Thomas G. Heintzman

Thomas G. Heintzman

Academic Qualifications: Harvard University (1962, BA cum laude in economics)University of London (1967, LLB)Osgoode Hall Law School (1966, LLB silver medallist)Alberta Bar Admission 1990 (retired)

Newfoundland Bar Admission, 1977 (retired)

Ontario Bar Admission, 1968

Professional Memberships: Law Society of Upper Canada, Law Society of Newfoundland, Canadian Bar Association, American Bar Association, Advocates Society, International Bar Association, Fellow American College of Trial Lawyers, Fellow of the International Academy of Trial Lawyers. ADR Institute of Ontario, Toronto Commercial Arbitration Centre, Fellow Chartered Institute of Arbitrators. Mr. Heintzman is a past President of the Canadian Bar Association 1994-1995, past President of the Ontario Bar Association 1989-1990, and a past Bencher of the Law Society of Upper Canada 2003-2011.
Arbitration Experience:Tom Heintzman has acted as counsel in trials, appeals, and arbitrations in Ontario, Newfoundland, Manitoba, British Columbia and Nova Scotia and New Brunswick.  Mr. Heintzman has been active in corporate commercial disputes relating to securities law, shareholders rights, government contracts, broadcasting and telecommunications, construction, franchise and environmental law.  He was the mediator in the amalgamation of three of Toronto’s major hospitals. As a bencher of the Law Society of Upper Canada Mr. Heintzman wrote numerous decisions as an adjudicator in Law Society conduct hearings.
ADR Specialization:
Banking/Financial
Commerical
Construction/Engineering
Healthcare/Medical
Professional Liability
Franchise
Firm:
Heintzman ADR
Address:
Arbitration Place, Bay Adelaide Centre, 333 Bay Street, Suite 900
Toronto ON M5H2T4
Phone:
416-848-0203
Email:  tgh@heintzmanadr.com
Website:
www.constructionlawcanada.com

 

Alberta Court Issues Wide-Ranging Judgment On Settlement and Mediation of Arbitrations

In Pinder v. Woodrow, the Alberta Court of Queen’s Bench recently issued a judgment addressing a number of arbitration and mediation issues. The judgment arose from a settlement that in turn arose from a mediation conducted during the course of the arbitral hearing. As a result, the court dealt with a number of issues that are not frequently addressed in arbitration law. In particular, the judgment of the court dealt with the formalities –or lack thereof- that should be met in conducting a mediation and concluding a settlement during an arbitration. In Canada, there are two regimes relating to whether arbitrators may act as mediators. So this decision, while it involved a matrimonial dispute, is of interest to all those engaged in arbitral law.

Background

The parties entered into an arbitration agreement to deal with a number of matrimonial issues.  The agreement was subject to the Alberta Arbitration Act (the Act).  The agreement stated that the arbitration award would be delivered within 30 days of the close of the hearing “subject to any reasonable delay due to unforeseen circumstances.” The award was to be in writing and to set out the facts found by the arbitrator, apply the relevant law and the determination of the issues in dispute. The agreement provided for an appeal to the Court of Queen’s Bench on a question of law, or with leave of the Court on a finding of fact involving a material misapprehension of the evidence.

While evidence was being given during the hearing, the parties entered into settlement discussions. The Arbitrator acted as the mediator with the agreement of the parties. The parties reached a settlement agreement. Both parties, through their counsel, advised on the record that they were in agreement with the terms of the Settlement Agreement as a final settlement. The Arbitrator submitted his final statement of account three days later.

The settlement agreement was set out in a document entitled “Settlement Terms”. It was signed by the Arbitrator, both of the parties, together with their respective counsel. It included a term that any dispute involving the content of the agreement was to be referred to the Arbitrator for binding determination.

The parties then acted in accordance with that document. The husband commenced paying child support, the wife transferred property to the husband. The husband made repeated demands that the wife comply with all aspects of that document.

Two months after the document was signed, the wife’s counsel applied to the arbitrator for relief, taking the position that the arbitration had been adjourned and that it was still open to the arbitrator to continue the arbitration and issue a final award. The wife alleged that the arbitration had not been formally concluded and that it was still open to the parties to reach a full and final settlement, that the settlement document was not an Arbitral Award within the meaning of the arbitration agreement or the Act, that errors were made during the process that necessitated a remedy; and that the arbitrator retained jurisdiction to deal with these matters.

Counsel for the parties appeared before the arbitrator. After that appearance, the arbitrator issued a written decision in which he stated that the settlement agreement was his final award and he refused to grant any relief to the wife.  The next day, the wife filed an application appealing the arbitrator’s decision of the prior day.

Decision of the Court

The judge hearing the application made a number of decisions:

  1. Reasons for Decision in a Settlement: The requirement, in s. 36 of the Act – that an arbitrator give reasons for decision – does not apply when the parties settle the dispute during the arbitration.
  1. Ingredients of an Arbitral Decision: The settlement agreement complied with the other requirements of s. 38 of the Act, namely that it be signed by the Arbitrator, and indicate the date and place where it was made. The settlement document should be examined in conjunction with the executed Certificates of Independent Legal Advice, the Matrimonial Property Act acknowledgements signed by both parties and their counsel, the attachments to the agreement, and the content of the record from December 13, 2013 in which the parties confirmed their agreement with the settlement. In totality, those documents set forth the date of the settlement agreement and the place where it was made.
  1. Settlement Document may be an Arbitral Decision: The fact that the document was entitled “Settlement Terms” and was not referred to as an arbitration award was of no significance. “It was, in fact, an arbitral award and treated by all concerned as such until a much later date, well after the expiration of the 30 day appeal period…Further, there is nothing in the Act or the agreement which prescribes the form of an arbitration award, just that it comply with the requirements of s. 38.”
  1. Natural Justice, Fairness and Equal Treatment: While the wife was not present during some portions of the hearing, her counsel was present. Accordingly there was no breach of the rules of natural justice nor did the process result in either unfair or unequal treatment of the wife.
  1. Process for converting from Arbitration to Mediation: The conduct of the parties during the hearing – leading to the mediation – was sufficient to satisfy the requirements of s. 35(1) of the Act relating to the conversion of the arbitration to a mediation.

Subsection 35(1) says: “The members of an arbitral tribunal may, if the parties consent, use mediation, conciliation or similar techniques during the arbitration to encourage settlement of the matters in dispute.” (emphasis added)

The parties’ conduct during the arbitral hearing was a sufficient “consent” by the parties to convert the arbitration into a mediation. The court held that there was no need for that process to be “explicit, formal, on the record and take place in advance of the conversion of the process.” The Act contains no ‘formula or “recipe”’ for that consent, and that is “consistent with the overall objective of the legislation – to provide a flexible mechanism to litigants that potentially assists them in the resolution of their dispute outside of the formal court process….Both parties were represented by experienced counsel throughout the process. From their agreement to submit this matter to arbitration, the parties must be assumed, in the absence of any evidence to the contrary, to have understood the flexible nature of the process, including that the process could shift from one mode of dispute resolution to another as circumstances dictated.”

