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Singleton Reynolds is pleased to announce the arrival of five new Associates to the firm.
Ali Aghaamoo is an Associate in the Commercial Litigation, Construction and Infrastructure, Insurance, and Employment Law Practice Groups. He maintains a broad commercial litigation practice with experience relating to a wide range of disputes.
Ramez Gries is an Associate in the Construction and Infrastructure Practice Group. He has experience assisting senior counsel on disputes related to large-scale construction projects, including both public and private infrastructure projects.
Lindsay Hiemstra is an Associate in the Commercial & Business Litigation and Entertainment Law Practice Groups. Lindsay has experience representing clients at mediation and appeared before the Provincial Court of British Columbia and the Supreme Court of British Columbia. She has also represented clients in Residential Tenancy Branch disputes.
Tanya Soni is an Associate in the Construction and Infrastructure Practice Group. She maintains a broad construction litigation practice, with a focus on Alternative Dispute Resolution. She has experience assisting senior counsel on a variety of large-scale construction projects, including public infrastructure projects related to transit and healthcare.
Kassandra Starnes is an Associate in the Commercial Litigation, Construction and Infrastructure, and Insurance Practice Groups. She maintains a broad litigation practice with a focus on commercial disputes, construction litigation, and insurance defence.
In RH20 North America Inc. v. Bergmann, 2024 ONCA 445, the Ontario Court of Appeal dismissed a cross-appeal of a motion to stay court proceedings in favour of arbitration. The Court emphasized that a party seeking to enforce an arbitration agreement has a negative obligation to not take any steps to seek the resolution of the disputes subject to the arbitration agreement in court. In this case, the Court held that a breach of that negative obligation was a waiver of the arbitration agreement such that the Court was not required to stay the court proceedings in favour of arbitration. Below, we review the case and consider the implications of this decision.
Factual Background
In late 2012, RH20 North America Inc. (“RH20”) entered into two agreements with Click+Clean GmbH (“Click”), for the use of control panels in “WSB” brand wastewater systems: a Licence Agreement, and a “General Agreement for Web Portal and GPRS Use” (the “Web Portal Agreement”).
The Licence Agreement included an arbitration agreement, which stipulated that all disputes were to be decided in accordance with the LCIA’s Arbitration Rules, and would be seated in London, England, while the governing law would be that of Germany. In contrast, the Web Portal Agreement contained a choice of forum clause, which provided that the jurisdiction for all disputes was Germany.
A number of disputes arose between the parties following the execution of the Licence Agreement and the Web Portal Agreement, as a result of which RH20 and its co-plaintiff commenced litigation against Click and a number of other defendants in Ontario.
In response to RH20’s claims, Click sought two orders through one motion: (1) an order staying the action against it and referring the dispute to arbitration; and (2) along with the other moving defendants, an order seeking to strike out parts of the statement of claim. Below, we consider only the second issue in detail.
The Superior Court Decision
In striking out various portions of the statement of claim and dismissing the stay motion, the motion judge made a number of findings. Fundamentally, the motion judge found that the arbitration referenced in the Licence Agreement was an international arbitration, meaning that it was governed by the International Commercial Arbitration Act, 2017, S.O. 2017, c. 2, Sch. 5 (the “ICAA”) and therefore that the Model Law applied (given its incorporation into the ICAA).
Ultimately, the motion judge dismissed Click’s request for a stay of the court proceedings for three main reasons:
Click appealed the dismissal of the motion, and argued (in relation to the stay motion) that the motion judge erred in failing to give effect to the arbitration agreement between it and RH20.
The Court of Appeal’s Decision
In dismissing the appeal, the Court of Appeal held that the motion judge did not err in refusing to grant Click’s stay request. The Court only reviewed the third reason for refusing a stay, finding that the assessment of this question alone was a sufficient basis to refuse a stay. On this issue, the Court agreed that Click’s participation in the motion to strike certain parts of the statement of claim was equivalent to waiving the agreement to arbitration, which consequently had the effect of rendering the arbitration agreement inoperative.
The Court came to this conclusion by considering four points.
First, the Court considered the Supreme Court of Canada’s judgement in Peace River Hydro Partners v. Petrowest Corp., 2022 SCC 41. In Peace River, the Court found that provincial arbitration legislation typically contains four “technical prerequisites” that must be satisfied in order for a court to grant a stay of proceedings in favour of arbitration:
The Court emphasized that the fourth requirement reflects a common concept shared by most Canadian and international commercial arbitration regimes that have adopted the New York Convention and the Model Law: namely, that parties to an arbitration must abide by a negative obligation to not seek the resolution of disputes subject to an arbitration agreement in court. This negative obligation finds its source in the parties’ agreement (meaning that participating in litigation is a rejection of that agreement).
Second, the Court reviewed the Model Law and found that it similarly gave effect to that negative obligation. In particular, the Model Law requires a court to consider whether the requesting party had sought the court’s assistance on the substantive claim before requesting a stay in favour of arbitration, as doing so would ignore the fundamental obligation of not pursuing the resolution of disputes in court. As a result, a party can waive the right to compel arbitration if they acquiesce to litigation concerning matters subject to arbitration (such as by participating in the litigation beyond raising threshold jurisdictional objections).
Third, the Court found that the motion judge correctly treated Click’s motion to strike certain parts of the statement of claim as a breach of its negative obligation under the arbitration agreement. By joining onto the motion to strike, Click went beyond a procedural step taken within the confines of the jurisdictional motion to stay, and instead sought substantive relief. Requesting an order to strike certain parts of a claim is a request for the court to render a final determination on the merits of part of a proceeding. This breach of the negative obligation amounted to a waiver of Click’s right to arbitrate.
Fourth, the Court considered whether Click’s breach of this negative obligation constituted a failure of the fourth “technical prerequisite” set out in Peace River, or whether it constituted a statutory exception to compelling arbitration on the basis of being “null and void, inoperative or incapable of being performed”. Relying on Gary Born’s treatment of this issue, the Court concluded that a waiver of the right to arbitrate renders an arbitration agreement “inoperative” within the meaning of the Model Law.
As a result, Click’s appeal was dismissed.
Analysis
The most apparent takeaway from Bergmann is the importance of acting in accordance with an arbitration agreement, including all of the positive and negative obligations therein. Accordingly, parties to an arbitration agreement must ensure that they understand all of the obligations imposed on them, especially prior to taking steps to enforce their rights under the arbitration agreement. These obligations may arise through the arbitration agreement itself, any institutional rules that it incorporates, as well as any applicable legislation.
Similarly, despite Canadian courts generally adopting a pro-arbitration stance and regularly granting stays in order to enforce arbitration agreements, Bergmann demonstrates that courts may be unforgiving to parties who attempt to “double dip” by seeking to enforce their right to arbitrate at the same time as they attempt to participate in the substantive merits of the litigation. Courts will not allow parties to enforce their rights under an arbitration agreement if they have not met the minimum technical prerequisites for doing so.
As such, parties to arbitration agreements must take care to ensure that they do not attempt to seek any substantive relief in court prior to – or in parallel with – requesting a stay of proceedings in favour of arbitration. As was demonstrated in Bergmann, a party can unintentionally waive its rights under an arbitration agreement by taking steps to enforce its rights in a court proceeding.
All of that being said, it bears emphasizing that Bergmann arose specifically in the international arbitration context, where the applicable legislation (and the relevant case law, such as Peace River) is clear that taking a step that amounts to substantive participation in litigation proceedings will disentitle a party from seeking to enforce their arbitration agreement. However, the situation is arguably less clear in Ontario’s domestic arbitration context, where the Arbitration Act, 1991 does not incorporate the Model Law and, as noted by the Court in Bergmann, stipulates a different test for determining whether a stay of proceedings should be ordered. Indeed, the Arbitration Act, 1991 does not contain any language about the effect on the availability of a stay by a party to an arbitration agreement taking a further “step” in the court proceeding.
As we have noted in relation to the Peace River decision (here), the Arbitration Act, 1991 includes the following exceptions to a stay:
From the foregoing list, the closest comparable to the “void, inoperative or incapable of being performed” exception found in the Model Law is likely the invalidity exception. However, case law arguably suggests that “invalid” is more closely analogous to “void” rather than “inoperative”.[1] As a result, there is a lack of clarity as to how an Ontario court, faced with a similar issue under domestic arbitration legislation, might resolve the issue. Accordingly, this remains a question for another day.
[1] See, for example, Uber Technologies Inc. v. Heller, 2020 SCC 16, where the Supreme Court of Canada found that an arbitration agreement was invalid under Ontario’s Arbitration Act, 1991 because it was unconscionable. In Peace River, the majority at paragraph 136 identify unconscionability as a basis for finding an arbitration agreement void.
Large construction disputes are regularly resolved privately through contractually-mandated or subsequently-agreed upon processes, including arbitration, dispute boards, mediation, and even structured negotiations. There are a number of reasons for this shift towards private dispute resolution processes, including cost effectiveness, court backlogs, construction expertise, and privacy (which reasons are not the subject of this article). However, due to the increased use of such processes, it has become less common for courts to be presented with complex delay and disruption claims, meaning that there are limited opportunities for them to offer new guidance on how such claims are viewed from the bench.
Fortunately, the Superior Court was recently presented with such an opportunity in Walsh Construction v. Toronto Transit Commission et al., 2024 ONSC 2782 (“Walsh”), and in response, has a offered a number of valuable takeaways for the construction industry and construction law practitioners, including counsel and arbitrators, regarding what can be expected in the resolution of a complex construction claim.
Notably, Walsh addresses a number of issues regularly found in complex construction disputes, including design issues, allegations of excessive scope changes, expert schedule and quantum analysis, flow-through of subcontractor claims, liquidated damages, and allegations of contract mis-administration, among many other issues.
Given the length of the Court’s analysis – totaling nearly 850 paragraphs – this case comment only covers a handful of the case’s key issues, rather than offering an exhaustive analysis.
Below, we provide an overview of the case, as well as outline the case’s key takeaways and key questions raised.
In 2011, the Toronto Transit Commission (the “TTC”) and Walsh Construction Company Canada (“Walsh”) entered into a design-bid-build contract for the construction of the Steeles West Subway Station, with a contract value of $165,925,000 inclusive of taxes. However, the contract value increased over time to a certified value of $223,267,711 (an increase of more than $57,300,000), of which amount Walsh had been paid $213,695,610 by the time of trial.
Substantial performance was originally scheduled to be achieved by November 5, 2014, while final completion was be achieved by February 4, 2015. In fact, substantial performance was not achieved until June 15, 2017 (953 days later than planned), while final completion was achieved on November 7, 2018.
TTC and Walsh disagreed as to the cause(s) of the delay and the apportionment of responsibility, with each side unsurprisingly attributing liability to the other. Walsh’s position was not an uncommon one – broadly speaking, it claimed that the TTC-provided design was incomplete when the contract was signed (notably, the TTC also third-party claimed against its designers), and that this design issue was then exacerbated by a lack of full site access and the TTC’s improper administration of the contract, which then created delay and consequently necessitated acceleration efforts. This in turn led to a multitude of change-related claims by Walsh. The TTC, on the other hand, was of the view that Walsh was fully responsible for the delay and all of the associated costs.
The situation ultimately culminated in litigation, in which context Walsh claimed for approximately $193,000,000. The amount of Walsh’s claim was comprised of a number of components commonly seen in large construction claims, including delay and disruption damages, acceleration costs, overhead, currency fluctuation, unpaid or underfunded change orders and change directives, bonding costs, subcontractor claims, and an unpaid Contract amount of $9,500,000.
The TTC counterclaimed for approximately $22,000,000 in liquidated damages associated with missed contractual milestones.
The Superior Court’s Decision
In introducing its reasons, the Court began by reflecting upon the significant amount of time and resources needed to administer the trial, including the following:
The trial of the matter was therefore, to say the least, a Herculean effort by the Court and counsel. In that regard, the Court’s judgment canvassed a host of issues; for the purpose of this case comment, we focus on two of them – the delay analysis (including the expert evidence provided in respect of delay), and the claims of Walsh’s subcontractors. We consider each issue under separate headings below.
Delay Analysis
On the issue of delay, each party attributed all of the delay to the other party. Somewhat more unusual, though, was the binary manner in which the issue was framed: on the one hand, Walsh took the position that the Court could find any number of days of TTC-caused delay other than the amount Walsh claimed; however, the Court observed that there was no basis to do so on the evidence before it. On the other hand, the TTC argued that the Court could only choose between the amount of days claimed by Walsh (being 1,047 days), or the amount of days acknowledged by the TTC as its responsibility (being 411 days). As a result, the Court determined that it could only choose between these two options as presented by the TTC.
The Court observed that the design was not completed by the time Walsh’s trades were required to start construction, and that the TTC’s witness acknowledged in cross-examination that the initial design was not constructible. According to Walsh’s design expert witness, the volume of changes (e.g. through change orders, change directives, RFIs, etc.) remained excessively high over the life of the project, and according to a third-party consultant report commissioned by the TTC during the project, the average time for responding to RFIs was also excessively high, with many changes attributable to the incomplete design. On its face, this does not appear surprising to these authors, as early design issues (whether a design is incomplete, inadequate or otherwise problematic) will typically require extensive changes (and such changes will give rise to lengthy RFI exchanges).
For its part, however, the TTC argued that it was “not surprising that on a project of this size and complexity, there would be issues leading to cost and time overruns”, and that as a result, both it and Walsh should bear responsibility. However, the Court did not accept this argument, given that the TTC bore the sole responsibility for issues arising from the design.
Among many other findings as to the causes of delay, the Court also observed that Walsh was entitled to (but deprived of) possession of the entire construction site, that such deprivation in turn deprived Walsh of sufficient lay-down areas and made available areas more crowded, and that increased crowding of such areas can (and did) lead to inefficiencies and resultant delays. As a result, the Court determined that several significant causes of delay were attributable to the TTC.
With respect to determining the amount of compensable delay, the Court was required to consider the evidence of Walsh’s delay expert, as atypically, the TTC did not put forward a delay analysis of its own (but rather provided expert evidence critiquing Walsh’s schedule analysis).
In that regard, the TTC abandoned an attempt to disqualify Walsh’s expert, instead arguing that Walsh’s expert’s evidence could be admitted but should be given no weight. On this point, the TTC argued that Walsh’s expert lacked independence and was biased, primarily on the basis that he had a history of being retained by Walsh (the expert had been involved in Walsh’s prior claims on this same project, although it was unclear if he had also been retained by Walsh on other projects).
The Court rejected this argument, confirming that it is not unusual for someone like Walsh’s expert to analyze work during construction, and to continue with this analysis if litigation ensued. In other words, the Court appears to have accepted that a claims consultant hired for a construction project to help with claims analysis during the project can potentially stay on as a delay expert through trial or other potential hearing (although the Court did not detail the precise pre-litigation scope of retainer for Walsh’s expert).
In any event, the TTC did not offer an expert delay analysis of its own, but rather offered expert evidence criticizing the methodology of Walsh’s expert – specifically, that Walsh’s analysis (1) did not insert fragnets for Walsh or subcontractor delay, (2) relied upon Walsh’s erroneous project schedules, (3) used “reverse logic”, (4) contained an excessive number of changes, (5) failed to account for concurrent delays, and as a result, ultimately failed to conduct a proper analysis. In response to this criticism, Walsh delivered further expert evidence affirming the propriety of the methodology. Given the lack of a competing delay analysis from the TTC, the Court’s analysis was therefore restricted to assessing the methodology of Walsh’s expert.
Ultimately, the Court rejected the TTC’s contention that because Walsh’s methodology departed from the AACE’s Recommended Practice 29R-03, it was therefore erroneous; to the contrary, the Recommended Practice allows for various adjustments and options, relies upon professional judgment and expert opinion, and usually requires subjective decisions by the expert. On the totality of the evidence, the analysis performed by Walsh’s expert was sufficiently credible that it was to be preferred over the TTC’s position.
Accordingly, the Court found the TTC responsible for the entirety of the 1,047 days of delay (bearing in mind that the Court was only presented with two options, as noted above). In this regard, the Court’s finding of full responsibility for delay may be facially problematic insofar as it represents a departure from the usual practice of apportioning delay, but it was unavoidable in this case given the binary nature of the TTC’s approach. Presumably, Walsh’s proposed approach of apportioning delay could have yielded some relief to TTC.
Subcontractor Claims
Consistent with many large delay claims, Walsh’s claim was partially comprised of a flow-through of claims made by its subcontractors on the project; in this case, Walsh’s claim included its subcontractors’ delay costs and acceleration costs. As is also not uncommon, Walsh entered into agreements with its subcontractors which released Walsh from liability. These agreements took two forms:
The most salient aspect of these arrangements was, as noted above, the fact that Walsh was released from liability.
As a preliminary point, the TTC sought to have this aspect of the action stayed on the basis that Walsh’s agreements with the subcontractors transformed their relationships from adversarial ones into cooperative ones, thus fundamentally altering the litigation landscape and thereby requiring disclosure (pursuant to Handley Estate v DTE Industries Limited, 2018 ONCA 324 and its subsequent case law).
