Nova Scotia – Court of Appeal sceptical that litigants suffer irreparable harm if obliged to litigate instead of arbitrate – #089

Nova Scotia’s Court of Appeal in Clyde Bergemann Canada Ltd. v. Lorneville Mechanical Contractors Ltd., 2018 NSCA 14 upheld a chambers judge’s decision granting a plaintiff a stay of its own litigation.  The Court held that a stay and an interlocutory injunction are remedies of the same nature and, absent different rules set out in particular legislation, are governed by the same rules.  Though section 9(1) Nova Scotia’s Commercial Arbitration Act, SNS 1999, c 5 did not authorize a stay in the circumstances, the Court accepted the chambers judges’ use of section 9(2) as a guideline in determining whether to exercise her discretion under section 41(e) the Judicature Act, RSNS 1989, c 240.  In its review of the chambers judge’s reasoning on irreparable damage, the Court also observed that claims of  litigation’s alleged disadvantages should be supported by evidence.

In her earlier decision, Lorneville Mechanical Contractors Ltd. v. Clyde Bergemann Canada Ltd., 2017 NSSC 119, Madam Justice Ann E. Smith decided two applications: Plaintiff Lorneville Mechanical Contractors Ltd. (“Lorneville”) application for a stay and Defendant Clyde Bergemann Canada Ltd. (“Bergemann”) application for consolidation of the court litigation with another.  Smith J. granted the stay but refused consolidation.  An ArbitrationMatters note on Smith J.’s earlier decision is available here: Nova Scotia court exercises discretion to grant plaintiff’s request to stay its own action .

Lorneville and Bergemann had entered into a stipulated price agreement (“SPA”) under which Lorneville agree to provide services related to Bergemann’s own supply and installation of an electrostatic precipitator at a mill site.  Following Bergemann’s termination of Lorneville’s contract, and to preserve its rights under Nova Scotia’s Builders’ Lien Act, RSNS 1989, c 277, Lorneville first filed a claim for a lien against Bergemann and then litigation to preserve it.

Lorneville as Plaintiff applied for a stay of its own lien action in favour of an undertaking for arbitration contained in the SPA.  Bergemann contested the stay, claiming that the parties were no longer bound by the undertaking to arbitrate and that Lorneville had unduly delayed seeking a stay.

Smith J. granted the stay.  She concluded that Lorneville could not rely upon section 9(1) of the Commercial Arbitration Act to stay its own court litigation, a lien action, but that it was not precluded from requesting her to exercise her discretion in favour of a stay pursuant to section 41(e) of the Judicature Act.

Bergemann applied for leave to appeal Smith J.’s decision to grant a stay.

Leave to appeal an interlocutory order in N.S. is governed by section 40 of the Judicature Act.  The test confirmed in Hatch Ltd. v. Factory Mutual Insurance Company, 2015 NSCA 60 requires determining whether an appellant has an arguable case which, if found, would lead to leave being granted, as demonstrated in Sydney Steel Corporation v. MacQueen, 2013 NSCA 5.  The Court of Appeal found that Bergemann met the test.

Referring next to Innocente v. Canada (Attorney General), 2012 NSCA 36, the Court then noted that the applicable standard of review for discretionary orders, such as a decision to grant or refuse a stay, is whether “wrong principles of law have been applied or a patent injustice would result”.

The first issue the Court of Appeal considered was whether Smith J. erred in identifying the correct legal test for granting a stay of proceedings.  Specifically, Bergemann’s appeal required the Court to focus on whether Smith J. erred by granting the stay under section 41(e) of the Judicature Act.

The Court did not question Smith J.’s decision to eliminate reliance on section 9(1) of the Commercial Arbitration Act.  The Court agreed that the Commercial Arbitration Act did not authorize a party to seek a stay of its own lien action.  The wording of section 9(1) authorized only other parties to the arbitration agreement, precluding Lorneville itself from applying for a stay.

9(1) Where a party to an arbitration agreement commences a proceeding in a court in respect of a matter in dispute to be submitted to arbitration under the agreement, the court shall, on the motion of another party, to the arbitration agreement, stay the proceeding.” (underlining added)

The Court moved on to a review of Smith J.’s reasoning under the Judicature Act’s section 41 to grant the stay.  It characterized her reasons to grant the stay as “quite short” and reproduced them, paras 67-71, at para. 34 of its own reasons.  In its own analysis, the Court made several observations leading it to uphold Smith J.’s decision.

First, the Court urged that stay of proceedings be viewed in the light cast by two cases, the “seminalPurdy v. Fulton Insurance Agencies Ltd., [1990] N.S.J. No. 361 (C.A.) and the oft-cited RJR-MacDonald Inc. v. Canada (Attorney General), [1994] 1 SCR 311, 1994 CanLII 117.

The Court observed that, while Purdy v. Fulton Insurance Agencies Ltd and RJR-MacDonald Inc. v. Canada (Attorney General) concerned stays of execution of lower court decisions, other Nova Scotia courts, such as Reid v. Halifax Regional School Board, 2006 NSCA 35 paras 27-28, Delorey v. Strait Regional School Board, 2012 NSSC 227 para. 4 and Brookfield Lumber Company v. Nova Scotia (Minister of the Environment), 1995 CanLII 4469 (NS SC) para. 10 have recognized that the two cases “apply to all manner of stay motions”.

The Court’s review of the cases lead it to affirm that a stay and an interlocutory injunction are remedies of the same nature.  Citing Robert J. Sharpe, Injunctions and Specific Performance, loose-leaf edition, (Toronto: Thomson Reuters, 2016) at 2.120, the Court agreed that, absent a different test set out in the legislation, stays and interlocutory injunctions “have the sufficient characteristics in common to be governed by the same rules”.

