Supreme Court Denies Leave In Tender Case – Refuses To Re-Write History

The Supreme Court of Canada has recently refused leave to appeal in Trevor Nicholas Construction Co. Ltd. v. Canada. In doing so, it has upheld the decisions of the Federal Court Trial Division and Federal Court of Appeal which declined to permit a bidder to rely on after-the-fact information to overturn an invitation to tender.  These decisions, and the Supreme Court’s decision not to allow an appeal, may signal a growing unwillingness of courts to disturb the tender process based upon facts or events occurring after the tender is completed.

Background Facts

This is a long story, starting 23 years ago in 1989. The summary judgment motion judge summarized the facts as follows.

In 1989 and 1990, Trevor Nicholas submitted the lowest bid on two invitations to tender for dredging contracts issued by Public Works Canada.  In each case, Public Works Canada advised Trevor Nicholas that it was “by-passed” in favour of the second lowest bidder based upon its previous work and apparent incapacity.  Trevor Nicholas submitted bids on three further projects between 1990 and 1993. It was the lowest bidder but was by-passed for the same reasons.

In 1995, Trevor Nicholas sued the federal Crown and alleged that the defendant had treated the plaintiff unfairly during the first four tenders.  Trevor Nicholas also claimed that the Crown had breached an implied term of the contracts which were created when the plaintiff delivered four fully qualified low tenders.

In May, 2001, the Federal Court granted summary judgment dismissing the plaintiff’s claim under the implied term theory.

In January 2011, the balance of the plaintiff’s claim was dismissed on summary judgment, on the ground that there was no genuine issue for trial with respect to the plaintiff’s claim that the defendant breached its obligation to treat the plaintiff fairly. The Federal Court of Appeal upheld that decision and the Supreme Court of Canada has now denied leave to appeal from that decision.

The Federal Court of Appeal’s decision

The Federal Court of Appeal quoted, and agreed with, the following portion of the trial judge’s reasons which stated the ingredients of the duty of fairness in an invitation to tender.  The Federal Court of Appeal underlined the concluding portion of the quote:

“The defendant’s implied obligation to treat the plaintiff fairly flows from its “obligation to treat all bidders fairly in the sense of not giving any of them an unfair advantage over the others” and not unfairly preferring one bidder over another… In assessing whether this obligation was breached, it must therefore be determined whether the plaintiff was treated unfairly, relative to other bidders. This assessment should include a determination as to whether the By-Pass Decisions were made on the basis of considerations that were extraneous to those set forth or implied in the tender documentation…. In my view, the assessment should also include a determination as to whether the defendant was biased against the plaintiff or made one or more of the By-Pass Decisions in bad faith, for example, by basing any of the By-Pass Decisions on facts that the defendant knew or ought to have known were untrue at the time those decisions were made. [underlining added]”

The central argument of Trevor Nicholas was that the Crown knew or should have known at the time of the tender that the information which the Crown relied upon to by-pass Trevor Nicholas was false.  Trevor Nicholas attempted to show the falsity of that information, and the Crown’s contemporary knowledge of it, through cross examination of witnesses on the summary judgment motion. Its difficulty was that all the facts that it relied upon were dated long after the invitation to tender.  Trevor Nicholas was attempting to show that, by virtue of those facts long after the tender, the Crown knew or should have known of the falsity at the time of the tender. But it had no information that the Crown did know that falsity at the time of the tender.

The trial judge and the Federal Court of Appeal were not prepared to allow Trevor Nicholas to proceed to trial on the issue of fairness when Trevor Nicholas based its case on facts occurring long after the tender, and sought to extrapolate backwards from those facts to show unfair conduct by the Crown at the date of the tender.  As the Federal Court of Appeal said:

“[T]he plaintiff had no direct evidence to show that when making his decision not to accept the plaintiff’s tenders, the decision-maker knew that the information before him was incorrect or based upon irrelevant factors. At best, the plaintiff’s evidence took issue with the accuracy of various opinions placed before the decision-maker…[T]he Judge wrote that there was nothing in the plaintiff’s motion record:

[…] that would indicate or suggest in any way that the defendant knew, at the time when it made the By-Pass Decisions, that any of the facts upon which it relied in making those decisions were false, erroneous or misleading. Despite my repeated requests during the oral hearing, the plaintiff was not able to identify any basis for this claim, other than its mere belief that the defendant knew that some of those facts were false.”

