N.L. – “shall” is not “must” and can be directory rather than mandatory – #165

In Labrador-Island Link Limited Partnership v. General Cable Company, 2019 NLSC 6, Madam Justice Gillian D. Butler examined the sufficiency of steps taken in a dispute resolution process to determine whether steps served as mandatory conditions precedent which a party had to complete prior to commencing litigation. In doing so, Butler J. provides remarkable guidance to arbitration practitioners grappling with identical issues in their arbitration clauses. Her efforts to distinguish between “shall” and “must” were informed by Plaintiff’s good faith in attempting to complete the work contemplated in the contracts and by the severe implication of an expired limitation period.

Labrador-Island Link Limited, Plaintiff, owns and operates the Muskrat Falls Project (the “Project”), the broad scope of which is sketched out at section 2.1 of the Energy Corporation Act, SNL 2007, c E-11.01. As part of Phase I of the Project, Plaintiff undertook the design, construction and installation of a transmission system consisting of 1080 kilometers of overhead transmission line from Labrador to Newfoundland via sub-sea cables and converter stations.

By January 2, 2014 contract (“Agreement”), Plaintiff retained General Cable Company Ltd., Defendant, to design and manufacture large diameter aluminum conductor steel-reinforced cables. The cables experienced a problem called “prouding” – when strands of a cable bulge out of shape and deform the cable.

Butler J.’s reasons set out Plaintiff’s willingness to collaborate despite its objections regarding the problems created by prouding in Defendant’s cables. Plaintiff undertook extensive efforts to discuss the problems and to find a workable solution by which Phase I of the Project would continue towards completion including Plaintiff’s payment of any modification costs demanded by Defendant. Her reasons also note that Plaintiff did not pair its willingness to complete the work with relinquishing its rights or remedies. The exchanges between Plaintiff and Defendant were numerous and summarized in a July 25, 2016 e-mail from Plaintiff to Defendant reproduced at para. 10 of Butler J.’s reasons.

The Agreement between Plaintiff and Defendant contained a dispute resolution provision at Article 34, reproduced in full at para. 14 of the reasons. That Article had to read in conjunction with other provisions in the Agreement, including Article 32, which expressly identified the manner in which either party was to formally give the other notice of a dispute.

Article 34 contained the words “shall” at Articles 34.1, 34.2 and 34.4 but “must” at Article 34.3 which played key roles in Butler J.’s analysis:

34.1 If any dispute, controversy, claim, question or difference of opinion arises between the Parties under this Agreement including an interpretation, enforceability, performance, breach, termination or validity of this Agreement (“Dispute”), the Party raising the Dispute shall give Notice to the other Party in writing within thirty (30) days of the Dispute arising, and such Notice shall provide all relevant particulars of the Dispute.

34.3 If the Dispute is not resolved by the Parties within ninety (90) days from the date of delivery of the Notice of Dispute then a Party may take whatever action is deemed appropriate pursuant to this Agreement. For greater certainty, the Parties must comply with this Article 34 before commencing any further action, legal or otherwise, with respect to a Dispute under this Agreement.

On March 13, 2018, Plaintiff initiated litigation against Defendant claiming rectification costs calculated at $57,552,556.00 and other damages to be assessed. On March 29, 2018, Defendant applied to the Supreme Court of Newfoundland and Labrador under Rule 14.24(1)(d of the Rules of the Supreme Court, 1986, SNL 1986, c 42, Sch D for dismissal of Plaintiff’s claim. Defendant alleged that Plaintiff’s had failed to comply with the dispute resolution process set out in Article 34 and initiating the litigation constituted an abuse of the court’s process. Defendant’s exact grounds are set out at para. 16:

(a) No written notice of the Dispute, nor with all relevant particular, was delivered by or on behalf of Plaintiff to Defendant’s designated representative as required under Article 32 of the Agreement or otherwise;
(b) No meeting between the senior project managers for the parties occurred to attempt to resolve the dispute;
(c) No meeting between the project sponsors for the parties occurred to attempt to resolve the dispute; and,
(d) No meeting between representative Vice Presidents for the parties occurred to attempt to resolve the dispute.

Having set the context, Butler J. at para. 24 paused her analysis for an observation:

[24] These facts beg the obvious question of why (if breach of Article 34 is established) the appropriate remedy would not be a stay of proceedings of the action. In response to this enquiry, Defendant’s counsel asserts that should strict compliance with Article 34 be waived and the action be stayed and not struck, the Defendant would lose its ability to defend a new action filed after compliance with Article 34 on the basis of a statutory limitation period of two years. In this regard, the Defendant would intend to rely upon section 5 of the Limitations Act, S.N.L. 1995, c. L-16.1, suggesting that the right to commence an action arose in May 2016 and that any legal action would have had to be commenced by May 2018.

Butler J. analysed the circumstances and the parties’ own wording used in their Agreement.

Her analysis applies to arbitration practitioners who encounter escalation clauses and forms of notices and grapple with whether completing the stated steps serve as conditions precedent to validly instituting arbitration.

Her analysis explores various submissions which easily lend themselves to disputes regarding arbitration. The submissions fall into six (6) sections, each of which merits close reading.

1. general principles of contractual interpretation – paras 27-35

Butler J. identifies a variety of sources which outlined the principles for contractual interpretation. Her summary provides readers with a sampling of variations in stating those principles.

2. “shall” vs. “must” – paras 36-47

Butler J. distinguished between “must”, which has only a mandatory character, and “shall” which can have either a mandatory or directory character, depending on the terms of the agreement.

