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COMMERCIAL ARBITRATION—2012 PAPER 1.3 Drafting Dispute Resolution Agreements: A Construction Lawyer’s Perspective

COMMERCIAL ARBITRATION—2012

PAPER 1.3

Drafting Dispute Resolution Agreements:

A Construction Lawyer’s Perspective

These materials were prepared by Karen Martin of Fraser Milner Casgrain LLP, Vancouver, BC, for the Continuing Legal Education Society of British Columbia, March 2012.

© Karen Martin

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DRAFTING DISPUTE RESOLUTION AGREEMENTS: A CONSTRUCTION LAWYER’S PERSPECTIVE

I. Introduction

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II. Tip #1: Tailor the Clause to the Situation

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A. Design a Process to Suit the Likely Disputes

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B. Consider Expert Determination

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C. Time Limits

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III. Tip #2: Consider Options for Negotiations Clauses

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A. Involvement of Senior Representatives

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B. Full Disclosure

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C. Good Faith/Best Efforts

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IV. Tip #3: Address the Possibility of Multi-Party Disputes

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1. Aligning Contracts

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2. Project Protocols

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3. Addressing Issues Required to be Litigated

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V. Conclusion: Best Practices from the CCA Protocols

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VI. Appendix A—Sample Dispute Resolution Clauses

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VII. Appendix B—Section 108 of the Housing Grants, Construction and Regeneration Act

1996

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I.

Introduction

Most construction contracts employed in British Columbia contain tiered dispute resolution clauses that require negotiation and/or mediation to be pursued before arbitration. Some samples are included in Appendix “A” to this paper.

For example, the standard form fixed price construction contract between owner and contractor, CCDC 2- 2008, provides a process in which:

(1)

a consultant makes a finding on the interpretation, application or administration of the contract, which is binding, unless within 15 days a notice of dispute is delivered;

(2)

the parties are obligated to make all reasonable efforts to resolve their dispute by amicable negotiations, and must provide frank, candid and timely disclosure of relevant facts, information and documents;

(3)

the parties must request a designated Project Mediator to assist with mediated negotiations under the CCDC 40 Rules;

(4)

10 days after request (or later if agreed), the Project Mediator must terminate the mediated negotiations if no resolution has been achieved;

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(5)

within 10 days of the termination of mediated negotiations, either party may refer the dispute to arbitration under the CCDC 40 Rules for Arbitration and Mediation of Construction Disputes;

(6)

on the expiry of 10 days with no reference to arbitration, the arbitration agreement is not binding.

The Master Municipal Construction Document (“MMCD”) commonly used by municipalities in BC to retain contractors to build civil works provides for a tiered dispute resolution process that can be summarized briefly as follows:

(1)

initial decision from a Contract Administrator, which is binding, unless within 10 days, a notice of dispute is delivered;

(2)

amicable negotiations with disclosure;

(3)

a non-binding Referee’s decision within 10 days of appointment (or longer if agreed);

(4)

if resolution is not reached within 10 days of the Referee’s decision, either party may demand a Settlement Meeting be convened within 30 days;

(5)

if resolution is not reached within seven days of the start of the Settlement Meeting, either party may request the other party to agree to binding arbitration, or, without notice, commence litigation.

On the Canada Line Public Private Partnership project, the Concession Agreement incorporates a Dispute Resolution Procedure (Schedule 14) that sets out a procedure similar in general terms to that found in the MMCD contract.

In this paper, these clauses will be used to make suggestions on selected topics to solicitors drafting dispute resolution clauses.