The judge did say that “it would have been preferable if the transcript had recorded the proceedings that led the parties and the Arbitrator to shift from arbitration mode to mediation mode.” However, there was no evidence indicating a lack of consent, and there was “very explicit agreement of both parties that is contained on the record at the conclusion of the proceedings.” On the whole record, the judge was satisfied that the parties had consented to shifting from an arbitration to mediation and that the requirements of s. 35 were met.

  1. Time to Appeal: The wife’s appeal was outside the 30-day period in the Act for an appeal to be brought. The settlement document was a valid arbitration award within the meaning of s. 38 of the Act. Once the 30-day period expired after the release of that document, then the arbitrator no longer had jurisdiction over the dispute. Neither the Act nor the agreement between the parties allowed for an extension of the 30-day period. The arbitrator’s later decision which dismissed the wife’s application to re-open the matter was of no legal significance or consequence, even though it was entitled “Arbitration Award”.

Discussion

This decision will be a useful reference anytime settlement discussions occur during an arbitration, and anytime the parties consider engaging in mediation during an arbitration.

The first issue is: how should the parties and the arbitrator record the process by which a settlement is reached during an arbitration?

Section 35(1) of the Alberta Arbitration Act says that “the members of an arbitral tribunal may, if the parties consent, use mediation, conciliation or similar techniques during the arbitration to encourage settlement of the matters in dispute.” (emphasis added) And subsection (2) then says that “after the members of an arbitral tribunal use a technique referred to in subsection (1), they may resume their roles as arbitrators without disqualification.” These subsections state the premise behind section 36 and the policy behind the Alberta Act, namely, that members of the arbitral tribunal may mediate the dispute if the parties consent, and then if the mediation is unsuccessful, they may revert to their position as members of the arbitral tribunal.

This policy position is quite different than that in some other provincial arbitration statutes. Thus, the Ontario Arbitration Act, 1991 states as follows: “The members of an arbitral tribunal shall not conduct any part of an arbitration as a mediation or conciliation process or other similar process that might compromise or appear to compromise the arbitral tribunal’s ability to decide the dispute impartially.”

However, section 3 of the Ontario Act says that, except with respect to certain specific sections, the parties may contract out of the Act. Section 35 and the section dealing with appeals (section 45 in the Ontario Act) are not listed in section 3, so the parties may contract out of them. In addition, under the Ontario Act, the parties could still engage in settlement discussions and mediation: the only prohibition (unless the parties otherwise agree) is that the members of the arbitral tribunal cannot be the mediators.

[This distinction in policy choices is expressly contained in the Uniform Arbitration Act of the Uniform Law Conference of Canada. Section 35 of the Uniform Act contains an Option A and an Option B. Option A is the one chosen by Alberta. Option B is that chosen by Ontario. The Commentary to Section 35 states:

“Enacting jurisdictions may choose either to allow the arbitrators to practise mediation and conciliation or to forbid them from doing so. The Uniform International Commercial Arbitration Act allows the arbitrators to engage in mediation on the consent of the parties. The present statute provides for a single consent at the beginning of mediation, without a separate consent when the arbitrator goes back to arbitrating, the mediation presumably having failed. The reason for eliminating the double consent found in the international statute was to prevent a party from subverting an arbitration in bad faith at the end of mediation, by refusing consent to return to arbitration. The reason for forbidding a change of role is that a mediator or conciliator may learn things from one party in confidence that he or she may not disclose to the other parties. Knowing this information might be perceived to prevent a judicial disposition of the case on the merits if the person then returns to arbitration.”]

Section 36 of the Alberta Arbitration Act then says that “If the parties settle the matters in dispute during arbitration, the arbitral tribunal shall terminate the arbitration and shall record the settlement in the form of an award.” As noted above, section 38(1) says that “An award shall be made in writing and, except in the case of an award made under section 36, shall state the reasons on which it is based.” (emphasis added).

So it is seems clear that a settlement during an arbitration should be recorded in something called “Award”, even though most litigation counsel might consider a settlement agreement to be an agreement between the parties, not an “award” of the tribunal. It also seems clear from section 38(1) that the settlement “Award” will not contain reasons, and the judge so concluded.

Sub-sections 38(2)-(4) of the Alberta Act say that: an award shall “indicate the place where and the date on which it is made” and “be dated and signed by all the members of the arbitral tribunal, or by a majority of them if an explanation of the omission of the other signatures is included”; and that “a copy of an award shall be served on each party.” (emphasis added) In these subsections, there is no exception for settlements under section 36. So, while one may wonder why these requirements should apply to a settlement, it seems that they do and that they must be met even if the “award” is a settlement.

Under sections 36-38 of the Ontario Act, these requirements apply to a settlement “Award”, even though the members of the arbitral tribunal cannot be the mediator.

The court in the present case demonstrated flexibility in considering all the surrounding facts in order to ensure that the technical requirements of section 38(2)-(4) are met. However, arbitrators and arbitral parties should be aware of these requirements – date, place, signature, service. These requirements should be addressed in the document which the arbitral tribunal issues as its “award” or in some other formal documentation, so that other documents or the surrounding circumstances do not have to be relied upon to provide those elements.

The second issue is: how should the parties’ consent to mediation during the arbitration be evidenced?

In the present case, the judge was satisfied by all of the surrounding evidence – and particularly the documentation after the settlement was made – that the parties had consented. But the judge did say that it would have been better if the “conversion” from arbitration to mediation had been recorded in the transcript of the hearing before the mediation commenced, and possibly in some formal Consent signed by the parties at that time. So counsel and arbitral tribunals in the future might be well advised to adhere to this advice in the future.

Should these requirements, and the same approach to them, apply if the members of the arbitral tribunal cannot be the mediator, as in Ontario (unless the parties contract out of section 35 of the Ontario Act)? Could one argue for a more lax – or stricter – regime when the mediator is a separate person? We will have to await a further decision on that point.

A third issue may be raised by this decision: if the wife’s application to the court related to the conduct or legal issues arising from her application to the arbitrator the day before (what might be called the “re-hearing application”), would it have been out of time?

In the present case, the wife appears to have been complaining about issues that related back to the matters leading up to the settlement. She does not appear to have been complaining about the specific events or legalities of her re-hearing application the day before to the arbitrator. In this situation, the arbitrator and the court found that her application was out of time. But if she had been asserting that her re-hearing application had not been properly dealt with, how should the court have dealt with the timing issue? Did the arbitrator’s disposition of her re-hearing application amount to an arbitral award from which judicial review or an appeal would lie? Does the Act provide any relief in respect of such an application? The present decision did not have to answer those questions.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed. Chapter 11

Pinder v. Woodrow, 2015 CarswellAlta 2182, 2015 ABQB 750

Arbitration – mediation – settlement – re-hearing application – appeal and review of arbitral awards

Thomas G. Heintzman O.C., Q.C., FCIArb                                   January 24, 2016

 

Arbitration Award Enforced Through The Oppression Remedy

Arbitration law and corporate law are usually thought to be two separate legal categories. But when it comes to remedies, they can overlap, especially in Canada where the oppression remedy is available. In the recent decision in T.Films S.A. Future Films (Three) Ltd. v. Cinemavault Releasing International Inc., the Ontario Supreme Court of Justice relied upon the oppression remedy in the Ontario Business Corporations Act (OBCA) to enforce an arbitral award. Any parties coming to Ontario to enforce arbitration awards against Ontario corporations, or person or corporations affiliated with an Ontario corporation, should be aware of this means of enforcing the award.

