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

Background

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

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

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

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

The Decision

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

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

First, as an aid to interpret the contract, and

Second on the ground of estoppel

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

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

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

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

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

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

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

First, the audit and 4.1 kilometre claims were different.

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

Discussion

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

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

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

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

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

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

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

www.heintzmanadr.com

www.constructionlawcanada.com