Grounds For Reviewing Arbitration Decisions Are Narrow: B.C. Court of Appeal

A recent decision of the British Columbia Court of Appeal warned that the grounds for reviewing an arbitral award are narrow. In Boxer Capital Corp. v. JEL Investments Ltd., the court noted that arbitral dispute had gone through two separate arbitrations and nine (yes, nine) judicial proceedings already. The Court of Appeal said: “Surely that procedural history is inconsistent with the objectives of commercial arbitration.” The court held that the motion judge had no basis to over-turn the last arbitral award and re-instated that award.

Background

The issue in the appeal was whether the second arbitrator was bound by principles of res judicata arising from the award of the first arbitrator or the decision of the judge who heard an appeal from that first award. The second arbitrator held that he was not bound by those decisions by reason of res judicata. The judge hearing an appeal from that decision held that the second arbitrator was so bound. I wrote about that decision in my article of February 17, 2014.

From that latter decision an appeal was taken to the British Columbia Court of Appeal.

The B.C. Court of Appeal’s decision

The B.C. Court of Appeal agreed with the arbitrator. The issue turned upon whether the issue before the second arbitrator was the same as the issue before the first arbitrator or the court which heard the appeal from the first award. The Court of Appeal held that it was not:

“Respectfully, Mr. Justice Abrioux erred in characterizing the issues so broadly, and in finding that they had been the same throughout. When the issues are properly framed, it becomes apparent that they are quite different. The issue before [the firs] Arbitrator….., as defined by the parties who chose to submit their dispute to him, was whether the shotgun purchase price under the [Co-Owner’s Agreement, or COA] was $1.425 million or $2.19 million. The issue before[the court on appeal from the second arbitral award], as defined by this Court’s decision granting leave to appeal, was whether [the second] Arbitrator “erred in failing to have regard to established principles of law in deciding that a term should be implied”. Finally, the issue before [the second] Arbitrator, again as defined by the parties, was whether the Boxer Parties had a continuing interest in the venture. These are different issues.”

  The B.C. Court of Appeal then concluded:

“It was open to [the second] Arbitrator to construe the COA afresh on the continuing interest issue. It is not for this Court to review the merits of his decision in this regard. His decision is the last word on the interpretation of the COA.”

In the course of making its decision the court made a number of comments about the decision of the Supreme Court of Canada in Creston Moly Corp. v. Sattva Capital Corp., 2014 SCC 53.

First, it distinguished the role of a court in an appeal from an arbitral award from its role in an appeal from another judicial decision; the former role is much more limited than the latter. It said:

Like the present appeal, Sattva dealt with an issue of contractual interpretation. Mr. Justice Rothstein explained that in most cases, issues of contractual interpretation will be important only to the parties themselves, and will not have a broader impact….. However, the role of appellate courts (including the B.C. Supreme Court, when sitting on appeal from an arbitral award) is generally not to provide “a new forum for parties to continue their private litigation” but rather to ensure “the consistency of the law” and decide legal issues of public importance (ibid.). Accordingly, “our legal system leaves broad scope to tribunals of first instance to resolve issues of limited application”…. In sum, “the goals of limiting the number, length, and cost of appeals, and of promoting the autonomy and integrity of trial proceedings … weigh in favour of deference to [arbitrators] on points of contractual interpretation”.”

Second, it said that if the principles in Sattva had been applied in the present case, there might have been no appeal from the first arbitral award and the matter might have ended there:

“Sattva held that questions of contractual interpretation should almost always be regarded as questions of mixed fact and law…. (Historically they were seen as questions of law.) This means that, after Sattva, leave will rarely be granted to appeal an arbitral award on a question of contractual interpretation. (If Sattva had been decided earlier, leave arguably would not have been granted to appeal the parties’ initial arbitral award and this lengthy saga would have been avoided.)”

Discussion

As in most debates, defining the question largely defines the answer. The Court of Appeal said this about the exercise involved in defining the question in an appeal from an arbitral award:

“This appeal serves as a reminder of the importance of judicial restraint in the review of arbitral awards, at least in the commercial context. When sitting on appeal from an arbitral award, a court’s jurisdiction is narrow. The inquiry differs fundamentally from a trial, and even from a judicial review of an administrative decision.”

As a result of the new test in Sattva for reviewing arbitration decisions, and the narrow definition of the question involved in the appeal from the second arbitral award, the Court of Appeal held that that question was not the same as the questions in the first arbitration or the appeal from the first arbitral award.

