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

While this decision was rendered in the context of automobile insurance, it may have wide implications for commercial arbitrations, especially under bonds or indemnity contracts.  The decision may mean that, in a wide variety of settings, the very demand by a claimant may start the limitation period running under an arbitration clause.  That is because, under the particular language of the contract in which the arbitration clause is found, the claim may be “discovered’ before or at the very time when the claim is made.  If that is so, then the claimant should start counting the very day it makes its claim. 

The Background

Between April and May 2006, Federation paid statutory accident benefits (“SABS”) to its insured under an automobile policy arising from an accident which the insured had with another motorist.  Under Ontario Insurance law, Federation was entitled to recover the SABS from the other motorist’s insurer and made a request for payment from the other insurer.   More than two years later and having not been paid by Markel, Federation instituted an arbitration claim against the other insurer for payment. 

The other insurer took the position that Federation’s claim was barred by Ontario’s two year limitation period.  The arbitrator agreed and dismissed Federation’s claim.  The arbitration award was upheld by the Ontario Superior Court and Court of Appeal. 

The Court of Appeal held that Federation suffered a loss and had discovered that loss at the very time that it made a demand for payment from the other insurer.  It said:

 [T]he first party insurer suffers a loss from the moment the second party insurer can be said to have failed to satisfy its legal obligation to satisfy the loss transfer claim… the first party insurer suffers a loss caused by the second party insurer’s omission in failing to satisfy the claim the day after the Request for Indemnification is made.

I cannot agree with the proposition that no loss is suffered until the second party insurer unequivocally denies the claim. That argument ignores the fact that once a valid request is made, the first party insurer is legally entitled to be indemnified and therefore suffers a loss each day it is out of pocket for the SABS paid to its insured. I note here that this conclusion is supported by the passage I have quoted at para. 9 from the FSCO bulletin for loss-transfer claims stating that loss-transfer claims are to be paid “promptly” upon receipt of a Request for Indemnification and that the relevant arbitral jurisprudence holds that where a first party insurer is successful in establishing a loss transfer claim, interest is payable from the date the claim was asserted.”

The Court of Appeal then considered the language in section 275(4) of the Ontario Insurance Act.   That sub-section stated that “If the insurers are unable to agree with respect to indemnification under this section, the dispute shall be resolved through arbitration under the Arbitration Act.”  (emphasis added)

The Court said that this sub-section did not require, as a precondition to the cause of action arising and the limitation period beginning to run, that the parties actually engage in discussions and actually be unable to agree.  The Court stated its decision on this point as follows:

“In my view, s. 275(4) does nothing more that stipulate that any disputes that cannot be otherwise resolved by the parties are to be resolved by arbitration rather than by litigation. Section 275(4) says: if you cannot agree, your claim is to be resolved by arbitration. It does not say: you must be able to demonstrate a failure to agree or a clear denial of your claim by the other insurer in order to commence arbitration.

 I accept that the loss-transfer regime assumes that virtually all claims can and should be resolved by agreement. I accept as well that as a practical matter, insurers should be encouraged to discuss and negotiate claims. Moreover, as a practical matter, no insurer would proceed with arbitration unless it was apparent that an acceptable agreement could not be reached by negotiation. But that does not mean that as a matter of law, an insurer must be able to demonstrate a failure to agree or clear denial of the claim by the other insurer as a condition precedent to commencing a proceeding to enforce a claim for indemnification.”  (emphasis added)

Federation submitted that this approach to the arbitration clause was contrary to public policy on the ground that it would discourage negotiation and real efforts at settlement.  The Court of Appeal disagreed:

            “I fully accept that parties should be discouraged from rushing to litigation or arbitration and encouraged to discuss and negotiate claims. In my view, when s. 5(1) (a) (iv) [of the Limitations Act, 2002] states that a claim is “discovered” only when “having regard to the nature of the injury, loss or damage, a proceeding would be an appropriate means to seek to remedy it”, the word “appropriate” must mean legally appropriate. To give ”appropriate” an evaluative gloss, allowing a party to delay the commencement of  proceedings for some tactical or other reason beyond two years from the date the claim  is fully ripened and requiring the court to assess to tone and tenor of communications in search of a clear denial would, in my opinion, inject an unacceptable element of  uncertainty into the law of limitation of actions.”

In this decision, the Court of Appeal arrived at a result which is contrary to the result in its 2011 decision in L-3 Communication Spar Aerospace Limited v. CAE Inc (which decision was not referred to in the Federation v. Markel decision, although one of the judges sat on both cases).

