Josh Reflects (2023): Multi-tier dispute resolution clauses: jurisdiction and limitations issues – #805

Canadian appellate courts have seldom made significant rulings on multi-tier dispute (sometimes called “step” or “cascading”) resolution clauses, so it is difficult to discern clear trends. A recent decision of the Hong Kong Final Court of Appeal (“HKFCA”) is of interest. It considered what forum has jurisdiction to determine whether prior steps in a multi-tier dispute resolution clause have been satisfied. 

Multi-tier dispute resolution clauses are becoming increasingly common, especially in successive performance contracts where parties are tethered in a long-term commercial relationship. Infrastructure and construction contracts are usual suspects.

Parties opting for multi-tier clauses are likely attracted by the potential for speedy, efficient, and flexible dispute resolution. These clauses set out a progression of steps, usually beginning with less costly consensual dispute resolution, like negotiation, then progressing toward consensual dispute resolution assisted by a neutral (e.g. mediation, conciliation), before a final stage, which is typically an adversarial method of dispute resolution, often arbitration. In this way, multi-tier clauses provide for (and in some cases require) several steps of speedy and less costly, consensual dispute resolution before full-blown litigation or arbitration.

Despite their advantages – or perhaps because of them – multi-tier dispute resolution clauses present unique challenges. As we look ahead to a new year of Arbitration Matters, this note considers two categories of such challenges – jurisdiction and limitations – and speculates on how they may give rise to future case law by Canadian appellate courts.

Jurisdiction – Multi-tier dispute resolution clauses give rise to unique jurisdictional questions. Such questions typically arise where one party contends that earlier steps of the dispute resolution process are preconditions to initiating an arbitration. Which forum has jurisdiction to decide compliance with steps prior to arbitration?

In this past year, the Hong Kong Final Court of Appeal (“HKFCA”) in C v D, [2023] HKCFA 16 handed down a highly anticipated decision confirming that, in the circumstances of the particular contract at issue, the arbitral tribunal had jurisdiction to determine whether prior steps in a multi-tier dispute resolution clause had been fulfilled.

The multi-tier clause at issue stipulated certain pre-arbitration procedures, which included good faith negotiations. The procedure further provided that any dispute not resolved within 60 days of the request for negotiation be finally settled by binding arbitration.

An arbitration was commenced pursuant to the contract. One of the parties immediately objected to the arbitration on the basis that prior steps in the dispute resolution procedure had not been fulfilled.

The objecting party requested that the issue be decided as a preliminary question; however, the arbitral tribunal did not do so. As such, the procedure under art. 16(3) of the UNCITRAL Model Law (which is incorporated in the Hong Kong Arbitration Ordinance applicable the dispute, see HKCFA, para 17) was unavailable.  

In a partial award (on liability, damages being reserved for a second phase) the arbitral tribunal dismissed the objection based on non-fulfillment of preconditions to arbitration. 

The objecting party then brought an application before the national courts in Hong Kong to set aside the partial award, on the basis, among other things, that in making the partial award, the arbitral tribunal exceed its jurisdiction (relying on art. 34(2)(a)(iii) of the UNCITRAL Model Law).

The first instance court dismissed the application. This decision was maintained on appeal, including by the HKFCA. In coming to its decision, the HKFCA held that it was first necessary to construe the arbitration agreement. In the absence of clear language setting out the parties’ intention, objections relating to pre-arbitration conditions generally come within the parties’ contemplation and intended submission to arbitration. In its interpretation of the clause at issue, the HKFCA found no such clear intention. As such, there was no basis for juridical interference on the basis of excess of jurisdiction under art. 34(2)(a)(iii) UNCITRAL Model Law. 

The decision features a discussion on the distinction between objections based on admissibility versus jurisdiction. An admissibility objection, reasoned the HKFCA, relates to the claim itself, whereas a jurisdictional objection relates to the tribunal (its constitution, validity of the arbitration agreement, etc). The majority of the HKFCA confirmed that the admissibility/jurisdiction distinction is relevant to determining whether the fulfillment of pre-arbitration conditions can be characterized as a jurisdictional issue based on the language of a given contract, and noted that this distinction is adopted in several other jurisdictions. 