This decision does not mean that the doctrine of res judicata should be applied narrowly by arbitral tribunals. It means that, in reviewing a decision by an arbitrator about that doctrine, the court has a very narrow jurisdiction. If the arbitrator has the jurisdiction to determine whether the doctrine applies or not – and that was not doubted in the present case – then the conclusions of the arbitrator must be accepted, unless the arbitrator’s errors about those matters result in a complete loss of jurisdiction or an error on a pure question of law.

In any event, this decision can go down as Exhibit A about how arbitration can lead to expense and delay if the procedures get out of hand. As I said in my February 12, 2014 article about the lower court decision in this case, “proponents of arbitration may wonder if there are better ways to find speedy justice. The parties selected arbitration presumably to avoid the costs and delays of the court system. That objective was not achieved in the present case.”

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 11, part 3.

Boxer Capital Corp. v. JEL Investments Ltd., 2015 CarswellBC 96, 379 D.L.R. (4th) 712

Arbitration – Appeal – Res Judicata – Standard of Review – Shot-gun agreements

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                March 13, 2015

www.heintzmanadr.com

www.constructionlawcanada.com

Supplier May Recover Against The General Contractor Based Upon A Promise Not To Register A Construction Lien

The Alberta Court of Appeal has recently decided an interesting issue relating to the right of a supplier to a subcontractor to enforce payment against the general contractor. The supplier alleged that the contractor had promised to pay it in exchange for the supplier’s agreement not to register a construction or builder’s lien. In Sherwood Steel Ltd. v. Odyssey Construction Inc., the Court of Appeal held that such a claim is enforceable and is not barred by res judicata, merger or abuse of process.

Background

Sherwood was a supplier to the subcontractor, Edmonton Concrete. It obtained judgement against Edmonton Concrete and was not paid. Sherwood then sued the contractor, Odyssey, alleging that Odyssey had promised to pay Sherwood if Sherwood did not register a builder’s lien. Odyssey moved for summary judgment on the basis that any such claim was barred by the fact that Sherwood had already obtained judgment against Edmonton Concrete and that its cause of action “merged” in that judgment and could no longer be asserted. The motion judgment agreed and dismissed the action.

Alberta Court of Appeal’s decision

The Alberta Court of Appeal allowed the appeal on three grounds.

First, since Odyssey was not a party to the first action against Edmonton Concrete, and was not privy to Edmonton Concrete, the basic principles of res judicata did not apply.

Second, the claim by Sherwood against Odyssey was not based on the same cause of action. Sherwood’s claim against Edmonton Concrete was based upon a contract between that company and Sherwood. Sherwood’s claim against Odyssey was based upon an entirely different contract between Odyssey and Sherwood.

Third, Sherwood’s claim was not barred as an abuse of process.   Odyssey argued that Sherwood’s claim against it would lead to double recovery. The Court of Appeal said that this would depend upon the proper interpretation of the contract between Sherwood and Odyssey. If the contract was to pay the indebtedness only to the extent that Edmonton Concrete did not pay, then no double recovery would arise.

The Court of Appeal held that, even if Sherwood’s claim against Odyssey was a separate cause of action not affected by recovery against Edmonton Concrete, this would not support the dismissal of Sherwood’s claim as an abuse of process. It said:

“It is not the law that parties are precluded from obtaining two separate judgments for the same loss. For example, the general rule is that there is no bar to a creditor bringing separate actions against both the debtor and guarantors….This is a particularly apt analogy here, given Edmonton Concrete’s financial difficulties which left Sherwood Steel looking to file a builder’s lien against title to the project lands. Just as it is no abuse of process for a creditor to obtain judgment on the debt and then sue on the guarantee, it is no abuse of process for Sherwood Steel to obtain judgment against Edmonton Concrete and then, not having received satisfaction, sue Odyssey on its alleged promise to pay. While their obligations may (again, depending on the interpretation of the contract between Sherwood Steel and Odyssey) be co-extensive, they are each separate and distinct, and as such may be asserted in different actions.”

The Court of Appeal also held that the fact that the damages were identical in each claim was not a bar to the second action. It said that “Our civil procedure permits multiple suits for the same damage” and continued:

“Contractors, architects and engineers who caused the same damage through separate breaches of separate contracts can be sued separately. Owners of motor vehicles can be sued separately from the operator for the same damage. Where all potential defendants are known from the outset (which would not have been the case on the facts alleged here, since Odyssey’s breach is said to have occurred only after Sherwood Steel obtained judgment against Edmonton Concrete), separate actions for the same loss are obviously an inefficient use of litigants’ and court resources. But that can be addressed under rule 3.72 of the Rules of Court (“Consolidation or Separation of Claims and Actions”). The point is that the mere fact of multiple potential judgments for the same loss does not denote an abuse of process, or even a potential abuse of process.”