The Crown led evidence to show that, at the time of the tenders, it retained and relied upon independent experts to evaluate the bids.  The tender documents explicitly stated the past performance of bidders, and the similarity of work previously undertaken by bidders to the proposed work, would be considered.  The summary motion judge concluded that, in all the circumstances, Trevor Nicholas had not shown that there was any genuine issue for trial on the issue of fairness. The Federal Court of Appeal agreed.

Discussion

The decision brings to an end 23 years of disputes and litigation over tenders. There have been 20 reported decisions in the two actions brought by Trevor Nicholas over these tenders. This is a remarkable amount of unsuccessful litigation.

One can well understand the frustration of a contractor repeatedly losing out on invitations to tender on which it was the low bidder.  This frustration is then fed by discovering later facts which demonstrate, in its view, that the decisions to by-pass it were unjustified.  In invitations to tender, bidders are outsiders to the decision-making process.  When they are excluded for subjective reasons, such as unsuitability or incapacity, there is a natural tendency to blame the process and to jump to the conclusion that the process was unfair.

But the invitation to tender process cannot be run by “monday morning quarterbacking.”  Business is business, and courts are not going to paralyze the tender process by raising the spectre of penalizing owners if facts are later discovered which call into question the wisdom of the tendering decision.  Fairness will be judged by the fairness of the process, and the later discovery of new facts does not render a prior process unfair.

See Heintzman and Goldsmith on Canadian Building Contracts (4th ed.), Chapter 1, section 1§1(f)    

Trevor Nicholas Construction Co. Ltd. v. Canada, 2012 FA 110

Building Contracts  –  Tenders  –  Fairness  –  Duty of Care  –  Remedies

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                                          December 9, 2012

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www.heintzmanadr.com       

Is The Person Who Ultimately Pays A Guarantor Entitled To The Securities Held By The Guarantor?

Bonds and other forms of guarantees and indemnities are commonly used on construction projects. If a contractor applies for a performance bond, the bonding company will require the contractor to indemnify the bonding company. The bonding company may also require the principal shareholder of the contractor to guarantee the contractor’s obligation and to directly indemnify the bonding company. The bonding company may also take security over the contractor’s assets as a further condition of providing the bond. If the principal shareholder of the contractor is required to indemnify the bonding company, is that shareholder entitled to the security obtained by the bonding company over the contractor’s assets?

Normally speaking, one would think so. By indemnifying the bonding company, the indemnifying party should be subrogated to all the rights of the bonding company, including the security held by the bonding company.

But the English Court of Appeal held to the contrary recently in Ibrahim v. Barclays Bank Plc. There were two significant features of the indemnity and guarantee documents in that case, and they resulted in Mr. Ibrahim not being entitled to exercise rights under the securities which were originally available to the guarantor.

Those features of the Ibrahim decision must be carefully scrutinized by any persons about to give or to guarantee a bond. A bonding company, or a person holding competing security to the bonding company, may want to duplicate the features found in the documents in the Ibrahim case in order to avoid those securities passing to the third party which agreed to indemnify the bonding company. On the other hand, a third party who is indemnifying the bonding company may want to avoid those features in order to obtain the securities held by the bonding company.

Factual Background

LDV was an English van manufacturer. In 2008, it was in severe financial condition. Weststar was interested in purchasing the shares of LDV, but it needed a due diligence period to examine LDV’s affairs. Barclays was LDV’s banker. It was agreeable to advance further moneys to LDV during the due diligence period provided that the repayment of its further loan to LDV was guaranteed by a department of the British government, BERR. As a condition of providing its guarantee of LDV’s obligation, BERR demanded a letter of credit from a bank, UBS. UBS in turn demanded a guarantee from the principal shareholder of Weststar, Mr. Ibrahim. These arrangements were put in place.

