B.C. – Stay of portion of counterclaim not “improper bifurcation”; arbitration agreement bifurcated disputes – #540

In Mazzei Electric Ltd. v Western Canadian Construction Company Ltd., 2021 BCSC 1873, the Plaintiff applied to stay a portion of the counterclaim brought by the Defendant, on the basis that it  was covered by the parties’ arbitration agreemeement. Justice W.A. Baker granted the stay while permitting the remainder of the counterclaim to proceed. In reaching her decision, she interpreted and applied a detailed and industry-specific dispute resolution clause, which allowed the parties to commence court proceedings to preserve a lien right. Justice Baker found that the Plaintiff’s lien action did not prevent it from seeking to have the Defendant’s counterclaim on other issues in dispute stayed in favour of arbitration.

The dispute arose out of a condominium construction project in Langford, BC. The project entailed construction of two towers. The Plaintiff was a subcontractor, and the Defendant was the general contractor. Two of the Defendant’s related corporations were the owners/developers, one in charge of each tower.

The Plaintiff and Defendant entered into a standard form contract, which provided a detailed, multi-tier dispute resolution process. It began with a timely filed notice, followed by a series of internal dispute resolution steps and culminated in arbitration. Importantly, the dispute resolution provisions permitted the parties to commence court proceedings to preserve a lien right. This was deemed not to waive the right to demand arbitration to resolve any other disputes.

In October 2019, the Plaintiff made a delay claim, triggering the dispute resolution process. The Defendant rejected the claim and the Plaintiff advised it would commence arbitration “if required”. A month later, the parties had a further dispute over how to interpret certain terms in the contract governing, among other things, schedule changes and change orders. The Plaintiff made several other claims during the following months.

In January 2021, the Plaintiff commenced an action to preserve its lien rights in conformity with the dispute resolution provision. Initially, the Defendant was not a party to the lien action, which was filed against the Defendant’s related developer corporations since they held title to the land. This was proper under the applicable legislation (Builders Lien Act, S.B.C. 1997, c. 45 and Strata Property Act, S.B.C. 1998, c. 43). The Defendant was added as a party to the action, on consent, to stand in place of the owner/developer corporations. It posted security for the lien, allowing the owners/developers to be discharged.

The Defendant filed a defence to the lien claim and commenced a counterclaim seeking damages for the Plaintiff’s alleged delay in performing the subcontract and filing improper liens. The Plaintiff moved to stay the delay/breach of contract aspect of the counterclaim on the grounds that it fell within the arbitration agreement’s scope.

The stay application was heard by Justice W.A. Baker, who began by setting out the well-established test for a stay under section 7 of the  Arbitration Act, S.B.C. 2020, c. 2 (the “Act”):

[29]      In Prince George (City) v. McElhanney Engineering Services Ltd. (1995), 9. B.C.L.R. (3d) 368, the court of appeal set out a three-part test for granting a stay under the Arbitration Act current at that time:

[22]      There are three prerequisites to the application of s.15. They are:

(a)  the applicant must show that a party to an arbitration agreement has commenced legal proceedings against another party to the agreement;

(b)  the legal proceedings must be in respect of a matter agreed to be submitted to arbitration; and

(c) the application must be brought timely, i.e. before the applicant takes a step in the proceeding.

Justice Baker noted that this test continues to apply under the new BC Act, which recently replaced BC’s former domestic arbitration statute in force when the Court of Appeal for British Columbia decided Prince George.

On the first limb, Justice Baker summarily determined the Defendant was a party to the arbitration agreement and that the counterclaim was a “legal proceeding” commenced “against another party to that arbitration agreement” (the Plaintiff).

On the second limb, Justice Baker was likewise satisfied the delay aspect of the Defendant’s counterclaim fell squarely within the range of disputes the contract required the parties to arbitrate.

On the third limb, Justice Baker addressed the Defendant’s argument that the Plaintiff took steps in the court proceeding such that it could not now rely on the arbitration agreement to obtain a stay. The argument was two-fold: 1) the Plaintiff failed to explicitly reserve its right to arbitrate in its Statement of Claim in the lien action, thus taking a step in the litigation; and 2) Plaintiff’s counsel sent letters to Defendant’s counsel about resolving the lien claims. The Defendant said this correspondence evidenced an intention to pursue the lien claims in court by way of summary judgment. This, the Defendant argued, amounted to conduct inconsistent with a plea that the counterclaim should be stayed in favour of arbitration.

Justice Baker rejected both of these submissions.

With respect to the Defendant’s first argument, Justice Baker found the dispute resolution provision’s plain language preserved the Plaintiff’s right to insist that any non-lien disputes be arbitrated. She also observed that the consent order adding the Defendant to the court proceeding provided this was without prejudice to the Plaintiff’s ability to pursue claims in arbitration. In light of these conclusions, the Plaintiff had no obligation to again reiterate its intention to arbitrate disputes other than the lien claims in its pleading.

Justice Baker dismissed the Defendant’s second argument because the correspondence forming the basis of the Defendant’s objection had to do with prosecuting aspects of the Plaintiff’s lien claim, not the Defendant’s counterclaim. In other words, the Plaintiff stated its intention to move its own claim forward in litigation by way of summary judgment, not portions of the Defendant’s counterclaim that it said should go to arbitration. Justice Baker concluded that any steps taken in respect of Plaintiff’s lien claims were irrelevant as only the Defendant’s counterclaim was the subject of the stay motion. This meant that although the Plaintiff might have taken steps in its own claim inconsistent with arbitration (of those claims), the “proceeding” for the purpose of the stay motion analysis was the Defendant’s counterclaim. The evidence showed the Plaintiff took no steps in that aspect of the litigation. On the contrary, it served a notice of arbitration for resolution of the delay issues.