Referencing commentary on international commercial arbitration, the HKFCA found that pre-arbitration conditions should be regarded as presumptively non-jurisdictional. On the facts, the HKFCA found that there was nothing in the words of the contract to suggest an intention to confer “jurisdictional status” on the pre-arbitration conditions.

To my knowledge, no Canadian appellate court has rendered a decision setting out such a framework of analysis for multi-tier clauses. In fact, as described by one author, Canadian courts often elide the prior steps of a multi-tier dispute resolution clause, referring to such clauses merely as “arbitration agreements” (see Joshua Karton, “Multi-Tier Dispute Resolution Agreement in Canadian Law and Practice: Interpreting, Enforcing, Escaping” in Can J Comm Arb 2:1 (2022), at p. 84-85, referring inter alia to Uber Technologies v Heller, 2020 SCC 16). 

It might be noted that in Cruickshank Construction Ltd v The Corporation of the City of Kingston, 2022 ONSC 5704 (“Cruickshank” ; see “Ontario – Limitations defence not a matter of arbitral jurisdiction” Arbitration Matters case note #674) a first instance court asked to rule on an application to nominate an arbitrator, held that a defendant’s objection based on alleged noncompliance with preconditions to an arbitration agreement should be decided in arbitration. The Court pointed out that the defending party submitted no law in support of the argument concerning compliance with pre-arbitration conditions. It reasoned that the argument regarding non-compliance with conditions was highly factual, such that the arbitrator was best positioned to rule on the matter. The Court declined to take position on whether the matter should be characterized as “jurisdictional” but noted that it is arguable in either case that the arbitrator would have jurisdiction over the question.

However, first instance courts may take different approaches when an objection based on pre-arbitration conditions is submitted to them,  before any arbitration has commenced. 

Recent decisions in the Superior Court of Québec seem to suggest that a court can refer parties to prior steps in a multi-tier dispute resolution process, even if the clause stipulates arbitration as the final and binding step. 

For example, in Capital JPEG inc c Corporation Zone B4 ltée, 2019 QCCS 2986 (“Capital JPEG”. see “Québec – parties ordered to mediate accordin to express, imperative agreement eve if dispute not arbitrable” Arbitration Matters case note #222) one party brought court proceedings, to which the other party objected. That party asked the court to refer the matter to mediation, based on a multi-tier dispute resolution clause in the parties’ contract. The court analysed the clause at issue, finding that it called for three dispute resolution phases, namely negotiation, mediation and arbitration. The court further found that each step was a mandatory pre-condition to the next. Accordingly, the court granted the request to refer the parties to mediation. Interestingly, in obiter, the court mentioned that, even if the matters referred to the multi-tier dispute resolution clause were not arbitrable under applicable law, nothing precluded non-arbitrable matters from being resolved through mediation, given that each step of the multi-tier dispute resolution clause must be taken separately.

Further, in Bridgepoint international (Canada) inc v Ericsson Canada inc, 2001 CanLII 24728 (QC CS) (“Bridgepoint”) the Court was faced with an application for a declinatory exception (motion to decline jurisdiction) in favour of final and binding arbitration based on a multi-tier dispute resolution clause in a master purchase agreement. The plaintiffs had instituted a claim based on the master purchase agreement before the Court. The defendants sought to have the action dismissed and referred to arbitration. Plaintiffs resisted the declinatory exception on the basis that the dispute resolution procedure was an “optional” alternative to courts. Thus, the clause did not oust the court’s jurisdiction.

The court recognized that a valid arbitration agreement is not optional and must be treated as a “complete alternative means to dispute-solving by the courts” (Bridgepoint, para 8). If the arbitration agreement is valid and enforceable, the parties must refer all disputes that fall within its scope to arbitration. The Court also determined that the binding agreement to arbitrate at issue in the case was enforceable (Bridgepoint, para 27). However, the Court read the clause as “granting each party a right to impose upon the other party the continuation of the Dispute Resolution Mechanism, step by step” (Bridgepoint, para 28). The Court found that “at each step of the process, each party has the right to choose go (sic) further or not.” As such, the Court considered that, according to the terms of the dispute resolution procedure, it should refer the parties to the dispute resolution procedure, rather than directly to arbitration. In the result, the Court dismissed the declinatory exception in favour of arbitration and referred the parties to mediation.