I dealt with the L-3 Communication decision in my article of July 17, 2011.  In that case, the contract provided for the dates for the delivery of data relating to a hardware and software aviation system.  The contract said that: “The price and other adjustments that are not agreed between the parties may be referred to arbitration”.  Based on that language and other language in the contract, the Court of Appeal held that the limitation period did not commence until the parties had undertaken negotiations and there had been a definite inability to agree on the price and other adjustments. The Court said:

The commercially reasonable interpretation is that a dispute over failure by SPAR to deliver information as required together with the cost consequences caused thereby is one that the parties were obliged to attempt to resolve between themselves. Failing agreement either party is entitled to take the dispute to arbitration

How can these two decisions be reconciled?

 In L-3 Communications, the words “not agreed between the parties” were held to mean that the limitation period did not commence before a negotiation and absence of agreement occurred.  In Federation v. Markel, the words “unable to agree” were held not to require the parties to negotiate and be unable to reach an agreement, and not to delay the commencement of the limitation period. 

It seems that the only way to reconcile the two cases is to examine the process leading up to the demand in each case.  In L-3 Communications, the parties were involved in a tender process and were in direct dealings and negotiations with each other over price and other adjustments.  The language of the tender documents contemplated real efforts to agree on price and adjustments.  So the Court of Appeal was able to conclude that the words “not agree” meant that the parties were obliged to engage in an actual process of negotiation leading to non-agreement, and until that process was concluded the claim did not arise in law and the limitation period did not begin.

In Federation v. Markel, there were no ongoing dealings between the parties, apart from one insurer’s demand that the other insurer indemnify it.  There was no prior contract, tender or other relationship between the parties.  The parties were simply insurers whose insureds had been involved in a motor vehicle accident.  In this circumstance, the Court of Appeal held that the words “unable to agree” did not signify that the parties had to go through an attempt to agree as a pre-condition to the existence of a legal entitlement to payment and the commencement of the limitation period.

These decisions demonstrate the danger lurking in limitation periods relating to contract claims in general, and to claims under arbitration clauses in particular.  While the general law of limitations will apply to those arbitral claims, the terms of the contract and the terms of the arbitration clause may fundamentally affect the question of when a legal right under the contract or arbitration clause comes into existence. 

All the ingredients of the cause of action may have arisen when the party with the claim makes its demand.  The party with the claim may have discovered all those ingredients when it makes its claim.  If these ingredients are in place then, unless the arbitration clause very clearly suspends the limitation period during settlement or negotiation, it may be unwise to rely on a suspension of the limitation period during that period.  Prudence may demand that the claim be issued and the negotiations come later.

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

Federation Insurance Co. of Canada v. Markel Insurance Co of Canada, 2012 CarswellOnt 4051, 2012 ONCA 218

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                          May 5, 2012

www.heintzmanadr.com
www.constructionlawcanada.com

The bottom line of this decision is that the limitation period is not stayed while the court sorts out whether the dispute should be resolved by court litigation or arbitration.

The Background

In June 2003, Penn-Co entered into a contract with Constance Lake to build a school on the reserve.  The work was to be completed by November 2004.  Constance Lake took possession of the school in February 2005.  Disputes remained between the parties about payment and the completion of the project.  In December 2005, Constance Lake served a notice alleging that Penn-Co was in default under the contract and gave Penn-Co five days to cure the default or provide a schedule to do so.  In May 2006, Constance Lake then served a Notice of Default on Penn-Co’s bonding company.  In September, 2006, Constance Lake served a notice on Penn-Co terminating the contract due to the inability or refusal of Penn-Co to perform the balance of the contract work.  In October, 2006, Constance Lake entered into a contract with another contractor for the “completion” of the contract. 

In January 2007, Penn-Co started an action against Constance Lake for damages for breach of contract.  At the same time, Penn-Co brought a motion to stay its own action pending arbitration.  Constance Lake opposed the motion on the basis that the action should proceed, not an arbitration.  The motion was dismissed in September 2007, and Penn-Co’s appeal was dismissed by the Court of Appeal in November 2008.  In May, 2009, Constance Lake served a Statement of Defence and Counterclaim, but did not have it formally issued by the court.  In September 2009, Penn-Co served its Defence to Counterclaim, and in October 2009, Penn-Co issued a third party notice seeking contribution and indemnity from certain sub-trades in respect of the counterclaim.  In April 2010, Penn-Co delivered an amended Defence to Counterclaim asserting that the Counterclaim had been issued outside the two year limitation period in the Ontario Limitatios Act, 2002.  Penn-Co then brought a summary judgment motion to dismiss the Counterclaim.