The Court rejected this argument, finding (among other things) that none of the subcontractors were parties to this action, and a stay can only apply to an agreement made between parties to the same proceeding. Notably, this appears to have been the first time this line of reasoning has been applied in the construction context, so it remains to be seen whether this point will be expanded upon in subsequent case law; at first blush, it would seem reasonable to conclude that a contractor settling with several of its subcontractors would change the dynamic of a proceeding (certainly from the contractor’s perspective), particularly given the complex web of claims that can arise on large construction projects.
On the substantive issue of whether Walsh could flow through these subcontractor claims, the Court determined that Walsh could not, and these claims were therefore dismissed. In reviewing the paucity of Canadian case law on the topic of flow-through claims, the Court observed that in order to sustain a flow-through claim, the contractor must have actual (or a least potential) liability to its subcontractors, which of course does not exist in circumstances where the contractor has obtained a release from its subtrades.
This was equally true in the US case of Severin v. United States, 99 Ct. Cl. 435 (1943), where the court held that a general contractor cannot flow through a subcontractor’s claim against an owner if the general contractor has no liability to the subcontractor for the damages at issue; this case led to the use of liquidating agreements, which is what Walsh had attempted to rely upon in this case, and which are considered under American law to be a valid means of flowing through subcontractor claims. In American practice, such agreements typically acknowledge that the contractor remains liable to the subcontractor for the subcontractor’s damages to the extent that the contractor prevails against the owner, thus creating a nexus of liability. It is not clear in Walsh how the liquidating agreements in question differed (if at all) from this practice, although the existence of the release appears to have been the most significant factor in this case.
In any event, the Court in Walsh rejected the validity of such claims, and determined that the liquidating agreements in this case could not overcome the fact that (1) Walsh had no liability to the subcontractors in question, and (2) the owner had no privity of contract with the subcontractors. In other words, Walsh took assignments of subcontractor claims that had no legal existence (in relation to the assignment liquidating agreements), while the other subcontractors (the parties to the non-assignment liquidating agreements) had no claims in contract against TTC.
Here, the Court concluded that Walsh could not flow through its claims as a result of the releases, which extinguished the claims of the subcontractors against Walsh – the entity with whom they were contracted – particularly in circumstances where Walsh “failed to scrutinize any of the subcontractor delay claims”; for those subcontractors with whom Walsh did not settle, the Court concluded that these were better dealt with as part of the subcontractor’s actions against Walsh, in respect of which Walsh had added the TTC via third-party claim.
Ultimately, in the result, the Court awarded judgment to Walsh in the aggregate amount of $52,160,563 (plus interest, bonding costs, and HST on certain items), while dismissing the TTC’s counterclaim in its entirety.
As noted above, Walsh offers a rare instance of a complex delay claim being litigated all the way through to judgment; as such, the Court’s judgment offers valuable guidance for parties advancing such claims in the construction context. That being said, the case also raises a number of questions in respect of the two issues considered above – some of which may need to await appeal for clarification.
With respect to the issue of expert witnesses and the manner in which their evidence is presented, the Court’s discussion of the schedule experts is instructive. First, and as noted above, the fact that only Walsh delivered an expert delay analysis (noting again that TTC only provided a critique) allowed Walsh to effectively frame the delay issue, which fact was emphasized by the further retainer by each party of additional experts to critique the methodology of Walsh’s schedule expert (or, in the case of Walsh’s secondary expert, to affirm the methodology of Walsh’s schedule expert).
In that regard, electing not to proffer a schedule analysis of one’s own may be a “high risk, high reward” endeavour since, as was the case here, such an approach might force a court or arbitrator into the binary choice of apportioning delay on an all-or-nothing basis. In our view, best practice is to take the default approach of proffering one’s own schedule analysis, subject to the possibility of exceptional circumstances dictating otherwise.
Here, it is worth considering that delay can be (and most often is) awarded on a spectrum. In other words, there could have been a middle ground finding of delay attributable to TTC – somewhere between 411 days and 1,047 days of delay that was not available to the TTC in the circumstances. While it is not clear from the decision as to why this approach were taken, the authors assume there was good cause in the circumstances.
In addition, the Court offered useful commentary on the issue of repeated retainers of the same expert by the same party. As readers will appreciate, it is not unusual in the construction industry for parties to appoint the same experts more than once over a period of several years. This is partly due to the fact that full-time expert witnesses (i.e. professionals who provide reports and/or testimony for a living) are common in the construction industry – particularly given the growth of large professional services claims firms – and partly due to the fact that some issues are so specialized that there are only a handful of experts in North America (or the world). Accordingly, it is not necessarily the case that repeated retainers of the same expert, in and of itself, should automatically disqualify an expert.
Furthermore, the fact that Walsh’s expert was not disqualified (and did not have his evidence discounted in weight) based on his involvement with Walsh’s prior claims submitted to the TTC on the same project is also consistent with industry practice on large construction projects. So long as the expert in question retains their independence, impartiality, and lack of bias over the course of their involvement (i.e. both before and during dispute resolution), then an extended familiarity with the project may be beneficial, insofar as it increases the expert’s knowledge of the project. On this note, it is important for counsel, experts and clients to remember the importance of maintaining the independence of experts and taking all steps necessary to do so – if the desired outcome is to rely on that expert for an independent analysis.
With respect to the issue of flowing through subcontractor claims, the result is more challenging insofar as it arguably creates a tension between the existing case law and the practicalities of managing large claims on construction projects.
In particular, the practicalities of large delay claims frequently dictate a different approach – particularly where the contractor is faced with dozens of subcontractor claims and the prospect of managing a tsunami of subcontractor litigation, all while attempting to motivate the subcontractors to finish building the project. In such circumstances, it is not uncommon for the contractor to resolve the subcontractor claims and then take an assignment of those claims, in order to streamline the overall litigation and put some funds into the pockets of the subcontractors notwithstanding the fact that payment still remains disputed as between owner and subcontractor. Such steps taken by contractors can be highly beneficial to both the contractor and the owner, given that they can potentially avoid large lien actions or other messy multi-party disputes.
Indeed, this latter point may be particularly important in the context of very large claims which take years to resolve. If contractors are disincentivized from settling with subcontractors for fear of being unable to pass those costs on to the owner (who the contractor believes is liable), then it might be the case that subcontractors go several years without receiving any payment, thus increasing the risk of their insolvency and potentially having a negative effect on the construction of the project itself. In Walsh, for example, the action was commenced in 2017, seven years before judgment was rendered. It is entirely plausible, particularly in the case of smaller subcontractors, that seven years of non-payment could seriously impact their ability to carry on business.
In that regard, it therefore bears noting that one of the key purposes of the Construction Act is to ensure the flow of funds down the construction pyramid to subtrades, suppliers, and so forth. Accordingly, it would seem that Walsh exposes a more fundamental tension between the first principles of contractual liability in relation to flowing through subcontractor claims, and the first principles of the Construction Act. Ultimately, the issue of flowing through subcontractor claims is a challenging one with no clear answer at present.
Given that the parties experienced mixed success in Walsh, we await with interest to see if one or both parties appeal, and if so, the outcome of such appeal(s).
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About Singleton Urquhart Reynolds Vogel LLP
Singleton Urquhart Reynolds Vogel LLP is a Canadian national law firm that specializes in the Construction and Infrastructure, Insurance, and Real Estate sectors.
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As readers will recognize, the case of MGW Homes Design Inc. v. Pasqualino has recently received attention with respect to the Court of Appeal’s consideration of a novel question in the context of statutory adjudication under the Construction Act, being the appropriate appeal route for orders vacating a writ of enforcement issued in connection with an adjudicator’s determination. That decision, which we have written about here, concluded that the proper route of appeal was to the Divisional Court.
In that regard, the Divisional Court quickly released its own decision on this issue, under the citation 2024 ONSC 2852 (available here).
In particular, the Divisional Court was asked to determine whether a writ of enforcement was void and barred the enforcing party from taking any further steps for enforcement, given that party did not comply with the Construction Act’s notice requirements after filing the determination with the court.
In reviewing the Construction Act’s prompt payment provisions, the Court concluded that non-compliance with the notice requirement in this case was not fatal to enforcement, and that it was therefore open to the enforcing party to remedy its error.
Below, we review the Divisional Court’s decision and consider its implications.
Background
MGW Homes Design Inc. (MGW) and Pasqualino referred a home renovation dispute to adjudication, which resulted in a determination requiring that Pasqualino pay MGW. Pasqualino did not comply with the determination and moved for leave to apply for judicial review, which was denied.
MGW filed the determination with the court and obtained a writ of enforcement. However, MGW failed to notify Pasqualino within ten days of the determination having been filed, contrary to s. 13.20(3) of the Act. Pasqualino then brought a motion to vacate the writ of enforcement.
The issue on the motion was whether MGW’s failure to provide Pasqualino with notice in the prescribed 10 days voided the writ, and if so, whether MGW was barred from pursuing enforcement any further.
The motion judge found in Pasqualino’s favour, on four bases: (a) a court ordered enforcement of an adjudicator’s determination is an extraordinary power; (b) similar to liens, the Act prescribes a timeframe that must be followed and leaves no room for judicial discretion; (c) strict compliance with the Act is necessary to enforce an adjudication decisions, such that without compliance, the writ is void; and (d) the 10-day notice requirement is not a suggestion or option, but rather a mandatory rule.[1]
Given MGW’s non-compliance, the motion judge found in Pasqualino’s favour, determining that MGW’s non-compliance meant the writ was void and that MGW was barred from pursuing further steps to enforce the determination.
The Divisional Court’s Decision
The Divisional Court overturned the motion judge, making several important observations in the course of its analysis.
First, the Court disagreed with the motion judge that enforcement of an adjudication determination was an extraordinary power. Enforcement of sub-judicial determinations by court order is regularly used with respect to arbitral decisions, administrative decisions, decisions under the Labour Relations Act, and references directed by a court. Each process is prescribed by the applicable legislation, necessarily curating each process to fit the specific context. With respect to adjudication, the Act’s provisions follow the general Ontario model for enforcement of administrative decisions prescribed under the Statutory Powers Procedure Act.[2]
Furthermore, the context and purpose of the adjudication provisions in “prompt payment” is to facilitate the flow of payment, making expeditious enforcement processes necessary. In that regard, the Court observed that pursuant to s. 13.20(1) of the Act, an enforcing party can file an adjudicator’s determination with a court, and that s. 13.20(3) makes it possible for the enforcement to begin before notice is given. Compared to other enforcement processes for sub-judicial decisions, the Act requires a more expeditious and less onerous process that facilitates the flow of payment and alleviates the risk of work stoppages.[3]
Second, the Court disagreed that the enforcement of prompt payment processes is analogous to the strict compliance requirements for lien claims. To the contrary, strict compliance with lien are necessary for stakeholders in making payments, securing loan advances, and releasing holdbacks; by contrast, an adjudicator’s payment direction is made after procedural timelines have been met, leaving parties with a direction that does not need to be filed with the court unless there is non-payment.
The opportunity to leave to seek judicial review is available; however, the granting of such a motion typically requires the disputed funds to be paid into court.[4] All of these aspects are in place to promote prompt payment. Additionally, there is no provision in that Act that deems a determination to expire if notice is not given that the determination has been filed with the court. Since the nature of the prompt payment provisions is to facilitate the flow of funds, the Court concluded that the notice requirement is “more properly seen as a statutorily-required courtesy than a strict condition that must be met before enforcement.”[5]
Finally, the Court disagreed that a failure to comply with the notice requirement necessarily voids the writ. Since the Act is silent on non-compliance with the notice requirement, courts have discretion in determining appropriate consequences.
Prompt payment is the driving force of adjudication, such that failure to provide notice should not undermine the core objective of prompt payment.[6] Accordingly, there is not a minimum or required sanction for failure to deliver notice, although the Court observed that there are certain criteria that a reviewing court should consider when deciding how to exercise its discretionary powers in the face of non-compliance:
The court should consider the extent of the non-compliance, any explanation for the non-compliance, any prejudice – or absence of prejudice – to the payor arising from the failure to give notice, and any other relevant circumstances, and then should place these matters in the overall context of the dispute and the breach by the payor of its statutory obligation to make prompt payment in accordance with the Act.[7]
In this case, because the non-compliance was inadvertent and was not egregious, the Court concluded that the consequence chosen by the motion judge was too severe, and that it would offend the purpose of the prompt payment scheme to entirely deprive MGW of the ability to enforce the determination.
Commentary
As with its related decision from the Court of Appeal, the Divisional Court’s decision in MGW continues to contribute to the growing body of case law on statutory adjudication under the Construction Act. Each such decision remains significant in providing guidance as to how the prompt payment framework is to be administered and how it will be applied by the courts.
In that regard, MGW is no different. The clarification provided – i.e. that failure to comply with the notice requirement is not fatal to a writ of enforcement – will be particularly beneficial to those participants in adjudication who are self-represented and not well-versed in the technicalities of the Act (in other words, those for whom it would be more likely that they are unaware of the applicable procedural steps for enforcing a determination). That being said, construction industry participants should not take this to mean that failing to provide notice of filing a determination is inconsequential; rather, as the Court made clear, the possibility of an adverse outcome remains in circumstances where the non-compliance is sufficiently egregious and/or unjustifiable.
On the other hand, however, it is not entirely clear what kind of conduct would rise to the level of justifying a decision to bar a claiming party from seeking enforcement. If the delay was egregiously long – i.e. several months – but due to inadvertence, then it seems plausible that the party seeking enforcement could convince a court to allow for the non-compliance to be remedied.
As always, best practice will of course be to comply with the Act’s timelines.
In any event, the Court’s analysis in MGW also offers a welcomed emphasis on the first principles underlying the prompt payment regime; as the Court observed, the overarching objective of the prompt payment and adjudication regime is to ensure an uninterrupted flow of payments and unimpeded progress of work, and in that regard can be distinguished from the objectives of, for example, the Act’s lien provisions. Ultimately, the Court’s conclusion strikes the right balance.
Samantha Spagnol, summer student, assisted with the preparation of this article.
[1] MGW Homes Design Inc v Pasqualino, 2024 ONSC 2852 at para 13.
[2] Ibid at para 15.
[3] Ibid at para 18.
[4] Ibid at para 21.
[5] Ibid at para 24.
[6] Ibid at paras 25-26.
[7] Ibid at para 30.
Singleton Urquhart Reynolds Vogel LLP is pleased to congratulate our partner Peter Wardle on his election as Treasurer of the Law Society of Ontario.
This accomplishment is well-deserved considering Peter’s active, long-term involvement with the Law Society of Ontario: he sat as a bencher between 2011 and 2019 and was re-elected in 2023. He is co-chair of the Governance Review Task Force and vice-chair of the Professional Development and Competence Committee. He has served as co-chair of the Mentoring Task Force and Audit and Finance Committee as well as chair of the Compensation Fund, and Professional Development and Competence Committees. He is the current vice-chair of the Appeal Division of the Law Society Tribunal and serves as a hearing and appeal adjudicator.
“I am grateful for this opportunity, and I thank my fellow benchers for bestowing it upon me. I look forward to leading the Law Society benchers, and the lawyers and paralegals of Ontario, in a respectful and productive manner,” said Mr. Wardle. “I extend thanks to my colleague and friend Jacqueline Horvat for her work over the years as a bencher and as Treasurer. I wish her well in her future endeavours. I also wish to thank and congratulate my colleague, Sidney Troister and I look forward to our continued work together on matters vital to serving the public and the profession.”
Peter has built his reputation as a recognized and trusted advocate over more than 38 years representing parties in commercial disputes involving contract interpretation, shareholder and partnership obligations, securities, directors’ and officers’ liability, professional negligence, construction, estates, and real estate. He is listed by numerous agencies, including Chambers Global, Benchmark Canada, Best Lawyers Canada®, Lexpert®, and others. Peter is also a Fellow of the International Academy of Trial Lawyers.
Peter is frequently consulted by board members and shareholders regarding both public and private company disputes. He regularly represents some of Canada’s largest law firms. He has acted as counsel and arbitrator in arbitrations involving commercial issues. Peter has acted for interested parties in a public inquiries. He has appeared before a wide variety of regulatory tribunals, and has acted as prosecutor for the College of Physicians and Surgeons of Ontario.
Peter is a certified mediator and regularly acts as a mediator in commercial disputes. He received his law degree from Queen’s University in 1984 and was called to the Ontario bar in 1986.
In Coinbase Inc. v. Suski et al, the United States Supreme Court considered the interesting scenario of two parties having entered into multiple contracts dictating conflicting modes of dispute resolution such that it is unclear which agreement governs on this issue. The Court concluded that in such circumstances, a court – not an arbitrator – must first decide which contract applies, and therefore which mode of dispute resolution governs.[1] Given that many Canadian parties also do business in the United States, Coinbase will accordingly be of interest to Canadian readers notwithstanding that it is premised upon an underlying arbitral framework much different from that seen in Canada with respect to similar issues.