Justice Baker also distinguished two cases the Defendant relied on for the position that the Plaintiff’s counsel’s correspondence amounted to taking steps in the court proceeding that waived the Plaintiff’s  right to demand arbitration: Larc Developments Ltd. v. Levelton Engineering Ltd., 2010 BCCA 18 and Fofonoff v. C and C Taxi Service Limited (1977), 1977 CanLII 358 (BC SC), 3 B.C.L.R. 159 (S.C.). Those cases were different, she held, because the conduct at issue—sending formal demands for particulars under the Rules of Court—“necessarily indicated the intention to proceed with the claim in court and not in arbitration”. Here, the correspondence related only to resolving the lien claim. As noted, this was not the aspect of the litigation the Plaintiff sought to refer to arbitration.

After finding the three aspects of the subsection 7(1) stay analysis were met, Justice Baker assessed whether the arbitration agreement was “void, inoperative or incapable of being performed”. The Defendant argued that the arbitration agreement was inoperative. It asserted that “allowing the arbitration to proceed would allow for an improper bifurcation of [the Plaintiff’s] claim, which is not an outcome contemplated under the [Act]”. The Defendant paired this with a statutory interpretation argument that section 7 of the Act pertained to staying “legal proceedings”, not portions of them.

In rejecting these arguments, Justice Baker observed that the contract expressly foresaw and allowed for some matters to be arbitrated and others litigated. She referred to the Court’s previous decision in Sandbar Construction Ltd. v. Pacific Parkland Properties Inc., 1992 CanLII 429. That case similarly dealt with a lien action and a parallel arbitration. The Court in Sandbar held that the substance of the claim could be decided in arbitration, with the award determining whether the lien action related to the underlying arbitrated dispute could be maintained. Justice Baker found this reasoning compelling and consistent with the Court’s other comments in Sandbar (and the jurisprudence generally) that parties should be held to their arbitration agreement.

In the result, Justice Baker granted the partial stay with costs to the Plaintiff on the application.

Contributor’s Notes

First, the Court noted the trite but important point that the jurisprudence under the BC Act’s previous iterations continues to apply to the test for stay motions. Although the stay provision’s wording has changed over the years, with the newest iteration closely tracking the language in article 8 of the UNCITRAL Model Law on International Commercial Arbitration, its substance has remained largely the same. The BC Courts have not altered the analysis originating in Prince George.

Second, this case shows the variability in arbitration agreements and ways in which parties may order their dispute resolution process. It is common to find all-encompassing arbitration agreements employing broad scoping language, such as the classic “any and all disputes arising out of or in connection with…shall be finally determined by arbitration”, or similar words. This is often appropriate, especially where avoiding a multiplicity of proceedings is a priority.

This case is one of many examples in which the parties opted for a more nuanced dispute resolution process, one entailing not only several pre-arbitral steps (preliminary decision by general contractor, good faith negotiations, mediation etc.), but also an express right to commence court proceedings for limited purposes. Such dispute resolution protocols demonstrate two of arbitration’s greatest strengths: party autonomy and flexibility. One size does not fit all, and unlike court proceedings, parties may select from various pre-made dispute resolutions processes, or design one all their own with very few statutory limitations (e.g. maintaining procedural fairness).

Third, Justice Baker’s decision, together with the decision in Sandbar Construction Ltd. v. Pacific Parkland Properties Inc., exemplify how arbitration and court proceedings can work in tandem (arbitration first and court second, or as needed) to provide a holistic dispute resolution solution. This most obviously happens when formal enforcement is required, or when a party seeks interim measures in aid of the arbitration. But there are other ways in which the arbitral tribunal and court might find themselves as dispute resolution dance partners.

Sometimes, as in this case, the Court will retain exclusive jurisdiction over a certain subject matter or remedy with other aspects of the dispute proceeding to arbitration. Another context in which this could arise is oppression matters. This is because some relief affecting third parties generally available to remedy oppression falls outside the arbitral tribunal’s remedial toolkit (see for example: Farah v. Sauvageau Holdings Inc., 2011 ONSC 1819), even though the substance of the dispute is arbitrable and might fall within the arbitration agreement (see for example: Woolcock v. Bushert, (2000) 2004 CanLII 35081 (ON CA), 246 D.L.R. (4th) 139 (Ont. C.A.); Randhawa v. Randhawa, 2021 ONSC 3643. For an analysis of Randhawa, see: Ontario – Arbitrator has jurisdiction to appoint inspector under the Ontario Business Corporations Act if terms of parties’ arbitration agreement allows, but court assistance needed if third parties affected – #510). Yet a third example could be an IP dispute in which the arbitral tribunal decides the merits of the dispute, but where the Federal Court is required, as under the Trademarks Act or Patent Act, for a party to strike out or modify a trademark or patent registration. In such cases, parties might wish to leverage the benefits of arbitration to decide as much of the dispute as possible and leave only necessary remedial issues to the courts once the award on the substance is rendered.