II. Tip #1: Tailor the Clause to the Situation

Concern is sometimes expressed about potential wasted time and expense associated with mandatory negotiations and/or mediation as conditions precedent to arbitration, particularly where one or both parties are perceived not to be interested in a negotiated settlement. However, tiered dispute resolution clauses are still extremely commonly employed in construction contracts, which may be explained by:

the very high likelihood of disputes on construction projects, due to the length of the contractual relationships, and therefore the desire for collaborative dispute resolution;

the tremendous amounts of time and costs associated with the adjudication of construction issues, and the opportunity cost in terms of diverting resources away from other projects;

the adverse impact on the success of the project itself;

the prevalence of long-term relationships and the importance of reputation in the industry;

the complexity associated with the involvement of multiple parties;

a desire by construction players for control over the solution to disputes;

the experience and approach of the construction bar, driven by clients’ desires to avoid arbitration or trial.

To reduce the risk of wasting time and money on unnecessary pre-arbitration steps, the following suggestions are offered for consideration by the drafters of dispute resolution clauses in commercial agreements:

consider the types of disputes likely to arise, and design a process to suit;

include time limits for pre-arbitration steps;

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• consider an expert determination phase.

A. Design a Process to Suit the Likely Disputes

Often the arbitration clause in a commercial agreement is taken from a precedent with little or no thought given to whether it should be revised to make it suitable for the particular relationship created by the agreement. In order to tailor a dispute process to a particular type of contract, the drafter should consider the nature of the relationship, including the importance of speedy resolution of disputes, the types of issues likely to arise between the parties, and the best options for resolution of those types of disputes. Where disputes are likely, the parties may consider appointing a contract mediator at the negotiation phase, akin to the Project Mediators or Dispute Review Boards sometimes employed on construction projects.

A discussion of the advantages and disadvantages of each type of resolution process is beyond the scope of this

paper, but some general observations can be made. Disputes about matters related to business judgment tend to be amenable to resolution through negotiation or mediation. Factually complex issues often benefit from a structured mediation process and may require some limited discovery rights. Legal issues may be best suited to an adjudicative procedure, but nevertheless may still be amenable to resolution in a more consensual process. Technical issues may be best resolved by the involvement of an expert.

See Robert N. Dobbins, “The Layered Dispute Resolution clause: From Boilerplate to Business Opportunity,” 1 Hastings Bus. L.J. 159 (2005) for a more detailed discussion as to how to tailor a tiered dispute resolution clause, and John M. Townsend, “Drafting Arbitration Clauses: Avoiding the 7 Deadly Sins,” Dispute Resolution Journal, Vol. 58, No. 1 (February/April 2003) for a summary of common drafting errors and suggestions for avoiding them.

B. Consider Expert Determination

Some of the issues arising on a construction project can be technical in nature and therefore a “referee”

process is often included in the dispute resolution clause in construction contracts, pursuant to which an

expert provides an opinion that may be binding or non-binding. Examples are provided in the attached

MMCD (G.C. 17.5) and Canada Line (s. 1.4) contracts.

Issues to consider in drafting such clauses include:

appointment procedures;

independence and impartiality;

attaching a referee’s agreement;

whether to specify aspects of the referee process (i.e. written or oral evidence and submissions);

time limits, including on the decision;

scope of the decision (length issues);

whether to give direction to the referee as to how the decision will be made or what criteria should be taken into account in his decision;

whether the decision is binding or not binding, or whether the opinion is binding unless written notice of dispute is provided within a specified period of time;

• the confidential and without prejudice nature of the process.

C. Time Limits

In order to minimize the risk of unnecessary delays and to force the parties to address resolution in a timely

way, time limits should be inserted in the tiered dispute resolution clause. MMCD goes further to set out the

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intention of the parties, by stating that the parties agree that timely resolution of disputes is mutually beneficial and therefore that the time limits shall be strictly enforced (G.C. 17.8).

