Same Court, Different Results: When Does The Limitation Period Start For An Arbitration Claim?

When does the limitation period start for an arbitration claim?  Can the very making of the demand start the period running?  Yes, the Ontario Court of Appeal recently said in Federation Insurance Co. of Canada v. Markel Insurance Co of Canada. In so deciding, the Court of Appeal seems to have reached a conclusion which is contrary to another of its decisions in 2011.

While this decision was rendered in the context of automobile insurance, it may have wide implications for commercial arbitrations, especially under bonds or indemnity contracts.  The decision may mean that, in a wide variety of settings, the very demand by a claimant may start the limitation period running under an arbitration clause.  That is because, under the particular language of the contract in which the arbitration clause is found, the claim may be “discovered’ before or at the very time when the claim is made.  If that is so, then the claimant should start counting the very day it makes its claim.

The Background

Between April and May 2006, Federation paid statutory accident benefits (“SABS”) to its insured under an automobile policy arising from an accident which the insured had with another motorist.  Under Ontario Insurance law, Federation was entitled to recover the SABS from the other motorist’s insurer and made a request for payment from the other insurer.   More than two years later and having not been paid by Markel, Federation instituted an arbitration claim against the other insurer for payment.

The other insurer took the position that Federation’s claim was barred by Ontario’s two year limitation period.  The arbitrator agreed and dismissed Federation’s claim.  The arbitration award was upheld by the Ontario Superior Court and Court of Appeal.

The Court of Appeal held that Federation suffered a loss and had discovered that loss at the very time that it made a demand for payment from the other insurer.  It said:

[T]he first party insurer suffers a loss from the moment the second party insurer can be said to have failed to satisfy its legal obligation to satisfy the loss transfer claim… the first party insurer suffers a loss caused by the second party insurer’s omission in failing to satisfy the claim the day after the Request for Indemnification is made.

I cannot agree with the proposition that no loss is suffered until the second party insurer unequivocally denies the claim. That argument ignores the fact that once a valid request is made, the first party insurer is legally entitled to be indemnified and therefore suffers a loss each day it is out of pocket for the SABS paid to its insured. I note here that this conclusion is supported by the passage I have quoted at para. 9 from the FSCO bulletin for loss-transfer claims stating that loss-transfer claims are to be paid “promptly” upon receipt of a Request for Indemnification and that the relevant arbitral jurisprudence holds that where a first party insurer is successful in establishing a loss transfer claim, interest is payable from the date the claim was asserted.”

The Court of Appeal then considered the language in section 275(4) of the Ontario Insurance Act.   That sub-section stated that “If the insurers are unable to agree with respect to indemnification under this section, the dispute shall be resolved through arbitration under the Arbitration Act.”  (emphasis added)

The Court said that this sub-section did not require, as a precondition to the cause of action arising and the limitation period beginning to run, that the parties actually engage in discussions and actually be unable to agree.  The Court stated its decision on this point as follows:

“In my view, s. 275(4) does nothing more that stipulate that any disputes that cannot be otherwise resolved by the parties are to be resolved by arbitration rather than by litigation. Section 275(4) says: if you cannot agree, your claim is to be resolved by arbitration. It does not say: you must be able to demonstrate a failure to agree or a clear denial of your claim by the other insurer in order to commence arbitration.

I accept that the loss-transfer regime assumes that virtually all claims can and should be resolved by agreement. I accept as well that as a practical matter, insurers should be encouraged to discuss and negotiate claims. Moreover, as a practical matter, no insurer would proceed with arbitration unless it was apparent that an acceptable agreement could not be reached by negotiation. But that does not mean that as a matter of law, an insurer must be able to demonstrate a failure to agree or clear denial of the claim by the other insurer as a condition precedent to commencing a proceeding to enforce a claim for indemnification.”  (emphasis added)

Federation submitted that this approach to the arbitration clause was contrary to public policy on the ground that it would discourage negotiation and real efforts at settlement.  The Court of Appeal disagreed:

“I fully accept that parties should be discouraged from rushing to litigation or arbitration and encouraged to discuss and negotiate claims. In my view, when s. 5(1) (a) (iv) [of the Limitations Act, 2002] states that a claim is “discovered” only when “having regard to the nature of the injury, loss or damage, a proceeding would be an appropriate means to seek to remedy it”, the word “appropriate” must mean legally appropriate. To give “appropriate” an evaluative gloss, allowing a party to delay the commencement of  proceedings for some tactical or other reason beyond two years from the date the claim is fully ripened and requiring the court to assess to tone and tenor of communications in search of a clear denial would, in my opinion, inject an unacceptable element of  uncertainty into the law of limitation of actions.”

In this decision, the Court of Appeal arrived at a result which is contrary to the result in its 2011 decision in L-3 Communication Spar Aerospace Limited v. CAE Inc (which decision was not referred to in the Federation v. Markel decision, although one of the judges sat on both cases).

I dealt with the L-3 Communication decision in my article of July 17, 2011.  In that case, the contract provided for the dates for the delivery of data relating to a hardware and software aviation system.  The contract said that: “The price and other adjustments that are not agreed between the parties may be referred to arbitration”.  Based on that language and other language in the contract, the Court of Appeal held that the limitation period did not commence until the parties had undertaken negotiations and there had been a definite inability to agree on the price and other adjustments. The Court said:

The commercially reasonable interpretation is that a dispute over failure by SPAR to deliver information as required together with the cost consequences caused thereby is one that the parties were obliged to attempt to resolve between themselves. Failing agreement either party is entitled to take the dispute to arbitration

How can these two decisions be reconciled?