The Court of Appeal went on to hold that the trial court had ample procedural mechanism to avoid double recovery, in particular by crafting the final judgment to ensure that that did not occur. However, it warned against the court being too cautious about fully awarding judgments to Sherwood. Rather, double recovery could be dealt with during the judgment enforcement process or by the judgment debtors dealing with the problem between themselves:

“I see no impediment in contract law to dividing liability between two parties who have breached two different contracts, causing the same damages to a plaintiff. Indeed, those avenues of recourse for Odyssey make it preferable that a specific, unconditional judgment for the full amount of the award be stated on the order. In other words, civil enforcement, whether by way of contribution between judgment debtors or set-off as between a judgment debtor and its judgment creditor, is a better route for avoiding over-compensation than adding contingent language to an order.”

Discussion

Lawsuits arising from construction projects can be numerous and complicated. They may run into various rules or doctrines designed to avoid multiplicity of proceedings. But ultimately the court must look through the whole process and do what’s fair and not allow the doctrines to get in the way.

When suppliers and subcontractors are unpaid, then there must be very good reason before court procedural rules bar their claims. In this case, the Alberta Court of Appeal was not prepared to allow those rules to stand in the way of a trial of the merits of the claim.

Interestingly, the Court of Appeal had no concern about Sherwood giving up its claim for a builder’s lien in entering into the contract with the contractor. The supplier agreed not to exercise a statutory right, and one which was against the owner. Yet, the court considered that agreement to be good consideration for the contract with the contractor. That result seems appropriate since the filing of a lien would likely have had a negative effect on the contractor in the form of additional holdbacks by the owner.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 16

Sherwood Steel Ltd. v. Odyssey Construction Inc., 2014 CarswellAlta 1750, 2014 ABCA 320

Construction and Builder’s liens  –  Merger  –  Res judicata  –  Abuse of process

Thomas G. Heintzman O.C., Q.C., FCIArb                                               February 18, 2015

www.heintzmanadr.com

www.constructionlawcanada.com

 

 

 

 

 

What Is The Effect Of Res Judicata On Arbitration?

The recent decision of the British Columbia Supreme Court in Boxer Capital Corp. v. JEL Investments Ltd. raises some fascinating issues with respect to the application of the doctrine of res judicata to the arbitration process.  The court effectively held that res judicata applies with all its force and effect to arbitration.  For this reason, the court set aside an arbitral decision which did not follow or apply a previous arbitration decision and court decision arising in the same dispute.

The proceedings in this case also raise concerns about the ability of arbitration proceedings to deal with disputes on a cost and time effective basis.  This dispute about $750,000 arose in May 2008 and has already been through two arbitral hearings and several trips to the British Columbia courts, and this latest decision was rendered on December 27, 2013 five and a half years after the dispute arose.

The Background

Boxer and JEL were parties to a property development agreement. Boxer had contributed more money to the project than JEL. The agreement contained a shot-gun agreement whereby one party could give notice that it would sell its interest to the other.  Failing the receiving party’s agreement to buy, the receiving party was required to sell at the same price.  JEL gave notice in May 2008 that it was willing to sell its interest in the project for $1.425 million. Boxer declined the offer so it was obliged to sell for that price to JEL. Boxer took the position that it was entitled to receive an amount from JEL which would equalize the difference in their respective capital contributions. Boxer said that JEL would have to pay an extra $765,732.26 to compensate Boxer for the additional capital funds invested by it at the time the property was purchased. JEL said that it was not obliged to pay for that interest or capital contribution and that the monies it would pay as a result of the buy-sell process included whatever obligation it had to pay Boxer for its larger capital contribution.

The Arbitration and Court Proceedings

The parties went to arbitration.  In March 2009, the arbitrator found that JEL was obliged to buy Boxer’s interest for $1.425 million plus a capital adjustment payment of $765,732.26. The arbitrator held that the obligation to pay the capital adjustment payment arose from an implied term in the agreement.

JEL did not comply with the arbitration award. So Boxer commenced an action to specifically enforce that award.  In August 2009, the B.C. Supreme Court issued an order enforcing the arbitration award and incorporated the award into its judgment as a judgment of the court.  The order directed JEL to pay the $1.425 million amount and as well the $765,732.26 capital adjustment amount.  There was no appeal from this order.

In the meantime, JEL sought leave to appeal the 2009 arbitration award to the British Columbia Supreme Court.  Leave to appeal was denied and JEL appealed to the B.C. Court of Appeal and in March 2011 the B.C. Court of Appeal allowed the appeal and granted leave to JEL to appeal from the 2009 arbitration award.