Background

The applicants were Luxembourg and U.K. companies which in 2004 entered into a film sales agency agreement with the respondent Cinemavault, an Ontario company. That agreement provided that any disputes under it were to be resolved by arbitration in Toronto in accordance with rules and procedures established by the Independent Film and Television Alliance (IFTA).

The applicants commenced an arbitration seeking to exercise contractual audit rights and for unpaid distribution revenues. The respondents failed to participate in the arbitration and ultimately the arbitrator awarded the applicants damages and costs in the total amount of about US $496,000.00.

The award was not paid and in May 2013, the applicants applied to the Ontario Superior Court to enforce the award. In their application the applicants also sought enforcement of the award by way of the oppression remedy in the OBCA. The applicants also asserted the monies received by the respondents were trust funds held for their benefit. In a prior decision, another judge of Ontario Superior Court had granted judgment enforcing the award and ordered that the balance of the application be dealt with in a separate hearing. In addition, in a further hearing another judge of the Superior Court had dismissed the respondents’ argument that the oppression and trust fund claims ought to have been asserted by way of arbitration.

The Decision

The Court found that the individual person behind the Cinemavault companies had:

“used the Cinemavault companies interchangeably to achieve whatever ends were thought desirable at the time. He cannot, under the law articulated in Sidaplex-Plastic and SCI, supra, treat his corporations’ contractual and financial obligations like an elaborate shell game where, unless the pea happens to sit under the shell selected by a creditor, [the principal] and his companies are judgment proof.”

The court concluded that the re-orgainzation of the Cinemavault companies was “carried out for the purpose, of denuding CRI of its assets such that it was not in a position to fulfill its financial obligations to the applicants under” the sales agreement. The court accordingly concluded that the respondents had acted in a manner which was oppressive and unfairly prejudicial to the applicants.

In making an order against Mr. S., who was a director of Cinemavault, the court said that person was:

“the directing mind of the Cinemavault operating corporations and the corporations, ……. which held the controlling interest over the operating corporations. He derived a direct personal benefit from the reorganization of Cinemavault’s business operations. Funds that the arbitrator found ought to have been paid to the applicants were diverted within the Cinemavault group to [the director’s] ultimate benefit. I conclude, therefore, that qua director [Mr. S]….. through the control he exercised over the Cinemavault companies, acted in a manner which was oppressive and unfairly prejudicial to Cinemavault’s creditors, namely the applicants. I therefore find [the director] to be personally liable for the arbitration award as well.”
The court also found that the funds received from the film distribution were trust funds in respondents’ hands. The Court then found that the respondents had knowingly participated in a breach of trust and knowingly received trust funds which they knew to be the rightful property of the applicants and were therefore liable for the arbitrator’s award for knowing participation in a breach of trust.

Discussion

It is unusual to see an application to enforce an arbitration award combined with other remedies. But this decision demonstrates that there may be more than one arrow in the enforcement quiver.

The oppression remedy is a particularly useful remedy if an arbitral award has been made against a corporation incorporated in a Canadian province. Most of those provinces have a Business Corporations Act or other corporate statute that contains the oppression remedy. The oppression remedy is available if the corporation, or its directors, officers or affiliates have conducted themselves in a manner which is oppression of, or unfairly prejudices the complainant or unfairly disregards the complainant’s interests. In some provinces, such as Alberta, creditors are listed as potential complainants. In other provinces, such as Ontario, creditors are not so listed and the court has to determine that a creditor is a proper complainant.

The oppression remedy usually provides a substantive remedy. That is, it usually addresses the wrongful conduct or management of the corporation which leads to a substantive wrong and the institution of an action or arbitral claim. But it may also provide a remedy after a judgment or award has been obtained, if oppressive conduct occurs which renders the corporation unable to pay the judgment or award. If that occurs, then the oppression remedy may be available to recover against the directors and affiliates who engaged in that conduct.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 10, part 9.

T.Films S.A. Future Films (Three) Ltd. v. Cinemavault Releasing International Inc., 2015 CarswellOnt 112, 2015 ONSC 6608

Arbitration – Enforcement of Arbitral Award – Oppression Remedy

Thomas G. Heintzman O.C., Q.C., FCIArb                                                 January 31, 2015

 

 

 

Grounds For Reviewing Arbitration Decisions are Narrow: BC Court of Appeal

A recent decision of the British Columbia Court of Appeal warned that the grounds for reviewing an arbitral award are narrow. In Boxer Capital Corp. v. JEL Investments Ltd., the court noted that arbitral dispute had gone through two separate arbitrations and nine (yes, nine) judicial proceedings already. The Court of Appeal said: “Surely that procedural history is inconsistent with the objectives of commercial arbitration.” The court held that the motion judge had no basis to over-turn the last arbitral award and re-instated that award.

Background

The issue in the appeal was whether the second arbitrator was bound by principles of res judicata arising from the award of the first arbitrator or the decision of the judge who heard an appeal from that first award. The second arbitrator held that he was not bound by those decisions by reason of res judicata. The judge hearing an appeal from that decision held that the second arbitrator was so bound. I wrote about that decision in my article of February 17, 2014.

From that latter decision an appeal was taken to the British Columbia Court of Appeal.

The B.C. Court of Appeal’s decision

The B.C. Court of Appeal agreed with the arbitrator. The issue turned upon whether the issue before the second arbitrator was the same as the issue before the first arbitrator or the court which heard the appeal from the first award. The Court of Appeal held that it was not:

“Respectfully, Mr. Justice Abrioux erred in characterizing the issues so broadly, and in finding that they had been the same throughout. When the issues are properly framed, it becomes apparent that they are quite different. The issue before [the firs] Arbitrator….., as defined by the parties who chose to submit their dispute to him, was whether the shotgun purchase price under the [Co-Owner’s Agreement, or COA] was $1.425 million or $2.19 million. The issue before[the court on appeal from the second arbitral award], as defined by this Court’s decision granting leave to appeal, was whether [the second] Arbitrator “erred in failing to have regard to established principles of law in deciding that a term should be implied”. Finally, the issue before [the second] Arbitrator, again as defined by the parties, was whether the Boxer Parties had a continuing interest in the venture. These are different issues.”

The B.C. Court of Appeal then concluded:

“It was open to [the second] Arbitrator to construe the COA afresh on the continuing interest issue. It is not for this Court to review the merits of his decision in this regard. His decision is the last word on the interpretation of the COA.”

In the course of making its decision the court made a number of comments about the decision of the Supreme Court of Canada in Creston Moly Corp. v. Sattva Capital Corp., 2014 SCC 53.

