This issue was recently considered by the Alberta Court of Appeal in A.G. Clark Holdings Ltd. v HOOPP Realty Inc.  In that case, the Alberta Court of Queen’s Bench had concluded that, since the dispute had not been dealt with by the consultant, the parties could proceed to litigation in court, and that arbitration was not mandatory. The Court of Appeal reversed and held that arbitration was mandatory.

The dispute resolution clause in question was a variant of that found in one of the standard forms of building contract used in the Canadian construction industry, namely, the CCDC 2 Stipulated Price contract.  Accordingly, the Alberta Court of Appeal’s decision provides important insight into when and whether a dispute resolution clause similar to that found in the CCDC documents will be held to be mandatory or permissive.

Background

In 1999, Clark Builders and HOOPP had entered into a Design-Build Agreement. Under that agreement, Clark was to design and build a warehouse for HOOPP, the owner. The warehouse was built in 1999 and 2000. As a result of alleged deficiencies in construction, HOOPP commenced an action against Clark in 2002 alleging breach of contract and negligence.

Clark brought a motion to stay the action and require the claim to be dealt with by arbitration. The judge hearing the motion held that the dispute resolution clause in the agreement did not mandate arbitration, and so he dismissed Clark’s motion, and Clark appealed.

The dispute resolution clause in the building contract followed, to some extent, the wording in the standard form CCDC 2 Stipulated Price Contract.  The clause in the contract stated as follows (with less relevant portions excluded, and the most relevant portions emphasized):

 Part 8 Dispute Resolution

GC 8.1 AUTHORITY OF THE CONSULTANT

8.1.1.  Differences between the parties to the Contract as to the interpretation, application, or administration of the Contract or any failure to agree where agreement between the parties is called for, collectively referred to as disputes, which are not resolved in the first instance by findings of the Consultant as provided in GC 2.1 – CONSULTANT, shall be settled in accordance with the requirements of Part 8 of the General Conditions – DISPUTE RESOLUTION. . . .

GC 8.2 NEGOTIATION, MEDIATION AND ARBITRATION. . .

8.2.3 The parties shall make all reasonable efforts to resolve their disputes by amicable negotiations and agree to provide, without prejudice, frank, candid and timely disclosure of relevant facts, information and documents to facilitate these negotiations.

8.2.4 After a period of 10 Working Days following receipt of a responding parties notice in writing of reply under paragraph 8.2.2, the parties shall request the Project Mediator to assist the parties to reach agreement on any unresolved disputes. The mediated negotiations shall be conducted in accordance with the latest edition of the Rules for Mediation of Construction Disputes …

8.2.5 If the dispute has not been resolved within ten (10) Working Days after the appointment of the Project Mediator either party may by notice to the other withdraw from the mediation process.

8.2.6 All disputes, claims and differences not settled as herein provided, arising out of or in connection with the Contract or in respect of any defined legal relationship associated with it or derived from it, shall be referred to and finally resolved by arbitration in accordance with the Alberta Arbitration Act. … [emphasis added]

During negotiation, the parties had discussed a form of dispute resolution clause that read as follows:

8.2.6 By giving notice in writing to the other party, not later than 10 Working Days after the date of termination of the mediated negotiations under paragraph 8.2.5, either party may refer the dispute to be finally resolved by arbitration … .

8.2.7 On expiration of the 10 Working Days, the arbitration agreement under paragraph 8.2.6 is not binding on the parties and, if a notice is not given under paragraph 8.2.6 within the required time, the parties may refer the unresolved dispute to the courts or to any other form of dispute resolution, including arbitration, which they have agreed to use. [emphasis added]

Those familiar with the CCDC 2 Stipulated Price Contract will recognize the latter wording as coming from General Condition 8.2 of that contract.

The Courts’ Decisions

The judge hearing the motion held that Part 8 of the agreement set out a series of steps which must be followed before the arbitration clause became applicable or mandatory. He found that only those disputes “which are not resolved in the first instance by findings of the Consultant” could proceed to the next steps in the process. Since the parties had not referred the dispute to the consultant, the judge held that the arbitration procedure had not been invoked and was not mandatory.

The Court of Appeal disagreed for two reasons:

First, that court found that the wording of Articles 8.1.1 and 8.2.6 were clear and required arbitration whether or not the parties had referred the dispute to the consultant. Article 8 contained a complete dispute resolution regime which did not require either party to refer the dispute to the consultant for it to be applicable.

Second, the Court of Appeal looked at the drafts of Article 8 and held that those drafts demonstrated that the parties had contemplated a permissive arbitration regime and had discarded it in favour of a mandatory regime.  The court held that:

The notion of “Dispute Resolution” could, of course, encompass litigation, as was evident in the original form of the Agreement. The deliberate decision of the parties to remove reference to litigation from the dispute resolution provisions of the Agreement emphasizes that their mutual intention at the time of drafting was to refer disputes to arbitration rather than proceed to litigation. HOOPP’s current position, that it is entitled to bypass arbitration in favour of litigation, is coloured by that earlier decision.

The Court of Appeal effectively held that the dispute resolution clause allowed for two routes to mandatory arbitration, one after consideration by the consultant, and the other without the involvement of the consultant.  In its view, this interpretation was “rational” from two aspects.