Coinbase, Inc. operates a cryptocurrency exchange platform where users can buy and sell digital currencies. In order to do so, users must create accounts and enter into a User Agreement with Coinbase. This User Agreement included an arbitration agreement, which specified that any disputes arising from the User Agreement, including issues related to its enforceability and scope, would be decided by an arbitrator:
This Arbitration Agreement includes, without limitation, disputes arising out of or related to the interpretation or application of the Arbitration Agreement, including the enforceability, revocability, scope, or validity of the Arbitration Agreement or any portion of the Arbitration Agreement. All such matters shall be decided by an arbitrator and not by a court or judge. (emphasis added).[2]
In June 2021, the respondents, having previously entered into a User Agreement, then entered a sweepstakes competition offered by Coinbase for a chance to win cryptocurrency. In agreeing to enter the sweepstakes competition, the respondents agreed to the Official Rules of the sweepstakes. The Official Rules, through a forum selection clause, designated that any controversies related to the promotion would be exclusively decided by the California courts:
The California courts (state and federal) shall have sole jurisdiction of any controversies regarding the [sweepstakes] promotion and the laws of the state of California shall govern the promotion. Each entrant waives any and all objections to jurisdiction and venue in those courts for any reason and hereby submits to the jurisdiction of those courts. (emphasis added).[3]
A conflict arose when the respondents filed a class-action lawsuit in the U.S. District Court for the Northern District of California, alleging that the sweepstakes violated various California consumer protection laws. Coinbase, invoking the Arbitration Agreement from the User Agreement, brought a motion to compel arbitration. However, the respondents argued that the forum selection clause in the Official Rules should prevail, thus requiring the dispute to be resolved in court.[4]
The District Court and the Ninth Circuit sided with the respondents, ruling that the forum selection clause in the Official Rules superseded the Arbitration Agreement in the User Agreement. Coinbase subsequently appealed to the United States Supreme Court, leading to the present case.[5]
The Supreme Court Decision
In finding for the respondents, the Court emphasized that the Federal Arbitration Act, as a core principle, endorses the fact that arbitration is a matter of contract. Indeed, the Court emphasized that arbitration agreements are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract”.[6] This principle ensures that arbitration agreements are on equal footing with other contracts, and are honoured based on the parties’ mutual consent.[7]
Moreover, the Court further emphasized that arbitration agreements are strictly a matter of consent. Specifically, while arbitration is a platform to resolve disputes, it can only resolve disputes which have been agreed by the parties to be submitted to arbitration. As a result, the proper analysis to be undertaken is to discern the exact scope of the parties’ agreement, in order to determine what the parties have agreed to in their contracts. In that regard, the Court acknowledged that parties can form multiple agreements concerning arbitration, which can pertain to (1) the merits of a dispute, (2) whether the dispute is arbitrable, as well as (3) who decides whether the dispute is arbitrable. In this case, the Court introduced a fourth layer: determining which contract governs when there are conflicting agreements as to who decides arbitrability (or, as the Court put it, whether the parties “agreed to arbitrate arbitrability”).[8]
The Court emphasized that determining who has the power to decide arbitrability is a crucial exercise as, usually, a party who has not agreed to arbitrate will posses the ability to go to court regarding the merits of the dispute. Thus, courts are cautious to assume that parties have agreed to arbitrate absent clear and unmistakable evidence.[9] In that regard, the United States differs from Canada and several other jurisdictions, in that the latter would generally apply the principle of competence-competence as a default rule in order to refer such a question to the arbitrator for determination (subject to some exceptions).
In any event, Coinbase argued that the User Agreement’s arbitration agreement was meant to govern all agreements moving forward, such that the parties agreed to arbitrate all subsequent disputes. On the other hand, the respondents argued that the forum selection clause in the Official Rules superseded the arbitration agreement in the User Agreement. This would mean that the parties’ intention was to send disputes related to the sweepstakes, including those regarding arbitrability, to California courts.
Moreover, Coinbase argued for the application of the severability principle, which stipulates that an arbitration or delegation provision is severable from the rest of the contract, and “unless the challenge is to the arbitration [or delegation] clause itself, the issue of the contract’s validity is considered by the arbitrator in the first instance”.[10] As a result, Coinbase argued that the Ninth Circuit should have isolated the arbitration provision and considered only arguments which were specific to that provision. However, the Court noted that this principle does not require a party to challenge only the arbitration provision. Rather, if a challenge applies equally to the whole contract and the arbitration provision, a court must address that challenge. Thus, the Court upheld the Ninth Circuit’s approach of considering both contracts to determine which agreement governed.[11]
Finally, Coinbase also argued that the User Agreement’s arbitration agreement should govern without regard to the subsequent forum selection clause in the Official Rules. The Court declined to address this argument, concluding that it was outside the scope of the question presented to the Court, given that the Court was only asked to decide whether a court or arbitrator would decide on the conflict between the two provisions – it was not asked to decide itself which agreement governed.[12]
Accordingly, the Court concluded that when faced with multiple agreements that are in conflict, the question of which contract governs must be answered by a court.[13]
Notwithstanding that Coinbase is not a Canadian case, it will nevertheless be of interest to Canadian readers given the possibility of a similar situation occurring for parties doing business in Canada (particularly where they are engaged in transactions or projects requiring multiple agreements).
That being said, readers should necessarily exercise caution in considering takeaways from this decision as it applies to Canada. As noted above, the United States differ from Canada and other jurisdictions in that the United States, in principle, does not treat competence-competence as a default rule that gives arbitrators the authority to rule on jurisdictional issues. To the contrary, the American approach is to assign that responsibility to the courts, unless there is clear and unmistakable evidence that the parties have delegated that authority to the arbitrator.
On the other hand, however, Coinbase is not necessarily a case purely about arbitrability or who has the ability to decide questions of arbitrability. As the Court observed, this was actually a case about the interpretation of conflicting agreements, to which traditional principles of contract interpretation apply, in order to answer the question of whether the parties agreed to arbitrate arbitrability issues (or in other words, whether or not there is an agreement to arbitrate). Ultimately, this question was resolved by reference to the American default rule of delegating such a question to the courts in the absence of clear and unmistakable evidence to the contrary (of which there was none in this case).
Ultimately, although the result may very well have been different if this case had occurred in Canada[14], Coinbase nevertheless offers certain fundamental takeaways for Canadian readers.
In particular, the decision confirms the necessity of ensuring uniformity in dispute resolution provisions across related documents. Ensuring that all agreements within a commercial relationship are consistent on this issue will allow parties to avoid disputes of this nature and focus on the merits of disagreements, thus saving time and resources on issues that are peripheral to the substance of a dispute. Indeed, Coinbase is a perfect example of such a risk, as the resolution of this case took several years (during which time the substance of the respondents’ class-action complaint took a back seat to this preliminary issue).
[1] Coinbase, Inc. v. Suski et al 144 S.Ct. 1186, No. 23-3 [Coinbase].
[2] Ibid at page 2.
[3] Ibid at page 3.
[4] Ibid.
[5] Ibid.
[6] Ibid at page 4.
[7] Ibid.
[8] Ibid at page 5.
[9] Ibid.
[10] Ibid.
[11] Ibid at pages 6-7.
[12] Ibid at page 8.
[13] Ibid at pages 6 and 8.
[14] See, for example, Peace River Hydro Partners v. Petrowest Corp., 2022 SCC 41 at paras 38-43.
In La Française IC 2 v. Wires (“La Francaise”), the Court of Appeal for Ontario has confirmed that the test for resisting enforcement of an international arbitral award is a stringent one. In allowing an application for enforcement, the Court affirmed a number of important considerations, including the timeliness of arguments and exhaustion of appeal routes, the prioritization of substance over form, as well as the role of abuse of process in order to prevent the re-litigation of issues already subject to arbitration.[1]
Below, we consider the case and its takeaways.
After entering into a bespoke funding agreement (the “Agreement“) with the respondent (Mr. Wires), the appellant (La Francaise IC 2) commenced an arbitration seated in England, and administered by the Arbitration Institute of the Stockholm Chamber of Commerce (the “SCC”), in order to obtain payment under the Agreement.[2]
The Agreement identified La Francaise by corporate registration number B148892. However, during the arbitration, La Francaise used a shortened name (“IC2 Fund”) and a different corporate registration number, B205456. During the arbitration, the arbitrator granted La Francaise security for costs against Wires.[3] The arbitrator’s award, however, referred to La Francaise using registration number B148892, which, at the time of the arbitration, referred to a corporate entity that been liquidated and placed into bankruptcy. In any event, Wires failed to pay the required security for costs.
Wires then challenged the arbitrator’s appointment before the SCC, alleging a reasonable apprehension of bias. However, the SCC dismissed this challenge, finding the challenge to be time-barred and unsubstantiated on the merits.
Following these events, Wires attempted to discontinue the arbitration, at which point La Francaise sought a dismissal of the arbitration and requested costs. The arbitrator granted the relief sought.[4]
La Francaise then applied for recognition and enforcement of the award in Ontario. In granting the application, the Superior Court of Justice affirmed La Francaise’s standing to bring the enforcement application, rejecting Wires argument that La Francaise lacked standing given due to the misnaming error regarding the bankrupt entity identified above.[5] Moreover, the Court concluded that Wires’ challenge to the arbitrator’s appointment based on alleged bias was an abuse of process, as it had already been dismissed by the SCC, and this decision was not appealed by Wires at any time prior to the proceedings before the Superior Court.[6] Consequently, the Court granted the applicant’s motion to amend the title of proceedings (to address the issue regarding the improperly named corporate entity), dismissed the respondent’s motion to dismiss or stay the application, and confirmed the enforceability of the award.[7]
On appeal to the Court of Appeal for Ontario, Wires argued that the judgment recognizing and enforcing the arbitration award should be set aside and remitted for a rehearing before the Superior Court. In advancing such a position, Wires relied on the following three main arguments:
With respect to the first ground of appeal, the Court of Appeal disagreed that the application judge had erred by not allowing Wires to raise issues regarding the propriety of the tribunal. Instead, the Court concurred with the application judge’s view that permitting such an argument to be advanced would have constituted an abuse of process.[11] In that regard, the Court emphasized the broad and flexible nature of abuse of process; it is not restricted to preventing the re-litigation of issues or addressing issues that could have been raised in previous proceedings, but is more generally intended to prevent unfair use of court procedures that could bring the administration of justice into disrepute.[12]
Moreover, the Court emphasized that Wires’ challenge of the arbitrator seemed to have stemmed from the arbitrator’s unfavourable order of security for costs, rather than any real concern with the arbitrator. Further, the Court emphasized that Wires’ allegations were introduced “out of time and were not well-founded”[13], confirming that this argument failed both procedurally and substantively.
In addition, the Court observed that since this challenge was made early in the arbitration process, any valid concerns could have been addressed, and a new arbitrator appointed if necessary, through an appeal of the SCC’s decision to the English courts. However, since Wires failed to take any of the steps open to it to continue his challenge of the arbitrator’s jurisdiction, the Court found that Wires was not now able to challenge jurisdiction. These circumstances, combined with the SCC’s determination that the challenge lacked merit, supported the application judge’s decision that relitigating the issue would constitute an overall abuse of process.[14]
Regarding the second point of appeal, the Court disagreed with Wires’ assertion that the application judge had erred in identifying La Francaise as the proper party to the arbitration. The Court confirmed that the application judge’s decision had been based on the evidence at hand, including Wires’ identification of La Francaise in the arbitration request. There was no error in the application judge’s conclusion that any discrepancies in naming had been inconsequential. Thus, La Francaise had standing to bring the application, and the application judge had the jurisdiction to ascertain the appropriate parties to the award and to order its recognition and enforcement accordingly.[15]
Lastly, the Court found no fault with the application judge’s recognition and enforcement of costs in the arbitration award. The arbitrator had differentiated between settled costs of La Francaise’s counterclaim and the costs of the arbitration, ensuring that there was no over-compensation.
As a result of the above, the Court dismissed the appeal.[16]
While the result of La Francaise is perhaps unsurprising, the Court’s analysis nevertheless offers several insights.
Firstly, La Française underscores the importance of exhausting all available appeal rights in the seat of the arbitration before raising a similar challenge in an enforcement jurisdiction. While appeal rights are uncommon in the international arbitration context (given the widespread application of the Model Law), readers will nevertheless appreciate that England is a very popular seat for international arbitration and therefore makes this issue particularly relevant where an England-seated award is in turn the subject of enforcement proceedings in Ontario (and Canada more generally). Parties would do well to consider all possible appeal rights early, and track such rights if necessary, during the course of an arbitration.
Although the exhaustion of appeal rights in this case would not necessarily have allowed Wires to overcome the Court’s other objections to the appeal, it would arguably have removed at least one obstacle.
On the other hand, however, an unsuccessful appeal in England would arguably have strengthened La Francaise’s position insofar as the bias allegations would have dismissed twice. On the facts of this case, the point may have been moot insofar as both England and Canada rely upon the IBA’s Guidelines on Conflict of Interest, such that the general framework for bias in each country is quite similar; on the other hand, however – and as we have written elsewhere – there is case law in Ontario that arguably establishes a lower bar for a finding of reasonable apprehension of bias.
In that regard, the discrepancy (if any) between English and Ontario law regarding reasonable apprehension of bias raises the interesting question of whether the Court’s reliance on abuse of process (as a means of preventing re-litigation) was grounded primarily in (1) the SCC’s conclusion that Wires’ allegations were unmeritorious, or (2) the fact that Wires’ did not appeal this conclusion under the Arbitration Act, 1996. The Court’s analysis does not make this entirely clear, but in our view, the latter basis is somewhat more persuasive given that the SCC’s decision was presumably grounded in English law (as a result of which the argument could be made that re-considering an issue under a different legal standard would not be an abuse of process).
Finally, with respect to the issue of La Francaise’s misnaming in the arbitration award and subsequent judicial proceedings, the Court has confirmed that there is a high bar for relying upon this procedural issue as a basis for resisting enforcement of an award. La Française confirms that a minor misnaming – particularly when it does not cause confusion or prejudice to the parties involved – is unlikely to constitute a valid basis to resist enforcement. However, where the error causes confusion or prejudice, such an error may not be correctable by a court. On balance, it appears that courts can (and will) rectify procedural errors such as misnaming when they do not compromise the fairness or clarity of the arbitration process, ensuring the integrity and enforceability of arbitration awards.
We will continue to monitor the decisions of the courts as they grapple with the issue of challenges to arbitral jurisdiction.
[1] La Française IC 2 v. Wires, 2024 ONCA 171 [La Française].
[2] Ibid at para 2.
[3] IC2 Fund v Wires, 2023 ONSC 3879 [IC2].
[4] La Française, supra note 1 at paras 2-3.
[5] IC2, supra note 5 at paras 55-61.
[6] Ibid at para 91.
[7] Ibid at para 93.
[8] La Française, supra note 1 at para 5.
[11] Ibid at para 7.
[12] Ibid at para 8.
[13] Ibid at para 9.
[14] Ibid at para 9.
[15] Ibid at para 10.
[16] Ibid at para 11.
The Ontario Superior Court’s recent decision in Canadian Flight Academy Ltd. v. The Corporation of the City of Oshawa, 2024 ONSC 2756, provides a useful reminder of the law on settlement privilege, including helpful clarification that labelling communications “with prejudice” is not necessarily fatal to a claim of privilege.
The plaintiff, Canadian Flight Academy Ltd. (“CFA“) commenced an action seeking relief in respect its of leasehold interest at the Oshawa Airport, including the possibility of compensation for leasehold improvements if the Court were to find that the lease was terminated. In the course of the litigation, CFA delivered to the defendant, the Corporation of the City of Oshawa (the “City“), a settlement offer letter (the “Letter”) marked “With Prejudice”. The Letter indicated that the offer was to remain open for acceptance until such time as CFA were to withdraw it.
Notwithstanding that the Letter was marked as “With Prejudice”, the City objected to CFA introducing the Letter at trial, on the basis that that the communication was subject to settlement privilege (and was in any event irrelevant to the issues at trial). The Court concurred with the City and found that the Letter was in fact subject to settlement privilege, and therefore could not be adduced as evidence at trial. To that end, it is not clear from the decision what evidence, or for what purpose, CFA was intending to adduce by introducing the Letter into evidence.
In determining that that the Letter was subject to settlement privilege and could not be admitted as evidence, the Court undertook a brief but helpful review of the relevant case law and underlying principles in relation to settlement privilege.