In that appeal, in August 2011 the B.C. Supreme Court held that JEL had validly acquired Boxer’s shares pursuant to the shotgun clause but the court set aside the part of the arbitrator’s award that require JEL to pay the capital adjustment payment. The court agreed with Boxer that it was entitled to be paid the capital adjustment amount but held that Boxer was not entitled to that amount at the time of the buy-out but only when the project became profitable as a first charge on any profits.  The court held that JEL did not purchase or acquire the disproportionate capital contribution made by Boxer, and that that contribution remained “in the project” to be paid out of the project pursuant to the agreement, if and when profits were earned. No appeal was taken from that decision.

The purchase by JEL of Boxer’s interest proceeded and JEL paid the $1.425million to Boxer. JEL took the position that Boxer no longer had any interest in the project.  In December 2011, so Boxer commenced an action to enforce its right to the capital adjustment amount.  JEL brought a motion to stay the action and in May 2012, the action was stayed and Boxer’s claim was directed to proceed by way of arbitration.

The arbitration awards were dated August and December 2012. The arbitrator held that he was not bound by the prior arbitration award or decisions of the B.C. courts.  The arbitrator held that Boxer was not entitled to a capital adjustment amount and that Boxer no longer had any interest in or claim arising from the project.

Boxer sought leave to appeal the 2012 arbitral decisions and in April 2013 leave was granted. JEL appealed to the B.C. Court of Appeal and in June 2013 that appeal was dismissed.

The appeal from the 2012 arbitration decisions was allowed in December 2013. In case you are still following this saga, the proceedings have now been before two arbitrators, before the B.C. Supreme Court five times and before the B.C. Court of Appeal twice. And appeals to the B.C. Court of Appeal and Supreme Court of Canada are still possible.

2013 Decision of the B.C. Supreme Court

The B.C. Supreme Court held that the parties to the 2012 arbitration were bound by the principle of res judicata arising from the 2009 arbitration and the 2011 decision of the B.C. Supreme Court.  Both those decisions had found that Boxer was entitled to the capital adjustment amount. The only difference between those decisions was in relation to the timing of the payment of that amount and whether it was required to be paid at the time of the buy-out (as the 2009 arbitrator found) or at the time the project became profitable (as the 2011 judge found).  Accordingly, the arbitrator had erred in holding that those decisions were not binding upon him.

The B.C. Court essentially found that the 2012 arbitrator was not at liberty to go behind – or “deconstruct” as the 2012 arbitrator said – the 2011 decision of the B.C. Court.  It said:

“Both [the 2009] Arbitrator and [the 2011 judge] interpreted the agreement and found, for different reasons, that the $1.425 million did not include the disproportional capital amount and yet, [in] his first partial award, [the 2012] Arbitrator stated:… ‘I am not bound by [2011 judge’s] reasoning….With great respect to [the 2011 judge], J., I do not agree with his interpretation of the COA on this issue.’

In my view it was an error of law for [the 2012] Arbitrator to “deconstruct” [the 2011 judge’s] reasoning and interpretation of the COA so as to “arrive at an opposite conclusion” regarding the ownership of the disproportionate capital, specifically whether it was included in the undisputed $1.425 million. This was the exact same issue as the one considered by both [the 2009] Arbitrator and the [2011 judge]…”

The 2013 judge also held that the 2012 arbitrator erred in exercising discretion not to enforce the principle of res judicata.  It said:

“Secondly, I disagree that it would be manifestly unfair and would work an injustice to JEL to apply the doctrine of issue estoppel in this case. Discretion must be exercised judicially. In my view, discretion judicially exercised should lead to the opposite conclusion to that reached by [the 2012] Arbitrator. The proper exercise of discretion would work as a grave injustice to Boxer …if the doctrine of issue estoppel were not applied in the circumstances of this case.”

Discussion

The res judicata issue is an extremely important one for the law of arbitration.  That is because arbitration – or at least domestic arbitration – exists within a legal framework that includes two systems, courts and arbitrators. The principle of res judicata is one means by which that relationship is governed as the courts can over-rule an arbitral tribunal if it does not abide by a prior court decision. To maintain the proper balance between the two systems, it could be argued that the court should have due respect for the arbitral system and not impose an unduly strict regime of res judicata on arbitrators, and arbitrators should have due respect for the court’s decisions and make decisions which respect the integrity of those decisions.

What can we learn from the present decision?

First, the decision of an arbitral tribunal about res judicata will be reviewed on a standard of correctness. That is exactly what the 2013 judge has held. No respect for judgment or error will be accorded to the arbitral tribunal on this issue.

Second, it seems clear from this decision that the principle of res judicata does apply to arbitral decisions. Nobody asserted to the contrary in this case and the court clearly applied that principle.

