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 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.
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