Broadly speaking, settlement proceedings are enhanced through open and honest communication between parties, which is enabled through the assurance that what is said in negotiations is inadmissible in court. Settlement privilege is endorsed by public interest in promoting candid communications between parties in order to increase the likelihood of a settlement, ultimately reducing time spent litigating disputes.[1]
Furthermore, settlement privilege has two purposes: it reduces the ability for parties to unfairly admit any admissions made during settlement negotiations, and it allows parties to speak freely during negotiations without the need to carefully monitor the content of their discussion. Thus, for the rule to truly encourage candid negotiations, the application of the settlement privilege must be broad, and the exceptions to the exclusionary rule must be narrow.[2]
Finally, the Court made two further observations: first, that settlement privilege belongs to both parties, such that it cannot be unilaterally waived by just one of them; and second, that if the contents of the communication is in furtherance of settlement and therefore privileged, it makes no difference whether the communication is marked ‘with prejudice’ or ‘without prejudice’. Rather, the assessment of privilege turns on the substance of the communication.[3]
Turning to the applicable test, the Court observed that a three-part test applies for determining whether settlement privilege applies to a given communication:
1) there is a litigious dispute;
2) the communications were made with the express or implied intention that they would not be disclosed in a legal proceeding in the event negotiations failed; and
3) the purpose of the communications is to attempt to effect a settlement.[4]
In this instance, there was obviously a litigious dispute, and the Letter was unambiguously an offer, such that the first and third criteria were not points of controversy.
On the second criterion, however, the Court observed that failing any specific stipulation within the Letter that it would be disclosed in the legal proceeding, it was “understood and implied” that such correspondence would not be disclosed in the proceeding, except in accordance with the Rules. Furthermore, the Court rejected CFA’s position that an offer to settle which does not receive a response is excepted from settlement privilege; to the contrary, The fact that an offer has been made but not responded to by the opposing party does not transform the document – if the letter sets out a proposal for settlement – it is privileged.
On the foregoing basis, the Court concluded that the Letter would not be admitted as evidence at trial.
While the Court’s decision does not canvas new ground, it is nevertheless a helpful reminder for parties that labels applied to settlement-related correspondence are not necessarily determinative of their evidentiary status. To the contrary, Canadian Flight Academy Ltd confirms that courts will be reticent to allow settlement-related communications into the record (other than for the purposes of determining costs, after liability is determined), even in the face of language suggesting that the communication is intended to be on the record.
In that regard, the Court’s discussion of the second criterion identified above is an interesting one, in that it seems arguable that the application of a “with prejudice” label could, at least in theory, plausibly support an inference that the party sending the communication intended to rely on that correspondence as part of the record at a later date. As the Court’s decision suggests, however, this may not be sufficient. Accordingly, to the extent that a party wishes to rely on a settlement offer at a later date if that offer is not accepted, they would be well advised to make that intention clear in the offer itself (or associated correspondence).
Finally, it bears noting that, had CFA wished to ensure that the offer was “on the record” and able to be referenced at trial, there are other avenues (including submitted a formal offer to settle under Rule 49 of the Rules of Civil Procedure).
This case provides parties with a good reminder to carefully consider for what purpose, and when, they intend to reference an offer to settle on the record. Evidently, best practice is to be explicit as to one’s intentions to reference with prejudice correspondence and/or settlement offers.
[1] Sable Offshore Energy Inc. v. Ameron International Corp., 2013 SCC 37 and Union Carbide Canada Inc. v. Bombardier Inc., 2014 SCC 35, at para 31.
[2] Bellatrix Exploration Ltd. v. Penn West Petroleum Ltd., 2013 ABCA 10, at paras 27 and 28.
[3] Leonardis v. Leonardis, 2003 ABQB 577 at paras 5 and 6.
[4] Re Hollinger Inc., 2011 ONCA 579, at para 16.
Introduction
On February 27, 2024, the Ontario Court of Appeal (ONCA) provided guidance – and some issues for further consideration – in Loblaw Companies Limited v Royal & Sun Alliance Insurance Company of Canada, 2024 ONCA 14, addressing the allocation of defence costs, self-insured retentions, and the management of conflicts of interest for liability insurers and insureds.[1]
This article is the first in a multi-part series discussing key take-aways from Loblaws. Below, we briefly summarize the background, the issues addressed by the ONCA, and delve into the Court’s reasoning regarding the allocation of defence costs among liability insurers.
The ONCA’s decision arises out of five underlying opioid class actions alleging negligence in the manufacture, distribution, and sale of opioids in Canada since 1995. Loblaw Companies Limited, Shoppers Drug Mart Inc., and Sanis Health Inc. (together, “Loblaws”), all named as defendants in the class actions, sought coverage from their primary and excess insurers (the “Insurers”).[2]
Loblaws was continuously insured by the Insurers over the relevant period – although individual coverage periods ranged from eight months to over 14 years, policies were subject to different self-insured retentions (SIRs), and different coverage available under each policy.[3]
Each insurer had acknowledged a duty to defend Loblaws in the underlying actions, subject to satisfaction of the applicable SIR. In addition, some insurers only extended coverage to Loblaws pursuant to a reservation of rights letter, particularly concerning alleged intentional acts of the insured. Dissatisfied with this arrangement, Loblaws applied for a declaration that each insurer had a duty to defend Loblaws in the class actions and that Loblaws could select any single policy under which there was a duty to defend, requiring the chosen insurer to defend all claims.[4]
The Application Judge’s Decision
The application judge held that:
On appeal, the Court overturned the application judge in many respects, holding that:
Below, we take a closer look at the Court’s reasons with respect to the defence cost obligations of Loblaws primary insurers.
The Duty to Defend in Long-Tail Claims
The Duty to Defend Stems from the Pleadings
It is trite law in Canada that where there is a possibility that the claim as pled could fall within the coverage provided by the policy, the insurer’s duty to defend will be triggered.[8] Where the claim in question arises out of a discrete “occurrence” and therefore falls within only one policy period, such an analysis is relatively straight forward: the insurer on risk for the policy period will be obligated to defend the insured. However, with long-tail claims involving continuous or progressive injury spanning many years, multiple policies and insurers, and consecutive rather than concurrent coverage, the analysis becomes more complex. As the ONCA described it, this is “among the thorniest problems in insurance law.”[9]
Contractual Bargain in Insurance Agreements
Applying the duty to defend analysis, the ONCA found that the application judge erred in allowing Loblaws to select one policy to provide coverage for defence costs for all claims arising during the entire period of the class action.[10] First noting that the policies in question were liability policies which provided coverage for occurrences arising during the policy period, the ONCA emphasized that insurance agreements are a contractual bargain, with coverage provided for a specific time period in accordance with the terms of the policy.[11] Applying this lens, the ONCA found that the application judge departed from the language of the insurance policies by extending one insurer’s obligation to defend the insured for claims arising from conduct outside the period specified in the policies. This contravened the contractual framework of the policies, which were designed to cover risks within defined temporal parameters.[12]
Relying on this contractual foundation, the ONCA further found that the application judge erroneously classified insurers as concurrent rather than consecutive insurers, leading to an inappropriate expansion of the coverage available under any one policy. As clarified by the ONCA, consecutive insurers are only liable for claims stemming from conduct occurring within their policy periods. Should multiple claims arise across multiple policy periods, the appropriate approach is to identify the insurers on risk at the time the occurrence arose rather than to paint all insurers with the same brush and leave the insurers to sort out contribution between themselves.[13]
Rejection of All-Sums Approach
The ONCA’s focus on the contractual bargain between the insurer and insured, was further buttressed by the ONCA’s confirmation that the “all sums” approach to coverage has generally been rejected by Canadian courts. The “all-sums” theory of allocation argues that each insurer is responsible for covering all defence costs incurred by an insured in the defence of a covered claim, allowing the insured to choose the policy with the best coverage and compel that insurer to pay all costs. The chosen insurer must then seek contributions from other insurers.
Moreover, a potential conflict of interest arises when insurers are obligated to defend claims beyond their policy parameters, as required by an “all-sums” approach. Conflicts arise when insurers must defend claims outside their policy coverage as their interest is to have liability found on grounds not covered by the policy. This misalignment of interests can compromise the defence. Mandating an insurer to defend claims that fall outside the policy’s coverage places the insurer in a position where it must advocate for claims that would be beneficial for it to fail, potentially creating a conflict of interest. [14]
In rejecting this approach, the ONCA endorsed a pro rata “time on risk” approach in line with the consecutive nature of the coverage available to Loblaws. [15] Unlike the “all sums” approach, a pro rata “time on risk” allocation of defence costs – i.e. insurers sharing in the defence of the insured based upon their proportionate time insuring the insured – is both better aligned with the contractual basis for coverage and has salutary policy implications as it ensures early participation of all insurers, fostering a stronger defence and encouraging settlement while mitigating the potential for conflicts in the defence.[16] This approach recognizes that it is not appropriate for an insurer with minimal exposure to control the defence and associated costs.[17]
What is not discussed in the ONCA’s decision confirming the application of a “time on risk” analysis to the sharing of defence costs between insurers, but is a relevant concern in applying the analysis to other cases of consecutive insurers is the trigger theories underlying the claim.
As set out in Alie v Bertrand, 2002 CanLII 31835 (ONCA), when considering whether an occurrence has arisen during a policy period for the purpose of determining whether a liability policy is engaged, a Court may consider and apply any one of four “trigger” theories as the situation may dictate being: exposure, manifestation, injury in fact, and continuous.[18] Where, as in the case of Loblaws, multiple injuries are alleged to occur to a class of plaintiffs over the entire class period, it likely makes sense to apply the exposure or continuous trigger theories thereby engaging all insurers who provided coverage during the class period and permitting a straightforward time on risk analysis.
With this in mind, one should be cautious in applying a blanket approach to other scenarios. For instance, a construction claim may allege resulting damage arising out of the work of a contractor on site, with the damage occurring over multiple policy periods. While the contractor may be insured by multiple policies during the period in which damage occurred, it may be more appropriate to apply the “injury in fact” trigger to find that the “occurrence” arose during only one policy period such that there is no requirement for a time on risk analysis.
A further question arises as to the appropriate manner of proceeding. While here the insured applied for a finding that it was entitled to call upon a single policy, often it will be an insurer who has been tagged for coverage that will seek equitable contribution from other consecutive or concurrent insurers – often times on a “time on risk” basis. The decision in Loblaws would indicate that the obligation is now squarely on the insured to ensure that all potentially responsive insurers are engaged and contributing, especially, as will be discussed in the next part of this series, where each policy is subject to deductible obligations.
[1] Loblaw Companies Limited v Royal & Sun Alliance Insurance Company of Canada 2024 ONCA 145 [Loblaw].
[2] Ibid at paras 1-5, 35.
[3] Ibid at para 7 and 36.
[4] Ibid at para 5.
[5] Ibid at para 46.
[6] Ibid at para 117.
[7] Ibid at para 144.
[8] Ibid at para 88.
[9] Ibid at para 65.
[10] Ibid at para 68.
[11] Ibid at paras 69-75.
[12] Ibid at paras 73.
[13] Ibid at paras 76-78
[14] Ibid at para 113.
[15] Ibid at para 108.
[16] Ibid at para 114.
[17] Ibid at para 115.
[18] Alie v Bertrand, at para 93; See also, Privest Properties Ltd. v Foundation Company of Canada Ltd., 1991 CanLII 2346 (BCSC)
(“Earthco”) recently rendered a decision on contracting party’s ability to contract out of a statutorily implied condition under Ontario’s Sale of Goods Act, providing important clarification on the extent to which an exclusion clause must be explicit in order to successfully oust the application a statutorily-implied term. Below, we review the decision and provide key takeaways with respect to the sale of goods and use of exclusion clauses, both of which are highly relevant for the construction industry.
The City of Toronto (the “City”) hired Pine Valley Enterprises Inc. (“Pine Valley”) as the contractor for a flood remediation project, which included the removal and replacement of topsoil for drainage purposes. Pine Valley in turn subcontracted with Earthco Soil Mixtures Inc. (“Earthco”), to supply topsoil with a specified composition (which composition had been specified by the City’s consultant for the project, presumably under the prime contract).
Earthco – whose sales process normally involved a multi-stage testing process prior to contract execution – provided Pine Valley with laboratory reports from different topsoil samples taken roughly six weeks before Pine Valley’s initial solicitation, but specifically warned Pine Valley against purchasing the topsoil without Earthco having the opportunity to conduct its usual testing process. Despite this warning, Pine Valley was seeking delivery of topsoil on an urgent basis, as it had already missed certain project milestones and was looking to avoid the application of liquidated damages by the City under the prime contract. Pine Valley therefore insisted on immediate delivery of the topsoil, rather than waiting for updated test results (in other words, the parties entered into a sale by description).
As a result, the parties agreed to add two clauses to their subcontract, which stated that Pine Valley had the right to test and approve the material before it was shipped, and that if it waived those rights, Earthco would not be responsible for the quality of the material once it left its facility (the “Exclusion Clauses”):
6) [Pine Valley] has the right to test and approve the material at its own expense at our facility before it is shipped and placed. Please contact [Earthco’s sales manager] to arrange.
7) If [Pine Valley] waives its right to test and approve the material before it is shipped, Earthco Soils Inc. will not be responsible for the quality of the material once it leaves our facility.
After the topsoil was delivered and placed on the project site, water ponding occurred over the topsoil in question. Subsequent testing by Pine Valley revealed that there was substantially more clay in the topsoil than the initial test results had indicated. As a result, Pine Valley had to remove and replace the topsoil supplied by Earthco. The City subsequently levied liquidated damages against Pine Valley; Pine Valley consequently sued Earthco for damages, alleging that it did not receive topsoil consistent with the initial test results.
Decisions of the Courts Below
At trial, the key issue was whether the Exclusion Clauses were sufficiently clear and explicit to oust the implied term established by s. 14 of the Sale of Goods Act, which stipulates that where there is a contract for the sale of goods by description, then there is an implied condition that the goods will correspond with the description.
The trial judge dismissed Pine Valley’s action. He found that although Pine Valley did not get the topsoil for which it had contracted (because of the discrepancy between the topsoil that was promised and the topsoil that was delivered), the Exclusion Clauses met the requirements of an “express agreement” according to section 53 of the Sale of Goods Act, which allows parties to contract out of the implied condition under section 14. Importantly, the trial judge reached this conclusion despite the fact that the Exclusion Clauses did not explicitly mention that they were added to the contract for the purpose of contracting out of section 14 of the Sale of Goods Act; in that regard, the trial judge found that Pine Valley was an experienced purchaser of soils, such that Pine Valley’s waiver of testing meant it deliberately assumed the risk that the soil would not meet the required specifications.
On appeal, the Court of Appeal disagreed with the trial judge, and instead found that the Exclusion Clauses were not sufficiently clear to exempt Earthco from liability under section 14. In particular, the Court of Appeal identified three errors of law:
The Court of Appeal therefore allowed the appeal. Earthco then sought and was granted leave to appeal to the Supreme Court of Canada.
The Supreme Court’s Decision
The Supreme Court rendered two judgments, with a 6-judge majority allowing the appeal and finding that the Exclusion Clauses were sufficient to oust the application of s. 14 of the Sale of Goods Act, with Côté J. writing in dissent that the Exclusion Clauses did not oust the implied term of that statutory provision.
Writing for the majority, Martin J first observed with respect to the standard of review. that the Court of Appeal was incorrect in identify the foregoing as either errors, or errors of law in particular. In doing so, the Court of Appeal sought to create general principles of law that would govern the interpretation of all exclusion clauses ousting implied conditions in a contract of sale, while also diminishing the role of the factual matrix in giving meaning to exclusion clauses (contrary to the fundamental principles of contractual interpretation set out in Sattva).
With respect to the Sale of Goods Act, the majority identified three key aspects of that legislation: fitness for purpose, merchantability, and correspondence with description, all of which address the negative effects of caveat emptor. The legislation implies these statutory protections as contractual conditions rather than warranties, which in turn gives an innocent party (in circumstances of a breach of condition) the option to either (1) treat the contract as repudiated, or (2) treat the breach of the condition as a breach of warranty and claim damages.
With respect to the condition at issue in this case – the implied condition that the goods sold by description will correspond with their description – the “description” is tied to identity and only protects those terms which identify the subject matter of the sale. In that regard, Canadian law distinguishes between traits that go to the identity of the goods (which pertains to their description), and those which go to the quality of the goods (which pertains to merchantability and fitness for purpose). The identity of a good should not be conflated with all the words used as descriptors, and instead is limited to “words whose purpose is to state or identify an essential part of the description of the goods”. In other words, quality is a matter of degree, while identity is a matter of kind.
That being said, the majority observed that the Sale of Goods Act is equally clear (at s. 53) that parties are able to contract out of these implied conditions, so long as those parties do so by “express agreement”, conduct, or usage (i.e. commercial custom). Given the nature of the Sale of Goods Act, the majority observed that it was necessary to review s. 53 of the Act alongside the relevant common law on contracts in order to determine whether an “express agreement” was reached in this case.
In that regard, the majority concluded that there were no special interpretive considerations that applied by virtue of the Sale of Goods Act applying, and rejected the proposition that Earthco needed to have explicitly excluded liability for conditions as to the identity of the soil. Furthermore, the term “express” does not refer to what the agreement must say, or to the required level of clarity of specific contractual clauses. Section 53 refers to an “express agreement”, and not the use of “express language ”, as a result of which it does not constitute a qualitative requirement about the specificity of language. Rather, the majority concluded that it will be “express” if it is made in distinct and explicit terms and not left to inference.
