Alberta – even after limitation period expires to initiate arbitration, court applies exceptions to deny stay – #171

In Fath v. Quadrant Construction Ltd, 2019 ABQB 151, defendant petitioned to stay litigation against it only after the limitation period expired in which plaintiff could initiate mandatory arbitration.  Master W. Scott Schlosser noted that a court lost its supervisory jurisdiction to stay if arbitration was no longer viable because its jurisdiction was over the arbitration and not the lawsuit.  Acknowledging that granting  a stay effectively barred plaintiff’s claim against defendant and faced with a divided approach in the case law, Master Schlosser opted to consider the exceptions to stay set in Section 7(2) of the Arbitration Act, RSA 2000, c A-43.  As an alternative, he also considered defendant’s waiver and attornment as further sources of the court’s jurisdiction to preserve the litigation.

In November 2011, Plaintiff hired Quadrant Construction Ltd. (“Quadrant”) for home renovation work scheduled for completion by the end of July 2012.  Quadrant ended the work in May 2012, not because the work was completed but because Quadrant was asked to stop. 

The contract provided for mandatory arbitration under the Arbitration Act, RSA 2000, c A-43:

9.1 If any dispute arises between the Builder and the Owner with respect to any matter in relation to this Agreement, the dispute shall be settled through binding arbitration, before a single arbitrator, in accordance with the Arbitration Act (Alberta). It is agreed that there shall be no appeal on questions of fact or law from the decision of the arbitrator.

Section 51(1) of the Arbitration Act stipulates that the law with respect to limitation periods applies to an arbitration as if the arbitration were an action and a matter in dispute in the arbitration were a cause of action.  Section 3 of the Limitations Act, RSA 2000, c L-12 provides a two (2) year period within which a plaintiff must initiate its action failing which the defendant would be immune from liability in respect of the claim.

Despite the arbitration agreement, Plaintiff filed court litigation on May 2, 2014, just under two (2) years from the end of the work.  Further to exchanges for clarity on alleged deficiencies, an expert report issued in January 2014.  The report set out the details of deficiencies which, arguably, Plaintiff could not have known or be deemed to have known were deficiencies.  Quadrant responded to the report in March 2014 and, in doing so, definitively provided Plaintiff with the realization that dispute resolution was warranted. The effect of the report was arguably to push the limitation period back to March 2014.

Two (2) years later, Quadrant applied on April 25, 2016 to dismiss Plaintiff’s litigation which had been filed May 2, 2014.  Neither party had served a notice of arbitration at any moment.

Master Schlosser observed that the facts presented a dilemma. Because Plaintiff had not instituted arbitration, staying the litigation under Section 7 of the Arbitration Act would effectively bar dispute resolution as no arbitration could subsequently be instituted as doing so would breach Section 3 of the Limitations Act.

[3] The Defendant argues that no arbitration having been commenced, the decided cases severely restrict the Plaintiff’s response: to the point where it’s like sudden-death overtime and only one side gets to shoot. This application is now not really about venue. It is about ending the lawsuit.

Master Schlosser commented on the timing.

[15] This application was not taken until April 25, 2016, just after that limitation expired. While this delay might be a tactic that would be endorsed by Sun Tzu (The Art of War), it is not supported in a cooperative civil litigation context. Equity is not kind to those who sleep upon their rights; especially when it can involve prejudice the other side. This is not one of those defences that can wait until the end. If you truly believe it you should do it, not say it; and right away, not two years later. Otherwise, the other side might fairly presume that you have no interest in it. But the decided cases do not make things so easy.

Master Schlosser reviewed the case law on stay applications to determine whether he could consider the grounds under Section 7(2) for refusing a stay if no arbitration had been commenced within the limitation period.  What distinguished the facts before him from other cases was Quadrant’s delay in bringing its application.  “This makes the facts of this case stand out. None of the other cases involve this kind of window of opportunity while the right to arbitrate (arguably) still existed.

Master Schlosser reviewed the case law and concluded that the guidance was “divided”.

[18] As I read the cases cited: three Court of Appeal decisions: [Agrium Inc. v. Babcock, 2005 ABCA 82], [Hnatiuk v. Assured Developments Ltd., 2012 ABCA 97], and [Lafarge Canada Inc. v Edmonton (City), 2013 ABCA 376] say, at least implicitly, that s. 7(2) can be considered post-limitation because they either do it, or they direct it. [A.G. Clark Holdings Ltd v. HOOPP Realty Inc., 2013 ABQB 402], at first instance, per Gill, J says that you cannot. [HOOPP Realty Inc. v A.G. Clark Holdings Ltd., 2014 ABCA 20] also says no (affirming Gill, J) but the Court of Appeal considers s. 7(2) anyway (at para 9). Jeffrey, J in Fernandes also says no. Dario, J in [Edmonton (City) v Lafarge Canada Inc, 2015 ABQB 56], after an able review of the law, says maybe.

Having undertaken his review and observing the mixed grill, Master Schlosser then asked: “The more perplexing question is why not?”.