First, it distinguished the role of a court in an appeal from an arbitral award from its role in an appeal from another judicial decision; the former role is much more limited than the latter. It said:

Like the present appeal, Sattva dealt with an issue of contractual interpretation. Mr. Justice Rothstein explained that in most cases, issues of contractual interpretation will be important only to the parties themselves, and will not have a broader impact….. However, the role of appellate courts (including the B.C. Supreme Court, when sitting on appeal from an arbitral award) is generally not to provide “a new forum for parties to continue their private litigation” but rather to ensure “the consistency of the law” and decide legal issues of public importance (ibid.). Accordingly, “our legal system leaves broad scope to tribunals of first instance to resolve issues of limited application”…. In sum, “the goals of limiting the number, length, and cost of appeals, and of promoting the autonomy and integrity of trial proceedings … weigh in favour of deference to [arbitrators] on points of contractual interpretation”.”

Second, it said that if the principles in Sattva had been applied in the present case, there might have been no appeal from the first arbitral award and the matter might have ended there:

Sattva held that questions of contractual interpretation should almost always be regarded as questions of mixed fact and law…. (Historically they were seen as questions of law.) This means that, after Sattva, leave will rarely be granted to appeal an arbitral award on a question of contractual interpretation. (If Sattva had been decided earlier, leave arguably would not have been granted to appeal the parties’ initial arbitral award and this lengthy saga would have been avoided.)”

Discussion

As in most debates, defining the question largely defines the answer. The Court of Appeal said this about the exercise involved in defining the question in an appeal from an arbitral award:

“This appeal serves as a reminder of the importance of judicial restraint in the review of arbitral awards, at least in the commercial context. When sitting on appeal from an arbitral award, a court’s jurisdiction is narrow. The inquiry differs fundamentally from a trial, and even from a judicial review of an administrative decision.”

As a result of the new test in Sattva for reviewing arbitration decisions, and the narrow definition of the question involved in the appeal from the second arbitral award, the Court of Appeal held that that question was not the same as the questions in the first arbitration or the appeal from the first arbitral award.

This decision does not mean that the doctrine of res judicata should be applied narrowly by arbitral tribunals. It means that, in reviewing a decision by an arbitrator about that doctrine, the court has a very narrow jurisdiction. If the arbitrator has the jurisdiction to determine whether the doctrine applies or not – and that was not doubted in the present case – then the conclusions of the arbitrator must be accepted, unless the arbitrator’s errors about those matters result in a complete loss of jurisdiction or an error on a pure question of law.

In any event, this decision can go down as Exhibit A about how arbitration can lead to expense and delay if the procedures get out of hand. As I said in my February 12, 2014 article about the lower court decision in this case, “proponents of arbitration may wonder if there are better ways to find speedy justice. The parties selected arbitration presumably to avoid the costs and delays of the court system. That objective was not achieved in the present case.”

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 11, part 3.

Boxer Capital Corp. v. JEL Investments Ltd., 2015 CarswellBC 96, 379 D.L.R. (4th) 712

Arbitration – Appeal – Res Judicata – Standard of Review – Shot-gun agreements

Thomas G. Heintzman O.C., Q.C., FCIArb                                           March 13, 2015

www.heintzmanadr.com

www.constructionlawcanada.com

 

 

No Appeal From Order Appointing An Arbitrator: Ontario Court of Appeal

In a recent decision, the Ontario Court of Appeal has held that there is no appeal from an order appointing an arbitrator. This decision highlights the legislative policy in Canada that the courts should take a hands-off approach to arbitration.

Background

In Toronto Standard Condominium Corporation No. 2130 v. York Bremner Developments Limited, the parties had entered into an agreement called the Complex Reciprocal Agreement (the “CRA”). The CRA related to the management of the common facilities, areas and services of a condominium in a development called Maple Leaf Square. The CRA contained an arbitration clause.

The Condominium Corporation issued a notice of arbitration seeking arbitration under the CRA and the Arbitration Act, 1991 and proposed a named arbitrator. The CRA required the respondents to give notice whether or not they accepted the proposed arbitrator. The responding parties failed to give such notice. The Condominium Corporation then applied to the court for the appointment of an arbitrator, nominating two persons.

Decision of application judge

Before the application judge, the respondents took no issue with the process of proposing an arbitrator and did not object to the individuals proposed by the Condominium Corporation to act as arbitrator. Rather, they submitted that the issues proposed to be arbitrated did not fall within the arbitration agreement, and so there was no point in appointing an arbitrator. The application judge held that there was at least one issue that arguably fell within the jurisdiction of the arbitrator and that an arbitrator should be appointed and determine his jurisdiction, and appointed one of the nominees as arbitrator.

Decision of Ontario Court of Appeal

In the appeal, the respondents sought to argue that the application judge was required to assess each of the issues raised in the notice of arbitration and to refer only those that she determined were arbitrable or at least potentially arbitrable under the arbitration agreement. However, they accepted that the application judge had authority to appoint an arbitrator. They only took issue with the scope of the matters to be referred to the arbitrator.

The Court of Appeal held that the respondents in the application were not entitled to appeal the order appointing the arbitrator. That is because section 10(2) of the Arbitration Act, 1991 states that “[t]here is no appeal from the court’s appointment of the arbitral tribunal.” Accordingly, the respondents appeal was quashed.

The Court of Appeal distinguished its prior decision in Brennan v. Dole (2005), 11 B.L.R. (4th) 169. There, the court held the purported arbitration agreement was not enforceable by the respondents against the appellants. Accordingly, there was no basis for an arbitration proceeding against the respondent, and accordingly jurisdiction at all to appoint an arbitrator.

Discussion

This decision highlights two features of the Ontario Arbitration Act, 1991.

First, the Act states in a number of places that there is no appeal from an order made by the court relating to arbitration. Thus, as noted in this decision section 10(2) says there is no appeal from an order appointing an arbitrator. Section 7(6) says that there is no appeal from a court decision about staying an action when there is an arbitration agreement between the parties. Section 15(6) says that there is no appeal from an order removing an arbitrator (except for an order concerning fees or compensation). Section 17(9) says that there is no appeal from the court’s review of a preliminary decision by the arbitral tribunal as to its jurisdiction.

Clearly, these sections represent a policy that the courts should not be involved in the arbitral process. So if there is to be a review of the arbitral decisions mentioned in these sections, then there is to be only “one kick at the can”, and no more. Since these sections do not involve matters going to the merits of the dispute, the policy is to let the matter rest with no more than one level of court review.

Second, this decision reflects another feature of arbitral law in Canada, namely deference to the arbitral tribunal’s jurisdiction, and respect for the tribunal’s competence to decide its own competence – known as the competence-competence principle. In the present case, the Ontario Court of Appeal held that, as long as it was arguable that the arbitral tribunal had authority over something in relation to the dispute, it was the arbitral tribunal – and not the court – which should first decide what that authority was. Then, a party could seek review of that decision by the court. But in the first instance, the respondent could not require the court to define the jurisdiction of the arbitral tribunal during the arbitral-appointment process.

There is a limit to that deference, however. The courts have allowed appeals if the legal issue or jurisdictional issue is clear. Thus, if a stay of a court proceeding is refused on the ground that no arbitration agreement is in place, then an appeal may be taken since the issue is entirely legal or jurisdictional. And as the Brennan v. Doyle case shows, if on a correct view of the facts and law there is no arbitration agreement applicable to the dispute, then an appeal may be taken from an order appointing an arbitrator.

