescribed under the Limitations Act. Thus, in Tribury, the court did not apply section 11 to the two year period for setting a lien action down for trial under section 37 of the Construction Lien Act (“section 37”). What is the effect of mediations on all the other procedural and limitation sections found in Ontario statutes?

Section 11(1) states as follows:

“ If a person with a claim and a person against whom a claim is made have agreed to have an independent third party resolve the claim or assist them in resolving it, the limitation periods established by sections 4 and 15 do not run from the date the agreement is made until,

(a) the date the claim is resolved;

(b) the date the attempted resolution process is terminated; or

Background

Tribury was the general contractor on a construction project for Laurentian University. Sandro was the structural steel subcontractor and Edward was Sandro’s structural steel consultant. The project started in 2006 and ground to a halt in June 2007 due to the alleged failure of certain steel connections. Apparently, all parties accepted that the claims between the parties were “discovered” in June 2007 for the purposes of the Limitations Act. As will be seen later, one of the issues in the motions in question was whether some of the subsequent proceedings were brought within the basic two year limitation period set out in section 4 of the Ontario Limitations Act or, in effect, by June 2009.

In October 2008, Sandro commenced a construction lien claim against Tribury and Laurentian. The other issue in the motions in question was whether Sandro had set that lien claim down for trial within two years of that date as required by section 37 of the Construction Lien Act, or, in effect, by October 2010.

In December 2008, Tribury counterclaimed in Sandro’s lien action. In April 2009, Tribury started its own action which was substantially the same as its counterclaim in Sandro’s lien action. While Tribury agreed to withdraw that counterclaim, the order dismissing the counterclaim was not made until November 2010.

The Mediation

In March 2009, Sandro suggested mediation to all parties. In April 2009, counsel for all the parties participated in a conference call and all the parties, with the exception of one party, agreed to participate in mediation. That agreement was confirmed by a letter from Tribury which suggested the names of mediators, proposed deadlines for the mediation briefs and confirmed the parties’ tentative consent to a cost sharing for the mediator’s fees. In July, 2009, Sandro delivered its mediation brief to Edward. In March, 2010 the parties chose a mediator. In August, 2010, a mediation date in November 2010, was scheduled. On November 10, 2010, counsel for Edward advised the other parties that Edward was not prepared to mediate the “Sandro remediation costs”, namely the remediation costs which Sandro itself had incurred and was now claiming against Edward (as opposed to remediation claims being asserted by others against Sandro which Sandro claimed over against Edward). The mediation was cancelled.

The Impugned Proceedings

On December 3, 2010, Sandro issued a new Statement of Claim against Edward. On December 6, 2010, in Tribury’s 2009 action Sandro served a Statement of Defence, Crossclaim (against Edward) and Counterclaim (against Tribury).

The Motions

Edward then brought a motion to dismiss the December 2010 action and cross claim against it on the ground that the limitation period had expired.

Tribury bought a motion to dismiss Sandro’s lien action on the ground that it had not been set down within the two years period set forth in Section 37 of the Construction Lien Act. Section 37 requires that, within two years of the lien action that perfected the lien, an order must be made for the trial of an action in which the lien may be enforced, or an action in which the lien may be enforced must be set down for trial. Otherwise, the lien action must be dismissed.

Tibury also sought an order dismissing Sandro’s December 2010 counterclaim on the basis that, by December 2010, the limitation period had expired for that counterclaim to be brought.

The Decision

1. Section 11

So far as Sandro’s December 2010 claim and cross claim against Edward and its December 2010 counterclaim against Tribury, the Court held that the limitation period for commencing those claims was extended during the whole period from April 2009 to November 2010, and had not expired by the time that Sandro’s December 2010 claim, cross claim and counterclaim were commenced, by virtue of the mediation and the effect of section 11 of the Limitations Act.

First, the Court held that an agreement under section 11 did not have to specify that the limitation period was suspended until the conclusion of the mediation. The suspension of the limitation period was effected by section 11 itself, without the parties having to say so. Their agreement to mediate, not any words agreeing to a suspension of the limitation period, caused the suspension.

The Court distinguished section 23(3) from section 11 of the Limitations Act. Sub-section 23(3) is the general provision allowing parties to agree to suspend or extend the limitation period. That sub-section depends, for it to be activated, on the parties’ agreement to do exactly that, namely, suspend or extend the limitation period. In contract, section 11 depends, for it to be activated, upon the parties’ agreement to mediate. If there is an agreement to mediate, it is section 11 which then suspends the limitation period. The Court said:

Edward has not convinced me that the agreement referred to in section 11 of the Limitations Act requires specific language suspending or extending applicable limitation periods for its efficacy. In my view, what is required is an agreement which is entered into after a dispute has arisen whereby the parties agree to have a third party assist in resolving the dispute, nothing more. In the case before the court, the parties entered into an agreement to mediate in response to a dispute which had arisen among them. They have therefore met the requisite test.