First, it recognized that allegations of negligence could not properly be dealt with by the consultant, but could be dealt with by arbitration.

Second, it allowed the parties to go through a mediation type process with the consultant if they wished to, but did not require them to do so before proceeding to arbitration.

How does this decision affect the interpretation of GC 8.2 of the CCDC 2 Stipulated Price Contract? Some might see that provision as an “opt-in” arbitration procedure.  Under that view, arbitration is mandatory once one of the parties elects arbitration under GC 8.2.6, and the meaning of the word “may” in that clause means that one of the parties may choose, but is not required to choose, arbitration, but once chosen, arbitration is binding on both parties.  The other view might be that the word “may” means that arbitration is entirely voluntary.

What does appear clear from GC 8.2.7 of CCDC 2 Stipulated Price Contract is that, if neither of the parties asks for arbitration within the 10 day period referred to in that clause, then either party can go to court. In the Clark v HOOPP case, the Alberta Court of Appeal held that, by their amended form of dispute relation, the parties had eliminated that choice and provided for arbitration to be the only form of dispute adjudication.

Another interesting aspect of the Court of Appeal’s decision is its conclusion that Clark was permitted to appeal the motion judge’s decision. Section 7 of the Alberta Arbitration Act states that the court shall stay an action brought in breach of an arbitration agreement, subject to certain exceptions. Sub-section 7(6) states that “There is no appeal from the court’s decision under this section.” The court held that this prohibition against appeal only applies when the merits of a stay motion are being considered. If the issue is whether the motion judge mis-interpreted his or her jurisdiction to make the stay decision, then the prohibition does not apply.  The Court of Appeal held that this was the situation before it:

Only if that agreement contained a mandatory arbitration clause would s 7 of the Arbitration Act apply. The chambers judge concluded that the agreement did not contain such a clause and he did not, therefore, address the application of s 7 to these parties and this dispute. The chambers judge’s decision on that preliminary issue is subject to appeal.

Accordingly, since dispute resolution, properly interpreted, did give rise to a prohibition of a court action under section 7 of the Act, then there was a right of appeal from the motion judge’s erroneous determination of that issue.

See Heintzman and Goldsmith on Canadian Building Contracts, 4^th ed,, chapter 10, part 6

A.G. Clark Holdings Ltd. v HOOPP Realty Inc., 2013 ABCA 101.

Arbitration  -  Construction law  -  Mediation  -  Mandatory or Permissive arbitration  -  Stay of Arbitration Proceedings -  Appeal from Stay Application

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                 June 9, 2013

www.heintzmanadr.com

www.constructionlawcanada.com

In Durham (Regional Municipality) v. Oshawa (City), the court held that the word “may” in an arbitration clause makes the arbitration permissive and not enforceable.  This conclusion is significant for building contracts which often use very similar wording.

Background

In December 2004, the Regional Municipality of Durham (the Region) passed a resolution relating to the jurisdiction over public transportation in the Region. The resolution transferred the jurisdiction over those facilities to the Region from City of Oshawa and certain lower-tiered municipalities which had previously had jurisdiction over them. The bylaw provided that the amount and future payment of exiting and unfunded liabilities was to be determined by negotiations between the region and the lower-tiered municipalities. It stated that “any matter not agreed to within three (3) months of the Effective Date [of the bylaw] may, at the request of the Region or a lower-level municipality, be determined by arbitration under the provisions of the Ontario Arbitration Act.”

There were some complicated issues to be resolved between the Region and the lower-tiered municipalities:  the identity of the facilities to be transferred, the nature of the legal arrangements (sale or lease), and amount and nature of the unfunded liabilities relating to former transit employees. Up until late 2009, it was not known exactly which assets would be transferred.

In early April 2009, the Region settled the issue of the transferred costs and liabilities with all the other lower-tiered municipalities except Oshawa.  On April 1, 2009 the Region requested arbitration. Oshawa asserted that, from the very beginning, it refused to accept responsibility for the unfunded liabilities. On April 21, 2009, Oshawa passed a resolution denying responsibility for the unfunded liabilities and refusing to proceed to arbitration.  On March 22, 2011, the Region commenced an action against Oshawa for payment of those liabilities.

The Regions took the position that the two year limitation period commenced on April 21, 2009 when Ottawa passed its resolution denying responsibility for the unfunded liabilities. The Region said that it was on that date that it “discovered” that there was a dispute with Oshawa, and that its action on March 22, 2011 was commenced within the two year limitation period from that date.

Oshawa asserted that the limitation period commenced in March 2005 when the three month negotiation period expired after the Region’s bylaw and that the Region’s action was barred by the limitation period. In the alternative, Oshawa said that its refusal to accept responsibility for the unfunded liabilities was well known to the Region long before Oshawa’s resolution of April 21, 2009 and that the Region knew or should have known, long before Oshawa’s resolution, that Oshawa denied responsibility for those liabilities and that the limitation period was running.

The Decision

The court held that the Region’s bylaw did not create a mandatory obligation to arbitrate. The words “may…be determined by arbitration” only established a permissive arbitral regime in which either party could opt not to arbitrate.  The court said:

“There is no decision that a permissive clause, in which parties “may” proceed to arbitration, triggers a limitation period. Had the limitation clause instead required  the parties to attend arbitration after three months by using the word “shall”, it would have changed the complexion of Oshawa’s arguments.”

