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

 

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