Instead, determining what qualifies as an “express agreement” is informed by the basic principles of contractual interpretation, such as those set out in Sattva and the law concerning exclusion clauses, as set out in Tercon, with the paramount consideration being the ascertaining of the parties’ objective intentions. This was particular true in circumstances where s. 57(1) of the Sale of Goods Act explicitly stipulates that common law rules continue to apply to the sale of goods, except in so far as those rules are inconsistent with the express provisions of the Sale of Goods Act.
To that end, the majority observed that although the law recognizes a difference between quality of goods and their identity, courts should not impose an unrealistic burden on contracting parties to be aware of, and fully understand, the legal characterization and consequences of the words they use to express themselves, although in some circumstances, sophisticated parties negotiating through lawyers may know all about the legal difference between conditions and warranties.
Therefore, in the particular context of this case, the majority concluded that although the Exclusion Clauses only explicitly referred to Pine Valley assuming responsibility for the quality of the soil, the surrounding circumstances of the parties’ agreement – including the fact that Pine Valley was an experienced commercial buyer of soil, and that the parties made bespoke edits to the contract without the input of legal professionals. As a result, the Exclusion Clauses applied in this case, and Earthco was not liable to Pine Valley for the incompetent topsoil.
In dissent, Côté J differed from the majority in concluding that the Exclusion Clauses were not sufficiently clear and unambiguous to exclude liability with respect to the identity of the goods. In that regard, the dissent the word “quality” in the Exclusion Clauses could not be taken to include both quality and identity, as this would change the word from its ordinary and grammatical meaning.
In addition, with respect to the meaning of the term “express agreement”, the dissent placed greater emphasis on the statutory interpretation of the term (as opposed to the majority’s focus on contractual interpretation), observing that the dominant approach to statutory interpretation is to interpret words in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the applicable Act, the object of the Act, and the intention of the legislature. In circumstances where the words of a provision are “precise and unequivocal”, the ordinary meaning of the words plays a dominant role in the interpretive process. Accordingly, and although not explicitly stated, the dissent appears to have placed greater emphasis on plain and ordinary meaning of the relevant words than the majority. On that basis, the dissent would have dismissed the appeal.
Earthco is necessary reading for those practicing in the construction industry, given the extent to which the sale of goods makes up a critical component of all construction projects. Needless to say, it is therefore highly relevant.
On the one hand, the result in Earthco is to some extent unsurprising as an issue of contractual interpretation, in the sense that the majority reaffirmed the primacy of Sattva and its subsequent case law. In that regard, the Court was consistent with other recent cases in which it was asked to consider the applicable rules of interpretation in specific contexts, such as its review of the law on releases in Corner Brook (City) v. Bailey. Accordingly, Earthco simply follows suit in that sense.
On the other hand, however, this conclusion also understates the extent to which the majority and dissenting decisions offer several interesting points to consider.
First, Earthco offers an intriguing example of the difficulties in determining the appropriate balance between contractual interpretation and statutory interpretation, where the contract in question is governed by a specific piece of legislation. This was particular true in the sale of goods context since, as both the majority and dissent observed, the Sale of Goods Act specifically incorporates the common law of contracts by reference. As noted above, the majority and dissent appeared to differ as to which of the two modes of interpretation should take primacy over the other in interpreting s. 14 of the Sale of Goods Act, with the majority prioritizing contractual interpretation and the dissent prioritizing statutory interpretation.
Second, the particulars of Earthco appear to have made it especially challenging to draw a clear distinction between the identity of the goods and their quality, given that the goods (i.e. the topsoil) were required to be composed of a specific collection of soils. In circumstances where goods are a composite of several different components, it is arguably unclear from Earthco whether there is any bright-line rule or guidance as to when a discrepancy between the goods as described versus the goods received will go to the very essence of the goods and rise to the level of incorrect identity. As always, best practice will be to articulate this point clearly in the terms of the relevant contract, but for borderline cases, it appears that it may remain a challenge.
Finally, with respect to the majority’s interpretation of the term “quality” as it appears in s. 14 of the Sale of Goods Act, this may also present a challenge insofar as there may be some circumstances in which it is unclear on the facts of a given case whether the contracting parties are referring to “quality” in the broad and general sense (i.e. potentially inclusive of identity), or whether they are using the term in the technical sense contemplated by the legislation (i.e. distinct from identity). It is plausible that parties without legal counsel might have the technical definition in mind when negotiation a contract for the sale of goods, just as it is plausible that parties with legal counsel advising them on the negotiation of such a contract might not appreciate the technical definition – through inadvertence or otherwise – and have in their contemplation the more expansive, general concept of “quality”. As the majority explained, it will depend upon the surrounding circumstances of each case.
Ultimately, parties in the construction industry will need to be especially mindful of the Sale of Goods Act, and particularly the distinction between quality and identity, when negotiating contracts for the sale of goods (along with any exclusionary clauses contained within such contracts). Because the interpretation of these issues turns so heavily upon the surrounding circumstances at the time of contract formation, parties will be well advised to ensure that the surrounding circumstances weigh in their favour.
In the recent decision of MGW-Homes Design Inc. v Pasqualino, the Court of Appeal for Ontario was presented with the novel question of the appropriate appeal route for orders vacating a writ of enforcement issued in connection with an adjudicator’s determination under the Construction Act.
In keeping with the relevant case law, the Court adopted a broad interpretation of the term “judgement” under s. 71 of the Construction Act in concluding that the appeal properly lay before the Divisional Court.
Below, we review the decision and consider its implications.
MGW-Homes Design Inc. (“MGW“) supplied labour and materials for Mr. Pasqualino’s home renovation, after which a dispute arose.[1] MGW consequently registered a lien and issued a statement of claim, which Mr. Pasqualino then vacated, followed by the delivery of a statement of defence and counterclaim.[2]
MGW initiate statutory adjudication under the Construction Act[3], which ultimately resulted in a determination that Mr. Pasqualino was required to pay MGW.[4] He did not pay, but instead sought leave for judicial review of the determination, which the Superior Court denied.[5]
As readers will appreciate, under section 13.15 of the Construction Act, the adjudicator’s decision is binding on the parties until a court, an arbitrator, or a written agreement between the parties confirms or changes the adjudicator’s determination. MGW accordingly obtained a writ of enforcement for the determination, by filing the determination with the court within the statutory deadline, but in doing so, MGW failed to give notice of the filing to Mr. Pasqualino as required under section 13.20(3) of the Construction Act.[6]
On the basis that MGW failed to provide notice, Mr. Pasqualino brought a motion to vacate the writ.[7] Mr. Pasqualino was successful on the motion, as the motion judge found that the “failure to give notice of filing the adjudicator’s determination with the court was fatal to the writ”.[8] The writ was ordered to be set aside, and the motion judge barred MGW from taking any steps to enforce the adjudicator’s order, including re-filing any writs of execution, MGW was also ordered to pay costs to Mr. Pasqualino.[9]
MGW appealed the orders given by the motion judge. Given that the parties had identified a preliminary issue as to the proper appeal route, MGW perfected its appeal in both the Divisional Court and the Court of Appeal.
This case comment addresses the Court of Appeal decision.
On appeal to the Court of Appeal, and although MGW raised substantive arguments, the Court addressed only the preliminary issue related to the proper route of appeal given that it was, in the view of the Court, dispositive of the entire appeal.
In brief, the issue was whether the order vacating the writ of enforcement fell within the definition of a “judgement” under section 71 of the Construction Act; as if it did, then the appeal was properly before the Divisional Court rather than the Court of Appeal.
Mr. Pasqualino raised several arguments in support of the proposition that the Court of Appeal was the correct venue, including: (1) that the motion judge’s order was a “final order” because it extinguished a substantive right, thus bringing it within the scope of 6(1)(b) of the Courts of Justice Act; and (2) that section 71(1) of the Construction Act is an exception to the normal appeal process under the Courts of Justice Act, and that it should therefore be interpreted narrowly.[10]
Regarding the first point, the Court concluded (by reference to prior case law) that the Construction Act’s appeal provision was “a provision under a special act dealing with construction liens, [and therefore] takes precedence over the appeal provisions in the Courts of Justice Act, which is a general act dealing with appeals from the final order of a superior court judge”. Although not explicitly stated, this appears to have also implicitly referred to s. 6(1)(b)(ii) of the Courts of Justice Act, which creates an exception for “an order from which an appeal lies to the Divisional Court under another Act” such as the Construction Act.
Regarding the latter point, the Court disagreed, finding that a narrow interpretation would “undermine the purpose of efficiency and would be contrary to case law interpreting appeal provisions”.[11] Instead, the Court referred to a line of case law interpreting the term “judgement” broadly; in both Bird Construction Co. v. C.S. Yachts Ltd. and Villa Verde L.M. Masonry Ltd. v Pier One Masonry Inc., the Court confirmed that “provisions under a special act dealing with construction liens, takes precedence over the appeal provisions in the Courts of Justice Act“.[12]
Furthermore, those cases interpreted “judgment” under s. 71 broadly, without limiting the scope of that interpretation to lien claims.[13] Rather, that case law established (among other things) that “judgment” could include trust claims, and that an order dismissing an action after the plaintiff’s claim for a lien had expired constituted a “judgment” notwithstanding the fact that it was referred to as an order, and notwithstanding the fact that it was made without a trial having taken place.
This was best encapsulated in TRS Components Ltd. v. Devlan Construction Ltd., where the Court of Appeal confirmed a broad definition of “judgement” under the Construction Lien Act:
In our view, “judgment … under this Act” in s. 71 includes a judgment granted in an action commenced and continued under Part VIII of the Act, including any counterclaim, crossclaim or third party claim, unless the action or any part of the action is removed from the construction lien proceeding, and directed to proceed under the Rules.[14]
Thus, given the Construction Act’s underlying objective of efficiency, along with the trend of interpreting “judgement” broadly, the Court of Appeal concluded that there was no clear reason for deviating from the norm established by prior case law.
The Court of Appeal therefore held that “adjudication under part II.1 of the Construction Act is a ‘proceeding under the Act’ and the motion judge’s order on the enforceability of the adjudicator’s determination is a ‘judgement…under [the] Act’”[15], such that the appeal properly lay before the Divisional Court.
Given the relative youth of statutory adjudication in Ontario, court decisions on the subject remain relatively rare, and the relevant body of case law therefore remains somewhat sparse.
Consequently, court decisions addressing adjudication are highly valuable; MGW is no different in that regard (as was the case with the Superior Court’s decision when it was released in 2022[16]).
It is perhaps unsurprising, and made good sense, for the Court to continue the trend of interpreting the term “judgement” broadly with respect to procedures available under the Construction Act, in that it avoids the confusion that might arise from different appeal routes for different procedures in under the Construction Act. This is equally true of the underlying goal of efficiency shared by statutory adjudication and the Construction Act more broadly.
That being said, it is perhaps understandable to some extent why parties might, at first blush, view the proper interpretation of “judgment” under the Construction Act differently. Specifically, the term “judgment” is undefined in the Construction Act, as a result of which the Court turned to the existing case law interpreting that term. However, Part VII of the Construction Act – which as the Court observed, applies to lien claims – stipulates at s. 50(2) that the Courts of Justice Act and the Rules of Civil Procedure apply to lien actions, except to the extent those former two are inconsistent with the Construction Act.
Given that the Construction Act does not define “judgment”, it may very well be normal for parties to in turn refer to the Courts of Justice Act for the definition of “judgment”, which that legislation defines as “a decision that finally disposes of an application or action on its merits and includes a judgment entered in consequence of the default of a party” (emphasis added). Arguably, this may have been an alternative means of distinguishing the case law interpreting “judgment” in the context of lien actions, although it is debatable whether the Courts of Justice Act being “inconsistent with” the Construction Act includes the case law under the Construction Act.
In any event, as the Court of Appeal and MGW rightly observed, this would not apply to breach of trust claims (among other things), making this point somewhat academic.
Accordingly, on balance, the decision in MGW is a welcome one. We look forward to seeing how the case law on statutory adjudication continues to develop.
[1] MGW-Homes Design Inc v Pasqualino, 2024 ONCA 422, at para 5 [MGW].
[2] Ibid.
[3] Ibid at para 6.
[4] Ibid at para 9.
[5] Pasqualino v. MGW-Homes Design Inc, 2022 ONSC 5632 [Pasqualino].
[6] MGW, supra note 1 at para 10.
[7] Ibid at para 11.
[8] Ibid at para 12.
[10] Ibid at para 24.
[11] Ibid.
[12] Bird Construction Co Ltd v CS Yachts Ltd and Tennyson, 38 OAC 147 at para 9 [Bird Construction]; Villa Verde LM Masonry Ltd v Pier One Masonry Inc, 2001 CanLII 7060 (ONCA) at para 9 [Villa Verde].
[13] Supra note 1 at 26.
[14] TRS Components Ltd v Devlan Construction Ltd, 2015 ONCA 294 at para 18 [TRS].
[15] Ibid at para 36.
[16] Pasqualino, supra note 5.
Singleton Urquhart Reynolds Vogel LLP is pleased to welcome new associate Gurinder Biring to the firm.
Gurinder Biring is an associate in the Construction and Infrastructure and Insurance Practice Groups.
She actively participates in resolving contractual and construction disputes, frequently representing design professionals and contractors in cases related to construction defects, warranty claims and general liability. She also specializes in insurance defence, particularly in matters related to professional liability and the construction industry.
Gurinder has successfully represented clients in settlement negotiations, mediations and trials within both the Provincial and Supreme Courts of British Columbia. Her commitment to delivering effective legal guidance ensures that clients receive comprehensive support during their legal journey.
Singleton Urquhart Reynolds Vogel LLP is proud to announce that the firm has been named Construction Law Firm of the Year at the 2024 Benchmark Canada Awards, for the sixth year. Partner Jesse Gardner also received the Emerging Talent Litigator of the Year Award.
In addition, 19 lawyers appear in Benchmark Litigation’s 2024 issue of Benchmark Canada, their annual directory recognizing Canada’s leading litigators. These lawyers were named “Litigation Stars” across various practice areas.
Clients said the following about these lawyers and the firm:
“They are absolutely the first call for construction litigation. They’ve expanded a lot though – they are now doing D&O, environmental, construction insurance for a number of insurers, and product liability…The firm has blossomed into a two-pronged force with a dense combined pool of talent, ranging from senior statesmen to future stars and no shortage of star power in between. One satisfied client testifies, “The lawyers at Singleton Reynolds have a winning mentality. Their knowledge and experience are vast, their work ethic is staggering. They are terrific at responding when needed, and at looking for innovative solutions. They are the consummate professionals but have a very friendly and easygoing manner. Working with this firm is an absolute pleasure,” according to the most recent Benchmark analysis.
Benchmark’s analysis of the firm can be found here.
Congratulations to the following Singleton Reynolds lawyers on their successful inclusion in Benchmark Canada:
Daniel Barber
Stephen Berezowskyj
Clive Boulton
David Edinger
Jesse Gardner
Catherine Gleason-Mercier
Stuart Hankinson, KC
Robert Hodgins
Cheryl Labiris
Seema Lal
James Little
Bruce Reynolds
Melanie Samuels
Elizabeth (Betsy) Segal
John Singleton, KC
Mark Stacey
Sharon Vogel
Steve M. Vorbrodt
Peter Wardle
About Benchmark Canada
Benchmark Canada recognizes the top litigation lawyers and firms across the country for the significance of their cases. The results listed are based on extensive interviews with litigators and their clients. For more information, please visit Benchmark Litigation.
Singleton Urquhart Reynolds Vogel LLP is a Canadian national law firm that specializes in the construction and infrastructure, insurance, and real estate sectors.
The firm consistently ranks first among Canadian construction and infrastructure firms and features prominently in the delivery of commercial litigation, corporate-commercial and employment law services.
In the construction industry, letters of credit serve a vital function as project security and as a means of securing lien claims, in both cases facilitating the flow of funds. In the context of lien claims specifically, their longstanding use has led to standard language that is employed by parties vacating liens.
The language used in such instruments is arguably so standard and so commonly understood, that it might even be said to be immune from scrutiny – or, if not immune, highly resistant due to common understanding and use. Notwithstanding one’s expectation, however, they would be wrong. Specifically, and interestingly, the common language utilized in standard form lien security letters of credit has recently come under scrutiny in a Superior Court of Ontario case named TruGrp Inc. v. Karmina Holdings Inc.,[1] (“TruGrp”).
In TruGrp, the plaintiff has raised the issue of whether the standard language used in a relatively basic letter of credit (issued by a well-known banking institution) was, in fact, consistent with the applicable legislative framework governing letters of credit employed for vacating liens. The Court provided a partial decision in TruGrp and below, we consider the implications of this decision and how it may impact the use of letters of credit in this context.
TruGrp Inc. (“TruGrp”) (a subcontractor specializing in building restoration and maintenance) moved to set aside an order obtained by Karmina Holdings Inc. (“Karmina”) that vacated TruGrp’s two claims for lien and certificate of action, which motion was initially decided on an ex parte basis. The order to vacate utilized a letter of credit from the Bank of Montreal (“BMO”) as security for TruGrp’s liens.