Master Schlosser revisited the cases and pulled at the reasoning in an attempt find common threads.  He agreed with the reasoning of Dario J. in Edmonton (City) v. Lafarge Canada Inc, 2015 ABQB 56 that, once the limitation period passed without arbitration being instituted, the court’s option was to strike, not stay, the litigation.  This conclusion stemmed from the principle that the court’s involvement was a supervisory jurisdiction over the arbitration and not over the lawsuit.  See para. 23 of his reasons and the excerpt of Fernandes v Jennings Capital Inc, 2016 ABQB 594 at para. 28 of the cited case.  The latter case concluded that the court had no jurisdiction to consider the exceptions listed in Section 7(2) as grounds to not strike claims that are out of time and for which arbitration was required.

[32] With respect, this divided dicta leaves me in considerable doubt about the applicability of the s. 7(2) factors in a post-limitation stay or strike application. I can see that it would be pointless to stay a lawsuit post-limitation because, there being no other remedy, the Court is really striking the action. However, I do not see that the Court loses its power to rule over the contact, or otherwise to dispense equitable remedies. Even in the face of an arbitration provision, the parties are free to waive a term of a contract, to be estopped from relying on it, or to submit to the jurisdiction of the Court to determine their dispute. It depends on their conduct which, in turn, come down to the principle of fair dealing.

[33] So it remains to do what everyone else seems to have done and consider both.

Aware that some other courts had declined to do so, Master Schlosser listed the factors considered when looking at the Section 7(2) exceptions.  He drew from the non-exhaustive list compiled in Edmonton (City) v. Lafarge Canada Inc, 2015 ABQB 56, paras 43-44:

(i) how long the parties have been active in the litigation;

(ii) the length of delay (though not determinative);

(iii) whether or not the parties are applying for a stay based on a genuine desire to arbitrate, or if they are looking to avoid an adverse ruling or for some other nefarious purpose;

(iv) how much they have spent on the litigation;

(v) the Plaintiff’s reliance in assuming litigation was going forward;

(vi) notice given to the other party that arbitration was mandatory.

He then reviewed the facts before him in light of those factors.  At para. 35, he listed in point form the steps taken in the litigation.  Having done so, he held that Quadrant’s application had been taken with undue delay and, under Sections 7(2)(d) and 7(2)(e), “the action should not be stayed or struck”.

[37]  Quadrant never did anything about [the mention of arbitration in Statement of Defence] for nearly two years after their defence. They showed no interest in arbitration from the start. The arbitration defence was only one of a number of defences which, otherwise, went to the merits of the claim. I acknowledge that the steps in the lawsuit were limited but no application to stay was taken out until, arguably, just after the extended limitation had expired.

[38]  Both sides had the right to arbitrate: Quadrant post-May 2012 and Fath either post-May 2012 or, arguably, within two years of Quadrant’s refusal to rectify the deficiencies identified by Fath’s expert. Neither side sought arbitration. Neither side showed any interest in arbitration whatsoever. Today’s application has less to do with the venue than it does with ending the lawsuit.

Master Schlosser also observed the effect of his decision. “This part of the decision (if it is legal) is final and binding pursuant to s. 7(6) of the Arbitration Act. There is no appeal.

Master Schlosser then considered added his analysis on waiver and attornment as alternatives in case he was wrong in having jurisdiction to consider the exceptions in Section 7(2).  He analysed whether Quadrant had either waived the application of the mandatory arbitration agreement or attorned to the court’s jurisdiction.  His starting point for both options was direct.  These two principles provided grounds in addition to the exception in Section 7(2) for “overruling the objection and allowing the lawsuit to proceed”.

[42] A party is free to waive a contractual term, including a mandatory arbitration clause regardless of anything in the Arbitration Act. This is a matter of contract law, or equity. A party can attorn, or accede, or submit to the jurisdiction of the Court to deal with a dispute in the same way, even if there is another remedy or another forum, thus giving up their rights to the alternate remedy.

Master Schlosser stated that waiver is a question of fact and involves and unequivocal act or representation made with knowledge of a right.  He referred to Plasticmoda Societa per Azioni v Davidsons(Manchester), Ltd, [1952] 1 Lloyds Rep 527 for its statement of waiver.

If one party, by his conduct, leads another to believe that the strict rights arising under the contact will not be insisted upon, intending that the other should act on that belief, and he does act on it, then the first party will not afterwards be allowed to insist on the strict rights when it would be inequitable for him so to do.

He also noted how attornment prevents a party from later taking exception to the forum chosen by the other party.

Master Schlosser held that, if he was incorrect on his ability to consider Section 7(2), he determined that Quadrant did not object in a timely way and “only objected when the default was certainly too late to cure”.  Quadrant had submitted to the court’s jurisdiction and “slept on its rights after it had identified this right in its defence”.

He acknowledged that “the law in this area is unsettled” but concluded that the uncertainty of the law, the uncertainty of the limitation period and the parties’ conduct in the lawsuit favoured allowing Plaintiff to proceed with his lawsuit.

He dismissed Quadrant’s application.  Given the “state of the law”, he ordered each party to bear its own costs.