Whether there was an agreement to mediate was disputed. After reviewing the evidence, The Court held there was an agreement to mediate and that it included the Sandro remediation costs. The Court found as follows:

The correspondence between the parties confirms their mutual intention to mediate the issues which arose following the failure of the steel connectors and I find that all parties decided to mediate these issues on the understanding that all outstanding damages issues would be mediated. Although the confirming letter did not specify which issues were to comprise the subject of the mediation, the agreement was open ended and not restricted in scope. There was a stated requirement in the letter confirming the mediation that both Sandro and Tribury submit damages briefs and there is no evidence that the parties intended that only some of the issues resulting from the failure of the steel connectors were to be mediated.

2. Section 37

So far as Sandro’s lien claim, the Ontario Superior Court exercised its discretion to permit that claim to proceed as an ordinary contract claim, and struck out the lien itself on the ground that the action had not been set down within the two year period set forth in section 37. In so deciding, it did not consider whether the mediation, and section 11 of the Limitations Act, could extend the time set forth in section 37. Since section 11 only refers to limitation periods in the Limitation Act, the Court presumably thought that it was self-evident that section 11 did not apply to section 37.

Discussion

There is good news (with a condition), bad news and two warnings arising from this decision.

First the conditional good news. If parties who are involved in a dispute agree to mediate, they thereby suspend the limitation period under section 11. This is a power that is often forgotten. The parties are not necessarily faced with a “do or die” alternative between commencing the proceeding on the one hand, or mediating and potentially letting the limitation period run out on the other hand. By reason of section 11, they are protected against the running of the limitation period by a proper mediation agreement.

The condition to the good news is this. In Tribury the Court held that the mediation agreement suspended the limitation period without inquiring whether the mediation agreement was an enforceable mediation agreement, so far as the obligation to mediate is concerned. That is, the Court did not consider whether the mediation agreement contained enough details to make it an enforceable agreement to mediate. There are many recent cases, particularly in the United Kingdom, holding that an agreement to mediate is not enforceable unless that agreement contains sufficient procedural details.

One explanation of the Tribury decision could be that it is not essential that mediation agreement be enforceable as such for it to activate section 11: a mediation agreement is enforceable to suspend the limitation period by virtue of section 11, even if it does not compel the parties to mediate.

Another explanation is that this issue was simply not considered, and that it is open for another court to conclude that, unless the mediation agreement contains sufficient details, it does not activate section 11.

Second, the bad news. Sections 11 and 23 only refer to limitation periods contained in the Limitations Act. They do not refer to limitation periods in any other Act, including the Construction Lien Act. For this reason, the parties cannot rely on sections 11 or 23 to extend by agreement the limitation periods for the commencement of a lien action or the statutory period for setting a lien action down for trial.

Nor do sections 11 or 23 apply to limitation periods, or periods for taking steps, in other statutes. For example, the Arbitration Act, 1991 of Ontario contains a number of limitation periods. Section 52(1) of that Act says that limitation period for an arbitral claim is the same limitation period as for an action. So presumably, sections 11 and 23 should apply to arbitral claims. Section 47of the Arbitration Act, 1991 establishes a 30 day period for commencing an appeal from an award or an application to set aside an award. Section 52(3) establishes a 2 year period for enforcing an award. Section 3 says that the contracting parties may agree to vary or exclude any provision of the Act, except certain specific mandatory sections. Sections 47, 52 and 53 are not among the mandatory sections. So the parties should be able to vary the limitation periods set forth in those sections.

Article 34(3) of the Model Law attached to the Ontario International Commercial Arbitration Act (“ICAA”) establishes a three month period for bringing an application to set aside an international commercial arbitral award. Article 52(3) establishes a two year limitation period for commencing an application to enforce the award. The ICAA and the Model Law do not contain any express power to grant relief from, or contract out of, those articles. While the two year enforcement period seems to be based on the two year general limitation period in the Limitations Act, it appears that the parties can vary the latter but not the former, unless a court were to find that parties can generally contract out of the ICAA .

Third – two warnings:

First, the mediation agreement should be carefully documented. An exchange of correspondence should not be relied upon as that exchange may be subject to dispute and interpretation. The dispute or disputes that fall within the mediation agreement should be specified. In the present case, Sandro was fortunate that the exchange of correspondence was interpreted by the Court to include all the issues between all the parties.

Second, in a construction lien action, attention should be paid to intersecting limitation and procedural periods, some of which may not be suspended by a mediation agreement. The same warning applies to any action or arbitration involving statutory limitation periods or periods for taking steps which could result in the proceeding being dismissed if not taken. In the present case, Sandro may have thought that the mediation agreement suspended all periods for taking procedural steps. But it didn’t. It didn’t suspend the two year period for setting the lien action down for trial.

See Heintzman and Goldsmith on Canadian Building Contracts, 4^th ed., Chapter 6, introduction, and Chapter 10, part 6.