On the set-aside motion, TruGrp expressed concerns over the language in the approved security – i.e., a letter of credit – suggesting that the letter might not constitute sufficient security for its liens. This concern was allegedly supported by an email from the Accountant of the Superior Court of Justice (the “Accountant”), in which the Accountant expressed a similar opinion (as detailed below). In the alternative, TruGrp requested direction from the Court in respect of how to address the Accountant’s concerns.[2]
Karmina, the registered owner of the liened property in Hamilton, opposed the motion. It argued that TruGrp misunderstood the nature of irrevocable letters of credit, which have been commonly used as lien security for decades[3] (a point these authors note is relatively uncontroversial).
The core dispute was therefore whether the form of the letter of credit was consistent with certain provisions of the Construction Act,[4] and with the Accountant’s role as “custodian” as specified in O Reg 191/95 under the Public Guardian and Trustee Act.[5]
Specifically, the common form of the letter of credit allows the issuing bank to opt out of renewing the credit, provided that they must (1) notify the Accountant at least thirty days in advance and (2) substitute a bank draft for the amount of the credit minus any payments already made. TruGrp argued that this provision introduced a contingency in the security that conflicted with the Construction Act, and imposed inappropriate duties on the Accountant, contrary to the Public Guardian and Trustee Act. Karmina disagreed, and presented a series of procedural challenges to the motion.
The core of TruGrp’s motion centered on the terms related to expiry and renewal in the letter of credit, previously approved by the Court as adequate security for TruGrp’s lien claims in respect of Karmina’s motion to vacate.
The letter stipulated that it would expire on July 6, 2024, but included provisions for automatic annual renewal unless BMO provided a 30-day prior notice of non-renewal to the Accountant, accompanied by a bank draft for the net remaining amount of the lien, effectively ensuring continuity of security.
The letter of credit’s stipulations included three pertinent factors: (i) its expiry date, (ii) the condition of automatic renewal for successive one-year periods, and (iii) BMO’s prerogative to cease renewal by notifying the Accountant and submitting a substitute bank draft for the remaining balance.[6] However, an email from the Accountant indicated that any replacement bank draft would require a court order pursuant to subrule 72.03(2) of the Rules (which provision governs how funds or securities held by the Accountant are managed and released).[7]
TruGrp argued that this requirement to seek a court order under 72.03(2) created a potential gap in security if BMO opted not to renew the letter of credit and the Accountant subsequently refused to accept the replacement bank draft without a court order, leading to a scenario where there could be no enforceable security for TruGrp’s lien.
This concern was heightened by Karmina’s ongoing efforts to sell the liened property, which could have resulted in TruGrp losing its secured position vis-à-vis the property, a scenario that would undermine the intent of the Construction Act to protect lien holders.[8]
Procedural context of motion
For decades, Ontario courts have accepted either lien bonds or letters of credit as “security” (as that term appears in section 44(1) of the Construction Act), despite that term not being defined in the Construction Act. Lien bonds (which were not the form of security in the present case) are specifically addressed in O Reg 303/18 under the Construction Act, prescribing Form 21 as the bond form, which, although outdated in referring to the “Accountant of the Ontario Court,” still effectively binds the principal and the surety in an obligation to the Accountant to cover any payment deficiencies on liens and associated costs.[9]
Conversely, while no specific form for letters of credit is prescribed under section 44, they are still viewed as acceptable security, especially when such letters of credit adhere to international commercial conventions as outlined in section 44(5.1) of the Act.[10] The Court in TruGrp found that the language in the BMO letter of credit was consistent with the industry standard. In the motion at hand, the Court in fact acknowledged its previous endorsement of that form of letter of credit in Sundance Development Corporation v. Islington Chauncey Residence Corp.[11]
During Karmina’s initial ex parte motion to vacate, the Court expressed reservations about the letter of credit proposed by Karmina, with respect to (1) the vagueness of its requirements regarding the Accountant’s actions in drawing on the letter and (2) its failure to append the international commercial convention to which it referred. These issues were resolved with an amended letter from BMO, leading to its approval and the subsequent vacatur of the two TruGrp liens.[12]
Following receipt of the order to vacate, Karmina took the necessary steps to clear the lien claims from the property title, and TruGrp was duly informed through delivery of the Court’s issued and entered order, and the Accountant’s receipt of the posted letter of credit.
Despite this, TruGrp took steps to contest the sufficiency of the letter as security before and after the order (which resulted, for example, in the email from the Accountant). Their subsequent direct communications with the Accountant confirmed the need for a court order to modify or release the letter of credit, prompting the motion at issue in this case.[13]
As of the date of the motion, TruGrp’s liens were attached to the BMO letter of credit maintained by the Accountant, consistent with section 44(6) of the Construction Act.
Procedural challenges to motion
Karmina raised five procedural challenges against TruGrp’s motion: (1) the motion’s issues were res judicata and an abuse of process; (2) TruGrp failed to present any new evidence that could have altered the initial ruling; (3) TruGrp did not file the motion promptly, causing prejudice to Karmina; (4) the motion’s request to reinstate the lien claims could disrupt public policy by creating turmoil in the construction bar; and (5) the issue was moot, such that the Court should not hear the motion.[14]
Addressing the first challenge, the Court found that the motion’s issues were neither res judicata nor an abuse of process. The decision to vacate TruGrp’s lien claims was not based on a contested hearing but on an ex parte motion, making the case law cited by Karmina distinguishable. TruGrp directly challenged the vacating order under specific procedural rules, and did not make a collateral attack.[15]
With respect to the second challenge, while TruGrp’s evidence regarding the Accountant’s position on the letter of credit may have been ambiguous and hearsay, TruGrp’s arguments about the inconsistencies between the letter of credit’s language and statutory obligations were new and relevant, not presented during the original motion, such that this challenge was also dismissed by the Court.[16]
Regarding the third challenge, despite Karmina’s delay claim, the Court concluded the motion was filed in a reasonably timely manner, considering TruGrp had signaled its intention to challenge in a timely manner and had been actively communicating with the Accountant and Karmina about the issue.[17]
Interestingly, on the fourth challenge, i.e., public policy concerns, the Court found that the potential public policy concerns of overturning the vacating order were outweighed by the need to review whether the approved form of security (1) complied with the Construction Act and (2) did not improperly burden the Accountant.[18]
Regarding the fifth and final challenge concerning mootness, the Court did not find the motion moot. Rather, it found that the dispute over the letter of credit’s renewal conditions remained relevant and tangible, affecting ongoing security practices under the Construction Act.[19]
Accordingly, considering the totality of the circumstances – including the adversarial nature of the ongoing dispute over lien security, judicial economy, and the court’s role in ensuring legal compliance – the Court decided to hear the motion. This decision aligned with the Court’s responsibility to address significant legal issues when they arise, ensuring that relevant practices adhere to statutory frameworks and the underlying intent of the Construction Act. Thus, the Court dismissed Karmina’s procedural objections and allowed the motion to proceed on its merits, focusing on the sufficiency and legality of the form of the letter of credit.
Sufficiency of Letters of Credit
The core issue was whether BMO’s letter of credit provided sufficient security under section 44 of the Construction Act, and whether the Court’s approval of this security conflicted with the Accountant’s statutory role as set out in the Public Guardian and Trustee Act.
Both parties acknowledged the absence of case law specifically addressing the form of letter of credit commonly used as lien security, with only two cases being partially relevant, but neither addressing of them the standard renewal and expiry provisions directly.
TruGrp contended that the typical form of the letter of credit, used by BMO in the letter of credit at issue in this motion, was an uncertain security form contrary to the intent of the Construction Act, which aims for consistent and reliable security until a lien is finally resolved. TruGrp argued that the renewal terms introduced uncertainties harmful to lien claimants, potentially leaving them without continuous security. Further, TruGrp argued that the obligations imposed on the Accountant by the letter of credit conflicted with the statutory definition of the Accountant’s role as merely a “custodian,” which term assumed that the Accountant would not assume any active duties unless specified by a court order.[20]
Karmina, on the other hand, defended the Court’s approval of the letter of credit, emphasizing decades of precedent without any issue arising, and arguing for a broader interpretation of “custodian” that would include managing the securities actively, not just passively holding them.
Given the implications for the Accountant’s role and the novelty of the legal issues presented, the Court found it inappropriate to decide the motion at hand without the Accountant’s input. The Accountant was not initially notified of the motion, with its absence becoming notable given its central role in the dispute. Further, BMO was also to be given notice of the motion, due to its direct involvement as the issuer of the letter of credit.[21]
Karmina suggested dismissing the motion to allow for a re-filing with proper notices, but the Court concluded that approach would be inefficient given the existing proceedings and submissions. Instead, the Court elected to adjourn the motion indefinitely until the Accountant and BMO could provide their positions, and a further hearing could be scheduled if necessary.
The Court therefore ordered that both the Accountant and BMO be served with motion records and the motion reasons within fourteen days, with instructions for arranging a case conference if they chose to engage. This was to ensure a comprehensive review and fair opportunity for all affected parties to contribute to the resolution of this matter.
If neither the Accountant nor BMO take a position, the Court noted that it would proceed to decide based on the existing submissions.
TruGrp v. Karmina presents an interesting and somewhat atypical issue regarding the use of relatively standard form letters of credit as lien security. This dispute accentuates the critical nature of understanding the legal and procedural frameworks that govern financial securities in construction projects by highlighting the complexities involved when traditional financial instruments such as letters of credit intersect with specific statutory roles and requirements, such as those of the Accountant in lien matters under the Public Guardian and Trustee Act.
For industry stakeholders, this case is also a reminder of the importance of ensuring that financial securities are drafted to meet the specific requirements of governing legislation, as well as its underlying policy rationale(s). The potential for a letter of credit to fail in providing sufficient security due to its terms not aligning with statutory duties (even in circumstances where already accepted by the Court in one sense) could lead to significant financial exposure and operational risks.
The consequences of such a failure are potentially severe. Financially, if a letter of credit is deemed insufficient, the party relying on it for security (typically the subcontractor or supplier) faces the risk of non-payment and a lack of collateral on which to rely (e.g., the original liened property). This scenario can escalate into cash flow problems, delayed project timelines, and, in a worst-case scenario, insolvency if the funds tied to the project are significant relative to the claimant’s operational capacity.
TruGrp also underlines a predicament for intermediate parties, such as general contractors, who depend on the reliability of these financial instruments to fulfill their contractual duties to vacate liens. As readers will appreciate, general contractors often rely on letters of credit to vacate liens and satisfy their obligations to project owners. If these instruments are found to be unenforceable due to non-compliance with statutory requirements, general contractors may find themselves without reliable security – – particularly some contractors who cannot, for example, access a lien bond for one reason or another. This exposure could leave them vulnerable to subsequent claims from subcontractors for non-payment, and breach of contract claims from property owners due to unvacated liens.
Moreover, there is a broader industry impact to consider. Repeated instances where letters of credit fail to align with statutory requirements could lead to a loss of trust in these instruments as reliable forms of financial security in construction projects altogether. This may force industry participants to favour alternative forms of security and could prompt regulatory changes to better define the use of such financial tools.
We await with interest to see if the Accountant and/or BMO participate in the motion in question, and what its ultimate outcome will be with respect to the appropriate language for use in letters of credit as lien security.
[1] 2024 ONSC 2165 (CanLII) (“TruGrp v Karmina”).
[2]TruGrp v Karmina at para 1.
[3] TruGrp v Karmina at para 2.
[4] RSO 1990, c C.30.
[5] RSO 1990, c P.51.
[6] TruGrp v Karmina at para 11.
[7] TruGrp v Karmina at para 12.
[8] TruGrp v Karmina at para 13.
[9] TruGrp v Karmina at paras 15-16.
[10] Typically, letters of credit in Ontario will refer to the ICC Uniform Customs and Practice for Documentary Credits (known as “UCP 600”). In that regard, Bruce Reynolds’ and Sharon Vogel’s seminal report on the Construction Lien Act, as it then was (Striking the Balance – available here) recommended that letters of credit that reference international commercial conventions should be accepted, provided that (among other things) the letter is unconditional and that the applicable convention is written into the terms of the letter of credit (see pg. 280).
[11] 2021 ONSC 241.
[12] TruGrp v Karmina at para 20.
[13] TruGrp v Karmina at para 23.
[14] TruGrp v Karmina at para 25.
[15] TruGrp v Karmina at paras 26-27.
[16] TruGrp v Karmina at paras 28-29.
[17] TruGrp v Karmina at para 30-32.
[18] Ibid at para 33.
[19] Ibid at paras 34-36.
[20] Ibid at paras 45-48.
[21] Ibid at paras 56-58.
Singleton Urquhart Reynolds Vogel LLP is pleased to welcome Kaleigh Du Vernet to the firm as Counsel.
Kaleigh Du Vernet is Counsel in the Construction and Infrastructure Practice Group at Singleton Urquhart Reynolds Vogel LLP.
She assists clients at all levels of the construction supply chain, through all stages of the construction process. Her practice involves representing parties in the construction industry through dispute resolution, litigation, arbitration, mediation, adjudication, and construction contract negotiation.
Kaleigh advises on a wide variety of construction matters including dispute avoidance, dispute resolution, contract claims, lien proceedings, payment disputes and Construction Act related matters.
In Campbell v. Toronto Standard Condominium Corporation No. 2600, 2024 ONCA 218, (“Campbell“) the Court of Appeal for Ontario considered the proper interpretation of the term “fraud” as it appears in the appeals and set-aside provisions of the Arbitration Act, 1991, S.O. 1991, c. 17 (the “Arbitration Act”), finding that the term – which is undefined in that legislation – does not encompass constructive fraud. Below, we review the takeaways from Campbell with respect to the meaning of fraud and the circumstances that permit an application to set aside an arbitral award.
From December 2018 to February 2021, a dispute arose between the owners of a condominium unit in a particular building (identified as the “Respondents” in this matter) and the condominium corporation for that building, Toronto Standard Condominium Corporation No. 2600 (the “Condo Corporation“). The parties’ dispute originated from complaints received by the Condo Corporation about excessive noise from the Respondents’ unit, and subsequently regarding the use of the unit as a short-term rental.
The parties initially agreed to proceed with mediation, but ultimately no mediation occurred because the Respondents withdrew their consent. In October 2020, the Condo Corporation wrote a cease and desist letter to the respondents demanding that they cease using their unit for short-term rentals. A month later, the Condo Corporation delivered a notice of arbitration pursuant to the Condo Corporation’s declaration. By February 2021, the Respondents were in the process of selling the unit – which would effectively resolve nearly all of the parties’ substantive issues – but there remained a live issue as to whether the Condo Corporation was entitled to its legal costs incurred in pursuing the Respondents.
On March 4, 2021 – the same day that the Respondents signed a conditional agreement for the sale of the unit – the parties entered into an arbitration agreement for the resolution of (1) the alleged contraventions of the rules regarding short-term rentals, and (2) the issue of all costs as incurred by the parties. The arbitration agreement stipulated that there would be no right of appeal, and specified that the parties agreed not to appeal to attempt to set aside any aspect of the Arbitration award (although not specifically addressed by the Court of Appeal in its decision, this latter agreement was obviously unenforceable given that the Arbitration Act’s set-aside provisions are not waivable).
The arbitration was completed in writing by August 2021, and the arbitrator rendered his decision on September 6, 2021, awarding the Condo Corporation $30,641.72 in costs on a partial indemnity basis.
57 days after the arbitrator delivered his decision, the Respondents commenced a set-aside application in the Superior Court under Section 46(1) of the Arbitration Act to set aside the award on the basis of fraud by the Condo Corporation, and constructive fraud by the arbitrator. Notably, this was despite the fact that the deadline for commencing a set-aside application, which is 30 calendar days from the date of delivery of the arbitrator’s award, had passed. That being said, this statutory time limit also contains an exception for set-aside applications based on allegations of corruption or fraud.
Although the application judge concluded that there was no actual fraud in this case, he concluded that the arbitral award was obtained by constructive fraud, as the arbitrator had adjudicated issues beyond those set out in the arbitration agreement.
In that regard, the application judge concluded that there was no fraud in the well-established legal definition of “deceit and dishonesty”.[1] By contrast, he found that there was constructive fraud given that this term ” does not necessarily involve dishonesty or moral fraud in the ordinary sense, but a breach of [the] sort that would be enforced by a court of conscience”, but rather focuses more on unfairness than deceit.[2]
On the facts of this case, the application judge concluded that the arbitrator had adjudicated beyond the scope of the parties’ arbitration agreement by looking at substantive issues beyond the narrow issue of costs. Although such a conclusion would normally be considered to raise a jurisdictional issue, and potentially an issue as to deprivation of natural justice, the application judge found that it amounted to constructive fraud insofar as it was “‘unconscionable and unfair’ that the Condo Corporation ‘lured their legal counsel, and the Arbitrator’ into adjudicating issues beyond those of costs” by delving into substantive issues beyond costs.[3]
Accordingly, the application judge concluded that the term “fraud” as it appears in the Arbitration Act includes constructive fraud, and set aside the award.
