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In Gay Company Limited v. 962332 Ontario Inc, 2023 ONSC 6023, the Ontario Superior Court of Justice provided guidance as to what constitutes “registration” under the Construction Act (the “Act”).[1] In particular, the case centered on a dispute regarding the registration of a claim for lien under the Act and an Application to Delete a Construction Lien through the Land Registry Office, with the central question being whether “registration” of these documents had occurred under the Act.
As discussed below, Gay emphasizes the tension often present in the interplay (and sometimes, the disconnect) between the Act, on the one hand, and the procedural steps carried out through the Land Registry Office, on the other. Overlooking the intricacies of the Act, even amidst the conveniences of the Land Registry Office’s registration processes, can have substantial ramifications. Gay also provides a timely reminder as to the importance of precise compliance with the Act and the critical role of certification in the registration process. In that regard, Gay is equally important in highlighting the importance of responsibility of lawyers for their staff as it relates to steps taken under the Act.
Below, we review the guidance provided by the Court, which should be of interest to those practitioners who regularly engage with the Land Registry Office on behalf of clients.
Case Background
On June 30, 2023, the defendant hired Edward Spong, a lawyer, to register a claim for lien against title of a property. However, Spong was in the process of winding up his practice and contacted John Montgomery, another lawyer, for assistance. When Montgomery was unavailable, Spong then entrusted his law clerk with the registration of the claim for lien, despite the fact that the clerk’s expertise was limited to real estate matters.[2] Unlike Spong however, the clerk was a registered Teraview user (the relevant software regarding property) and therefore could actually take the practical steps necessary to register a lien on title.[3]
On July 6, 2023, the clerk met with the defendant’s representative and ultimately registered the claim for lien (the “First Claim for Lien“). However, a typographical error was identified in the name of the lien claimant. In an apparent effort to address this error, the clerk prepared an Application to Delete Construction Lien as a draft under Teraview under the incorrect assumption that the document was necessary to rectify the typographical error in the lien claim, (which assumption was based on the fact that such a process is required in real estate transactions).[4]
The next day, the clerk consulted Spong regarding her intention to register a second Claim for Lien in respect of the same matter (the “Second Claim for Lien“) as well as an Application to Delete Construction Lien in order to clear the title of the erroneous First Claim for Lien. However, Spong disagreed with registering the Application to Delete, and advised that another lawyer taking over the matter should handle it. At the time of this discussion, Spong was unaware that the clerk had already prepared the Application to Delete Construction Lien.[5] Spong agreed with the intent to register the Second Claim for Lien.
Pursuant to Spong’s instructions, the clerk did not prepare an Acknowledgment and Direction for the Application to Delete Construction Lien, and did not present such a document for the defendant’s representative’s signature. However, on the same day (July 7, 2023), the clerk did register the Second Claim for Lien with all of the same details and this time with the corrected lien claimant’s name. Notwithstanding instructions to the contrary, the clerk inadvertently also registered the Application to Delete Construction Lien, but as a separate instrument.[6]
On July 11, 2023, the Land Registry Office pointed out an error in the Second Claim for Lien. The clerk entered the Lien Claimant’s name as “962332 Ontario Inc., trading as Liberty Metal Fabricators”, to which the Land Registry Office requested that she remove “trading as” from the lien claimant’s name in order to effect registration under the Land Titles Act. The clerk then informed the Land Registry Office about the typographical error in the First Claim for Lien, and the erroneous registration of the Application to Delete the First Claim for Lien. The clerk then requested the withdrawal of both documents on July 13, 2023.[7]
Through the process, it does not appear that either the clerk or Spong considered the implications under the Act, but rather appeared to be focused squarely on the process requirements under the Land Titles Act.
On July 13, 2023, Spong had a call with the plaintiff’s counsel, who argued that the First Claim for Lien had been discharged and thus the defendant’s lien rights were forfeited. This appears to be the first time that Spong became aware that the Application to Delete the First Claim for Lien was registered on title notwithstanding instructions not to do so. Spong then notified the clerk about this issue, and on July 17, 2023, the clerk corrected the Second Claim for Lien as instructed by the Land Registry Office.
On August 1, 2023, the Land Registry Office confirmed that the clerk emailed the Land Registry Office to confirm the withdrawal of the First Claim for Lien and the Application to Delete the First Claim for Lien. On that same day, the Land Registry Office confirmed the withdrawals, and importantly, confirmed the Second Claim for Lien was certified by the Land Registry Office.[8]
The Superior Court’s Decision
The plaintiff brought a motion to have the defendant’s lien discharged on the basis of the registration of the Application to Delete the First Claim for Lien from July 7, 2023 which had been inadvertently submitted to Teraview by Spong’s clerk. In this regard, the plaintiff argued that the integrity of the land title system would be at risk if users cannot rely on registration of such documents.
Meanwhile, the defendant argued that the Application to Delete Construction Lien had not been validly “registered”, and thus, the lien was not actually discharged (and in fact remained valid).[9]
The Court considered several key issues relevant to the construction industry, (1) the definition of “registration” under the Act and the Land Titles Act, (2) whether the defendants correctly registered the Application to Delete Lien Claim in accordance with the definition of registration, and (3) whether the defendant’s lien was discharged pursuant to the Act.
Applicable Legislation
As noted above, the Act makes a number of references to “registration”, but does not actually define it. Since the Act does not define “registration” or articulate a mechanism for registration, the Court instead turned to the Land Titles Act (LTA) and the Land Registry Reform Act (LRRA) to ground its analysis. These statutes specify the criteria, procedures and forms involved in registration on title within Ontario.[10]
Section 78 of the LTA provides detailed information on the process of registering an instrument. Subsection 78(3) reads:
(3) Registration of an instrument is complete when the instrument and its entry in the proper register are certified in the prescribed manner by the land registrar, deputy or assistant deputy land registrar, and the time of receipt of the instrument shall be deemed to be the time of its registration.[11] [emphasis added]
Thus, under s. 78(3) of the LTA, an instrument’s registration is only complete when it has been received and certified. Further, s. 78(2) of the LTA allows for an instrument to be withdrawn before certification is granted.[12]
In addition, s. 23 of the LRRA explicitly prohibits direct electronic registration of documents in the electronic land registration database until the Land Registrar registers the document.[13] In other words, the simple fact that an electronic document is delivered is not sufficient in and of itself to qualify as registration; rather, the Land Registrar must be the party that fulfills this step.
The Court’s Analysis
In this case, the Court examined the relevant legislation with a view to the principles of statutory interpretation, particularly focusing on the meaning of “registration” within the context of the LTA.
The Court reiterated that modern statutory interpretation involves examining the words of an Act and are to be read within their complete context and in their grammatical and ordinary sense harmoniously with the legislative scheme, purpose, and parliamentary intent of the Act.[14]
On this point, the Court relied on the presumption of consistent expression[15] to find that, since the Act did not provide a definition of “registration”, the definition stipulated in the LTA would apply in order to avoid inconsistencies and absurd outcomes. Thus, consistent with the LTA, registration of an instrument under the Act is only complete when that instrument has been certified by the Land Registrar, such that, the Land Registrar has confirmed and accepted the accuracy and compliance of a document or registration process, and importantly, the registration may be withdrawn prior to certification.[16]
In this case, since registration under the LTA required the receipt and certification of the instrument, withdrawal before certification meant that registration was never completed. On this basis, the Court found that the First Claim for Lien and the Application to Delete the First Claim for Lien were withdrawn before certification, and therefore were never registered.[17]
With respect to concerns regarding the integrity of the land title system and potential complications for owners and contractors due to withdrawal of claims for lien, the Court maintained that the registration process was specifically included to ensure the system’s integrity, and emphasized that the Land Registrar plays a gatekeeping role which prevents improper use of the land registry system.[18]
Ultimately, the Court dismissed the motion to discharge the lien, finding that there was no registration of the First Claim for Lien or the Application to Delete of the First Claim for Lien, such that the lien itself could not be discharged as a result.[19] The Court therefore noted that the proper registration of the claim for lien was the registration (which included the step of certification) of the Second Claim for Lien.[20]
Commentary
The case at hand serves as a reminder of several critical lessons with broader applications.
First, it highlights the importance of accuracy in the context of lien registration. It goes without saying that accuracy is of paramount importance in the context of legal documents, but this concern is even more heightened in the context of registering a lien. However, an important consideration which Gay did not consider is section 6 of the Act. This provision allows for the correction of minor defects in a lien claim:
6 (1) No certificate, declaration or claim for lien is invalidated by reason only of a failure to comply strictly with subsection 32 (2), 33 (1) or 34 (5) unless[21], in the opinion of the court, a person has been prejudiced as a result, and then only to the extent of the prejudice suffered; 6 (2) Minor errors or irregularities to which subsection (1) applies include, (a) a minor error or irregularity in (i) the name of an owner, a person for whom services or materials were supplied or a payment certifier, (ii) the legal description of a premises, or (iii) the address for service; and (b) including an owner’s name in the wrong portion of a claim for lien
6 (1) No certificate, declaration or claim for lien is invalidated by reason only of a failure to comply strictly with subsection 32 (2), 33 (1) or 34 (5) unless[21], in the opinion of the court, a person has been prejudiced as a result, and then only to the extent of the prejudice suffered;
6 (2) Minor errors or irregularities to which subsection (1) applies include,
(a) a minor error or irregularity in
(i) the name of an owner, a person for whom services or materials were supplied or a payment certifier,
(ii) the legal description of a premises, or
(iii) the address for service; and
(b) including an owner’s name in the wrong portion of a claim for lien
It is unclear why the Court did not discuss this section, as it seemingly encompasses both the first and second errors in registering a lien, both of which arguably constitute a “minor error” under s. 6(2) of the Act.
Second, in light of the legislative gap in defining “registration”, this decision provides parties with a clearer understanding of what constitutes registration of a lien under the Act, and a succinct roadmap for how to effect registration, as well as the critical role of certification in the registration process. The Court’s application of the presumption of consistent expression ensures clarity and consistency, enabling parties to make informed assessments in pursuit of their objectives. As well, parties can better assure themselves of compliance with the correct processes when registering or withdrawing claims for lien under the Act.
Lastly, this case highlights the responsibility of lawyers with respect to the actions of their non-lawyer staff members under the Law Society of Ontario’s Rules of Professional Conduct (“LSO Rules”).[22] A lawyer may delegate routine administrative tasks and the preparation of certain legal documents to non-lawyer staff, such as law clerks or paralegals, so long as these tasks fall within their skill set and expertise.[23] However, the lawyer retains ultimate responsibility, and is required to review the non-lawyer’s work at frequent intervals to ensure the work is completed properly.[24]
In this case, Spong’s responsibilities included assessing the clerk’s competency with respect to drafting a lien. Further, Spong was required to consistently check in with the clerk to ensure the lien registration was done correctly. Considering the clerk’s lack of prior experience in this specific task, and the fact that her experience was limited to real estate, it is arguable in retrospect that this matter ought to have raised some doubt regarding the appropriateness of delegating such a task to the clerk. Additionally, the registration of the lien occurred without Spong’s prior verification of its accuracy, which was inconsistent with a lawyer’s duties under the LSO Rules.
Thus, Gay ultimately emphasizes the crucial balance between delegation and oversight in legal practice, underscoring the lawyer’s paramount responsibility for the actions of their staff.
[1] Gay Company Limited v. 962332 Ontario Inc 2023 ONSC 6023 [Gay]. This case occurred under the Construction Act, rather than its predecessor legislation, the Construction Lien Act.
[2] Ibid at paras 4-7.
[3] By way of further context, Teraview is a portal used to access data in the Government of Ontario’s land records database. It is used by parties to perform searches, create and submit title documents for registration, view and print several instruments, plans, parcel registers and also search for writs of executions, without the need to visit a ServiceOntario office.
< https://www.teraview.ca/en/about-teraview/>
[4] Ibid at paras 7-10.
[5] Ibid at paras 11-13.
[6] Ibid at paras 14-17.
[7] Ibid at paras 18-20.
[8] Ibid at paras 21-24.
[9] Ibid at paras 1-3.
[10] Construction Act, RSO 1990, C 30; Land Titles Act, RSO 1990, c L.5; Land Registry Reform Act, RSO 1990, c. L.4.
[11] Land Titles Act, RSO 1990, c L.5, s 78(3).
[12] Land Titles Act, RSO 1990, c L.5, ss 78(2) and 78(3).
[13] Land Registry Reform Act, RSO 1990, c. L.4, s 23.
[14] Gay, supra note 1 at paras 37 and 38.
[15] The presumption of consistent expression stipulates that legislative language is drafted in such a manner that identical words are intended to hold the same meaning both within a statute and across different statutes (Vavilov, para 44).
[16] Ibid at paras 46-5; the term “certification” is not defined under either piece of legislation; however, in practice, it refers to the process of the Registrar verifying that the lien is compliant with statutory and regulatory requirements.
[17] Ibid at paras 59-60.
[18] Ibid at para 61.
[19] Ibid at para 59.
[20] Ibid at paras 57-60.
[21] Section 32(3) discusses liability for refusal to certify, s. 33(1) discusses certification of a subcontract, and s. 34(5) deals with the content of claim for every lien.
[22] Rules of Professional Conduct [LSO Rules].
[23] LSO Rules, s 6.1, commentary [1].
[24] LSO Rules, s 6.1, commentary [1].
A recent decision from Belgium’s Cour de Cassation raises an interesting question about the extent to which arbitrators are permitted to delegate tasks to their secretaries – namely, at what point has a tribunal delegated too much responsibility? While this issue – aptly named as the “fourth arbitrator” problem – has received a great deal of scrutiny in international arbitration circles over recent years, it has received little discussion in Canada despite the increased use of tribunal secretaries.
In the Belgian case, stylized for our purposes as Emek Insaat Sti Ltd v European Union (“Emek”),[1] the Court found that an ICC tribunal could allow the Administrative Secretary to draft the award, so long as the tribunal reviews the file and reviews, corrects and validates the award.[2] The Court’s decision echoes the Court of Appeal of the Hague’s decision in 2020 to reinstate three awards against the Russian Federation in international investor-state arbitration proceedings started by shareholders in the now defunct Yukos Oil Company (“Yukos”)[3], and provides food for thought for Canadian practitioners as to the proper boundaries of a tribunal secretary’s authority.
The Decision
In Emek, the Court upheld a lower court’s interpretation of the “Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration Under the ICC Rules of Arbitration”, dated January 1, 2019 (the “ICC Note”),[4] which bound the tribunal and which stated at paragraphs 184 and 187 as follows:
The tasks entrusted to an Administrative Secretary shall in no circumstances release the arbitral tribunal from its duty to personally review the file. Under no circumstances may the arbitral tribunal delegate its decision-making functions to an Administrative Secretary. Nor shall the arbitral tribunal rely on an Administrative Secretary to perform on its behalf any of the essential duties of an arbitrator.
[…]
A request by an arbitral tribunal to an Administrative Secretary to prepare written notes or memoranda shall in no circumstances release the arbitral tribunal from its duty personally to review the file and/or to draft any decision of the arbitral tribunal. [emphasis added]
The lower court concluded that paragraph 184 required the tribunal to personally review the file, and that therefore the “and/or” in paragraph 187 must permit the Administrative Secretary to draft any decision (i.e., award) of the tribunal, so long as the tribunal corrects and validates the decision. If paragraph 187 did not permit the Administrative Secretary to draft a decision, the lower court reasoned, then the ICC Note would not have used the phrase “and/or”.[5]
The Cour de Cassation also held effectively that because the Administrative Secretary is explicitly permitted under paragraph 187 to prepare notes and memoranda, which could form the basis of the award or even form part of the award, the secretary’s drafting of the award itself would not amount to an improper delegation, by the tribunal, of its jurisdiction.[6]
Analysis
To Canadian readers, the lower court’s interpretation of paragraph 187 of the ICC Note, adopted by the Cour de Cassation, seems somewhat artificial in its construction, and is arguably inconsistent with other provisions of the ICC Note. If the “and/or” in paragraph 187 were meant to allow the tribunal either to review the file or to draft the award, then that would conflict with paragraph 184, which requires the tribunal to review the file.
Since, in light of paragraph 184, paragraph 187 cannot “release the arbitral tribunal from its duty personally to review the file”, the “and/or” in paragraph 187 does not appear in fact to be disjunctive in nature. It is arguable that paragraph 187 should not be read as releasing the tribunal from its duty personally to “draft any decision” on the basis simply that the tribunal reviewed the file.
As well, if the word “and” or the word “or” had been used alone, paragraph 187 would likely be interpreted to mean that the tribunal is required to both review the file and draft the award. While “and/or” typically means “both or either,” the slash between “and” and “or” in this case may have indicated that the author(s) of the ICC Note did not feel compelled to commit to either word, given that each word, used alone, would have imported the same meaning. It is not unheard of for synonyms to be separated by a slash – indeed, legal doublets, such as “null and void,” “over and above,” “covenant and agree,” “from now and henceforth” are pairs of synonyms that are used today in legal writing essentially for the sake of emphasis rather than to express different concepts.
Further it should be noted that paragraph 185 of the ICC Note enumerates the tasks that an Administrative Secretary can perform, none of which suggest the authority to draft an award (except for the undisputed factual portions):
Notwithstanding the above, an Administrative Secretary may perform organisational and administrative tasks such as:
It could be argued that paragraph 185 of the ICC Note would permit the Administrative Secretary to attend a hearing in an arbitrator’s stead, because it states that the Administrative Secretary’s responsibilities can include “attending hearings, meetings and deliberations; taking notes or minutes or keeping time”. Of the same token the ICC Note does not state explicitly that arbitrators must attend hearings. Accordingly, if the Cour de Cassation’s logic were extended, it would be arguable that that an arbitrator could meet the requirements of the ICC Note simply by reviewing the notes or minutes kept by the Administrative Secretary. This would seem to be an insupportable outcome, though, insofar as the fundamental principle of a the right to a fair hearing would logically include the right to be heard by the person(s) adjudicating the matter.
In light of the above, it may therefore be that the Cour de Cassation’s interpretation of “and/or” in the ICC Notes will have limited persuasive value outside of Belgium.
Even so, it is worth noting that a revised “Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration Under the ICC Rules of Arbitration” came into effect on January 1, 2021 (the “Revised ICC Note”), and contains the following language to replace paragraph 187 of the 2019 version:
Under no circumstances may the arbitral tribunal delegate its decision-making functions to an administrative secretary or rely on an administrative secretary to perform on its behalf any of the essential duties of an arbitrator. Likewise, the tasks entrusted to an administrative secretary, such as the preparation of written notes or memoranda, will not release the arbitral tribunal from its duty to personally review the file and/or draft itself any arbitral tribunal’s decision.
The content of paragraph 184 has been removed in the Revised ICC Note. While the “and/or” language remains, the provision that the Belgian lower court relied on in its decision is no longer part of the Revised ICC Note.
While, in our view, the Cour de Cassation’s interpretation of “and/or” would arguably not be adopted by a Canadian court, and despite the fact that Belgian law is of limited persuasive value in Canada, Emek nevertheless highlights a key issue as to the proper role of tribunal secretaries and the perils of over-delegation. This is particularly true where there is no case law in Canada that provides guidance as to the boundaries of delegation, where the ICC Note is only applicable to ICC proceedings, and where the role of tribunal secretaries has been a live issue in the arbitration community for several years, generating commentary from both practitioners and institutions.
As a practical matter, readers will appreciate that tribunals often delegate tasks to the secretary as a means of reducing costs to the parties, making proceedings more efficient, and otherwise freeing up the tribunal’s time for its adjudicative responsibilities. Indeed, this aligns with the proposition (expressed in many institutional rules) that an arbitration should be economical and proportion to the dispute at hand. In that regard, paragraph 185 of the ICC Note provides a helpful enumeration of various activities that fall within the bounds of permissible delegation, all of which could broadly be described as administrative, organizational, or clerical in nature rather than adjudicative.
However, as noted in the Revised ICC Note, tribunals should not delegate their decision-making functions or allow staff to perform “essential duties” of an arbitrator. In that regard, it is not always clear where to draw the line, particularly where there has also been no judicial consideration in Canada as to what constitutes an “essential duty” of an arbitrator. Arguably, a secretary drafting an award might not constitute an abdication of responsibility by the tribunal, if the arbitrator were to then scrutinize the draft award and independently reach their own conclusions as to the disputed issues. In that regard, the secretary’s draft award would simply be “for consideration” by the tribunal. On the other hand, however, it could credibly be argued that the delivery of a draft award naturally frames the manner in which the tribunal will assess the disputed issues, and might therefore predispose them to some form of unconscious bias. Ultimately, the key consideration is likely that the tribunal has preserved its exercise of independent judgment.[7]
As a result, it unsurprising that many institutions (such as the LCIA, SIAC, HKIAC, ICCA, and the IBA under its Guidelines on Conflict Interest) have either incorporated sections within their arbitral rules concerning the scope of a secretary’s duties, or else have published freestanding commentary or guidelines in respect of the issue. Given that practitioners’ perception of the practice is critical to bolstering its legitimacy – i.e., the adage that justice must be seen to be done – such consideration by leading institutions is welcome. Generally, those institutions have taken a more conservative approach, explicitly prohibiting the delegation of decision-making and otherwise mandating strict scrutiny by the tribunal of the secretary’s performance, as well as mandating that the tribunal’s duties of independence and impartiality apply with equal force to the secretary.[8]
Practically speaking, however, the act of drafting is rarely a solitary task even in the litigation context. Indeed, in North America, it is common in many fields (including legal practice) for subordinates to draft documents under the direction, supervision and/or guidance of the individual(s) engaged to do so. What is ultimately important is that the final author assumes responsibility for its content, with the implicit understanding that they have scrutinized and approved of the document’s specific contents, even if they themselves did not draft every word. As such, the line between appropriate and inappropriate delegation might rest at least partly in the eye of the beholder.
Finally, the Cour de Cassation’s decision also echoes the Court of Appeal of the Hague’s decision in the Yukos cases. In that decision, the Court of Appeal rejected the Russian Federation’s argument that the tribunal’s assistant was effectively an unacknowledged “fourth arbitrator”. The Court of Appeal found no evidence that he had participated in decision-making, even if he may have played a significant role in drafting the awards. The Court of Appeal rejected the idea that only the drafting of memoranda and factual portions of an award would be permissible, while the drafting of the “decisive” portions would not be under any circumstances.
While these two decisions are, as noted, unlikely to be of persuasive authority under Canadian law due to a lack of historical reliance by Canadian courts on Belgian decisions (to say nothing of the differing legal systems), Emek nevertheless raises the interesting question of how a Canadian court might resolve this issue should it present itself in future.
On the one hand, Emek is consistent with Yukos and the practical realities of legal practice; on the other hand, however, the balance of institutional and critical commentary arguably suggests a more conservative approach. Between these two positions, the England & Wales High Court’s decision in P v Q and Ors – which would be of greater persuasive authority to a Canadian court, given its provenance – strikes a middle ground, suggesting that the ultimate consideration remains whether the tribunal has or has not abrogated or impaired its non-delegable and personal decision-making function (in other words, its independent judgment).[9]
Ultimately, the answer will depend on the circumstances of each case, including the applicable institutional rules and guidelines agree to by the parties. While it is difficult to reach a definitive conclusion as to the appropriate boundaries of delegation in the absence of Canadian case law, the safest practice for arbitrators remains for them to delegate judiciously and to carefully scrutinize those tasks that have been delegated, applying their own personal judgement throughout.
[1] Court file number C.21.0548.F (European Case-Law Identifier: ECLI:BE:CASS:2023:ARR.20230424.3F.1).
[2] C.21.0548.F/5 (i.e., page 5 of the decision).
[3] European Case-Law Identifier: ECLI:NL:GHDHA:2020:234.
[4] The ICC Note can be accessed at https://iccwbo.be/icc-issues-updated-note-providing-guidance-to-parties/.
[5] C.21.0548.F/5 (i.e., page 5 of the decision).
[6] C.21.0548.F/5 (i.e., page 5 of the decision).
[7] In that regard, see the England & Wales High Court’s decision in P v. Q and Ors [2017] EWHC 194 (Comm) at para 65.
[8] On the other hand, the ICCA’s Young ICCA Guide on Arbitral Secretaries at Article 3 suggests that “the role of an administrative secretary ‘may legitimately go beyond the purely administrative’” with appropriate direction and supervision by the tribunal. Ultimately, that Article provides rather generally that in such circumstances, a secretary could be involved in drafting “appropriate” parts of the award.
[9] P v Q and Ors [2017] EWHC 194 (Comm) at paras 65-66.
In Praxy Cladding Corp. v. Stone Lamina Inc., 2023 ONSC 5288, the Ontario Superior Court reviewed the process for amending pleadings in proceedings under the Construction Act, and in doing so, provided important clarity as to what constitutes an admission, as well as the distinction between (and implications of) an admission from a pleading versus an admission arising out of an examination for discovery.
Below, we consider the key takeaways from this decision with respect to pleadings and conducting examinations for discovery.
Factual Background
Praxy Cladding Corp. (“Praxy“), contracted with Stone Lamina Inc. and GCAT Group Inc. (collectively, “Stone Lamina“) for Stone Lamina to supply and install– among other things panels, aluminum rails and clips for the project that was the subject matter of this case.
Praxy commenced an action against Stone Lamina under the Construction Act. Praxy’s Statement of Claim pleaded, in relevant part, that the parties “executed a Purchase Order”, referring to the fact that the parties had executed a purchase order for the supply and installation of the materials mentioned above.
After the close of pleadings, the parties conducted examinations for discovery (pursuant to the order for Trial Directions, as required under the process set out in the Construction Act). During the examination of the representative for Praxy, counsel for Stone Lamina showed the purchase order and asked expressly if Praxy agreed that the purchase order formed the parties’ contract. The witness agreed, although the question was then the subject of on-the-record disagreement between counsel as to whether it was proper for a legal question to be put to the deponent.
After examinations for discovery concluded, Praxy sought to amend its Statement of Claim by adding two paragraphs describing Praxy’s quote for its scope of work, and a third paragraph stating that the quote was expressly or implied incorporated into the purchase order and that the quote formed a contract document.
The original paragraph in the Praxy Statement of Claim read as follows:
“On or about February 1, 2019, Praxy and Stone Lamina executed a Purchase Order for the installation of Stone Lamina panels, aluminum rails and clips, Rockwool insulation and Blueskin membrane and the supply and installation of galvanized angles and brackets (the “PO”) in respect of the Project.”[1]
Stone Lamina consented to certain other amendments proposed by Praxy, but resisted the amendment to the foregoing paragraph on the basis that the existing Statement of Claim admitted that only the purchase order comprised the contract. Stone Lamina also took the position that a binding admission to that same effect was made during examinations for discovery.
Praxy brought a motion for leave of the Court to include the disputed amendments, which was granted.
The Court’s Decision
Before the Court, Praxy took the position that since the Construction Act is silent on the process for amending a pleading, leave to amend should be granted under Rule 26.01 . Conversely, Stone Lamina took the position that leave is required under Rule 51.05, since the proposed amendments would constitute a withdrawal of an admission.
The Court found that Praxy did not make a binding admission in its pleadings, nor during its examination for discovery, and that even if Praxy had made an admission in the Statement of Claim (which it did not), it would still met the test for withdrawal of an admission.
The Court began its analysis by noting as follows:
With these points in mind, the Court turned to its consideration of whether Praxy should be permitted to withdraw the purported admission.
First, the Court reiterated that an admission in a pleading must be an unambiguous and deliberate, generally being admissions of fact that assist the opposing side in proving its claim or defence. In this case, the purported admission was ambiguous at best in that it was unclear whether the Statement of Claim stated unequivocally and deliberately that the purchase order was the only contract document.
Further, even if the statement in question was an admission in the Statement of Claim, the Court referred to the test for withdrawal of an admission[4] as set out in the case law (which is distinct from Rule 51.05):
As a preliminary point, the Court considered whether the impugned phrase from the original Statement of Claim – that the parties “executed a Purchase Order” – constituted an allegation of fact (which could be withdrawn), or whether it was a legal conclusion (which could not be withdrawn, insofar as it would have amounted to an admission). In that regard, the Court noted that under subrule 25.6(2) of the Rules, parties can raise a point of law in a pleading, provided that the conclusions of law may be pleaded, only if the material facts supporting them are pleaded. In the Court’s view, the impugned phrase was not a legal conclusion, but rather was a statement of material fact (1) that the purchase order was signed, and (2) the scope of work was contemplated by it. As such, it was a factual statement, and not a legal conclusion.
Therefore, it was appropriate to consider whether the impugned phrase could be withdrawn according to the common law test for withdrawal of an admission. The Court found as follows:
The Court also rejected a number of additional arguments raised by Stone Lamina including arguments to the effect that (1) the motion was an “ambush after the fact”, (2) there would further prejudice from “unjust delays” in the matter proceeding to trial, such delays arising from the need to revisit the pleadings stage, and (3) permitting the withdrawal would allow Praxy to change its litigation strategy.
Key Takeaways
Overall, and although Praxy is a relatively short decision, it nevertheless provides useful reminders with respect to pleadings and conducting examinations for discovery.
First, Praxy offers an important reminder to parties and their counsel to plead precisely with respect to the nature of a purchase order or a quote when drafting their pleadings, and to ensure that all contract documents are properly pleaded. This is of course particularly relevant in the construction context, where many (if not most) contractual relationships with subtrades and suppliers involve the delivery of a quote and the subsequent execution of a purchase order. Careful pleading will avoid the risk – and just as importantly, the cost – of needing to bring a motion to amend a pleading down the road because key facts were initially omitted.
Second, Praxy also provides a number of helpful clarifications and reminders in respect of issues that can be overlooked by practitioners and which, although they may be small or subtle, can nevertheless be impactful. Most obviously, this includes the proposition that different rules apply to the withdrawal of admissions made during an examination for discovery than those rules that apply to admissions in respect of pleadings, requests to admit, and deemed admissions.
Finally, Praxy suggests that the difference between an allegation of fact in a pleading versus a legal conclusion is a fine line, and that a mere handful of words can make the difference between a successful motion to amend and a failure. In this particular case, Praxy only pleaded that the parties had executed a purchase order – such statement was insufficient to qualify as a legal conclusion by Praxy that the purchase order constituted the parties’ agreement. If, however, Praxy had pleaded to the effect that the parties executed a purchase order in order to enter into an agreement as to the supply and installation of materials, then one wonders whether such language may have been sufficient to tip the balance from allegation of fact into legal conclusion.
As always, careful pleading is a necessity and alleviates the need to “take back” what is alleged.
[1] Praxy Cladding Corp. v. Stone Lamina Inc., 2023 ONSC 5288 at para 7.
[2] Ontario v. Rothmans Inc., 2011 ONSC 2504 at para. 120.
[3] Praxy Cladding Corp. v. Stone Lamina Inc., 2023 ONSC 5288 at para. 17.
[4] PBW High Voltage Ltd. v. Metrolinx, 2021 ONSC 6715 at para. 27.
