In Federal Electric (1976) Limited v McDonald Brothers Construction,(1) the Ontario Superior Court considered the application and operability of an arbitration clause in a subcontract in the context of a related claims proceeding under a related main contract. It found that the parties had agreed to consolidate certain claims with those proceeding under the contract, which had frustrated the application of the arbitration agreement altogether.
On 12 March 2014 McDonald Brothers Construction Inc entered into a contract with Public Works and Government Services Canada (PWGSC), whereby it would be the general contractor for the fit-up of a laboratory and office building located in Ottawa. Shortly thereafter, McDonald Brothers entered into a subcontract with Federal Electric (1976) Limited, whereby Federal Electric would supply the labour, material and related services associated with the electric scope of work for the project. The project encountered a number of delays, resulting in claims by McDonald Brothers against PWGSC under the contract and by Federal Electric against McDonald Brothers under the subcontract.
After failing to resolve its claims through mediation, Federal Electric sought an order from the Ontario Superior Court of Justice that its claims should proceed to arbitration pursuant to an arbitration agreement in the subcontract. In response, McDonald Brothers argued that:
- the delays on the project had been caused by PWGSC, which made it a necessary party to any proceedings regarding Federal Electric's claims; and
- the contract had required a specific procedure for delay claims, which excluded arbitration.
Based on the subcontract's wording, McDonald Brothers argued that Federal Electric's delay claims had to proceed with the McDonald Brothers' delay claims against PWGSC under the contract.
Accordingly, the court had to determine whether Federal Electric was entitled to have its delay claim against McDonald Brothers arbitrated separately from the proceeding with PWGSC under the contract.
The court's analysis was guided by the terms of the dispute resolution clause in the contract and subcontract. In particular, the subcontract contained the following provision, which potentially required the consolidation of certain claims under the subcontract with those under the contract:
Should any dispute or portion of any dispute between the Contractor and Subcontractor relate to a dispute between the Owner and the Contractor, such dispute or portion thereof as between the Contractor and Subcontractor shall be disposed of at the same time in the same proceedings and by the same Arbitration Board as is appointed to resolve the dispute between the Owner and the Contractor.(2)
According to McDonald Brothers, this clause required Federal Electric's claims under the subcontract (which would normally have been arbitrated) to be heard with the delay claims arising under the main contract. This position was complicated by two issues:
- Federal Electric argued that McDonald Brothers had not made best efforts to move forward its delay claim with PWGSC. However, following a factual analysis of the steps taken by McDonald Brothers to advance its claims against PWGSC and of what constitutes 'best efforts' under Ontario law, the court found that McDonald Brothers had made best efforts to advance its claim against PWGSC.
- The contract did not include an arbitration clause. Accordingly, any consolidation of the delay claims arising under the subcontract with claims under the contract would frustrate the arbitration clause in the subcontract. On this issue, the court upheld the consolidation clause in the subcontract on the basis that:
- it had been sufficiently clear; and
- failing to give effect to it would result in a multiplicity of proceedings.
In reaching this conclusion, the court appears to have frustrated the parties' agreement to arbitrate, although the reasoning does not directly address this question.
From a legal perspective, the court's decision appears to be motivated by efficiency concerns rather than the strict enforcement of an arbitration agreement. These concerns may well have been justified given that, at the time of the judgment, approximately five years had elapsed since the claims first arose. Moreover, given that the subcontract had not only directed the parties to arbitrate their disputes, but also required the parties to have certain disputes consolidated with other claims arising under the contract (which did not contain an arbitration clause), it is arguable that the parties had never exhibited a clear intention to arbitrate their claims in the first place.
In practical terms, Federal Electric highlights the challenges involved in drafting pre-dispute arbitration clauses that will operate effectively when multiple claims arise between multiple parties under multiple contracts. These challenges are especially common in the construction sector where general contractors and owners must structure and manage a complex contractual network of engineers, subcontractors, suppliers and other specialist vendors. In these circumstances, parties should pay particular attention to dispute resolution clauses in all related contracts to ensure that, in the event of multiple claims between multiple parties, the possibility of consolidation or joinder remains available. The failure to do so may not only result in additional delay and costs in the proceedings, but, as in the case of Federal Electric, may also undermine an intention to arbitrate altogether.
For further information on this topic please contact Hugh A Meighen at Borden Ladner Gervais LLP by telephone (+1 604 687 5744) or email ([email protected]). The Borden Ladner Gervais LLP website can be accessed at www.blg.com.
(1) 2019 ONSC 496 [Federal Electric].