The agreement between Barclays and BERR provided that “unless and until the Guarantor Liabilities have been paid and discharged in full and [BERR] has no further actual or contingent liability under or in respect of the Guarantee”, Barclays and BERR were to share in the recovery from the assets of LDV under the security which Barclays held over LDV’s assets. USB and Mr Ibrahim were not parties to those arrangements.

As a result of the due diligence conducted by Weststar, it decided not to proceed with the purchase of the shares of LDV and LDV went into insolvency. Barclays called on BERR ‘s guarantee of LDV’s obligation to repay the monies it had advanced to LDV. BERR in turn called upon UBS to pay under its letter of credit, and UBS demanded the Mr. Ibrahim pay under his guarantee. Having paid UBS, Mr Ibrahim asserted the right to exercise the rights accorded to BERR under its agreement with Barclays and to share in the recovery which Barclays had made under the security it held over LDV’s assets.

At trial, Mr. Ibrahim asserted his claim by way of subrogation to BERR’s rights. By the time the appeal was heard, Mr. Ibrahim had obtained an assignment of BERR’s rights under its arrangement with Barclays and asserted that BERR had a right, and that he had the same right by way of assignment, to share in the recovery from LDV’s assets.

The Decision

The English trial division and Court of Appeal held that Mr. Ibrahim had no right to share in the recovery made by Barclays from the assets of LDV, for two reasons.

First, they held the effect of the payment by UBS to BERR was that BERR was paid in full in respect of the obligation of LDV. Under the wording of the Barclays-BERR agreement, that payment discharged the obligation of LDV even though the proceeds came from UBS, and not LDV. Therefore, under the Barclays-BERR agreement, BERR’s rights to share in LDV’s assets had come to an end.

Second, the Court of Appeal held that the letter of credit given by UBS to BERR was an “autonomous instrument” which stated that the obligation to pay accrued when the Secretary of State certified that amounts were due in respect of the LDV debt and that it would discharge the LDV debt. Therefore, the payment by UBS to BERR under that letter of credit did discharge the LDV debt to BERR, and under the Barclays-BERR arrangement BERR had no further right to share in Barclays’ recovery from LDV’s assets.

Mr. Ibrahim argued that the payment by UBS did not discharge LDV’s obligation to BERR. He argued that a payment by a third party of a debtor’s obligation to the creditor does not discharge the debt, that the debt remains alive and that the third party can assert the creditor’s rights against the debtor by way of subrogation or assignment.

A considerable amount of old English legal authority was reviewed by the court. The point of the review was to determine the circumstance in which a debt is considered to be discharged by a payment made by a third party. Having reviewed those cases, the Court of Appeal concluded that when the third party has an obligation to pay the debtor’s obligation by reason of some outstanding obligation to do so, then the debtor’s obligation to the creditor is discharged but the third party has a direct right to recover from the debtor.

In the second situation, when the third party has no such obligation and makes the payment voluntarily, the debt is not discharged unless the payment is made as agent for the debtor, and the third party can bring a subrogated claim against the debtor based on the continued existence of the debt.

Since UBS’s payment was made under an obligation to do so contained in the letter of credit, and in any event UBS’s payment was not made as an agent for LDV, the English Court of Appeal held LDV’s obligation to BERR had been satisfied. Therefore, under the particular wording of the Barclays-BERR agreement, BERR had no further right to share in Barclays’ recovery from LDV’s assets.

Discussion

This decision has a number of lessons for those using bonds, guarantees and indemnities.

First, a third party who is providing a guarantee to the bonding company should examine the securities which the bonding company is taking. If those securities provide that upon payment to the bonding company the loan is effectively discharged, then that is not a good provision so far as the third party is concerned. Or if upon payment by the third party to the bonding company, the bonding company loses its security or its security is in any way impaired, the guaranteeing party will want to change that wording to ensure that its payment does not discharge the debt or impair the security which the bonding company is holding. Indeed, the third party may want to require the bonding company not to impair any securities obtained by it and to ensure that any securities held by it shall remain in effect and be transferred to the third party guarantor.