The court also held that the limitation period commenced when Oshawa passed a resolution denying liability for the unfunded obligations, not when the three month period expired after the Region’s bylaw was enacted. The parties had negotiated in good faith right up to April 2009, all apparently in good faith. The relevant financial statements, upon which a resolution of the issues between the municipalities could be resolved, were not available until April 2006. So the limitation period could not sensibly run from the expiry of the three month period after the Region’s bylaw was enacted . Since a municipality can only officially act by resolution, it was not until Oshawa’s resolution of April 21, 2009 that the Region could reasonably know, and therefore discover, that there was a dispute.

Comments

Whether an arbitration clause requires, or merely permits, arbitration is of crucial importance in any contract and, to no less an extent, in a building contract. How does this decision help us understand and apply arbitration clauses?

The Region’s bylaw used the word “shall” at least 15 times.  It would seem that the arrangements instituted by the bylaw were mandatory, that the assets and liabilities were being transferred, with no going back. In those circumstances, what meaning should be given to “may”, at the request of the Region or a lower-tier municipality, be determined by arbitration”? Could the word “may” simply mean that the parties are not required to have a dispute?  Did all the “shall”s in the bylaw mean that the regime itself was mandatory, but that disputes were not mandatory? Did it make sense that the municipalities would have two dispute resolution regimes (arbitration and an action) to resolve their disputes?  Or does it make sense for an arbitration clause to be interpreted as permissive when that would mean that the Region had inserted an unenforceable clause into its bylaw?

This issue is of interest to construction law because wording of the same kind is found in building contracts . For example, GC 8.2 of the CCDC 2 Stipulated Price Contract is the dispute resolution clause in that contract.  GC 8.2 has the word “shall” in it at least six times.  But when it refers to arbitration, it says in GC 8.2.6 “either party may refer the dispute to be finally resolved by arbitration.” Other parts of GC 8.2 may make it clear that arbitration is mandatory if one party wants arbitration. But the use of the word “may” in the pivotal clause, 8.2.6 may confuse the issue if the decision in Durham v. Oshawa is strictly applied.

The decision in Durham v Oshawa may be more readily understood by considering whether the Region’s bylaw was an enforceable document as between the Region and Oshawa. If it was not, then the word “may” makes sense because a mandatory obligation could not be imposed on Oshawa.  If this is the case, then this decision has no application to a contractual arbitration clause.

It is interesting that the Region did not press the point that the arbitration provision was mandatory. It had passed a resolution on April 1, 2009 that the dispute should proceed to arbitration. But when Oshawa passed a resolution on April 21, 2009 refusing to arbitrate, the Region did not try to force Oshawa to proceed with arbitration. Perhaps it did not do so because it was concerned that, on April 1, 2009, the two year limitation period had already passed since its 2004 bylaw and the three month period for negotiation.  But having passed that resolution on April 1, 2009, it seems odd that it could later assert that the limitation period hadn’t even started to run.

There are some other interesting issues arising from this decision. But enough has been said to emphasize the point that limitation periods and arbitration clauses are a troublesome mixture.

Durham (Regional Municipality) v. Oshawa (City) (2012), 113 O.R. (3d) 54 (Ont. S.C.J.)

Construction Law  -  Arbitration  -   Limitation Periods

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                                            April 20, 2013

www.heintzmanadr.com

www.constructionlawcanada.com

What happens when one party wants to appeal the decision which grants the motion to stay or dismiss? Can the parties to the arbitration agreement agree beforehand that there shall, or shall not be, a right of appeal?  That was the issue that Federal Court of Appeal recently considered in Murphy v. Amway Canada Corporation.

Interestingly, the Federal Court of Appeal held that, while the applicable arbitration legislation can preclude an appeal from that decision, the parties cannot, and that the court’s own statutory powers relating to appeals apply despite what the parties have agreed to. This decision could have wider ramifications relating to the parties’ ability to limit or expand the powers of courts relating to arbitration proceedings. According to this decision, the parties may have no right to do so.

Background

Amway is in the business of distributing home, personal care, beauty and health products. It does so through individual distributors who sell the products in their homes or through other persons they recruit. Mr Murphy was an Amway representative in British Columbia.

The agreement between Amway and Mr Murphy was called the Registration Agreement. The Registration Agreement contained a clause requiring any dispute between the parties to be arbitrated. The arbitration clause contained conflicting provisions relating to the arbitration. On the one hand it said that the Ontario Arbitration Act, 1991 was to govern the “interpretation, enforcement, and any proceedings in any federal or provincial court in Canada.”  On the other hand, it said that Michigan law applied to the arbitration and that the “United States Arbitration Act shall govern the interpretation and enforcement of the arbitration rules and the arbitration proceedings.”  The Rules of Conduct incorporated into the arbitration clause stated that the arbitration would be conducted under the procedures of JAMS (an American-based dispute resolution service) or the American Arbitration Association.