The Decision

The motion judge held that the Counterclaim had been issued outside the limitation period and dismissed the Counterclaim.  There was no dispute that the limitation period commenced at the latest in September 2006 when Constance Lake terminated the contract.  Accordingly, the two year limitation period ended in September 2008, long before Constance Lake served its Counterclaim in May 2009.

Constance Lake’s argued that the limitation period was extended due to Penn-Co’s motion to stay its action in favour of arbitration.  Constance Lake argued that until that motion was dismissed there was every possibility that Penn-Co’s action would be stayed and that the dispute would be dealt with by arbitration, and that accordingly the limitation period did not start to run until November 2008 when the Court of Appeal dismissed Penn-Co’s appeal on that issue.  Constance Lake argued that Penn-Co’s motion either suspended the limitation period or amounted to a waiver of the running of the limitation period by Penn-Co.

Section 52(2) of the Ontario Arbitration Act, 1991 does provide that, if the court sets aside an arbitration award, terminates an arbitration or declares an arbitration to be invalid, then the court may order that the time period from the commencement of the arbitration to the date of the order shall be excluded from the limitation period.  Constance Lake argued that, by analogy, the period during Penn-Co’s stay motion should also be excluded from the limitation period.

The motion judge rejected that argument.  The court which had dismissed Penn-Co’s stay motion, and the Court of Appeal, had not done any of the things referred to in Section 52(2);  setting aside the arbitration award or terminating or declaring invalid the arbitration.  Nor was the present motion judge doing any of those things.

The motion judge also rejected the assertion that he had discretion to go beyond either section 52(2) of the Arbitration Act, 1991 or the Limitation Act and, by judicial interpretation, expand on the specific terms of either statute.  To do so would be contrary to the Limitation Act itself which contemplates that the provision of that statute are the only limitation periods to be applied, and would also be contrary to the previous directions of the Court of Appeal that any suspensions of the periods contained in the Limitation Act must be found in that Act itself or another statute, not in judge-made law.    

The motion judge also did not accept the argument that Penn-Co had waived the limitation period or that there was, effectively, an agreement between the parties to waive the limitation period.  At any time Constance Lake could have commenced an action, or could have issued a Counterclaim in Penn-Co’s action after it was issued in January 2007.  At no time did Penn-Co relinquish or waive its right to rely on the limitation period.

The Importance of Keeping Your Eye on The Limitation Period

 This decision is, perhaps, more about not letting the opposition dazzle you with fancy procedures than it is about determining when a limitation period commences and ends.  In the absence of statutory authority or agreement to that effect, the notices to bonding companies, the commencement of proceedings by the other party, or motions or other fancy moves by the other side will not do anything to stop the limitation period from running for the other party’s claim. 

 In a construction project, there may be all sorts of opportunities to serve notices, give directions, make claims against bonding companies and even commence litigation which may confuse and confound the other party.  But those moves should not distract the other party into thinking that the limitation period is no longer an issue for its own claim.  It is.

 In particular, if any time is taken up in deciding whether one party’s claim should proceed in court or by arbitration, that period of time does not extend the limitation period for the other party’s claim to be commenced.

So it is necessary to keep an eye on the limitation period from the beginning.  And certainly, after a party to a contract terminates that contract, or purports to do so, a big, solid mark and reminder should be made in the diary which alerts that party to commence court or arbitration proceedings within the limitation period after that date, no matter what the other party does.

 Construction Law  –   Arbitration  -  Limitation Period:  

Penn-Co construction v. Constance Lake First Nation, 2011 ONCS 5875

Thomas G. Heintzman O.C., Q.C.                                                                               November 4, 2011

www.constructionlawcanada.com
www.heintzmanadr.com

An arbitration clause in a contract may be written in a way that encourages the parties to settle their differences by negotiation and agreement.  But if the parties attempt to do so and fail, can one of the parties then say to the other:  “Gotcha! The limitation period for your claim has now passed!”  That is the issue which the Ontario Court of Appeal recently addressed in L-3 Communication Spar Aerospace Limited v. CAE Inc.