All of which shows that in Ontario, both the statute and judicial policy are in favour of letting the arbitrator make the first decision about the jurisdiction of the arbitrator, but only if there is an arguable basis for that jurisdiction.

Toronto Standard Condominium Corporation No. 2130 v. York Bremner Developments Limited, 2014 ONCA 809

arbitration – appointment of arbitrators – appeal – competence-competence

Thomas G. Heintzman O.C., Q.C., FCIArb                                                         January 15, 2015

www.heintzmanadr.com

www.constructionlawcanada.com

Contracts Must Be Honestly Performed Says The Supreme Court Of Canada

In its recent decision in Bhasin v. Hrynew, the Supreme Court of Canada has established two fundamental principles for the Canadian common law of contract.

First, parties are under a general obligation to perform contracts in good faith.

Second, the parties have a duty to act honestly in the performance of contracts. These contractual obligations can no longer be relegated to some kinds of contracts or situations. Rather, they are principles that apply to every sort of contract.

It is, perhaps, somewhat surprising that these principles were still in dispute under Canadian contract law and that the Supreme Court had not previously ruled on them. Having now done so in Bhasin v. Hrynew, this decision is of great importance to the common law of contract in Canada and should be well understood by anyone concerned with the performance of contracts.

Background

The following facts were found by that trial judge:

Bhasin and Hrynew were both retail dealers who marketed education savings plans developed by Canadian American Financial Corp. (“Can-Am”).   Bhasin’s agreement with Can-Am was for a term of three years and automatically renewed unless one of the parties gave six months’ notice of termination.

Hrynew was in effect a competitor of Bhasin and wanted to obtain capture Bhasin’s market. On many occasions, Hrynew had proposed to Bhasin that they merge their dealerships and he campaigned with Can-Am to direct such a merger. Bhasin had resisted any such merger. Can-Am appointed Hrynew as the officer to review dealership compliance with securities laws, but Bhasin object to Hrynew reviewing his business records.

Can-Am had discussions with the Alberta Securities Commission about restructuring its agencies. Can-Am did not tell Bhasin about these discussions. Can-Am repeatedly misled B about its future plans for its agencies. When Bhasin continued to refuse to allow Hrynew to review his records, Can-Am gave notice of non-renewal of the agreement. As a consequence, Bhasin lost his business and his workforce went to work for Hrynew.

Decisions of the Trial Judge and Alberta Court of Appeal

Bhasin sued Can-Am and Hrynew.  The trial judge held that Can-Am breached the implied term in its contract with Bhasin that the contract would be performed in good faith. He found that Mr. Hrynew pressured Can-Am not to renew its Agreement with Mr. Bhasin and that Can-Am dealt dishonestly with Mr. Bhasin and ultimately gave in to that pressure.

The Court of Appeal allowed the appeal and dismissed B’s lawsuit. The court held that there was no self-standing contractual duty of good faith in Canadian law. In addition, the court found that Bhasin had suffered no recoverable damages because, quite apart from any alleged bad faith conduct by it, Can-Am was entitled in any event to give notice of non-renewal of the contract.

Decision of the Supreme Court of Canada

The Supreme Court forthrightly stated that it was necessary to clarify – or some might say, reform – the Canadian common law relating to the performance of contracts. Speaking for a unanimous court, this is how Justice Cromwell approached the matter:

“In my view, it is time to take two incremental steps in order to make the common law less unsettled and piecemeal, more coherent and more just. The first step is to acknowledge that good faith contractual performance is a general organizing principle of the common law of contract which underpins and informs the various rules in which the common law, in various situations and types of relationships, recognizes obligations of good faith contractual performance. The second is to recognize, as a further manifestation of this organizing principle of good faith, that there is a common law duty which applies to all contracts to act honestly in the performance of contractual obligations.” (emphasis added)

The Supreme Court explained what it meant by “an organizing principle.” Such a principle “states in general terms a requirement of justice from which more specific legal doctrines may be derived. An organizing principle therefore is not a free-standing rule, but rather a standard that underpins and is manifested in more specific legal doctrines and may be given different weight in different situations.”

Having recognized the organizing principle of good faith performance of contracts, Justice Cromwell held that the court should now recognize a contractual duty of honest performance:

“I would hold that there is a general duty of honesty in contractual performance. This means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. This does not impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from the contract; it is a simple requirement not to lie or mislead the other party about one’s contractual performance. Recognizing a duty of honest performance flowing directly from the common law organizing principle of good faith is a modest, incremental step.”

Justice Cromwell then summarized the position in three paragraphs which should be duly noted for application in future cases:

“A summary of the principles is in order:

(1) There is a general organizing principle of good faith that underlies many facets of contract law.

(2) In general, the particular implications of the broad principle for particular cases are determined by resorting to the body of doctrine that has developed which gives effect to aspects of that principle in particular types of situations and relationships.

(3) It is appropriate to recognize a new common law duty that applies to all contracts as a manifestation of the general organizing principle of good faith: a duty of honest performance, which requires the parties to be honest with each other in relation to the performance of their contractual obligations.” (emphasis added)

Having stated the legal principles, Justice Cromwell found that Can-Am had breached its contractual duty of honest performance. Can-Am wanted to force a merger of the Bhasin and Hrynew agencies, effectively giving Mr. Bhasin’s business to Mr. Hrynew. To accomplish that end, it acted dishonestly with Bhasin throughout the period leading up to its exercise of the non-renewal clause. It told the Alberta Securities Commission that Bhasin’s agency was to be merged under Hrynew’s but it said nothing of this to Bhasin. Can-Am was working to forestall the Commission’s termination of its license in Alberta and was prepared to do whatever it could to forestall that possibility.  When questioned by Bhasin about Can-Am’s intentions with respect to the merger, it equivocated and did not tell him the truth. Nor was it truthful with Bhasin about its dealings with the Commission and the Commission’s intentions, and repeatedly misrepresented to Bhasin that he was bound by duties of confidentiality. Can-Am continued to insist that Hrynew audit Mr. Bhasin’s agency, on the supposed basis that it required to do so by the Commission, even though it arranged for its own employees to conduct the audit of Hrynew’s agency.

The Supreme Court noted that the trial judge had found that this dishonesty on the part of Can-Am was directly and intimately connected to Can-Am’s performance of its agreement with Bhasin and its exercise of the non-renewal provision. The court concluded that “Can-Am breached the 1998 Agreement when it failed to act honestly with Mr. Bhasin in exercising the non-renewal clause.”

Discussion

The decision in Bhasin v. Hrynew is significant on three levels.

First, it firmly establishes good faith performance as an organizing principle in the common law of contract in Canada. From now on, the interpretation of all contractual obligations of performance involves asking this question: is this interpretation consistent with good faith performance? Similarly, the actual performance of contracts can be analyzed by asking this question: does this conduct amount to the good faith performance of the contract?

Second, every contract will now have an implied term that the contract will be performed honestly. In Bhasin v. Hrynew, the Supreme Court noted that Bhasin was not a franchisee of Can-Am. Nor was there any fiduciary obligation between the two parties. Bhasin’s claim was dealt with on the basis of the general law of contract. Accordingly, the court’s conclusions will apply to all contracts.