The Court of Appeal’s decision
On appeal, the Condo Corporation took the position that the application judge had erred in the interpretation of the term “fraud”, insofar as he concluded that it encompasses constructive fraud. The Court of Appeal allowed the appeal, concluding that the application judge had erred in expanding the definition of “fraud” to include constructive fraud.
In that regard, the Court of Appeal noted that while the arbitrator did determine substantive issues, it was both “appropriate and necessary for him to consider factors such as the history and the nature of the complaints, the length of the proceedings, and the reasonableness of the parties’ conduct in exercising his cost discretion” pursuant to Section 54 of the Arbitration Act.[4]
With respect to whether the term “fraud” should be construed so as to encompass constructive fraud, the Court of Appeal observed that because the term “fraud” has an established legal meaning at common law, it was incumbent upon the legislature to use clear language in order to displace this well-understood meaning. In other words, if the legislature had intended to expand the meaning of “fraud” in the Act in order to include constructive fraud, then the legislature would have made this explicit in the language of the Act.[5] It did not, meaning that as a matter of statutory interpretation, “fraud” could not include constructive fraud.
Furthermore, the Court of Appeal observed that expanding the meaning of “fraud” to include constructive fraud would be at odds with the relevant case law on the Arbitration Act’s set-aside provisions, which are not intended as an alternative appeal route. To allow such an interpretation would risk undermining the principles of efficiency and finality that have been consistently emphasized by the case law. Therefore, this too was a basis upon which to reject the inclusion of constructive fraud within the concept of “fraud”.
Finally, the Court of Appeal noted from a policy perspective, the Arbitration Act clearly intended that there should be limited court intervention in arbitral matters. To the extent that an arbitration agreement allows for any appeal rights, courts are required to avoid strategic attempts to broaden the scope of the appeal by turning questions of mixed fact and law into questions of law, and are required to guard against strategic attempts to enlarge the scope of an appeal beyond what the parties have agreed to.
Bearing all of the foregoing in mind, the Court of Appeal concluded that “fraud” should not be interpreted to include constructive fraud, and that in reality, the Respondents in this case were simply seeking to circumvent the time limit for a set-aside application by alleging fraud and constructive fraud. Accordingly, the Court of Appeal allowed the appeal, restoring the arbitral award.
Takeaways
Campbell is a useful reaffirmation of the basic principles of arbitration, including most prominently that court intervention is intended to be limited. In that regard, the Court’s decision not to include constructive fraud within the concept of “fraud” under Ontario’s domestic arbitration legislation is a positive step, insofar as the alternative would appear far less desirable. Notwithstanding that the facts of this case were arguably somewhat unusual, it is not difficult to envisage an alternate outcome in which parties would exploit the inclusion of constructive fraud as a means of avoiding the Arbitration Act’s set-aside deadline in order to draw out dispute resolution even further. This is particularly true in circumstances where Sections 46(1)(9) and Section 47 of the legislation do not provide a deadline for bringing applications based on fraud, meaning that the standard two-year limitation period would presumably apply.
In the circumstances, the Court of Appeal has rightly continued to uphold arbitration as a means of private dispute resolution and not simply a dress rehearsal for court proceedings.
[1] Campbell v. Toronto Standard Condominium Corporation No. 2600, 2024 ONCA 218, at para 24 [“Campbell“].
[2] Campbell, at para 24.
[3] Campbell at para 24.
[4] Campbell, at para 61.
[5] Campbell, at para 54.
Eurobank Ergasias S.A. v Bombardier Inc is an important decision of the Supreme Court of Canada addressing letters of credit. In this decision, the Court has provided guidance on the relationship between the autonomy principle and the fraud exception as these principles apply to letters of credit in circumstances where an issuing bank is asked to honour a demand for payment in the face of fraudulent conduct by a third party.
The underlying dispute involved two contracts between the Hellenic Ministry of Defense, or “HMOD” (as purchaser), and Bombardier Inc. (as seller). The first contract was a procurement agreement for the purchase of aircrafts; the second agreement was an offsets contract, which stipulated that Bombardier would subcontract some of its work to Greek companies, failing which it would be liable to pay liquidated damages to HMOD.[1] Disputes arising from the offsets contract were to be settled pursuant to the rules of the International Chamber of Commerce (the “ICC”).[2]
Payment of the liquidated damages was guaranteed by a letter of credit issued by a predecessor company of Eurobank Ergasias S.A., a Greek bank (“Eurobank”), in favour of HMOD (the “Greek Letter of Guarantee”), which letter was governed by Greek law.[3] Subsequently, the National Bank of Canada issued a second letter of credit in favour of Eurobank, ensuring reimbursement for any amounts Eurobank might need to pay HMOD under the Greek Letter of Guarantee (the “Canadian Letter of Counter-Guarantee”).[4] This letter of guarantee was governed by Quebec law.
Ultimately, Bombardier determined that it could not satisfy its subcontracting obligations because of an insufficient number of available and qualified Greek companies. As a result, Bombardier claimed that it should not be liable for liquidated damages; HMOD disagreed. The parties therefore initiated ICC-administered arbitration proceedings. After the arbitration had begun, HMOD formally undertook to Bombardier and the arbitral tribunal not to demand payment under the Greek Letter of Guarantee for as long as the arbitration remained ongoing.
Despite its undertaking, HMOD delivered multiple demands to Eurobank under the Greek Letter of Guarantee prior to the tribunal’s final award.[5] In response, Bombardier obtained a procedural order from the tribunal ordering HMOD to abstain from demanding payment under the Greek Letter of Guarantee. Bombardier then obtained an injunction from the Superior Court of Quebec to prevent payment under the Greek Letter of Guarantee and the Canadian Letter of Counter-Guarantee until the final award was issued, because it was not sure whether HMOD would comply with the procedural order.
Nevertheless, HMOD continued to demand payment. In the days prior to the issuance of the tribunal’s final award, HMOD delivered a further demand to Eurobank in which it advised that if Eurobank failed to pay HMOD within one day, then the Greek state would pursue civil and criminal measures against the responsible officers and employees of Eurobank. One day later, Eurobank paid HMOD under the Greek Letter of Guarantee, and then sought reimbursement from the National Bank of Canada under the Canadian Letter of Counter-Guarantee.[6]
The tribunal’s final award nullified the offsets contract on the basis that it violated European Union law, as a result of which the liquidated damages provisions were void.[7] Subsequently, Eurobank initiated proceedings in Greek courts to recover the funds paid to HMOD, but was unsuccessful.[8] In brief, the Greek courts ruled that HMOD’s actions did not constitute fraud under Greek law.
Meanwhile, in the Quebec courts, Bombardier sought to prevent the National Bank of Canada from paying Eurobank under the Canadian Letter of Counter-Guarantee, citing the fraud exception.[9] The trial judge determined that HMOD’s conduct in obtaining payment under the Greek Letter of Guarantee was fraudulent, and Eurobank’s awareness of this fraud (which the trial judge found as a fact) rendered its demand for payment under the Canadian Letter of Counter-Guarantee fraudulent as well.[10] Consequently, the trial judge enjoined the National Bank of Canada from making any payments to HMOD under the Canadian Letter of Counter-Guarantee.[11]
On appeal, the Quebec Court of Appeal upheld the trial decision, reasoning that the Canadian bank was not obligated to pay the Greek bank under the Canadian Letter of Counter-Guarantee because the Greek bank had prior knowledge of HMOD’s fraudulent conduct associated with the payment under the Greek Letter of Guarantee.[12] The lone dissenting judge concluded that Eurobank should not be held responsible for HMOD’s fraud, given that it had no way of knowing that HMOD expected to lose at arbitration or that HMOD intended to keep the funds even if it lost; while Eurobank may have had “suspicions” of fraud, this was not sufficient to rise to the level of knowledge necessary to hold Eurobank responsible. Eurobank then sought and was granted leave to appeal to the Supreme Court.
The Majority Decision
The Nature of Letters of Credit
Justice Kasirer, for the majority, observed that the legal distinction between demand guarantees and standby letters of credit is largely semantic. Legally, demand guarantees and standby letters of credit are indistinguishable, with the latter falling within the definition of demand guarantees.[13] (The dissent, from Justice Côté, disagreed, observing that while letters of credit protect against non-payment, demand guarantees protect against non-performance or part-performance.)
The majority observed that letters of credit – particularly standby letters of credit – are commonly used in both domestic and international commercial transactions in order to mitigate risk. In that regard, a letter of credit does not replace the customer’s obligation to pay the beneficiary under the contract; rather, it acts as an additional layer of security. A demand for payment typically arises when there is an alleged failure by the customer to fulfill their contractual duties, with the operative principle being “pay now, argue later”.[14] From a judicial perspective, courts are “slow to interfere” with letters of credit, out of concern that such interference might impair the reliance that international business places upon them.
The majority then reaffirmed that the two key principles governing letters of credit are (1) the autonomy principle and (2) strict compliance.
The autonomy principle refers to the proposition that a letter of credit contains an independent obligation of the issuing bank in favour of the beneficiary, unaffected by the performance or existence of the underlying contract between the beneficiary and the issuing bank’s client. This principle ensures certainty in credit transactions, as the issuing bank’s duty to pay is solely based on the terms outlined in the letter of credit; they need not inquire into the performance of the underlying contract.[15]
The rule of strict compliance dictates that the bank’s duty to make payment is conditional upon the beneficiary submitting documents that precisely conform to the requirements specified in the letter of credit, and which must also be consistent with each other. There is next to no room for error on this point, although courts do have minimal tolerance for immaterial discrepancies in exceptional cases.[16] That being said, if the issuing bank pays the beneficiary without evaluating the documents to ensure that they strictly conform to the requirements set out in the letter of credit, then the bank runs the risk of not being reimbursed by their client.
The Fraud Exception
Importantly, the majority also reaffirmed that fraud remains the only exception to the obligation to honour demands on letters of credit that is recognized in Canada, and “must import some aspect of impropriety, dishonesty or deceit”.[17] In that regard, the majority emphasized that this exception was identical in both common law and civil law systems, which underscores “the desirability of as much uniformity as possible in the law with respect to these vital instruments of international commerce”.[18]
Furthermore, a mere absence of good faith may not be sufficient; there must be some aspect of impropriety, dishonesty, or deceit.[19] The fraud exception permits non-payment if fraud by the beneficiary is sufficiently proven or brought to the attention of the issuing bank before payment. The standard for proving fraud is set high, in order to strike a balance between safeguarding the autonomy of letters of credit and deterring fraud. This exception applies not only to the original letter of credit, but also to counter-guarantees (the latter of which was particularly relevant in this case).[20]
In this case, Eurobank argued that the trial judge and the majority in the Court of Appeal had erred in applying the fraud exception, given that the Greek courts had found no fraud in HMOD’s demand for payment under the Greek Letter of Guarantee, and that even if fraud had occurred, it did not affect Eurobank’s right to demand payment under the Canadian Letter of Counter-Guarantee. Rather, the principle of autonomy suggested that the Canadian Letter of Counter-Guarantee should have been treated distinctly. In addition, Eurobank argued that there was no proof that Eurobank was aware of HMOD’s alleged fraud.[21]
However, the majority disagreed with Eurobank and HMOD, emphasizing that Eurobank had not identified a palpable and overriding error for appellate intervention, and that in this transaction, both letters of credit were intimately linked to one another such that fraudulent conduct in respect of one letter could be relevant to an assessment of the other.[22]
Further, the trial judge was entitled to deference with respect to his conclusions that (1) HMOD demanded payment under the Greek Letter of Guarantee despite having no right to do so, which constituted fraud, and (2) Eurobank knew of and participated in the fraud by making payment.[23] This was notwithstanding that Greek courts had concluded there was no fraud, because the Greek judgments had not been formally recognized by Quebec courts and were thus unenforceable in Quebec (although they were admissible as fact evidence).[24]
Notably the majority observed that while the fraud of a third party typically does not engage the fraud exception, the beneficiary may be deemed complicit if they have clear knowledge of the third party’s fraud and participated in that fraud.[25] Indeed, participation in the fraud is paramount, as knowledge of fraud without participation will not suffice to invoke the exception.[26] Participation may take the form of honouring a demand for payment in improper situations, such as (1) where the beneficiary is aware of the fraud but then nonetheless demands payment under the letter of credit,[27] and (2) by knowingly presenting fraudulent documents to the issuer.[28] In such instances, the fraud becomes the beneficiary’s own, justifying non-payment under the letter of credit.
Ultimately, the majority concluded that the fraud exception applied in this case to enjoin Eurobank from drawing down on the Canadian Letter of Guarantee. HMOD had demanded payment under the letter despite knowing it had no right to do so, contravening orders from the ICC Arbitral Tribunal and the Quebec Superior Court.[29] Eurobank had knowledge of HMOD’s fraudulent activities, but nonetheless made payments under the Greek Letter of Guarantee. The majority therefore concluded that Eurobank’s knowledge of and participation in the fraud thereby attributed HMOD’s fraudulent conduct to Eurobank itself.
Lastly, the majority dismissed Eurobank’s argument that they were acting under duress, finding that it voluntarily chose to participate in the fraudulent activities despite being aware of the circumstances.[30] Consequently, the fraud exception applied to prevent Eurobank from drawing down on the Canadian Letter of Counter-Guarantee.
The Dissent
In dissent, Justices Côté and Karakatsanis would have allowed the appeal.[31] The dissent differed from the majority primarily on two points: first, the factual finding that Eurobank knew of and participated in the fraud; and second, the extent to which the Greek judgments should be given weight. In particular, the dissent concluded that the decisions of the Greek courts, which found no fraud in the demand for payment under the Greek Letter of Guarantee, should be given weight and not disregarded due to the principle of international comity, and particularly given that foreign judgments are prima facie proof of the reported facts contained in those judgments, such that Eurobank ought not to be found to have known of or engaged in fraud itself.[32]
Moreover, the dissent highlighted the nature of demand guarantees as contracts established at the request of a principal where the guarantor (usually a bank) irrevocably promises to pay the beneficiary on demand, regardless of any disputes between the principal and the beneficiary.[33] The guarantor’s obligation to pay was triggered solely by the terms and conditions specified by the principal, and the guarantor’s role was to ensure compliance with those terms, without delving into the underlying contract’s disputes.[34]
Further, the dissenting justices emphasized the high bar for proving fraud in order to prevent payment under a demand guarantee, stating that fraud must be blatantly apparent and, under Quebec law, must involve an aspect of public order. The dissent found that fraudulent conduct by a third party should not necessarily prevent an innocent beneficiary from demanding payment under the guarantee.[35]
Finally, the dissent concluded that the judgments of the Greek courts should have been considered as factual constraints by the Quebec courts, even if those judgements were not formally recognized, and therefore should not have been ignored by Canadian courts.[36] Eurobank’s payment under the Greek Letter of Guarantee, based on the Greek court’s decision, therefore should not have been deemed fraudulent. Based on the principle of comity, Eurobank should have been considered an innocent beneficiary under the Canadian Letter of Counter-Guarantee, as it had no clear or obvious knowledge of any alleged fraud at the time of payment.[37] Thus, the dissent concluded that the fraud exception did not apply in this case, and that the appeal should have been allowed.[38]
As the foregoing suggests, Eurobank provides a thorough articulation of the Canadian law on letters of credit. Furthermore, the case clearly articulates the threshold for applying the fraud exception to letters of credit. Mere allegations or suspicions of fraudulent conduct are insufficient; compelling evidence demonstrating fraud, and the beneficiary’s knowing participation, is required. This stringent standard safeguards the autonomy principle, while addressing instances of clear misconduct that undermine the letter of credit’s purpose.
The majority decision also offers a helpful clarification as to the requisite nature of the fraud itself. While fraud in the context of letters of credit might arguably be more common with respect to the documents tendered by the beneficiary to the issuing bank, the fraud exception can also be engaged by fraud in the underlying transaction between the beneficiary and the issuing bank’s client (as was the case in Eurobank).
In addition, the majority’s confirmation that breach of a procedural order from an arbitral tribunal can constitute grounds for fraud (although there must be an element of dishonesty or impropriety) reaffirms judicial support for the legal force of such procedural orders.
Finally, with respect to international comity, Eurobank highlights the limitations of extra-jurisdictional judgments within Canada, given their status as issues of fact rather than law (and the trial judge’s ability to assign weight to such judgments accordingly).
[1] Ibid at para 21.
[2] Ibid at para 24.
[3] Ibid.
[4] Ibid at para 22.
[5] Ibid at para 25.
[6] Ibid at para 34.
[7] Ibid at para 36.
[8] Ibid at para 42.
[9] Ibid at paras 44-45.
[10] Ibid at para 46.
[11] Ibid at para 48.
[12] Ibid at para 54.
[13] Ibid at para 69.
[14] Ibid at para 70.
[15] Ibid para 74-76.
[16] Ibid at paras 77-79.
[18] Ibid at para 84.
[19] Ibid at para 115.
[20] Ibid at paras 80-87.