On November 10, 2023 the Supreme Court of Canada (“SCC”) released its decision in R v. Greater Sudbury (City) (“Greater Sudbury”)[1] finding that an “owner” of a construction project can be considered an “employer” under the Occupational Health and Safety Act (the “OHSA” or the “Act”) of Ontario.[2] This decision showcases a paradigm shift in how project owners, constructors, and employers perceive and undertake their health and safety obligations under the OHSA. It underscores the importance of a collective approach to workplace safety and mandates a higher level of vigilance and compliance from all parties involved in a construction project. Below, we consider some of the key takeaways of this decision.
Background
The City of Greater Sudbury (the “City”) hired Interpaving Limited (“Interpaving”) to repair a downtown water main (the “Project”). The contract between the City and Interpaving stipulated that Interpaving would oversee the entire Project. This included acting as the “constructor” as defined by the OHSA, and guaranteeing compliance with the standards set forth in the Act. During the project, an Interpaving employee, driving a road grader in reverse, fatally struck a pedestrian while she crossed an intersection within the construction zone. It was determined that the project site lacked necessary safety measures, such as a fence and signaller, as mandated by regulations, leading to the Ministry of Labour (the “Ministry”) charging the City and Interpaving with violations of Construction Projects, O. Reg. 213/91, contrary to section 25(1)(c) of the OHSA. The Ministry charged the City on the basis that the City was a “constructor” and an “employer” under the OHSA.[3]
Procedural History
The Ontario Court of Justice acquitted the City, finding that Interpaving exercised direct control over the workers and the Site, thus excluding the city from the definition of an employer. The trial judge also noted that if the City was an employer, it had acted with due diligence, thus acquitting the City of all charges.[4]
The Crown appealed to the Ontario Superior Court of Justice (“ONSC”), arguing that the City was a “constructor” on the Project due its level of control, however, this argument was rejected. The ONSC found that the City’s contract with Interpaving was typical for municipal maintenance work, and the City’s involvement, including quality control, did not make it a “constructor” or “employer” under the OHSA, leading to a dismissal of the Crown’s appeal.[5]
Following this, the Ontario Court of Appeal (ONCA) granted the Crown leave to appeal to determine if the City was an employer under the OHSA, based on the definition of employer as one who employs workers. The ONCA found that the City was an employer, as it had employed inspectors at the project site for tasks such as quality assurance, irrespective of its control over the project. The issue of the City’s due diligence defense was referred back to the ONSC for further consideration.[6]
The Decision of the Supreme Court of Canada
In a split decision, four justices agreed (with the other four judges in dissent, given that Justice Brown did not participate in the judgment) with the Court of Appeal that the City was indeed an employer and had breached its duty under section 25(1)(c) of the OHSA. Because a majority is required to overturn a lower court decision, the fact that the court was evenly split meant that there was no majority and that the appeal was therefore dismissed.
The SCC found that the Act is designed to offer a reasonable level of protection for worker health and safety at the workplace and is recognized as a remedial public welfare statute, aimed at ensuring a minimum level of worker protection. Citing to Ontario (Ministry of Labour) v Hamilton (2002), the SCC emphasized that the Act should be interpreted generously to promote public health and safety, avoiding narrow or technical interpretations that could hinder its public welfare objectives.[7]
Further, the SCC found that the Act achieves its public welfare purpose by allocating health and safety duties among various workplace parties, including constructors, employers, and owners, emphasizing that these duties are often concurrent and overlapping, ensuring multiple parties are responsible for the same safety measures. This approach is described as the “belt and braces” strategy in occupational health and safety, ensuring worker protection through multiple safeguards. If one system fails, another might compensate, rendering the protection of workers a collective responsibility.[8] Following this approach, the SCC held that multiple workplace entities are accountable for health and safety breaches, and they cannot use others’ failures as an excuse for their own negligence. Every workplace participant must ensure a safe working environment.[9]
Since a breach of s. 25(1)(c) is a strict liability offence, the Ministry only needed to prove the actus reus beyond a reasonable doubt to ground a conviction, which, according to the SCC, had been done. Importantly, the Ministry was not required to demonstrate that the City had exercised control over the workers or workplace to establish a breach. The Court determined that the Act’s text and context indicated a legislative intent to deliberately focus on the employer’s connection to the workplace rather than control over individual workers.[10] This broad interpretation of “employer” and their duties should be viewed as complementary within the Act’s framework. Furthermore, the presence of a due diligence defense under section 66(3)(b) is significant. This defense acts as a safeguard, allowing employers who breach section 25(1)(c) to avoid penalties if they can prove they took all reasonable steps to prevent the breach. The SCC found that imposing a control requirement in this context could undermine the Act’s public welfare objective of establishing shared responsibility.[11]
In considering whether the City had successfully demonstrated due diligence under section 66(3)(b) on a balance of probabilities, the SCC opined that here, control was a relevant factor. An employer can argue that its lack of control over the workplace or workers indicates it took all reasonable steps under the circumstances. This approach addresses fairness concerns about imposing liability for breaches caused by others. Factors for consideration include the accused’s degree of control, whether control was delegated to a constructor, the evaluation of the constructor’s compliance abilities, and the monitoring and supervision of the constructor’s work.[12]
In the case at hand, the City was deemed an employer of both the quality control inspectors it directly employed and dispatched to the construction project, and of Interpaving. As such, the City was obligated under section 25(1)(c) to ensure prescribed measures and procedures were implemented at the worksite. The failure to implement required safety measures, such as fencing and signallers, on the accident date meant that the City, as an employer, committed an offence under section 25(1)(c).
The Supreme Court of Canada’s decision in Greater Sudbury carries significant implications for the construction industry, particularly with respect to how project ownership and health and safety responsibilities are viewed under the OHSA. The following takeaways highlight these impacts.
Expanded Scope of ‘Employer’ Under OHSA: The ruling establishes a broad interpretation of what constitutes an ’employer’ under the OHSA. By finding that the City, as the project owner who employed inspectors for quality assurance, was an ’employer’, the SCC effectively expanded the scope of this definition. This implies that any project owner, irrespective of their direct control over the project or workers, can be deemed an employer if they have a contractual relationship with employees or contractors at the project site. This expansion is pivotal for project owners who may not be directly involved in day-to-day operations but have a contractual nexus to the project. They must now be more vigilant about health and safety compliance, understanding that their connection to the workplace, not control over it, determines their responsibility under the Act.
‘Belt and Braces’ Strategy in Workplace Safety: The decision emphasizes the ‘belt and braces’ approach to occupational health and safety. The SCC’s interpretation reinforces the idea that multiple parties can be concurrently responsible for the same safety measures, ensuring a collective responsibility for worker protection. This approach indicates that failures by one party cannot be used to absolve others from their safety obligations. For the construction industry, this translates to a more collaborative approach to safety, where constructors, employers, and owners must work in tandem to ensure compliance with safety regulations. This landmark ruling may encourage a culture of shared responsibility, potentially leading to more rigorous safety protocols and collaboration in the industry.
Due Diligence Defence and its Implications: The SCC’s decision also sheds light on the due diligence defence under section 66(3)(b) of the Act. While this defence acts as a safeguard for employers who can prove they took all reasonable steps to prevent a breach, the ruling clarifies that control is a relevant factor in this context. In cases where an employer lacks direct control over the workplace or workers, demonstrating due diligence becomes crucial. Project owners and employers in the construction industry should be mindful of this aspect and should consider adopting more proactive and comprehensive safety measures and oversight mechanisms. They will need to ensure that not only are safety measures in place, but that they are actively monitoring and evaluating the compliance abilities of contractors and constructors to reinforce their due diligence obligations.
It is likely that this decision extends beyond the borders of Ontario and has potential implications for similar workplace health and safety legislation in other Canadian provinces. In British Columbia, for example, the Occupational Health and Safety Regulation (the “Regulation“)[13] states that its purpose is aimed at promoting occupational health and safety and protecting workers and others from work-related risks. The Regulation also expressly stipulates that compliance with its requirements is not just an end in itself but serves as a foundational aspect of building an effective health and safety program. It emphasizes cooperation between workers and employers to resolve workplace health and safety issues. The SCC’s decision in Greater Sudbury highlights the necessity of interpreting such regulations to advance public welfare and health and safety goals. This approach aligns with the Regulation’s objective in British Columbia, where the focus is on creating a collaborative and comprehensive safety culture rather than merely adhering to technical compliance.
Similarly, the definition of ’employer’ under the OHSA shares parallels with that in Alberta’s Occupational Health and Safety (OHS) Act[14]. Both Acts encompass a range of relationships, including those involving contractors and subcontractors, and do not depend on direct control over workers. This similarity suggests that the principles set out in Greater Sudbury are likely to be pertinent in interpreting the scope of ’employer’ in Alberta and potentially in other provinces as well. These interpretations imply a broader understanding of employer responsibilities, emphasizing the collective role in ensuring workplace safety.
[1] 2023 SCC 28 [“Greater Sudbury“].
[2] R.S.O. 1990, c. O.1.
[3] R. v. Greater Sudbury (City), 2019 ONSC 3285 [Sudbury].
[4] Greater Sudbury, supra note 1 at para 3.
[5] Sudbury, supra note 3 at paras 28-37.
[6] Ontario (Labour) v. Sudbury (City), 2021 ONCA 252.
[7] Greater Sudbury, supra note 1 at para 8.
[8] Ibid at paras 10-11, citing Ontario (Ministry of Labour) v Enbridge Gas Distribution Inc., 2010).
[9] Ibid.
[10] Ibid at paras 17-22.
[11] Ibid at para 37.
[12] Ibid at paras 49-60.
[13] BC Reg 296/97.
[14] SA 2020, c O-2.2
In FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation (“FamilyMart”),[1] the Judicial Committee of the United Kingdom’s Privy Council (“JCPC”) held that when a party to an arbitration agreement seeks a remedy that is only available in court, the arbitration agreement still applies to the extent that the matters in dispute are arbitrable. In short, a court may bifurcate the dispute, and order a stay of the court proceeding pending the outcome of the arbitrable matters.
The JCPC also confirmed that effect should be given to an arbitration agreement unless (1) the agreement is contrary to the public policy of the court or (2) there is a rule of law or statutory provision that renders the matters within the scope of the arbitration agreement incapable of resolution by arbitration.[2]
The Facts
FamilyMart involved a dispute between two holding companies that together controlled a convenience store business in mainland China, which was a going concern (i.e., was solvent). The minority shareholder (“FMCH”) was a Japanese company with considerable experience in the convenience store business across Asia through one of its subsidiaries. The majority shareholder (“Ting Chuan”) was part of a group of companies owned by the Taiwanese Wei family.
Believing that Ting Chuan was diverting profits from the joint venture to members of its corporate group, FMCH sought to have the joint venture wound up under the Companies Act[3] of the Cayman Islands, where the joint venture convenience store business was incorporated, on the basis that it would be “just and equitable” for a court to do so.[4] In the JCPC’s view, “the real aim” of FMCH’s petition to court was to have the Grand Court of the Cayman Islands require Ting Chuan to sell its majority stake in the business to FMCH.[5]
A shareholder agreement between the two parties contained an arbitration agreement, and it was conceded by FMCH at the Court of Appeal that the dispute fell within the scope of the arbitration agreement. The question for the JCPC therefore was whether FMCH’s petition to court “has made the matters raised in that petition not susceptible to arbitration.”[6]
Those matters were identified as the following:
(1) Whether FMCH has lost trust and confidence in Ting Chuan and in the conduct and management of the Company’s affairs. Ting Chuan particularises this matter into three sub-headings: (i) whether the majority directors owe various duties to the Company, (ii) whether the majority directors have breached those duties or engaged in misconduct, and (iii) whether Ting Chuan caused, permitted or procured the majority directors to act in breach of their duties or to engage in the alleged misconduct (2) Whether the fundamental relationship between FMCH and Ting Chuan has irretrievably broken down. In particular: (i) whether an understanding was reached between the shareholders by 2003 and, if so, what were the terms of that understanding, (ii) was the understanding superseded at any point in time after 2003, for example by reason of the conclusion of the SHA, and (iii) whether Ting Chuan acted contrary to that understanding after 2012. (3) Whether it is just and equitable that the Company should be wound up. (4) Whether FMCH should be granted the alternative relief, which it prefers, under section 95(3)(d) of the Companies Act, namely an order requiring Ting Chuan to sell its shares in the Company to FMCH, and, if so, what is the value of those shares. (5) Whether, if such alternative relief is not appropriate, an order winding up the Company should be made and whether the persons identified by FMCH should be appointed as joint official liquidators.[7]
(1) Whether FMCH has lost trust and confidence in Ting Chuan and in the conduct and management of the Company’s affairs. Ting Chuan particularises this matter into three sub-headings: (i) whether the majority directors owe various duties to the Company, (ii) whether the majority directors have breached those duties or engaged in misconduct, and (iii) whether Ting Chuan caused, permitted or procured the majority directors to act in breach of their duties or to engage in the alleged misconduct
(2) Whether the fundamental relationship between FMCH and Ting Chuan has irretrievably broken down. In particular: (i) whether an understanding was reached between the shareholders by 2003 and, if so, what were the terms of that understanding, (ii) was the understanding superseded at any point in time after 2003, for example by reason of the conclusion of the SHA, and (iii) whether Ting Chuan acted contrary to that understanding after 2012.
(3) Whether it is just and equitable that the Company should be wound up.
(4) Whether FMCH should be granted the alternative relief, which it prefers, under section 95(3)(d) of the Companies Act, namely an order requiring Ting Chuan to sell its shares in the Company to FMCH, and, if so, what is the value of those shares.
(5) Whether, if such alternative relief is not appropriate, an order winding up the Company should be made and whether the persons identified by FMCH should be appointed as joint official liquidators.[7]
The JCPC concluded that matters (1) and (2) “are substantive disputes between FMCH and Ting Chuan which provide the factual basis for the winding up petition on the just and equitable ground”, and therefore must be determined by an arbitral tribunal (unless the parties were to jointly waive their right to arbitration).[8] This required a mandatory stay of the winding up petition in relation to matters (1) and (2) under the Foreign Arbitral Awards Enforcement Act of the Cayman Islands (the “FAAEA”),[9] and, accordingly, a discretionary stay in respect of matters (3) to (5) on the basis that matters (1) and (2) are the precursor to any determination on those matters.
Reasoning
The JCPC considered the New York Convention in detail recognizing that it quite successfully fulfilled its aim “to establish a single uniform set of international legal standards for the recognition and enforcement of arbitration agreements and awards.”[10] Specifically, the JCPC interpreted Article II(3) of the New York Convention, which is implemented in the FAAEA. Article II(3) provides:
The court of a Contracting State, when seized of an action in a matter in respect of which the parties have made an agreement within the meaning of this article, shall, at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.[11] [emphasis added]
In particular, the JCPC considered the meaning of “a matter” and of “inoperative.” The JCPC found it appropriate to consider “the jurisprudence of several countries as guides”, given that their statutes – unsurprisingly – contain similar provisions.[12] Therefore, the JCPC’s interpretation of Article II(3) might be considered persuasive, though not binding, on Canadian courts, when interpreting that provision, as enacted through Canadian statutes such as Ontario’s International Commercial Arbitration Act, 2017.[13]
With respect to “a matter,” the JCPC relied on the Court of Appeal of Singapore’s decision in Tomolugen Holdings Ltd v Silica Investors Ltd,[14] to conclude as follows:
[A] “matter” is a substantial issue that is legally relevant to a claim or a defence, or foreseeable defence, in the legal proceedings, and is susceptible to be determined by an arbitrator as a discrete dispute. If the “matter” is not an essential element of the claim or of a relevant defence, it is not a matter in respect of which the legal proceedings are brought. … [A] “matter” is something more than a mere issue or question that might fall for decision in the court proceedings or in the arbitral proceedings.[15]
Based on this understanding of the term, the JCPC divided the matters in dispute into the five listed above.
The JCPC considered an arbitration agreement “inoperative” when there is either (1) “subject matter non-arbitrability”, i.e. the matters at issue between the parties are incapable of being settled by arbitration (for example, a criminal law matter), or (2) remedial non-arbitrability, i.e., the remedies sought are unavailable to an arbitral tribunal.[16]
In FamilyMart, the issue was one of remedial non-arbitrability, because it was common ground between the parties that a company could only be wound up by a court rather than an arbitral tribunal. However, the JCPC described the “underlying concept” of subject-matter non-arbitrability, which is “that there are certain matters which in the public interest should be reserved to the courts or other public tribunals for determination.”[17] Certain types of disputes are “excluded by statute or public policy from determination by an arbitral tribunal.”[18]
FMCH argued that bifurcation between an arbitral proceeding and a court proceeding was a public policy question, on the grounds that it would cause undue delay. This was rejected by the JCPC, which found that unnecessary delay could be avoided by proper case management. The JCPC also found case law to support the proposition that courts will grant a stay while arbitral matters are first addressed.[19]
The JCPC also found that a court would effectively be bound by the findings of fact at arbitration, much in the same way that a court would be bound by an agreed statement of facts between the parties.
FamilyMart is a further reminder that courts will seek to enforce arbitration agreements to the extent possible. The JCPC cites the pithy statement of Lord Dunedin in A Sanderson & Son v Armour & Co Ltd: “If the parties have contracted to arbitrate, to arbitration they must go.”[20]
In FamilyMart, bifurcation was required because the arbitration agreement between the parties was inoperative with respect to matters (3) to (5) due to the non-arbitrable nature of the remedies being sought. Accordingly, the JCPC required the dispute to be arbitrated up to the point at which a court determination was necessary, i.e., the dispute required arbitration for matters (1) and (2).
It should also be observed that the JCPC found no contractual prohibition on initiating a petition.[21] FMCH did not breach the arbitration agreement by doing so. At the same time, in the JCPC’s view, the arbitration agreement required the petition to be stayed. Thus, as a procedural question, it may be open to a party to initiate a court proceeding even while recognizing that it will likely be stayed pending the outcome of an arbitration. Indeed, it may even be advisable to do so, particularly when a remedy sought cannot be granted by an arbitral tribunal; for example, in Ontario, where a party must commence an action in order to perfect their lien rights, it is necessary to commence a lien action in order to “perfect” the lien and advisable to thereafter agree to a stay in favour of mandatory arbitration. Broadly speaking, by initiating a court proceeding, a party can demonstrate that it is not seeking an impermissible remedy from the tribunal, but rather is laying the groundwork for a properly bifurcated process.
Finally, the JCPC’s affirmation as to what constitutes a “matter” under Article II(3) of the New York Convention provides helpful guidance for Canadian practitioners in determining whether a legal issue has risen to the level that necessitates referral to arbitration (assuming an arbitration agreement is in place and is operative). As the JCPC observed, there is considerable jurisprudence on this topic in several countries; however, this is less so in Canada. While the devil remains in the details as to whether an issue will meet the threshold of “relevance” on the facts of a given case, the general principle is clear that the issue must be essential – rather than secondary or peripheral – to the claim or defence, in order for it to constitute a “matter” in respect of which legal proceedings are brought.
Fundamentally, as noted above, FamilyMart confirms that effect should be given to an arbitration agreement unless (1) the agreement is contrary to the public policy of the court or (2) there is a rule of law or statutory provision that renders the matters within the scope of the arbitration agreement incapable of resolution by arbitration.
[1] FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33.
[2] FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33 at para 29.
[3] Companies Act (2022 Revision).
[4] Companies Act (2022 Revision), Section 92(e).
[5] FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33 at para 8.
[6] FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33 at para 13.
[7] FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33 at para 23.
[8] FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33 at para 105.
[9] Foreign Arbitral Awards Enforcement Act (1997 Revision).
[10] FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33 at para 31, citing Enka Insaat ve Sanayi AS v OOO “Insurance Co Chubb”, [2020] UKSC 38 at para 126.
[11] United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 10 June 1958), available at https://www.newyorkconvention.org/english.
[12] FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33 at para 31.
[13] International Commercial Arbitration Act, 2017, SO 2017, c 2, Sch 5. See also, e.g., United Nations Foreign Arbitral Awards Convention Act, RSC 1985, c 16 (2nd Supp).
[14] Tomolugen Holdings Ltd v Silica Investors Ltd, [2015] SGCA 57.
[15] FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33 at para 61.
[16] FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33 at para 70.
[17] FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33 at para 72.
[18] FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33 at para 70.
[19] FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33 at para 101.
[20] A Sanderson & Son v Armour & Co Ltd, [1922] UKHL 268, 1922 SC (HL) 117 (Scot) at 126.
[21] FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33 at para 91.
In Symtech Innovations Ltd. v Siemens Canada Limited (“Symtech”),[1] the Ontario Superior Court of Justice considered a series of arguments advanced by a party advancing a delay claim (Symtech Innovations Ltd. (“Symtech“)) in the context of a responding party (Siemens Canada Limited (“Siemens“)) seeking to resist based on strict notice provisions under standard-form contracts.
In construction claims, contractual notice provisions are sometimes overlooked, but can in certain circumstances prove fatal to the success of a claim. Symtech provides important reaffirmations with respect to compliance with contractual notice provisions, and the requisite precision in presenting evidence and articulating claims. Below, we discuss some of the key takeaways of this decision in the Ontario context (noting that notice provisions need to be considered carefully, as they vary from province to province and contract to contract).
This matter arose due to a dispute between Symtech and Siemens over the performance of contractual obligations related to a Toronto Transit Commission (“TTC“) project, the Duncan Shop Ventilation Upgrade, Supply and Install Monorail Crane, and Bus Hoist Replacement Phase 1 (the “Duncan Shop Project” or the “Project“). This Project entailed, among other things, upgrading HVAC systems and the integration of a crane at the W.E.P. Duncan Building bus maintenance site in Toronto (the “Project Site”).
Black & McDonald Limited (“B&M“) was awarded the main contract for the Project. As general contractor, B&M subsequently retained Siemens (by way of subcontract) to furnish and integrate the building automation system.[2] Siemens then sub-subcontracted Symtech for the installation certain works related to the building automation system (the “Symtech Subcontract”). Siemens delivered the system components and issued a fixed-price purchase order to Symtech for installation of same. The base price agreed upon by the parties for the Symtech Subcontract was $583,059, plus HST, which was later increased to $664,981.89, plus HST (with Siemens’ approval).
Although the Project faced numerous delays, Symtech was not alleged to be responsible for any such delays. Symtech took the position that it was seriously impacted in its work by the delays to the Project and the ongoing disruptions. As a result of these delays and disruptions, and Siemens’ unwillingness to pay Symtech for any related costs, Symtech preserved a lien in the amount of $915,934.28.
Symtech commenced an action seeking to perfect and enforce that lien (the “Lien Action”), and claimed against Siemens for breach of contract. Siemens vacated Symtech’s lien by posting a security of $965,934.28, and then brought a third-party claim seeking contribution and indemnity from B&M for Symtech’s claim. Based on Symtech’s Scott Schedule, the lien was later reduced by Symtech to $859,942.49, which included a prolongation claim for alleged disruptions.[3]
Symtech also commenced a parallel breach of trust claim. However, the Court refused to grant any judgment on that matter due to the differences in the cause of action, the additional parties, and variances in jurisdiction.[4]
While Siemens acknowledged some liability in the matter, it asserted that such liability was restricted to an unpaid statutory holdback of $66,315.01 in respect of the base contract scope as increased by approval. Siemens did not agree that Symtech was entitled to the additional delay and disruption damages it claimed in the Lien Action. Siemens further claimed that the holdback funds were thereafter subject to set-off for Siemens’ costs of defending the action.[5]
Siemens moved for summary judgment within the Lien Action, claiming that there was no genuine issue for trial regarding its liability for Symtech’s prolongation claim as, among other things, there was no breach of contract by Siemens and Symtech failed to provide contractually required notices.
The ONSC’s Decision
Siemens submitted that there was no genuine issue requiring trial based on a number of different arguments:
The Court began by reviewing the applicable framework for summary judgment, then turning to two preliminary challenges to Siemens’ evidence, before ultimately reviewing each of the five arguments above.
Preliminary Challenges to Siemens’ Evidence
Symtech challenged the admissibility of two aspects of Siemens’ evidence: namely, the affidavit of a lawyer, and Siemens’ reliance on the transcript from the examination for discovery of Siemen’s own representative.
Symtech challenged the admissibility of the lawyer’s affidavit on the basis of rule 20.02(1) of the Rules, which states that an affidavit used on a motion may be based on information and belief, but on the hearing of the motion, the court may draw an adverse inference if the evidence was not provided by someone with personal knowledge of the contested facts. Symtech alleged that the lawyer’s affidavit fell within the ambit of this subrule since she lacked personal knowledge of the dispute.
The Court rejected this argument, finding that the lawyer’s affidavit was factual in nature, confirmed procedural history, summarized the claims raised in the Scott Schedule, and summarized transcripts from examinations for discovery.[7]
Symtech also challenged Siemens’ reliance on the transcript of its own deponent’s examination for discovery on the basis of subrules 39.04(1)-(2) and 31.11(1), which generally preclude a party from using, in evidence on a motion, its own examination for discovery as evidence. The Court rejected this challenge as well, finding that the manner in which it was done was not a violation of subrule 39.04(2), as it was not tendered to avoid cross-examination. Symtech was free to cross-examine the representative, which they did.[8]
With these challenges addressed, the Court turned to Siemens’ submissions for summary judgment.
Issue 1: The Notice Issue
In assessing the notice issue, the Court was required to consider a number of different sub-issues:
Sub Issue 1: The Court determined that there was no genuine issue for trial that the parties’ agreement – as set out in two relevant contract documents, being a purchase order and Siemens subcontract with B&M (the latter being incorporated by reference into the purchase order) – outlined Symtech’s obligations to notify Siemens of delays and of its intentions to claim compensation. In that regard, the Symtech Subcontract required not only that Symtech notify Siemens “forthwith” of any delay, but also to notify of Symtech’s intention to seek relief in relation to that delay (whether that be compensation or schedule relief).
Sub Issue 2: The Court determined that there was a genuine issue requiring trial. Specifically, it found that although there was ambiguity surrounding the “schedule of Siemens”, given that the Symtech Subcontract did not include a schedule for the performance of the work. It was therefore unclear what comprised the “schedule” that was meant to contractually govern Symtech’s work.
Sub Issue 3: The Court determined that there was no genuine issue requiring trial. The critical concern was whether Symtech had provided timely notice of its prolongation claim which, if Symtech had failed to do so, would make the previous issue of notice as to delay moot.[9] Here, the Court re-affirmed a number of key points on the law of notice including the following:
With these principles in mind, the Court undertook a detailed review of the record before it.
Siemens claimed that it was not informed of Symtech’s potential claim for additional delay-related compensation until January 17, 2019. However, Symtech claimed that it was unaware of its losses until December 2018. Further, Symtech presented evidence of project delays, expert evidence, and details of disruptions such as delayed roof reinforcing work and late deliveries. Siemens, for its part, highlighted a lack of formal written notice from Symtech regarding these delays.
The core of this analysis concerned when Symtech was aware of its losses, and if it duly notified Siemens of its claim based on the date it knew or ought to have of those losses. In that regard, the Court accepted that there would arguably be a genuine issue on when Symtech knew it was suffering losses for which it was entitled to make a claim and when it ought to have given notice; however, this issue could be resolved on the record before the Court rather than requiring a trial, which is what the Court proceeded to do.
In that regard, the Court concluded that project delay was clear by July 2018, when Siemens provided Symtech with an updated schedule which showed significant delay as compared to the baseline schedule. There were notices from October 2018 onward, but these were notices in respect of claims for changes (i.e. extra work) rather than delay-related claims. Similarly, the Court rejected the argument that B&M giving general notice to TTC of project cost impacts on behalf of itself and its subcontractors satisfied Symtech’s notice obligations.
Ultimately, and although Siemens did not tender any evidence supporting that Symtech knew it was suffering losses before December 2018, the Court found on the totality of the evidence that Symtech ought to have been aware of its losses – including loss of productivity and additional labour hours, as a direct result of the ongoing delays and disruptions to its work – well before January 2019, when it actually delivered what could be construed as a formal notice.
Furthermore, the Court rejected Symtech’s argument that nothing in the Symtech Subcontract stipulated that failure to provide timely notice of a claim meant that a claim could not still be advanced. This argument was contrary to the relevant case law, which rejected this proposition on the basis that it would deprive the notice recipient of the benefits of the notice provision (i.e. the opportunity to consider its position and choose a course of action).
Accordingly, and as noted above, the Court concluded that there was no genuine issue for trial that Symtech had failed to provide timely notice of its prolongation claim.
Sub Issue 4: The Court determined that there was no genuine issue requiring trial. Here, the Court similarly rejected the argument that Siemens had waived the notice requirement.
Waiver, as the Court explained, will be found only where the evidence demonstrates that the party waiving had (i) a full knowledge of the right or of the other party’s deficient performance of an obligation, and (ii) an unequivocal and conscious intention to abandon the right to rely on it. The intention to relinquish the right must be communicated; communication can be formal or informal, and it may be inferred from conduct.[11]
In this case, Siemens had expressed challenged Symtech’s January 17, 2019 letter on the basis of a lack of prior, timely notice. Similarly, the fact that Siemens had advanced a claim to B&M on behalf of itself and Symtech for compensation (including Symtech’s prolongation claim) was not sufficient to prove waiver of the notice requirement; in that regard, agreeing to assist Symtech in recovering against B&M was not the same as acknowledging the timeliness of Symtech’s claim.
Finally, the Court concluded that the fact Siemens did not reply to Symtech’s claim within the time required by the Symtech Subcontract was not proof of waiver. To the contrary, the Court observed that this argument essentially amounted to the proposition that failing to expressly deny a claim somehow validates it. This proposition had no supporting case law, and commercially unreasonable insofar as it would substantially weaken (if not vitiate) the express requirement for timely notice.
Accordingly, the Court concluded that there was no genuine issue for trial and on the basis of the record before it, concluded that Siemens had not waived the notice requirement.
Issue 2: Is there a viable claim against Siemens if it did not cause Symtech’s delay?
Siemens acknowledged that Symtech worked on a portion of its scope of work, and that Symtech was on-site before Siemens. However, Siemens argued that it was not responsible for the delays alleged by Symtech and as such, there could be no triable issue that Siemens was liable for the prolongation claim.
The Court was not convinced of Siemens’ argument on this issue, but declined to address the argument given its finding on Issue 1.[12]
Issues 3-4: Is there a genuine issue for trial on Symtech’s prolongation claim quantification?
Siemens challenged the prolongation claim on the basis that (i) it failed to connect the losses and damages to any specific events of delay, and (ii) it was based on a global claim for costs incurred by Symtech divorced from the fixed price nature of the Symtech Subcontract relationship. The Court found that these were both essentially challenges to the methodology behind Symtech’s claim quantification.
However, similar to issue 2, the Court did not address these arguments given its findings on Issue 1 regarding notice.
Issue 5: Is there a genuine issue requiring a trial on whether Siemens breached the Symtech Subcontract and the quantum of unpaid amounts owing under the Symtech Subcontract ?
Symtech claimed that Siemens breached the Symtech Subcontract by not managing the project effectively, and by not paying the holdback that Symtech believed it was owed. However, Siemens claimed that there was no evidence of such breaches. The Court found that the core issue revolved around Siemens’ responsibility to supervise Symtech’s work, and whether Siemens was in breach for non-payment of the holdback.