It appears that the parties cannot contract out of these duties. In the Bhasim decision, the Supreme Court said that “because the duty of honesty in contractual performance is a general doctrine of contract law that applies to all contracts, like unconscionability, the parties are not free to exclude it”. However, Justice Cromwell did say that he would “not rule out any role for the agreement of the parties in influencing the scope of honest performance in a particular context. The precise content of honest performance will vary with context and the parties should be free in some contexts to relax the requirements of the doctrine so long as they respect its minimum core requirements.” In any event, it’s hard to imagine parties to a contract expressly agreeing that ‘dishonest performance of this contract shall be permitted” or words to that effect.

Third, the facts in the Bhasin v. Hrynew case provide good examples of the kind of circumstances that may constitute dishonest contractual performance. Misleading or acting untruthfully toward the other party, particularly in the lead-up to the termination of the contract or contractual rights; misrepresenting the intentions of a regulatory tribunal or dealings with the tribunal; and preferring one contracting party over another in a like position; all have the potential to amount to dishonest performance of the contract.

Honesty is, however, a word which may have different meanings in different circumstances. It may mean one thing for the principles of equity and another thing for the principles of criminal law. Using the conclusions in Bhasin v. Hrynew, Canadian courts will now, through actual cases, develop the scope of that word for Canadian contract law, just like they have with the words “reasonable”, and “good faith”. This is a serious matter for building contracts and one which American courts have wrestled with. Thus, for a cost plus contract, what sort of unjustified additions to the costs amount to “dishonesty”? What sort of mis-management of a project site amount to “dishonesty”? Perhaps we just know it when we see it.

Bhasin v. Hrynew, 2014 SCC 71

Building Contract – Performance – Good Faith – Honest Performance

Thomas G. Heintzman O.C., Q.C., FCIArb                               November 30, 2014

www.heintzmanadr.com

www.constructionlawcanada.com

 

 

 

A Mediation Obligation Is Enforceable Says The Ontario Court Of Appeal

Is a person bound to mediate before commencing an action or arbitration if the contract or applicable statute requires mediation? Or should an obligation to mediate only become effective after an action or arbitration has been commenced? And if mediation is a pre-condition to suing or arbitrating, does the limitation period run before the mediation occurs?

In Madder v. South Easthope Mutual Insurance Co., the Ontario Court of Appeal recently held that if a statutory claims regime states that claimant must seek mediation of the dispute, then the claimant has no claim unless mediation has been attempted. The court also held that, under the applicable no fault insurance regime in question, the claimant had no claim unless the claimant had returned the funds already paid to her.

While this decision was made in the context of no fault automobile insurance legislation, it has real implications for all claims, particularly arbitration claims or claims involving the limitation period.

Background

In July, 2002, Ms. Madder was involved in a motor vehicle accident. She was insured by South Easthope under a no-fault policy for accident benefits governed by the Statutory Accident Benefits Schedule — Accidents on or after November 1, 1996, O. Reg. 403/96 (the “SABS”). She immediately applied for accident benefits pursuant to the SABS and in August, 2002, she began receiving income replacement benefits.

In April, 2003, South Easthope gave Ms. Madder notice that it was terminating the benefits claiming that Ms. Madder was able to resume her employment duties, and in May 2003 South Easthope stopped paying income replacement benefits to Ms. Madder.

In July 2003, before a DAC assessment could take place, and in exchange for a lump sum payment of $3,000, Ms. Madder signed a release in which she released South Easthope from any obligation to pay accident benefits.

The circumstances in which that release was signed were disputed. Ms. Madder said that South Easthope’s adjuster showed up at her apartment and convinced her to sign the release in exchange for the $3,000 and that she felt compelled to accept the settlement. According to South Easthope, Ms. Madder initiated the discussions due to her financial difficulties.

In April 2005, Ms. Madder commenced an action against South Easthope. In August, 2005 South Easthope advised Ms. Madder that she had a statutory obligation to repay the settlement funds received and to mediate the dispute through the Financial Services Commission of Ontario (“FSCO”) before commencing her action. In its defence, South Easthope pleaded that the action should be dismissed because, inter alia, Ms. Madder had not satisfied the statutory prerequisites to litigation.

Motion Judge’s Decision

Each side brought summary judgment motions. The motion judge dismissed Ms. Madder’s motion and granted South Easthope’s motion. The motion judge held that Ms. Madder was obligated to repay the settlement funds and proceed to mediation before she could commence litigation. The motion judge also held that Ms. Madder could not bring the claim as a stand-alone action not subject to the statutory requirements. Her claim was about her right to rescind the settlement agreement and claim accident benefits since the settlement date and such a claim was subject to the mandatory mediation provisions. Her claims of mental distress and bad faith were not independent causes of action but, rather, arose from South Easthope’s alleged breach of the insurance policy.

Court of Appeal’s Decision

The Court of Appeal held that Ms. Madder’s claims, whether asserted in an action or by way of FSCO arbitration, were subject to the statutory obligation to first seek mediation. “Without mediation”, the court said, “the court had no jurisdiction to hear the appellant’s claim.”

The court also held that, before Ms. Madder could assert a claim to rescind the settlement agreement, she was obliged to return any settlement moneys, pursuant to s. 9.1(7) of the automobile Insurance Regulation; and under s. 8.1(8) of the same Regulation she was not entitled to commence a mediation unless she returned the settlement funds.

The court held that Ms. Madder’s claims for conspiracy and bad faith also fell within the statutory regime and could not be asserted in the absence of Ms. Madder instituting mediation and returning the settlement funds.

Discussion

This decision raises, once again, the nature of an “obligation” to mediate. Is it an enforceable obligation, and is it a precondition to the existence of a cause of action? In this decision, the Court of Appeal has answered Yes to both of these questions. But is this the right legal and public policy result?

There is a body of law holding that an obligation to mediate is not an enforceable obligation because it is no more than an obligation to negotiate, which is too uncertain to constitute a legal obligation. The decision of the English Court of Appeal in Sulamerica CIA Nacional de Seugros S.A. v. Enesa Enenharia S.A., [2012]EWCA Civ. 648 is the leading decision to that effect. That decision was discussed in my article dated July 9, 2012 and this issue was also addressed in my articles dated July 27, 2014, Feb. 2013 and July 2014. However, in Madder v. South Easthope Mutual Insurance Co., the Ontario Court of Appeal has concluded, or proceeded on the assumption, that the obligation to mediate is enforceable and disentitles the claimant from commencing proceedings.

Even if the obligation to mediate is enforceable, what is the effect of that obligation? Does it mean that the claimant has no cause of action until mediation occurs, as the Court of Appeal has apparently found? Or does it mean that there is a cause of action but the court or arbitrator can stop it from being further prosecuted until the obligation to mediate is fulfilled? If this is second approach is adopted the result, then the action or arbitration is properly commenced but may be stayed pending a mediation.

There are a number of reason for questioning the approach adopted by the Court of Appeal. If mediation must be sought before a cause of action arises, then Ms. Madder’s cause of action remains suspended. The limitation period has not yet started to run because the mediation has not occurred. That means that Ms. Madder can now seek mediation and pay back the settlement money and go on with her claim. That approach allows actions or arbitrations to be continued long after the events in question have occurred. That, it could be argued, is not a good public policy result.