SPAR was awarded a contract to develop a hardware and software system.  SPAR subcontracted some of the deliverables to CAE.  SPAR was required to deliver data about those deliverables to CAE within a certain timetable.  The subcontract said that if the data was not delivered within 90 days of that timetable “and the parties cannot agree to a price adjustment due to the delay….beyond the 90 days”, then CAE was relieved of its obligations under the subcontract “only to the extent that performance is not possible as a direct result of Spar to provide that information”.  The subcontract then stated: “The price and other adjustments that are not agreed between the parties may be referred to arbitration” under the arbitration clause in the contract.

SPAR provided certain data to CAE, but CAE took the position that it was inadequate, and that SPAR should obtain further data from the vendors of the relevant software to SPAR.  Spar refused to do so, and its refusal to do so was clear by November 2005.  CAE proceeded to obtain the data from SPAR’s vendors.  CAE’s evidence was that it had discussions with SPAR about settling the question of who would pay for the cost of obtaining that data. 

When the cost and price issue was not settled by December 2008, CAE demanded payment for the cost of obtaining the data from SPAR’s suppliers.  SPAR responded by stating that CAE’s demand was premature and that CAE was required to proceed by way of the arbitration.  When CAE then delivered a Request to Arbitrate in January 2009, SPAR took the position that CAE’s arbitration claim was barred by the two year limitation period in Ontario.  SPAR said that the limitation period commenced in November 2005 when SPAR unequivocally said that it would not obtain the data.  SPAR commenced a court application for a declaration to that effect. 

The Ontario Superior Court dismissed SPAR’s application and its decision was upheld by the Ontario Court of Appeal. 

The Superior Court held that, under the wording of the subcontract, the right to arbitrate arose and the limitation period for CAE’s claim commenced, not from the date that SPAR said that it would not obtain the data, but from the date that the parties had failed to agree on a proper price adjustment.  The Court held that that date was not until at least the fall of 2007, and accordingly the arbitration claim was commenced in time.  The Court did not agree with CAE that the limitation period did not commence until CAE had full knowledge of the full costs of obtaining the date.  But it did agree that the entitlement to arbitrate and the limitation period did not commence until “SPAR indicated its intentions to avoid any and all financial responsibility for the increased costs associated with procuring the data”.

The Court of Appeal agreed.  It held that the commercially reasonable interpretation of the subcontract was that “a dispute over failure by SPAR to deliver information as required together with the cost consequences caused thereby is one that the parties were obliged to attempt to resolve between themselves. Failing agreement either party is entitled to take the dispute to arbitration.”  Only then did the right to arbitrate arise and the limitation period commence running.

The Superior Court also found that, by its conduct, SPAR was estopped from asserting that the limitation period was running from November 2005.  In light of its decision on the primary matter, the Ontario Court of Appeal did not deal with this issue.

Two comments can be made about this decision: 

First, it is a welcome recognition of the duty to negotiate where such a duty is contained in the contract.  Had the courts held that the limitation period started running from the time SPAR refused to obtain the data, the obligation to negotiate the price and costs dispute would have been effectively removed from the contract.  When parties include an obligation to seek an agreement over those sorts of matters, then full recognition and effect should be given to that obligation.  The only way to do so is to hold that the limitation period does not commence until that process is complete.  That causes no hardship on either party, since either party can at any time state that negotiations are over and refuse to negotiate further.

Second, this decision is a reminder that it is the exception.  It is the exception because most contracts do not contain an express duty to negotiate and attempt to agree on costs or other matters in dispute under the contract.  Accordingly, in most instances it is dangerous for a party to continue to negotiate when, based upon the date of the other party’s alleged wrongful conduct or its discovery, a limitation period is looming.  In most cases, the limitation period will have started to run and the party with the claim must protect its litigation rights, and then negotiate. 

So there are two lessons to be learned: 

First, when you are negotiating the contract and want to provide for an obligation to negotiate, expressly state that obligation in the contract and expressly state that any limitation period will only commence once the negotiations are complete.

 Second, if you are in the midst of a contractual dispute and a limitation period is looming based on the date of the wrongful conduct or its discovery, then initiate the arbitration claim and negotiate later, unless you are very certain that the contract provides that the limitation period is not running in the meantime.

Arbitration – Negotiations – Limitation Periods – Contract – Subcontract 

L-3 Communication Spar Aerospace Limited v. CAE Inc., 2010 ONSC 7133; 2011 ONCA 435 (CanLII)

Thomas G. Heintzman, O.C., Q.C.                                                                                    July 17, 2011

www.heintzmanadr.com       
www.constructionlawcanada.com