Further, Symtech referenced specific clauses in the Symtech Subcontract which mandated that Siemens supervise and manage the project. They provided evidence through emails and testimonies that Siemens was aware of project issues but failed to address them. Siemens disagreed, emphasizing Symtech’s status as an independent contractor, thus bearing the responsibility to supervise its own work.
On this issue, the Court found a lack of clarity on the supervisory obligations and the unpaid amount under the Symtech Subcontract, both being genuine issues necessitating a trial.
Issue 6: Is partial summary judgment appropriate?
In view of all the foregoing (i.e., a mix of issues and sub-issues where some were and were are not appropriate for summary judgment), the Court granted partial summary judgment. In this regard, genuine issues requiring a trial were found to exist, especially concerning Siemens’ purported breach of contract and the quantification of Symtech’s claims; however, the Court found no merit to Symtech’s prolongation claim, finding that Symtech failed to provide timely notice.
As such, the Court dismissed the prolongation claim and directed the remaining issues to proceed to trial.[13]
Given that Symtech essentially ran the gamut of notice arguments typically advanced by a claiming party in circumstances. where their contracting party resists on the basis of a notice defence, Symtech therefore offers a comprehensive articulation of many of the relevant principles that apply in such a scenario.
First and most obviously, this case emphasizes the importance of adhering diligently to notice requirements and otherwise ensuring timely and comprehensive communication. Proper communication (including by following information requirements of contractual notices, aside from timing) ensures that all parties are aligned and aware of potential or actual claims, reducing the potential for unexpected legal challenges.
Second, Symtech reaffirms the importance of providing timely notice in the proper form and substance. The Court notably rejected Symtech’s argument that its notice(s) of change-related claims were sufficient notice of its delay claim, which conclusion makes good sense insofar as these types of claims are fundamentally different in nature. Similarly, a general contractor giving notice to an owner on behalf of itself and its subcontractors does not satisfy the subcontractor’s notice obligation; that onus rests with subcontractor, and cannot be satisfied by another party (unless, presumably, the applicable subcontract suggests otherwise). Again, the best practice is the most obvious – provide timely, clear notice that is formally and substantively rigorous.
Third, and although again not a novel proposition, the threshold remains high for demonstrating waiver of a party’s right to rely on a notice provision. It is common in the construction industry for a contractor to pass through a subcontractor’s claim even in circumstances where the contractor is relying on a notice defence against the subcontractor; this makes good sense insofar as the notice defence applies as between the contractor and subcontractor, not the contractor and the owner. Accordingly, and although it would presumably not be impossible to prove waiver in such circumstances, it remains a steep hill to climb absent very clear facts.
Fourth and finally, in the post-Hyrniak era, parties involved in construction disputes seeking summary judgment need to be particularly attentive to several principles under the Rules as it relates to the admissibility of evidence. Use of an affidavit from a lawyer on a summary judgment motion may be permissible, but parties will wish to be careful of the evidence it presents lest a court draw an adverse inference from a failure to provide the evidence of any person having personal knowledge of contested facts. Similarly, the Court’s affirmation that a party can use its own discovery evidence on a motion, assuming the deponent is available for cross-examination, is a welcome clarification for parties in determining who should be their affiant on a motion.
Importantly, if you are a contractor working in Ontario, consider seeking legal advice early in respect of claims and notice requirements. Some notice requirements are incredibly tight (e.g., within 24-48 hours) and need to be taken seriously. Waiting for a claim to “crystalize” may prejudice you in future efforts to collect. Similarly, despite best intentions not to “rock the boat”, it may be the case that your claim is invalid if you do not provide owners with clear update information on claims and potential claims – which is a key reason for the notice provisions themselves. Every party to a construction project should work collaboratively through claim processes and processing to ensure that claims are properly presented, and that opportunities to mitigate such claims are available early and often.
For owners, encouraging open dialogue of claims and working with contractors on notices may prevent end-of-project claims from arising, and thereby mitigate against significant litigation risk. There are plenty of opportunities to work with contractors early to ensure that mitigation opportunities are available and appropriate resources can be engaged earlier. That said, owners should also engage legal services early and often to ensure that any communications are fair, reasonable and in accordance with the contract and the law. In particulars, owners need to be cautious in promoting any extra-contractual claims processes that may, for example, waive existing notice requirements which may have been carefully negotiated for good reason.
Notice of claims remains a tricky part of construction projects. All parties should therefore take care to ensure that they are aware of specific contractual requirements and understand the manner in which the courts treat these requirements, such as how the court in Symtech has done here in Ontario.
As a final reminder, notice requirements differ depending on the contract in question, and their treatment differs in various jurisdictions (i.e., by province and certainly internationally). Feel free to reach out to the authors if you have any questions about the notice provisions in your contract.
[1] 2023 ONSC 5795
[2] Ibid at paras 1-3.
[3] Ibid at paras 4-6.
[4] Ibid at paras 129-132.
[5] Ibid at paras 6-7.
[6] Ibid at para 11.
[7] Ibid at para 26.
[8] Ibid at para 28.
[9] Ibid at paras 45-46.
[10] Ibid at paras 47 and 78.
[11] Ibid at para 87.
[12] Ibid at paras 104-109.
[13] Ibid at paras 125-128.
In its recent decision, Ponce v. Société d’investissements Rhéaume ltée., 2023 SCC 25 (“Ponce”), the Supreme Court of Canada rendered a decision in the civil law context regarding duties of loyalty, good faith obligations, and the availability of disgorgement of profits as a remedy, which provides an intriguing point of comparison for common law practitioners regarding the obligation to perform one’s contractual obligations in good faith.
The Appellants were presidents of a group of insurance companies known as “Groupe Excellence”. The Respondents were the majority shareholders of each of the companies comprising Groupe Excellence.
The Appellants and Respondents entered into an “incentive pay agreement” (the “Agreement”), which was based on the parties’ commitment to the common goal of ensuring the ongoing success of Groupe Excellence, with a view to a potential sale.
In April 2005, Industrial Alliance Insurance and Financial Services Inc. (“IA”) informed the Appellants of its interest in acquiring Groupe Excellence. The Appellants and IA entered into an “Undertaking of Confidentiality” and a series of discussions occurred between IA and the Appellants. In addition, and at the Appellants’ request, an exclusivity clause was also included in the undertaking, the purpose of which was to prevent IA from dealing directly with the Respondents. This materialized when one of the Respondents asked the Appellants whether IA would be interested in buying his shares, and the Appellants, despite directly knowledge to the contrary, advised that IA was not interested.
As such, the Respondents – unaware of IA’s interest – agreed to sell their interests to the Appellants, who in turn resold to IA the interests they had acquired from the Respondents, for a significant profit (the “Excess Profits”). The Respondents only learned of IA’s acquisition of Groupe Excellence via IA subsequently publishing a press release. In response, the Respondents commenced proceedings in the Quebec Superior Court.
Decisions of the Courts Below
Before the Quebec Superior Court, the Respondents (at the time, the plaintiffs) alleged that the Appellants breached (1) their contractual and legal obligations, (2) their fiduciary obligations, and (3) their obligations to act in good faith, with loyalty and transparency, by intentionally failing to inform them of IA’s interest.
The Superior Court ruled in the Respondents’ favour, finding that under both the Civil Code of Québec (the “CCQ”) and the Canada Business Corporations Act, the Appellants (in their capacity as directors) owed duties of honesty, loyalty, prudence and diligence to Groupe Excellence. By extension, these duties could be extended to the Respondents, where there was an “independent relationship between the directors . . . and the shareholders”, which independent relationship existed due to the Agreement.
The trial judge concluded that the Agreement entailed three implied obligations: (1) to maximize the profits and value of Groupe Excellence; (2) to report to the Shareholders, in a full and transparent manner, all information that might enable them to assess the value of Groupe Excellence or make a decision to sell their shares and to determine a sale price; and (3) not to use information for personal benefit without obtaining the Shareholders’ consent.
The trial judge accordingly found that the negotiations with IA constituted intentional concealment, and that the Appellants had consequently breached their duties of good faith and loyalty as well as their duty to inform.
With respect to damages, the trial judge found that the injury corresponded to the lost business opportunity. The loss was therefore equivalent to the profits made by the Appellants when they resold the shares to IA.
On appeal, the Court of Appeal affirmed the lower court’s decision, although it noted that the trial judge erred in finding that the duties of honesty and loyalty provided for in the CCQ could be extended to the Respondents as shareholders. In any event, this error was moot insofar as the Agreement was the source of the obligations in question.
With respect to the duty to inform, the Court of Appeal held that the Appellants’ conduct fell within the three criteria set out in Bank of Montreal v. Bail Ltée, [1992] 2 S.C.R. 554. The Court of Appeal focused on the fact that it had been impossible for the Respondents to inform themselves of IA’s interest, as well as on the atmosphere of trust that had existed between the parties. On these bases, the Court concluded that the Appellants breached the obligation of contractual good faith and the obligation to inform.
The Presidents then sought, and were granted, leave to appeal to the Supreme Court of Canada.
The Supreme Court’s Decision
On appeal, the parties’ arguments – and the Court’s analysis – focused on two key issues:
Kasirer J, for the unanimous Court, addressed each of these issues in turn.
Whether the Failure to Inform Constituted a Breach of a Contractual or Legal Duty
On the first issue, the Court considered four possible bases for the proposition that the Appellants held a duty to inform the Respondents of IA’s interest:
The Court considered each of these issues separately.
Obligation of Loyalty
The Court quickly rejected the proposition that any duty to inform could be a fiduciary-related obligation of loyalty, which would have required the Appellants to subordinate their interests to those of the Respondents. Put another way, no duty of loyalty could be extended to the Respondents as shareholders of the companies making up Groupe Excellence.
Here the Court distinguished between two types of loyalty: a contractual loyalty arising from good faith, which requires a contracting party to take the other party’s interests into account; and a loyalty in the exercise of a power, which must be exercised only in the beneficiary’s interest or to achieve the goal that led that power to be conferred.
In this case, the Appellants did not have the latter type of loyalty, which the Court termed a “maximalist” loyalty (similar to a fiduciary obligation at common law). It bears noting that the Court confirmed that under both the civil law and the common law, duties associated with the general principle of good faith in contractual performance have “strong conceptual differences from the much higher obligations of a fiduciary”.
In this case the Appellants were not required to exercise their powers for the benefit of the Respondents, and thus, there was no obligation of “maximalist” loyalty owed.
That being said, the Court clarified that in Quebec civil law, the concept of loyalty does not refer solely to “maximalist” loyalty, but also encompasses duties of good faith which, although they do not require a party to subordinate their interests below others’, nevertheless affect the way in which that party can exercise certain of its legal rights, as detailed further below.
Extracontractual Duty to Inform in the Course of the Share Sale by the Shareholders
The Appellants argued that because the allegations against them related to the formation of the contracts by which the Respondents sold their interests to the Appellant, the Agreement therefore did not apply because it did not govern buy-out negotiations. Accordingly, the Appellants argued that liability could not arise from the Agreement and must instead be extracontractual.
On this point, the Appellants acknowledged that at the stage of contract formation, the requirements of good faith give rise to a duty to inform (unlike at common law); however, on the facts, they maintained that this duty did not require them to disclose IA’s interest.
Interestingly, the Court declined to consider this issue in detail – despite the fact that it recognized that the topic would have been the subject of “meaningful debate” – because no argument based on pre-contractual liability had been raised.
Implied Obligation to Inform under the Agreement
On this issue, the Appellants argued that the Agreement did not contain an implied obligation to inform as it was simply a “remuneration agreement”, as a result of which the non‑disclosure of IA’s interest could not be a contractual fault.
In rejecting this argument, the Court observed that the nature of the Agreement led to the conclusion that it necessarily contained an implied obligation to inform. The Agreement was the cornerstone of the relationship between the parties, and clearly defined their roles. Furthermore, the “general scheme” of the Agreement indicated that it was intended to formalize a mutually beneficial business relationship. In this sense, the Court concluded that the Agreement reflected a high level of trust on which the entire enterprise rested. The sharing of Groupe Excellence’s profits and increase in value was the centrepiece of the Agreement, because this mechanism encouraged the Appellants to increase their efforts to ensure its success, which would ultimately benefit all parties.
In that regard, the CCQ bound the parties not only to what was specifically expressed in the Agreement, but also “as to what is incident to it according to its nature and in conformity with usage, equity or law”. This was a long-term agreement that formalized a business relationship in which the parties played different roles in order to maximize the value of Group Excellence; regardless of whether the Agreement was characterized as a relational contract, the Court confirmed that it required reciprocal contractual loyalty.
Having regard to the nature of the Agreement, the Court concluded that the Appellants had an implied obligation to maximize the value of Groupe Excellence, including with a view to a sale, as well as an implied obligation to inform the Respondents of any fact that might enable them to assess the companies’ profits and value and decide whether to sell their shares and, if so, at what price. These implied obligations served to “ensure the Agreement’s internal coherence”.
In addition, the Court confirmed that the Appellants breached not only their duty to inform, but also their duty under the CCQ to perform the Agreement in a manner consistent with requirements of god faith. The Court concluded that regardless of the duty to inform under the Agreement, the requirements of good faith imposed a separate duty to inform as an “obligation of public order” (i.e. a duty that does not arise from the contract itself).
On this point, the Court observed that there is a fundamental difference between non‑performance of a contractual obligation and performance of the obligation in a manner contrary to the requirements of good faith. While the former relates to the implementation of the content of the obligation, the latter relates instead to the manner in which the obligation is performed. In this regard, where the Appellants worked to maximize the value of Groupe Excellence but secretly took action to prevent the Respondents from reaping the benefits in the event of a sale, the Appellants would have performed their obligation but would have done so in a manner contrary to the requirements of good faith. Although this point was somewhat academic insofar as the facts of this case led to the conclusion that there was a wrongful act by the Appellants in any case, evidence of an additional breach of the requirements of good faith could have an impact at the remedy stage, as discussed below.
Obligation to Perform the Agreement in Good Faith
The Appellants argued that they were not bound to disclose IA’s interest because such disclosure did not meet the criteria set in Bank of Montreal v. Bail Ltée, [1992] 2 S.C.R. 554 (“Bail”) regarding a duty to inform arising from good faith; rather, IA’s interest was simply an indication of market value, or information that the Respondents could and should have obtained for themselves.
The Court rejected this argument, observing first that good faith, in Quebec civil law, is an “enacted standard of public order” – that is, it infuses every contract as if a clause provided for it, and through the combined effect of certain articles of the CCQ, good faith performance is an obligation that must be included in every contract. Put differently, the justification for such an implied obligation is an idea of contractual fairness grounded in public order rather than the parties’ autonomy, and its implementation varies depending on the circumstances.
As a result, although the Appellants did not have a maximalist obligation of loyalty to the Respondents in the exercise of their powers, they did have an obligation of contractual loyalty towards them – in other words, a “minimalist” loyalty. This did not require the Appellants to act in the sole interest of the Respondents, but did require them to consider their interests when performing the Agreement.
In that regard, the Court observed that loyalty has both prohibitive and proactive dimensions – that is, entails certain negative obligations (refraining from a course of action) and positive obligations (being compelled to take a course of action).
The prohibitive dimension requires that parties to a contract not act dishonestly in performing it; that they conduct themselves loyally by not unduly increasing the burden on the other party or behaving in an excessive or unreasonable manner; and not jeopardize the existence or equilibrium of the contractual relationship.
In this case, the Appellants conducted themselves in a disloyal manner when they failed to disclose IA’s interest. Conversely, the Respondents were entitled to expect the Appellants refrain from scheming in any way to enrich themselves at the Respondents’ expense. The Appellants therefore engaged in dishonest conduct that thwarted the legitimate expectations of the Respondents, which was for all parties to maximize the profits and value of the Groupe Excellence.
The proactive dimension requires that parties engage in active behaviour that is intended to assist their contracting partner but that still remains compatible with the party’s own interests. This requires a contracting party to provide the other party with the information that is relevant to the performance of their obligations, in order to facilitate it or avoid making it more onerous. In the context of this case, the proactive dimension entailed a duty to inform.
Accordingly, the final point for determination in this case was the precise extent of the duty to inform. Relying on Bail, which set out the criteria for when information falls within the scope of this duty, the Court concluded that IA’s interest in Groupe Excellence met all of the criteria, and that as a result, the Appellants’ duty to inform included this information.
What was the Appropriate Remedy?
With respect to the appropriate remedy, the Court was left to determine whether the Respondents were entitled to the profits made by the Appellants in reselling their shares to IA – that is, disgorgement of profits.
The Court observed that disgorgement is, in principle, available only where a person is charged with exercising powers in the interest of another (i.e. in the case of maximalist loyalty). In that regard, disgorgement is meant to ensure compliance with such loyalty, whereas damages are intended to compensate the victim for the injury they have sustained.
The Court furthermore concluded that the relevant case law did not support extending disgorgement to situations in which there was simply a breach of the obligation of good faith, and similarly concluded that an amount equivalent to disgorgement could not be award as damages without proof of injury.
Moreover, the Court found that where a breach of good faith obligations prevents the injured party from proving the injury sustained, it should be presumed that the injury is equivalent to the profits made by the party at fault. However, this presumption is rebuttable, as it can be displaced by evidence to the contrary showing that the quantum of damages differs from the amount of the profits.
In this case, the Appellants were unable to rebut this presumption; as a result, the Respondents were entitled to the difference between (1) the sale price received by the Respondents when initially selling their shares to the Appellants, and (2) the sale price received by the Appellants on the resale of those shares to IA.
Key Take-Aways
Ponce is of course a Quebec case based in the civil law, and therefore fundamentally different in many respects from analogous concepts in the common law; for example, it has been well-established many times that at common law, good faith does not entail a duty of disclosure. That being said, Ponce nevertheless offers many points of comparison that elucidate their corresponding common law analogues.
First, the Court’s discussion of relational contracts affirms the characteristics necessary to constitute such a contract, and how it impacts the parties’ obligations. As readers will recall from Churchill Falls (Labrador) Corp. v. Hydro-Québec, 2018 SCC 46, the fact that a contract is long-term and interdependent in nature does not, in and of itself, result in a relational contract, which imports heightened obligations on the parties. Rather, a relational contract requires close cooperation over the long term, with an emphasis on the parties’ relationship and achievement of a common goal. Although relational contracts are not a well-developed topic at common law, their brief reference in Bhasin v Hrynew suggests that the Court’s discussion in Ponce may be relevant to some extent in the common law context and it will be interesting to see how the Court further considers this question.
Second, the distinction between the prohibitory and proactive dimensions of loyalty provides a useful reference point for understanding the different aspects of good faith at common law. The Supreme Court’s holdings in recent cases like Bhasin, Wastech, and Callow have almost unanimously been framed in prohibitory terms, insofar as parties cannot (i.e. must refrain from) lying, and cannot (i.e. must refrain from) exercising a contractual discretion unreasonably. That being said, these cases also admit some degree of proactive obligation, insofar as Callow found that a party must correct a misrepresentation that it thought was true at the time of the representation, but later learned was false. Accordingly, Ponce serves as a reminder to common law parties that good faith duties do not exclusively entail negative obligations.
Third, the Court’s discussion of the appropriate form of relief and measure of damages calls to mind a number of parallels with, and distinctions from, the common law. With respect to the availability of disgorgement, the Court’s discussion recalls its recent judgment in Atlantic Lottery Corp. Inc. v. Babstock, 2020 SCC 19 – whereas the Court in Ponce clarified that disgorgement “straddles restitution and compensation” at civil law, the Court in Babstock confirmed that disgorgement is distinct from restitution at common law because only the latter requires that a defendant’s gain correspond to the plaintiff’s loss. Conversely, the Court in both instances was in agreement that disgorgement is available in situations of fiduciary (or analogous) relationships, with only the dissent in Babstock finding that it was an arguable issue as to whether “quasi-fiduciary” relationships could justify disgorgement.
Similarly, the discussion of the measure of damages calls to mind Ontario courts clarifying this point at common law. Ponce confirms that at civil law, where a breach of good faith prevents a party from proving their injury, it is presumed that the injury is equivalent to wrongdoer’s gain. Kasirer J in Callow similarly concluded that it could be presumed that the plaintiff lost an opportunity, because the defendant’s dishonesty prevented him from conclusively proving that the opportunity was lost. This latter point, was further discussed by the Court of Appeal for Ontario in Bhatnagar v. Cresco Labs Inc., 2023 ONCA 401 (which we discuss here), where the Court observed that it may make such a presumption, and that the claimant must show some evidence that it lost an opportunity. Accordingly, Bhatnagar raises the question of whether at civil law, a court has the discretion to make such a presumption, or whether it is mandatory.
It is notable that regardless of whether this case arose at civil law or common law, it is possible that the result would have been similar. As the Court observed, the Respondents specifically asked if IA had an interest in Group Excellence and were lied to. This accordingly would have likely qualified at common law as a breach of the duty of honest performance. Similarly, it is entirely possible that the measure of damages would have been similar, given the Appellants’ failure to rebut the presumption of damages.
Ultimately, Ponce emphasizes the point illustrated by the Supreme Court in recent years that although the civil law and common law traditions have fundamentally different bases, they can nevertheless serve as useful points of comparison in the understanding various areas of law.
We await with interest to see whether Ponce may be applied to common law good faith in future.
The “right to be heard” is often associated with a litigant’s access to the courts, but in Song Lihua v Lee Chee Hon (Former Name Que Wenbin) (“Song”),[1] Hong Kong’s Court of First Instance confirmed that it also requires a court – or an arbitral panel for that matter – to actually hear the parties.
Song suggests that this right requires arbitrators attending by video-conference to provide their undivided attention to a hearing, particularly while parties are adducing and challenging evidence, making submissions, or responding to questions from the tribunal. Below, we review certain key considerations for Canadian arbitration practitioners.
In Song, two individuals were in a contract dispute in mainland China with respect to a share purchase agreement, which dispute was referred to arbitration. At an arbitral hearing, one member of the tribunal (referred to in the Court’s decision as “Q”) participated by video-conference, as a result of which the hearing was recorded.
Song was successful in the arbitration, and subsequently sought (and was granted) an order by a court in Mainland China – the Chengdu Intermediate People’s Court (the “Mainland Court”) – to enforce the award. In that proceeding, the Mainland Court dismissed Lee’s application to set aside the award on the basis of the manner in which the arbitration was conducted, finding that although Q’s conduct in the hearing amounted to a procedural defect, it did not have any impact on the hearing.
After the issuance of the enforcement order, however, Lee applied to set aside the enforcement order in Hong Kong on a number of grounds, including (1) that he was unable to present his case in the Arbitration, (2) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the parties’ agreement, and/or (3) that it would be contrary to public policy to enforce the Award in Hong Kong. For the purpose of this article, the most relevant of these grounds was based on the allegation that Q’s conduct had deprived Lee of the opportunity to present his case, and of the right to a fair hearing, which was contrary to public policy.
As part of the Hong Kong Court of First Instance’s review, the Court reviewed the video recording of the hearing. After reviewing the footage, the Court found that Q was “not properly focused” [2] on the hearing, as follows (the details are worth repeating in the Court’s own words):
For at least the second half of the hearing, Q was moving from one location to another, indoors and outdoors, and had eventually left his premises, and traveled in a car, without giving his undivided attention to the hearing. He was off-line for periods of time from the second half, and obviously could not hear what was being said by the parties’ lawyers or by the other members of the tribunal. […] [I]t is quite obvious that essentially for the second half of the hearing…Q had scarcely been stationary for more than 1 minute (apart from the last part of the Video when he was inside a car). The Video clearly showed the background of Q’s various locations, and it could be observed that he had moved from one room of the premises to another, at times talking to and/or gesturing to others in the room. Q could also be seen to be looking into the distance frequently, instead of watching the screen and the video of the proceedings. […] Approximately 6 minutes from the commencement of the Excerpt of the Video, Q could be seen walking out of the main door of the premises into an open public area. He remained standing there for a short period of time, and then went off-line at around 7:50 minutes after the commencement of the Excerpt. Q went online again at approximately 8:20 minutes, before going off-line again at around 8:28, and again at 9:14. When Q appeared online again at 9:56 minutes, he was seen inside a vehicle which appeared to be a private car as he was sitting in the front seat and adjusting his seatbelt. The video image froze again at 10:35 minutes of the Excerpt, and when Q appeared online at 10:58, the chairman of the tribunal could be heard asking if Q could hear him but there was no response whatsoever from Q for some time. At 11:25 minutes of the Excerpt, Q spoke for the first time to state that he had no reception as he was on or proceeding to the high-speed railway.[3]
For at least the second half of the hearing, Q was moving from one location to another, indoors and outdoors, and had eventually left his premises, and traveled in a car, without giving his undivided attention to the hearing. He was off-line for periods of time from the second half, and obviously could not hear what was being said by the parties’ lawyers or by the other members of the tribunal.
[I]t is quite obvious that essentially for the second half of the hearing…Q had scarcely been stationary for more than 1 minute (apart from the last part of the Video when he was inside a car). The Video clearly showed the background of Q’s various locations, and it could be observed that he had moved from one room of the premises to another, at times talking to and/or gesturing to others in the room. Q could also be seen to be looking into the distance frequently, instead of watching the screen and the video of the proceedings.
Approximately 6 minutes from the commencement of the Excerpt of the Video, Q could be seen walking out of the main door of the premises into an open public area. He remained standing there for a short period of time, and then went off-line at around 7:50 minutes after the commencement of the Excerpt. Q went online again at approximately 8:20 minutes, before going off-line again at around 8:28, and again at 9:14. When Q appeared online again at 9:56 minutes, he was seen inside a vehicle which appeared to be a private car as he was sitting in the front seat and adjusting his seatbelt. The video image froze again at 10:35 minutes of the Excerpt, and when Q appeared online at 10:58, the chairman of the tribunal could be heard asking if Q could hear him but there was no response whatsoever from Q for some time. At 11:25 minutes of the Excerpt, Q spoke for the first time to state that he had no reception as he was on or proceeding to the high-speed railway.[3]
The Court concluded, perhaps not surprisingly, that, the “manner of Q’s attendance…, by going outdoors where reception was poor, was obviously disruptive of the proceedings, to say the least.”[4] Importantly, the Court also noted that on at least two occasions, Q was addressed by other members of the tribunal or the secretary of the tribunal, and “made no answer at all, nor… made any indication or gesture” that he heard them.[5] This led the Court to conclude that Q did not appear to have heard the case.
In the Court’s view, this raised several issues touching on fundamental principles of adversarial proceedings.
For one, it jeopardized the appearance of impartiality: “an objective observer would have reasonable doubts as to firstly, whether Q had already made up his mind as to the dispute before or without hearing the parties, and was not interested in what the parties had to say on the evidence or on the law.”[6] In that regard, it need hardly be said that impartiality – including the appearance of impartiality – is a bedrock principle of essentially any adjudication proceeding, including arbitration.
For another, this impinged the right to be heard, which is “an important procedural right under the rules of natural justice going directly to the question of fairness”.[7] While that right is generally associated with access to the courts, the Court here provided an important reminder that this principle applies with equal force in the context of arbitration.
On the latter point, the Court relied on the English Court of Appeal decision in Stansbury v Datapulse plc & Anor,[8] which involved a “more extreme case of…improper conduct” by a member of an employment tribunal who fell asleep during a hearing.[9] In that case, the Court of Appeal concluded that it is “axiomatic” that a tribunal must hear all the evidence,[10] and that a hearing may be found to be unfair if an arbitrator does not appear to be alert as to what is being said, or seems unable to give their full attention to the hearing.[11]
Because “there is no apparent justice and fairness, when a member of the decision-making tribunal was not hearing and focused on hearing the parties in the course of the trial”, the Court in Song found as a matter of public policy that enforcement of the award would “violate the most basic notions of justice”.[12]
Notably, the Court also held that counsel for the party that lost the arbitration need not have raised an objection during the hearing itself, because the Court has jurisdiction to raise and rely on public policy grounds irrespective of the parties. The Court also noted that counsel could not be expected to notice when an arbitrator on-screen is distracted, given that counsel may be focused on present the client’s case, and challenging the opponent’s case.
While the result in Song is perhaps unsurprising, it nevertheless provides a welcome reminder that key principles of natural justice apply with equal force in arbitration just as they do in court. This is precisely why, as readers will appreciate, these principles are enshrined in virtually all arbitral rules, as well as governing legislation.[13] Conversely, the fact that the arbitral award was upheld in Mainland China suggests that different jurisdictions’ respective public policies may result in differing conclusions, particularly depending on whether parties advance the same or different arguments in set-aside proceedings.
In that regard, the Court notably observed – by reference to the decision of the Appellate Committee of the House of Lords in Lawal v Northern Spirit Ltd – that “[w]hat the public was content to accept many years ago is not necessarily acceptable in the world of today. The indispensable requirement of public confidence in the administration of justice requires higher standards today than was the case even a decade or two ago”.[14] Quite rightly, the standard for these principles continues to be raised over time.
Accordingly, although Song is a Hong Kong case, it may nevertheless be useful in the Canadian context as well.
In any event, it may seem self-evident that an arbitrator cannot hop in a car in the middle of a hearing to head to the train station. Even so, Song articulates how exactly this offends the rules of justice and fairness: it jeopardizes the appearance of impartiality, and it impugns the right to be heard. Song effectively confirms that those principles – at least in of Hong Kong – include the right to have the full attention of the decision-maker, rather than simply the right to appear before them.
However, Song also provides a potentially important insight – or at least raises an interesting question – regarding the distinction between a right afforded to the parties and a principle that transcends the parties’ rights. In that regard, it is notable that the Court concluded that counsel’s failure to raise the issue during the hearing – and indeed, his express confirmation at the end of hearing that he had no objection to the procedure of the arbitration – was not sufficient to bar this ground of set-aside.
As readers will appreciate, virtually all institutional rules and arbitration legislation provide parties with the right to challenge the appointment of an arbitrator, and will establish a time limit within which such a challenge must be brought. If such a challenge is not raised in a timely manner, it is barred, and furthermore, the issue cannot be raised or relied upon by a tribunal or supervisory court. In other words, if a party fails to raise the issue, such failure is fatal to its position.
By contrast, the Court in Song suggests that the right to be heard, and the tribunal’s impartiality, transcend this limitation, which may create a logical tension insofar as a lack of partiality is itself a basis for to challenge an arbitrator’s appointment. Accordingly, it would be interesting to consider whether a party could avoid a time bar associated with an arbitrator challenge by relying on the public policy exception.
Ultimately, it has yet to be seen when the reasoning in Song will be adopted elsewhere—but of course, that may require circumstances similar to those in Song, which would seem to be rare.
[1] Song Lihua v Lee Chee Hon (Former Name Que Wenbin), [2023] HKCFI 2540.
[2] Song Lihua v Lee Chee Hon (Former Name Que Wenbin), [2023] HKCFI 2540 at para 51.
[3] Song Lihua v Lee Chee Hon (Former Name Que Wenbin), [2023] HKCFI 2540 at paras 38, 40, 42.
[4] Song Lihua v Lee Chee Hon (Former Name Que Wenbin), [2023] HKCFI 2540 at para 42.
[5] Song Lihua v Lee Chee Hon (Former Name Que Wenbin), [2023] HKCFI 2540 at para 43.
