Ontario – claimant unable to arbitrate its dispute unless consolidated with non-existent arbitration – #164

In Federal Electric (1976) Limited v. McDonald Brothers Construction, 2019 ONSC 496, Madam Justice Michelle O’Bonsawin refused to refer A and B to arbitration because their agreement provided that any of their disputes also relating to a dispute between B and C shall be arbitrated “at the same time in the same proceedings and by the same Arbitration Board as is appointed to resolve the dispute between” B and C. The contract between B and C had no agreement to arbitrate. O’Bonsawin J. also lists and applies the principles applicable to determining whether “best efforts” were made by B to advance its claim against C.

McDonald Brothers Construction Inc. (“McDonald Brothers”) signed a March 12, 2014 contract with Public Works and Government Services Canada (“PWGSC”) to transform a large Ottawa building for the specific requirements of a tenant (the “Contract”). McDonald Brothers then signed a separate, March 25, 2014 sub-contract with Federal Electric (1976) Limited (“Federal Electric”) by which Federal Electric undertook to supply labour, material and related services for the electric work required for the building fit-up (the “Subcontract”).

A schedule to the Subcontract stipulated the date for the completion of the work and Federal Electric accounted for that date when bidding for the work. Significant delays occurred for reasons unrelated to the Subcontract. Other issues arose as well and, as reported in the reasons, “[a]t each point during the execution of the work under the Subcontract, Federal Electric sought to resolve the issues that arose in collaboration with McDonald Brothers pursuant to the terms of the Subcontract.

The dispute resolution provisions of the Contract and the Subcontract appear at paras 28, 29 and 31. Each provides for consultation and forms of notices. O’Bonsawin J. noted that the Contract between McDonald Brothers and PWGSC contained no specific arbitration provision. The Subcontract between McDonald Brothers and Federal Electric did provide for mediation and arbitration.

Federal Electric sought to resolve its claim for delays which it argued led to additional amounts owing to it. By September 11, 2015 letter, Federal Electric asked to mediate its delay claim with McDonald Brothers. It subsequently e-mailed McDonald Brothers on October 5, 2015 enclosing a Notice of Appointment of an Arbitrator.

PWGSC issued a November 14, 2016 Certificate of Completion. McDonald Brothers communicated to PWGSC a December 9, 2016 notice of McDonald Brothers’ delay claim.

Two (2) other disputes raised by Federal Electric related to (a) the supply and installation of variable frequency drives and (b) the additional cost of automatic switches. Both of these were arbitrated together in July 2017 and a final award issued. The delay claim was not part of that arbitration.

Following up a year after its December 9, 2016 notice, McDonald Brothers contacted PWGSC on November 28, 2017 to follow up on its delay claim, requesting that PWGSC advise whether it was prepared to proceed to arbitration. PWGSC responded the same day, advising that “it would be premature to proceed directly to binding arbitration”. McDonald Brothers forwarded that message to Federal Electric on November 30, 2017. Further to requests made by PWGSC, Federal Electric provided McDonald Brothers with additional information relating to the delay claim.

Federal Electric applied to the Superior Court for an order requiring McDonald Brothers to attend and participate in an arbitration with Federal Electric. Federal Electric argued that as it and McDonald Brothers must proceed by way of arbitration for dispute resolution and cannot proceed to Court for relief since the Court does not have jurisdiction to deal with the delay claim.

[25] For its part, McDonald Brothers argue that the delays on the Project were caused by PWGSC and as such, they are a necessary party to any arbitration/action commenced to recover the expenses and additional costs incurred. The terms of the Contract between McDonald Brothers and PWGSC require that a specific procedure which does not include a provision for mandatory arbitration be followed when initiating a claim for delay against PWGSC. As per the terms of the Contract, McDonald Brothers submitted its claim for delay against PWGSC. Consequently, McDonald Brothers submit that Federal Electric’s delay claim must proceed with the delay claim against PWGSC in accordance with the provisions of the Contract and the Subcontract.

O’Bonsawin J. identified a single issue: is Federal Electric entitled to have its delay claim with McDonald Brothers arbitrated separately from the dispute resolution with PWGSC?