In L-3 Communications, the words “not agreed between the parties” were held to mean that the limitation period did not commence before a negotiation and absence of agreement occurred.  In Federation v. Markel, the words “unable to agree” were held not to require the parties to negotiate and be unable to reach an agreement, and not to delay the commencement of the limitation period.

It seems that the only way to reconcile the two cases is to examine the process leading up to the demand in each case.  In L-3 Communications, the parties were involved in a tender process and were in direct dealings and negotiations with each other over price and other adjustments.  The language of the tender documents contemplated real efforts to agree on price and adjustments.  So the Court of Appeal was able to conclude that the words “not agree” meant that the parties were obliged to engage in an actual process of negotiation leading to non-agreement, and until that process was concluded the claim did not arise in law and the limitation period did not begin.

In Federation v. Markel, there were no ongoing dealings between the parties, apart from one insurer’s demand that the other insurer indemnify it.  There was no prior contract, tender or other relationship between the parties.  The parties were simply insurers whose insureds had been involved in a motor vehicle accident.  In this circumstance, the Court of Appeal held that the words “unable to agree” did not signify that the parties had to go through an attempt to agree as a pre-condition to the existence of a legal entitlement to payment and the commencement of the limitation period.

These decisions demonstrate the danger lurking in limitation periods relating to contract claims in general, and to claims under arbitration clauses in particular.  While the general law of limitations will apply to those arbitral claims, the terms of the contract and the terms of the arbitration clause may fundamentally affect the question of when a legal right under the contract or arbitration clause comes into existence.

All the ingredients of the cause of action may have arisen when the party with the claim makes its demand.  The party with the claim may have discovered all those ingredients when it makes its claim.  If these ingredients are in place then, unless the arbitration clause very clearly suspends the limitation period during settlement or negotiation, it may be unwise to rely on a suspension of the limitation period during that period.  Prudence may demand that the claim be issued and negotiations come later.

See  Heintzman and Goldsmith on Canadian Building Contracts (4th ed.), Chapter 6

Federation Insurance Co. of Canada v. Markel Insurance Co of Canada, 2012 CarswellOnt 4051, 2012 ONCA 218

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                            May 5, 2012

www.heintzmanadr.com

www.constructionlawcanada.com

Can You Change Horses When Appealing From An Arbitration Decision?

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

The Background

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

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

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

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

The Decision

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

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

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

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

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

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

But the VIH decision discounts that fear on two bases:

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

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

Potential Impact on “As-of-Right” Appeals

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

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

Arbitration   –   Appeal   –   Change of Position

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

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

www.heintzmanadr.com

www.constructionlawcanada.com

Conduct After An Arbitration Award May Nullify That Award

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

The Background

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

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

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

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

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

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

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

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

Three thoughts come to mind:

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

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

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

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

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

Arbitration   –   Enforcement   –   Waiver

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

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

www.heintzmanadr.com
www.constructionlawcanada.com

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

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

The Background

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Arbitration  –  Construction Contract   –   Insurance  –   Subrogation

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

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

www.heintzmanadr.com

Playing Offence, Not Defence, In International Arbitrations

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

The Background

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

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

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

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

The “Just and Equitable” Principle

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

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

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

Two Reasons for “Playing Offence”

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

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

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

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

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

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

Accordingly, Lord Justice Rix said:

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

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

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

Pro-Actively Protecting the Arbitral Regime

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

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

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

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

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

www.heintzmanadr.com

www.constructionlawcanada.com 

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

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

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

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

Background Information:

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

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

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

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

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

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

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

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

The Contrast Between The Model Law and ICAA

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

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

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

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

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

Arbitration  –   Absence of Reasons  –  Enforcement

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

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

www.heintzmanadr.com
www.constructionlawcanada.com

How Correct Does An Arbitrator Have To Be?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

or erroneously decides or applies general principles of law;

or is unfair or outside the bounds of reasonableness.

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

Nor-Man Regional Health Authority v. Manitoba Association of Health Care Professionals2011 SCC 59;

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

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

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

www.constructionlawcanada.com
www.heintzmanadr.com

Remember Rainy Sky: The Commercially Sensible Interpretation Prevails

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

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

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

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

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

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

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

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

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

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

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

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

The Supreme Court ended its judgment with the following statement:

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

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

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

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

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

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

Construction Law  –  Interpretation of Building Contracts  –  Bonds:

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

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

www.heintzmanadr.com
www.constructionlawcanada.com

The Limitation Period Quagmire Between Litigation And Arbitration

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

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

The Background

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

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

The Decision

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

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

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

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

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

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

The Importance of Keeping Your Eye on The Limitation Period

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

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

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

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

Construction Law  –   Arbitration  –  Limitation Period:

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

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

www.constructionlawcanada.com
www.heintzmanadr.com

Ontario’s Highest Court Upholds NAFTA Arbitration Against Mexico

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

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

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

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

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

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

The Court of Appeal’s conclusion:

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

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

In particular, the Court held as follows;

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

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

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

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

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

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

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

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

Arbitration  –   International Arbitration  –   Enforcement-Remedies  –  Damages

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

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

www.constructionlawcanada.com

www.heintzmanadr.com