Canada: Arbitrating Lien Claims

Introduction

Arbitration is becoming more and more prevalent as a means to resolve construction industry disputes, including claims under the Construction Act. Many standard form contracts in use in Canada now provide for a tiered dispute resolution process culminating in arbitration following unsuccessful negotiation and mediation. Under some contracts, parties agree to make arbitration mandatory, others make arbitration voluntary. Under the CCDC 2, for example, parties must arbitrate once one of the parties refers the matter to arbitration, while the OAA 600 – 2021, makes arbitration subject to mutual agreement after the dispute arose.

Arbitration has been defined as a process in which two or more parties submit a dispute to a neutral third person or persons and contract with each other to be bound by that person's determination of their dispute: D.W. Glaholt, M. Rotterdam, The Law of ADR in Canada: An Introductory Guide, 3^rd ed. (Toronto: LexisNexis, 2022) at p. 64.

The power of an arbitrator, or arbitration panel, to decide a dispute must be granted to the arbitrator by the parties to the arbitration. You must agree to arbitrate. You can agree before a dispute arises, or after a dispute arises, but you must agree.

Arbitrators make final and binding decisions which are enforced as a judgment of the court. Unlike court decisions, however, arbitration decisions are not published. Arbitrations do not take place in public. Although evidence in an arbitration is often transcribed, just like it is at a trial, none of this evidence is available to the public.

Arbitration looks and feels a lot like litigation. There are still pleadings, hearings, rulings, and evidence, but the arbitrator and the parties have almost unlimited scope to shape the proceeding to the parties' needs. Provided that each party is given an equal opportunity to make its case and meet the case made against it, parties can work with the arbitrator to make the proceedings as efficient as possible for the kind of dispute in question.

Most arbitration clauses are of the "final and binding" type, which means that unless the arbitrator exceeds his or her jurisdiction, or does something very wrong, the arbitration "award" is final and binding and enforceable without appeal. Some arbitration clauses allow for limited rights of appeal on errors of law. If the arbitrator sticks to his or her jurisdiction, however, and does a reasonable job of determining and applying the applicable law to the facts as presented by the parties, the chances of overturning an award on appeal are slim to none.

Arbitration can be cheaper than litigation, but not always. You must work with the other side and your arbitrator to make that happen. Arbitration is much more adaptable than litigation. With a little co-operation from the other side and a little assistance from your arbitrator, arbitration can be made to fit the case, instead of fitting the case to the arbitration. Usually the shorter the arbitration, the cheaper it is for the parties. Too short, however, and the parties may not feel they got an opportunity to make their cases or respond to the case made out against them. Too long, and the parties will wonder why they chose arbitration over litigation.

The parties are free to make their own rules or adopt one of the many existing rules already in place. The CCDC, for example, publishes Document 40 – Rules for Arbitrations and Mediations. These are very useful as a guide. In addition, the Ontario Arbitration Act, 1991 provides access to Ontario's courts in aid of arbitrations.

The choice of arbitrator is important. You want an arbitrator (or panel) that is experienced. The fact that an arbitrator is chosen for his or her subject matter expertise will be a consideration in the court's review of their conduct of the arbitration. Courts will give such arbitrators considerable latitude in establishing the facts of the case: see Dufferin v. Morrison Hershfield, 2022 ONSC 3485.

There are two types of expertise: subject matter expertise and process expertise. Subject matter expertise means working knowledge about your industry and the sources of disputes in that industry. Process experience means working knowledge of dispute resolution, including how trials work, how pre-trial processes work, how evidence works, how counsel work, and, most importantly, how to write a good, binding award based on the law and facts of the case that does real justice among the parties. Usually, this experience is found in former judges and senior lawyers. This experience can also sometimes be found in senior engineers with several completed, litigated claims in their CVs. With a sole arbitrator, you need both kinds of experience in one person. With a three person "arbitral tribunal" the chair should have strong "process" experience, and the two other appointees can add the "subject matter" expertise.