The Murphy v Amway decision:

The Murphy v. Amway decision is most famous for the ruling that a party to an arbitration agreement who asserts a claim under the Competition Act must bring the claim by way of arbitration, and cannot bring the claim in court. Accordingly, Mr. Murphy was precluded from bringing a class action asserting remedies under the Competition Act against Amway.

A judge of the Federal Court stayed Mr. Murphy’s action based upon the arbitration agreement contained in the agreement between Mr Murphy and Amway. Mr. Murphy appealed. A preliminary issue in the Federal Court of Appeal was whether Mr. Murphy had any right to appeal.

Amway argued that Mr. Murphy had no right of appeal from the decision of the Federal Court because, by virtue of the parties’ agreement, the Ontario Arbitration Act, 1991 applied. Section 7 of that Act provides for a party to an action bringing a motion to stay an action based upon an arbitration agreement. Sub-section 7(6) states that “there is no appeal from the court’s decision.”  Accordingly, Amway argued that the parties had incorporated sub-section 7(6) into their agreement and that subsection precluded Mr. Murphy from appealing.

The Federal Court of Appeal rejected Amway’s submission and held that Mr. Murphy was entitled to appeal.  It held that the Ontario Arbitration Act, 1991 did not apply to the Registration Agreement as a matter of statute law. It said: “Simply put, we are not bound by the term of that statute.” It so held presumably because the Registration Agreement related to an Amway representative located in British Columbia and a distribution agreement to be performed in British Columbia, and not agreements made in Ontario.  The Federal Court of Appeal accordingly held that the Ontario Arbitration Act, 1991 only applied by way of agreement, that is, by being incorporated into the Registration Agreement.

The Federal Court of Appeal further held that, simply as an agreement, the arbitration clause in Registration Agreement could not over-ride the Federal Courts Act. That Act provides for an appeal to the Federal Court of Appeal from decisions of the Federal Court. In that situation, the Federal Court of Appeal held that the Federal Courts Act applied and was not ousted by the parties.

The Federal Court of Appeal distinguished the present situation from that found in a number of provincial trial and appellate courts decisions in which the court had applied sub-section 7(6), or the comparable section in other provinces. In those cases, sub-section 7(6) applied directly to the proceedings because the arbitration was governed by that provincial law. Here, the Ontario Arbitration Act, 1991 apparently had no application qua statute.

The Federal Court of Appeal also distinguished the decision in Halterm Ltd v. Canada, [1984] F.C.J. No 541. In that case the parties had effectively appointed the Federal Court trial division as the arbitrator of their dispute. In that situation, they were permitted to make a binding and effective agreement that there would be no appeal.

In the result, the Federal Court of Appeal held that the parties had not and could not agree there was no appeal from the judge’s order granting the stay. The Court proceeded to hear the appeal, but dismissed the appeal on the ground that the Federal Court had properly held that the dispute must be determined by arbitration.

Discussion

This decision raises the very interesting public policy issue of where the limits of agreement are in respect of court procedures generally and specifically in relation to arbitration proceedings.

There are a number of sections in the Ontario Arbitration Act, 1991 that state that there is “no appeal” or limited rights of appeal:

section 7(6) – no appeals with respect to a court decision to stay the action in favour of arbitration;

section 10(2) – no appeals with respect to the court’s appointment of the arbitral tribunal;

section 15(6) – right of appeal only by a removed arbitrator or party with respect to a court decision to remove an arbitrator;

section 16(4) – no appeal from court order appointing a replacement arbitrator; section 17(9) – no appeal from a court order dealing with a jurisdictional objection.

None of these prohibitions on appeals (and particularly the one found in sub-section 7(6) of the Ontario Act) are found in the British Columbia Commercial Arbitration Act. This may be the reason why Amway relied upon the Ontario Act.

These prohibitions on appeal exist alongside the provisions in the Courts of Justice Act and the Rules of Civil Procedure contemplating appeals from the same judges to courts of appeal.  Nevertheless, the latter provisions have been found to be inoperative in the face of the specific prohibition on appeals found in the Arbitration Act, 1991.

Section 3 of the Ontario Arbitration Act, 1991 says that “the parties to an arbitration agreement may agree, expressly or by implication, to vary or exclude any provision of this Act except” certain specific sections.  None of those non-waivable sections include any of the sections precluding appeals. In that situation may the parties agree that there is an appeal? Presumably the argument would be that the parties cannot create by an agreement an appeal to the courts; and that only the legislature can do that.

If that is so, and if the parties cannot contract in to an appeal, then should the parties be able to contract out of an appeal? Should they be able to contract out of the right in section 45 to seek leave to appeal? Section 45 is not one of the sections that the parties are precluded from waiving and the case law appears to support the entitlement of the parties to contract out of this statutory right to seek leave to appeal. But if a party can do so, should it also be entitled to contract out of the prohibition against appeals in the other sections?

These sections are, of course, one step closer to the arbitration than the situation in Murphy v. Amway. There, the appeal concerned an appeal from one Federal Court judge to the Court of Appeal, that is, an appeal within the court system itself.  So the argument that the parties should not be able to contract out of the appeal rights found in the court statutes may have greater weight. Nevertheless, without citing any authority, the Federal Court of Appeal held that no such agreement can be made, even if the prohibition on appeal is exactly what is found in provincial arbitration statutes. Since the prohibition on appeals is found in provincial statutes, it is hard to say that such a prohibition is contrary to general public policy.  The argument must be made entirely on the basis that the parties cannot, in advance, contract into or out of the provisions of the court system. For example, just as they cannot contract about what are the grounds for appeal to the Federal Court of Appeal (or the Supreme Court of Canada) will be between them, they cannot contract that there will be no such appeal.