[6] Song Lihua v Lee Chee Hon (Former Name Que Wenbin), [2023] HKCFI 2540 at para 51.
[7] Song Lihua v Lee Chee Hon (Former Name Que Wenbin), [2023] HKCFI 2540 at para 45.
[8] Stansbury v Datapulse plc & Anor, [2003] EWCA Civ 1951.
[9] Song Lihua v Lee Chee Hon (Former Name Que Wenbin), [2023] HKCFI 2540 at para 46. Parenthetically, it is worth noting that, if Song had been an entirely in-person hearing, the Court would not have been required to consider the matter at issue.
[10] Stansbury v Datapulse plc & Anor, [2003] EWCA Civ 1951 at para 27, citing Whitehart v Raymond Thomson Ltd, an unreported decision of the Employment Appeal Tribunal from September 11, 1984.
[11] Song Lihua v Lee Chee Hon (Former Name Que Wenbin), [2023] HKCFI 2540 at para 46
[12] Song Lihua v Lee Chee Hon (Former Name Que Wenbin), [2023] HKCFI 2540 at paras 52, 56.
[13] See s 46(3)(b) of Hong Kong’s Arbitration Ordinance, Cap 609, as of December 16, 2022; see also, Ontario’s Arbitration Act, 1991, SO 1991, c 17, s 19(2).
[14] Lawal v Northern Spirit Ltd, [2003] ICR 856 (HL).
In Sjostrom Sheet Metal Ltd v Geo A Kelson Company Limited,[1] the Ontario Superior Court of Justice provided a timely reminder regarding the significance of careful pleading, clear and transparent change order processes, precise record-keeping, adherence to contractual obligations, and effective communication amongst contractual counter-parties in the context of a construction project with subcontractors and sub-subcontractors performing overlapping scopes of work. Below, we discuss some of the key takeaways.
This matter arose as a result of issues in respect of the construction of the University Health Network (“UHN“) Centre for Cell & Vector Production (“CCVP“). UHN hired Canadian Turner Construction Company (“Turner“) as the general contractor for this project. In this case, UHN and Turner were not parties to the action, nor were they relevant to the Court’s analysis.
Turner subcontracted with Geo A Kelson Company Limited (“Kelson“) to perform the mechanical work on the Project. Kelson then sub-subcontracted with A Amar and Associates Ltd (“Amar“) for Amar to perform certain sheet metal work for a fixed price. After being retained by Kelson, Amar subsequently faced labour issues which resulted in it hiring labourers from Sjostrom Sheet Metal Ltd (“Sjostrom“) to assist with its scope of work. Kelson was not aware of the hiring of Sjostrom at the time.
Ultimately, Sjostrom abandoned the Project as a result of non-payment by Amar.[2] Per the Court, Kelson and Sjostrom then reached an arrangement whereby Sjostrom would return to site and continue working, with Kelson being responsible for direct payments to Sjostrom on a go-forward basis. Consequently, Kelson issued a change order which reduced the total amount of Amar’s subcontract due to the work performed (and to be performed) by Sjostrom (the “Change Order”).[3] Although not explicitly stated, this Change Order was presumably agreed to by Amar, given that the change was implemented via change order rather than change directive.
Amar subsequently brought a claim against Kelson for unpaid services and materials under its sub-subcontract. In addition, Amar argued that it was relieved of its remaining sheet metal responsibilities due to the Change Order issued by Kelson and thus no longer had any obligations to Sjostrom.
In parallel with Amar’s action against Kelson, Sjostrom brought a lien action against Kelson for unpaid amounts allegedly owing pursuant to the aforementioned arrangement between Kelson and Sjostrom, which Sjostrom alleged to be a contract between the two. In response, Kelson argued that it had no contract with Sjostrom, and that as result, it had no liability for Sjostrom’s claim and that Amar was in fact required to pay any amounts proven by Sjostrom’s claim. Kelson also counterclaimed against Amar for damages, contribution, and indemnity if Kelson were found liable to Sjostrom.[4]
Given the somewhat unusual (and more importantly, disputed) contractual arrangement amongst the parties, the Court’s analysis touched in relevant part on a number of issues that are broadly relevant to the construction industry.
In particular, the Court considered the following:
Broadly speaking, Amar argued that its responsibility for sheet metal labour performed on the Project (whether by Sjostrom or otherwise) ceased after the issuance of the Change Order, and Sjostrom’s work was subsequently governed by a separate, direct sub-subcontract with Kelson. Sjostrom held the same position as Amar. Conversely, Kelson alleged that it had no direct contract with Sjostrom, alleging any responsibility for any owed amounts to Sjostrom rested with Amar.
The Agreement Between Kelson and Sjostrom
A key issue was of course whether a direct contract was established between Kelson and Sjostrom; in that regard, and despite the absence of a written agreement Sjostrom alleged that the parties entered into an oral agreement. In determining whether Kelson and Sjostrom entered into a contract, the Court considered first principles of contract formation including (1) offer, acceptance, consideration, certainty of terms and intention, (2) the factual matrix between the parties, (3) an examination based on an objective standard, and (4) the presence of a meeting of the minds.[5]
Ultimately, the Court found that it was unnecessary to rely on these contractual principles, given that Kelson’s pleadings were sufficient to establish the existence of an agreement.[6] In particular, the Court observed that subrule 25.07(3) of the Rules of Civil Procedure requires a party who intends to prove a version of facts that is different from the facts pleaded by the opposing party must plead the party’s own version of the facts in their defence.[7] However, Kelson’s statement of defence failed to dispute Sjostrom’s claim of the existence of a direct contract between Kelson and Sjostrom. Rather, the Court found that Kelson unintentionally acknowledged the existence of a direct contract with Sjostrom.
Further, in its pleadings, Kelson relied on s. 17(3) of the Construction Lien Act, which permits a party that is liable for payment to another to claim a set-off against such payment. This subsection contemplates that a payee’s outstanding debts, claims, or damages related to their payer can be set off against the amount of the payee’s lien. However, Kelson could only rely on s. 17(3) if it qualified as the “payer” of Sjostrom, which was defined under the CLA as “the owner, contractor, or subcontractor who is liable to pay for the services or materials supplied to an improvement under a contract or subcontract” (emphasis added). The Court found that Kelson’s reliance on this provision logically required privity of contract between Sjostrom and Kelson. Thus, relying on this section was effectively an admission of a direct contractual relationship by Kelson.[8]
Moreover, even in the event that Kelson’s statement of defence did not admit a direct contract, the Court would have found that the objective evidence supported the existence of a contract between Sjostrom and Kelson,[9] referring to communications between the parties, negotiations, as well as email correspondence suggesting an agreement on terms and pricing.[10] Indeed, the examination of whether a contract has been formed entails assessment based on an objective standard – in which the parties’ conduct is assessed based on how it would be construed by a reasonable, disinterested third party (i.e., a reasonable person) – rather than a subjective standard, based on the subjective understanding of each party. In applying this standard, the Court therefore found that a reasonable person would conclude that both parties intended to enter into a direct contractual relationship.
Claimed Amount of Work Performed by Sjostrom
The next issue considered by the Court was whether Sjostrom had proven the amount claimed in respect of the work it allegedly performed.
The agreement between Sjostrom and Kelson (now found to exist) was based on hours spent on sheet metal labour at a set rate, which the Court considered sufficiently similar to a cost-plus contract such that the case law on cost-plus contracts applied in this case. In that regard, the Court identified several distinct principles that applied to the assessment of a damages claim including the need for the parties to practice diligence in managing costs, prevention of wasteful or uneconomic use of labour and materials, reasonableness of estimates, examination of the context to an estimate, and the sophistication and knowledge of the parties.[11]
The Court found that Sjostrom failed to provide sufficient evidence that the time summaries it had provided were an accurate reflection of the hours worked by Sjostrom. Specifically, Sjostrom combined its overtime hours with its regular hours, leading to a distorted picture. Further, Sjostrom provided weekly summaries that were not signed by the labourers themselves, and which lacked details of the actual work undertaken.[12] Timesheets were not accurately kept, and often consisted of notes on scrap paper, pieces of drywall, cardboard and napkins.[13]
Moreover, the Court found that time summaries were not provided to Kelson on a weekly basis.[14] Rather, they were only provided with Sjostrom’s invoices, which made it such that there was “no evidence tendered at trial supporting that Kelson could reasonably have known how many hours Sjostrom was spending on site until receiving the invoices”.[15] The Court also found that there was a discrepancy between the actual hours worked and estimates, as evidence suggested that the sheet metal labour was substantially completed earlier than Sjostrom’s estimate.[16]
The Court emphasized the principle that “time spent by labourers must be strictly proven due to the difficulty in verifying them after the fact”.[17] The Court found that Sjostrom did not meet its evidentiary burden to demonstrate actual hours, how the hours were incurred, why they varied significantly from estimates, and why no notice was provided regarding the fact that actual labour hours were significantly exceeding the estimate. Thus, the Court dismissed Sjostrom’s claim for payments made exceeding the sum already remitted by Kelson due to insufficient evidence.[18]
The Change Order’s Impact on Amar’s Scope of Work
Kelson and Amar also disagreed with respect to the contractual impact of Kelson’s Change Order which reduced the amount of Amar’s sub-subcontract, but also arguably the scope – depending on the view of each party considering it. In this regard, Kelson asserted that the Change Order merely credited the cost of Sjostrom’s labour against the price of the sub-subcontract between Kelson and Amar, but did not remove sheet metal labour from Amar’s scope of work, while Amar argued that it fully removed sheet metal labour from Amar’s scope of work.[19]
In this case, the Court noted that the Change Order was ambiguous, only referring to a price reduction and a description of “work performed by others.” As a result, an analysis of the surrounding circumstances was required in order to assess the intentions of the parties.[20]
In examining the factual background, the Court observed that the labour rate as agreed upon between Kelson and Sjostrom was not discussed with Amar. The Court found this “curious” given Kelson’s assertion that, despite Sjostrom not being included in their discussions, Sjostrom continued to be Amar’s sub-subcontractor, and that Amar was liable to pay the labour rate agreed upon by Kelson and Sjostrom in their agreement.[21]
Moreover, Sjostrom sent an email to Amar stating, “going forward Sjostrom will have to follow instruction as directed by [Kelson], exclusively. This includes but not limited to, time sheet [submittal] etc.”[22]The Court found that this email was consistent with the understanding that Kelson assumed responsibility for Sjostrom, especially given the fact that there was no response from Kelson or Amar to indicate otherwise.[23]
In another e-mail exchange in response to an e-mail from Sjostrom to which Kelson was copied regarding labour required for installation of control dampers, Amar responded ” [Kelson] has received and deducted costs from my contract for the entirety for ‘cost to complete'”[24]. While Kelson responded to the e-mail, it did not dispute Amar’s characterization that the “cost to complete” was deducted from Amar’s sub-subcontract. Thus, the Court found that the Change Order had the effect of removing sheet metal labour from Amar’s scope of work. [25]
Breach of Kelson and Amar’s Subcontract
The Court then considered who breached the subcontract between Kelson and Amar. Amar claimed that Kelson breached the subcontract through non-payment, while Kelson claimed that Amar breached the subcontract due to its failure to provide sheet metal labour. The Court observed that the subcontract required a notice of default to be delivered in order for Amar to be in breach, and since no notice was provided until after the parties completed their work, “Amar was not formally in breach… at any material time”. Thus, without having issued a notice of default, Kelson had no right to back charge Amar for costs beyond the figure agreed upon in the Change Order. [26]
In addition, the Court found that Kelson breached the subcontract by failing to pay Amar the remaining holdback due upon final payment after substantial completion and found Kelson had separate holdback obligations under the Construction Lien Act for its subcontracts with both Amar and Sjostrom. Thus, Kelson breached its subcontract with Amar by not making the payments.[27]
Further, in determining the earned and unpaid amount owing to Amar, Kelson argued that Amar underbid the labour portion of the sheet metal work. However, the Court emphasized that whether Amar underbid was immaterial, as Amar’s subcontract was a fixed price contract, not a cost-plus contract. On this basis, Kelson would not have to pay anything more than the fixed subcontract price agreed by parties.[28]
Moreover, the Court found that since the sheet metal labour was removed from Amar’s sub-subcontract scope of work through the Change Order, and since they were called back to the project site in order to perform work outside of their revised scope, Amar’s invoice constituted a valid extra.[29] Lastly, the evidence did not support a finding that Amar intended or agreed to be indemnified for expenses associated with the completion of sheet metal labour.[30]
The Court’s Determination
Based on all of the above, the Court concluded overall that Sjostrom and Kelson did enter into a separate sub-subcontract for Sjostrom to complete the remaining sheet metal labour in Amar’s scope of work, but that Sjostrom has failed to prove its claimed damages, as a result of which the Court dismissed Sjostrom’s action and discharged its lien. With respect to Amar, the Court concluded that the Change Order had removed all of Amar’s remaining scope of work, and Kelson breached its subcontract with Amar due to non-payment, such that Amar was entitled to judgment against Kelson.
Notwithstanding that the fact pattern of this case was not especially unusual, Sjostrom nevertheless offers several takeaways with respect to how a party can best protect or advance its position in a construction dispute.
First, and as it relates to pleadings, it is crucial that parties take care when drafting such documents in order to ensure their pleadings align with the theory of their case. Here, the Court found inconsistencies between Kelson’s statement of defence and its subsequent submissions, which led to a finding that a direct contract existed between Kelson and Sjostrom. Such inconsistencies, as seen in this case, can lead to unexpected outcomes.
Second, it is imperative that parties understand their rights under their contract(s) and any particular actions required to enforce them. In this case, the subcontract between Kelson and Amar required a notice of default in order to ground a finding of breach of contract, and since Kelson did not provide such notice, the Court found that Amar was not in breach and that Kelson was not entitled to exercise any associated remedies. While this may be a somewhat unusual precondition depending on the form of contract used (whether it be a standard form or a bespoke contract), it nevertheless emphasizes the importance of ascertaining all relevant preconditions to taking a given position, and then complying with those preconditions.
Third, the Court provided helpful guidance in its discussion of the judicial assessment that applies in making claims for payment under certain forms of construction contract. A cost-plus basis for payment in particular – as well as time and materials basis – is inherently uncertain, and can vary quite significantly from any estimate given before the start of work. A court will consider whether the claiming party exercised diligence and was economical in the use of its labour and materials, and the claiming party will have to meet a high evidentiary burden (among other things).
In that regard, contractors operating on a cost-plus or time and materials basis would be well advised to be cautious and comprehensive in considering the basis for any estimate they give to a client, in order to have confidence that the work can be completed for an amount roughly equivalent to that stated in the estimate. The alternative, as Sjostrom shows, entails significant scrutiny by a court or other decision-maker (e.g. an arbitrator).
In that regard, parties must ensure that their time is tracked in a reliable and accurate manner. The reliability of time sheets, and other timekeeping methods, is crucial to establishing their validity as admissible evidence – not to mention the practical and relationship benefits of doing so. As the Court observed, time spent by labourers must be proven to a strict evidentiary standard, given the difficulty in verifying hours after the fact. In this case, the Court found that Sjostrom failed to provide sufficient evidence to prove that their time summaries were an accurate reflection of their work. This lack of reliable evidence left Sjostrom with no evidentiary foundation for any additional amount claimed. Similarly, it is important to ensure that change orders or side agreements are clearly documented and agreed upon, as well as disseminated to all relevant parties.
In any event, however, construction industry participants would be well advised to be candid with counterparties if and when the cost estimate will be exceeded (or when it is anticipated to be exceeded), so as to avoid unpleasant surprises and acrimony. Successful projects are often those which operate on the basis of a cooperative and collaborative relationship, and in that regard, financial candor is arguably no different.
[1] Sjostrom Sheet Metal Ltd v Geo A Kelson Company Limited 2023 ONSC 4959.
[2] Sjostrom at paras 1-3.
[3] Sjostrom at para 3.
[4] Sjostrom at paras 4-6.
[5] Sjostrom at paras 10-11.
[6] Sjostrom at para 14.
[7] Sjostrom at para 17.
[8] Sjostrom at para 21.
[9] Sjostrom at para 24.
[10] Sjostrom at paras 25-39.
[11] Sjostrom at paras 40-41.
[12] Sjostrom at paras 42, 44-46.
[13] Sjostrom at para 62.
[14] Sjostrom at para 63.
[15] Ibid.
[16] Sjostrom at paras 53 and 59.
[17] Sjostrom at para 74, Citing Infinity Construction Inc. v. Skyline Executive Acquisitions Inc., 2020 ONSC 77 at para. 114.
[18] Sjostrom at paras 74 and 75.
[19] Sjostrom at paras 80 and 81.
[20] Sjostrom at paras 82 – 84.
[21] Sjostrom at para 94.
[22] Sjostrom at para 96.
[23] Sjostrom at para 97.
[24] Sjostrom at para 102.
[25] Sjostrom at paras 104 -105, 117.
[26] Sjostrom at para 123.
[27] Sjostrom at paras 127-130.
[28] Sjostrom at para 135.
[29] Sjostrom at para 137.
[30] Sjostrom at para 143.
In Sundance Development Corporation v. Islington Chauncery Residences Corp., 2023 ONSC 5239, the Ontario Superior Court of Justice considered repudiation (broadly, the law applicable in cases where a contractual party abandons or refuses to perform its contract) in respect of a construction contract in the context of a troubled townhouse development project. Here, the Court reaffirmed that repudiation is an exceptional remedy and that there is a high bar to proving that a party has repudiated its contract.
As discussed in more detail below, unless there is sufficient evidence to prove repudiation on an objective basis, parties should be cautious when deciding whether to stop work in acceptance of an alleged repudiation. In particular, we consider the case and the implications of failing to prove repudiation in a construction project where so alleged.
Islington Chauncey Residences Corp. (“Islington”) (the developer) hired Sundance Development Corporation (“Sundance”) to act as construction manager for a townhouse development project (the “Project”) under a services agreement (the “Agreement”).
Sundance commenced its work in July 2019; however, the construction phase of the project was delayed (notably related to the early days of the COVID-19 pandemic). By late summer 2020, Islington was pushing for Sundance to complete two model units for the development.
In September 2020, the model units were still not ready, and the overall construction was far from complete. At this time, for extraneous reasons, the site superintendent (a Sundance employee) advised of his intention to leave the job at the end of October 2020. Although Sundance proposed that Sue Capobianco, another one of its personnel, be the replacement site superintendent, Sundance did not have the unilateral right to appoint the site superintendent and Islington did not agree with Sundance’s recommendation. No other proposals were made, and the replacement site superintendent was not agreed to or appointed.
Sometime after the site superintendent’s announcement, Islington’s principal engaged a project manager, Tony Murdocca (who himself was recommended by the father of the Islington principal), to help assist in getting the Project finished. Mr. Murdocca arrived on site on October 15, 2020, and began directly coordinating with trades to complete the model units.
In a telephone conversation on October 15, 2020, representatives from Islington and Sundance discussed the possibility of terminating the Agreement. By the end of the call, the parties had agreed to try to work out an agreement to end their contractual relationship effective October 31, 2020.
In the last two weeks of October 2020, the parties made efforts to negotiate the terms of the termination/settlement agreement. While the concept of a mutual agreement was agreed to in principle and most terms were agreeable to both parties, no mutual termination agreement was ultimately reached as a result of an inability to agree on the scope of the release (specifically, Islington would not agree to release Sundance from future claims). Throughout this period, Mr. Murdocca took the lead on coordinating the finishing of the two model units.
On October 30, 2020, and absent an executed termination/settlement agreement, Islington sent a memorandum to Sundance which provided a list of alleged damages arising from Sundance’s mismanagement and project delays and noted their position that Sundance had breached the Agreement. The memorandum confirmed that Islington “agreed in principle with terminating the contract, but would not agree to releasing Sundance from future claims” and that Islington intended to back charge Sundance for “costs incurred from delays and Sundance’s alleged ‘negligent mismanagement.’”
In response to the memorandum, Sundance sent a letter on the same day, taking the position that Islington had repudiated the Agreement, and that Sundance therefore accepted that repudiation. The letter included a demand for payment of three invoices (which were attached to the letter) as a precondition for delivering remaining materials and accounting records in Sundance’s possession. Sundance alleged that Islington’s collective conduct repudiated the contract and specifically referred to Islington’s decision to use Islington personnel (including Mr. Murdocca) to take over Sundance’s construction management function on the project and Islington’s conduct during the termination agreement negotiations.
Sundance withdrew from site on the next day October 31, 2020, and ceased supplying all services to the Project. After Sundance ceased services, and given that Islington did not believe that Sundance had earned the fees and had claims against them in negligence and for failing to complete the work under the Agreement, Islington made no further payments to Sundance.
Although the Court had four issues before it, for the purposes of this article we will only be focusing on the first issue: “Was Sundance justified in ceasing all services effective October 31, 2020? Specifically:
Did Islington repudiate the contract?
Broadly speaking, in Canadian Law repudiation means: “the conduct of one of the parties to a contract which demonstrates to the other that it will not fulfill the terms of the contract.”[1] Repudiation “entitles the other party not to perform its obligations under the contract and claim damages.”[2]
Looking at the totality of the evidence, the Court held that Islington did not repudiate the Agreement. The Court found that Islington’s conduct was not repudiatory for three main reasons: (i) Islington had a contractual right to direct Sundance to cooperate or coordinate with it in supervising and managing the construction; (ii) Sundance was never excluded from full and free access to the site or materially impeded in its role as construction manager (including with respect to the hiring of Mr. Murdocca); and (iii) Islington’s “hard bargaining” with Sundance in respect of the termination/settlement agreement did not rise to the level of repudiatory conduct.
The Court began its analysis by reviewing the relevant law of repudiation. The Court noted that repudiation is assessed on an objective standard, and that the court must ask “whether a reasonable person would conclude that the breaching party no longer intends to be bound by the contract, which requires considering the surrounding circumstances”. To establish repudiation, more than an ordinary, non-repudiatory breach of the contract is required. The breach must be serious and “[i]t must deprive the innocent party of substantially the whole benefit of the contract.” In this regard, the Court had to consider whether Islington breached the Agreement and whether such breach was serious and deprived Sundance of substantially the whole benefit of the Agreement.
The Court considered the Agreement and found that Islington had a “contractual right to deploy its own forces and … to require that Sundance cooperate and coordinate with those forces in supervising and managing the construction.” Pursuant to Section 3.1 of the Agreement specifically, “Sundance expressly agreed ‘to do all such acts and things as [Islington] considers necessary or desirable, whether independently or in cooperation or coordination with [Islington], to supervise and manage the accounting, financing and construction […] of the Units’”. In addition, Section 3.1 specifically enumerated several matters which captured the scope of work performed by Mr. Murdocca.
By utilizing this contractual right, Sundance argued that “Islington obstructed its free and full access to the model units by taking over the coordination of their construction”. On that point, Sundance referred to Section 7.1(d) of the Agreement, which entitled Sundance to “full and free access” to all units.
The Court found that “the fact that Islington assigned personnel to take a primary role in directing construction of the model units did not result in Sundance being excluded from ‘full and free access’ to the units to complete its work.” First, although there was a trade meeting invitation without Sundance’s inclusion, the Court found that there was no evidence supporting that “trade contractors were directed to or did cease communicating with Sundance or were directed to coordinate with Tony Murdocca to the exclusion of Sundance.” Second, the only Sundance personnel with a regular on-site presence, Ms. Capobianco, was not impeded in executing her duties. While she subjectively felt that she was being excluded from site operations, objectively there was no convincing evidence to show that Sundance’s on-site work was materially impeded. Ms. Capobianco continued to have involvement with the model units and continued to perform the same kinds of things she had done for the prior Sundance site superintendent that was leaving. Third, the site superintendent and Ms. Capobianco continued to have the controlling access to the site. Mr. Murdocca did not have the keys or codes for the electronic locks to the site, and had to be let in by either Sundance’s site superintendent or Ms. Capobianco.
On a balance of probabilities, the Court therefore found that Islington did not breach the Agreement by deploying personnel to site as the evidence did not support “that Sundance’s construction management function was genuinely impeded or superseded by the presence of Tony Murdocca or other Islington personnel.” In any event, managing the construction work was only one of Sundance’s many duties, and having its full and free access impeded would not be sufficient in itself to ground repudiation of the entire contract.
Lastly, the Court found that “what transpired in late October was hard bargaining, not repudiatory conduct.” When the parties could not agree to the terms of termination, Islington eventually offered an ultimatum: “agree to the release being proposed or face back charges for all the costs that Islington said were incurred solely by Sundance’s mismanagement of the project.” There was no language in Islington’s memorandum that treated the Agreement as being at an end. In addition, the Court found that “nothing in the evidence support[ed] a finding that, objectively, Sundance had any genuine intention or willingness to take steps to investigate and respond to the alleged breaches of contract.”
In this regard, the court found that there was no breach of the Agreement, let alone a repudiatory breach.
If the contract was not repudiated, was Sundance entitled to withdraw its services?
The Court held that Sundance was not entitled to withdraw its services, and therefore breached the Agreement by doing so.
The relevant law states that if “an owner ceases to make payments under the contract or by other conduct makes it impossible for the contractor to complete, the contractor is justified in abandoning the work and may enforce a claim in quantum meruit to the extent of the actual value of the work performed and material supplied to that time”.[3] The Court also noted that “a party cannot rely on its own breach of contract to be relieved of its contractual obligations”.
Sundance argued that because Islington was in breach of the Agreement, it was entitled to cease work. In its response letter to Islington, Sundance demanded payment of accounts and ceding control of the model units to Sundance’s forces as pre-conditions for its return. The Court ultimately held that those demands were unsupported by the terms of the Agreement, and that there was no opportunity provided to Islington to remedy the alleged defaults as Sundance walked off the job the next day.
The Court found that Sundance lacked a contractual basis to demand that Islington cede control of the model units. First, pursuant to Section 3.1, Islington was entitled to take over primary responsibility for coordinating and construction of the model units and Sundance was required to cooperate or coordinate with Islington on the construction of the units. Therefore, Islington deploying its own forces (i.e., Mr. Murdocca) was not a breach of contract under the Agreement. Second, as Sundance was factually not obstructed from “full and free access” to the units, there was no breach of Section 7.1(d) of the Agreement.
With respect to payment of accounts, the Court found that “Sundance had not met its burden of proving that Islington was in breach of the Agreement when Sundance advised it would be withdrawing all services and made demand for payment.” On the contrary, the Court found that there was no contractual basis for the three invoices that Sundance had attached (the invoices were for fees not yet due or payable or for its own materials that it left on site), and stated that “[d]emanding payment to which a contractor is not entitled or refusing to proceed unless paid is a breach of contract”.
As Islington had not repudiated the Agreement nor ceased to make payments to which Sundance was entitled, the Court found that “Sundance breached the contract by demobilizing from site with no legitimate basis and by making demand for payment of amounts to which it was not contractually entitled at the time of the demand.”
The Court ultimately ordered that Sundance repay Islington for the partial costs of the replacement construction management and the costs of extra work and work redone.
The Court in Sundance has reaffirmed the high bar for repudiation, and that courts are reluctant to grant it as an exceptional remedy. As stated by the Court, repudiation is “only available in circumstances where the entire foundation of the contract has been undermined, namely where the very thing bargained for has not been provided”.[4]
Further, this decision confirms just how necessary objective evidence is when showing repudiation. Although a party may feel impeded or that the other party intends to not be bound by the contract, those subjective impressions are not relevant to the analysis. A party proving that there was repudiation must, on an objective basis, establish that: (1) there was a breach of the contract; (2) the breach deprived it of substantially the whole benefit of the contract; and (3) the other party evinced an intention to no longer be bound by the contract.
When considering repudiation as a remedy, it is crucial that a party carefully reread its contract with a neutral lens and ensure that there is sufficient factual evidence to prove repudiation on an objective basis, before acting on the alleged repudiation. Given the drastic outcome of such a scenario, due diligence is therefore imperative. Caution is particularly warranted given a failed repudiation allegation likely, as was the case here, gives rise to a breach of contract by the alleging party – which can result in damages being awarded against the claimant.
Sundance also raises an interesting question as to whether there is a material distinction between the legal concepts of repudiation and fundamental breach, notwithstanding some case law suggesting they are two separate things.[5] Whereas proving fundamental breach ostensibly requires only that the non-breaching party is deprived of substantially the whole benefit of the agreement, repudiation also requires proving that, by words or conduct, a party has evinced an intention not to be bound by the contract. While proving intent might arguably constitute a higher evidentiary threshold, the Court’s observation that “intent” is measured on an objective standard – in other words, a party can repudiate a contract without subjectively intending to do so – suggests that the reference to intent may be somewhat illusory.
In any event, this case also demonstrates the importance of providing contractual counterparties sufficient time to respond to allegations of breaches of contract. The Court noted at a few points in its analysis that no objections had been raised by Sundance during the time when Mr. Murdocca took over the management and coordination of the model units until after negotiations had failed and Islington provided its memorandum regarding expected costs. In addition, the Court found that Sundance breached the Agreement later when it accepted the alleged repudiation and immediately demobilized from the site. If a party does not raise issues while they are occurring and does not give the other party an opportunity to resolve those issues, this could be a breach of the contract in and of itself and/or negatively affect any legal argument it may later want to raise regarding the other party’s breach of contract.
Indeed, readers will recognize this exact rationale as the underlying principle of contractual notice provisions, breach of which is often fatal to a claiming party’s position.
To conclude, we note that construction parties specifically should consider this case to be a cautionary tale. If a party intends to allege repudiation and accept such alleged repudiation, where no repudiation exists, and begins to act as if the contract has been terminated, that party will then be potentially liable for a breach of contract. Such a course of action is, to put it simply, a high-risk maneuver. While the other party on a construction project may take subjectively extreme steps that may harm the parties’ professional and personal relationship, a party should be careful to take note of exactly what obligations and entitlements exist within the contract – indeed, in circumstances where the contractual relationship has become highly acrimonious, parties would be best served by confirming their rights and obligations under the relevant agreement(s) and, if necessary, consulting a lawyer.
[1] Barron’s Canadian Law Dictionary, 6th ed (Barron’s Educational Series, Inc, 2009), sub verbo “repudiation”.
[2] Ibid.
[3] Sundance Development Corporation v. Islington Chauncery Residences Corp., 2023 ONSC 5239 at para 82 citing D&M Steel Ltd. v. 51 Construction Ltd., 2018 ONSC 2171 at para 49, and Summers v. Harrower, 2005 CanLII 50261 (ONSC) at para 13.
[4] Sundance Development Corporation v. Islington Chauncery Residences Corp., 2023 ONSC 5239 at para 18 citing Remedy Drug Store Co. Inc. v. Farnham, 2015 ONCA 576 at paras 50-51, and Spirent Communications of Ottawa Limited v. Quake Technologies (Canada) Inc., 2008 ONCA 92 at para 37.
[5] Spirent Communications of Ottawa Limited v. Quake Technologies (Canada) Inc., 2008 ONCA 92 at para 37.
In the recent decision of C v D,[1] the Hong Kong Court of Final Appeal (“HKCFA”) unanimously found that when an arbitral tribunal concludes that pre-arbitration conditions in an arbitration agreement have been met, this is not reviewable by a court in a proceeding to set aside the award.
