Québec – arbitration and litigation endorsed as independent recourses for different claims related to new residential home disputes – #091

Québec’s Court of Appeal in 3223701 Canada inc. v. Darkallah, 2018 QCCA 937 distinguished between statutory arbitration and court litigation for disputes stemming from the construction and sale of new residential homes in Québec.  The Court agreed with Madam Justice Carole Therrien’s trial decision in Darkallah v. 3223701 Canada inc., 2016 QCCS 3245 which declared that arbitration of issues covered by Québec’s Regulation respecting the guarantee plan for new residential buildings, CQLR c B-1.1, r 8 (“Regulation”) does not oust the courts’ jurisdiction for other issues such as disputes over the contract of sale and the legal guarantee for latent defects.  The Court agreed that the arbitration and litigation are independent recourses providing different remedies and can be pursued either in isolation or in tandem, at the option of the home owner.

Moussa Darkallah and Sadié Djimi, Plaintiffs (“Plaintiffs”) bought a new house from 322371 Canada Inc., Defendant (“Contractor”).  They intended to use the basement to lodge a part of their family but could not because the soil contained iron ocher. Québec’s Régie de bâtiment provides information online on what it classifies as “Particular building problems” and explains iron ocher.

Iron ochre results from a chemical reaction or a biological process, and both of these causes may occur either individually or simultaneously:

 Chemical reaction: When the soil contains iron, it migrates along with the water towards the drainage system. When it comes in contact with the atmosphere, it forms a sludge of iron hydroxide.

Biological process: When iron bacterium is present within the water table, this bacterium, following oxidation of the iron upon coming into contact with the atmosphere, produces a gel-like mass.

When the biological process adds up to the chemical reaction, the oxidation effect is considerably increased.

 Both cases result in the formation of a viscous deposit on the corrugated wall of drain pipes. This deposit is what we call iron ochre.

Plaintiffs were also concerned about the French drain (or weeping tile) becoming ineffective due to clogging by the bacteria.

Plaintiffs sued in Superior Court requesting the cancellation of the contract of sale for the house plus damages.  The Contractor resisted, claiming that Plaintiffs had already undertaken arbitration under the Regulation and were foreclosed from suing in court as the Superior Court had no jurisdiction.  In addition, Contractor disputed Plaintiffs’ entitlement to sue for cancellation.

The trial judge, Therrien J., at paras 16-20 of her trial decision analyzed the jurisdictional challenge and held that, for the claims made to cancel the sale, she retained jurisdiction. That remedy sought by Plaintiffs was unavailable under the guarantee plan issued under Québec’s Regulation adopted under Québec’s Building Act, CQLR c B-1.1.

For a recent ArbitrationMatters note on three (3) cases applying the consequences of pursuing arbitration – or the failure to undertake arbitration to dispute a decision – read more at “Québec courts assert consequences of not undertaking/participating in mandatory legislated arbitration”.

Therrien J. sketched the procedural history of Plaintiffs’ and Contractor’s involvement with Plaintiffs’ complaint under the Regulation and arbitration procedure available.   Plaintiffs’ filed a complaint with the manager of the guarantee plan and obtained comments back from the manager.  They initiated arbitration regarding the complaint but later discontinued it.

Therrien J. referred to section 19 of the Regulation which specifies that arbitration is for a dispute regarding the guarantee.  It reads, in part, that the “beneficiary or contractor who is dissatisfied with a decision of the manager shall, in order for the guarantee to apply, submit the dispute to arbitration within 30 days following receipt by registered mail of the manager’s decision”. (underlining added)  She determined that the procedure was limited to exercising rights under the guarantee and did not serve to free the Contractor from the legal guarantee for latent defects set out in the Civil Code of Québec, CQLR c CCQ-1991 (“C.C.Q.”).  She held that she had jurisdiction to order the cancellation of the sale if warranted.  The Regulation covered repairs and certain categories of expenses and not damages for breach of the legal guarantee.

On the merits, after hearing the parties’ proof and legal argument, Therrien J. granted Plaintiffs’ action, cancelled the sale, ordered Contractor to reimburse Plaintiffs $348,469.00 with legal interest and the additional indemnity due under article 1618 C.C.Q. and ordered Contractor to pay for ‘fees’ (“frais”) related to cancelling the hypothec (mortgage) and to pay Plaintiffs their ‘expenses’ (“dépens”).

Contractor appealed.  The Québec Court of Appeal granted the appeal but only to reword the trial decision’s order to (a) replace the word ‘fees’ or “fees for cancelling the hypothec” and (b) replace the word ‘expenses’ with ‘legal costs’.  The latter category covers sums calculated according to a government-issued tariff and not on a solicitor-client scale.

The Court’s reasons address six (6) grounds of appeal raised by Contractor, the first of which deal with whether the Superior Court had jurisdiction.   The Court’s analysis appears at paras 16-23.

The Court followed its own earlier analysis in Consortium MR Canada ltée v. Montréal (Office municipal d’habitation de), 2013 QCCA 1211 at paras 17 and following which determined that an arbitration under the Regulation had a ‘distinct vocation’ separate from court litigation.

The Court considered that the Superior Court litigation had a completely different purpose than Regulation arbitration contesting a manager’s decision.  The Superior Court action concerned the contract of sale and the claims for latent defects set out in Québec’s C.C.Q. whereas the complaint filed to the manager was based on the guarantee plan provided by the Regulation.   The complaint concerned defective work existing at the time of sale but non-apparent and discovered in the year following the sale with a reference to articles 2113-2120 C.C.Q.   The complaint did not deal with only with the iron ocher but many problems.

The decision under the Regulation which issued in response to Plaintiffs’ complaint did not resolve the dispute stemming from the iron ocher.  The decision only mentioned facts observed but did not state that the author found any issues related to iron ocher.  Another problem, unrelated to iron ocher, was identified by the decision and resolved by the Contractor.   The Court determined that any evidence in first instance regarding a resolution of the problem identified in the decision was limited to that unrelated issue and did not address the iron ocher.  To the contrary, the issues related to the iron ocher, such as drainage problems, were recognized as unresolved by Contractor’s own expert witness.

The remedy sought by Plaintiffs in Superior Court was beyond those available under the Regulation and an arbitration under the Regulation could not have resulted in cancellation of the contract of sale and related damages. The Regulation’s expedited procedure is to repair defective work which complements the C.C.Q. recourse for latent defects.

The Court held that a beneficiary of a guarantee plan under the Regulation can opt between the recourse under the Regulation and an action in Superior Court and even sometimes engage both.  The Regulation’s guarantee does not extinguish the legal guarantee for latent defects.  Rather, the Regulation confers an advantage to the beneficiary instead of withdrawing a right.  A beneficiary is given a contractual claim against the manager of a guarantee plan and may choose to not exercise its recourse.

The Court determined that Therrien J. committed no error in concluding she had jurisdiction.  The Court dismissed the appeal.

As noted in an earlier ArbitrationMatters note, the guarantee plan does have consequences for complaints which have been arbitrated and complaints which have received decisions but were not contested by arbitration under the Regulation.  As the three (3) cases covered in that earlier note set out, the decision to submit a complaint and arbitrate it does have consequences including binding effect on the matters covered by the complaint and any resulting decision or arbitration award.