The time to do so is, of course, at the time of the initial guarantee. Mr Ibrahim may have been in a position at the outset to insist that Barclays agree that he would share in the LDV asset recovery if, through UBS, he effectively paid LDV’s obligation to BERR. If Barclays was willing to make that arrangement with BERR, it may have made that arrangement with Mr. Ibrahim who was the principal in Weststar and was providing the guarantee which supported the loan arrangement.

Similarly, when a shareholder of a contractor is asked to give a guarantee for the contractor’s performance bond, and the bonding company also asks for security over the contractor’s assets, the time when the application for the bond is made is the time for the shareholder to examine that security The guaranteeing shareholder will want to ensure that, if the guarantee is called upon and paid by the shareholder and not the contractor, the contractor’s debt will not be considered to have been paid or the security impaired, and that the security will be available to the shareholder who pays the bonding company. On the other hand, the contracting company itself, or those with a financial interest in that company including its other secured creditors, may have an opposite interest and may wish the security to terminate if the bond is paid by the guaranteeing shareholder.

Second, the Ibrahim decision may suggest that a letter or credit or negotiable instrument has an independent role which can nullify or impair the rights of the ultimate third party guarantor.

This suggestion could be supported from the absolute nature of these instruments. A guarantor such as BERR may wish to have the certainty of an unconditional promise to pay without any requirement to account for securities to which it is entitled. BERR may not have wanted any obligation on its part to bargain with Barclays to retain rights to a continued share in LDV’s asset after it was paid. If this is so, then bonding companies may wish to use these sorts of instruments and third party guarantors will want to avoid them.

However, others may argue that this suggestion is based on an incorrect reading of the Ibrahim decision. It can be argued that the wording of the particular letter of credit, when combined with the particular wording of the Barclays-BERR agreement, simply led to the conclusion that, once BERR was paid by UBS, BERR had no further rights under that agreement and therefore neither did Mr. Ibrahim either by way of subrogation or assignment. If so, then a third party guarantor will want to avoid the particular wording of the documents in the Ibrahim case, while a bonding company may want to use that wording as a useful precedent.

Whichever way one reads the Ibrahim decision, it serves as a warning to all those involved in bonds and other sorts of indemnities and guarantees. If the bonding company holds securities for the bonded obligation, then the parties should clearly understand the rights of a third party in that security if the third party has the ultimate obligation to indemnify the bonding company.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed., chapter 9

Ibrahim v. Barclays Bank Plc., [2012} EWCA Civ 640

Building Contracts – Bonds – Remedies

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                         November 11, 2012

www.heintzmanadr.com
www.constructionlawcanada.com

If You Want Specific Performance, Do You Still Have To Mitigate Your Damages?

Is a party to a contract obligated to mitigate its damages at the same time that it is asking the court to order specific performance? Since the party wants the contract performed, not damages for non-performance, the obligation to mitigate seems to be totally inapplicable.

Yet, in Southcott Estates Inc. v. Toronto Catholic District School Board the Supreme Court of Canada has just held that a plaintiff seeking specific performance may have an obligation to mitigate.  If it doesn’t do so, and the court holds that specific performance should not be granted, then the plaintiff may be awarded very little if any damages.

Building contracts do not often give rise to claims for specific performance. That is because a court cannot readily supervise the conduct of a construction project.  But specific performance is a remedy which is often sought by developers who assemble land for the purpose of construction projects.  So the decision in Southcott has direct implications for companies involved in the assembly of land for building projects.

Factual Background

Southcott was a single purpose company which was part of the Ballantry Group of Companies.  The Toronto Catholic District School Board agreed to sell to Southcott a property which was surplus to its needs. Southcott intended to develop the property for residential purposes.  It was a condition of the agreement that the School Board obtain a severance from the Committee of Adjustment on or before the closing date. The School Board failed to have a development plan prepared and failed to obtain the severance. When the closing date arrived, the School Board refused Southcott’s request to extend the closing date.  The School Board declared the transaction to be at an end, and returned Southcott’s deposit.