In reaching this conclusion, the majority adopted a conceptual distinction between subject-matter jurisdiction and procedural “admissibility” of a matter to arbitration.[2] The majority found effectively that non-compliance with pre-arbitration conditions does not negate an arbitral tribunal’s jurisdiction over a dispute; rather it merely renders the dispute not yet admissible to arbitration.
Because the question of compliance does not affect the tribunal’s jurisdiction, it is not jurisdictional in nature, and cannot be reviewed by a court (unless otherwise specified by the parties), even if the question was raised as an objection to the tribunal’s jurisdiction.
Given the similarities between Hong Kong and Canada as Model Law[3] jurisdictions, and the application of the jurisdiction/admissibility distinction in some other common law jurisdictions (in the territorial sense of the word), C v D will therefore be of interest to Canadian readers.
Company C (“C”)[4] was a Hong Kong company that owned and operated broadcasting satellites. Company D (“D”) was a Thai company that operated satellites in the Asia Pacific. The two entered into a cooperation agreement in December 2011 (the “Agreement”) regarding a jointly-owned satellite. The Agreement contained the following clauses regarding dispute resolution:
14.2 Dispute Resolution. The Parties agree that if any controversy, dispute or claim arises between the Parties out of or in relation to this Agreement, or the breach, interpretation or validity thereof, the Parties shall attempt in good faith promptly to resolve such [dispute] by negotiation. Either Party may, by written notice to the other, have such dispute referred to the Chief Executive Officers of the Parties for resolution. The Chief Executive Officers (or their authorized representatives) shall meet at a mutually acceptable time and place within ten (10) Business Days of the date of such request in writing, and thereafter as often as they reasonably deem necessary, to attempt to resolve the dispute through negotiation. 14.3 Arbitration. If any dispute cannot be resolved amicably within sixty (60) Business days of the date of a Party’s request in writing for such negotiation, or such other time period as may be agreed, then such dispute shall be referred by either Party for settlement exclusively and finally by arbitration in Hong Kong at the Hong Kong International Arbitration Centre (‘HKIAC’) in accordance with the UNCITRAL Arbitration Rules in force at the time of commencement of the arbitration (the ‘Rules’)…[5]
14.2 Dispute Resolution. The Parties agree that if any controversy, dispute or claim arises between the Parties out of or in relation to this Agreement, or the breach, interpretation or validity thereof, the Parties shall attempt in good faith promptly to resolve such [dispute] by negotiation. Either Party may, by written notice to the other, have such dispute referred to the Chief Executive Officers of the Parties for resolution. The Chief Executive Officers (or their authorized representatives) shall meet at a mutually acceptable time and place within ten (10) Business Days of the date of such request in writing, and thereafter as often as they reasonably deem necessary, to attempt to resolve the dispute through negotiation.
14.3 Arbitration. If any dispute cannot be resolved amicably within sixty (60) Business days of the date of a Party’s request in writing for such negotiation, or such other time period as may be agreed, then such dispute shall be referred by either Party for settlement exclusively and finally by arbitration in Hong Kong at the Hong Kong International Arbitration Centre (‘HKIAC’) in accordance with the UNCITRAL Arbitration Rules in force at the time of commencement of the arbitration (the ‘Rules’)…[5]
The foregoing clauses effectively called for a tiered or cascading dispute resolution procedure. Clause 14.2 required an attempt at good faith negotiations, while Clause 14.3 required that 60 Business days elapse between the written request for negotiations and a referral to arbitration.
On December 24, 2018, D sent a letter to C’s board of directors alleging that C breached the Agreement by interfering with D’s portion of the satellite’s payload (the “Dec 24 Letter”). In the Dec 24 Letter, D expressed a willingness to refer the dispute to the parties’ respective management teams. C responded through external counsel, who requested that all further correspondence on the matter be directed to external counsel or, if pursuant to Clause 14.2, to C’s CEO.
There was no further correspondence from D until it issued a notice of arbitration pursuant to Clause 14.3 on April 18, 2019. In its response, C claimed that the arbitral tribunal lacked jurisdiction because the pre-arbitration conditions under Clause 14.2 had not been met.
Under Article 16 of the Model Law, the tribunal was empowered to rule on its own jurisdiction:
(1) The arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement. … […] (3) The arbitral tribunal may rule on a plea referred to in paragraph (2) of this article either as a preliminary question or in an award on the merits. If the arbitral tribunal rules as a preliminary question that it has jurisdiction, any party may request, within thirty days after having received notice of that ruling, the court specified in article 6 to decide the matter, which decision shall be subject to no appeal; …[6] [emphasis added]
(1) The arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement. …
(3) The arbitral tribunal may rule on a plea referred to in paragraph (2) of this article either as a preliminary question or in an award on the merits. If the arbitral tribunal rules as a preliminary question that it has jurisdiction, any party may request, within thirty days after having received notice of that ruling, the court specified in article 6 to decide the matter, which decision shall be subject to no appeal; …[6] [emphasis added]
The tribunal opted to deal with C’s objection to the tribunal’s jurisdiction and the issue of liability together, rather than address the objection as a preliminary question. In a partial award on the merits, the tribunal held that D had fulfilled the requirements of Clause 14.2 by sending the Dec 24 Letter, and fulfilled the requirements of Clause 14.3 by sending its notice of arbitration more than 60 business days after the Dec 24 Letter. The tribunal also held that referring the dispute to the parties’ respective CEOs was optional under Clause 14.2. The tribunal found C liable to pay damages in an amount to be assessed.
C then initiated proceedings in the Hong Kong Court of First Instance to set aside the partial award on jurisdictional grounds; namely, that the pre-arbitration conditions had not been met. C relied on Article 34 of the Model Law:
(1) Recourse to a court against an arbitral award may be made only by an application for setting aside in accordance with paragraphs (2) and (3) of this article. (2) An arbitral award may be set aside by the court…only if: (a) the party making the application furnishes proof that: […] (iii) the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the award which contains decisions on matters not submitted to arbitration may be set aside[.][7] [emphasis added]
(1) Recourse to a court against an arbitral award may be made only by an application for setting aside in accordance with paragraphs (2) and (3) of this article.
(2) An arbitral award may be set aside by the court…only if:
(a) the party making the application furnishes proof that:
(iii) the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the award which contains decisions on matters not submitted to arbitration may be set aside[.][7] [emphasis added]
The Court of First Instance rejected C’s application to set aside the partial award, and the Hong Kong Court of Appeal upheld the decision. C then appealed to the HKCFA.
A panel of five judges unanimously dismissed C’s appeal, albeit each with separate reasons.
In the view of Justice Ribeiro, the question before the Court was “whether the Court should have reviewed [the tribunal’s] decision”; in other words, “who finally decides – the tribunal or the Court – whether [the pre-arbitration condition in Clause 14.2] has been met.”[8] The Court concluded that the tribunal has final say, and did not consider whether the pre-arbitration conditions had been met.
Four of the five judges on the panel found the admissibility/jurisdiction distinction to be – in the words of Justice Fok – “a useful principle by which to distinguish between those issues that are reviewable by a supervising court and those that are not.”[9] The fifth judge, Justice Gummow, found the distinction to be “an unnecessary distraction” which “presents a task of supererogation: there is no need to find the answer somewhere else when it is supplied by construing and applying the statute to the facts of the case.”[10]
As discussed in the Analysis section below, there is live debate about the use of the distinction and how it might apply in a given set of circumstances.
The Majority View
The majority view was expressed by Justice Ribeiro and in concurrences by three other judges. Justice Ribeiro considered Articles 16 and 34 of the Model Law (as reflected in Hong Kong’s Arbitration Ordinance[11]), and concluded that a supervisory court has the power to consider questions of jurisdiction, despite the fact that Article 34 does not explicitly mention “jurisdiction.” The Court agreed unanimously that Articles 16 and 34 must be read to confer the same powers on a supervisory court to intervene, albeit at different stages of an arbitration.
As set out above, Article 16 permits an arbitral tribunal to consider a question of jurisdiction on a preliminary basis or in its award. Article 16 lays out a procedure for dealing with the question on a preliminary basis, but does not provide one for deferring the question to the award. When the question is deferred to the award, then Article 34 instead applies, since it deals with setting aside an award.
For obvious reasons, Article 34 must permit the setting aside of an award on the same grounds as Article 16 would; otherwise, a tribunal could avoid judicial scrutiny of its ruling on jurisdiction simply by deferring the question to the award. This would be arbitrary. Therefore, as noted by the majority, Article 16 and 34 must be read “in tandem” and construed consistently.[12] As Chief Justice Cheung put it in his concurrence, Article 34 “must cover an award made by the tribunal without ‘jurisdiction’ in the [Article 16] sense.”[13]
The question for the majority, therefore, was whether the issue of compliance with pre-arbitration conditions was a jurisdictional question or not. The majority found it was not, essentially on the basis that a tribunal would have jurisdiction over the dispute regardless of whether the conditions had been met or not.
In other words, a premature dispute – one that was not yet appropriate to be heard by a tribunal – was still arbitrable in the sense that arbitration was still the appropriate forum for an eventual hearing, rather than a court. The majority observed that neither party would have wanted the underlying substantive dispute about the Agreement to go to court instead of arbitration, even though the parties disagreed about whether the pre-arbitration conditions had been met.
The question of compliance with those conditions, therefore, related to admissibility rather than jurisdiction. Jurisdiction can be understood as “the power of the tribunal to hear a case”, and admissibility as “whether it is appropriate for the tribunal to hear it”.[14] In Justice Ribeiro view, the distinction “seeks to encapsulate [the] principle…that the court may review a tribunal’s ruling on the former, but not on the latter, category of challenge.”[15]
Justice Ribeiro concluded that “pre-arbitration conditions should be regarded as presumptively non-jurisdictional”, although the parties are always free to explicitly specify in their arbitration agreement that the question of compliance with pre-arbitration conditions is reviewable by a court.[16] That is to say, pre-arbitration conditions “inherently involve aspects of the arbitral procedure”…and “are best suited for resolution by arbitral tribunal, subject to minimal judicial review, like other procedural decisions.”[17]
In the case of the Agreement, Justice Ribeiro concluded that the pre-arbitration conditions were “merely procedural and intended to be exclusively decided by the tribunal”[18]. Non-compliance with the conditions would not negate the tribunal’s jurisdiction, and therefore the issue was not jurisdictional in nature.
Justice Ribeiro also rejected C’s attempt to argue that a condition precedent to arbitration had not been met, and that this negated C’s consent to arbitration (as a matter of jurisdiction). He observed that C had argued the question of compliance in front of the tribunal, and that the correctness of the tribunal’s decision about D’s compliance with the conditions was not before the Court. Rather, the question was whether a court had the power to review the tribunal’s decision regarding compliance.
Effectively this meant that the question for the Court was whether the tribunal had jurisdiction over the question of compliance. And because the Court concluded that it did, there was no reviewable issue.
The Minority View
For his part, Justice Gummow agreed that Article 16 and 34 of the Model Law “operate in tandem”; however, unlike the majority, he considered the “scope of curial intervention under Article 34 is epexegetical of Article 16(1)”, which is to say that Article 16 should be read in light of Article 34 rather than vice versa.[19] Accordingly, Justice Gummow implied that a supervisory court did not have the power to consider all jurisdictional questions, although he was careful to emphasize that the scope of curial intervention had “not been the subject of focused submissions by the parties”.[20]
In any event, in his view, a supervising court could only intervene on the issues explicitly set out in Article 34, such as an award that deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or that contains decisions on matters beyond the scope of the submission to arbitration.
In that regard, he concluded that the question of compliance with pre-arbitration conditions was exclusively within the jurisdiction of the arbitral tribunal, because Clause 14.3 of the Agreement applied to “any controversy, dispute or claim [arising] between the Parties out of or in relation to this Agreement, or the breach, interpretation or validity thereof”, such that there was “no reason to confine the scope of arbitrable disputes…to substantive disputes…and exclude…disputes on whether the pre-arbitration procedural requirements…had been fulfilled.”[21] In short, compliance with pre-arbitration conditions was not a basis for intervention under Article 34.
Like Justice Ribeiro, Justice Gummow rejected C’s argument that a condition precedent to arbitration had not been met, albeit for different reasons. He observed that a supervisory court was not entitled under Article 34 of the Model Law to consider the merits, i.e., whether the tribunal was correct in deciding that the pre-arbitration conditions had been met.
Further, in Justice Gummow’s view, “the precondition contained in clauses 14.2 and 14.3 was directed to the obligation to arbitrate with respect to the specific claim in question, not to the agreement to arbitrate.”[22] Thus, a failure to meet the precondition(s) would not negate consent to arbitrate or the tribunal’s jurisdiction.
First, as is often the case, C v D demonstrates the general reluctance of courts to intervene in arbitrations or interfere with arbitral awards. This is, broadly speaking, a welcome reaffirmation that is consistent with global trends, and is perhaps best encapsulated in the Court’s characterization of the dispute as an issue as to the scope of the supervisory court’s review jurisdiction. This characterization may deter parties from initiating court proceedings on issues of procedural admissibility, emphasizing that they are properly matters for the tribunal to consider.
Second, C v D suggests that courts will not necessarily treat a question as jurisdictional simply because a party is objecting to the jurisdiction of the tribunal, or the tribunal itself treated the question as jurisdictional. Parties in a similar position to C would therefore be well advised to remain wary, given that C raised the issue in the form of what it thought was a jurisdictional question before the tribunal, the tribunal relied on Article 16 of the Model Law to defer an answer until its partial award on the merits, and the tribunal then concluded it had jurisdiction. It was therefore arguably reasonable for C to have assumed that its objection would be treated as a jurisdictional question, only later to discover that such an assumption was incorrect.
Third, C v D also suggests that if a party to an arbitration agreement believes that pre-arbitration conditions have not been met, then that party may be better off refusing to recognize a tribunal’s jurisdiction than arguing the question of jurisdiction in front of the tribunal. That said, refusing to recognize a tribunal’s jurisdiction carries its own set of risks, such as the tribunal deciding to proceed with the arbitration in the party’s absence (as contemplated by Article 25 of the Model Law, for example, although such article is rarely employed).
Fourth, the judges were divided on the question of how widely the jurisdiction/admissibility distinction has been adopted in other common law jurisdictions. Justice Fok argued:
[T]he distinction has gathered such support as to be widely recognised across several jurisdictions, including England and Wales, Singapore and New South Wales, and in leading academic texts on arbitration law and practice. For Hong Kong to reject the distinction now would risk placing this jurisdiction at variance with other jurisdictions which, like Hong Kong, promote international arbitration and limit the extent of court intervention in the arbitral [process.][23]
However, Justice Gummow rightly observed that the sole Australian case in question – a lower court decision[24] – did not make any reference to the distinction. Accordingly, in Justice Gummow’s view, “it would not appear that New South Wales is a jurisdiction in which the distinction has gathered support.”[25]
In Canada, there appears to be scant jurisprudence on the distinction. However, in a 2020 decision, United Mexican States v Burr (“Burr”), the Ontario Superior Court appears to have approved of the principle:
The Tribunal set out to examine the issue of jurisdiction by considering whether it had the power to adjudicate the dispute (jurisdiction), and if so, whether it should exercise that power over a particular claim (admissibility). The distinction is important in this case as this court may review and set aside findings relating to jurisdiction, but not findings relating to admissibility.[26] [emphasis added]
In a 2022 article, Professor Joshua Karton calls Burr a “rare example of a Canadian court taking seriously the distinction between jurisdiction and admissibility and using the correct terminology”.[27] In his view, the distinction “is often ignored or elided by Canadian courts”.[28]
However, it is one thing to adopt the jurisdiction/admissibility distinction as an analytical tool, and another to conclude that a pre-arbitration condition goes to admissibility rather than jurisdiction. Consider the following example from Professor Karton, who endorses the distinction, and yet concludes that pre-arbitration conditions similar to those in C v D would qualify as jurisdictional:
Suppose, for example, that the contract provides that the parties must attempt to settle any disputes by mediation and that neither party may resort to arbitration unless they have (1) commenced mediation, (2) engaged in that mediation, and (3) at least 60 days have passed since the mediation commenced. Such language will be sufficient to establish mediation as a jurisdictional precondition to arbitration.[29]
Karton reaches the opposite conclusion from the Court by treating the above conditions not as a chronological predecessor activity to arbitration, but rather as an agreed-upon requirement to achieving consent to arbitrate. As noted in Burr (a case involving a dispute under NAFTA, CUSMA’s predecessor treaty, where the tribunal similarly concluded that it had jurisdiction because arbitral preconditions went to the issue of admissibility), “Some tribunals have found that compliance with a prior recourse requirement goes to the question of whether a tribunal has jurisdiction over a dispute and that the tribunal does not have jurisdiction to waive the requirement as a procedural or admissibility-related matter”.[30]
Similarly, in C v D, Justice Gummow notes that the distinction was developed in the context of bilateral investment treaties between countries – where it was necessary to consider, unlike in C v D, whether the parties had consented to submit the dispute to arbitration – and suggests that it would be inappropriate to “transplant” the distinction to a situation, like that in C v D, where an agreement to arbitrate exists between the private parties.[31]
It has yet to be seen when the jurisdiction/admissibility distinction will receive fulsome consideration by Canadian courts and whether this approach will become more widely adopted in Canada. However, given that Canada and its provinces are all Model Law jurisdictions, it stands to reason that this distinction may – and perhaps should – be instructive for Canadian courts applying both international and domestic legislation.
Finally, it does not necessarily follow from C v D that a party has no recourse in court if a tribunal concludes that pre-arbitration conditions have not been met, and then decides to waive compliance with those conditions. Depending on the tribunal’s reasons for doing so, this might be treated by a court as an excess of jurisdiction insofar as the proper approach would likely be to suspend the arbitration pending compliance with the conditions. As noted in Burr, “If the claimant has not complied with the prior recourse requirement, the tribunal does not have jurisdiction over the claim”.[32]
In short, if a tribunal hears a dispute that the tribunal implicitly acknowledges is inadmissible, that may qualify as a jurisdictional error. However, the aggrieved party should be wary of framing the issue as a question of admissibility, given the approach taken in C v D. Rather, the issue might be better framed as a question of procedural fairness or as a breach of the rules of natural justice.[33] Such a breach has been held – at least in the Canadian context – to constitute an excess of jurisdiction.[34]
As noted recently in Mattamy (Downsview) Limited v KSV Restructuring Inc (Urbancorp) (“Mattamy”),[35] which was the subject of a previous article (available here), some procedural decisions are immune from review (e.g., declining to admit fresh evidence following delivery of an award, or ordering security for costs), while others are not (e.g., deciding to exclude evidence). In Mattamy, the Ontario Superior Court referred to “blanket categories” of procedural decisions of arbitrators that are immune from review, but did not elaborate on the underlying basis for which a given form of decision would qualify for such immunity.
Therefore, the line between what is reviewable and what is not is unclear, and, accordingly, we look forward to when Canadian courts will have the opportunity to address this issue in detail.
[1] C v D, [2023] HKFCA 16.
[2] “Admissibility” in this context should not be confused with the admissibility of evidence, which coincidentally – and perhaps confusingly – is raised in United Mexican States v Burr, 2020 ONSC 2376 [Burr], discussed below.
[3] The United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration (1985), with amendments as adopted in 2006, can be found here: https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/19-09955_e_ebook.pdf.
[4] As is common practice in certain jurisdictions internationally, the identities of the parties to the arbitration were anonymized by the Court.
[5] C v D, [2023] HKFCA 16 at para 58.
[6] C v D, [2023] HKFCA 16 at para 20.
[7] C v D, [2023] HKFCA 16 at para 23.
[8] C v D, [2023] HKFCA 16 at para 61.
[9] C v D, [2023] HKFCA 16 at para 97.
[10] C v D, [2023] HKFCA 16 at para 159.
[11] Arbitration Ordinance, Cap 609, as of December 16, 2022.
[12] C v D, [2023] HKFCA 16 at paras 22, 4.
[13] C v D, [2023] HKFCA 16 at para 4.
[14] C v D, [2021] HKCFI 1474 at para 40, citing The Republic of Sierra Leone v SL Mining Ltd, [2021] EWHC 286 (Comm) at para 18.
[15] C v D, [2023] HKFCA 16 at para 29.
[16] C v D, [2023] HKFCA 16 at para 49.
[17] C v D, [2023] HKFCA 16 at para 49, citing G B Born, International Commercial Arbitration, Vol 1: International Arbitration Agreements, 3rd ed (Wolters Kluwer, 2020) at 1000.
[18] C v D, [2023] HKFCA 16 at para 49, citing G B Born, International Commercial Arbitration, Vol 1: International Arbitration Agreements, 3rd ed (Wolters Kluwer, 2020) at 1000.
[19] C v D, [2023] HKFCA 16 at para 157.
[20] C v D, [2023] HKFCA 16 at para 157.
[21] C v D, [2023] HKFCA 16 at para 133.
[22] C v D, [2023] HKFCA 16 at para 137.
[23] C v D, [2023] HKFCA 16 at para 97.
[24] The Nuance Group (Australia) Pty Ltd v Shape Australia Pty Ltd, [2021] NSWSC 1498.
[25] C v D, [2023] HKFCA 16 at para 143.
[26] United Mexican States v Burr, 2020 ONSC 2376 at para 59. An appeal by the United Mexican States was quashed on the grounds that Article 16(3) of the Model Law prohibited the appeal; 2021 ONCA 64 at para 29.
[27] J Karton, “Multi-Tier Dispute Resolution Agreements in Canadian Law and Practice: Interpreting, Enforcing, Escaping” (2022) 3:1 Can J Comm Arb 81 at 86.
[28] J Karton, “Multi-Tier Dispute Resolution Agreements in Canadian Law and Practice: Interpreting, Enforcing, Escaping” (2022) 3:1 Can J Comm Arb 81 at 86.
[29] J Karton, “Multi-Tier Dispute Resolution Agreements in Canadian Law and Practice: Interpreting, Enforcing, Escaping” (2022) 3:1 Can J Comm Arb 81 at 87.
[30] United Mexican States v Burr, 2020 ONSC 2376 at para 106.
[31] See C v D, [2023] HKFCA 16 at para 148.
[32] United Mexican States v Burr, 2020 ONSC 2376 at para 106, citing Daimler Financial Services AG v Argentine Republic, ICSID Case No ARB/05/01, Award, 22 August 2012 at para 200, involving a request to waive pre-arbitration conditions in a bilateral investment treaty rather than an tribunal’s conclusion that such conditions were met.
[33] Natural justice has been described by the Supreme Court of Canada as “but fairness writ large and juridically”; Nicholson v Haldimand-Norfolk (Regional Municipality) Commissioners of Police, [1979] 1 SCR 311 at para 25, citing Furnell v Whangarei High Schools Board, [1973] AC 660 at 679 (PC).
[34] A “breach of the rules of natural justice is regarded in itself as an excess of jurisdiction and consequently there is no doubt that such a breach opens the way for judicial review”; Université du Québec à Trois-Rivières v Larocque, [1993] 1 SCR 471 at para 43.
[35] Mattamy (Downsview) Limited v KSV Restructuring Inc (Urbancorp), 2023 ONSC 3012.
In Grupo Unidos por el Canal, SA v Autoridad del Canal de Panama (“Grupo Unidos v ACP“),[1] the United States Court of Appeals for the Eleventh Circuit (the “Court of Appeals“) considered whether a lack of disclosure regarding the involvement of arbitrators in separate proceedings compromises the impartiality of a tribunal. The Court concluded that although the tribunal’s disclosure was lacking, it was insufficient to ground a finding of partiality. Below, we consider the relevance takeaways of this important decision for Canadian arbitration practitioners.
Grupo Unidos, a consortium of European companies, secured a multi-billion dollar contract to design and build new locks for the Panama Canal expansion that began in 2009 and was set to conclude by October 2014. However, unforeseen complications led to a delay of over twenty months, resulting in numerous disputes between the parties involving seven arbitrations. The appeal in Grupo Unidos v ACP concerned one of these arbitrations, namely the Panama 1 Arbitration, where Grupo Unidos brought several contractual claims against the canal authority, Autoridad del Canal de Panama (the “Arbitration”).[2]
The contract between Grupo Unidos and Autoridad del Canal de Panama contained a mandatory arbitration clause, which required that disputes be resolved through arbitration in Miami pursuant to the International Chamber of Commerce’s Rules of Arbitration (the “ICC Rules“). Each party nominated one arbitrator, confirmed by the International Court of Arbitration (“ICA“). The nominees were Dr. Robert Gaitskell, and Claus von Wobeser, who in turn appointed Pierre-Yves Gunter as the president of the tribunal.[3] Autoridad del Canal’s counsel included Andres Jana, James Loftis, and Manus McMullan.
All three arbitrators had substantial international arbitration experience, having collectively been involved in over 500 arbitrations.[4] After their confirmation, each submitted statements confirming their impartiality and independence and disclosed any potential conflicts. At that stage, neither party sought additional disclosure or other details from the arbitrators.
The Arbitration
The subject arbitration took over five years, involving thousands of pages of pleadings, over 150 fact and expert witnesses, thousands of exhibits, and a 20-day merits hearing. On September 21, 2020, the tribunal issued a Partial Award (the “Partial Award”) by which Grupo Unidos was awarded $26.8 million while Autoridad del Canal was awarded $265.3 million, amounting to a net victory of $238.5 million, plus interest, for Autoridad del Canal.[5]
Three weeks after the Partial Award was granted, Grupo Unidos began to question the arbitrators’ impartiality, seeking additional information concerning the arbitrators’ relationships with (1) each other, (2) other arbitrators in related matters, and (3) with the parties’ counsel in other arbitrations.[6] The disclosures revealed certain professional engagements amongst the arbitrators, and between the arbitrators and the parties’ counsel in the current and other, unrelated arbitrations.[7]
The ICA Decision
Based on these disclosures and prior to the issuance of a final award, Grupo Unidos filed an application with the ICA seeking the removal of the tribunal members, claiming they had concealed significant connections that raised doubts about their neutrality. After extensive proceedings, the ICA determined that although some of the professional intersections should have been disclosed, there was no conflict significant enough to sustain a challenge to the arbitrators. The tribunal then issued a Final Award on February 17, 2021, amounting to approximately $285 million in favour of Autoridad del Canal (the “Final Award“). Grupo Unidos subsequently paid the full amount of the Final Award.[8]
The District Court’s Decision
On November 25, 2020, before the ICA released its decision, Grupo Unidos moved to vacate the Partial Award in the Southern District of Florida. Additionally, by April 19, 2021, Grupo Unidos had also moved to vacate the Final Award. Grupo Unidos argued that the arbitrators showed clear bias, basing their assertions on the New York Convention . Specifically, they relied on Articles V(2)(b), V(1)(d), and V(1)(b) of the New York Convention, which allow a party to resist the enforcement of an international arbitration award if (1) enforcement would be contrary to the public policy, (2) the arbitral procedure was not in accordance with the agreement of the parties, or (3) the party was unable to present its case.[9]
The District Court determined that none of these defenses were available, and criticized Grupo Unidos’ stance as being based on skeptical (and speculative) assumptions about the arbitrators and assuming the worst about their character. Thus, the Court rejected the motion to vacate, and confirmed Autoridad del Canal’s awards. Grupo Unidos appealed this decision to the Court of Appeals. [10]
The Court of Appeals’ Decision:
Which law should govern this case?
Relying on a prior en banc decision, the Court stated that if an arbitration is seated in the United States or governed by United States law, Chapter 1 of the Federal Arbitration Act (“FAA“) dictates the grounds for vacating an award. In this case, the parties agreed that the FAA would govern the arbitration, and although the parties’ arguments on vacatur were framed as arising out of the Convention, the core dispute about vacatur centered on the FAA‘s ‘evident partiality’ exception.[11]
Deference to Arbitral Decisions
As a preliminary point, the Court emphasized that U.S. federal courts will only overturn an arbitral award under rare circumstances:
“[…] U.S. courts refrain from unilaterally vacating an award, rendered under international arbitral rules, in all but the most extreme cases. It is no surprise, then, that although the losing parties to international arbitrations often raise defenses to award enforcement before our courts, those efforts “rarely” succeed.”[12]
Moreover, with respect to international arbitrations, the reluctance to overturn decisions is even more pronounced, primarily because the New York Convention emphasizes global standards for arbitral agreement observance and award enforcement. As such, American courts only vacate international arbitral awards in exceptional cases.
Grupo Unidos argued that the Panama 1 Arbitration was one such exception due to the non-disclosure of potential biases of the arbitrators. Although the Court agreed that the ICC Rules and American arbitration law emphasized transparent disclosure, it did not accept that Grupo Unidos’ claim that mere professional familiarity amounted to potential bias.
The Appellant’s Arguments
The Court considered and rejected each of the four instances Grupos Unidos submitted as proof of evident partiality, and explained why bias could not be established. Grupo Unidos’ submissions were as follows:
Gaitskell’s Nomination of Gunter
The Court determined that this alone did not qualify as evidence of partiality, as Grupo Unidos did not present any precedent where the simple fact of one arbitrator nominating another in a separate matter was sufficient cause for vacating an award. Indeed, to the contrary, the Court cited to American precedent for the proposition that the fact arbitrators appoint each other to panels does not per se manifest evident partiality. Moreover, Gunter’s extensive arbitration experience and his affirmed impartiality negated the suspicion of bias.[13]
von Wobeser and Jana’s Concurrent Service
The Court rejected this argument, and in doing so, rejected Grupo Unidos’ reliance on prior case law holding that partiality exists where an arbitrator represented co-defendants in a different matter with a member of counsel appearing before them. The Court observed that the relationship between co-arbitrators is not the same as the relationship between co-counsel, because arbitrators do not represent a client and have a duty of impartiality. As such, there was nothing inherently suspect regarding von Wobeser and Jana having served as co-arbitrators in another case.[14]
Gaitskell and Loftis’s Prior Co-Arbitration
The Court found that because the mere fact that an arbitrator had previous contact with a party’s counsel does not automatically imply bias. In that regard, the Court observed that international construction arbitration law is a relatively small community, and as such, prior interactions or relationships is a less compelling basis for arguing partiality than might otherwise be the case in non-specialized areas (in other words, it is to some extent unavoidable that construction arbitrators will serve with other construction arbitrators, only to then appear before them as counsel).[15]
Gaitskell and McMullan Prior Involvement
The Court found this insufficient to question Gaitskell’s impartiality, re-emphasizing that repeated interactions within the small international arbitration community do not indicate bias. The record showed no actual bias in the Panama 1 Arbitration, and as such, the overlap was not a cause for concern.[16]
Thus the Court upheld the district court’s decision against vacating the awards.
Confirming the Awards:
After determining there were no grounds to vacate the awards under the FAA, the Court assessed whether to confirm the awards under the New York Convention. Grupo Unidos relied upon the same three provisions from Article V of the Convention as they had relied upon during the District Court’s proceedings.