The Court emphasized the “separate” nature of each dispute resolution step in the process, just as the court more recently commented in JPEG Capital. If arbitration is but one, eventual, step in the process, the Court seemed to reason that it is authorized to intervene in the dispute resolution process before the parties have arrived at that ultimate step. 

Canadian appellate courts will eventually catch up to these issues in multi-tier clauses and hopefully inject clarity in the approach that should be adopted.

Limitation periods – Parties must be wary of limitation periods when dealing with multi-tier clauses. These often require the passage of time between steps of dispute resolution. For instance, a clause may stipulate that a certain number of days must pass after negotiations before the parties may initiate mediation. Similarly, arbitration may only be possible a certain number of days after a mediation.  

Such requirements may have an important bearing on limitations arguments (extinctive prescription, in Québec). A party that initiates the dispute resolution process based on such a clause must be mindful of these time requirements to prevent the lapse of a limitation period.

For example, in Suncor Energy Products inc. v Howe-Baker Engineers, Ltd., 2010 ABQB 310 (“Suncor”) the  Court decided an application to strike an arbitration on the basis that the attempt to commence the arbitration by notice to arbitrate was time-barred.

The Court first determined that it had jurisdiction to decide the motion to strike. It recognized that arbitral tribunals generally have jurisdiction to determine whether an arbitration has been commenced in accordance with the contractual procedure. However, the Court determined that a different question was raised in the case. Relying on Bell Canada v the Plan Group, 2009 ONCA 548 and Autoweld Systems Ltd v CRC-Evans Pipeline International, Inc, 2009 ABCA 366, the Court determined that the question being raised was whether there was any matter to submit to arbitration at all given the limitations issue, and that the Court could decide this matter. 

The defending party argued that, prior to submitting a notice of arbitration, it had submitted a notice of dispute, in accordance with the multi-tier clause, to initiate the dispute resolution procedure. It said that the notice of dispute was delivered within the limitation period, and should be considered analogous to a statement of claim for the purposes of limitations.

The Court disagreed. It considered that the multi-tier dispute resolution clause set out three steps – negotiation, mediation and arbitration – which were each separate and distinct. On this basis, it found that a party wishing to commence arbitration must do so with a separate notice of arbitration after the prior steps had been completed,  and only “if all else fails” (Suncor, para 46, 54). The notice of dispute did not commence the arbitration, but rather the dispute resolution procedure (beginning with negotiation) and was therefore not analogous to a statement of claim for the purposes of limitations. In the result, the Court struck the arbitration proceedings since the eventual notice of arbitration was filed outside the limitation period.

To my knowledge, this issue has not yet come before a Canadian appellate court. More generally, Courts may take different approaches when asked to assess a limitations argument raised in the context of a request to arbitrate. In Cruickshank, the Court decided that the limitations defence raised against the application to nominate an arbitrator in that case was not an issue of jurisdiction. It was a defence to the claim and was in any event not a matter for summary judgment given the factual nature of the argument; the limitations argument was referred to the arbitrator. By contrast, in Maisonneuve v Clark, 2022 ONCA 113 (see “Ontario- Start of limitation period determined by interpretation of stepped arbitration clause” Arbitration Matters case note #592), the Court interpreted an arbitration agreement in concluding that an application to nominate an arbitration was not time-barred because, based on s. 5(1)(a)(iv) of the Ontario Limitations Act, 2002, (which provides that a limitation period starts to run when the plaintiff knew that a proceeding would be an “appropriate” means to seek to remedy), in the light of the arbitration agreement and parties’ conduct, it was not “appropriate” to arbitrate until it was clear that the dispute could not be resolved through negotiation.

Thus, some court decisions suggest a willingness to interpret and apply the multi-tier clause, as the court would any term of a contract. Others do not, preferring to refer matters concerning jurisdiction or limitations that arise in the context of a multi-tier clauses directly to arbitration. This may – or may not – be out of tune with the approach taken by the HKFCA. Even if reasoning akin to that evidenced in the HKFCA decision were to be adopted in Canada, it remains unclear whether courts can step in to interpret and apply prior steps of a multi-tier dispute resolution clause before the dispute has progressed to arbitration.

We are keen to see how these issues may be addressed in Canadian appellate courts.

Keep reading Arbitration Matters to keep up with the next bars in the multi-tier clause progression!