An arbitration is usually considered to be a less formal type of dispute resolution than court litigation. For this reason it may be thought that less formal rules about limitation periods apply to arbitrations.
If you had this impression, then the recent decision of the Ontario Court of Appeal in Penn-Co Construction Canada (2003) Ltd. v. Constance Lake First Nation will quickly disabuse you of that view. Just like a court action, unless an arbitration is started within the appropriate limitation period, the right to commence the arbitration claim will be lost. The issue may be trickier in an arbitration than in a court action since, unlike in a court action, there is no court office in which to issue the arbitration claim. But it is still the same question: was the proceeding commenced within the limitation period?
The appeal to the Court of Appeal in the Penn-Co case was from a 2011 decision of the Ontario Superior Court. I commented on that decision in my article of November 6, 2011.
The Legal Background
In Ontario, there are two enactments that are relevant to the limitation period for an arbitration claim.
First, the Limitations Act, 2002 says that the general limitation period in Ontario is two years from the discovery of the facts giving rise to the claim. Section 52(1) of the Ontario Arbitrations Act, 1991 (the Act) says that “the law with respect to limitation periods applies to an arbitration as if the arbitration were an action and a claim made in the arbitration were a cause of action.” So, an arbitration must be commenced within two years of the date that the would-be applicant first had knowledge of the facts giving rise to its claim.
Second, section 23 of the Act says that an arbitration may be commenced “in any way” including three particular ways:
A party to the arbitration agreement serving on the other parties to that agreement a notice to appoint or to participate in the appointment of an arbitrator under the agreement;
If a third party has the power to appoint an arbitrator, serving a notice on that third party to exercise that power, and serving the other parties with that notice;
A party serving on the other parties a notice demanding arbitration under the agreement. (emphasis added by the Court of Appeal)
As a result, the limitation issue in the Penn-Co case was whether Constance Lake took one of these three steps before the limitation period expired.
The Background Facts
In 2003, the parties signed a standard form building contract for the construction by Penn-Co of a school for Constance Lake. The contract contained a three-step process for resolving disputes: negotiations involving the consultant, mediation and arbitration. By the summer of 2005, there were several alleged deficiencies in Penn-Co’s work that were the subject matter of dispute. In December 2005, Constance Lake served a cure notice on Penn-Co. Penn-Co’s counsel responded by asking for mediation. Then, on January 20, 2006, counsel for Constance Lake suggested that the parties dispense with the provisions under their contract and proceed directly with arbitration under an amended form of the CCDC 40 Rules for Arbitration of Construction Disputes. In response, Penn-Co’s counsel suggested that the parties proceed with a neutral third party “peer review”. However, the parties could not agree upon the terms of the peer review and by mid-2006 that process was abandoned.
In June 2007, Penn-Co commenced an action against Constance Lake. In response, in May 2009 Constance Lake instituted a counterclaim in that action. That counterclaim was instituted more than two years after December 2005 when, as acknowledged in its own cure notice, Constance Lake had knowledge of its claim against Penn-Co. Penn-Co brought a motion to dismiss the counterclaim on the ground that the counterclaim was barred by the limitation period.
The Superior Court judge had held that the counterclaim was barred, and the Court of Appeal agreed. It held that the letter of January 16, 2006 did not commence an arbitration. It said that that this letter, and the other correspondence between the parties, amounted to “mere proposals for an arbitration agreement” and not a notice under the existing arbitration agreement which satisfied section 23 of the Act. The Court of Appeal held that the “parties failed to commence an arbitration under the building contract or any other agreement.” Accordingly, the limitation period to do so had expired.
In these circumstances, the Court of Appeal also held that section 52(2) of the Act had no application. That sub-section gives powers to the court when it sets aside an arbitration award or terminates an arbitration or declares an arbitration to be invalid. In those circumstances, the court may order that the “period from the commencement of the arbitration to the date of the order” is to be excluded from the computation of time for limitation purposes. The Court of Appeal held that, if no arbitration was commenced, then this sub-section had no application.
Finally, the Court of Appeal held that Penn-Co was not estopped by its conduct from relying on the limitation period. None of the elements of estoppel were present. There was no evidence that Penn-Co gave any assurance or representation that it would not rely on the limitation period, or that Constance Lake relied upon any such assurance.
This decision is a good reminder that an arbitration is a formal proceeding and must be formally commenced. But this decision does not answer the question of what exactly such a formal commencement might encompass.
Section 23 of the Act says that an arbitration may be commenced “in any way recognized by law”. That is just about as broad a definition as could be drafted. One wonders what the limit of that definition might be, apart from the examples given in the section. The legislature has said that a notice demanding arbitration is sufficient. If that is so, and if that is included within but is not exhaustive of the definition, then something less than such a notice may amount to a commencement. The Court of Appeal has said that proposing arbitration under some other procedure or regime is not sufficient, at least until that regime is agreed to. But exactly what can amount to a “commencement” of an arbitration less than a notice of arbitration is left uncertain.
Several lessons can be learned from this decision.
One is that, before a party suggests alternatives to the arbitration agreement that is already in place, that party should first give notice of arbitration under that agreement. Then, other dispute resolution solutions can be proposed.
The second lesson is that the institution by one party of mediation or arbitration does not protect the other party. In the present case, Penn-Co instituted the mediation provisions of the building contract. Whether the commencement of mediation proceedings stops the limitation period from running is open to question. As I have commented upon in previous articles, the Ontario Court of Appeal has issued two decisions on this issue which arrived at contradictory results. But the commencement of mediation proceedings by one party will not likely stop the running of the limitation period against the other party.
Finally, the limitation issue may not entirely deprive Constance Lake of its cause of action. It may still be able to rely upon that cause of action by way of defence and setoff against the claim by Penn-Co. The limitation statutes bar the commencement of a claim but not the reliance on the cause of action in any other way.
See Heintzman & Goldsmith on Canadian Building Contracts (4th ed.) at Chapter 10, part 6
Penn-Co Construction Canada (2003) Ltd. v. Constance Lake First Nation, 2012 ONCA 430
Building Contract – Arbitration – Limitation Periods – Commencement of Arbitration
Thomas G. Heintzman O.C., Q.C., FCIArb August 27, 2012