Alberta – court applies its “unique” legislation to stay arbitration, prevent manifestly unfair/unequal treatment – #112

Combining Alberta’s “unique” Arbitration Act, RSA 2000, c A-43, and its Judicature Act, RSA 2000, c J-2, Mr. Justice John D. Rooke, Associate Chief Justice, in Canadian Natural Resources Limited v. Flatiron Constructors Canada Limited, 2018 ABQB 613, granted a stay of the parties’ arbitration but only until further order of the court. Rooke ACJ determined that the circumstances triggered the application of the Arbitration Act’s section 6(c) authorization to intervene in order to prevent “manifestly unfair or unequal treatment of a party to an arbitration agreement”. In granting the order, Rooke ACJ acknowledged that other jurisdictions might not provide the same order as Alberta’s legislation and that legislation different from Alberta’s was “not helpful”.

In 2012, Canadian Natural Resources Limited (“CNRL”) sought to expand its extraction facilities for one of its oil sands projects. The expansion included construction of several tanks and other components such as mechanically stabilized earth walls (“Walls”), collectively referred to in the reasons as the “System”. Only two (2) of the tanks, TH3001 and TH4001, were subject to the court litigation.

CNRL and Flatiron Constructors Canada Limited (“Flatiron”) entered into an October 18, 2012 Construction Agreement (“Agreement”) by which Flatiron, as general contractor, would design, supply and install the System. Work began in November 2012 and, soon after substantial completion in April 2014, two (2) failures of the System occurred in which the Walls collapsed and other damage resulted (the “Failure”).

CNRL and Flatiron could not agree on the cause of the Failure but both recognized the need to undertake prompt work to repair the System (“Remedial Work”). Despite disagreements, CNRL and Flatiron agreed to complete the Remedial Work without delay, under reserve of their respective rights, and entered into a Cost Sharing Agreement (“CSA”). Flatiron entered the CSA under protest but performed the necessary Remedial Work. CNRL contribute some funding not covered by insurance.

As a submission agreement, negotiated after the dispute had arisen, the CSA contained an arbitration clause which detailed how and when, if/as necessary, costs for the Remedial Work would be covered:

… ultimate responsibility of the Remedial Costs will … be resolved … in accordance with the Arbitration Process. In the event that the Dispute is not resolved by any settlement between the Parties and either the Insurance Claims have been denied or there is a Shortfall, then either Party may submit this matter to arbitration in accordance with the Arbitration Process by no later than 9 months from the date of this CSA.

As of the date of Rooke ACJ’s August 17, 2018 reasons, insurance coverage for the May 2014 Failure had not been denied, in whole or in part, save for a single insurer. Substantial amounts had in fact been paid by the insurers for the costs of the Remedial Work. Other claims were still being adjusted. A December 1, 2015 tolling agreement between CNRL, Flatiron and the insurers pre-empted the need to file litigation but neither CNRL nor Flatiron knew the final amount of the payments they might receive.

Both CNRL and Flatiron as co-plaintiffs filed a May 6, 2016 action (“Court Action”) against contractors and subcontractors who worked on the System. In their Court Action, CNRL and Flatiron claimed damages for insured and uninsured losses, including the costs of the Remedial Work for the May 2014 Failure.

A little over a year later, Flatiron as sole claimant served a July 26, 2017 notice of arbitration against CNRL (“Flatiron Arbitration”) as sole respondent under the CSA. CNRL described the substance of Flatiron’s claims in the Flatiron Arbitration as seeking the same damages as those sought in the Court Action but, in contrast, now alleged CNRL’s responsibility for the Failure.

In its application heard by Rooke ACJ, CNRL sought a stay of the Flatiron Arbitration. Flatiron agreed to an interim stay pending the hearing of and Rooke ACJ’s decision on CNRL’s stay application.

In his reasons, Rooke ACJ relied on two (2) grounds to grant a stay. First, he agreed that the condition(s) precedent in the CSA had not been met and that the Flatiron Arbitration was premature. Second, he agreed that, under section 6(c) of Alberta’s Arbitration Act, he had jurisdiction to grant a stay to prevent manifestly unfair or unequal treatment of CNRL as a party to the arbitration agreement contained in the CSA.