Southcott commenced an action for specific performance or, in the alternative, for damages. Southcott succeeded on the merits of the action, and the real question was whether it was entitled to specific performance or damages.

Southcott admitted that it didn’t intend and never tried to mitigate its damages.  It said that it was incorporated solely for the purposes of this project and had no assets other than the money provided by Ballantry. Southcott said that it neither intended to nor tried to purchase other land, especially having regard to its involvement in this action. At trial, the School Board led evidence that 81 parcels of vacant development land in the Greater Toronto Area (GTA) were sold between the date of breach and the date of trial. That land was suitable for residential development. In fact during that period other companies in the Ballantry Group purchased lands which were similar to the subject property.

The Decision

The Supreme Court noted that, in Asamera Oil Corp. v. Seal Oil& General Corp, [1979] 1 S.C.R. 633, it had dealt with the obligation to mitigate in relation to a claim for specific performance.  The Asamera case dealt with an investment contract, not real estate.  In Asamera, the court had said that the plaintiff needed to show “some fair, real, and substantial justification” before a claim for specific performance could be insulated from the obligation to mitigate. If the plaintiff could show some “substantial and legitimate interest” in seeking specific performance as opposed to damages, then the plaintiff might justify its inaction in failing to mitigate.

The Supreme Court also noted that, since its decision in Semelhago v. Paramadevan, [1996] 2 S.C.R. 415, a plaintiff could not assert that every piece of land was “unique” and insist on specific performance of a contract to purchase that piece of land.

The Court then proceeded to deal with three issues:

First, the fact that Southcott was a single purpose company did not exempt it from the general principles applicable to specific performance and mitigation of damages. If it were otherwise, everyone would establish single purpose companies to exempt themselves from these general principles.

Second, Southcott did not have a sufficient justification for its failure to mitigate its damages. The Court said:

“The trial judge made clear findings that the land was nothing more unique to Southcott than a singularly good investment and that this was not a case in which damages were too speculative or uncertain to be an adequate remedy. The unique qualities related solely to the profitability of the development for which damages were an adequate remedy … A plaintiff deprived of an investment property does not have a “fair, real, and substantial justification” or a “substantial and legitimate” interest in specific performance… unless he can show that money is not a complete remedy because the land has “a peculiar and special value” to him…. Southcott could not make such a claim. It was engaged in a commercial transaction for the purpose of making a profit. The property’s particular qualities were only of value due to their ability to further profitability. Southcott cannot therefore justify its inaction.”

Third, the Supreme Court held that there was evidence to support the Court of Appeal’s conclusion that Southcott had suffered no damages.  It agreed with Southcott that the mere fact that Southcott had admitted it did not mitigate its damages did not throw the burden of proof on the damages issue onto Southcott.  Since mitigation of damages was at issue, the normal burden of proof remained on the defendant, the School Board.  However, taken as a whole and in the light of purchases by other Ballantry companies of similar land during the same period, there was evidence to demonstrate that Southcott had suffered no damages.

Discussion

The Southcott decision shows that the plaintiff – and the defendant – rolls the dice on the same “uniqueness of the property” issue, both for the specific performance claim and the damage claim. If the property isn’t really unique, then the plaintiff won’t be awarded specific performance.  If the property isn’t really unique, then the plaintiff will be denied damages if it doesn’t mitigate. So the parties had better get that issue right, or someone is either going to win or lose both issues. In effect, the plaintiff is either going to obtain specific performance, or (if the damages could have been mitigated) little or no damages.

The second lesson to learn from Southcott is that the uniqueness cannot be solely based on value.  Value can be as much translated into a damage award as into an award for specific performance.  If the property is really valuable, or more convenient, or more developable, in relation to other available properties, then those advantages can be awarded by way of damages.  They may not be an excuse for the plaintiff not searching for reasonable alternative properties.

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

Chapters 5 and 6, part 1.