Third, the principle of res judicata applies with the same strictness as it does to a court. Again, no-one apparently argued that there should be some leeway for the arbitral tribunal, on the ground that arbitration is a less formal and legal system than the court system.  Neither side argued that there was a public policy rational for a less lenient approach to res judicata in arbitrations than in court proceedings.  There is no hint of leniency in this decision.

Fourth, the courts will expect arbitral tribunals to give a broad and purposeful interpretation and effect to the court’s prior decisions.  In this case, the court appears to have been impatient with the 2013 arbitrator’s effort to fully understand the 2011 decision of the court.  The court did not accept that the arbitrator had any jurisdiction to disagree with that decision or to be technical with its interpretation.

And Fifth, the courts will expect the parties to exhaust their appeal rights from an arbitral decision before asserting in a subsequent proceeding that the arbitral decision or the court’s review of it was wrong.  In the present case, the failure of JEL to appeal the finding of the 2011 judge that Boxer had a remaining entitlement to the capital adjustment amount was fatal to its efforts to uphold the 2013 arbitral award finding that Boxer had lost its entitlement to that capital adjustment amount.

Proponents of arbitration may wonder if there are better ways to find speedy justice.  The parties selected arbitration presumably to avoid the costs and delays of the court system. That objective was not achieved in the present case.

Boxer Capital Corp. v. JEL Investments Ltd. 2013 CarswellBC 3913, 2013 BCSC 2366

Arbitration – Res Judicata – Standard of Review – Shot-gun agreements

Thomas G. Heintzman O.C., Q.C., FCIArb                                                     February 10, 2014

www.heintzmanadr.com

www.constructionlawcanada.com

The Mother Of All Tender Cases Revisited: Three More Issues

The last article about the decision of the Superior Court of Ontario  in Envoy Relocation Services Inc. v. Canada (Attorney General), 2013 ONSC 2034 considered the impact of that case upon the Contract A  –  Contract B principles of tender law.  There are many more interesting issues which emerge from that case.  This article considers three more issues.

The first issue is:  What Standard of review should be applied by the Court to the procurement authority’s decision? Should that decision be over-ruled if the court considers it to be incorrect; or only if it is unreasonable; or only if it was made in bad faith or fraudulently?

The second and third issue concerns the Court’s entitlement to review the procurement decision in the first place.  Was the Court’s authority excluded by federal legislation?  And was a prior decision in this case on this point res judicata and binding on the court?

The fourth issue related to how the plaintiff’s damages should be awarded.  The Open Windows Bakery decision of the Supreme Court of Canada directs that damages for breach of contract are to be calculated according to the least burdensome way for the defendant to perform the contract. But what does this mean in the context of a tender or procurment? That issue will be addressed in my next article about this very interesting case.

The background

The facts were set out in my last article on this case.  Mr. Justice Annis took 1194 paragraphs to set forth the facts, so this article provides just a brief synopsis. The dispute arose in relation to a 2004 RFP by the Canadian government for a relocation service for personnel employed in the Canadian armed services, government services and RCMP.  An earlier RFP had been undertaken in 2002.

One element in both RFPs was a service called Property Management Services, or PMS.  Under PMS, the winning bidder was required to arrange and pay for various services to the individuals being moved, such as realty services, legal services and similar services. The incumbent provider which had won the 2002 RFP knew that the RFP services were hardly used at all by any of the transferred individuals. It had bid the 2002 RFP showing zero as the ceiling cost for the PMS service, thereby contracting to provide the service free of charge. In fact, it actually charged the few individuals who used the service under the 2002 contract.

Then, in the 2004 RFP, the incumbent provider knew that few individuals used the PMS service.  So it again included zero cost for this service in its bid.  The other bidders were told by the sponsor to include a specified number of projected users of the PMS service, and did so.  By reason of doing so, their bids were about $45 million more than they would otherwise have been if they had bid zero as a ceiling for PMS services.

These facts about the 2002 and 2004 procurements were discovered by the Office of the Auditor General.  One of the other bidders, Envoy Relocation Services Inc., sued the Canadian government and this trial ensued.

The Trial Judge’s decision

As discussed in the prior article, the trial judge found that the Crown breached the express terms of the contract applicable to the invitation to tender, and also breached the implied term that it would conduct the tender fairly.  In addition, the trial judge addressed the following three issues which are of importance to construction and procurement law.

Standard of Review

One of the important issues in tender cases is:  what standard of review should the court apply when considering the sponsor’s evaluation of the tender proposals? Should the sponsor’s decision to accept one tender and reject the others be overturned: if the court believes that the sponsor was incorrect in its assessment; or must the court apply a higher standard and find that the sponsor acted unreasonably before it interferes; or must the court apply an even higher standard and only interfere if the sponsor acted fraudulently, in bad faith, by mistake or unconscionably?