Tribury v. Sandro, 2013 ONSC 658

Construction Law – Building Contracts – Construction and Builders Liens – Arbitration – Mediation – Limitation Periods

Thomas G. Heintzman O.C., Q.C., FCIArb February 24, 2013

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Arbitration Building Contracts Construction and Builders Liens Construction Law limitation periods Mediation

Is A Third Party Obliged To Bring Its Claim Under An Arbitration Agreement

A recurring issue in arbitration law is whether a third party is bound to assert his or her claims by way of arbitration, even though the third party is not a party to the arbitration agreement. In Yaworski v. Gowling Lafleur Henderson LLP, the Alberta Court of Appeal recently held that, where a limited partnership was a party to an agreement containing an arbitration clause, the owner of the limited partnership was obliged to arbitrate any disputes arising under the agreement.

Facts

Mr. Yaworski’s limited partnership was an income partner of the law firm Gowling Lafleur Henderson between 2004 and 2009, and Mr. Yaworski worked in the Gowling firm. The agreement between Yaworski LP and the firm terminated in 2009. Mr. Yaworski then commenced an action for breach of contract. The action was stayed by a judge of the Albert Court of Queen’s Bench on the ground that the claim must be arbitrated. That decision was upheld in the recent decision of the Alberta Court of Appeal.

Reasons of the Court of Appeal

The Alberta Court of Appeal held that Section 7(1) of the Alberta Arbitration Act and Section 18 of the Alberta Judicature Act authorized the judge of first instance to stay Mr. Yaworski’s action.

Section 7(1) states that “if a party to an arbitration agreement commences a proceeding in a court in respect of a matter in dispute to be submitted to arbitration under the agreement,” the court shall stay the action, subject to certain exceptions. Section 18(1) contains the court’s equitable jurisdiction to stay any proceedings when the court deems it fit to do so. In combination, the Court of Appeal held that the court was entitled to stay the action even though it was not brought by the party to the arbitration clause, Yaworski LP.

The Court of Appeal was not prepared to allow Mr. Yaworski to escape the arbitration clause which his limited partnership had entered into. It said:

“However, arbitrations cannot be avoided by simply having a related party commence a lawsuit claiming relief with respect to arbitrable subject matter. In this case Yaworski PC and Gowlings agreed that all disputes between them was to be arbitrated. In fact the arbitration clause is so broad as to make the issue of whether something is subject to arbitration, arbitrable….

In our view the combination of section 7 of The Arbitration Act, section 18 of the Judicature Act, and the court’s inherent jurisdiction to control its own process to avoid unnecessary and duplicitous proceedings provided the chambers judge with jurisdiction to stay Yaworski’s suit pending the arbitration.”

Moreover, the Court of Appeal was of the view that the real claim belonged to Yaworski LP, not Mr. Yaworski. Therefore, the judge at first instance had been right to stay the action brought by Mr. Yaworski. In this way the proper claim, brought by Yaworski LP, could be asserted by way of arbitration, and if there was any issue about the jurisdiction to hear various claims of Mr. Yaworski and his limited partnership, the arbitrator could address them:

“[22] Our conclusion regarding the continuation of Yaworski PC as a Gowlings partner strongly suggests that at least most of the cause of action against Gowlings advanced by Yaworski in his personal suit actually rests with Yaworski PC. Again if any part of that is outside the purview of the arbitration that question can be determined by the arbitrator.

Discussion

On its face, this is a relatively straightforward decision. It holds the parties to an arbitration clause to their agreement and refuses to allow one party to circumvent the agreement by allowing a person controlling that party from suing personally. The decision does, however, raise a number of issues.

It seems clear that Section 7(1) of the 7(1) of the Arbitration Act would not have empowered the court to grant the stay order unless the party bringing the action can somehow be brought under that subsection. In this circumstance it seems wise to state in arbitration agreements that the parties are executing the agreement as principals, and also on behalf of, and so as to bind, the shareholders, assignees and any other persons asserting facts or issues dealt with in the agreement.

In the absence of such a provision, the party seeking the stay must rely on the general equitable powers under Section 18 of the Judicature Act. One wonders what exactly is the limit of the court’s power under this section. Is the power totally wide open? Or was the court’s finding that the claim was really one which could only be asserted by Yaworski LP an essential ingredient to the court’s decision to stay the action?

If that is so, then there may be two results.

First, Mr. Yaworski’s action should have been dismissed on the ground that it was brought by a party which had no claim. This is the effective decision of the Court of Appeal, as it said: “On the record Yaworski cannot make out a proper claim for summary judgment because the cause of action or at least most of it rests with Yaworski PC.” The rest of the decision may be obiter.

Second, the Court of Appeal is effectively saying that the words “to an arbitration agreement” in Section 7(1) should not be in the subsection. The important words are “in respect of a matter in dispute to be submitted to arbitration”. The Court of Appeal appears to be saying that, if the dispute falls within the arbitration agreement, then it should be arbitrated, no matter who brings the claim. That may well be a sensible reading of the subparagraph even though it eliminates four words.

See Heintzman and Goldsmith, Canadian Building Contracts (4^th ed.), Chapter 10, Parts 1 and 4

Yaworski v. Gowling Lafleur Henderson LLP, 2013 ABCA 21

Arbitration – Stay of Court Proceedings – Third parties

Thomas G. Heintzman O.C., Q.C., FCIArb February 11, 2013

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Arbitration stay of court proceedings Third Parties