The first defense centred on the arbitrators’ undisclosed relationships infringing Article V(2)(b) of the Convention (i.e. the award is contrary to public policy). Relying on the basic proposition that enforcement will only be refused where it would violate the jurisdiction’s most basic notions of morality and justice, the Court observed that the public policy in question here pertained to evident partiality, which was not breached (as explained above)[17]
Next, the Court rejected Grupo Unidos reliance on Article V(1)(d) of the New York Convention (i.e. refusing enforcement on the basis the tribunal or procedure was not in accordance with the parties’ agreement or the law of the country where the arbitration took place), Grupo Unidos argued that late disclosures showed a level of partiality that they would not have initially agreed to had they known at the time the tribunal was formed. While these nondisclosures did not breach the evident partiality portion, the focus shifted to whether the arbitration violated the ICC Rules. The Court found that despite late disclosures by Gaitskell and von Wobeser, the ICA did not disqualify them or question their impartiality, emphasizing their adherence to the ICC Rules. As a result, the arbitration followed the format the parties agreed upon, and the ICA’s interpretation of its rules was deemed reasonable.
Finally, Grupo Unidos relied upon Article V(1)(b) to argue that it as not given proper notice regarding the appointment of an arbitrator or the proceeding (which is intended to protect procedural fairness). The Court again rejected Grupo Unidos’ argument, stating that this exception is narrow and safeguards only against severe procedural defects that render the arbitration fundamentally unjust. The Court additionally observed that Grupo Unidos’ claim did not contradict basic principles of due process, which demands an impartial hearing where parties can present and rebut evidence. Here, the Court found no evidence that Grupo Unidos did not have such an opportunity.[18]
Thus, the Court affirmed the District Court, denying the application for vacatur and confirming the arbitral awards.
Overall, three main takeaways emerge from Grupo Unidos v ACP that are broadly applicable to construction arbitration practice in Canada.
First, this case reaffirms the basic principle that arbitral awards are not easily set aside on grounds of bias. Specifically, mere allegations or suspicions of bias will not be enough to vacate arbitral awards. This is equally true in the Canadian context, as Canadian arbitration practitioners will appreciate. Consolidated Contractors Group S.A.L. (Offshore) v Ambatovy Minerals S.A.[19] presents a perfect example of such deference, where the Ontario Court of Appeal observed that “this court has repeatedly held that reviewing courts should accord a high degree of deference to the awards of international arbitral tribunals under the Model Law”.
In this particular case, it appears that Grupo Unidos position was not assisted by the timing of its challenge – in particular, Grupo Unidos appears to only have begun to raise questions as to the impartiality of the arbitrators after it received the Partial Award, which was adverse to its interests. While this timing may have been coincidental, a disinterested observer (or, more importantly, a court) might be led to conclude that Grupo Unidos’ challenge was motivated by its loss on the merits rather than genuine concerns of partiality. Needless to say, courts will be skeptical of any challenges that exhibit such timing.
Second, this decision aptly illustrates the distinction between bias and mere professional familiarity. As the Court observed, not every professional overlap can be construed as bias, especially in specialized areas of law such as international construction arbitration.
In that regard, the Court properly rejected the suggestion of any quid pro quo flowing from the overlap of arbitral appointments; given that acting as an arbitrator inevitably involves remuneration, and given the narrow pool of arbitrators in the construction industry, a finding to the contrary would have been problematic as a practical matter insofar as party-appointed arbitrators will commonly appoint other arbitrators with whom they are familiar or with whom they have arbitrated in the past (and likely will again in future). In other words, such a situation is, in practical terms, essentially unavoidable in specialized industries, and in any event, the appointment of a tribunal president will involve agreement between both party-appointed arbitrators, such that a quid pro quo would seem speculative at best.
Finally, this case highlights the importance of judicious and timely disclosure by arbitrators. There is a delicate balance that arbitrators must maintain between disclosing any matters that could give rise to justifiable concerns as to their impartiality and avoiding over-disclosure. In respect of the latter point, it would arguably be impractical for arbitrators to disclose every conceivable professional relationship that might give rise to unjustified or unsupported concerns as to impartiality, as this would simply invite objections to the arbitrator’s appointment on spurious grounds.
In this particular case, and as the tribunal observed, the disclosure sought by Grupo Unidos following the Partial Award were different and much broader than the ICC’s Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration, which was then followed by an even more far-reaching request, which the tribunal indulged. In that regard, although the Court did not specifically rely on the ICC Note in reaching its conclusions, and although guidance prepared by leading arbitral institutions is not binding, it may nevertheless be a persuasive authority on this point (as is the case, for example, with the IBA’s Guidelines on Conflicts of Interest).
Interestingly, Grupo Unidos also provides a useful reminder that a legitimate lack of disclosure is not sufficient in and of itself for a finding of bias or partiality – there must be something more in order to ground such a finding. Here, the ICA concluded that certain of the professional relationships amongst the arbitrators and counsel should have been disclosed by the arbitrators, but nevertheless concluded that the lack of disclosure in and of itself was not sufficient to ground a finding of partiality or lack of independence. This is consistent with English case law on the topic (such as Halliburton v Chubb), as well as certain Canadian case Law (such as Aroma Franchise Company v Aroma Espresso, which we previously discussed here, although the court ultimately made a finding of reasonable apprehension of bias in that case).
On balance, then, it appears that arbitration practitioners should (and perhaps will) manage their practices with a strong emphasis on continuous disclosure, and may lean towards over-disclosure notwithstanding the potential for losing out on arbitral mandates on spurious grounds. As the aphorist has observed, sunlight is the best disinfectant.
[1] 78 F (4th) 1252, 2023 US App LEXIS 21750, 30 Fla L Weekly Fed C 106 (11th Cir 2023) [Grupo Unidos v ACP].
[2] Grupo Unidos v ACP at 4.
[3] Grupo Unidos v ACP at 4.
[4] Grupo Unidos v ACP at 5.
[5] Grupo Unidos v ACP at 7.
[6] Grupo Unidos v ACP at 7.
[7] Grupo Unidos v ACP at 8-9.
[8] Grupo Unidos v ACP at 9-10.
[9] Grupo Unidos v ACP at 10-11.
[10] Grupo Unidos v ACP at 10-11.
[11] Grupo Unidos v ACP at 11-12.
[12] Grupo Unidos v ACP at 14.
[13] Grupo Unidos v ACP at 16-17.
[14] Grupo Unidos v ACP at 17-18.
[15] Grupo Unidos v ACP at 18-19.
[16] Grupo Unidos v ACP at 19-20.
[17] Grupo Unidos v ACP at 21.
[18] Grupo Unidos v ACP at 23-24.
[19] 2017 ONCA 939 at para 23.
A recent decision of a Hong Kong court suggests that fully virtual arbitration hearings are becoming standard practice even as the COVID-19 pandemic (the “Pandemic”) has ebbed, and that courts may be reluctant to find that such a hearing in and of itself causes prejudice to one of the parties.
In Sky Power Construction Engineering Limited v IrAero Airlines JSC (“Sky Power v IrAero”),[1] Hong Kong’s Court of First Instance found that the respondent had not been prejudiced by the fact that an arbitrator had conducted a fully virtual – rather than semi-virtual – hearing over the respondent’s objections. The Court would therefore not entertain a request by the respondent to apply to set aside the Court’s earlier order to enforce the arbitrator’s award.
Hong Kong-based Sky Power Construction Engineering Limited (“Sky Power”) obtained an award against Russia-based IrAero Airlines JSC (“IrAero”) at the London Court of International Arbitration (“LCIA”) in an arbitration conducted by remote hearing in February 2022 before a single arbitrator.
The hearing had originally been scheduled for December 2021, but was postponed to February 2022 because the arbitrator contracted COVID-19. Roughly a month prior to the hearing, in January 2022, the arbitrator issued Procedural Order Number 3 (“PO #3”), which set out procedural parameters for a semi-virtual hearing. Counsel and the parties’ own fact witnesses were to convene at one location in Moscow, while other fact and expert witnesses could participate remotely via video-conferencing. The arbitrator would sit in London, and conduct the hearing remotely. PO #3 appears to have reflected such an agreement between the parties.
However, shortly after the issuance of PO #3, Sky Power indicated that its only fact witness was not available to travel to Moscow “due to the inconvenience and disruptions to his business, and the safety concerns of exposure to the risk of becoming infected with Covid”.[2] Sky Power proposed a fully virtual hearing. IrAero objected, given that the parties’ agreement to hold a semi-virtual hearing had been memorialized in PO #3 earlier the same month.
The arbitrator decided that the hearing would proceed on a fully virtual basis rather than be postponed until such time as the witness could attend in Moscow. She explained that it was necessary for her “to balance both the need for the proceedings to be concluded expeditiously and for the conduct of the proceedings to be fair to the Parties”,[3] and referred to Article 14 of the LCIA Arbitration Rules (the “LCIA Rules”),[4] which imposes the following duties on an arbitral tribunal (which readers will recognize are broadly consistent standard international rules of procedure):
(i) a duty to act fairly and impartially as between all parties, giving each a reasonable opportunity of putting its case and dealing with that of its opponent(s); and (ii) a duty to adopt procedures suitable to the circumstances of the arbitration, avoiding unnecessary delay and expense, so as to provide a fair, efficient and expeditious means for the final resolution of the parties’ dispute.[5]
(i) a duty to act fairly and impartially as between all parties, giving each a reasonable opportunity of putting its case and dealing with that of its opponent(s); and
(ii) a duty to adopt procedures suitable to the circumstances of the arbitration, avoiding unnecessary delay and expense, so as to provide a fair, efficient and expeditious means for the final resolution of the parties’ dispute.[5]
Given the continuing impact of the Pandemic, the continued regulatory uncertainty it engendered, and the nature of the case, the arbitrator concluded that it was more appropriate to conduct the hearing on a fully virtual basis than to wait indefinitely in the hopes of rescheduling the semi-virtual hearing.
Ultimately, Sky Power obtained an award in its favour, and subsequently obtained an enforcement order in Hong Kong against IrAero, which IrAero sought to challenge after the statutory deadline for bringing such a challenge. IrAero therefore required leave from the Court to file an affirmation (equivalent to an affidavit) and to apply to set aside the enforcement order. In deciding whether to grant leave, the Court considered the merits of IrAero’s application to set aside the order.
The Court declined to grant leave on the basis effectively that IrAero’s application would fail on the merits, as discussed below.
Position of the Respondent (IrAero) on the Merits
In trying to resist enforcement of the arbitrator’s award, IrAero argued on the merits essentially that the arbitrator lacked jurisdiction to alter PO #3 over IrAero’s objections, and that IrAero was prejudiced by the fully virtual nature of the hearing.
With respect to jurisdiction, Article 14 of the LCIA Rules states in addition to the foregoing:
14.2 The Arbitral Tribunal shall have the widest discretion to discharge these general duties, subject to the mandatory provisions of any applicable law or any rules of law the Arbitral Tribunal may decide to be applicable; and at all times the parties shall do everything necessary in good faith for the fair, efficient and expeditious conduct of the arbitration, including the Arbitral Tribunal’s discharge of its general duty.[6] [emphasis added]
IrAero took the position that the arbitrator’s decision to proceed conflicted with applicable law, because the UK’s Arbitration Act 1996 (the “Act”)[7] provides at section 34 that a tribunal’s power to decide procedural and evidential matters is “subject to the right of the parties to agree any matter.”[8] In IrAero’s view, the arbitrator (i.e., the tribunal in this case) impermissibly overruled PO #3, which reflected the parties’ agreement to hold a semi-virtual hearing.
With respect to prejudice, IrAero argued that it was hindered from “adequately viewing the demeanour” of Sky Power’s sole fact witness because he attended remotely, and from vetting the “genuineness and the authenticity” of his oral evidence.[9] Further, IrAero claimed it was unable to present its case adequately. As well, IrAero’s director-general claimed he would have preferred to testify in person, and that, because Sky Power’s witnesses ended up testifying remotely from Irkutsk, rather than from Moscow, the time difference with London (eight hours versus three) put IrAero at a disadvantage (for reasons that are not explained).[10]
The Court’s Decision on the Merits
As noted above, Sky Power v IrAero involved a request for leave to apply to set aside an order to enforce an arbitration award. The Court considered the merits of the application. On the merits, the Court rejected both of the respondent’s arguments.
First, the Court found that there was no longer an agreement between the parties once Sky Power requested a fully virtual hearing. Therefore, the arbitrator did not exceed her jurisdiction in deciding which procedure to follow.
The Court made note of the considerable deference that is owed to arbitrators in determining procedure:
Whether it is appropriate in any particular case to permit the factual witnesses to give evidence at the hearing remotely, whether the effectiveness of cross-examination can be or was undermined, whether appropriate measures are required or were put in place to ensure the security of the process, are all matters for the consideration and final decision of the tribunal in the case.[11]
Second, the Court found no prejudice to IrAero, based on two grounds:
Indeed, as stated by the Court, “On the materials available, I cannot see any real injustice or prejudice to the Respondent, in the sense that the outcome of the Arbitration could have been different, if the hearing had not been conducted on [a] fully virtual basis.”[13]
Although Sky Power v IrAero is a Hong Kong case, and while the arbitration at issue involved special circumstances – namely, it occurred during the height of the Omicron wave of the Pandemic – it nevertheless suggests that a party to an arbitration may face an uphill battle when arguing that a virtual hearing caused it prejudice, even in a post-Pandemic context.
This is not to suggest that there are no tradeoffs involved in opting for a remote hearing. While remote hearings generally result in substantial cost savings when parties, counsel, witnesses and/or the tribunal are in different locations, there can also be technical difficulties, time zone differences, and challenges to examining witnesses.
However, as noted by the Court, both parties will generally face the same difficulties and risks in a remote hearing, the implication being that they will be able to make their respective cases in an equal manner. On the other hand, however, this potentially understates the significance of a scenario where one party calls several witnesses while the other party calls very few (particularly if the tribunal has ordered equal time-limits for the parties’ presentation of their cases). Arguably, in circumstances where one party relies much more heavily on oral testimony, their counterparty’s argument of prejudice may be more persuasive. In any event, the foregoing strengthens the proposition that, in the construction context, contemporaneous project documents are generally considered preferable over witness testimony delivered months or years after the fact.
In this case, it may be that IrAero felt genuinely misled by Sky Power, given that Sky Power had agreed to a semi-virtual hearing before requesting a fully virtual hearing. IrAero may also have found it more challenging to impeach the credibility of Sky Power’s fact witness, and IrAero’s director-general may indeed have struggled giving testimony remotely. Even so, IrAero’s arguments were decidedly unpersuasive to the Court – which serves to highlight how difficult it may be for a dissatisfied party to find a meaningful basis to obtain redress after the fact.
First, while there may be instances in which a tribunal will hold a party to a prior agreement on procedure that the party had made with the opposing party, the question of whether to do so is generally within the jurisdiction of the tribunal. In this case, once the party’s position changed, there was a disagreement to be resolved by the arbitrator, which she did by balancing the various factors at play, including uncertainty surrounding the Pandemic.
In other instances, a tribunal may insist that a prior agreement stand, and may even do so summarily, i.e., without entertaining formal submissions on the question (although declining to hear submissions on such an issue may result in allegations of parties being deprived of sufficient opportunity to present their case). Ultimately, the power of a tribunal to resolve a disagreement over procedure generally cannot be preempted simply by denying that the disagreement exists.
Conversely, it would seem that IrAero’s argument was not without some merit, insofar as it raises an interesting question as to the relationship between the parties’ arbitration agreement and the chosen procedural rules. Given that the parties were in agreement as to the content of PO #3 – that is, it was issued on consent – it may be arguable that PO #3 formed part of the parties’ arbitration agreement and accordingly, it would follow that the arbitrator could not deviate from the parties’ agreement to proceed on a semi-virtual basis.
That being said, it is standard practice for an arbitration agreement and/or Procedural Order #1 to provide the tribunal with full latitude to establish and vary rules of procedure, in which case an interpretive issue would arise as to whether the provision endowing the tribunal with procedural powers can override a different, subsequent provision that dictates a specific method of procedure. Ultimately, the answer would likely depend on the specific wording of the procedural order(s) in issue. In any event, it would appear wise for a tribunal to include in its procedural orders a provision permitting the tribunal to vary the order if necessary and appropriate.
Second, IrAero struggled to convince the Court of any real prejudice under the circumstances. For instance, IrAero could not persuade the Court that the trier of fact – i.e., the arbitrator herself – was unable to assess the demeanour of Sky Power’s sole fact witness, because even under PO #3, the arbitrator would have conducted the hearing remotely from London. Instead, IrAero could only argue that it could not assess the witness’s credibility. The corollary of the foregoing is that, if the arbitrator could assess the witness’s credibility remotely, it would be difficult for IrAero to argue that it could not.
Similarly, it is unclear from the decision why IrAero would be at a disadvantage due to the time difference between Irkutsk and London, as opposed to Moscow and London, when it was Sky Power’s witnesses that were in Irkutsk, rather than IrAero’s. If anything, it would seem that Sky Power was at a disadvantage.
That being said, it is conceivable that a different Court or judge might have decided this point differently. Over the course of the Pandemic, disputes lawyers and judges have expressed varying opinions as to the importance of being able to examine witnesses in person, with many taking the position that in-person examination is indispensable – and indeed fundamental – to interrogating a witness’s credibility and reliability. With that in mind, a likeminded judge might very well have ruled differently.
In any event, in the post-Pandemic landscape, it would appear difficult for one party to argue that it was prejudiced by the use of a remote hearing. While it is impossible to categorically dismiss the possibility of such a finding if a case were to have the right set of facts, Sky Power v IrAero suggests a high threshold for any such argument.
[1] Sky Power Construction Engineering Limited v IrAero Airlines JSC, [2023] HKCFI 1558 [Sky Power v IrAero].
[2] Sky Power v IrAero at para 12.
[3] Sky Power v IrAero at para 30.
[4] LCIA Arbitration Rules, effective October 1, 2020, available at https://www.lcia.org/Dispute_Resolution_Services/lcia-arbitration-rules-2020.aspx [The LCIA Rules].
[5] The LCIA Rules, art 14.1.
[6] The LCIA Rules, art 14.2.
[7] UK Arbitration Act 1996, 1996 c. 23 [The Act].
[8] The Act, s 34(1).
[9] Sky Power v IrAero at para 7.
[10] Given that IrAero is based in Irkutsk, and Sky Power is registered in Hong Kong, there may be a typographical error in the decision regarding which party testified from Irkutsk.
[11] Sky Power v IrAero at para 39.
[12] Sky Power v IrAero at para 37.
[13] Sky Power v IrAero at para 41.
What happens when a regulated medical professional’s use of their expressive rights conflicts with the ethical standards of their profession?
In Peterson v College of Psychologists of Ontario, 2023 ONSC 4685, the Divisional Court considered a case pitting high profile psychologist Jordan Peterson against a decision by the College of Psychologists’ Inquiries, Complaints and Reports Committee (the “ICRC“) requiring him to complete a specified continuing education or remedial program (a “SCERP”). The ICRC’s decision was based on what appeared to be inflammatory and unprofessional comments by Peterson in various venues, including on social media and podcasts.
Background Facts
Jordan Peterson is a registered clinical psychologist who has amassed a sizeable social media following. In 2022, the College received complaints regarding Peterson’s public conduct on social media and for his public appearances on several podcasts which were criticized for being degrading, demeaning, and unprofessional:[i]
The ICRC Decision
The ICRC found that Peterson’s statements could be seen as degrading, demeaning, and unprofessional, emphasizing that psychologists can reasonably regard these statements as disgraceful and dishonourable.[iii] The panel expressed concern that Peterson’s comments were inconsistent with professional standards, posed a risk of harm to the public, and had the potential of undermining public trust in the profession.[iv] The panel noted that despite not practicing clinically, he continues to be registered, and has the authority to practice.[v]
The panel ordered Peterson to undergo a SCERP which required that Peterson attend a coaching program to address his professionalism. Peterson sought judicial review.
The Divisional Court’s Decision
The main issue in judicial review was whether the Panel’s decision to order a SCERP was reasonable.[vi] Peterson’s main argument was that the ICRC did not properly consider his freedom of expression.
The Legal Framework
The court began by outlining the framework for determining how Charter guarantees are meant to be protected in the context of adjudicated administrative decisions. That framework is set out in Doré v Barreau du Québec, 2012 SCC 12, which requires administrative decision-makers like the ICRC to proportionately balance Charter rights and values and its statutory objectives. As the Court explained, this is a “highly contextual inquiry”[vii]:
A decision-maker must first consider the statutory objectives it is seeking to uphold, and then, secondly, “ask how the Charter value at issue will best be protected in view of the statutory objectives.” This requires conducting a proportionality exercise, balancing “the severity of the interference of the Charter protection with the statutory objectives”.[viii]
However, a decision-maker need not “choose the option that limits the Charter protection least”.[ix]
Review of the ICRC Decision
The Divisional Court found that the ICRC appropriately balanced Peterson’s freedom of expression with the statutory objectives of the College.[x]
With respect to the statutory objectives at issue, the Court referred to various sections of the Canadian Code of Ethics for Psychologists including a statement that “respect for the dignity of persons is the most fundamental and universally found ethical principle across disciplines, and includes the concepts of equal inherent worth, non-discrimination, moral rights, and distributive, social and natural justice”. The Code continues by requiring that members of the profession “Not engage publicly…in degrading comments about others, including demeaning jokes based on such characteristics as culture, nationality, ethnicity, colour, race, religion, sex, gender or sexual orientation.”[xi]
While Peterson argued that reliance on the Code by the ICRC was “misplaced’ given that he was expressing his “off duty opinions” (i.e. that his statements were made in his personal capacity), the Court rejected this argument and held that Peterson’s comments were “not personal comments made in conversation with friends or colleagues, but public statements to broad audiences” and that he described himself both on Twitter and on the podcast as a clinical psychologist. Peterson’s regulated status lent credibility to his words. Moreover, the Court noted that even when “off duty”, members of regulated professions can still harm public trust in the profession.[xii]
The Court then considered whether the ICRC appropriately balanced the statutory objectives of the Code with Peterson’s freedom of expression. The Court emphasized that given the ICRC’s role as a screening body, it effectively had three options: refer the matter to the Discipline Tribunal, do nothing, or direct a SCERP. By directing a SCERP, the “ICRC pursued a proportionate and reasonable option to further its objective of maintaining professional standards, and which will have a minimal impact on Dr. Peterson’s right to freedom of expression.” The ICRC’s decision “does not prevent Dr. Peterson from expressing himself on issues of interest to him and his audiences; rather, the Decision is focussed on concerns over his use of degrading or demeaning language” particularly in light of earlier warnings he had received in 2020. [xiii]
Takeaways
The freedom of expression of regulated professionals is not absolute in circumstances where their speech transgresses certain boundaries set by the profession itself. Even when “off duty”, regulated professions may still cause harm to the public trust (and therefore be subject to remedial and disciplinary measures) by engaging in conduct which is inconsistent with the core values of their profession.
[i] Ibid at para 9.
[ii] Ibid.
[iii] Ibid at para 23.
[iv]Ibid at para 24.
[v] Ibid at para 25.
[vi] Ibid at para 28.
[vii] Ibid at para 31.
[viii] Ibid at para 32.
[ix] Ibid at Para 33
[x] Ibid at para 38.
[xi] Ibid at paras 40-41.
[xii] Ibid at paras 46-47, 51-55.
[xiii] Ibid at para 64.
In this article, we consider the Ontario Superior Court’s decision in Mattamy (Downsview) Limited v. KSV Restructuring Inc. (Urbancorp), 2023 ONSC 3012, and its implications for the limits to an arbitrator’s discretion over matters of procedure and evidence in arbitration.
Brief Factual Background
Downsview Homes Inc (“DHI“) owned land where DHI had developed a residential construction project (the “Downsview Project“). Ownership of DHI was shared by Urbancorp Downsview Park Development Inc. (“UDPDI“) and Mattamy (Downsview) Limited (“Mattamy“), where the rights and obligations between the two parties were governed by the Amended and Restated Co-Ownership Agreement (the “Co-Ownership Agreement“).
In May of 2016, KSV Restructuring Inc. was appointed monitor (the “Monitor“) over UDPDI and its affiliated entities under a Companies’ Creditors Arrangement Act (“CCAA“) proceeding. Consequently, Mattamy became a lender under a debtor-in possession (“DIP“) facility, secured by a charge over UDPDI’s property, which included UDPDI’s interest in DHI. As part of the CCAA proceeding, KSV Restructuring was appointed as the monitor (the “Monitor“) over UDPDI.
In June of 2021, the Superior Court approved a sale process (the “Sale Process Order“) proposed by the Monitor for the sale of UDPDI’s interest in DHI to Mattamy. The proceeds were intended to satisfy the outstanding DIP facility. Additionally, the Sale Process Order also directed the Monitor to arbitrate various disputes, including, among other things, the determination of any Urbancorp Consulting Fees (the “Consulting Fees“) payable by Mattamy to Urbancorp Toronto Management Inc (“UTMI“) – from the same group of companies as UDPDI (together, “Urbancorp”) under the Co-Ownership Agreement.
Notably, section 2.7 of the agreement of purchase and sale provided that the transaction was:
Without prejudice to the Purchaser’s [Mattamy’s] position that neither the Seller [UDPDI]] nor UTMI are entitled to the payment of any amounts in respect of the Urbancorp Consulting Fee, the Purchaser acknowledges that no consideration is being paid to UTMI in respect of the Urbancorp Consulting Fee and as such UTMI retains whatever rights it may have, if any, to recover such amounts.
The above-mentioned purchase and sale transaction closed in January of 2022 (the “Transfer Date“).
In March of 2022, the Monitor (on behalf of the Urbancorp parties) submitted a Notice of Request to Arbitrate. The Monitor/Urbancorp sought a determination that UTMI was entitled to receive the Consulting Fees amounting to $5.9 million as of the Transfer Date. This amount was based on a calculation of “Gross Receipts” (as defined by the Co-Ownership Agreement) for the Downsview Project and the corresponding 1.5% percent Consulting Fee entitlement.
The dispute revolved around the definition of “Gross Receipts”, in respect of which the Monitor argued that revenues from the sale of residential dwellings should be included on a “non-cash basis”. This interpretation suggested that revenues from sales were to be included under “Gross Receipts” when such dwellings were sold, regardless of whether the sale proceeds were actually collected at that time. Conversely, Mattamy contended that “Gross Receipts” only included revenues from residential dwellings once the sales had closed as of the Transfer Date.
In determining the correct interpretation of “Gross Receipts”, the Arbitrator posed questions that were not covered in the parties’ pre-filed evidence or submissions. As such, the Arbitrator introduced a new issue (the “New Issue“) regarding accounting standards and the status of specific residential units that were sold, but not closed.
Accordingly, the arbitration hearing was adjourned, and the parties were directed to provide supplementary materials addressing the New Issue. Mattamy sought to adduce an affidavit that included portions of the ASPE [accounting standards for private enterprises] and a handbook published by the Real Property Association of Canada entitled “Recommended Accounting Practices for Real Estate Investment and Development Entities Reporting in Accordance with ASPE” (the “Handbook”).
The Urbancorp parties objected to some aspects of this affidavit, but interestingly, none of these objections were related to the Handbook. Mattamy indicated that if there were further objections to their proposed supplementary evidence, they would bring a motion for leave to file the evidence based on a proper record.
However, in June of 2022, the Arbitrator orally ruled at a case conference that certain parts of Mattamy’s affidavit would not be allowed into evidence. Specifically, the Arbitrator declined Mattamy’s request to schedule a motion to determine the admissibility of the Handbook, and struck all references to the Handbook, without providing written reasons for his decision.
In accordance with the Arbitrator’s ruling, Mattamy provided a revised version of their affidavit and argued that the application of the ASPE supported the proposition that Gross Receipts should not include revenue from sales until such revenue had been recognized at the interim closing date. Since certain residential condominium sales in question reached interim closing after the Transfer Date, Mattamy contended that such sales should not be calculated as part of the Gross Receipts.
The Arbitrator dismissed Mattamy’s argument and ruled that the definition of “Gross Receipts” did not require revenues to be received in order to be included within the Gross Receipts. Hence, the residential units in question could be recognised as Gross Receipts even if certain amounts were yet to be collected, and the Arbitrator granted the Monitor/Urbancorp an award of $5.9 million (the “Award“) in respect of the unpaid Consulting Fees.
Following the Arbitrator’s ruling, Mattamy brought an application to set aside the Award and to order a new arbitration under section 46 of the Arbitration Act, 1991 (the “Act“) based on two grounds:
1) exceeding the scope of the Arbitration and the Arbitrator’s jurisdiction; and
2) breaching the requirements of procedural fairness.
The Arbitrator did not Exceed his Jurisdiction
The Court first emphasized that an arbitrator’s jurisdiction is derived “exclusively from the authority conferred by the parties in their arbitration agreement and the terms of appointment of the arbitrator.” To determine whether the Arbitrator had gone beyond his jurisdiction, the Court applied the test established in Mexico v Cargill, 2011 ONCA 622 which involved the consideration of three questions:
In applying the foregoing test, the Court identified that the issue in question was UTMI’s entitlement to any Consulting Fees and the mechanics and timing of when such fees were to be paid. This issue was clearly set out both in the Notice of Request to Arbitrate provided to the Arbitrator, and in the parties’ pleadings. Although, the New Issue raised by the Arbitrator “shifted the analysis” as to whether monies paid after the Transfer Date fell within the definition of Gross Receipts, the Court determined that this was simply “another data point and perspective” to be considered when determining UTMI’s entitlement to the Consulting Fees. Thus, the New Issue fell within the submission to arbitration.
The Court also confirmed that that there was nothing in either the Co-Ownership Agreement or the Terms of Appointment that precluded the Arbitrator from making the Award. Consequently, the Court ruled that the Arbitrator did not exceed his jurisdiction in raising and considering the New Issue.
The Arbitrator’s Conduct gave rise to Procedural Unfairness
Mattamy argued that the Arbitrator’s ruling on the inadmissibility of the Handbook gave rise to a procedural unfairness. According to Mattamy, they were denied a sufficient opportunity to present their case, as the Arbitrator failed to engage in a thorough procedure to determine the admissibility of the Handbook and further denied an appropriate way for the evidence to be received.
The Court concurred with Mattamy’s position, and highlighted that Section 46(1)6 of the Act allows a Court to set aside an award on the basis that an applicant is treated unequally and unfairly, denied the chance to present a case or to respond to another party’s case, or is not given proper notice of the arbitration or of the arbitrator’s appointment.
Furthermore, the Court observed that the Handbook was relevant to the New Issue raised during the arbitration. The Handbook not only provided context and guidance on the application of ASPE principles concerning revenue recognition from the sale of residential condominium units, but it also provided rationale as to why revenue from the sale of residential condominium units was to be recognized at the time of interim closing. As such, the Arbitrator did not have the benefit of the full context of accounting principles from an industry perspective when making his decision.
Even if the accounting approach and the contents of the Handbook were, in hindsight, not found to be determinative in interpreting the definition of Gross Receipts, the Court held that an accounting rationale remained a “relevant data point” that Mattamy should have had the opportunity to present in support of its submissions on the New Issue.
Mattamy further asserted that if the Arbitrator was concerned that the Handbook was lacking support by an expert opinion, Mattamy would have rectified this issue (including by leading expert evidence) even if it were to delay the arbitration. The Court found that this point reinforced the conclusion that Mattamy was not afforded a sufficient opportunity to present its case on the New Issue.