The other view of the matter is that the cause of action accrued when the insurer terminated payment. It was then that the claimant could start the action. Mediation is an element in the court’s or arbitrator’s jurisdiction to deal with the action, not a pre-condition to the existence of a cause of action. That view reflects the fact that mediation is part of, and not a precursor to, the court’s jurisdiction under the rules of civil procedure. That view would enable the court or arbitrator to stay the action until mediation occurs, if that is appropriate in all the circumstances.

If Ms. Madder, or another claimant, seeks to argue that the limitation period has not run until mediation has occurred, it will be interesting to see what decision the court arrives at. In the meantime, it will be important to pay close attention to a mediation obligation and the limitation period. Proceed with mediation if there is an obligation to do so, but be ready to commence an action or arbitration if the limitation period is expiring based on the events giving rise to the claim, even if the mediation hasn’t been completed.

Madder v. South Easthope Mutual Insurance Co., 2014 CarswellOnt 14500, 2014 ONCA 714

Mediation – Limitation Period – Commencement of proceedings

Thomas G. Heintzman O.C., Q.C., FCIArb                                 November 16, 2014

www.heintzmanadr.com

www.constructionlawcanada.com

 

Eight Rules Of Tender Law Pronounced By The Ontario Court of Appeal

In Rankin Construction Inc. v. Ontario, the Ontario Court of Appeal recently made a number of significant rulings in a tender case. While the rulings were based upon the specific wording of the tender in that case, they were made in the context of a major Ontario highway tender and appear to have wider application.

Factual Background

The Ministry of Transportation of Ontario (MTO) issued an invitation to tender for the widening of Highway 406. The invitation to tender required a bidder to declare the value of imported steel in its bid. The invitation stated that a 10 percent preferential allowance would be granted for domestic steel but that allowance did not apply H-Piles. Rankin did not declare the value of H-Piles as imported steel, believing that its steel qualified as domestic steel even though manufactured outside Canada. A competitor complained that Rankin’s bid was non-compliant and Rankin’s bid was disqualified and the contract was awarded to the second lowest binder.

The trial dismissed Rankin’s claim against Ontario and that dismissal was upheld by the Ontario Court of Appeal but for different reasons.

Rulings of the Ontario Court of Appeal

The Court of Appeal made the following rulings:

  1. Under the formula set forth in Ron Engineering, Contract A governing the tender process arose when bidders submitted their tenders.

This point may seem obvious but other decisions have raised doubts as to when Contract A is formed: Is it the moment before a bid is submitted; or when the bid is submitted, or when the bids are opened or when the bids are published? In this decision the Court of Appeal has said that “Contract A arose when the appellant submitted its tender.”

  1. Contract A was formed with any bidder who submits a bid, not just with a compliant bidder

This is an important point since some decisions, including that of the trial judge in this case, have held that Contract A is only formed between the person issuing the invitation and a compliant bidder. That approach does not make sense since if it is only Contract A that requires the issuer to deal fairly with the bidder in determining compliance. So there must be a Contract A in order for the treatment of compliance to be a binding factor between the issuer of the tender and the bidder. The Court of Appeal was clear that Contract A is formed with any bidder who submits a bid:

“The significance of the appellant’s non-compliance with the tender documents is that, pursuant to the express or implied terms of that Contract A, it may not be awarded Contract B, even if it is the lowest bidder — not that no Contract A is formed. I come to this conclusion based on the language of the Instructions to Bidders, which form part of the tender documents. In this case, the tender offer contemplated that tenders submitted might not be compliant….Paragraph 7.3 of the Instructions to Bidders specifically requires that a bidder include a tender deposit with its tender. This requirement is clearly material. However, para. 11.2 of the Instructions to Bidders also provides that “Tenders not accompanied by a Tender Deposit in the required amount may be rejected.” The fact that the MTO specifically addresses the consequences of the submission of a materially non-compliant tender — when viewed in conjunction with the other provisions in the Instructions to Bidders discussed below — is evidence that it intended that a Contract A come into effect, even if the tender submitted is non-compliant.
Respectfully, the trial judge erred in concluding that the necessary consequence of Ron Engineering referred to in Tercon, is that no Contract A can come into existence where a bid is not materially compliant with the tender documents, without considering the effect of the tender documents. In other words, the terms of the offer to consider bids made by the request for tenders, as reflected in the tender documents, must be scrutinized to determine whether the parties intended contractual relations to arise on the submission of a tender: see M.J.B. Enterprises. In my view, subject to the governing documentation, contractual relations would usually come into existence on the submission of a bid. This is a desirable result: it provides greater certainty as to the rights and obligations of the bidders and the owner, and may reduce the frequency of litigation arising out of the award of tenders.”

  1. The person issuing the invitation to tender has a right, but not an obligation, to investigate the bids

The trial judge had held that in the decision in Double N Earthmovers Ltd. v. Edmonton (City), [2007] 1 S.C.R. 116, the Supreme Court had found that the owner issuing an invitation to tender does not have an implied duty to investigate allegations of non-compliance by a rival bidder, but that the owner has a right to do so. The Court of Appeal agreed:

“…the tender documents do not preclude the MTO from conducting an investigation. They do not expressly provide that the MTO will not investigate any complaints, and I see no basis for implying such a term….Like the trial judge, I reject the appellant’s argument that an owner cannot investigate allegations of non-compliance unless the bid documents specifically give the owner the right to do so or the owner has a written policy that it will do so.

  1. The effect of non-compliance clause and the privilege and discretion clause was that the owner might, but was not obliged to, waive the non-compliance and accept the bid

The privilege clause said that “the Ministry reserves the right to reject any or all tenders, and to waive formalities as the interests of the Ministry may require without stating reasons, therefore, the lowest or any tender may not necessarily be accepted.”

As the Court of Appeal noted, this paragraph “constitutes both what are often referred to in cases involving the law of tender as a “privilege clause” (the right not to accept the lowest or any tender) and a “discretion clause” (the right to waive formalities as the interests of the MTO may require).”

The Court held that this paragraph allowed, but did not require, the MTO to waive a “formalities”:

“In my view, where an owner has the discretion to waive formalities and exercises that discretion reasonably and in good faith, it cannot be sued for failing to waive a “formality” and entering into a Contract B with a non-compliant bidder.”

In arriving at this conclusion, the Court of Appeal apparently considered that “formalities” are what might be called “informalities”, that is, something that is a mere formality and not significant.

Accordingly, the Court of Appeal held that the MTO had the right not to waive the non-compliance in Rankin’s bid.

  1. A formality which could be waived was one which arose honestly and which does not substantially affect cost or the resulting comparative bids and maintains the integrity of the bidding process.

The Court of Appeal gave two reasons for its decision that the non-compliance was in respect of a formality which could have been waived by the MTO.

First, it applied what it called the ‘generous view of “informality”’ of the Supreme Court of Canada in Double N Earthmovers and then held that the non-compliance could have been waived:

“because of the appellant’s honest intention to use Canadian steel and the fact that the outcome, and the cost to the MTO, would have been the same had it declared that the H-Piles are imported steel. The price preference for Canadian steel was a mechanism for evaluating the competing bids. It did not affect the actual price to be paid by MTO to the successful bidder. And the MTO expected that American H-Piles would be used in the project. The appellant’s non-compliance “did not materially affect the price or performance of Contract B” [quoting from Double N Earthmovers], and therefore amounts to an informality….”