Southcott Estates Inc. v. Toronto Catholic District School Board, 2012 SCC 51

building contracts – remedies – claims – specific performance – damages

Thomas G. Heintzman O.C., Q.C., FCIArb                                                       October 28, 2012

www.heintzmanadr.com

www.constructionlawcanada.com

Can Someone Be Compelled To Arbitrate By Estoppel?

Can the conduct of the parties after they have signed a commercial contract influence the interpretation of the arbitration agreement contained in that contract? If they take one position during the performance of the contract with respect to whether a dispute is arbitrable, can they be estopped from asserting to the contrary when a dispute actually arises?  The Albert Court of Queen’s Bench has recently answered Yes to both questions in Alberta Oil Sands Pipeline Ltd v. Canadian Oil Sands Limited.  This decision raises important issues relating to the conduct of parties leading up to arbitration, particularly under long term commercial agreements.

Background

Alberta Oil Sands Pipeline Ltd. (AOSPL) owned and operated a pipeline between Fort McMurray and Edmonton in Alberta. AOSPL entered into an agreement with Canadian Oil Sands and other companies (the Participants) which had refineries in Fort McMurray.  Under that agreement, AOSPL agreed to build a new portion of the pipeline.  However, AOSPL did not complete 4.1 kilometres of the new pipeline. The Participants said that this failure amounted to a breach of the agreement. AOSPL said that it did not, and that the existing pipeline, together with the new portion it had constructed, satisfied all of the obligations it had undertaken in the agreement. In April 2009, the parties entered into a tolling agreement preserving their right to raise claims and defences with respect to the 4.1 kilometre pipeline dispute.

Then, other disputes also arose. One related to an increased pipeline tariff imposed by AOSPL and another relating to the details of invoices submitted by AOSPL. The Participants asserted their right under the agreements to audit the books and accounts of AOSPL. As a result of the 2009 audit, the Participants submitted a claim against AOSPL. Article 18.3 of the agreement provided for arbitration of audit claims.  The Participants submitted their claim under that article. In June 2010, AOSPL submitted its response and the Participants replied to AOSPL’s response, both within the time period called for in that article. After the 180 day period for resolving disputes referred to in Article 18.3, in November 2010 the Participants delivered a notice of arbitration of their claims.

In December 2010, AOSPL commenced an action for a declaration that the audit claims were not subject to arbitration.  The Participants filed a Statement of Defence asserting that they were subject to arbitration and brought an application to stay the action.  In that motion, AOSPL asserted that the right of audit was only a right to verify its books and records from an accounting or mathematical standpoint, and not from a contractual correctness standpoint and that therefore the arbitration agreement did not apply to the Participants’ claims.  The Participants asserted that the audit and arbitration processes applied to any errors in the books and records of AOSPL.

In March 2011, AOSPL gave the Participants 60 days’ notice of the termination of the tolling agreement.  The Participants then immediately commenced an action for damages for breach of contract by reason of AOSPL’s failure to complete the 4.1 kilometres of pipeline. Both parties agreed that this claim was not an audit claim and was not arbitrable.  AOSPL brought a motion to consolidate this action with its action relating to the audit claims.

The Decision

The Court found that the arbitration clause applied to the audit claims. It held that “it is unreasonable commercially to accept that the intention of the parties was to resort to two different forums for the resolution of disputes about a single aspect of the pipeline tariff,” one relating to accounting correctness and the other relating to contractual correctness.  The court noted that the Alberta Arbitration Act specifically gave the arbitrator the authority to determine questions of law, and there was nothing in the arbitration agreement that removed that authority.

The judge also held that, if she was incorrect in that interpretation, she would arrive at the same conclusion by reference to the conduct of the parties subsequent to the making of the contract, and this is the interesting point which is addressed in this article.  The judge held that the conduct of the parties was relevant for two reasons:

First, as an aid to interpret the contract, and

Second on the ground of estoppel

The conduct of AOSPL that the judge found relevant was of two kinds.

