A recent Alberta court decision considered the enforceability of a mandatory arbitration clause in a construction project gone wrong.
What Happened?
The plaintiff hired a construction company to do home renovations. The contract was dated November 2011 and work started that month. It was to have been completed by the end of July 2012.
Part of the contract between the parties contained the following arbitration clause:
9.1 If any dispute arises between the Builder and the Owner with respect to any matter in relation to this Agreement, the dispute shall be settled through binding arbitration, before a single arbitrator, in accordance with the Arbitration Act (Alberta). It is agreed that there shall be no appeal on questions of fact or law from the decision of the arbitrator.
The construction company’s work ended in May 2012, not because the work had been completed in accordance with the contract, but because they were asked to stop.
In January 2014, the plaintiff hired an inspector who found a number of deficiencies in the work. The construction company was asked to rectify the deficiencies but they refused. They also denied responsibility.
The plaintiff filed a lawsuit against the construction company on May 4, 2014, which was within two years of the May 11, 2012 termination. He did not file anything relating to arbitration.
The construction company filed a defence in June 2014, in which they raised the issue of mandatory arbitration under the parties’ contract. However, they did not raise the issue of staying the proceedings under s. 7(2) of the Arbitration Act until nearly two years after the lawsuit started.
Issue
The question was whether the plaintiff’s lawsuit could continue in the face of a mandatory arbitration clause.
The Law
Section 7 of the Arbitration Act provides:
7(1) If a party to an arbitration agreement commences a proceeding in a court in respect of a matter in dispute to be submitted to arbitration under the agreement, the court shall, on the application of another party to the arbitration agreement, stay the proceeding.
(2) The court may refuse to stay the proceeding in only the following cases:
(a) a party entered into the arbitration agreement while under a legal incapacity;
(b) the arbitration agreement is invalid;
(c) the subject‑matter of the dispute is not capable of being the subject of arbitration under Alberta law;
(d) the application to stay the proceeding was brought with undue delay;
(e) the matter in dispute is a proper one for default or summary judgment.
Decision
The court began by noting that under s. 7(1) of the Arbitration Act, a court must stay proceedings in the presence of an arbitration agreement, unless one of the exceptions in subsection (2) applies. Specifically in this case, the court had to consider whether the s. 7(2)(d) exception applied due to the late stage at which the stay was raised by the construction company.
After reviewing the conduct of the parties, the court ultimately found that the application to stay the proceedings had been brought with undue delay pursuant to the exception under s. 7(2)(d) of Arbitration Act, stating:
“In this case the [construction company] did not object to the lawsuit in a timely way. It took steps in the lawsuit, including raising defences on the merits. I acknowledge that the arbitration provision was in the defence but [it was] only acted upon with great delay and with knowledge of the right. In my view, the [construction company], by its conduct, led the Plaintiff to believe that [its] strict rights under the contract would not be insisted upon. It only objected when the default was certainly too late to cure.”
As a result, the court refused to stay the action.
Get Advice
The knowledgeable Calgary construction lawyers and staff at DBH Law understand the complex risks of both multimillion-dollar and smaller construction projects and the expensive disputes that can arise when something goes wrong in all cases. We handle all elements of a construction relationship. We can proactively advise and help draft important documents such as contractor and subcontractor agreements and similar, to make expectations clear and eliminate as much risk as possible. We can also represent you in any litigation or other dispute resolution that may be needed if a dispute arises.
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