A recent decision of an Alberta court in Lafarge Canada Inc. v Edmonton (City) confirms that a party choosing to commence an action in the face of a valid agreement to arbitrate runs the risk of being left without a remedy. InLafarge, the court struck Lafarge’s claims because the limitation period expired before Lafarge had commenced its claims in the proper forum – arbitration rather than litigation. The court confirmed that commencing litigation when arbitration is the proper forum does not stop the limitation period clock from running, noting that parties must abide by their agreement to arbitrate. The court also said that it was too late to commence arbitration now that the limitation period had expired; it was unmoved by Lafarge’s plea that it would be left without a remedy despite its allegation that the defendant had unduly delayed bringing the motion to strike the action. The court held that the expiry of the limitation period was determinative because its jurisdiction to stay or not the action expired with the limitation period; but even if it had such jurisdiction, it would still have struck out the action.

Facts – Parties Agree to Arbitrate, Court Action Commenced, Then Limitation Period Expires

The City of Edmonton (“the City”) contracted with Lafarge Canada Inc. (“Lafarge”) in May 2007 to supply storm sewer pipe. The contract required Lafarge to deliver pipe on 22 June and 20 July 2007, and specified that if the deliveries were late, the City could set off against the purchase price any damages or costs it had suffered due to the delay. The parties agreed to arbitrate any disputes under the contract. Both deliveries were late. On 24 July 2007, the City advised Lafarge that it would hold Lafarge responsible for its costs due to the late deliveries. Lafarge disputed the City’s right to do so. In May 2009, the parties entered into a standstill agreement in which they agreed that neither would assert a limitation period defence to any proceedings commenced within three months from the termination of the agreement. Lafarge terminated the standstill agreement on 2 February 2011 and commenced a court action on 14 February 2011, seeking $889,511, the balance of the contract price held back by the City.

The City submitted a jurisdictional defense to the court on the basis that the parties had agreed to submit any dispute to arbitration. The City’s lawyer wrote Lafarge’s lawyer, stating that he thought arbitration may be mandatory and suggesting Lafarge commence arbitration within the three-month period. Lafarge did not do so. Instead, it continued with the litigation and, in July 2011, served its affidavit of records in the lawsuit.

The case went to the Alberta courts on three occasions.

Commencement of A Court Action Does Not Commence Arbitration

First, in June 2012, the City applied to the Court of Queen’s Bench for orders striking out the Statement of Claim, staying the action on the basis of the arbitration clause, and declaring that the arbitration of the dispute was barred  by the expiry of the limitation period. The court dismissed the City’s application, holding that the Statement of Claim was a “commencing document” to start the arbitration and that, since it was issued within the time referred to in the standstill agreement, the arbitration had been “commenced in a timely way”.1

On appeal, the Alberta Court of Appeal reversed the lower court’s decision holding that an action is a distinctly different process from an arbitration. The court said that the legislature has clearly indicated a policy choice by which a court is required to stay an action commenced in the face of an arbitration clause subject to certain exceptions and discretion – such as in the case of “undue delay”. While the notice to commence an arbitration is not required to have any particular form, it must be “clear and unequivocal” in showing an intention to arbitrate rather than litigate a dispute. A Statement of Claim ​communicates the opposite intention. Consequently, no arbitration had been commenced. 2

The result of the court’s decision was that Lafarge’s only potential recourse was to convince the court to exercise its discretionary power under Alberta’s Arbitration Act 3 to refuse to stay the proceeding because the City’s application to stay had been brought with “undue delay”, or that the City had “attorned” to the court’s jurisdiction. The Court of Appeal refused to deal with these issues because the record was inadequate and the case returned to the Court of Queen’s Bench.

Court Must Stay The Action If Limitation Period Expired Before Arbitration Commenced, Even If That Leaves The Claimant Without A Remedy

For the case’s third trip to court, the City brought a motion to strike the action or, in the alternative, stay it. The court held that it could not consider whether to decline to stay the action because of the City’s delay because its jurisdiction to do so under the Arbitration Act expired with the limitation ​period, i.e., had arbitration still been a possibility, the court would have undertaken a consideration of whether the City had been guilty of undue delay.4The court reasoned as follows:

… when the parties agree to a mandatory arbitration clause in their contracts, they must submit their claim to arbitration or risk having their litigation claim struck… [O]nce the applicable limitation claim for arbitration is over… the Court’s supervisory role is also over. …[T]he issue of undue delay becomesirrelevant – even if it means that the partyhaving commenced a court action is deniedan avenue for recourse.

While this position may seem to be rigid, there is an important underlying policy consideration: to enforce contracts between parties who have agreed to arbitrate. This imposes an onus on the parties to proceed with arbitration if they agreed to do so in their contract. [Emphasis added.]

Expiry of Limitation Period Is Not “Undue Prejudice” to Prevent a Stay

The court proceeded to consider whether the City had unduly delayed bringing the motion to strike in case an appeal court were to disagree with the above finding. Based on the facts of the case and existing case law on undue delay in the context of stay applications under the Arbitration Act, the court held that the City had not unduly delayed its motion by waiting 16 months after service of the Statement of Claim. The court was comforted by the fact that the City had asserted a jurisdictional defense at the outset of the proceedings and had not participated in the litigation in any meaningful way.

The court concluded that the expiry of the limitation period before the application to stay had been brought did not result in “unfair prejudice” to Lafarge even though it meant that it had no remedy. The court pointed out that the expiry of a limitation period always denies recourse to a claimant. Where the claimant had agreed to arbitrate rather than litigate, the expiry of a limitation period was not sufficient to amount to “undue delay” and justify a court refusing to stay a court action.

As mentioned above, the court held that the City had not waived its right to arbitration. Although, in Canada and elsewhere, it is possible for a party to attorn to a court’s jurisdiction and thereby lose its right to arbitrate, simply filing a pleading does not do so in all Canadian provinces, so long as an objection to the court’s jurisdiction is raised in a timely manner.

In the result, the court struck the action and granted a declaration that Lafarge was statute barred from commencing its claim.

Conclusion – If You Have Agreed to Arbitrate, Trying to Litigate Is Risky

The Alberta courts’ conclusions underline a clear message that parties will be held to their agreement to resolve disputes by arbitration. A claimant who chooses to commence a court action in the face of an arbitration clause does so at its peril. In the Lafarge case, the defendant was permitted to wait until after the applicable limitation period expired before asking the court to strike the claim. Parties to arbitration agreements and their counsel should be cognizant of the relevant limitation periods ​and local rules on when jurisdictional objections must be raised in order to avoid the potential risk of being left without a remedy.