Choosing Between Arbitration And Litigation? Look To Your Contract! And Ponder The Pitfalls

Parties considering whether to resolve disputes through arbitration or litigation should first look to their agreements to determine the appropriate course. Two recent out-of-province decisions demonstrate the issues that can arise when parties proceed with dispute resolution outside of the terms of their contracts.

The Risks of Choosing the Wrong Forum

In Lafarge Canada Inc. v. Edmonton (City), 2015 ABQB 56, an Alberta court enforced a mandatory arbitration clause in a contract between the parties despite the result leaving the plaintiff without a remedy due to the expiry of the limitation period to commence arbitration. The case involved a dispute between Lafarge Canada Inc. ("Lafarge"), the industrial supply company, and the City of Edmonton in relation to a contract for the delivery of piping materials. The parties had contractually agreed to resolve any disputes by arbitration. A dispute arose after the City claimed a set off against the purchase price for costs it had incurred due to Lafarge's late delivery of the materials. Lafarge challenged the City's right to set off and sought payment of the balance of the contract price.

Nearing the two year limitation period to commence litigation or arbitration proceedings, the parties entered a standstill agreement whereby neither party would rely on a limitation defence to any proceedings commenced within three months from the termination of the agreement. Lafarge subsequently terminated the standstill agreement and, within three months, commenced a court action seeking the balance of the contract price. Following the expiration of the three month limitation period, the City applied to have Lafarge's claim struck on the basis that the dispute was to be resolved by arbitration in accordance with the contract.

The issue of whether Lafarge could proceed with the litigation was considered by the Alberta courts on three occasions, with the courts ultimately finding that:

the mandatory arbitration clause was enforceable against Lafarge; Lafarge's Statement of Claim filed in the court action was not a "commencing document" to start arbitration and, as such, Lafarge had failed to commence an arbitration within the three month period specified in the standstill agreement; Lafarge's claim could not proceed by way of litigation despite the expiry of the limitation period to commence arbitration leaving Lafarge without a remedy; and the City had not unduly delayed bringing its application to strike the...