At paragraphs 29-41, Rooke ACJ compiled a short section entitled “Simple Reasons”, followed by paragraphs 42-53 collected as “Additional Reasons”, leading up to what he characterized as his “Preliminary Conclusion” at paragraphs 54-55 in which he ordered that the Flatiron Arbitration be stayed “until further order of the Court”.

In his reasons, Rooke ACJ identified both Alberta’s Judicature Act, sections 5(3)(c) and 5(3)(f), and Alberta’s Arbitration Act, sections 6 and 8, as the sources of his jurisdiction to stay an arbitration proceeding brought by a party to an existing proceeding.  He relied on Alberta v. Alberta Union of Provincial Employees, 1984 ABCA 130, paras 8-9 and 13 to set the tests for determining stays in the face of duplicative proceedings.

“[27] [Alberta v. Alberta Union of Provincial Employees, 1984 ABCA 130], which is binding on me , similar to [New Era Nutrition Inc. v Balance Bar Co., 2004 ABCA 280, (overturning, in part, New Era Nutrition Inc. v. Balance Bar Co., 2003 ABQB 509], which is not binding on me, set the tests for determining stays in the face of duplicative proceedings, which, as I understand it, include: (1) whether the questions in issue are substantially the same; (2) if so, would continuation of both proceedings, and, in particular, the proceeding asked to be stayed, be abusive and unfair as to the applicant for a stay; and (3) has the respondent established the opposite; all on a balance of probabilities.

Rooke ACJ presented each party’s arguments on the stay application – those of CNRL favouring a stay at paragraphs 9-14 and those of Flatiron resisting a stay at paragraphs 15-22. He identified two reasons to grant the stay.

First, his primary reason to grant the stay was that the parties’ undertaking to arbitrate in the CSA required that two (2) conditions be met prior to commencing arbitration. Rooke ACJ summarized CNRL’s argument on this point, placing it first among others.

[11] CNRL argues … that the Flatiron Arbitration is premature on the basis that the condition precedent for commencing an arbitration under the CSA, namely that further insurance coverage is denied and/or there is a Shortfall, has not been met. Indeed, as alluded to above, as at the date of the hearing (and I have not been advised otherwise since), the insurance claims have not been denied in whole or in part, and any unresolved claims remain pending, without a final determination to this point, and without any current Shortfall, although it is clear that Flatiron is currently out-of-pocket for some significant costs of the Remedial Work.

In identifying and addressing Flatiron’s arguments, Rooke ACJ placed this ‘condition precedent’ argument second and rephrased the role of the condition precedent. (Flatiron’s first argument dealt with timing of initiating arbitration, in light of the nine (9) month deadline in the CSA and its own refusal to refresh a tolling agreement it had renewed repeatedly with CNRL.)

[17] Flatiron secondly argues that the Dispute has not been resolved by the parties and there is a significant Shortfall. I can summarily dismiss this argument as well. True, the Dispute has not been resolved. True too, Flatiron currently has unpaid costs of performing the Remedial Work. However, for an arbitration to proceed, the CSA requires both: (1) no resolution of the Dispute; and, either (2)(a) the Insurance Claims have been denied, or (2)(b) there is a Shortfall”. The Insurance Claims have not been denied. And, while there are currently costs of the Remedial Work that Flatiron has not yet covered, there is currently no final “Shortfall”, as defined, pending the determination of the Insurance Claims. It is the very further payments from the Insurance Claims, not yet determined, that will conclude whether Flatiron “has not been 100% reimbursed”, thereby potentially creating a final Shortfall. It may, however, be that liability of the Civil Defendants, if any, will be relevant to the determination of any element of “Shortfall” … , which, if true in fact and law, would continue to affect the conditions precedent for the Flatiron Arbitration.

Second, Rooke ACJ offered an extensive consideration of the court’s role under the Arbitration Act, particularly at paragraphs 45-48. In those paragraphs, Rooke ACJ turned his analysis directly to the provisions of what he calls “the unique arbitration legislation currently in place in Alberta”. He states, paragraph 49, that he agrees with CNRL to ensure “avoidance of duplication of proceedings with inextricably linked issues” and that “the determinative issue is the existence of the duplicative proceedings, not the specific role and identity of the parties”. (In contrast to the mention at paragraph 27 of his reasons that New Era is not binding on him, he does note at paragraph 48 that New Era “remains the binding law on this Court in the context of s.6 applications”.)