The Ontario International Commercial Arbitration Act (ICAA) and the Model Law attached to that statute do not contain any prohibitions on appeals or any right to contract out of the statute. It is interesting to speculate why this is so, in light of the contrasting provisions in the domestic statute.  So far as appeals are concerned, one might conclude that, being an international law intended to be adopted in many countries, the Model Law does not deal with rights of appeal, leaving each country to sort that matter out. In the case of Ontario, however, the effect is to leave wide open rights of appeal in many cases in which there would be no appeal under the domestic statute. So far as contracting out, ICAA and the Model Law are written in a fashion that makes it appear that they are public policy and that the parties cannot contract out of them.

All of the above, and the decision in Murphy v. Amway, may make us re-think the legal principles underlying the waiver or creation of rights relating to appeals and arbitration proceedings.  Is the right to waive or create such rights based on contract law, administrative law, public policy or what, and why?

See Heintzman and Goldsmith on Canadian Building Contracts, 4^th ed., chapter 10

Murphy v. Amway Canada Corporation, 2013 FCA 38

Arbitration – Stay of court proceedings – appeals - 

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                                          March 10, 2013

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www.heintzmanadr.com

Or is an agreement to mediate simply not enforceable because an agreement to negotiate is not enforceable? If this is the case, then the limitation period is running and either party can ignore the mediation agreement and go to court or commence arbitration. The Ontario Court of Appeal so held in Federation Insurance Co. of Canada v. Markel Insurance Co of Canada, 2012 ONCA 218.

The uncertainty about the enforceability of mediation agreements creates real dangers for those engaged in dispute resolution under arbitration and building contracts. Fortunately, in Ontario there may be at least a partial solution in section 11 (“section 11”) of the Limitations Act, 2002 of Ontario (“Limitations Act”). This solution is often forgotten but in the recent decision in Tribury v. Sandro, the court held that a mediation agreement, once made, does effectively stop the limitation period from running.

However, there are other dangers arising from mediation agreements and limitation and procedural periods.  The Tribury decision did not expressly determine whether the mediation agreement would suspend the limitation period even if it was not an enforceable agreement to mediate.  In addition, section 11 only applies to limitation periods prescribed under the Limitations Act.  Thus, in Tribury, the court did not apply section 11 to the two year period for setting a lien action down for trial under section 37 of the Construction Lien Act (“section 37”).  What is the effect of mediations on all the other procedural and limitation sections found in Ontario statutes?

Section 11(1) states as follows:

“ If a person with a claim and a person against whom a claim is made have agreed to have an independent third party resolve the claim or assist them in resolving it, the limitation periods established by sections 4 and 15 do not run from the date the agreement is made until,

(a) the date the claim is resolved;

(b) the date the attempted resolution process is terminated; or

(c) the date a party terminates or withdraws from the agreement.”

Background

Tribury was the general contractor on a construction project for Laurentian University.  Sandro was the structural steel subcontractor and Edward was Sandro’s structural steel consultant.  The project started in 2006 and ground to a halt in June 2007 due to the alleged failure of certain steel connections. Apparently, all parties accepted that the claims between the parties were “discovered” in June 2007 for the purposes of the Limitations Act. As will be seen later, one of the issues in the motions in question was whether some of the subsequent proceedings were brought within the basic two year limitation period set out in section 4 of the Ontario Limitations Act or, in effect, by June 2009.

In October 2008, Sandro commenced a construction lien claim against Tribury and Laurentian. The other issue in the motions in question was whether Sandro had set that lien claim down for trial within two years of that date as required by section 37 of the Construction Lien Act, or, in effect, by October 2010.

In December 2008, Tribury counterclaimed in Sandro’s lien action.  In April 2009, Tribury started its own action which was substantially the same as its counterclaim in Sandro’s lien action. While Tribury agreed to withdraw that counterclaim, the order dismissing the counterclaim was not made until November 2010.

The Mediation

In March 2009, Sandro suggested mediation to all parties. In April 2009, counsel for all the parties participated in a conference call and all the parties, with the exception of one party, agreed to participate in mediation. That agreement was confirmed by a letter from Tribury which suggested the names of mediators, proposed deadlines for the mediation briefs and confirmed the parties’ tentative consent to a cost sharing for the mediator’s fees. In July, 2009, Sandro delivered its mediation brief to Edward. In March, 2010 the parties chose a mediator. In August, 2010, a mediation date in November 2010, was scheduled.  On November 10, 2010, counsel for Edward advised the other parties that Edward was not prepared to mediate the “Sandro remediation costs”, namely the remediation costs which Sandro itself had incurred and was now claiming against Edward (as opposed to remediation claims being asserted by others against Sandro which Sandro claimed over against Edward). The mediation was cancelled.