The trial judge appears to have applied a two part test. For those parts of the sponsor’s assessment which were based on its expertise, he concluded that a standard of reasonableness should be applied; for those parts of the assessment where the sponsor’s employees had no expertise or had acted improperly (due to clear error, conflict of interest, or obvious preference for one bidder), a standard of correctness should be applied.  The trial judge rejected the Crown’s submission that he must find fraud, mistake, bad faith or unconscionability before he could review the tender assessments made by the Crown, finding that such a standard was “overly deferential” to the sponsor and not supported by the case law.

These distinctions between the various standards of review are useful.  Often the standard of review may be the decisive factor in whether the court will interfere with the sponsor’s assessment of the bids.  The trial judge’s reasons for using the correctness standard when the conduct of the sponsor’s decision-makers does not deserve respect, but otherwise the standard of reasonableness, provide a nuanced approach to the standard of review.

The Court’s Jurisdiction

The Crown asserted that the court had no jurisdiction to deal with the plaintiff’s claim because the  Canadian International Trade Tribunal Act and the Canadian International Trade Tribunal Procurement Inquiry Regulations  had established a statutory code for procurement disputes falling within the jurisdiction of the Canadian International Trade Tribunal, and that the present dispute fell within the Tribunal’s jurisdiction. The Crown submitted that the statutory code operated to oust the jurisdiction of the Superior Court, such that the action must be dismissed.

The trial judge rejected this submission.  He noted that this submission had been made to the court by way of a motion to dismiss earlier in the action, and that motion had been dismissed.  Accordingly, the trial judge held that the issue was res judicata.  But the trial judge went on to agree with the motion judge’s decision.  He held that there would have to be very clear language in the statute before the court’s jurisdiction was ousted, and there was nothing in the legislation that expressly did so.

The trial judge also expressed some horror that the court’s jurisdiction could be usurped in this kind of case. He said

“The fundamental difference between a court like the Superior Court of justice and the CITT involves the capacity to determine facts. It would frankly be unthinkable for any judicial body, but a trial court to hear a matter such as this one.

 If I may resort to a Proustian sentence to make the point: this matter involves facts extending over several years [and the trial judge continued in one sentence for seventeen lines concluding] …and everything else that goes with a trial in which factual findings are fundamentalto the ultimate decision that teams of lawyers have spent thousands of hours working on.

I cannot imagine more inappropriate circumstances in which to advance an argument that the jurisdiction of the Superior Court should be ousted because Parliament intended that cases of this nature should be resolved before the CITT.

This is not intended to be disrespectful towards the CITT, but it is clearly not a fact-finding quasi-judicial institution. Matters of contract, tort and remedies resulting therefrom are generally fact driven. One cannot replace a trial court with an administrative tribunal, unless the tribunal takes on the general characteristics of the trial court, such as has happened in many respects in labour law. But there is nothing in the constitution and procedures before the CITT that suggests it has either the capacity or the experience to make factual determinations, unless of a fairly rudimentary nature…..

 In matters of procurement, there is an obvious need in some cases for recourse to a judicial institution whose primary responsibility is the finding of facts in the pursuit of justice. I consider this to be a strong policy argument supporting the conclusion that Parliament could not have intended to exclude the Superior Court’s jurisdiction in this area without the clearest words to that effect.”

The private sector may well share the judge’s concern that the review of government procurements exclusively by government appointed tribunals is no way to ensure independent justice. The private sector may well wish to be vigilant to ensure that Parliament and the provincial legislatures do not try to shut off recourse to the courts arising from government procurements.

Res Judicata 

 Res judicata was considered by the trial judge twice in his reasons.

First, he held that the earlier decision of the motions judge, that the role of the Canadian International Trade Tribunal (CITT) did not oust the jurisdiction of the court, was res judicata on that issue. Nevertheless, he agreed with that decision and arrived at the same conclusion.

Second, the trial judge concluded that the unsuccessful proceedings by Envoy before the CITT were not determinative of Envoy’s rights.  Again, that issue had been raised by the Crown before the motion judge on its earlier motion, and had been dismissed.  That made the earlier judge’s decision res judicata on the issue.

In addition, the trial judge considered this issue on its merits and concluded that the earlier proceedings before the CITT were not definitive for two reasons.

First, the “intervening circumstances” showed that the proceedings before the CITT “bear no relationship to those argued before and ultimately determined by the Court.” Moreover, the trial judge said that he would exercise his discretion to not apply the doctrine of res judicata having regard to the refusal by the CITT to allow any inquiry into the allegations raised by Envoy and the subsequent discovery by the Auditor General of the facts relating to PMS.