In his further analysis, specifically at paragraph 47, Rooke ACJ, identified the alternatives made available to the Court by either section 6(c) or 7 of the Arbitration Act. Section 6(c) provides that the court can intervene in matters governed by the Arbitration Act if the purpose is “to prevent manifestly unfair or unequal treatment of a party to an arbitration agreement”.

Rooke ACJ noted at paragraph 23 of his reasons that Flatiron made no application under section 7 of Alberta’s Arbitration Act to stay the Court Action. (Independent of whether Flatiron would want to delay a decision against the contractors and subcontractors by pausing the Court Action, Alberta’s legislation permits only “another party” to the arbitration agreement to apply for a stay of litigation filed by “a party” to the arbitration agreement. CNRL, as co-plaintiff with Flatiron but as a distinct “party”, instituted the Court Action and triggered section 7. Flatiron was technically separate from CNRL’s decision to sue but also undertook the same decision as CNRL to file that Court Action.)

He determined that he faced an application under section 6(c) and not an application under section 7. His reasoning can assist parties in estimating whether their own stay applications qualify or not if taken under Alberta’s Arbitration Act.

[47] While, Strekaf J, as she then was, appears, in Toyota Tsusho Wheatland Inc. v Encana Corp, 2016 ABQB 209 (CanLII), at para 82, to have adopted the reasoning of Hawco J in Western Oil Sands Inc. v Allianz Insurance Co of Canada, 2004 ABQB 79 (CanLII), at paras 30-31, that for a court to have any non-consent jurisdiction to interfere with the arbitration process, it must be found under the Act, and while s. 17 of the Act says that an arbitral panel is competent to determine its own jurisdiction, there are also provisions under the Act where the court, in the right situation, may intervene. In this case, that is s. 6. This is not a case where s. 7(1) and (4) of the Act apply, to require one of arbitration or litigation to be stayed, because here it is not competing claims by two parties using two different modes, but, rather, at least partially duplicative claims by one party, Flatiron, using two different modes (see discussion by Strekaf J, at para 39 of UCANU v. Graham). Moreover, this is also not a case, like the UCANU court proceeding to the parallel UCANU arbitration, UCANU Manufacturing Corp v Calgary (City), (unreported – Langston J, in chambers), upheld 2015 ABCA 22 (CanLII), which was an application under s. 7(1) of the Act to stay an arbitration in favour of a court action that was sought for the purpose of attacking an unfavourable arbitration decision, with the intent to stay the arbitration. Further, in UCANU v Graham, Strekaf J found (para 43) that the overlapping issues were not “inextricably linked” and could be severed. That is not the situation in the case at Bar. On the other hand, New Era was not based on an application under s. 7, but rather s. 6(c), of the Act, as CNRL argues here, to stay an arbitration brought in face of an existing court action … , as expressly recognized by Strekaf J, at para 44:

As I am required by the specific language in section 7(1) of the legislation to stay the action, there is no scope for me to apply the general language in section 6(c) to override that specific direction. The circumstance in this case are distinguishable from those [in] New Era where no application pursuant to section 7 was before the Court.

Likewise, there is no application pursuant to section 7 of the Act before this Court, in the case as Bar.

Enabled by Alberta’s Judicature Act and what he characterized as Alberta’s “unique” Arbitration Act, Rooke ACJ asserted clearly his motivation in ordering a stay.

[53] I also agree with CNRL … that the continuation of the Flatiron Arbitration would be oppressive and prejudicial to CNRL and others (including Flatiron) in litigating substantially the same issues twice in the two proceedings, with the added expense, and the potential for inconsistent determinations. I also agree with CNRL … that any issues remaining that cannot be resolved in the Court Action (with all the parties present) could later be determined in the Flatiron Arbitration (between just CNRL and Flatiron), for which the findings in the Court Action would be of assistance.