The Impugned Proceedings

On December 3, 2010, Sandro issued a new Statement of Claim against Edward. On December 6, 2010, in Tribury’s 2009 action Sandro served a Statement of Defence, Crossclaim (against Edward) and Counterclaim (against Tribury).

The Motions

Edward then brought a motion to dismiss the December 2010 action and cross claim against it on the ground that the limitation period had expired.

Tribury bought a motion to dismiss Sandro’s lien action on the ground that it had not been set down within the two years period set forth in Section 37 of the Construction Lien Act. Section 37 requires that, within two years of the lien action that perfected the lien, an order must be made for the trial of an action in which the lien may be enforced, or an action in which the lien may be enforced must be set down for trial.  Otherwise, the lien action must be dismissed.

Tibury also sought an order dismissing Sandro’s December 2010 counterclaim on the basis that, by December 2010, the limitation period had expired for that counterclaim to be brought.

The Decision

1.      Section 11

So far as Sandro’s December 2010 claim and cross claim against Edward and its December 2010 counterclaim against Tribury, the Court held that the limitation period for commencing those claims was extended during the whole period from April 2009 to November 2010, and had not expired by the time that Sandro’s December 2010 claim, cross claim and counterclaim were commenced, by virtue of the mediation and the effect of section 11 of the Limitations Act.

First, the Court held that an agreement under section 11 did not have to specify that the limitation period was suspended until the conclusion of the mediation.  The suspension of the limitation period was effected by section 11 itself, without the parties having to say so. Their agreement to mediate, not any words agreeing to a suspension of the limitation period, caused the suspension.

The Court distinguished section 23(3) from section 11 of the Limitations Act. Sub-section 23(3) is the general provision allowing parties to agree to suspend or extend the limitation period.  That sub-section depends, for it to be activated, on the parties’ agreement to do exactly that, namely, suspend or extend the limitation period.  In contract, section 11 depends, for it to be activated, upon the parties’ agreement to mediate. If there is an agreement to mediate, it is section 11 which then suspends the limitation period. The Court said:

Edward has not convinced me that the agreement referred to in section 11 of the Limitations Act requires specific language suspending or extending applicable limitation periods for its efficacy. In my view, what is required is an agreement which is entered into after a dispute has arisen whereby the parties agree to have a third party assist in resolving the dispute, nothing more. In the case before the court, the parties entered into an agreement to mediate in response to a dispute which had arisen among them. They have therefore met the requisite test.

Whether there was an agreement to mediate was disputed. After reviewing the evidence, The Court held there was an agreement to mediate and that it included the Sandro remediation costs.  The Court found as follows:

The correspondence between the parties confirms their mutual intention to mediate the issues which arose following the failure of the steel connectors and I find that all parties decided to mediate these issues on the understanding that all outstanding damages issues would be mediated. Although the confirming letter did not specify which issues were to comprise the subject of the mediation, the agreement was open ended and not restricted in scope. There was a stated requirement in the letter confirming the mediation that both Sandro and Tribury submit damages briefs and there is no evidence that the parties intended that only some of the issues resulting from the failure of the steel connectors were to be mediated.

2.       Section 37

So far as Sandro’s lien claim, the Ontario Superior Court exercised its discretion to permit that claim to proceed as an ordinary contract claim, and struck out the lien itself on the ground that the action had not been set down within the two year period set forth in section 37. In so deciding, it did not consider whether the mediation, and section 11 of the Limitations Act, could extend the time set forth in section 37. Since section 11 only refers to limitation periods in the Limitation Act, the Court presumably thought that it was self-evident that section 11 did not apply to section 37.

Discussion

There is good news (with a condition), bad news and two warnings arising from this decision.

First the conditional good news.  If parties who are involved in a dispute agree to mediate, they thereby suspend the limitation period under section 11.  This is a power that is often forgotten. The parties are not necessarily faced with a “do or die” alternative between commencing the proceeding on the one hand, or mediating and potentially letting the limitation period run out on the other hand.  By reason of section 11, they are protected against the running of the limitation period by a proper mediation agreement.

The condition to the good news is this. In Tribury the Court held that the mediation agreement suspended the limitation period without inquiring whether the mediation agreement was an enforceable mediation agreement, so far as the obligation to mediate is concerned. That is, the Court did not consider whether the mediation agreement contained enough details to make it an enforceable agreement to mediate. There are many recent cases, particularly in the United Kingdom, holding that an agreement to mediate is not enforceable unless that agreement contains sufficient procedural details.

One explanation of the Tribury decision could be that it is not essential that mediation agreement be enforceable as such for it to activate section 11: a           mediation agreement is enforceable to suspend the limitation period by virtue of section 11, even if it does not compel the parties to mediate.

Another explanation is that this issue was simply not considered, and that it is open for another court to conclude that, unless the mediation agreement contains sufficient details, it does not activate section 11.

Second, the bad news. Sections 11 and 23 only refer to limitation periods contained in the Limitations Act. They do not refer to limitation periods in any other Act, including the Construction Lien Act.  For this reason, the parties cannot rely on sections 11 or 23 to extend by agreement the limitation periods for the commencement of a lien action or the statutory period for setting a lien action down for trial.

