Ontario – expired limitation period pre-empts need to decide stay application

Ontario’s Court of Appeal in Glen Schnarr & Associates Inc. v. Vector (Georgetown) Limited, 2019 ONCA 1012 asserted jurisdiction to decide a claim’s viability rather than defer the decision to an arbitrator as mandated by section 7(1) of the Arbitration Act, 1991, SO 1991, c 17 and Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34 (CanLII), [2007] 2 SCR 801. A court may pre-empt an arbitrator’s competence-competence to determine jurisdiction if it can decide that an applicable limitation period has expired.  This approach is presented as a second exception, independent to the “superficial consideration of the documentary evidence in the record” for questions of law or mixed fact and law. The approach addresses viability of claims and not the interplay of the arbitration agreement and the dispute. 

Plaintiffs initiated litigation November 5, 2015 against seven (7) defendants.  They claimed breach of a January 31, 2002 Cost Sharing Agreement (“Agreement”) for consultation services destined to obtain government approval to allow development of lands for urban use.

In response to the action, Defendant Lormel Developments (Georgetown) Ltd. (“Lormel”) filed a June 8, 2018 Notice of Motion under Rule 21.01(1)(a) of Rules of Civil Procedure, RRO 1990, Reg 194 for determination of a question of law or, in the alternative, for summary judgment dismissing Plaintiffs’ action on the basis that the limitation period for bringing the action had expired.

Rule 21.01 (1) A party may move before a judge,

(a) for the determination, before trial, of a question of law raised by a pleading in an action where the determination of the question may dispose of all or part of the action, substantially shorten the trial or result in a substantial saving of costs; or

(b) to strike out a pleading on the ground that it discloses no reasonable cause of action or defence,

and the judge may make an order or grant judgment accordingly.

(2) No evidence is admissible on a motion,

(a) under clause (1) (a), except with leave of a judge or on consent of the parties;

(b) under clause (1) (b).

Plaintiffs filed a June 11, 2018 Notice of Motion for a stay under section 7(1) of the Arbitration Act, 1991, SO 1991, c 17 and section 106 of the Courts of Justice Act, RSO 1990, c C.43 (“CJA”).

Section 7(1) If a party to an arbitration agreement commences a proceeding in respect of a matter to be submitted to arbitration under the agreement, the court in which the proceeding is commenced shall, on the motion of another party to the arbitration agreement, stay the proceeding.

Section 106 A court, on its own initiative or on motion by any person, whether or not a party, may stay any proceeding in the court on such terms as are considered just.

As motions judge in first instance, Mr. Justice Michael R. Gibson in Glenn Schnarr & Assoc. Inc. v. Vector (Georgetown) Ltd., 2019 ONSC 519 granted Defendants’ motion and dismissed Plaintiffs’.  Gibson J. held that Plaintiffs had failed to commence litigation in time and were also estopped by their conduct and laches.

On appeal, Plaintiffs/Appellants argued that the motions judge (i) erred in failing to exercise his discretion under section 106 of the CJA to stay the action and refer the parties to arbitration and (ii) erred in law by failing to determine a Defendants’ right to terminate their Agreement and, in doing so, erred in his analysis of the limitation and the laches.

Agreeing with Defendants/Respondents, the Court of Appeal held that it must first deal with the “threshold issue of the limitation period to determine whether a stay of proceedings is appropriate”.

[22] Here the motions judge found that the appellants’ action was out of time, and that they were estopped by conduct and by laches. He dismissed the action on these grounds and declined to exercise his discretion under s. 106 of the CJA. It follows that if his decision that the action was out of time is correct, there is no need to address the stay request. Thus, the real issue is whether the motions judge was correct in his conclusion that the appellants’ action was out of time, the issue to which I now turn.

Acknowledging that Haas v. Gunasekaram, 2016 ONCA 744 had confirmed that the “law favours giving effect to arbitration agreements and this is evident from both the applicable legislation and jurisprudence”, the Court reminded that exceptions exist.  It noted the now-familiar exception, mentioned in Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34 (CanLII), [2007] 2 SCR 801 paras 84-85, involving challenges based solely on a question of law or mixed fact and law requiring only a superficial consideration of the documentary evidence in the record. 