The Court then turned to whether the Arbitrator engaged in a thorough proceeding to determine whether to admit the Handbook into evidence. The Court considered that the Arbitrator’s decision to strike the Handbook was made despite:
Considering these findings, coupled with the fact that the Arbitrator’s decision was made without the benefit of a motion and supporting reasons for excluding Mattamy’s evidence, the Court deemed the arbitration process to be unjust and unfair. The Court therefore ordered that the Award be set aside and the parties were directed to procced with a new arbitration before a different arbitrator.
Analysis and Commentary
Broadly speaking, Mattamy provides a useful reminder of the limits to an arbitrator or tribunal’s procedural discretion. It is common practice – particularly in construction disputes – to provide that a set of procedural rules will apply to the arbitration (e.g. the UNCITRAL Arbitration Rules, which themselves provide the tribunal with wide procedural discretion), and to provide in Procedural Order No. 1 that the tribunal will then have the authority to modify those chosen rules to the extent the tribunal deems appropriate or just. However, as Mattamy shows, it is critical to bear in mind that such authority is necessarily limited by the requirement of fair and equal treatment, which is part of essentially all arbitration legislation (and cannot be excluded by the parties’ agreement, unlike other legislative provisions).
In that regard, Mattamy raises an interesting question as to the overlap between administrative law and arbitration. In particular the Court relied upon the Supreme Court of Canada’s decision in Université du Québec à Trois-Rivières v. Larocque, [1993] 1 S.C.R. 471 to conclude that a decision to exclude evidence in an arbitration is not a “procedural” decision that is immune from review, unlike certain other procedural decisions which are immune from review (e.g. declining to admit fresh evidence following delivery of an award, or ordering security for costs). Indeed, the Court referred to “blanket categories” of procedural decisions of arbitrators that are immune from review, but did not elaborate on the underlying basis for which a given form of decision would qualify for such immunity.
In any event, while the Court’s conclusion seems intuitively correct as a matter of procedural fairness, it nevertheless bears noting that the Supreme Court has clarified on several occasions that there are “important differences between commercial arbitration and administrative decision‑making”.[1] While it is important not to overstate the degree to which arbitration and administrative law are separate spheres[2], the most notable among these differences is arbitration’s greater emphasis on party autonomy and freedom of contract (particularly in respect of crafting rules of procedure). As a result, it arguably would have been preferable for the Court to more fully articulate a freestanding rationale for why such a decision in the arbitral context is not immune from review, rather than relying on an administrative law authority.[3] This would be particularly beneficial to determining a principled basis for when a form of procedural decision constitutes one of the aforementioned “blanket categories”.
Similarly, it is worth also clarifying the significance of the lack of written reasons in respect of the New Issue since, understood through an administrative lens, the absence of written reasons might (in certain circumstances) be grounds in and of itself for a finding of procedural unfairness. In this case, the Court observed that (among other things), in the absence of any written or oral reasons from the Arbitrator as to why he decided to exclude the Handbook, the Court could not satisfy itself that a thorough procedure was followed in determining whether to exclude the Handbook.
Importantly, this is not to suggest that in all instances, a lack of written or oral reasons in the arbitral context will inevitably give rise to a finding of procedural unfairness. Indeed, it is not uncommon for parties to agree (for the sake of expediency) that a tribunal will not need to provide detailed (or any) reasons as part of its final award. The more salient point in respect of this issue is that, on this set-aside application, there was insufficient evidence before the Court that a thorough procedure had been followed in arriving at the decision to exclude the Handbook.
In that regard, the Arbitrator’s decision to address the issue via case conference rather than formal motion appears to have been a significant factor, as the latter would have undoubtedly provided a more thorough procedure. In future, wary arbitrators may err on the side of caution in addressing similar issues – while this will ensure greater procedural rigour, it is arguable that some of the efficiency of arbitration may be eroded.
In addition, the nature of Urbancorp’s position as to the admissibility of the Handbook raises an interesting question as to what qualifies as ‘agreement’ between the parties and its impact on the scope of the arbitrator’s jurisdiction. As noted above, the Court observed that Urbancorp did not object to the admission of the Handbook into evidence. On that basis, the argument could be made that the parties agreed to its inclusion, thus modifying their arbitration agreement and thereby leaving the Arbitrator with no discretion to exclude the Handbook (meaning a decision to do so would exceed the arbitrator’s jurisdiction).
However, this in turn raises the question of whether a lack of disagreement (i.e. a lack of objection) is synonymous with agreement; the Court’s analysis is not clear whether Urbancorp expressly or implicitly agreed with the Handbook’s admission, or whether Urbancorp simply took no position on the issue. As readers will appreciate, the issue of whether an agreement has been reached in the contractual context is highly fact-specific, and it is accordingly difficult to state as a general proposition that a lack of disagreement amounts to acquiescence and in turn agreement (or, in fact, whether acquiescence is itself sufficient for agreement as a matter of contract law).
Clearly, though, it appears that the Court is predisposed to protect a party’s right to make its case and to be able to respond to the case against it, such that, as a conservative practice, the potential rejection of significant evidence by an Arbitrator should be accompanied by the opportunity to be heard and an articulation of the basis for exclusion.
Eric Lee (summer student) assisted with the preparation of this article.
[1] See, for example, Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7 at para 119, citing Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 at para 104.
[2] See, for example, Vento Motorcycles, Inc. v. United Mexican States, 2021 ONSC 7913, where the Ontario Superior Court concluded that the applicable test for admitting fresh evidence on an application to set aside an international arbitral award on procedural fairness grounds is akin to the test for admitting fresh evidence in the context of an application for judicial review of an administrative decision.
[3] Parenthetically, this also calls to mind the current uncertainty in relation to the applicable standard of review for arbitral awards following the Supreme Court’s decision in Vavilov.
Summary
Below we consider the Divisional Court’s decision in Devlan Construction Ltd v SRK Woodworking Inc, 2023 ONSC 3035 (“Devlan Construction“) and its implications for the joinder of trust and lien claims under Ontario’s Construction Act. Broadly, based on a reading of the Construction Act’s regulations and rules of statutory interpretation, the Divisional Court concluded that trust claims could not be joined with lien claims under the Construction Act.
Below, we discuss some implications of this decision, contrasting it with the recommendation on the joinder of lien and trust claims from Striking the Balance: Expert Review of Ontario’s Construction Lien Act (“Striking the Balance“), which was one of the bases for the updating of the Construction Lien Act (or the Construction Act, as it ultimately became).
In the original dispute (SRK Woodworking Inc. v. Devlan Construction Ltd. et al., 2022 ONSC 6229), SRK Woodworking Inc. (“SRK”) brought a lien action with respect to payment for the supply and installation of millwork to a local public school against the contractor, Devlan Construction Ltd. (“Devlan”). Subsequently, SRK sought to amend its pleadings by adding parties who were officers and directors of Devlan, and to claim breach of trust under the Construction Act. At issue was what the Construction Act and O Reg 302/18 provided regarding joinder of lien and trust claims.
The contract that was the subject of the proceedings was entered into in March 2019. The motion judge was unable to determine which version of the Construction Act applied. Though the subcontract between Devlan and SRK was executed in March 2019, it was unclear to the Court when the prime contract was executed or when procurement began based on the evidence available.
For this case, the motion judge specified that while s. 50(2) of the Construction Lien Act was no longer part of the Construction Act, the permissive section of joining lien claims and breach of contract claims was introduced into the Construction Act’s new regulations.
Both parties asked the motion judge to apply the legal principle of statutory interpretation which provides that the expression of one or more things of a particular class may be regarded as impliedly excluding others (the “implied exclusion” principle).
One concern raised was the proper manner in which to interpret the removal of two sections in the Construction Lien Act prior to its amendment in 2017. Specifically, the removal of the following sections:
Section 50(2) A trust claim shall not be joined with a lien claim but may be brought in any court of competent jurisdiction; and Section 55(1) A plaintiff in an action may join with a lien claim a claim for breach of contract or subcontract.
Section 50(2)
A trust claim shall not be joined with a lien claim but may be brought in any court of competent jurisdiction; and
Section 55(1)
A plaintiff in an action may join with a lien claim a claim for breach of contract or subcontract.
While both sections were removed, s. 55(1) was subsequently re-enacted, verbatim, in O Reg 302/18 at s. 3(2) – that is, as a regulation to, instead of a provision within, the Construction Act.
Devlan relied on O Reg 302/18, s. 3(2), which only specified that breach of contract or subcontract claims could be joined with lien claims (i.e. the lack of a similar permission in respect of breach of trust claims meant that it was implicitly forbidden). By contrast, SRK’s position was that since the former prohibition to join trust and lien claims no longer existed in the statute, the legislature intended that such joinder was permitted.
For the motion judge, the key issue regarding the meaning of O Reg 302/18, s. 3(2) was whether the legislature – by creating a regulation which expressly allowed joinder of breach of contract claims to lien claims – intended to signal that the joinder of all other claims to lien claims was barred.
To help determine legislative intent, the motion judge reviewed a chart prepared by the Ministry of the Attorney General titled Amendments to the construction lien and holdback provisions, which stipulated that the prohibition on joinder of lien claims and trust claims had been removed.
The judge also reviewed Striking the Balance, which recommended removing the prohibition on joinder of trust claims and lien claims under s. 50(2) of the Construction Lien Act.
The judge analyzed the totality of the Construction Act and noted that the legislation was designed to provide a scheme that would allow construction projects to move forward in an organized, efficient, effective, and timely manner.
Nevertheless, the motion judge was unconvinced by the argument that joining trust and lien claims was inconsistent with the Construction Act as a whole. This was because the parts of the Construction Act dealing with prompt payment and adjudication did not apply to the matter before them. Thus, the motion judge found that SRK should be allowed to join their trust claim with their lien claim. Devlan accordingly appealed to the Divisional Court.
The Divisional Court began by acknowledging that the Construction Act and its regulations, read together, could be clearer about this issue of joinder; however, for the purpose of this case, the Court stipulated that the key question was simply what the Construction Act and regulations provided. The current Construction Act neither permitted nor prohibited joinder of claims in a construction lien proceeding.
While the Construction Act provided for recourse to the Rules of Civil Procedure, this was only in respect to procedural matters left unaddressed by the Construction Act and regulations. Thus, once O Reg 302/18 came into effect, this regulation ousted the application of the Rules of Civil Procedure in respect of the joinder of claims. This was because of the express language of s. 50(2) of the Construction Act:
Except to the extent that they are inconsistent with this Act and the procedures prescribed for the purposes of this part, the Courts of Justice Act and the rules of court apply to the actions under this part. [emphasis added]
In that regard, O Reg 302/18 stipulated that “a plaintiff in an action may join with a lien claim a claim for breach of contract or subcontract.” By expressly permitting joinder of contract and subcontract claims, O Reg 302/18 impliedly excluded joinder of other claims. In this, the Court considered the implied exclusion principle noted above.
The Court acknowledged that the express prohibition on joinder of trust and lien claims was repealed and not reintroduced in the regulations. However, the applicable principle of statutory interpretation set out in the Legislation Act precluded construing current provisions on the basis of prior versions of the legislation:
No implication 56 (1) The repeal, revocation or amendment of an Act or regulation does not imply anything about the previous state of the law or that the Act or regulation was previously in force; Same (2) The amendment of an Act or regulation does not imply that the previous state of the law was different.
No implication
56 (1) The repeal, revocation or amendment of an Act or regulation does not imply anything about the previous state of the law or that the Act or regulation was previously in force;
Same
(2) The amendment of an Act or regulation does not imply that the previous state of the law was different.
Finally, the Court noted that the Construction Act should be as far as possible a summary procedure. Adding breach of trust claims would, it surmised, result in adding further issues that would significantly complicate the narrow issue of breach of contract in a lien action. This would then increase documentary production, examinations for discovery, and the number of parties and issues to be tried, which would undoubtedly increase the cost and the length of the proceeding.
Furthermore, the Court observed that even if it were wrong in its reading of the Construction Act and the regulations, this could be remedied by amending the regulations to expressly address joinder of trust and lien claims.
Accordingly, Devlan’s appeal was allowed, with the breach of trust claims struck from the proceeding and the action struck as against the trust defendants.
Analysis & Commentary
Devlan Construction provides helpful clarification about relevant rules of statutory interpretation used by the Divisional Court to make its determination, including:
That being said, Devlan Construction raises important issues for further consideration.
First, it is arguable whether the Legislation Act explicitly precludes analysis of prior versions of legislation in all cases. Section 56(1) of the Legislation Act lists repeal, revocation, and amendment of an act or regulation as elements that do not imply anything about the previous state of the law. In Devlan Construction, what is at issue is re-enactment of a provision as a regulation, which might arguably not be captured by s. 56(1).
Also, s. 46 of the Legislation Act indicates that every provision of “Part IV – Interpretation” – that is, the Part wherein s. 56 appears – applies to every Act and regulation. However, an exception appears in s. 47:
47 Section 46 applies unless; (b) its application would give to a term or provision a meaning that is inconsistent with the context. [emphasis added]
47 Section 46 applies unless;
(b) its application would give to a term or provision a meaning that is inconsistent with the context. [emphasis added]
According to Sullivan’s Statutory Interpretation, courts work with an expansive view of admissible context, meaning very little cannot be considered if it is relevant to the interpretive problem at hand.[1] This includes legislative history, which is anything that is prepared to facilitate the passage of legislation[2], and legislative evolution, which begins with analysis of the first enactment of legislation, followed by subsequent amendments, up to final repeal.[3]
Even if current provisions cannot be construed based on prior versions of the legislation, s. 56(2) of the Legislation Act only specifies that “amendment of an Act or regulation” does not imply anything about the previous state of the law. This language arguably does not extend to the context surrounding the amendments.
This proposition is also supported by the Superior Court’s recent decision in Director of Employment Standards v Sleep Country Canada, 2023 ONSC 3975. There, the Court observed that an amendment to the statute at issue in and of itself did not reveal anything; rather, the Court referred to the lack of evidence (such as Hansard) that would have demonstrated a reason for why the legislature made the amendment in question. This suggests that the context surrounding the amendments forms a valid part of the assessment. In the present case, there was ample evidence of context surrounding the intent of the amendments and the desire to remove the prohibition against joinder of lien and trust actions specifically.
As such, the position of the Divisional Court appears to somewhat understate available extrinsic context, such as legislative history, especially in light of s. 47(b) of the Legislation Act. For example, this creates a situation where the recommendation to remove the prohibition on joinder of trust and lien claims in the Striking the Balance report was not followed.
This is despite the fact that Ontario is the only common law province that prohibits this type of joinder, and despite the fact that multiple stakeholders consulted in Striking the Balance believed that this type of joinder should be allowed. The ultimate question is of course what the legislature intended; however, since this report was commissioned and written in order to aid the legislature in updating the Construction Lien Act – in addition to which the drafters of the report were engaged by the legislature to consult in the drafting of the legislation – it still forms part of the relevant interpretive context.
Additionally, removing the prohibition on joining trust and lien claims was expressly included in the chart prepared by the Ministry of the Attorney General on July 1, 2018 in Amendments to the construction lien and holdback provisions. This document, described as “a chart describing some of the key changes”, was part of a summary prepared by the Ministry of the Attorney General to explain the amendments to the Construction Act.
The chart specified the following: “the prohibition on joinder on lien claims and trust claims has been removed.” This chart followed the Hansard debates from November 15, 2017, where the removal of the prohibition on breach of trust claims being joined with lien claims was described as a “well overdue” amendment. Again, this forms part of the context surrounding the updates to the Construction Lien Act.
Second, without a regulation being added to explicitly prohibit joinder of trust claims to lien claims, the arguable implication of Devlan Construction appears to be that this explicit removal of the prohibition on joinder of trust and lien claims ultimately served no purpose.
However, both s. 50(2) and s. 55(1) were removed from the Construction Lien Act, but only s. 55(1) was re-enacted as a regulation. According to Sullivan’s Statutory Interpretation, departure from a pattern or practice is one reason why Courts may reject certain interpretations of legislation.[4]
This re-enactment of s. 55(1) as a regulation may create a fixed pattern of expression where the legislature seems to have been aware of the need to re-enact certain provisions as regulations. Despite the legislature knowing about the removal of the provision that prohibited joinder of trust and lien claims based on the contextual evidence above, they did not re-enact said provision as a regulation.
Third, the issue of implied exclusion raises questions regarding other related principles of statutory interpretation, including analysis of legislative intent and the objective of the amendments. In Rizzo v Rizzo Shoes Ltd (Re), [1998] 1 SCR 27 (“Rizzo”), the Supreme Court stated that there is only one principle or approach to the interpretation of legislation:
[T]he words of the Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.
The objectives of amending the Construction Lien Act to the Construction Act included the following:
While prompt payment was one objective of the amendments, modernizing the construction lien rules was also another expressly-stated objective. Permitting joinder of trust claims with lien claims would arguably help modernize the construction lien rules because the basis for the prohibition was from a Report of the Attorney General’s Advisory Committee in 1983. At the time, it was decided that issues related to lien and trust claims were very different, and resolving lien claims was the primary concern under the Construction Lien Act.[6]
However, in practice, courts had been willing to join lien and trust claims while the Construction Lien Act was in force.[7] Thus, permitting joinder of these types of claims in the Construction Act at least to some degree would only be following the actual practice of the courts themselves. Furthermore, as readers will appreciate, the Courts of Justice Act (along with the Rules of Civil Procedure) emphasize the avoidance of a multiplicity of proceedings, which proposition is particularly relevant in respect of this issue given that trust issues often overlap to a significant extent with lien issues. In other words, such a change would modernize the legislation by bringing it into line with modern practice, both specifically in the construction context and in the litigation context more generally.
As stated by the Supreme Court in Rizzo, using legislative history to help determine the intention of the legislature is an “entirely appropriate” exercise that has frequently been employed by the Supreme Court. In conjunction with the potential applicability of s. 47 of the Interpretation Act, it may be possible to look at the legislative history of s. 50(2) of the Construction Lien Act and the provision’s subsequent removal in the Construction Act.
In that regard, one point made by the motion judge bears repeating: the principle of implied exclusion should be used carefully, as much depends on the context, and thus it is not a principle of universal application.
Due to the significance of the questions raised by Devlan Construction, we look forward to seeing how it will be subsequently interpreted or applied, or if the provincial legislature will subsequently respond with additional regulations to clarify this issue. In that regard, it bears noting that Devlan may somewhat understate the ease with which regulations are revised. While moving the relevant provisions from the Construction Act to its regulations may have avoided the issue of having to formally amend the legislation through the legislature, the practical reality remains that revising regulations requires significant input from stakeholders both within and outside of government. Ultimately, the legislature will ideally consider the original intent behind Striking the Balance in making any subsequent changes; in the interim, however, there will likely be some confusion and difficulties in matters involving breach of trust issues under the Construction Act, and associated additional costs will be borne by litigants.
Jeff Wong (summer student) assisted in the preparation of this article.
[1] Ruth Sullivan, Statutory Interpretation, 3rd ed (Toronto: Irwin Law Inc, 2016) at 51 [Statutory Interpretation].
[2] Ibid at 259.
[3] Ibid at 260.
[4] Ibid at 149-150.
[5] Ministry of the Attorney General, “Summary” (October 1, 2019), online <https://www.attorneygeneral.jus.gov.on.ca/english/construction_law_in_ontario_chart.php>.
[6] Bruce Reynolds & Sharon Vogel, “Striking the Balance” (April 30, 2016), online <https://wayback.archive-it.org/16312/20210402052122/http:/www.attorneygeneral.jus.gov.on.ca/english/about/pubs/cla_report/#_Toc450127325>.
[7] Ibid.
The Ontario Superior Court’s recent decision in Arad Incorporated v Rejali et al, 2023 ONSC 3949[1] (“Arad”) provides helpful guidance on motions for the return of posted security in circumstances where an interim adjudication process has concluded in accordance with Ontario’s Construction Act (the “Act”).[2]
In particular, the court confirmed that it would be wary of relying on the determinations of adjudicators (which are, of course, interim binding) when deciding to reduce or return security that has been paid into court to vacate a lien claim.[3] In fact, the court in Arad suggests that the determinations of adjudicators themselves will generally not be sufficient for a court to grant such relief.
In Arad, the plaintiff (or its principal – this fact was unclear) entered into a contract to provide services and materials for the improvement of a residential property owned by two of the defendants (a third defendant was alleged to have acted as the owners’ agent or joint venture partner). The plaintiff alleged that the defendants owed it money in respect of the supply of such services and materials, and as a result, the plaintiff registered a claim for lien and certificate of action against the property. The claim for lien and certificate of action were vacated from title pursuant to s. 44 of the Act, with the defendants paying money into court as security.
The plaintiff then commenced a construction dispute interim adjudication under Part II.1 of the Act. The third defendant (the alleged agent or joint venture partner) also brought an adjudication for monies allegedly overpaid to the plaintiff’s principal. An engineer, acting as the adjudicator for both issues, concluded that no additional monies were owed to the plaintiff, and that the plaintiff’s principal was not responsible for any overpayment by the third defendant.
Neither party sought judicial review or a stay of the adjudicator’s decision. Instead, the defendants brought a motion to reduce or return the security paid into court, on the basis that the adjudicator had found no additional monies were owed to the plaintiff.
No details are provided in the decision as to the status of the lien action.
As noted by the Court, “in a nutshell, the issue [of this case was] whether the determinations of the adjudicator that no monies are owed means that the money paid into court should be returned”.
In bringing their motion, the defendants relied on s 44(5) of the Act, which states:
Reduction of amount paid into court (5) Where an amount has been paid into court or security has been posted with the court under this section, the court, upon notice to such persons as it may require, may order where it is appropriate to do so, (a) the reduction of the amount paid into court, and the payment of any part of the amount paid into court to the person entitled; or (b) the reduction of the amount of security posted with the court, and the delivery up of the security posted with the court for cancellation or substitution, as the case may be.[4]
Reduction of amount paid into court
(5) Where an amount has been paid into court or security has been posted with the court under this section, the court, upon notice to such persons as it may require, may order where it is appropriate to do so,
(a) the reduction of the amount paid into court, and the payment of any part of the amount paid into court to the person entitled; or
(b) the reduction of the amount of security posted with the court, and the delivery up of the security posted with the court for cancellation or substitution, as the case may be.[4]
Relying on prior case law[5], the Court found that the applicable test was whether the Court was “satisfied on the basis on the motion material that there is no reasonable prospect of the lien claimant proving that the lien claimed attracts the requirement to attract security per ss 44(1) or (2) of the Act.”[6]
While the defendants filed two affidavits, the Court observed that the “sole evidentiary basis” they provided were the determinations of the adjudicator.[7] The Court therefore considered whether or not it was appropriate to reduce or return the security based solely on the determinations of the adjudicator (who, as noted above, found against the plaintiff entirely).
In that regard, the Court found it necessary to examine the adjudicator’s methodology and conclusions. In doing so, the Court discussed the nature of interim adjudication, and adopted the following statement from Pasqualino v MGW-Homes Design Inc:
The Adjudication provisions were introduced into the Construction legislation to provide a quick, efficient, interim determination allowing funds to flow down the contractual “pyramid”. I stress that adjudication determinations are interim, allowing the parties to continue litigating the issues, including those the subject of the Adjudication determination to a final and binding determination in the courts or by arbitration.[8]
The Court also added the following observations about the interim nature of adjudication under the Act:
As interim decisions, it does not put an end to the proceeding. The proceeding continues between the parties including that which was subject of the adjudication process. The determinations of the adjudicator are not binding upon this court. The findings and conclusions of an adjudicator set out in the determination is evidence, like any other evidence, this court may take into consideration in determining whether to exercise its discretion to reduce security “where it is appropriate to do so.” But an adjudicator’s conclusions are not determinative on the decision to reduce security.[9] […] For the adjudication process, I make no assertion that such a methodology is or is not permitted. … Not all evidentiary rules may be adhered to. Not all evidence provided may be subject to scrutiny through the discovery process or subject to cross examination.[10] [emphasis added]
As interim decisions, it does not put an end to the proceeding. The proceeding continues between the parties including that which was subject of the adjudication process. The determinations of the adjudicator are not binding upon this court. The findings and conclusions of an adjudicator set out in the determination is evidence, like any other evidence, this court may take into consideration in determining whether to exercise its discretion to reduce security “where it is appropriate to do so.” But an adjudicator’s conclusions are not determinative on the decision to reduce security.[9]
For the adjudication process, I make no assertion that such a methodology is or is not permitted. … Not all evidentiary rules may be adhered to. Not all evidence provided may be subject to scrutiny through the discovery process or subject to cross examination.[10] [emphasis added]
In other words, although the Court recognized that statutory adjudication was deliberately designed to allow for the relaxation of certain rules of procedure and evidence, it appears that this relaxation was itself cause for skepticism from the Court of the weight to be assigned to the adjudicator’s determination.
In that regard, with respect to the methodology of the adjudicator in this case, the judge noted that the adjudicator indicated that no witnesses were called and that determinations were made based on documentary evidence, oral submissions, and a site visit.[11] Further, the Court noted as follows:
The adjudicator made findings based on his opinion as an engineer and not based on the expert opinion or reports of others presented by either of the parties. His opinion was not subject to contestation by any of the parties. He made findings based on a site visit and verbal statements during the oral hearing. His findings were not all based on admissible evidence. He admitted that there was contradicting claims and statements made by the parties on the facts: the agreement and the scope of work to be performed and the worked performed. The adjudicator conceded that he did not consider the extra claims of the plaintiff for, in his opinion, he did not receive “proper evidence”. The adjudicator also decided to just rely on the documentation provided and use his own construction and engineering experience to make final determinations.[12] [emphasis added]
The Court therefore found that the “determinations of the adjudicator alone do not meet the evidentiary threshold required for the court to conclude that the lien claim does not attract need for security.”[13]
Ultimately, the Court concluded that courts should be wary of solely relying on the findings of an adjudicator in deciding whether to reduce or return security for a lien claim.[14] In this particular case, the Court also found that there was no basis to reduce the amount of the security, given that any reduction would be arbitrary without evidentiary basis.[15]
While Arad suggests that courts may be wary of relying solely on the determinations of an adjudicator, it is also important to note that the Court did not rule out the possibility that an adjudicator’s determinations could provide sufficient evidence to reduce or return security in the right circumstances.
In the Court’s view, consideration must be given to whether the adjudicator’s determinations provide the “necessary evidentiary foundation” for reducing or returning the security[16], meaning that a court will scrutinize the adjudicator’s methodology and conclusions in deciding whether the adjudicator’s findings provide a sufficient evidentiary basis.
It follows that the closer an adjudicator adheres to evidentiary rules and elements of the adversarial system such as cross-examination of witnesses – in short, to standard civil procedure – the likelier it would be that a court would find an adjudicator’s determination to be sufficient evidence. The same would seem to hold true more broadly, in other circumstances in which a party may seek to rely on an adjudicator’s determinations as evidence in a proceeding, such as in a motion for summary judgment. Therefore, in commencing a construction dispute interim adjudication, it is important to consider that the quicker and more efficient the process is, the less likely it will subsequently be relied on by a court as evidence in a proceeding.
It therefore remains to be seen if this will incentivize parties to avoid or curtail the summary nature of adjudication in favour of a more robust procedure that they might then rely upon in the context of related lien litigation (or other construction court proceedings). As readers will appreciate, adjudication was intended from its inception to forego procedural trappings in favour of a quicker, “rough justice” approach in order to maintain the flow of funds down the construction pyramid. If parties begin to view this skepticism as it relates to related proceedings, then this aspect of adjudication might unfortunately be undermined.
The summary nature of adjudication (and its contemplation of subsequent court proceedings) is, of course, one of the reasons that adjudication is interim. By contrast, the return of posted security removes a protection for lien claimants granted by statute, and is itself more akin to a final determination (except to the extent that such an order is successfully appealed). It would seem inconsistent with the purpose of the Act – and the purpose of adjudication – for a lien claimant to lose its right to the protection of posted security on the basis of an interim determination alone, and accordingly, this decision appears to strike the appropriate balance in that regard.
[1] Arad Incorporated v Rejali et al, 2023 ONSC 3949.
[2] Construction Act, RSO 1990, C-30.
[3] While the Act distinguishes between security posted with the court and monies paid into court as security, they are equivalent for the purposes of this analysis and treated as interchangeable. See Construction Act, RSO 1990, C-30, s 44(5).
[4] Construction Act, RSO 1990, C-30, s 44(5).
[5] Pentad Construction Inc v 2022988 Ontario Inc, 2021 ONSC 824; and Chesney et al v Malamis et al, 2023 ONSC 1742.
[6] Arad Incorporated v Rejali et al, 2023 ONSC 3949 at para 22.
[7] Arad Incorporated v Rejali et al, 2023 ONSC 3949 at para 19.
[8] Pasqualino v MGW-Homes Design Inc, 2022 ONSC 5632 at para 30.
[9] Arad Incorporated v Rejali et al, 2023 ONSC 3949 at para 17.
[10] Arad Incorporated v Rejali et al, 2023 ONSC 3949 at para 28.
[11] Ibid at para 20.
[12] Ibid at para 25.
[13] Ibid at para 24.
[14] Ibid at para 28.
[15] Ibid at para 30.
[16] Ibid at para 24.
In CZT v CZU,[1] the plaintiff – seeking to set aside the award of an arbitral tribunal on the basis of serious allegations by the dissenting arbitrator against the two other members of the tribunal – brought an application to compel the arbitrators to produce records of their deliberations.
The Singapore International Commercial Court (“SICC” or “Court”) dismissed the plaintiff’s production application, concluding that the plaintiff had not demonstrated that the interests of justice outweighed the policy reasons for protecting the confidentiality of deliberations. In the Court’s view, the application to set aside the award could proceed without those records.
The decision is an important benchmark in terms of deliberative secrecy in arbitration, which according to the Court, will only yield in the rarest of cases, which generally would not include bare allegations even of a serious nature.
The plaintiff entered into a contract with the defendant to deliver certain component packages that included materials, machinery and equipment, which the defendant subsequently alleged were defective. The defendant commenced arbitration proceedings in Singapore under the Rules of Conciliation and Arbitration of the International Chamber of Commerce (“ICC”) in Singapore. The majority on a panel of three (the “Majority”) found in favour of the defendant. However, the dissenting arbitrator (the “Minority”) made various allegations against the majority, accusing them of:
The Minority concluded in his dissent that he had “lost any and all trust in the impartiality of [his] fellow arbitrators”.[3]
On the basis of this apparent “smoking gun,” the plaintiff brought an application before the SICC to have the award set aside under Singapore’s International Arbitration Act 1994 (2020 Revised Edition). When the ICC Secretariat and all three members of the panel refused voluntarily to hand over records of the deliberations, the plaintiff filed summonses in the SICC against the three arbitrators for production of their records.