[21] Ibid at paras 89-90.
[22] Ibid at para 138
[23] Ibid at paras 92, 108-111.
[24] On this point, the majority engaged in a detailed analysis under Quebec law as to why the trial judge was entitled to give the Greek judgments little evidentiary weight, particularly in circumstances where the Greek appellate courts gave no weight to the decisions of the Superior Court of Quebec and the Court of Appeal of Quebec: para 109.
[25] Ibid at para 129
[26] Ibid at para 131.
[27] Ibid at para 130.
[28] Ibid at para 131.
[29] Ibid at para 134.
[30] Ibid at para 142.
[31] Ibid at para 157
[32] Ibid at para 235. The dissent also provided a detailed analysis under Quebec law of how foreign judgments are to be treated as findings of fact and which factors are appropriately considered in assigning weight to those findings of act. However, given that this case comment is intended for a common law audience, we do not discuss the dissent’s analysis on this point in detail.
[33] Ibid at para 240.
[34] Ibid.
[35] Ibid at para 259.
[36] Ibid at para 248.
[37] Ibid.
[38] Ibid at para 299.
As arbitration practitioners will appreciate, the International Bar Association’s Guidelines on Conflicts of Interest in International Arbitration (the “IBA Guidelines”)[1] are widely considered to be the authoritative resource on conflicts of interests for arbitrators; as such, they are a topic of particular interest. The IBA Guidelines were initially published in 2004, and were revised in 2014. Given the passage of another ten years, the IBA Guidelines were therefore ripe for further revision. Arbitration has continued to grow as a preferred mechanism for dispute resolution and the law on conflicts of interest has continued to evolve, such that those participating in arbitration will wish to ensure that the most recent changes are adhered to.
The IBA Guidelines are used by legal professionals across common law and civil law jurisdictions, and have been recognized as persuasive authority in Canadian courts.[2] As noted in the foreword in the IBA Guidelines, they are “recognised as a solid soft law instrument reflecting standards expected to apply to impartiality and independence of arbitrators, as well as disclosures in specific circumstances.”[3] While the IBA Guidelines do not override any applicable legislation or rules chosen by parties, they can be used as general guidance for practitioners and can be binding by agreement by the parties.
The IBA Guidelines are comprised of two parts. Part I set outs the “General Standards” regarding impartiality, independence and disclosure, along with accompanying explanatory notes on those standards. Part II provides three different non-exhaustive lists of situations that may occur in arbitration. The lists are broken down into Red, Orange, and Green, and are commonly known as the Traffic Light system (i.e. red means stop, orange means caution, and green means go).
While the recently revised IBA Guidelines (the “2024 Guidelines”) offer relatively modest amendments to both Part I and Part II, below we highlight some of the key changes and consider their implications.
Part I Changes
Changes were made to the following Sections in Part I:
(3) Disclosure by the Arbitrator
The 2024 Guidelines now expressly provide that “in determining whether facts or circumstances should be disclosed, an arbitrator should take into account all facts and circumstances known to the arbitrator.”[4] While similar language was in the explanatory notes in the 2014 version, this has now become an express obligation of the arbitrator.
Another critical change in the 2024 Guidelines is with respect to professional secrecy rules affecting an arbitrator’s duty to disclose. The 2024 Guidelines now provide that if an arbitrator must make disclosure, but is prevented from doing so by professional secrecy rules or other rules of practice or professional conduct that preclude disclosure, the arbitrator should reject the appointment or resign.[5]
Lastly, the 2024 Guidelines have clarified that a failure to disclose when required does not automatically result in a conflict of interest. In particular, the new rule provides that an “arbitrator’s failure to disclose certain facts and circumstances that may, in the eyes of the parties, give rise to doubts as to the arbitrator’s impartiality or independence, does not necessarily mean that a conflict of interest exists, or that a disqualification should ensue.”[6]
(4) Waiver by the Parties
The 2024 Guidelines have introduced a new rule which incentivizes parties to conduct investigations into any potential conflicts of interest. The 2024 Guidelines provide that a party is deemed to have learned of any facts or circumstances that could constitute a potential conflict of interest for an arbitrator that a “reasonable enquiry” would have yielded if conducted at the outset or during the proceedings.[7]
(5) Relationships
In general, the recent amendments have broadened the relationship considerations throughout the 2024 Guidelines with respect to the arbitrator’s employment. For example, the term “or employer” has been added throughout the 2024 Guidelines when a rule makes reference to an arbitrator’s law firm (i.e. the Guidelines no longer assume that employment related conflicts of interest only arise via employment at a law firm). In addition, the 2024 Guidelines provide a modern description of the concept of a “law firm” to account for the evolution in the structure of legal practices.[8]
The 2024 Guidelines have also created a new general rule that “[a]ny legal entity or natural person over which a party has a controlling influence may be considered to bear the identity of such party.”[9]
(6) Duty of the Parties
The 2024 Guidelines have amended the list of relationships that a party must disclose to the arbitrator so as to include any relationship between the arbitrator and “a person or entity over which a party has a controlling influence”,[10] and a party must disclose any relationship between the arbitrator and “any other person or entity it believes an arbitrator should take into consideration when making disclosures”.[11] This accordingly encompasses a very broad scope of potential relationships, although it does not extend as far as relationships that the parties ought to have known about, thus refraining from introducing a more challenging (and fraught) standard for parties to meet.
A new accompanying explanatory note to Section (7) also provides that the parties are required to explain the persons’ and entities relationship to the dispute “[w]hen providing the list of persons or entities the parties believe an arbitrator should take into consideration when making disclosures”.[12]
Part II Changes
In Part II, the Red Lists (both Waivable and Non-Waivable) did not undergo any significant substantive change. Notably, though, the 2024 Guidelines for the Red List have clarified that an “affiliate” also includes “an individual having a controlling influence on the party in the arbitration, and/or any person or entity over which a party has a controlling influence”.
The majority of the substantial changes in the 2024 Guidelines in Part II were to the Orange List. As readers will appreciate, the Orange List is a “non-exhaustive list of specific situations that, depending on the facts of a given case, may, in the eyes of the parties, give rise to doubts as to the arbitrator’s impartiality or independence.”[13]
The following situations were added to the Orange List:
The Green List only had one notable change, which was the addition of the following situation: “The arbitrator, when acting as arbitrator in another matter, heard testimony from an expert appearing in the current proceedings.”[23]
Conclusion
Although the overall changes to the IBA Guidelines are modest, the Orange List will of course be the subject of particular interest given the more extensive additions to it. In that regard, the additions reflect a number of circumstances that are not uncommon in the construction context, insofar as it is a relatively small bar both domestically and internationally such that the repeat appointments of arbitrators and experts is not uncommon. In the international context, it is not uncommon for counsel to act as arbitrators or legal expert witnesses in other matters, such that there is a heightened possibility of the new Orange List categories being engaged.
It is possible that the recent amendments to the IBA Guidelines may have a larger impact on the construction industry than others, given the nature and use of construction arbitrators and the pool of arbitrators to draw from. Given recent case law in Ontario finding that the IBA Guidelines are of persuasive value, even where the parties have not agreed they are applicable to their arbitration,[24] and given the degree of uncertainty as to what will qualify as a reasonable apprehension of bias in the arbitration context,[25] legal practitioners of the construction bar should therefore be particularly conscious of the IBA Guidelines irrespective of whether or not the construction contract specifies that the IBA Guidelines are binding.
[1] International Bar Association Guidelines on Conflicts of Interest in International Arbitration dated February 2024 (“2024 Guidelines”).
[2] See, for example, Aroma Franchise Company Inc. et al. v. Aroma Espresso Bar Canada Inc. et al., 2023 ONSC 1827 at para 33; and Vento Motorcycles, Inc. v. United Mexican States, 2023 ONSC 5964 at para 107.
[3] 2024 Guidelines, Foreword, pg. 2.
[4] 2024 Guidelines, Part I, Section (3)(a).
[5] 2024 Guidelines, Part I, Section (3)(e).
[6] 2024 Guidelines, Part I, Section (3)(g).
[7] 2024 Guidelines, Part I, Section (4)(a).
[8] 2024 Guidelines, Part I, Section (6), Explanatory Note (a).
[9] 2024 Guidelines, Part I, Section (6)(c).
[10] 2024 Guidelines, Part I, Section (7)(a).
[11] 2024 Guidelines, Part I, Section (7)(a).
[12] 2024 Guidelines, Part I, Section (7), Explanatory Note (a).
[13] 2024 Guidelines, Part II, pg. 14.
[14] 2024 Guidelines, Part II, Section 3.1.4.
[15] 2024 Guidelines, Part II, Section 3.2.10.
[16] 2024 Guidelines, Part II, Section 3.1.5.
[17] 2024 Guidelines, Part II, Section 3.1.6.
[18] 2024 Guidelines, Part II, Section 3.2.9.
[19] 2024 Guidelines, Part II, Sections 3.2.12 and 3.2.13.
[20] 2024 Guidelines, Part II, Section 3.3.2.
[21] 2024 Guidelines, Part II, Section 3.3.6.
[22] 2024 Guidelines, Part II, Section 3.4.2.
[23] 2024 Guidelines, Part II, Section 4.5.1.
[24] Aroma at para 33.
[25] See our article on the Aroma decision here, for further discussion.
Mass timber construction is a fast-emerging method in the construction industry, both in Canada and abroad; unsurprisingly, proposed regulatory changes to expand its use have therefore been the subject of significant interest and discussion within the industry. In particular, the proposed regulatory changes will bring greater alignment amongst Canadian model codes, with the goal of fostering harmonization between the national and provincial codes on the use of mass timber. Below, we review these proposed changes, and provide our takeaways on the awaited development of mass timber as an alternative method of construction.
Mass timber buildings, which are easily spotted by their wooden aesthetic and biophilic design, use thick layers of engineered wood as structural load-bearing components such as beams, columns, and panels. In recent years, mass timber has received increased attention due to its role in sustainable construction (i.e. via the embodied carbon stored in the timber and the responsible forestry practices used as part of the manufacturing process), coupled with the cost and time efficiencies flowing from the increased use of prefabricated mass timber products. As a result, the adoption of mass timber construction continues to rise.[1]
In fact, the number of mass timber projects has increased two-fold since 2015, coinciding with changes to the National Building Codes (which, as discussed below, include a building code, fire safety code, and others), and in particular, the inclusion of permitted height allowances of up to six storeys for mass timber projects; in 2020, this was increased to a permitted height of up to 12 storeys.[2]
The Regulatory Landscape
However, the regulatory regime continues to evolve, portending more changes on the horizon for mass timber. In particular, the National Research Council (“NRC“) – a Federal Crown Corporation – publishes model codes (including a building code, fire safety codes, and plumbing and energy codes) for adoption by provincial and territorial authorities. Provinces and territories can then adopt these model codes in their entirety and modify them as they see fit, or they can publish their own independent code(s) that may or may not be based on the national model code(s). Manitoba, Saskatchewan, New Brunswick, Nova Scotia, Prince Edward Island, and the Territories have all adopted these model codes, while British Columbia, Alberta, Ontario, and Quebec have published their own independent codes.[3]
Earlier this year, the Canadian Board for Harmonized Construction Codes (“CBHCC”) hosted a public comment period led by the Joint Task Group for Harmonized Variations for Mass Timber (“JTG-HVMT”), which includes the provinces of British Columbia, Ontario and Quebec, on proposed changes to the National Building Code (the “NBC”) in relation to encapsulated mass timber construction (“EMTC”). The proposed changes were developed on an expedited basis to meet provincial needs and will be considered by the CBHCC after feedback has been analyzed and next steps are determined.
The CBHCC is made up of representatives from provincial, territorial, and federal public services and is responsible for developing the National Model Codes, which are subsequently published by the NRC. The CBHCC provides a forum for the provinces to provide input with respect to proposed changes to a given model code, so as to promote the harmonization of codes between jurisdictions. Notably, this is a rare instance of a province-driven proposal being hosted by the CBHCC and represents a noteworthy change in the code development process that (1) appears to be more responsive to provincial priorities and (2) creates consistency amongst various codes across Canada’s jurisdictions.[4]
In short, there appears to be a broad consensus at the provincial and federal level to expand the use of mass timber in order to allow for greater building occupancy, allow for taller mass timber buildings, and varying encapsulation requirements dependent on the building archetype and height.
Key Proposed Changes
In relevant part the key proposed changes to the NBC relate to Encapsulated Mass Timber Construction (“EMTC“). Under the NBC, EMTC is defined as the “type of construction in which a degree of fire safety is attained by the use of encapsulated mass timber elements with an encapsulation rating[5] and minimum dimensions for structural members and other building assemblies”. This often translates to a lower quantity of exposed wood surfaces, but greater levels of fire protection, as the limiting of exposed surfaces will delay ignition and combustion.
By contrast, EMTC is different than two other widely-known mass timber construction methods, known as “combustible construction”[6] and “heavy timber construction”[7]. Both combustible construction and heavy timber construction, which often have larger areas of timber exposure, each only stipulate a fire resistance rating of under 45 minutes, which mean that they fall below the degree of fire protection required of EMTC. In other words, combustible construction and heavy timber construction offer less fire safety protection than EMTC; as a result, they pose a greater hazard than EMTC, and are more restricted in their usability. In particular, these two types of construction have a lower permissible storey height in order to ensure compliance with fire safety standards, but provide some flexibility through the availability of larger areas of exposed timber surfaces.
In summary, the proposed changes to the NBC would permit EMTC to be employed in (i) buildings up to 18 storeys with a 70-minute minimum encapsulation rating, (ii) buildings up 12 storeys with a 50-minute minimum encapsulation rating, and/or (iii) buildings up to 6 storeys with a 0-minute encapsulation rating – across 7 new building “archetypes”.[8]
There are 6 proposed changes in total:
These proposals are based on the International Building Code (“IBC”) 2021 elements, and the existing historical limits for buildings and fire safety principles in practice from the NBC. The joint task force had also independently commissioned a transferability report to compare the EMTC provisions in the IBC and their applicability to the Canadian context. The transferability report concluded that the NBC can adopt some of the fire and structural provisions with a handful of conservative modifications. By way of example, the IBC recommends that IV-B (Mass timber protected exterior, limited exposed timber interiors) allow for 100% mass timber ceilings and integral beams, whereas the NBC continues to require no more than 25% exposure of similar areas.
As focus shifts towards greater Environmental-Social-Governance (ESG) goals, more businesses are considering sustainable construction materials in their construction plans. EMTC is likely to gain further traction following the 28th Conference of the Parties to the UN Framework Convention on Climate Change (commonly known as “COP28”, which was held in November and December of 2023 in Dubai) as the environmental and financial benefits of building with mass timber continue to offer an appealing avenue for the various jurisdictions to explore in order to meet those requirements.
These proposed changes collectively improve the viability of EMTC as a viable construction method by establishing clear performance criteria, and it therefore stands to reason that it will encourage even wider adoption of EMTC in future Canadian projects. This will naturally be of interest to the construction industry as a whole, including those seeking low carbon alternatives to traditional construction materials and methods at a time when the regional, national, and international markets continue to struggle through supply chain disruptions and material shortages.
The JTG-HVMT public review and consultation closed on February 16, 2024. Subject to comments received, these changes are expected to be adopted by provinces as early as spring 2024. As of now, Ontario has not decided whether to adopt the proposed changes based on this initiative, and the province will likely undertake a technical review of the proposed changes. We await with interest to see how Ontario and other provinces proceed with this initiative.
[1] According to the 2021 State of Mass Timber Buildings in Canada Report, there were nearly 800 mass timber projects built or under construction across Canada as of 2021: https://cfs.nrcan.gc.ca/publications?id=40364.
[2] National Building Code, Division B Part 3 Fire Protection, Occupant Safety and Accessibility, s. 3.1.6 Encapsulated Mass Timber Construction.
[3] For example, the Ontario Building Code incorporates approximately 60% of the NBC.
[4] In this context, “public review” refers to members of the public submitting comments/feedback, via an online portal, on each of the proposed changes, including whether they should be approved, altered (and if so, how), or rejected.
[5] Under the NBC, the “encapsulation rating” is the amount of time that a material or assembly will delay the ignition and combustion of encapsulated mass timber when it is exposed to fire under specific test conditions and performance criteria.
[6] “Combustible construction” means construction that does not meet the requirements or criteria for (1) “non-combustible construction” as set out in the CAN/ULC-S114 “Standard Method of Test for Determination of Non-Combustibility in Building Materials” or (2) encapsulated mass timber construction.
[7] “Heavy timber construction” means combustible construction in which a degree of fire safety is attained by placing limitations on the sizes of wood structural members and on the thickness and composition of wood floors and roofs and by the avoidance of concealed spaces under floors and roofs.
[8] In essence, an “archetype” – which term does not carry an authoritative definition – is generally understood to refer to a building categorized according to a combination of (1) its function (e.g. residential single family, residential multi-family, office, commercial, etc.), and (2) its occupancy capacities (such as building height and floor/mass ratio, and how many units or individuals can occupy each floor).