Ontario – Parties share responsibility to keep arbitration moving – #835

In Bank-Strox Renovation Inc. v. Lugano View Limited, (“Bank-Strox”) the Court dismissed the defendant’s motion to dismiss a construction lien action for delay where the had parties agreed to have their dispute resolved by arbitration. As a reminder of the sharp distinction between litigation and arbitration, the Court held that a respondent in an arbitration has the same, or in some circumstances a greater, contractual obligation to keep the arbitration moving as the claimant. Simply sitting back and doing nothing is not a basis to later seek dismissal of the claim for delay. That might work in a court case but it won’t where the parties have agreed to move their dispute to arbitration.

This was an ad hoc, domestic arbitration.

Lugano View (“Lugano”) was the defendant in the lien action and respondent in the arbitration. Lugano had hired Bank-Strox Renovation (“BSR”) to renovate balconies on Lugano’s apartment block. Lugano terminated the contract in January 2017. BSR registered a lien in March and commenced a lien action in April. Lugano never defended the lien action because in November 2017 the parties agreed to arbitrate the dispute and agreed on an arbitrator. Other than the agreement to arbitrate and the selection of the arbitrator, no other terms of the arbitration were agreed and the arbitration stalled. 

In September 2017, a sub-contractor filed its own lien and in October commenced a lien action against Lugano and BSR. In its statement of defense Lugano alleged BSR had abandoned the contract, delayed, caused deficiencies, and not paid trades. The sub-trade action was settled in February 2018.

The arbitration never did take place. From November, 2017, to February, 2019, there were several email exchanges with the arbitrator. During this time, the parties also discussed settlement. In February 2019 BSR delivered a Statement of Position concerning the arbitration. Lugano did not file a response. Also in February the arbitrator circulated terms of appointment. It was not executed by either side.

A since-amended version of the Ontario Construction Act applied to the lien action. Under s. 37 of that version of the Act, BSR’s lien was set to expire unless certain steps were taken. The parties obtained a consent order in April, 2019, to meet the requirements of s. 37. The order also stayed the lien action to facilitate the arbitration and authorized the parties to move for further directions and to lift the stay at a later date.

At that point BSR changed counsel. In December, 2019, BSR’s new counsel suggested switching arbitrators but Lugano refused on the basis that  the party’s original arbitrator should hear the matter. There was  no activity in 2020 and 2021. In February, 2022, BSR switched counsel yet again, but again nothing happened. In May, 2023, Lugano filed its dismissal  motion but without a fixed hearing date. In September, 2023, Lugano’s counsel threatened to schedule the motion if BSR didn’t confirm by month-end that it intended to move forward with the arbitration. The deadline passed with no response, but in October BSR’s counsel advised BSR’s principal was ill and unable to give instructions. The motion came on for hearing and resulted in the decision I am discussing today.

To be clear, because the parties had agreed to stay the lien action in favour of arbitration all the delay related to the arbitration. 

The question for the Court was whether the delay in the arbitration justified lifting the court-ordered stay and dismissing the lien action?

The Court started its analysis with what it called the “cornerstone” of motions for dismissal for delay, namely, the principle that the plaintiff bears the primary responsibility for the progress of an action and suffers the consequences of a dilatory regard for the pace of the litigation.  However, while recognizing the,  “principle makes sense for civil actions where the plaintiff is the one who commences the action and forces the defendant to incur the expense and inconvenience of a response”, the Court rejected its application in arbitral proceedings:

“13      In my view, this principle does not apply to an arbitration like the one in this case, where both parties together agree to arbitrate the case after the commencement of a civil action to perfect a lien. In these circumstances, the rules of contract interpretation apply and require that both parties fulfil their contract obligations to each other in good faith and take the steps necessary to arbitrate the case. That means that the responsibility at minimum rests on both parties to progress the arbitration and that both parties suffer the consequences of failing to do so.

14      But I go a step further. In a case, like this one, where the defendant fails even to plead, either in the lien action or in the arbitration, the defendant bears a greater responsibility to move the arbitration forward. The defendant is the sole party that is aware of all of the issues that will drive the case and has not disclosed this knowledge and information on the record. The agreement to arbitrate and the eventual consent stay order act as a shield protecting the defendant from the adverse consequences of not pleading, namely against being noted in default and all the consequences in a lien action that flow from that. That means, in my view, that the defendant bears the greater responsibility to move the arbitration forward to allow for pleadings and the other necessary interlocutory steps.”

The Court concluded Lugano had not explained its delay saying it “did virtually nothing to advance the arbitration once the arbitration agreement was in place in late 2017” and noting it did not seek an order from the arbitrator regarding the delay. The Court noted:

“19. …[W] hile there was evidence that Bank-Strox delivered a pleading in the arbitration and started preparing an affidavit of documents, Lugano did neither and had no explanation for not doing so other than to say that there was no arbitration agreement in place in this regard… Lugano’s profound inaction is, in my view, fatal to this motion.”

The Court also found there was no evidence of actual prejudice to Lugano as a resut of the delay or that a fair hearing could not still take place despite the delay.  

While it dismissed Lugano’s motion, the Court also indicated it was “not impressed with [BSR’s] conduct”, described its response to Lugano’s motion as “poor”, and ultimately awarded no costs of the motion to either party.

Contributor’s Notes: 

Bank-Strox serves as a reminder that litigation and arbitration are not the same. 

In a court proceeding the defendant is free to adopt the tried and true strategy of simply doing nothing until called upon by the plaintiff. Eventually, if all goes well and the plaintiff loses interest, the defendant can move to have the claim dismissed for delay. If things have taken long enough or there’s evidence of prejudice, there’s a reasonable prospect of success.

Not so with arbitration. The courts have long recognized the important distinctions between the two forms of dispute resolution. First and foremost among those is the fact arbitrations are founded in contract. The parties to an arbitration have each committed voluntarily to have their dispute resolved by arbitration. By contrast, the plaintiff controls whether to launch a court action and the defendant has no choice but to participate in the process.

Courts have long emphasized the contractual nature of arbitration in finding that dismissal for delay isn’t available to the respondent who does nothing to advance the case. See e.g., the House of Lords decision in Bremer Vulkan Schiffbau und Maschinenfabrik v. South India Shipping Corp. [1981] 2 All E.R. 289, followed by the B.C. Court of Appeal in Premium Brands Operating GP Inc. v. Turner Distribution Systems Ltd., 2011 BCCA 75 (CanLII), and noted in Casey, Brian J,. Arbitration Law of Canada: Practice & Procedure, 4th, New York, Juris Publishing, 2022 at 6.14.

In Bank-Strox the Court held parties to an arbitration are bound by contract to act in good faith in discharging their obligations. That includes the obligation to ensure the arbitration proceeds diligently and without delay. But the Court consciously went a step further finding that where the respondent is the only party “aware of all of the issues that will drive the case” they were under a positive obligation to apply to the tribunal to force the claimant to proceed. That is exactly what the Court in Bank-Strox said Lugano ought to have done rather than pursue its motion in court. In Canada most jurisdictions give an arbitral tribunal the power to require a claimant to submit a “statement” within certain time limits and the power to make an award dismissing the claim absent a “satisfactory explanation”.

So, as respondent’s counsel, you can’t simply sit on your hands and expect the passage of time to solve your client’s problem. A dilatory claimant is no guarantee of success; if your client hasn’t discharged its contractual obligation to keep the process moving, don’t look to the tribunal – or the courts – for help.