The reasoning of the trial judge can be a useful starting point for any litigant facing the issue of res judicata arising from a tender.  The decision could be that of a government tribunal, but it could also be that of the engineer or architect on the project.  If the issue is whether that decision is binding on the parties by reason of res judicata, or whether the court should exercise its discretion to relieve against the application of that doctrine, then reference to the Envoy Relocation Services decision may be useful.

Quantifying Damages: The Open Window Bakery Decision

Time and space do not permit this article to review the trial judge’s consideration of the Open Window Bakery decision of the Supreme Court of Canada to the calculation of the plaintiff’s damages.  The issue may be crucial in tender and procurement law. It will be addressed in the next article.  In all, it will take three articles to fully digest the issues raised in this Mother of All Tender Cases.

See Heintzman and Goldsmith on Canadian Building Contracts (4th ed.), chapter 1, paragraph 1(f)

Envoy Relocation Services Inc. v. Canada (Attorney General), 2013 ONSC 2034

 Construction Law  –  Tenders  –   Res Judicata  –  Standard of Review  –  Jurisdiction of the Court

 Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                                       May 16, 2013

How Many Times Can A Contractor Sue The Owner Under The Same Construction Contract?

Can a contractor bring several claims against the owner arising from the same building contract?  Multiple proceedings arising from the same contract certainly seem like a waste of time and money.

And even if the contractor can do so, can those claims be asserted first in arbitration and then in court litigation?  Once again, different proceedings before different tribunals seem abusive.

The Alberta Court of Appeal recently held that multiple proceedings by the contractor are justified in some circumstances.  In Hnataik v. Assured Developments Ltd, the Court held that the contractor could sue the owner after bringing an arbitration claim against the owner.  The Court allowed the court claim to proceed because that claim was different than the claim in the prior arbitration and was not reasonably known to the contractor at the time when the pleadings were delivered and evidence was led in the arbitration.

The Background

 The Hnatiuks hired Assured to build them a new house.  In 2004, the Hnatiuks sued Assured alleging a fireplace problem and other related problems. Assured brought a motion to stay the action, asserting that the claim must be arbitrated under the provincial New Home Warranty Program. The motion was not heard and the parties proceeded straight to arbitration, and the action was left in abeyance.

After the evidence was heard and during the final argument in the arbitration, the Hnatiuks became aware of mould problems in the house.   On May 15, 2006, the arbitrator rendered his decision in the Hnatiuks’ favour.

On May 29, 2006 the Hnatiuks commenced a new action based on the mould problem.  Assured delivered a Statement of Defence asserting that the Hnatiuks were obliged to arbitrate their claim and then brought a motion to stay the action but did not proceed with that motion. The Hnatuiks’ action proceeded through discovery to trial.  At the opening of trial, the trial judge raised the issue of whether the action was barred by the prior arbitration.  He decided that it was and dismissed the action based on res judicata and abuse of process.  On appeal, the Court of Appeal reversed that decision.

The Court of Appeal decided that res judicata and related doctrines did not apply for three reasons.

First, the subject matter of the arbitration claim (faulty fireplace and related issues) was not the same as the subsequent court action (mould). On this basis, the Court held that “res judicata is not made out.”  The Court said that:

“causes of action are specific…If someone sues over a particular breach of contract and then later the defendant commits a second but different breach of contract, nothing forbids a second suit over that new breach….If a building contractor twice sets fires in the same building, working under the same ongoing maintenance contract, would that be the same cause of action?  Even if the fires were five years apart?  Surely not.”

Second, issue estoppel did not apply because the issue decided in the arbitration (relating to a faulty fireplace) was not the same as the issue in the subsequent action (mould).  The Court of Appeal said: “[Assured] seems not to suggest any arbitration finding contrary to some significant fact now alleged by the plaintiffs. It lists other claims, but they are plainly different. ”

Third, the Court of Appeal held that, while res judicata and related doctrines would preclude the Hnatiuks from bringing an action based on a claim which they ought to have asserted in the arbitration, there was no evidence that established that they ought to have included the mould claim in the prior arbitration.  That issue required the Court to analyze the arbitration proceedings. The Court said the following:

“The trial judge found that the plaintiffs probably saw mould by the close of argument in the arbitration.  But there is no evidence that its extent, cause or significance could be reasonably appreciated then…..It may be that the arbitrator could have consented to stop the arbitration, add new envelope items to the submission, hold a new hearing on them and then adjudicate on all items.  But the parties agreed he did not have to.”