Rooke ACJ acknowledged that other jurisdictions might have decided otherwise in similar situations but, at paragraph 46, distinguished them because they did not deal with “the unique arbitration legislation currently in place in Alberta”. See Alberici Western Constructors Ltd. v. Saskatchewan Power Corp, 2015 SKQB 74, upheld in Saskatchewan Power Corporation v. Alberici Western Constructors, Ltd., 2016 SKCA 46.

For other references to Alberta’s “unique” arbitration legislation, see the ArbitrationMatters notes:  “Alberta court applies legislative rule “unique” to Alberta to refuse leave to appeal extricable question of law in multimillion dollar dispute” on KBR Industrial Canada Co v. Air Liquide Global E&C Solutions Canada LP, 2018 ABQB 257 and “Alberta Court of Appeal acknowledges lack of authority to extend time to appeal set out in Arbitration Act” on Funk v. Funk, 2018 ABCA 210.

In support of his reliance on New Era, he referred to Ontario’s endorsement of New Era’s approach demonstrated by the results in Griffin v. Dell Canada Inc., 2010 ONCA 29 and Wellman v. TELUS Communications Company, 2017 ONCA 433. The latter two cases dealt with class proceedings under Ontario’s Consumer Protection Act, 2002, SO 2002, c 30, Sch A, for consumers and non-consumers respectively, and the interplay of that legislation with stay applications available under Ontario’s Arbitration Act, 1991, SO 1991, c 17.

Rooke ACJ recorded other arguments by CNRL regarding economy of resources, significant economies to be gained if the arbitral tribunal used factual findings made in the Court Action at trial and the extent to which the Court Action and the Flatiron Arbitration overlapped. Rooke ACJ expressly agreed with CNRL that the Court Action contained all the parties necessary to determine the cause of and responsibility of the Failure and that the Flatiron Arbitration was “unworkable” for determining the cause of the Failure. Rooke ACJ also agreed with the obvious fact, argued by CNRL, that the contractors and subcontractors in the Court Action were not parties to the Flatiron Arbitration. In doing so, Rooke ACJ did not state that this was in and of itself a standalone reason to grant the stay.

Rooke ACJ was unwilling to issue an order, staying the Flatiron Arbitration, that might result in the Flatiron Arbitration languishing. He resisted issuing a flat order to stay the Flatiron Arbitration until a final determination of the Court Action. Rather, he imposed a stay until further order of the court.

Accordingly, this Decision would allow the Court Action to proceed to determine the cause of the Failure (also an issue in the Flatiron Arbitration), but maintain the Flatiron Arbitration, if and as necessary, to determine issues related to any remaining Shortfall of the costs of the Remedial Work. Thus, in this sense, contrary to Flatiron’s argument, it may not be forced to completely “await the outcome” of the Court Action.

[25] One last point. I said earlier that the stay would be in place until further Order of the Court, because there may be a scenario, before the “final determination of the Court Action”, that might make it prudent to allow the Flatiron Arbitration to proceed in whole or in part, beyond its current state of progress, which, as I understand it, has not proceeded beyond being filed. Indeed, CNRL submits … that there is a place for the “Flatiron Arbitration … [to proceed] … after the determination of the Court Action, for any remaining issues”.

Rooke ACJ was careful to mention that in staying the Flatiron Arbitration in favour of completing the court litigation, he did not agree that the Court Action was “clearly the preferable procedure”. Rather, all he decided was, given the particular facts and the way in which both parties had decided to litigate their disputes, the Court Action had to proceed first and the Flatiron Arbitration would be stayed. That stay would be subject to a future court order and not merely the final outcome of the Court Action.

At paragraphs 56-67, Rooke ACJ provided a remarkable, analysis of certain post-hearing steps taken by CNRL in the Flatiron Arbitration and by Flatiron in new litigation filed by Flatiron. Following a careful look at each of those steps, including the content and the strategic necessity for taking them, he concluded that those steps did not change his Preliminary Conclusion. His analysis of those post-hearing provides helpful guidance for arbitration counsel looking to identify if and when their own disputes, involving competing/parallel court and arbitral proceedings, can reinforce or undermine stay applications.