Arbitrability of Lien Claims

Lien claims can be arbitrated. Neither s. 4 nor s. 5 of the Construction Act preclude the arbitration of lien claims. Section 62(6)(b) of the Act expressly contemplates joinder in a lien action of persons with perfected liens whose lien actions are stayed by reason of an order under the Ontario Arbitration Act, 1991.

In Automatic Systems Inc. v. Bracknell Corp. (1994), 18 O.R. (3d) 257, the Ontario Court of Appeal held that the Construction Lien Act anticipates that some issues will be resolved by arbitration and expressly accommodates arbitration. The court held that in light of the strong commitment made by the legislature to the overall policy of commercial arbitration through the adoption of the International Commercial Arbitration Act and the Model Law, it would require very clear language to preclude arbitration, and the court found no such language in the Ontario Act. The court further held that no distinction should be made in this regard between domestic and international arbitration or, for that matter, between domestic and interprovincial arbitration.

The Supreme Court of Canada, in Desputeaux c. Éditions Chouette (1987) inc., 2003 SCC 17, held that parties have virtually unfettered autonomy in identifying disputes that may be subject of arbitration proceeding, pretty much ending the debate on arbitrability in Canada. Consequently there are few if any things that an arbitrator cannot decide between parties to an arbitration agreement.

As discussed above, an arbitrator's power to decide a dispute flows from an agreement by the parties to give the arbitrator that power. Therefore, there will likely be no issues where no parties other than the arbitrating parties are affected by the arbitration.

However, things become complicated when one tries to bind non-parties, or, in a lien context, even complete strangers to the construction contract involving the arbitration clause, such as a mortgagee for example.

In any given case, there may be ten lien claimants and no dispute about the amount of holdback to be shared. Two of the ten lien claimants go into an arbitration with the owner and the general contractor, and an arbitral award determines the size of their liens and therefore their right to participate with the other eight lien claimants, who are not parties to the arbitration.

In another example, an owner and general contractor agree to arbitrate. The mechanical and electrical subcontractors join the arbitration. The arbitrator's finding on the amount of holdback as between owner and general could not be binding upon other subcontractors, who might argue that it should be more. The parties to the arbitration might agree to the amount of holdback, but why would that bind the other subcontractors who did not participate in the arbitration? These issues become important when it comes to staying proceedings in favour of arbitration.

Stay Issues

Where parties to a lien action have agreed to have disputes arbitrated, an application for an order directing the parties to proceed with the arbitration should generally succeed and the arbitral issues incorporated into the lien proceeding should be stayed until the completion of the arbitration.

There are two bases for stays, s. 7 of the Arbitration Act, 1991 and s. 106 of the Courts of Justice Act. Section 7 of the Arbitration Act, 1991. The reason both provisions are important in an arbitration context is that s. 106 is available to both the plaintiff and the defendant, while s. 7 is available only to "another party", i.e., not the party that commenced the action.

Another important distinction is the mandatory language in the Arbitration Act compared with the discretionary language in the Courts of Justice Act. Where the applicant for a stay moves under s. 7, the stay of the court action must be granted, subject to certain limited exceptions. Where the applicant for a stay is also the plaintiff in court and therefore has to move under s. 106, i.e., where a party seeks to stay its own proceeding, the stay is discretionary.

As pointed out above, things become more complicated when multiple parties and multiple issues are involved.

Generally speaking, s. 138 of the Courts of Justice Act tasks the courts with avoiding a multiplicity of proceedings. The question therefore arises as to if and when courts should enter a stay to prevent a multiplicity of proceedings that might arise when a dispute (or aspects of it) is both litigated and arbitrated. Courts have generally held that the prospect of a multiplicity of proceedings in and of itself is not a valid reason for refusing to refer the parties to arbitration.