The Court of Appeal then gave a second reason: waiving the non-compliance maintained        the integrity of the bidding process. It said:

“I would add the following. Maintaining the integrity of the public bidding process is thought to encourage more bidders to participate in the process. And increased competition, in turn, promotes the public’s interest in the government obtaining the best price possible. Here, the tender process was essentially fair and the appellant’s bid was materially less costly to the public purse. Given this, in my view, a balancing of the public interest in promoting the integrity of the public bidding process so that the government can generally obtain the best prices, against the public interest in the MTO obtaining the best price possible in this particular case for widening Highway 406, also weighs in favour of the conclusion that the appellant’s non-compliance was a formality”.

  1. The owner could not waive a material non-compliance

On its interpretation of the invitation to tender, the Court of Appeal held that the MTO could not waive a non-compliance that was not a mere formality:

“In my view, a requirement that the MTO would not accept bids that were non-compliant, if the non-compliance amounted to more than a “formality”, can in this case be implied in Contract A on the basis of the presumed intention of the parties.”

The Court of Appeal held that, by not waiving the non-compliance in Rankin’s bid, the MTO had adopted the more cautious route in a sensible effort to avoid litigation.

  1. The owner was not obliged to notify bidders of non-compliant bids within 10 days

The tender documents contained two stipulations, as follows:
6.3         Bidders whose Tender has been rejected by the Ministry will be notified of the reasons within 10 days of Tender Opening.

12.1       The Ministry will notify the successful bidder that the Tender has been accepted within 30 days of the Tender Opening.

Paragraph 6.3 appeared in Part 6 of the tender documents headed Unbalanced Bids and Discrepancies. Paragraph 12.1 appeared in Part 12 of the tender documents headed Contract Award Procedures. MTO did not advise Rankin that its bid was non-compliant within the 10 days. Accordingly, Rankin argued that the rejection of its bid was invalid and MTO was obliged to award the contract to it as the lowest bidder.

The Court of Appeal rejected Rankin’s arguments for a number of reasons.

First, it held that paragraph 6.3 only applied to unbalanced bids, not non-compliance:

“….given that para. 12.1 gives the MTO 30 days to determine the successful bidder, I agree with the trial judge that interpreting para. 6.3 to require the MTO to determine whether it will waive “formalities” and, if not, notify non-compliant bidders, within 10 days of tender opening, makes no sense. To require the MTO to notify all unsuccessful bidders of the reasons why it will not accept their bids within 10 days of Tender Opening, would effectively require the MTO to determine the successful bidder within 10 days, rather than 30 days as expressly provided for under para. 12.1.”

Second, paragraph 6.3 did not convert an invalid and non-compliant bid into a valid and compliant bid. As the court said, the clause “does not provide that a “rejection” is invalid if the bidder is not notified of the reasons for the rejection within 10 days of Tender Opening.”

  1. The Exculpatory clause excluded all liability

Paragraph 11.3 of the tender documents said:

“The Ministry shall not be liable for any costs, expenses, loss or damage incurred, sustained or suffered by any bidder prior, or subsequent to, or by reason of the acceptance or the non-acceptance by the Ministry of any Tender, or by reason of any delay in acceptance of a Tender, except as provided in the tender documents”.

The Court of Appeal applied the tests in the Supreme Court of Canada’s decision in Tercon to determine the proper interpretation and enforceability of this exclusion clause. It found that the paragraph was a complete defence to any claim in the present circumstance. Rankin did not argue that the clause was unconscionable or unenforceable due to public policy. Rather it argued that the paragraph did not apply if MTO breached the conditions of tender. The court rejected that argument:

“The language is in my view clear — both in the paragraph itself and in the context of the Instructions to Bidders as a whole. A bidder presumably would not sue unless it alleged that the MTO had breached a term — express or implied — of the tender documents by accepting another’s bid, or not accepting its bid. To interpret para. 11.3 as not applying where a breach by the MTO of the tender documents is alleged would effectively render it meaningless. Paragraph 11.3 is a commercial response to the increased litigation faced by owners arising out of the acceptance, and corresponding non-acceptance, of bids.”
The court did say that in some circumstances the “the conduct of the owner in the bid process is so aberrant that it would justify a court’s refusal to enforce an exculpatory provision in the tender documents on public policy grounds. This is not such a case.”

Comments

The first three principles adopted by the Court of Appeal are helpful clarifications of the tender law relating to Contract A.

Principles 4 to 6 are more contentious since they involve three possible layers of discretion. The first layer involves the determination of the boundary between the two categories. Clearly, the court is hesitant to interfere with the owner’s determination that the non-compliance is a mere formality or is a substantial non-compliance. The second layer of discretion is introduced by the court’s finding that the tender documents allow the owner to waive something which is a mere formality. But the third level of possible discretion goes the other way. The court interpreted these tender documents as not giving the owner the discretion to waive material non-compliances. Differently worded tender documents might change either of these latter two discretions, requiring the owner to waive a mere formality or allowing the owner to waive a material non-compliance, but it seems that tender documents would have to be clearly written to achieve the latter result.

Principle 7 involves principles of contract interpretation that were used to rescue MTO from what were less than well-drafted tender documents. Besides arising from an analysis of the different parts of those documents, the principle appears to be based on a distinction between the substantive and procedural provisions of tender documents. The owner’s failure to follow the procedures – giving the bidders notice of non-compliance – cannot convert what is a non-compliant bid into a compliant bid.

Principle 8 is probably the most important and contentious. The Court of Appeal appears to have held that the exclusion clause drafted by MTO is the elusive “magic bullet” that removes all the owner’s liability arising from breach of any term of a tender. The court was at pains to say that egregious conduct by the owner might, in another case, not be protected by this exclusion clause. But absent such conduct, the court appears to have held that this clause gives the owner complete protection in respect of the tender.

If that is so, then many questions arise. Is there a Contract A at all? What is the consideration for the contractor’s bid if the contractor has no effective remedies? If the owner inserts such a sweeping exclusion clause into the tender documents, should the contractor be able to say that there is no Contract A and withdraw its bid? Or is such an exclusion clause so sweeping that it is contrary to public policy or unconscionable from the standpoint of the law of contract formation – something not argued by Rankin. Further cases may have to explore the answers to those questions.

Rankin Construction Inc. v. Ontario, 2014 CarswellOnt 12595, 244 A.C.W.S. (3d) 79

Construction Law – Tenders – Waiver – Non-Compliance – Exclusion Clauses

Thomas G. Heintzman O.C., Q.C., FCIArb                                                     October 26, 2014

www.heintzmanadr.com

www.constructionlawcanada.com

 

Upcoming Events

side-bl-line


The TCAS Gold Standard Course in ArbitrationTM* commencing on September 16th.


search-for-arb-btn


TCAS provides a searchable member database to assist you in selecting an Arbitrator/Counsel.


search-for-arb-btn

Not a Member of TCAS yet?


signup-arb

side-bl-line-btm

Service Providers