She considered Greater Essex County District School Board v. United Association of Journeymen, 2011 ONSC 5554, British Columbia (Attorney General) v. Canada (Attorney General); An Act respecting the Vancouver Island Railway (Re), [1994] 2 SCR 41, 1994 CanLII 81 (and its consideration of Re Manitoba Language Rights, [1985] 1 SCR 721, 1985 CanLII 33 and Montreal Street R. Co. v. Normandin, 1917 CanLII 464 (UK JCPC)) as well as Ruth Sullivan & Elmer A. Driedger, Construction of Statutes, 4th ed. (Butterworths Canada Ltd., 2002), page 60. These supported her conclusion that a distinction can exist.

[43] From these authorities I accept that the term “must” is mandatory language whereas the term “shall”, although imperative, may, depending upon the context in which the word is used, be considered mandatory or directory.

Having found authorization to consider something less than a mandatory term when parties use “shall”, Butler J. then determined that she would rephrase the question put to her. “ …. I believe I must address firstly, whether the parties intended strict adherence to the form of Notice, the manner of service, the timing of meetings and the attendees at the meetings, and secondly, did they intend that failure to strictly adhere could potentially deprive a party from access to the Court for remedies available at law?

3. “problem” vs. “dispute” – paras 52-57

Defendant argued that the meetings held between Plaintiff and Defendant involved “discussions related to a problem” and not “negotiations to resolve a dispute”. “Counsel for the Defendant suggests that a business problem can be elevated to a dispute and that when and if that occurs, Article 34 applies, but until such time Article 34 has no relevance to what occurred in the spring and summer of 2016.

Butler J. held that the wording of the Agreement supported no such distinction and that Defendant was “drawing a distinction without a difference”.  The strength of the argument prompted her to add that she agreed with Plaintiff that Defendant’s attempt to make this distinction “is a reflection of the Defendant’s lack of a genuine interest in resolving the claim.

4. construing Article 34 – paras 61-68

Butler J. held that, because the parties had used the term “shall”, their “true intentions” were not for strict adherence to the form of notice, the manner in which it was served by Plaintiff on Defendant, the timing of the meetings held between the parties and the escalation of steps required before commencing litigation.

At para. 61, Butler J. evaluated the facts against several reasons for determining their “true intentions“, explaining her take on each:

(a) surprise;
(b) actions of Plaintiff and Defendant;
(c) commercially unfair/unreasonable;
(d) canons of construction;
(e) trivial or technical non-compliance; and,
(f) good faith and reasonableness.

Butler J. was alert to the issue of the expired limitation period. If Plaintiff’s action was struck, then it could not refile its action as the limitation period had passed and Defendant argued that it was entitled to plead that expired limitation period against a subsequently filed action. This result, based on Defendant’s interpretation of the provisions, would lead to an “absurd” result despite Plaintiff’s good faith efforts to collaborate.

The Defendant’s interpretation suggests potential for an expired limitation period notwithstanding that the Plaintiff acted in good faith, “shelved” the liability issue and continued to perform its obligations without interruption or delay as contemplated by Article 34.4. This interpretation could leave the Plaintiff with no recourse, contrary to Article 1.13 and would be an absurd result.

Confronted with the choice between an interpretation that would produce an absurd result and one that supports intended effect of the clause, I prefer the Plaintiff’s interpretation (McCamus, page 772).

As to reasonableness, this principle requires the Defendant to rationally defend its position with regard to the other party’s interest. The Defendant’s position (that it is entitled to have the Statement of Claim struck) would leave the parties in a situation where meetings and negotiations could occur but with the Defendant wielding the enormous bargaining power that comes with the knowledge that if negotiations failed, there was a risk that the Plaintiff would have no ability to resort to this Court in pursuit of its claim for $57.5 million in damages. The Defendant has not established that the parties intended such a result under Article 34 and I find it is neither rational nor a commercially reasonable result to the alternative dispute resolution provisions of this contract.

Similar tensions would appear in arbitration proceedings and may equally lead a court’s reasoning away from an “absurd” result.

The above focus on “shall” was not enough to address all the issues raised by Article 34.  A closing, key component of Butler J.’s reasoning on how to construe Article 34 was the need to balance the use of “must” in Article 34.3 with the “shall” in Articles 34.1, 34.2 and 34.4. Though “must” is mandatory, she had already determined that Plaintiff had complied with the parties’ intentions in the Articles containing “shall”.

Article 34.3 required that the parties “must” comply with “this Article 34 before commencing any … action”. Butler J. then affirmed that Plaintiff had met that mandatory obligation because it had complied with the other obligations set out in Articles 34.1, 34.2 and 34.4 which used “shall”.

5. striking the Statement of Claim – paras 69-77

Defendant claimed that Plaintiff’s litigation was an abuse of process and that the Court should not approve an action “taken in blatant default of the terms of the contract”. Butler J. found the argument uncompelling.

[76] I conclude that the fundamental principles of justice require that I take a “big picture” approach to the issue. Were I to strike the Statement of Claim in this instance (based on what would, at worst, be characterized as trivial or technical non-compliance with Article 34), I would render futile the Plaintiff’s good faith actions in attempting to resolve the problem, by “shelving” the dispute and covering the full costs of remediation. It would leave the parties to enter negotiations with the Defendant wielding the enormous bargaining power that comes with the knowledge that, failing further dispute resolution discussions, the Plaintiff has no ability to pursue its claim for $57.5 million in damages. Such a result would violate the community’s sense of fair play and decency.

6. Stay of proceedings – paras 78-82

Butler J. held that, if she were wrong regarding compliance with the dispute resolution clause, she would stay the proceedings and not strike them, relying on Oppenheim v. Midnight Marine Limited, 2010 NLCA 64. Doing so, presumably, would allow Plaintiff to satisfy the clause but not dismiss the action.