Nor do sections 11 or 23 apply to limitation periods, or periods for taking steps, in other statutes.  For example, the Arbitration Act, 1991 of Ontario contains a number of limitation periods. Section 52(1) of that Act says that limitation period for an arbitral claim is the same limitation period as for an action. So presumably, sections 11 and 23 should apply to arbitral claims.  Section 47of the Arbitration Act, 1991 establishes a 30 day period for commencing an appeal from an award or an application to set aside an award. Section 52(3) establishes a 2 year period for enforcing an award. Section 3 says that the contracting parties may agree to vary or exclude any provision of the Act, except certain specific mandatory sections.  Sections 47, 52 and 53 are not among the mandatory sections.  So the parties should be able to vary the limitation periods set forth in those sections.

Article 34(3) of the Model Law attached to the Ontario International Commercial Arbitration Act (“ICAA”) establishes a three month period for bringing an application to set aside an international commercial arbitral award.  Article 52(3) establishes a two year limitation period for commencing an application to enforce the award. The ICAA and the Model Law do not contain any express power to grant relief from, or contract out of, those articles.  While the two year enforcement period seems to be based on the two year general limitation period in the Limitations Act, it appears that the parties can vary the latter but not the former, unless a court were to find that parties can generally contract out of the ICAA .

Third –  two warnings:

First, the mediation agreement should be carefully documented. An exchange of correspondence should not be relied upon as that exchange may be subject to dispute and interpretation.  The dispute or disputes that fall within the mediation agreement should be specified. In the present case, Sandro was fortunate that the exchange of correspondence was interpreted by the Court to include all the issues between all the parties.

Second, in a construction lien action, attention should be paid to intersecting limitation and procedural periods, some of which may not be suspended by a mediation agreement. The same warning applies to any action or arbitration involving statutory limitation periods or periods for taking steps which could result in the proceeding being dismissed if not taken. In the present case, Sandro may have thought that the mediation agreement suspended all periods for taking procedural steps.  But it didn’t. It didn’t suspend the two year period for setting the lien action down for trial.

See Heintzman and Goldsmith on Canadian Building Contracts, 4^th ed., Chapter 6, introduction, and Chapter 10, part 6.

Tribury v. Sandro, 2013 ONSC 658

Construction Law  -   Building Contracts   -   Construction and Builders Liens  – Arbitration  -  Mediation  -  Limitation Periods

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                                           February 24, 2013

www.heintzmanadr.com

www.constructionlawcanada.com    

The English High Court recently considered this issue in Wah (Aka Alan Tang) & Anor v Grant Thornton International Ltd & Ors. The court upheld an arbitral decision that a clause requiring mediation was not enforceable.  Therefore, the arbitration was not premature.

What is interesting about the decision is that the court did not hold that mediation clauses are per se unenforceable. Rather the court held that such a clause must have one of two qualities to be enforceable.

Either the mediation clause must provide reasonable certainty as to the beginning, the ingredients and the end of the mediation process;

Or the subject matter of the mediation must be determinable by fairness or reasonableness so that the court can infer the necessary procedural ingredients.

Finding that the mediation clause in the Grant Thornton case satisfied neither criteria, the court upheld the arbitrator’s decision that the mediation clause was ineffective.

In the alternative, the court found that the period for the mediation had expired by the time that the arbitration started. Therefore, the arbitration was validly commenced.

Background

The claimants were two partners in a Hong Kong partnership, JBPB.  That partnership was a member of the international Grant Thornton organization.  JBPB was removed as a member of the international Grant Thornton organization. The claimants sought to invoke the mediation provisions of the international Grant Thornton agreement before going to arbitration. The partnership agreement contained a two stage mediation procedure involving the Chief Executive Officer and Executive committee.   The English High Court summarized those procedures as follows:

Section 14.3(a) requires that the dispute or difference should be referred to the Chief  Executive with a view to him attempting amicably to resolve that dispute or difference by amicable conciliation of an informal nature;

Section 14.3(b) prescribes that the Chief Executive shall attempt to resolve the dispute or difference in an amicable fashion within one month after receipt of a request that he should do so;

Section 14.3(c) prescribes that if the dispute or difference is not by then resolved it should be referred to a three-person Panel selected by the Board (none of whom is associated with or in any other way related to the member Firm(s) who are parties to the dispute), it being provided that the Panel is to have up to one further month to resolve the dispute or difference.

The international agreement stated that, until the Panel determined that it could not resolve the dispute or one month passed after the reference of the dispute to that Panel, “no party may commence any arbitration procedures in accordance with this Agreement.”

It is interesting to note that the CEO recused himself from the mediation process on the ground that he had been involved in the decision to remove JBPB. In addition, nobody volunteered to be members of the three member board. These facts did not expressly figure in the decisions of the  arbitral tribunal or court. The Grant Thornton international organization and the other partners of JBPB did not object to the arbitral tribunal proceeding with the arbitration without the mediation procedures in the partnership agreement being utilized.

Arbitral and Court Decisions

The claimants took the position before the arbitral tribunal and the court that participating in the mediation process was a condition precedent to arbitration and that, since there had been no mediation, the arbitration was premature and the arbitral tribunal had no jurisdiction to proceed with it. The arbitral tribunal held that the mediation clause did not preclude the tribunal from proceeding with the arbitration.  That decision was upheld by the court.

