Ontario – Trial required to determine compliance with arbitration preconditions – #618

In H. R. Doornekamp Construction Ltd. v. Canada (Attorney General) (Department of Public Works and Government Services), 2022 ONSC 2247, the Divisional Court (Justices Stewart, Lederer and Tzimas) dismissed the Defendant’s motion for summary judgment and decided that a trial was required to determine whether a party had properly complied with a condition precedent to an arbitration clause. The issue was whether the Plaintiff’s rights under the dispute resolution clause were extinguished or whether the Defendant’s conduct was such that the Plaintiff’s rights were not yet engaged.

The dispute related to a construction contract between a contractor and the Government of Canada (“Canada’) for the demolition and replacement of a canal lock. The contract contained a stepped resolution procedure in the event of a dispute: consultation and cooperation between the parties, followed by mediation, lastly followed by arbitration. At the end of the project, the contractor claimed compensation for additional work and materials. The parties exchanged a complicated series of communications in which the contractor asserted its entitlement and Canada denied it. The contractor then started an action in court. Canada brought a summary judgment motion to dismiss the action. Canada argued that the contractor’s rights had been extinguished because, after Canada had made its decision rejecting the contractor’s claim, the contractor failed to submit a notice of dispute within 15 days as required under the dispute resolution clause in the contract.

The contractor’s position was that the condition precedent (the need to consult and co-operate) was not met. Prior to rejecting the contractor’s entitlement, Canada had promised “updates” and “recommended next steps” which Canada did not deliver. There was therefore no decision properly made by Canada about which the contractor could submit a notice of dispute.

The court found that whether or not Canada had satisfied the obligation to consult and cooperate, and thereby complied with the condition precedent, was a genuine issue requiring a trial. This meant that Canada’s motion for summary judgment could not be granted. The parties agreed that the dispute resolution procedure could extinguish the contractor’s right to bring a court action if the contractor had failed to submit a notice of dispute within the 15 days. But the court determined that a trial was required to determine the factual question of whether Canada had met the requirement to consult and cooperate.

The court rejected Canada’s argument that whether the condition precedent had been complied with was itself a difference to be submitted to the dispute resolution procedure:

“…[C]ounsel for Canada suggested that a dispute over whether there was a condition precedent and whether it had been met was itself a difference to be dealt with pursuant to Clause GC 8.3.1. […]

As submitted by counsel for Canada this provision would apply to the question of whether the condition precedent (consultation and co-operation) had been satisfied. As she sees it, following the receipt of the July 8, 2016 letter (the decision), Doornekamp, if it wished to rely on the failure to consult and co-operate would have been required to deliver a Notice of Dispute raising that issue and engaging the dispute resolution process as a means resolving that “difference”.

The problem with this approach is not hard to see. The dispute resolution process, once engaged, takes the parties through a series of defined steps […]

If this is the applicable approach to resolve the issue of whether the condition precedent of consultation and co-operation has been satisfied, it would confront the contractor with what has been colloquially referred to as a Hobson’s choice (a choice of taking what is available or nothing at all) being:

  • the contractor could file a notice of dispute on the basis that the condition precedent had not been satisfied, thus acknowledging a claim could be filed in the absence of consultation and co-operation rendering the requirement to provide it meaningless or
  • in order to satisfy the condition precedent, the contractor could ask for consultation and co-operation as to whether the condition precedent had been satisfied prior to the decision of July 8, 2016. In such circumstances, Canada could, as it is alleged to have done here, “decide”, without providing any substantive response, that there had been consultation and co-operation. Doornekamp would be left to make the same request in response to that decision in what could become a continuous circle of requests for consultation and decisions made without it.

If, in this situation, Dispute Resolution was engaged, the question of whether the condition precedent was satisfied would have to be negotiated and, after that, mediated and then arbitrated. It is unlikely that either party would concede its position because to do so would jeopardize the overall issue of whether the claim for additional compensation was justified. The matter would proceed through the process, at each juncture a new notice would be required to proceed to the next step, in time, taking the parties through to ‘Binding Arbitration’.”

The court also explained that even then, the dispute resolution process did not exclude all court action:

“Even then the reliance on the dispute resolution process, separate from the courts, may not be the result. Taking the last step, that is choosing to proceed from mediation to binding arbitration, is uncertain. If the dispute remains unresolved and the mediation is terminated, either party, by giving notice in writing “may require that the dispute be resolved by binding arbitration”. The functional word is “may”. There is no obligation to do so. If such a notice is not provided there will not be any arbitration. However, that is not necessarily the end of the matter. Where an arbitration does not proceed because notice was not given “either party may take such court action or proceedings as it considers appropriate, including, without limiting the foregoing, all suits that would otherwise have been immediately available to it but for the provisions of these Dispute Resolution Conditions”

Contributor’s Notes:

This decision demonstrates the challenges yet importance of clear drafting and complying with stepped dispute resolution clauses.

The contract’s drafting was not clear as to what exactly constituted “consultation and cooperation”, with the court exploring potential meanings without settling on any at this stage. It was also not clear to what extent a mechanism providing specifically for price adjustments was itself a separate dispute resolution process or an additional condition precedent to the stepped dispute resolution clause. The court also noted that even once the parties had been through the consultation and cooperation phase and the mediation phase of the dispute resolution process, the arbitration clause merely stated that either party “may require that the dispute be resolved by binding arbitration”. The functional word is “may”. There is no obligation to do so.” The arbitration clause was not comprehensive, which allowed disputes to leak into court.

Complying with the stepped dispute resolution clause was a challenge to the point that the court determined a trial was necessary to answer that question on the facts. A lack of clarity as to whether Canada had complied with the obligation to consult and cooperate meant that rather than being a mechanism by which a dispute could be resolved, the dispute resolution process was itself generating meta-disputes or disputes about disputes. The decision serves as a reminder of the importance of clearly complying with each phase of a stepped dispute resolution process.