Québec – party autonomy to design arbitration includes right to risk loss of statutory construction lien rights – #401

In 9221-2323 Québec inc. v. Excavation L. Martel inc., 2020 QCCS 4363, Mr. Justice Martin F. Sheehan enforced the parties’ agreement to arbitrate contractor’s claims for additional sums even if doing so might result in loss of the contractor’s right to publish (register) its legal hypothec (lien) within the statutory delay.  Sheehan J. recognized that the arbitration award might issue only after the end of the construction work and, by mere lapse of time, extinguish the contractor’s right to publish its legal hypothec.  Party autonomy included the ability to require arbitration as a condition precedent to exercising statutory rights to protect claims and thereby give notice to third parties of that claim.  Sheehan J. determined that the contractor had agreed that its legal hypothec could be published only after arbitration, knowing that the award might issue too late.

9221-2323 Québec Inc. (“9221”) sought to convert a convent into residential units and contracted with Excavation L. Martel Inc. (“Martel”) to do so, entering into an April 9, 2018 partial fixed-price construction contract (“Contract”) valued at $4.5 million including taxes.

Performance of the Contract proved more difficult than anticipated.  On April 26, 2019, the parties signed a partial release, the first of three (3), for sums paid up to March 31, 2019 and Martel received a partial payment bringing payments to date to $3.18 million including taxes. Further disagreements prompted Martel to leave the worksite on May 16, 2019 but Martel later returned and the parties negotiated a second release on July 19, 2019.  Martel left the worksite again on September 28, 2019 but returned October 25, 2019. 

Despite the terms of the second release, on November 4, 2019, Martel published a legal hypothec (lien) against the immovable under article 2724 of the Civil Code of Québec, CQLR c CCQ-1991 (“C.C.Q.”) to secure its contribution made in the construction or renovation of the immovable.  The legal hypothec purported to secure $1.66 million regarding work performed prior to the earlier releases.

Martel and 9221 signed a third release on November 27, 2019 (“November Release”).  They agreed that: (i) Martel and 9221 would engage in arbitration to quantify disputed amounts; (ii) Martel would radiate (vacate) its legal hypothec; (iii) Martel would return to the work site; (iv) 9221 had thirty (30) days from the date of the award to arrange payment terms or to negotiate terms acceptable to Martel within sixty (60) days from the date of the award; and, (v) if the parties failed to resolve payment terms following the award, Martel could publish (register) a new legal hypothec.

Martel radiated its first legal hypothec and returned to the worksite.  Martel left the worksite on February 25, 2020 and published a new legal hypothec on September 21, 2020 despite the terms of the November Release.  9221 applied for an order to radiate the second legal hypothec.

9221 raised two (2) grounds in support of its application. 

First, 9221 argued that Martel had renounced to publishing a legal hypothec because the earlier releases covered the time period and the work covered by the new legal hypothec.  Sheehan J. disagreed.  At the early stage of a dispute, it was not appropriate for the court on a summary motion to determine substantive rights or key facts without a full record.  The court could not at this stage resolve disputes involving overlapping releases and the new legal hypothec and whether Martel, by signing a set price contract, had renounced altogether any right to claim amounts over and above the fixed amount of the Contract.  See Schnob (Entreprises J. Schnob) v. Parent, 2013 QCCA 923 paras 45-46.

Second, 9221 argued that the November Release confirmed Martel’s renunciation of its right to publish a legal hypothec.  Martel argued that the November Release did not prevent it from publishing the legal hypothec. Sheehan J. determined that the actual agreement in the November Release fell between the two (2) positions.  The November Release prevented Martel from publishing a legal hypothec so long as the arbitration process had not yet determined the value of Martel’s claims and the parties had not agreed on terms for payment, if any.

Sheehan J. relied on the clear wording of the parties’ agreement.

[informal translation] ‘[55] Thus, it is not just the right to publish a legal hypothec which Martel had renounced.  Rather, by signing the agreement to arbitrate, Martel subjected its right to the legal hypothec itself to a double condition: 1) that its claim be recognized by the arbitrator; and 2) that the parties not agree on the payment of its claim thus recognized’.

Sheehan J. referred to article 1426 C.C.Q. when commenting that his interpretation rested on the circumstances of the contract.

Article 1426 C.C.Q. In interpreting a contract, the nature of the contract, the circumstances in which it was formed, the interpretation which has already been given to it by the parties or which it may have received, and usage, are all taken into account”.

Sheehan J. dismissed Martel’s concern that the delays in the arbitration could well lead to elimination of its right to publish the legal hypothec if the arbitration award issued after the publication period calculated from the end of the work.  Sheehan J. held that this possibility was known to the parties when negotiating the agreement to arbitrate in the November Release and that the parties had given ample time in their agreement to conduct and complete the arbitration.

[informal translation] ‘[59] Martel pleads that the suspension of its right pending the arbitrator’s evaluation might have the effect of completely extinguishing its right to its security.  In fact, it is possible that the work ends before the arbitration and thus Martel would be out of time to publish his hypothec.

[60] However, this possibility was known to the parties when they signed the agreement to arbitrate.

[61] When the agreement to arbitrate was signed, the work was not ended.  Besides, Martel undertook to do it.  It was altogether foreseeable for the parties to conclude the arbitration before the work ended.  The agreement to arbitrate provided for the nomination of the arbitrator before December 20, 2019 et the close of evidence before April 15, 2020.  The arbitrator was to issue the award before July 15, 2020.

[62] Having subjected its right to the legal hypothec to an award in its favour from the arbitrator, 9221’s application is well-founded’.

urbitral notes – First, article 2727 C.C.Q. requires publication of legal hypothecs for construction or renovation of an immovable within thirty (30) days after the work has been completed.  Such hypothecs are extinguished six (6) months after the work is completed unless the creditor of the hypothec publishes an action against the immovable’s owner or registers a prior notice of the exercise of its hypothecary right.

Second, performance of the agreement to arbitrate could well result in loss of a right issued by legislation which provided for publishing notice of a claim under dispute.  That notice would alert third parties to the dispute and attach to the immovable.  The parties had agreed to arbitrate without providing for a right to publish notice of Martel’s claim if the arbitration took too long or did not progress at all.  Sheehan J. held the parties to their bargain despite the potential loss of the legislated right.  Sheehan J.’s reasons confirmed that the parties’ autonomy prevailed even if it resulted in the loss of a right.