The court held that an agreement to negotiate in good faith, without more, is unenforceable, even if that agreement is contained within an agreement that is otherwise enforceable. But this is the beginning, not the end of the debate.  The court will “strain to give effect” to a mediation agreement.

The court outlines two ways in which a mediation agreement may be effective.

First, the subject matter of the mediation may be one that can be objectively determined, and if it is, then the mediation agreement may be enforceable:

“For that purpose it may imply criteria or supply machinery sufficient to enable the Court to determine both what process is to be followed and when and how, without the necessity for further agreement, the process is to be treated as successful, exhausted or properly terminated. The Court will especially readily imply criteria or machinery in the context of a stipulation for agreement of a fair and reasonable price.”

The court found that the decision in Petromec Inc and others v Petroleo Brasileiro SA Petrobras and others, [2005] EWCA Civ 891 could be explained on that basis. There, the English Court of Appeal stated that a provision requiring negotiation in good faith with respect to the cost of equipment was enforceable.  In Grant Thornton, the court said that a mediation agreement dealing with that sort of matter may be enforceable, but that was not the nature of the mediation agreement and dispute in the present case.

The second approach is to determine whether the mediation process is sufficiently clear to give rise to an enforceable agreement. But the court said that the issue is not just the clarity of the procedures, but the clarity of the end of those procedures:

The Court has been in the past, and will be, astute to consider each case on its own terms. The test is not whether a clause is a valid provision for a recognised process of ADR: it is whether the obligations and/or negative injunctions it imposes are sufficiently clear and certain to be given legal effect.

The Court set forth a three step process for making this determination:

“the test is whether the provision prescribes, without the need for further agreement, (a) a sufficiently certain and unequivocal commitment to commence a process (b) from which may be discerned what steps each party is required to take to put the process in place and which is (c) sufficiently clearly defined to enable the Court to determine objectively (i) what under that process is the minimum required of the parties to the dispute in terms of their participation in it and (ii) when or how the process will be exhausted or properly terminable without breach.”

The court concluded that the Grant Thornton partnership agreement did not satisfy these criteria:

“I have reached the clear conclusion that Section 14.3 is too equivocal in terms of the process required and too nebulous in terms of the content of the parties’ respective obligations to be given legal effect as an enforceable condition precedent to arbitration. In particular, I accept that the omission to give any guidance as to the quality or nature of the attempts to be made to resolve a dispute or difference renders the Court unable to determine or direct compliance with the provisions of Section 14.3(a), (b) and (c).”

The Court also rejected the suggestion that the mediation process could indefinitely postpone arbitration if the two steps in that process never occurred. The court said that it was not “realistic to suppose the parties to have intended that the Board or panel members could indefinitely postpone the right to arbitration.” Accordingly, the court held that, in the alternative, the mediation clause did not prevent a party to the partnership agreement from commencing any arbitration procedures after the time limits set for the in the mediation agreement. The arbitration in question started well after that time frame.

Discussion

The Grant Thornton decision holds that a mediation agreement is enforceable, if properly drafted. This decision is useful because it advances the debate on this issue to a further level. For the clause to be enforceable, Grant Thornton says that the clause must be one of two kinds.

Either the mediation agreement must set out a process that has a reasonably certain commencement, procedural ingredients and ending.  Or the mediation agreement must deal with a dispute over some matter of fairness or reasonableness which allows the court to infer reasonable procedural elements. Furthermore, in order to ensure that the mediation clause does not hold up dispute resolution in court or arbitration, the mediation clause should have a reasonably prompt “drop dead date.”

The court’s remarks about secondalternative, namely a mediation to determine a matter on the basis of fair and reasonableness, raise difficult issues. Must the mediation agreement itself state that it deals with the fairness of something, such as price? Or if the specific mediation is in fact about some matter of fairness or reasonableness, is that sufficient to infer the necessary procedural ingredients to validate the mediation agreement, or its application in the particular case? If it is the latter, then the validity of the mediation agreement will be determined on a case by case basis.  A mediation clause which may or may not be valid, depending on the issue being mediated, may be an unsatisfactory sort of mediation agreement.

In prior articles I have dealt with Ontario decisions dealing with the enforceability of the duty to mediate.  In an article on July 17, 2011, I reviewed the decision in L-3 Communication Spar Aerospace Limited v. CAE Inc., 2010 ONSC 7133 in which the Ontario Court of Appeal held that, in that case, there was a legally enforceable duty to mediate.  In an article on May 5, 2012, I reviewed the same court’s decision in Federation Insurance Co. of Canada v. Markel Insurance Co of Canada,, 2012 ONCA 218 in which it was held that the mediation clause in that case was not enforceable and that in the meantime the limitation period had expired.  Clearly, the law relating to the enforcement of mediation clauses remains a matter of considerable importance.

See Heintzman and Goldsmith on Canadian Building Contracts (4^th ed.), Chapter10, part 6

Wah (Aka Alan Tang) & Anor v Grant Thornton International Ltd & Ors [2012] EWHC 3198

Mediation  -  Validity of Mediation Agreement  –  Uncertainty  -  Duty to Mediate  -Commencement of Arbitration