The Subcontract contained provisions stipulating the conditions by which Federal Electric and McDonald Brothers had agreed to arbitrate. Two (2) of those provisions, reproduced in fuller detail at para. 31, spoke to how and when a party could compel arbitration:

8.2.5 By giving a Notice in Writing to the other party, not later than 10 Working Days after the date of termination of the mediated negotiations under paragraph 8.2.4, either party may refer the dispute to be formally resolved by arbitration under the Rules of Arbitration of Construction Disputes as provided in CCDC 40 in effect of the time of bid closing with the following amendment […]

8.2.10 Should any dispute or portion of any dispute between the Contractor and Subcontractor relate to a dispute between the Owner and the Contractor, such dispute or portion thereof as between the Contractor and Subcontractor shall be disposed of at the same time in the same proceedings and by the same Arbitration Board as is appointed to resolve the dispute between the Owner and the Contractor.

Federal Electric argued that McDonald Brothers had not made “best efforts” to advance its claim against PWGSC. O’Bonsawin J. reviewed OEB International Ltd. v. Leyden, 1995 CanLII 7332 which determined that “best efforts” turned on the facts of each case and, at para. 33, listed the principles identified in the case law:

1.“Best efforts” imposes a higher obligation than a “reasonable effort”.
2.“Best efforts” means taking, in good faith, all reasonable steps to achieve the objective, carrying the process to its logical conclusion and leaving no stone unturned.
3.“Best efforts” includes doing everything known to be usual, necessary and proper for ensuring the success of the endeavour.
4.The meaning of “best efforts” is, however, not boundless. It must be approached in the light of the particular contract, the parties to it and the contract’s overall purpose as reflected in its language.
5.While “best efforts” of the defendant must be subject to such overriding obligations as honesty and fair dealing, it is not necessary for the plaintiff to prove that the defendant acted in bad faith.
6.Evidence of “inevitable failure” is relevant to the issue of causation of damage but not to the issue of liability. The onus to show that failure was inevitable regardless of whether the defendant made “best efforts” rests on the defendant.
7.Evidence that the defendant, had it acted diligently, could have satisfied the “best efforts” test, is relevant evidence that the defendant did not use its best efforts (para. 49).

Applying those principles to the facts, O’Bonsawin J. found that McDonald Brothers had made best efforts to advance its delay claim when it: filed its claim with PWGSC within the time set by the Contract; followed up with PWGSC to confirm the status of its delay claim; and, retained an expert to provide a report to PWGSC. These steps demonstrated that McDonald Brothers had followed the procedure imposed by its Contract with PWGSC.

O’Bonsawin J. then addressed the overlap between (a) the Federal Electric/McDonald Brothers dispute and (b) the McDonald Brothers/PWGSC dispute. She held that the overlap fell within the wording of 8.2.10 of the Subcontract.

[35] It must be noted that Federal Electric’s delay claim relates to the actions of PWGSC and involve the same parties (PWGSC, Federal Electric and McDonald Brothers). As per the clear language in paragraph 8.2.10 of the Subcontract, the delay dispute between Federal Electric and McDonald Brothers “shall be disposed of at the same time in the same proceedings and by the same Arbitration Board as is appointed to resolve the dispute between the Owner and the Contractor”.

[36] I agree with McDonald Brothers that undertaking separate proceedings as sought by Federal Electric is duplicitous.

In the result, O’Bonsawin J. dismissed Federal Electric’s application.

urbitral note – The reasons do not disclose how 8.2.10 can be applied in practice. The obligation in 8.2.10 for Federal Electric and McDonald Brothers to arbitrate might be difficult, if not impossible to implement.  As O’Bonsawin J. noted at para. 29 of her reasons, the Contract between McDonald Brothers and PWGSC contains no undertaking to arbitrate. Without more facts available, it would appear to readers that Federal Electric is obliged to pursue resolution of its claim against McDonald Brothers in an arbitration between McDonald Brothers and PWGSC but that McDonald and PWGSC have no agreement to arbitrate.