First, during the claims process arising from the present dispute, AOSPL had followed the claims and arbitration process and only asserted that the claims were not arbitrable after they had been submitted to arbitration by the Participants.  In that process, personnel of AOSPL made statements, both within AOSPL and in meetings with the Participants, that the claims were arbitrable.

Second, AOSPL had participated in arbitration proceedings relating to audit claims in 2001, 2002 and 2005.  In 2001, when the Participants had issued a Statement of Clam with respect to audit claims, AOSPL had referred the issue to arbitration, the action was stayed and the dispute was arbitrated.

AOSPL submitted that none of this conduct was relevant due to the clause in the contract stating that there was to be no waiver of a party’s rights by virtue of its conduct. To this the judge replied that the relevance of AOSPL’s conduct was not whether it had waived any rights but the proper interpretation of the contract in light of the parties’ conduct.

As to estoppel, the judge found that AOSPL’s conduct amounted to a representation by conduct. AOSPL had participated in the claims process leading to arbitration and that amounted to a representation to the Participants that the “audit procedure …was not disputed.” If it was an essential ingredient in an estoppel that the Participants had altered their position, that alteration was present. If AOSPL had notified the Participants of its position at the outset, then the Participants would have issued a Statement of Claim immediately, and not be faced with the limitations defence that AOSPL now raised.

While silence is not always a representation, the judge concluded that silence is a representation when the parties are in a contractual relationship with each other and engaged in a dispute resolution process. In those circumstances, AOSPL had a duty to respond and to not remain silent about its position that the audit claims were not arbitrable.

The judge then considered whether the audit claims should proceed to arbitration or be tried with the 4.1 kilometre claim. The judge refused to exercise her discretion to order that the audit claims proceed in court, for two reasons.

First, the audit and 4.1 kilometre claims were different.

Second, AOSPL had asserted a limitation defence to the audit claims if they proceeded in court. In the result, there was good reason to apply the mandatory language in section 7 of the Alberta Arbitration Act and stay AOSPL’s action brought in the face of the arbitration agreement.

Discussion

The judge’s decision to apply the principles of estoppel to an arbitration agreement is novel, but one could argue that it is heartening.   It is novel because estoppel is usually thought of as either a principle of evidence or a principle of substantive law.  In this case, estoppel was applied in a procedural setting, in the lead-up to the commencement of an arbitration.

But some will see this decision as welcome on the ground that estoppel is an ideal response when contradictory positions are taken in pre-arbitral proceedings, especially when the result is the loss of time and expense and, possibly, a limitation period.  Indeed, in the face of an assertion that a limitation period has been lost, it is hard to imagine that a court could take any other position than sustain the earlier proceeding.

Estoppel has a particular application to the commencement of arbitration proceedings. As I have commented in a recent article, it is sometimes difficult to know whether an arbitration proceeding has been commenced, or properly commenced.  There is no court office in which the arbitration claim may be issued. When the agreement requires that certain steps be taken before the arbitration is started, there is no court to rule on whether those steps have been properly taken. Even after notice of arbitration is given and before the arbitral tribunal is appointed, there is no body to rule on whether the arbitration has been properly started.  Yet time is passing and a limitation period may go by. The whole process seems dependent on each party stating a timely objection to any steps leading to the appointment of the arbitral tribunal.

Estoppel also seems appropriate when the parties have an ongoing contractual relationship.  Thus, under a labour, franchise or construction agreement, when the parties deal with each other over a period of time and are not just engaged in a one-off transaction, they make daily decisions which are instantly understood to be acceptable to the other party if there is no objection, and without turning to each other each time and saying “Right?”  True, each party is not expected to be the other party’s lawyer.  But making timely procedural objections does not seem to be too much to ask, or if not made, that the silent party live with the procedural result.

Alberta Oil Sands Pipeline Ltd v. Canadian Oil Sands Limited, 2012 ABQB 524

Arbitration – Stay of arbitration – Limitation Period – Estoppel  –  Refusal to arbitrate

Thomas G. Heintzman O.C., Q.C. FCIArb                                                                                                      September 4, 2012

www.heintzmanadr.com

www.constructionlawcanada.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

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