The SICC’s Decision
With respect to general principles of deliberative secrecy, it was common ground between the parties that the records of arbitral deliberations are confidential by default and therefore protected against production orders, and the Court agreed that “it can scarcely be argued otherwise” even though no statutory provision expressly protects the confidentiality of arbitrators’ deliberations.[4] In the Court’s view, the confidentiality of deliberations, like the confidentiality of arbitral proceedings themselves, “exists as an implied obligation in law”[5] – that is, it exists at common law independent of (or in addition to) any statutory, institutional, or contractual provision to similar effect, for the following well-recognized policy reasons (which readers will recognize as very similar to the reasons justifying deliberative secrecy for courts):
The parties were also in general agreement that the default rules of confidentiality with respect to arbitral deliberations are subject to exceptions. The plaintiff argued that confidentiality will yield in appropriate circumstances to “considerations of due process, the interests of justice and the public policy of preserving the integrity and reputation of Singapore as a seat of arbitration.”[7]Conversely, the defendant and one of member of the Majority (who was present before the Court) argued that confidentiality will yield only in the “rarest of cases”, and requires “the most compelling reasons and exceptional circumstances”.[8] The member of the Majority further drew a distinction between “process issues” and “disagreements on substance”, and submitted that there is an exception for process issues, such as “allegations that one arbitrator has been excluded from deliberations”.[9]
The Court agreed that the plaintiff’s formulation was too wide in scope, and found that confidentiality of deliberations only applies to protect substantive disagreements that involve an arbitrator’s thought processes or reasons for his/her decision; conversely, confidentiality does not apply to “essential process issues”. However, the Court did not consider the protection of essential process issues to be an exception to the principle of confidentiality, because such process issues do not represent the tribunal’s thought processes or reasons for decision, and therefore do not engage the policy reasons for protecting confidentiality in the first place.[10] The Court relied on case law from the UK and Australia, as follows:
In Duke of Buccleuch,[11] the court held (at 457) that an arbitrator may be questioned as to what had taken place before him, including what matters had been submitted to him for decision, but he could not be questioned as to how he arrived at his decision. In Nathan v MJK Constructions [1986] VR 75 (“Nathan”), the Australian Supreme Court of Victoria held that whilst an arbitrator may not be questioned as to his reason for making a particular decision, there was no policy reason why he should not give evidence as to what took place before him.[12]
The Court also acknowledged that the line between process issues and substantive issues is not always clear, and that “there may also well be some issues which are described as ‘process issues’ which raise questions of fact and degree as to the extent of consultation between arbitrators which could give rise to the need to explore deliberations”. On the facts of this case, the Court did not find it necessary to consider that issue further.[13]
The Court found that there can be an exception to confidentiality when the facts and circumstances are such that the interests of justice in ordering the production of records of deliberations outweigh the policy reasons for protecting the confidentiality of deliberations.[14] This would only occur in the “very rarest of cases”, and would require a case involving allegations that (1) are very serious in nature, and (2) have a real prosect of succeeding.[15] For example, the Court observed allegations of corruption would be serious enough because they “attack the integrity of arbitration at its core.”[16]
The plaintiff argued that it was entitled to production on the following grounds:
With respect to the first argument, the Court found that even if it were true, it would be insufficient to displace the protection of confidentiality, and that this allegation could in any event be decided on the basis of the arbitration record alone (i.e. without reference to deliberation records). On that basis, the Court concluded that this ground could not amount to an exception to the default rule of deliberative secrecy for arbitrations.
With respect to the second argument, the Court found it “difficult to follow”.[18] The plaintiff alleged that the ICC, which reviewed the drafts of the Final Award, had approved an earlier draft (the “May Award”, and that the majority then concealed from the ICC that the final version of the Final Award included substantial changes made after the ICC had approved an earlier version. The Court was skeptical that this amounted to an impropriety, and found that the Final Award would stand or fall on its own merits, since it contained the reasons that the Majority “chose to give to justify the findings they made”.[19] The Court therefore similarly found that this ground could not constitute an exception to the default rule of deliberative secrecy for arbitrations.
With respect to the third argument, the Court found that it could – as a general proposition – constitute an exception, because “impartiality is fundamental to the integrity of arbitration proceedings”[20], and that the general principle of deliberative secrecy was not intended to facilitate the concealment from the parties of an arbitrator’s partisanship.
On the facts of this case, however, the Court did not come to a definitive conclusion, because it found that the plaintiff had not shown that its allegations on this issue had any real prospect of succeeding. This is because, while the allegations of the Minority were serious, they were bare allegations. No facts were stated in the dissent that would support the Minority’s views or opinions. The dissent did not explain how the draft May Award differed from the Final Award, nor how the Majority had allegedly distorted the history of deliberations or misstated the record.
The plaintiff argued that the Minority was constrained by what he was permitted say in the dissent, but the Court found that the Minority seemingly did not feel any such constraint given that his allegations of serious misconduct and improprieties were contained within his dissent. Rather, the Court’s analysis suggests that it was incumbent upon the Minority to fully articulate the allegations of fact necessary to support an argument that could justify an argument that the Majority lacked impartiality. In other words, if an arbitrator is to allege misconduct by other members of the same tribunal, it would seem that the arbitrator would have to go much further in particularizing such allegations in order to justify intervention by a court. Accordingly, the Court refused to allow a “fishing expedition” based on bare allegations regarding the dishonesty of the Majority.[21]
Finally, The Court found that the May Award – which the plaintiff relied upon to argue that the Majority had concealed its true reasons for rendering its ultimate decision – was protected by the confidentiality of arbitral deliberations, such that the May Award need not be produced (and the plaintiff was not entitled to receive it).
Although CZT is a Singaporean case, and although it may be appealed, it is nevertheless of interest to Canadian readers given the novelty of deliberative secrecy in the arbitration context. Given the lack of similar case law in Canada, it may also stand as persuasive authority for parties faced with a similar situation in future (particular where Canada, much like Singapore, has placed an emphasis on presenting itself as an arbitration-friendly jurisdiction).
To that end, as CZT v CZU illustrates, the party seeking to set aside the award will, generally speaking, only be able to rely on the record. Bare allegations, even serious ones made by a member of an arbitral panel, will generally not displace the protection of confidentiality of arbitral deliberations, particularly if the case for setting aside an award can be made using the arbitration record.
This is particularly true in circumstances where the standard of proof requires ‘real prospects of succeeding’, meaning that bare allegations will invariably fail to meet that threshold. It is unclear what level of detail would be required of such allegations in order to meet such a threshold, but it stands to reason that evidence directly from the dissenting arbitrator (e.g. an affidavit or testimony) might suffice.
In that regard, the Court’s decision raises an interesting question of whether it in fact serves as guidance for dissenting arbitrators in a similar situation to CZT. In this case, the plaintiff’s argument faltered in large part due to what, in the Court’s view, was a lack of particularization in the Minority’s reasons. Going forward, it is possible that dissenting arbitrators might particularize allegations of impropriety in much greater detail, thereby pre-empting judicial concern for arbitral confidentiality by exposing the tribunal’s deliberations.
In any event, while the Court raised four policy reasons for protecting confidentiality of deliberations, it also arguably raises a fifth: finality (which, as readers will know, is arguably the most attractive aspect of arbitration). Here, the Minority alleged that the Majority was “wrong in its findings”, and disagreed with the Majority’s “conclusions and reasoning… (vehemently, in fact)”[22] – in other words, that the Majority and the Minority were in fundamental disagreement as to substantive aspects of the arbitration. Disagreements between arbitrators are not uncommon, and indeed are an aspect inherent to the very nature of the process. Such substantive disagreements, although they may be vehement and may sometimes dovetail with allegations of impropriety, are not grounds in and of themselves to interrogate the legitimacy or finality of an award.
Finally, it is also worth noting that the Court did not appear to be seriously concerned by the allegation – bare though it was – that the Majority concealed its “true” reason(s) for its decision. While this allegation can be quite serious if accompanied by allegations of corruption, or potentially allegations of partiality (assuming there is a real prospect of success), the Court observed that the “reasons for the Final Award are those that the Majority chose to give to justify the findings they made, and they stand or fall on their own merits.”[23] The distinction between the stated and unstated reasons for an award would appear to be immaterial, since the reasons that a tribunal does provide are subject to scrutiny and/or challenge.
We await with interest to see if CZT is appealed, and if so, its outcome.
[1] CZT v CZU, [2023] SGHC(I) 11. As readers will appreciate, in certain jurisdictions – Singapore among them – courts frequently anonymize party names for matters being referred from arbitration, in order to preserve (insofar as possible) the confidentiality ostensibly afforded by arbitration. This practice is typically not followed in Canada.
[2] CZT v CZU, [2023] SGHC(I) 11 at para 19.
[3] Ibid.
[4] Ibid at para 43.
[5] International Coal Pte Ltd v Kristle Trading Ltd, [2009] 1 SLR(R) 945 at 82.
[6] Ibid at para 44.
[7] Ibid at para 46.
[8] P v Q, [2017] EWHC 148 at para 68(3)(d).
[9] CZT v CZU, [2023] SGHC(I) 11 at para 49.
[10] Ibid at para 50.
[11] Duke of Buccleuch v The Metropolitan Board of Works (1872), LR 5 HL 418
[12] CZT v CZU, [2023] SGHC(I) 11 at para 51.
[13] Ibid at para 52.
[14] CZT v CZU, [2023] SGHC(I) 11 at para 52.
[15] Ibid at para 53.
[16] Ibid.
[17] CZT v CZU, [2023] SGHC(I) 11 at para 58.
[18] Ibid at para 60.
[19] Ibid.
[20] Ibid at para 61.
[21] Ibid at para 67.
[22] CZT v CZU, [2023] SGHC(I) 11 at paras 65, 69.
[23] CZT v CZU, [2023] SGHC(I) 11 at para 60.
In this article, we consider the Court of Appeal for Ontario’s recent decision in Bhatnagar v. Cresco Labs Inc., 2023 ONCA 401, and its impact on the duty of honest performance, as articulated by the Supreme Court of Canada in Bhasin v Hrynew and Callow v Zollinger. As readers will appreciate, these cases have been significant in shaping the boundaries of acceptable conduct in contractual relationships.
In Bhatnagar, the Ontario Court of Appeal considered the issue of damages flowing from a breach of the duty of honest performance, and in particular, the burden of proof for proving such damages in case of breach. Ultimately, while Bhatnagar offers helpful clarification as to the appropriate measure of damages, it also raises a number of questions on how to remain compliant with the duty as set out by the Supreme Court of Canada in Bhasin and Callow.
180 Smoke – a retailer of vaping products – was founded by Gopal Bhatnagar, Boris Giller, and Ashutosh Jha (the “Appellants“). Through a share purchase agreement (the “SPA“) dated February of 2019, 180 Smoke was sold to a company called Origin House for $25 million.
Under the SPA, Origin House provided the Appellants an opportunity to earn an additional $15 million: $2.5 million was to be awarded if 180 Smoke obtained a processing license within a specified period of time, and $12.5 million was to be awarded in installments if 180 Smoke met yearly revenue milestones over the first three years after closing (the “Revenue Milestone Payments“). Specifically, three “earn-out” periods were set for the 2019, 2020, and 2021 calendar years, where each year had a target payment of $4,166,667 (for an aggregate total of $12.5 million).
The SPA also included an “Unearned Milestone Payment Commitment” clause (“Commitment Clause”), which, broadly speaking, stipulated that if there was a change of control of Origin House during the three year “earn-out” period, then the Appellants would be entitled to the amount of all future unearned milestone payments (i.e., the balance of the $12.5 million).
In April of 2019, Origin House and Cresco Labs (“Cresco“) entered into an agreement where Cresco would purchase Origin House (the “Cresco Transaction“) – thereby transferring control of the company to Cresco. The Cresco Transaction was expected to take place before the end of 2019, triggering the earn-out period of all three years pursuant to the Commitment Clause.
Aware of the Cresco Transaction, the Appellants asked Origin House in June of 2019 what would happen to the Revenue Milestone Payments if the deal did not close in time. Origin House responded that there was no reason to believe that the deal would not close by the end of 2019. However, Cresco, in October of 2019, proposed to postpone the closing date to January of 2020. Origin House did not relay this information to the Appellants, and the Cresco Transaction proceeded to close on January 8, 2020.
Per the Commitment Clause, Cresco provided the 2020 and 2021 Revenue Milestone Payments to the Appellants ($8.333M). However, Cresco did not include the 2019 Revenue Milestone Payment as, in their view: (1) the Cresco Transaction fell outside the first earn-out period (i.e., after 2019 had concluded notwithstanding the original closing date), and (2) the Appellants did not meet the revenue target in 2019. Accordingly, the Appellants brought an application seeking an order directing Cresco to pay the 2019 Revenue Milestone Payment ($4.166M).
Decision of the Court
Before the application judge, the Appellants argued that their failure to achieve the 2019 revenue target was a result of breaches of contract by Origin House, and that they were denied the opportunity to obtain the processing license (also due to breaches of contract by Origin House). More specifically, the Appellants claimed that Origin House’s failure to advise them of the postponement of the Cresco Transaction’s closing to 2020 – after previously advising that the closing was expected to occur in 2019 – breached an unspecified “duty of good faith in contractual dealings”.
The application judge agreed with the Appellants’ argument, and held that Origin House’s failure to update them of the change in closing date constituted a breach of the duty of honest performance. In particular, although the application judge made no finding that Origin House had intentionally misled the Appellants about the closing date, the breach lay in Origin House’s failure to update the Appellants upon determining that the closing date was impossible.
Nevertheless, despite finding in favour of the Appellants, the application judge did not award any damages for the breach. According to the judge, even if the Appellants had been promptly advised of the change in closing date, the Appellants would not have been able to meet the revenue target by the end of 2019, nor could they have taken steps to force the Cresco Transaction to close by the end of 2019. Hence, the court decided that the Appellants were not entitled to damages, as there was no evidence of a lost opportunity, and no damages were inferred or proven to flow from the breach.
Having failed to receive any of the damages they sought, the Appellants appealed the decision of the application judge.
The Court of Appeal
On appeal, the Appellants argued that the application judge erred:
There is no presumption of loss as a result of the breach of the duty of honest performance
First, the Appellants submitted that if a court found that a party had breached its duty of honest performance, there existed a legal presumption of damages. Accordingly, the Appellants claimed that the Court must presume that Origin House’s breach caused the Appellants to lose the opportunity of reaching the 2019 revenue milestone target and that the Court’s only task would be to quantify damages resulting from the loss. The legal authority for this argument was derived from the words of paragraph 116 (“the Emphasized Words“) of Callow, which stated that:
[E]ven if I were to conclude that the trial judge did not make an explicit finding as to whether Callow lost an opportunity, it may be presumed as a matter of law that it did, since it was Baycrest’s own dishonesty that now precludes Callow from conclusively proving what would have happened if Baycrest had been honest. [Emphasis added.]
The Court of Appeal rejected the Appellants’ interpretation of Callow, and held that in determining damages, the claimant has the onus of providing that the breach resulted in “the claimant failing to have a fair opportunity to protect its interests or caused [the claimant] to lose an opportunity.”
Furthermore, the Court found that the Emphasized Words must be read in the context of paragraph 116 as a whole. The Emphasized Words contained the word “may”, indicating permissive language. Hence, the Appellants were incorrect in their submission that the Court was obligated to presume that the Appellants suffered a loss of opportunity – at best, the Court had the discretion to make such a presumption.
The Emphasized Words were followed by qualifying language. As explained by the Court of Appeal, it can be presumed that a party has lost an opportunity if the opposing party’s dishonesty precluded the claimant from conclusively proving what would have happened had the opposing party acted honestly. In this case, the findings of the application judge indicated that there was “little or no chance” for the Appellants to achieve the 2019 revenue milestone target in question, and as a result, the Appellants had no evidentiary foundation (unlike in Callow) to support their claim of a lost opportunity.
The application judge did not misapprehend the evidence relating to lost opportunity
Second, the Appellants submitted that the application judge erred in misapprehending the evidence relating to lost opportunity. However, this argument was summarily dismissed, as the Court of Appeal held that the application judge correctly concluded that there was no evidence before the court to support the Appellants’ claim of lost opportunity.
The application judge did not err in refusing to award damages on a basis other than expectation damages
The Appellants further claimed that the application judged erred in refusing to award damages on a basis other than expectation damages, which was warranted on the basis that courts have recognized the necessity of departing from the ordinary measure of damages in cases where expectation damages are difficult or impossible to calculate or where expectation damages would effectively allow the breaching party immunity, notwithstanding the breach.
Although not explicitly stated, it appears from the Court’s analysis that the Appellants had argued that in the alternative to expectation damages (i.e., the normal measure of damages for breach of contract, which puts the aggrieved party in the position that it would have been had the duty been performed), they ought to be entitled to punitive damages or disgorgement of the benefit gained by Cresco as a result of its breach.
However, the Court of Appeal also dismissed this submission, given that the “ordinary contractual measure” would be to award expectation damages, and the issue remained that the Appellants had no entitlement to expect anything given their inability to demonstrate they could have achieved the Revenue Milestone Payment. Moreover, the Court found that both punitive damages and disgorgement for breach of contract would be inappropriate measures – in relation to punitive damages, there was no evidence before the court to suggest that Cresco had been dishonest or untoward, and in relation to disgorgement, there was nothing exceptional about the Appellants’ interest that would justify such a remedy.
The application judge did not err in failing to find that Origin House breached its duty of good faith by impeding the Appellants from achieving the milestones
Finally, the Appellants argued that the application judge erred in failing to find that Origin House breached its duty of good faith.
Though not explicitly stated, this appears not to have been an argument based on a duty of honest performance, but rather a duty of avoiding interfering with a contractual counterparty. However, the fundamental nature of this claim appears to have been muddled by the fact that the Appellants’ relied upon the idea that Cresco undermined the Appellants’ “legitimate expectations and interests”, which concepts were discussed by the Supreme Court in Bhasin v Hrynew in the context of the organizing principle of good faith rather than the duty of honest performance.
In any event, the Court of Appeal also dismissed this argument in short order. Without engaging in or clarifying the nature of the foregoing submission, the Court more straightforwardly observed that the Cresco Transaction could not be contrary to the Appellants’ expectations when it was specifically contemplated in the SPA.
Furthermore, certain provisions of the SPA allowed the Appellants to give notice of a complaint, which they failed to do.
The Cross Appeal
In addition, Cresco cross-appealed that the application judge erred in concluding that Origin House breached its duty of honest performance. Cresco submitted that the application judge erred:
The Court of Appeal acknowledged that referring only to two occasions may not amount to Origin House “repeatedly” advising the Appellants of the closing date. However, the Court of Appeal nevertheless held that there was sufficient evidence to make such a finding, and that “judges do not need to discuss every item of evidence in their reasons.”
Regarding the second error, the Court of Appeal examined a letter from the Appellant’s counsel from November of 2019, which stated in relevant part as follows:
The [Appellants] are nevertheless prepared to refrain from taking legal action to enforce their rights under the [SPA] upon receiving your confirmation that in the event that the [Cresco Transaction] fails to close by January 30, 2020, the [Appellants] will receive the Milestone Payments in the total amount of $12,500,000 and the License Milestone payment in the amount of $2,500,000 to be deposited into their account no later than the close of business on January 31, 2020. [Emphasis added.]
Based on the letter, the Court of Appeal found that the Appellants were aware in 2019 that the closing of the Cresco Transaction could be delayed. Furthermore, this was an error that could not support the application judge’s finding that Origin House breached its duty of honest performance. As a result, the Court reversed this decision and held that Origin House did not breach this duty.
Relatedly, Cresco also sought to introduce fresh evidence.[1] However, the Court dismissed the motion as the evidence at hand did not meet the criteria for admission under the Palmer test.[2] Furthermore, the Court held that admitting such evidence would be contrary to the interests of justice.
Accordingly, the Court of Appeal dismissed the appeal, and granted the cross-appeal.
Bhatnagar provides a welcome insight in interpreting the duty of honest performance. Importantly, this decision suggests that Callow does not create a presumption of damages for a breach of the duty of honest performance, but rather, the claimant must show that on a balance of probabilities, the breach of the duty deprived the claimant of an opportunity to protect its interests or else caused it to lose an opportunity to realize a gain.
This conclusion appears to be a common-sensical one, insofar as the general proposition is that a party must prove its damages (i.e., that the onus of proof rests with the claiming party). It is not clear why any particular contractual duty would deviate from this norm, particularly on the basis of a single clause within one sentence of Callow. To the extent that the burden of proof were to be altered, it stands to reason that such a change must be clearly discussed and established by an appellate court.
However, the Appellants did identify what, in isolation, would appear (at least at first blush) to support arguments for such a deviation. As a result, it would be beneficial for the Supreme Court to clarify this point if and when the opportunity arises.
In any event, one takeaway from Bhatnagar is the need for parties and their lawyers to deliver appropriate evidence when seeking damages for lost opportunity based on a breach of the duty of honest performance. The application judge and Court of Appeal’s conclusions were both fundamentally premised upon the lack of evidence before the Court in that regard.
In addition, the Court’s discussion of the proper measure of damages recalls the discussion between the majority and the concurrence in Callow, whereby the majority concluded that the expectation interest was the appropriate measure of damages (i.e. the claimant should be put in the position it would have been in had the duty not been breached), while the concurrence concluded that the reliance interest was the appropriate measure (i.e. the claimant should be entitled to the loss caused by relying on the dishonesty). Although in practice, these two measures may often be the same, Bhatnagar raises the interesting question of whether reliance damages might be appropriate in circumstances where expectations damages cannot be proven.
At a minimum, such an approach would be more palatable than the possibility of punitive damages or disgorgement, both of which rely on very different justifications than the standard rationale for compensatory damages for breach of contract.
That being said, Bhatnagar also warrants further caution from parties in future. In particular we note as follows:
Taken together, these findings suggest a lack of intentional misconduct on the part of Origin House and Cresco, yet the application judge nevertheless found a breach of the duty of honest performance based on an objective failure to correct the misrepresentation that the transaction would close in 2019.
Notwithstanding that the Court of Appeal overturned the application judge on this point, the foregoing nevertheless supports a recommendation that parties be vigilant in ensuring that their representations to counterparties are, and remain, accurate. Bhatnagar does not suggest that Origin House or Cresco intentionally failed to correct their statements that had become incorrect, yet such unintentional failure may nevertheless be the basis for finding a breach of such a duty.
Similarly, Bhatnagar raises the question of whether the duty of honest performance can be indirectly satisfied. Before the Court of Appeal, Cresco sought to introduce fresh evidence demonstrating that even though Origin House may not have advised the Appellants directly of the delayed closing date, Origin House had publicly released this information to the market though press releases and other documents. Although this evidence was not considered and the Court refrained from addressing this question, it will be interesting to see in future cases if indirect means of communication may fulfill the duty of honest performance. Ultimately, parties should continue to strive to be transparent and forthcoming in their communications with contractual counterparties.
Eric Lee, summer student, assisted with the preparation of this article.
[1] Evidence that existed at the time of the trial, but was not before the trial judge.
[2] Briefly put, the Palmer requires that the additional evidence (1) should generally not be admitted if, by due diligence, it could have been adduced at trial; (2) must be relevant, in the sense that it bears on a decisive or potentially decisive issue in the trial; (3) must be credible, in the sense that it is reasonably capable of belief; and (4) if believed and when taken with the other evidence adduced at trial, could reasonably be expected to have affected the result.
In Haider v Rizvi, 2023 ONCA 354, the Court of Appeal for Ontario found that where the terms and content of a full and final mutual release are not prescribed, the court will imply the terms by interpreting the settlement. Without an agreement to the contrary, a court will only imply what the case law suggests are “standard” or “usual” terms. Below, we review the case and consider the implications of failing to prescribe the form and content of a release in a settlement.
On December 11, 2017, the appellant, Zulfiqur Al Tanveer Haider (“Haider”), the respondent, Syed Aftab Hussain Rizvi (“Rizvi”), and Rizvi’s wife signed Minutes of Settlement (the “Minutes”) which settled all claims arising out of the subject matter of Actions CV-13-480703 and CV-16-547391 (the “Actions”). The Minutes provided that the parties had to enter into a full and final mutual release; however, the form and content of the release were not prescribed. The Minutes also attached an undertaking which provided that specific indemnities would survive the settlement (the “Undertaking”).
In January 2019, when a draft full and final mutual release was provided by Rizvi’s counsel to Haider, Haider’s counsel objected to “the release of unknown claims, and a clause prohibiting the parties from taking proceedings against any other person who could claim over for contribution or indemnity against a releasee” (a “no claims over clause”). The terms of the release were never finalized.
In November 2021, Rizvi brought a motion seeking: (1) a declaration that the parties had reached a settlement of the Actions; (2) an order requiring Haider to enter into a Full and Final Mutual Release as contemplated by the Minutes of Settlement; and (3) an order and declaration that the form of release sent to Haider’s counsel on January 25, 2019 met the requirements of a full and final mutual release contemplated by the Minutes of Settlement.
Haider opposed the motion and argued that r. 49 of the Rules of Civil Procedure – which was relied upon in Rizvi’s notice of motion – was not applicable, that Rizvi was statute-barred because the limitation period had expired, and that if the parties were required to sign a full and final mutual release, then it should not include the release of unknown claims or a no claims over clause.
The Motion Judge’s Decision
The motion judge agreed that Rizvi was entitled to enforce the settlement under r. 49 since “the action in which the settlement was reached had not yet been dismissed”, and rejected Haider’s argument that the limitation period had expired. The parties were required to provide a full and final mutual release, and because the parties had not provided for the content of the release in the Minutes, the motion judge concluded that “they should be required to sign a ‘standard form’ release releasing all claims arising out of the subject matter of the Actions and containing a provision barring claims over”, as a no claims over clause is “‘part of and parcel’ of a standard full and final release”. As such, the motion judge ordered that Haider sign a standard form release, with a no claims over clause.
The Court of Appeal’s Decision
On appeal, Haider submitted that the motion judge erred as follows:
There was no Procedural Defect in the Manner in Which the Case was Brought to Court
Although the Court found that r. 49 was in fact not applicable, it held that it was still appropriate for Rizvi to bring this matter to court by way of motion and that therefore, there was “no [demonstrated] reversible error in the motion judge’s conclusion that the issue could be determined on the motion before her.”
While r. 49 does not apply to non-compliance with a settlement agreement, a motion was still the appropriate way for Rizvi to bring the matter before court as the “commencement of a fresh proceeding to enforce the settlement was unnecessary and would have been inappropriate”. The Court stated that when the issue is not whether the parties concluded a settlement, but some step in its execution, subsequent disputes should be resolved by application, or by common sense within the framework of the settlement to which the parties have agreed. As the motion judge had the jurisdiction to determine the motion, she did not err in hearing and deciding it.
No Limitation Defence to the Delivery of a Release
Regarding the limitations defence, the Court made two key findings. First, the Court found that Haider had not identified an error with the motion judge’s conclusion that Rizvi’s claim arose only at the time that Haider refused to deliver any release at all. On that factual basis, it was clear that the limitation period had not expired.
Further, the Court held that there was no basis for Haider to rely on the expiry of a limitation period. As the delivery of the release was properly sought in the context of a motion in an ongoing action, Rizvi was “not required to start a new action or to amend his pleadings to seek an order for an exchange of releases as part of the completion of the settlement.” Even if no release had been delivered, Rizvi was released by the terms of the Minutes, subject only to the Undertaking.
The Motion Judge ought to have Prescribed the Specific Form of the Release
First, relying on the Superior Court’s decision in Terranata Winston Churchill Inc. v. Teti Transport Ltd., et al., 2020 ONSC 7577 (“Terranata”), the Court found that when the form of release is not prescribed in a settlement, the “content and scope of the release depend on an interpretation of the settlement.”
In Terranata, the Superior Court found that when an offer to settle is silent on the terms of the release, the court’s task is to imply the terms of the release that are consistent with the settlement made by the parties. In this context, a court will imply that the parties agreed to sign a “standard form general release consistent with the settlement”, and would imply only those terms that are ‘standard’ or ‘usual’ as those terms have been interpreted in the case law.
In this case, Haider argued that the scope of the release was overbroad, as it would apply to claims he might have in the future against Rizvi arising out of anything that was raised or could have been raised in the Actions. Haider also objected to the inclusion of the no claims over clause on the basis that he had contemplated and subsequently commenced a new action against unrelated parties in which Rizvi was third-partied.
The Court found that the motion judge ought to have considered Haider’s arguments in the context of the specific terms of the settlement the parties had reached, including the Actions that had been settled and the Undertaking that would survive the settlement.
In addition, the Court observed that it would have been helpful for the motion judge to have reviewed and approved a particular version of a release, with modifications as appropriate to reflect the motion judge’s interpretation of the Minutes and its surrounding circumstances. In this regard, the parties provided two draft releases to the Court, which the Court reviewed. The parties agreed on all the terms except for the inclusion of a no claims over clause and whether that clause should include an indemnity.
The Court held that the full and final mutual release should include a no claims over clause, because the parties intended that – in consideration of the payment of the settlement funds and the survival of Rizvi’s indemnities – the matters raised in the Actions could not be raised again. In that regard, the inclusion of a no claims over clause was “consistent with the parties’ goal of providing a full and final release.” However, by contrast, the Court found that there was no basis for an indemnity in the no claims over clause, as the parties had already bargained for certain indemnities to survive the settlement (which were those included specifically in the Undertaking).
The Court therefore approved the version of the full and final mutual release that contained a no claims over clause, in the form submitted by Haider, and directed Haider to sign and deliver to Rizvi a copy of that release.
Given that settlements are one of the most common forms – if not the most common form – of dispute resolution in the construction industry and in commercial disputes more generally, and given that releases are standard in settlements, it goes without saying that an agreed-upon form of release is critical to achieving a settlement that fully and finally disposes of a given matter.
On that point, Haider v Rizvi offers an important reminder to parties and their counsel to be mindful of arriving at an agreed-upon form and content of the release as part of a settlement. Executing minutes of settlement in the absence of a finalized release runs the risk of a release being ordered that defies one or both parties’ best interests, insofar as the Court of Appeal’s decision indicates that “standard” or “usual” terms as interpreted in the jurisprudence will be implied. In the context of a highly specialized area of practice and/or an especially idiosyncratic dispute that requires complex or unusual terms, the introduction of the “usual” terms into a release might be to both parties’ detriment. Put simply, parties may end up with standard language that does not reflect the deal that one or both parties may have believed it was making.
As the release is an essential part of a settlement, agreeing to finalize the form and content at a later date may expose the parties to risks that neither anticipated at the time of settlement. This is particularly relevant in the construction context, where disputes are often large and complex, and may overlap with subsequent disputes. For example, if the parties have only valued damages up to a certain point in time and the potential future harm to a project is unknown, the parties may agree to settle the dispute at that point in time and leave open the possibility of future liability if additional harm results from certain prescribed circumstances. As a full and final mutual release would usually release the parties from all claims arising from the subject matter of a dispute, parties must be cautious to include specifically what will be released by the settlement.
This case is therefore an important reminder that counsel should be mindful of the “standard” terms of a release, and should specify the form and content of a release whenever a settlement is contemplated. In addition, this case emphasizes the importance of certain types of clauses in a release, such as the no claims over clause and a release of unknown claims, when determining what the “standard” term language is. Finally, a clear understanding of what terms are generally expected to be included in such a release may assist counsel when negotiating release language.