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April 21, 2016 - view full issue

Choosing between arbitration and litigation? Look to your contract! And ponder the pitfalls.

By David Buxton-Forman

Parties considering whether to resolve disputes through arbitration or litigation should first look to their agreements to determine the appropriate course. Two recent out-of-province decisions demonstrate the issues that can arise when parties proceed with dispute resolution outside of the terms of their contracts.

The Risks of Choosing the Wrong Forum

In Lafarge Canada Inc. v. Edmonton (City), 2015 ABQB 56, an Alberta court enforced a mandatory arbitration clause in a contract between the parties despite the result leaving the plaintiff without a remedy due to the expiry of the limitation period to commence arbitration. The case involved a dispute between Lafarge Canada Inc. (“Lafarge”), the industrial supply company, and the City of Edmonton in relation to a contract for the delivery of piping materials. The parties had contractually agreed to resolve any disputes by arbitration. A dispute arose after the City claimed a set off against the purchase price for costs it had incurred due to Lafarge’s late delivery of the materials. Lafarge challenged the City’s right to set off and sought payment of the balance of the contract price.

Nearing the two year limitation period to commence litigation or arbitration proceedings, the parties entered a standstill agreement whereby neither party would rely on a limitation defence to any proceedings commenced within three months from the termination of the agreement. Lafarge subsequently terminated the standstill agreement and, within three months, commenced a court action seeking the balance of the contract price. Following the expiration of the three month limitation period, the City applied to have Lafarge’s claim struck on the basis that the dispute was to be resolved by arbitration in accordance with the contract.

The issue of whether Lafarge could proceed with the litigation was considered by the Alberta courts on three occasions, with the courts ultimately finding that:

  1. the mandatory arbitration clause was enforceable against Lafarge;
  2. Lafarge’s Statement of Claim filed in the court action was not a “commencing document” to start arbitration and, as such, Lafarge had failed to commence an arbitration within the three month period specified in the standstill agreement;
  3. Lafarge’s claim could not proceed by way of litigation despite the expiry of the limitation period to commence arbitration leaving Lafarge without a remedy; and
  4. the City had not unduly delayed bringing its application to strike the action by waiting 16 months after service of the Statement of Claim, in particular because the City had submitted that arbitration was the appropriate forum for resolution at the outset of the dispute and had not engaged in the litigation in any meaningful way.

The Risks of Choosing both Forums

In Alberici Western Constructors Ltd. v. Saskatchewan Power Corp., 2015 SKQB 74, the plaintiff had to seek a stay in its own court action to allow arbitration to proceed in the face of the defendant’s preference to proceed with a court action. The case involved a dispute between a general contractor, Alberici Western Constructors Ltd. (“Alberici”), and a defendant owner, Saskatchewan Power Corp. (“SPC”), in relation to a construction project at the Boundary Dam in south-eastern Saskatchewan. The contract between the parties specified that disputes were to be resolved by arbitration.

Alberici commenced a court action seeking unpaid amounts under the contract, and at the same time issued a notice of arbitration indicating that it wished to proceed to arbitration as prescribed by the contract. The court action was commenced as a precaution in the event arbitration failed. SPC responded by filing a defence in the court action and expressing its position that the dispute should be resolved through litigation. Alberici was forced to take the unusual step of applying to the court to have its own action stayed pending the outcome of an arbitration. SPC opposed the application on the basis that only “another party” to the arbitration agreement, and not Alberici, could seek to stay the proceedings. In support of its argument, SPC relied on section 8 of Saskatchewan’s Arbitration Act which allows the court to stay proceedings on the application of “another party to the arbitration agreement”.

The court granted the stay finding that:

  1. section 8 was not determinative of the issue, the court had a discretionary power to grant a stay;
  2. Alberici had not waived its right to arbitration by commencing the court action;
  3. the stay application had not caused delay that prejudiced SPC; and
  4. the benefits of proceeding by arbitration, such as confidentiality, had not been diminished by the filing of pleadings in the court action.

Alberici was ultimately able to proceed with arbitration, but not without incurring the costs and complications of additional court applications. While the risk of these potential complications alone should discourage parties from commencing concurrent proceedings, it is very important to note that a British Columbia court would likely not have allowed Alberici to proceed with arbitration. There are differences in the legislation governing arbitrations in Alberta and British Columbia, and a British Columbia court would likely not have allowed Alberici to stay its own court action after filing pleadings.

Implications

Both Lafrage and Alberici serve as a reminder that parties should follow the dispute resolution processes set out in their contracts to avoid further complicating the resolution process. In particular, parties should be aware that if they have agreed to arbitration, our courts will uphold the primacy of arbitration over litigation even where doing so would leave a party without a remedy, and parties should be careful not to waive their right to proceed with arbitration by commencing concurrent court proceedings.