The Court then added a more targeted reference to Jean Estate v. Wires Jolley LLP, 2009 ONCA 339 which, at para. 99 referred to Dalimpex Ltd. v. Janicki, 2003 CanLII 34234 (ON CA), which, at para. 21, referred to Gulf Canada Resources Ltd. v. Arochem International Ltd., 1992 CanLII 4033 (BC CA), which provided the following:

[99] The case law of this court supports a deferential or prima facie approach to the question of arbitrability. In Dell, Deschamps J. cited this court’s decision in Dalimpex Ltd. v. Janicki (2003), 2003 CanLII 34234 (ON CA), 64 O.R. (3d) 737, [2003] O.J. No. 2094, 228 D.L.R. (4th) 179 (C.A.) and observed that the prima facie analysis is applied in Ontario not only to the validity but also the applicability of an arbitration clause. In Dalimpex, Charron J.A. adopted [at para. 21] the following test articulated by the British Columbia Court of Appeal in Gulf Canada Resources Ltd. v. Arochem International Ltd., 1992 CanLII 4033 (BC CA), [1992] B.C.J. No. 500, 43 C.P.R. (3d) 390, 66 B.C.L.R. (2d) 113 (C.A.):

Considering s. 8(1) in relation to the provisions of s. 16 and the jurisdiction conferred on the arbitral tribunal, in my opinion, it is not for the court on an application for a stay of proceedings to reach any final determination as to the scope of the arbitration agreement or whether a particular party to the legal proceedings is a party to the arbitration agreement, because those are matters within the jurisdiction of the arbitral tribunal. Only where it is clear that the dispute is outside the terms of the arbitration agreement, or that a party is not a party to the arbitration agreement, or that the application is out of time should the court reach any final determination in respect of such matters on an application for a stay of proceedings.

When citing from the above passage, the Court underlined the mention of “or that the application is out of time”. That mention was decisive to the appeal.

The Court analysed the facts in the record which raised the issue of “whether the appellants could do nothing for approximately 11 years after the purported termination or whether they were required to take action when confronted with LDGL’s purported termination”.  The answer depended on whether Defendants anticipatorily repudiated the Agreement, how Plaintiffs responded and the applicable limitation period.

At paras 29-34, the Court set out the circumstances in which anticipatory repudiation can occur and the resulting response or election made by the other party followed by the limitation period in which the parties are to act to preserve their rights.

[34] After receipt of the correspondence of December 12, 2004, the respondents heard nothing from the appellants for 11 years when they were suddenly served with the appellants’ statement of claim. Based on the evidence, it is fair to infer that quite apart from the bonus, which is the subject matter of the lawsuit, no budgets for annual services as referenced in Article 12.1 of the Agreement were ever remitted by the appellants to LDGL. The respondents’ evidence was that they received no benefit from the consulting services and that they performed all of the services required under the Agreement themselves as they believed the Agreement had been terminated as of 2004. There is no evidence to the contrary or that the appellants did anything in that intervening time period. In these circumstances, by their conduct, the appellants accepted the anticipatory repudiation by LDGL. As a result, by 2015 when the action was started, the limitation period had long expired. As such, the motions judge’s conclusion that the appellants’ action was out of time was correct.

The Court upheld Gibson J.’s decision to dismiss the claim on the basis of a limitation period and further held that there was “no need to consider” the alternative arguments related to estoppel and laches.

urbitral note – First, neither level of court focused on the more common challenges made to the validity, enforceability or scope of the arbitration agreement in question, reproduced in the Court of Appeal’s reasons at para. 3:

All matters in difference between or among all or any of the parties in relation to this Agreement shall be referred to the arbitration of a single arbitrator, if such parties agree on one, otherwise to three arbitrators, one to be appointed by each party and a third to be chosen by the first two named before they enter upon the business of the arbitration. The award and determination of the arbitrator or arbitrators or any two of the three arbitrators shall be binding upon such parties and their respective heirs, executors, administrators and assigns.

The agreement to arbitrate was acknowledged but neither court had to deal with its application to the parties’ choice of dispute resolution or to the courts’ jurisdiction.  Instead, the Court of Appeal confirmed that a court, presented with an ostensibly valid arbitration agreement, can determine the viability of the court litigation on the basis of a limitation period and not deal at all with the mandatory referral to arbitration under section 7(1) of the Arbitration Act.

This process is presented as a second exception, independent from the one noted in Dell Computer Corp. v. Union des consommateurs for challenge limited to a question of law or one of mixed fact and law where the question of law requires for its disposition only superficial consideration of the documentary evidence in the record.

The Court of Appeal may have taken, in effect, a “superficial consideration of the documentary evidence in the record” but did so in regard to the merits of the claim and not the interplay of the arbitration agreement and the dispute.  Before protecting the arbitrator’s competence-competence to determine jurisdiction to resolve the dispute, the Court affirmed that courts can pre-empt that determination by deciding the viability of the claim on a limitation period.