Second, though Bergemann argued that Smith J. erred and did not mention the test from Purdy v. Fulton Insurance Agencies Ltd and RJR-MacDonald Inc. v. Canada (Attorney General), the Court held that her analysis “in substance” applied the exceptional circumstance of the test.

Third, the Court was not distracted by Smith J.’s reference to section 9(2) of the Commercial Arbitrations Act in her analysis on the stay application.   The Court noted that she used that section as guideline in determining whether to exercise her discretion.

[40] In my view, the judge, in referencing the provisions of s. 9(2) the Commercial Arbitration Act, was using the provisions of that section as a guideline in determining whether to exercise her discretion in favour of granting the stay.  In other words, in the face of an arbitration agreement and the spirit and intent of the Commercial Arbitration Act, would it be fit and just to grant a stay of the lien action?

The Court endorsed the approach adopted in Saskatchewan Power Corporation v. Alberici Western Constructors, Ltd., 2016 SKCA 46 para. 34 wherein Saskatchewan’s Court of Appeal endorsed the chambers judge’s use of the “spirit and the particulars” of Saskatchewan’s The Arbitration Act, 1992, SS 1992, c A-24.1 to guide his discretion under that province’s The Queen’s Bench Act, 1998, SS 1998, c Q-1.01.

It concluded that it was “entirely appropriate for the judge to be guided by the factors in the Commercial Arbitration Act where the motion was brought in the context of an arbitration agreement.

Fourth, to close off its support of Smith J.’s handling of the stay application, the Court underlined that the interplay of the arbitration and lien litigation under the Builders’ Lien Act, RSNS 1989, c 277 was specifically mentioned in section 33B of the Builders’ Lien Act.  Section 33B expressly acknowledged and allowed an arbitral party to initiate litigation to further the scheme of the lien legislation and protect subcontractors’ security for unpaid work without qualifying as a waiver of the agreement to arbitrate.

33B Notwithstanding the Arbitration Act, the Commercial Arbitration Act or the International Commercial Arbitration Act or equivalent legislation of any other jurisdiction, where the contract or subcontract of a lien claimant contains a provision respecting arbitration, the taking of any step described in Section 33A does not constitute a waiver of the lien claimant’s rights to arbitrate a dispute pursuant to the contract or subcontract.

The Court of Appeal’s review of the applicable test for the exercise of discretion on a stay application lead it to validate Smith J.’s exercise of discretion.

[49] Taking these factors into consideration and exercising her broad discretion, the judge determined, in essence, that this was one of those exceptional cases referred to in Purdy where it would be “fit and just” that a stay be granted.  In exercising her discretion she did not apply wrong principles of law nor would a patent injustice result.

In closing its reasons, the Court of Appeal reserved special attention on alternative reasoning relied on in first instance to grant a stay.   That reasoning related to whether Lorneville had established irreparable harm under the test set by Purdy v. Fulton Insurance Agencies Ltd and RJR-MacDonald Inc. v. Canada (Attorney General).  The stated reasoning in first instance supported the conclusion that Lorneville would suffer irreparable harm if it was ‘forced to resort to the courts’ if the stay was not granted.

The Court of Appeal determined that it was an error to conclude that Lorneville had established irreparable harm – the first ground of the Purdy v. Fulton Insurance Agencies Ltd and RJR-MacDonald Inc. test.  While the Court noted that its comments had no impact on the outcome of the appeal before it, it did examine the evidence asserted in first instance to conclude that irreparable harm had been met.

Smith J. had focused on the claimed advantages of arbitration over litigation.

[73] Counsel for Lorneville contends that if the issues in dispute are not arbitrated, his client will suffer irreparable harm because it will lose the efficiencies of having the disputes arbitrated.  He notes that the Civil Procedure Rules require more substantial documentary disclosure than would be required in arbitration and that his client would be forced into a lengthy process of civil litigation.  While Bergemann argues that referring its disputes with Lorneville to arbitration will result in a multiplicity of proceedings and raises the spectre of possible inconsistent findings of facts, I do not agree.  I note that if the factors in Section 9(2) are relevant to the exercise of the Court’s inherent jurisdiction to stay an action, those factors do not list the risk of multiple proceedings as exceptions to deny a stay.

 [74] I accept that Lorneville will suffer irreparable harm if it loses the right to have its issues with Bergemann able to be arbitrated in the manner the parties contracted would occur.  Arbitration, freely chosen, should take primacy over litigation.

The Court of Appeal disagreed that evidence existed to support Lorneville’s claims or a grant of a stay.

[52] With respect, there was no basis upon which the judge could make a finding of irreparable harm on the evidence before her.  First, the finding of irreparable harm was based on the assertions of counsel as to the efficiency of the dispute resolution process, the substantial documentary disclosure that would be required in litigation, and that litigation would be a lengthy process.  They were simply that – assertions without evidence.

 [53] Second, the judge’s decision suggests that civil litigants in the Supreme Court are subject to irreparable harm because of the Court’s rules regarding document disclosure and time limits.  With respect, no one gave evidence on how the arbitration would be faster or the discovery less intrusive than a court proceeding.  It cannot be assumed that a civil litigant will suffer irreparable harm if it is required to litigate in the courts rather than arbitrate.

The Court of Appeal’s comment should caution arbitration practitioners.  The promised benefits of arbitration over litigation mentioned in first instance – speed, trimmed procedure – should not be assumed in seeking a stay, especially in the absence of evidence.