However, until recently, courts have sometimes refused to stay an action in the face of numerous proceedings raising various issues, among them the validity and timeliness of liens, which were outside the scope of the agreement to arbitrate. See, for example, Tricin Electric Ltd. v. York Region District School Board, 2009 CarswellOnt 2452 (S.C.J.).

Similarly, courts have refused to stay proceedings between a general contractor and an owner-developer where the general contractor would have been required to contemporaneously or subsequently relitigate many of the same issues in court with subcontractors and sub-subcontractors who had registered liens. In Carillion Construction Inc. v. Imara (Wynford Drive) Ltd., 2015 ONSC 3658 (Master), an owner/developer had waited seven months after the action was started before applying for a stay, resulting in a large quantity of lien claimants being added. The court held that having started its own action, the owner/developer had waived arbitration and was estopped from invoking it. If the stay had been granted, there would still have been over 50 liens claims left in court, which the general contractor/construction manager would have had to respond to. In those circumstances, being forced to participate in the arbitration and also litigate the same issues in court with the subcontractors would have constituted unfair treatment of the general contractor/construction manager. The distinguishing factor in that case, however, was the absence of a harmonized arbitration process among all levels of contractors on the project. Had there been such a process, the court would likely have granted the stay:

The Supreme Court of Canada and the Ontario Court of Appeal have now clarified the availability of arbitration where multiple proceedings would result. In TELUS Communications Inc. v. Wellman, 2019 SCC 19, the Supreme Court of Canada ruled that when arbitrable and non-arbitrable matters are combined in a single court proceeding, under s. 7(5) of the Ontario Arbitration Act, 1991, the motion judge cannot refuse to stay the court proceeding in respect of the matters dealt with in the arbitration agreement. Commenting on this case, the Ontario Court of Appeal held that Wellman expressly overturned earlier case law on the interpretation of s. 7(5) in which courts refused a stay and allowed the action to proceed on the basis that only some of the litigants were bound by an arbitration clause and the claims were so closely related that it would be unreasonable to separate them.

In Vale Canada Limited v. Royal & Sun Alliance Insurance Company of Canada, 2022 ONSC 12 (S.C.J.), the court summarized this new line of cases as follows:

Therefore, it is now clear that unless a basis to refuse the stay exists under s. 7(2) of the statute, the unreasonableness of bifurcating the proceedings under s. 7(5) on its own does not authorize the court to refuse the mandatory stay of the proceeding: Star Woodworking Ltd. v. Improve Inc., 2021 ONSC 4940. Cases like Tricin Electric, mentioned above, are therefore no longer good law.

What is less clear is how all of this would look in practice in a complex lien proceeding with multiple parties. In the above example where an owner and general contractor agree to arbitrate, the mechanical and electrical subcontractors join the arbitration and the arbitrator makes a finding on the amount of holdback as between owner and general, what happens with the other subcontractors who did not participate in the arbitration?

It seems that there are two ways to address these issues. The first is the one taken by the parties in Cityscape. Parties on any given project should ensure that a harmonized arbitration process among all levels of contractors on the project is in place.

A second way would be to refer the matter to the chosen neutral under s. 58(1)(b) and turn the whole process into a reference, thus giving the "arbitrator" all the jurisdiction, powers, and authority of the court to try and completely dispose of the action and all matters and questions arising in connection with the action. If that route is taken, of course, parties must be aware that their dispute is now subject to the Construction Act rather than the Arbitration Act, 1991, with all that entails. Instead of getting an award under the Arbitration Act, 1991 parties would get a report under the Construction Act, which would mean, among other things, that appeals would be governed by s. 71 of the Construction Act rather than the much more limited options available under ss. 45 and 46 of the Arbitration Act, 1991. Also, once a motion is made to the Superior Court to oppose confirmation of the report, nothing is confidential any longer. In other words, while references do offer jurisdictional advantages, many of the core reasons why parties choose arbitration are lost.

Originally published June 05, 2023

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.