The Court of Appeal also noted that including the mould claim might cause real problems under the provincial scheme in which claim was being arbitrated:

Adding a whole new set of claims to the arbitration could be troublesome to the arbitrator.  There would be money problems. The New Home Warranty Program….calls for a time estimate, and for a deposit toward the arbitrator’s fees….And of course it calls for pleadings… And there would be time problems in adding a large new claim at a later stage.  The program imposes a 30-day time limit after conclusion of the hearing for the arbitrator to deliver his award and account.  The power to amend the award is narrow…. So adding a big new claim to the arbitration, after the end of the evidence would be difficult.  It might well not be possible without the consent of both parties. The defendant builder never suggested that it would have consented, and indeed hints that it would not have.”

In colourful words, the Court of Appeal then said:

“We cannot see any advantage in trying to hitch such a trailer to that van, especially as it is probable that the trailer would have been far bigger and slower than the van.”

The Court of Appeal then drew a line in the sand, saying that the time for a new issue to be raised in the arbitration was at the time of pleadings or at the latest, at the close of evidence. In the present circumstances, there was no basis to conclude that the Hnatiuks ought to have raised the mould issue by either of those stages of the arbitration.

So far as abuse of process, the Court of Appeal held that the application of that doctrine required that the questions in both proceedings be the same; and/or that the plaintiffs’ second action be in the nature of misconduct, lack of diligence or harassment.  The Court found none of those ingredients in the present case.

Finally, the Court of Appeal held that Assured had waived or acquiesced in the second claim being brought by way of action and not by arbitration.  While Assured pleaded that the second claim ought to have been included in the prior arbitration and served a motion to stay that action, it did not proceed with that motion and fully participated in the action.  The Court of Appeal held that Assured had “plainly” waived its right to arbitration and attorned to the jurisdiction of the court.  Moreover, under section 7 of the Alberta Arbitration Act (the Act), the court’s duty to stay the action based on an arbitration agreement does not apply if the defendant’s stay motion is “brought with undue delay.”  Here, Assured never in fact brought such a motion and the raising of the arbitration issue at trial amounted to “gross” delay.

Observations

This decision raises many issues relating to whether contractors can bring multiple claims against owners arising out of the same building project.  Contractors may want to tuck this decision away and rely on it in a variety of situations because, on its face, the decision could countenance multiple claims by contractors before multiple adjudicators arising from the same building contract.

However, a wise reading of this decision would give it a narrow application, and indeed raise serious issues for contractors.  If the issue raised in the second proceeding is the same as the issue raised in the first proceeding, then the contractor may not be able to raise the same issue in two proceedings.  If the same factual issue arises twice during a building project under the same contract, then the decision in the first proceeding may bind the parties if a second proceeding is commenced, and the contractor may be obliged to make every effort to bring the second claim within the first proceeding.

Clearly, there are two inter-related factors at work here: how similar are the two issues; and how much did the contractor know about the second issue when the first issue was being adjudicated.  In this case, the Court of Appeal found that these issues were at one extreme end of the spectrum: the two issues were very different, and the contractor knew little or nothing about the second issue when the first issue was being arbitrated .  If these factors were different, then the contractor could well be barred by the determination in the first proceeding.

Two other aspects of the decision of the Court of Appeal’s decision do raise questions.

First, the Court said that “it is far from clear” that res judicata is as readily applied to arbitral decisions as to court decisions, and that in any event “the court has a discretion not to find or enforce res judicata flowing from a tribunal’s decision.”  These remarks will be troubling to all those who maintain that the arbitral regime is not a second-class dispute resolution system and that the arbitration process should be fully supported by judicial decisions.

Second, the builder’s reliance on section 7 of the Act and “undue delay” raises the question of the proper purpose of that section.  Its apparent purpose is to deal with an existing and future proceedings and to permit a court proceeding to go forward if a stay motion is not brought expeditiously.  It seems to have nothing to do with past proceedings and the application of res judicata and related principles arising from a past decision.  Put in another way, if res judicata does apply but the question is whether those principles can be waived and have been waived, then that question does not seem to be answered by resorting to section 7.

In the result, the Hnatiuk decision contains a potpourri of issues that contractors and owners may resort to when multiple proceedings arise from the same building contract.  The decision provides us with circumstances in which multiple claims by the contractor were allowed.  It also provides a useful spectrum of conduct or events which may influence or determine whether multiple claims will be permitted in the future.  And it raises questions about how supportive the courts will be in giving effect to arbitral decisions based upon res judicata and related principles.

Hnatiuk v. Assured Developments Ltd.                                                                                                                                                                 

 Building contracts  –  arbitration  –  stay of arbitration  –  res judicata

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