Ontario – no jurisdiction over dispute not properly raised in arbitration – #720

In EBC Inc. v. City of Ottawa, the parties’ primary construction contract contained a multi-tier  dispute resolution clause that provided for notice, negotiation, mediation, and arbitration. The parties also negotiated an agreement that contained a Claims Process applicable to disputes between them that provided for the exchange of documentation, negotiation, mediation and arbitration. The parties followed the Claims Process and proceeded to arbitration on a number of issues consisting of a jurisdiction motion and then three arbitral phases. As part of the jurisdiction motion the Arbitrator held that the arbitration could only address claims that had been advanced prior to September 2018. After completion of the arbitration, EBC brought an application for payment of money from the Respondent City, which was an issue that had not been raised in the Claims Process. Justice P. J.  Boucher rejected EBC’s application on the basis that as the dispute arose after September, 2018, it should have been raised using the dispute resolution process in the Contract, and not before the court. 

The parties entered into a contract dated July 24, 2015 (the “Contract”) for the design and build of the Ottawa Art Gallery expansion and the Arts Court redevelopment (the “Project”). They agreed Regis Côté & Associates (“RCA”) would be the Consultant for the Project. The work on the Ottawa Art Gallery (the “OAG”) was substantially performed by April 26, 2018, and on the Arts Court redevelopment (the “OAC”) by July 19, 2019. Paragraph 8 of the Contract set out the dispute resolution process and included notice, negotiation, mediation and arbitration. 

When substantial performance of the OAG portion of the Contract was reached, there were outstanding issues between the parties. They wished to avoid the registration of a construction lien, the time limit for registration of which would soon expire. The parties accordingly negotiated an agreement (the “Lien Agreement”) effective as of July 3, 2018, though it was only signed by the parties on September 18, 2018. Paragraph 4.4 of the Lien Agreement defined the Claims Process as the exchange of documentation, negotiation, mediation and arbitration, and also established a timeframe for the parties to complete the aforementioned steps. Subparagraph 4.4(d) of the Lien Agreement provided that: 

On or before April 30, 2019, if a resolution is not achieved through the mediation process described in paragraph 4.4(c) above, the Parties shall commence binding arbitration with an arbitrator to be agreed upon by the Parties.  The Parties agree that the chosen mediator cannot also serve as arbitrator.”

The parties were unable to resolve their issues through mediation and accordingly proceeded to arbitration. They argued a jurisdictional motion before the Arbitrator and thereafter the process was broken down into three phases. The arbitration concluded in May, 2021, when the Arbitrator released his phase three award on the merits.

Part of the dispute during the arbitration concerned funds held back and whether the Applicant was entitled to receive the holdback funds from the Respondent City. Prior to the release of the phase three award, the Applicant demanded the Respondent City pay the holdback funds to it. The Respondent City refused and this issue formed part of this application. 

The Applicant argued that it was not made aware of the Respondent City’s failure to transfer the holdback funds until early 2021 and this was a matter the City failed to bring to its attention during the mediation phase. The whole point of the Lien Agreement, the Applicant argued, was to openly discuss and work toward resolving outstanding matters. The City, the Applicant alleged, failed to give the Applicant notice, as required by paragraphs 7.1.2, 7.1.3 and 7.1.4 of the Lien Agreement, of the Applicant’s alleged failure to complete Contract work which the Respondent City claimed allowed it to keep the holdback funds. Since the Applicant was not given the chance to correct the issues, the Respondent City could not engage in self-help or keep the holdback funds.

The Respondent City argued that the Applicant was required to raise the dispute about the holdback funds within the dispute resolution mechanisms of the Contract or the Lien Agreement, neither of which it had done. This prevented the Applicant from bringing the application to the Court.  It submitted that the Applicant could not circumvent the dispute resolution process by bringing its application, which the Respondent City argued was an abuse of process. 

The Respondent City also relied on the Arbitrator’s jurisdictional ruling dated March 22, 2020 (the “Jurisdictional Ruling”) concerning the scope of disputes that could be determined in the arbitration process and the documentary evidence that could be relied upon. The Jurisdictional Ruling determined that the parties were not prevented by the Lien Agreement from bringing other claims that had not been set out therein. The Arbitrator also ruled that the arbitration could only address claims that had been advanced prior to September 18, 2018 (the “September 2018 Deadline”).

In the result, Justice P.J. Boucher dismissed the Applicant’s claim for the holdback funds. He held the Applicant did not follow the dispute resolution process set out in the Contract regarding the balance of the holdback funds. Nor did it pursue it in the Claims Process.

Justice P.J. Boucher found on the evidence that as of April 16, 2019, the Applicant was aware the City did not intend to make any further payments from the holdback fund while issues remained unresolved. At that point, the Applicant could have raised the issue within the Claims Process, though it would likely have been too late given the September 2018 Deadline. Indeed, the Arbitrator concluded in the Jurisdictional Ruling that he could only consider matters which had been raised on or before that date.

The Jurisdictional Ruling was also clear that claims not within the Claims Process could be brought by the parties under the Contract. The Applicant failed to do so. That is where the parties agreed disputes would be raised, subject to the Lien Agreement. The Applicant did not need to know the reason why the Respondent City was not paying the holdback money to engage the dispute resolution mechanism in the Contract. Justice P.J. Boucher. held that given it was likely too late to bring it under the Claims Process, the dispute resolution process under the Contract was the proper forum for the dispute, not an application to the court. 

There was no evidence of an appeal of the Jurisdictional Ruling before Justice P.J. Boucher and he held that the Applicant’s position that the Lien Agreement represented the parties’ attempt to make each other aware of all outstanding issues was an inappropriate collateral attack on the Jurisdictional Ruling. 

He dismissed the Application.

Contributor’s Note

This case highlights the importance of parties following the dispute resolution process set out in their contracts and the risk of failing to raise issues in a timely manner and at the appropriate point where there is a multi-tier dispute resolution clause. Multi-tier clauses are often nuanced and present a risk of excluding claims found to be outside of the arbitration’s jurisdiction because the claim does not fall into the scope or timeframe of the arbitration process agreed to by the parties. In complex disputes, where additional claims may be discovered while the parties’ proceedings have already gotten under way, it is important for the party with the potential claim to raise it for the purpose of incorporating it into the ongoing dispute resolution process, or alternatively, initiate the first step of the multi-tier dispute resolution process as it relates to the new claim. Parties who fail to do so run the risk that their claims, which would otherwise have fallen in the jurisdiction of an arbitration, being left behind.