Other provisions designed to minimize the impact of delays in dispute resolution on the relationships, transaction or project may also be considered. Common provisions that help avoid the dire consequences of a construction project halting pending resolution of disputes include:

an agreement that the parties will not delay performance on account of a dispute (MMCD GC

17.2.2);

an agreement that the consultant may provide instructions, which the parties agree to follow (on a without prejudice basis), to allow the performance of the contract, with the ability to recover costs if the instructions were in error or at variance with the contract provisions (i.e., GC 8.1.3 of CCDC 2 – 2008; MMCD, GC 17.2.3 and .4);

a requirement that parties must act in accordance with the consultant’s finding or a referee’s decision pending final resolution of the dispute (i.e., see Canada Line Contract, s.1.10);

an “adjudication” 1 or project referee process, whereby a relatively quick decision is made by an independent adjudicator, which is binding on the parties until the dispute is finally decided.

III. Tip #2: Consider Options for Negotiations Clauses

Three issues that may arise when drafting the negotiation component of a tiered dispute clause are:

involvement of senior representatives;

obligation to provide full disclosure;

• obligation to negotiate in good faith or use best efforts.

A. Involvement of Senior Representatives

It is relatively common to require at some stage of a tiered dispute process that senior representatives be involved in negotiations. This requirement is based on experience that there can be hurdles to resolution when the persons intimately involved with the facts underlying the dispute are in charge of the negotiations to resolve the dispute. While the input of such persons may be beneficial to ensure that the decision-makers have the necessary background, requiring senior representatives to be involved in, or even solely responsible for settlement negotiations may eliminate unnecessary “human” factors, and allow objectivity and strategic business factors to be applied early in the resolution process.

Sometimes, the mere fact that the next step in a dispute is to involve senior representatives encourages the parties to resolve their issues.

By way of example, the MMCD and Canada Line Contracts provide respectively as follows:

MMCD

17.4.2 For the purpose of negotiating the Dispute each of the parties shall consider appointing new representatives, where possible, who have not been directly involved in the Work, although neither party shall be obligated to do so.

Canada Line

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Negotiation

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Within 5 Business Days of one party receiving a Dispute Notice from the other, senior management representatives of the parties will meet and make reasonable good faith efforts to resolve the Dispute by amicable negotiations. The negotiations of the parties under this Section 1.3 will be without prejudice in any subsequent proceedings regarding the Dispute.

B. Full Disclosure

Negotiation clauses often require full disclosure, presumably to seek to ensure that a negotiated settlement is not made without the opportunity to fully explore the strengths and weaknesses of the other party’s position.

For example, under CCDC 2 – 2008 and MMCD, the parties agree to provide “without prejudice, frank, candid and timely disclosure of relevant facts, information and documents” to facilitate the mandatory negotiations under the dispute provision.

The Canada Line contract does not have such a requirement for the negotiations phase, but the parties agree to comply with all reasonable requests from the Referee for additional information, documents and access to personnel.

The goal of these provisions is certainly laudable, and although one could envision valid complaints that such full disclosure had not occurred, in the writer’s experience, such challenges are extremely rare.

C. Good Faith/Best Efforts

Negotiation clauses commonly require the parties to use “best efforts” or “good faith” in negotiations, or in the construction context, often obligate the parties to participate in “amicable” negotiations. These phrases are inserted to attempt to prevent undermining of, or even abuse of the negotiation or mediation process through conduct designed to increase expense and delay or to gain an advantage for future processes, rather than to resolve the dispute.

Concern is often expressed about the vague and uncertain scope of these terms and the extent to which they may expose the parties to a risk of litigation on whether there has been compliance with such clauses. 2 There has been litigation in the US about issues such as whether it was a breach of good faith for representatives not to have “full” settlement authority, to attend a mediation without being sufficiently prepared or with no intention to negotiate a resolution, or to fail to make a reasonable officer. However, it appears that litigation on this topic in the context of dispute resolution clauses is rare in Canada, and there are other purposes related to assisting the parties with dispute resolution that may be achieved with this language.

One partial solution is to insert requirements in the dispute resolution clause relating to procedure that are more specific and objective, such as provisions for a minimum length of mediation, or a required exchange of written positions.

IV. Tip #3: Address the Possibility of Multi-Party Disputes

Construction projects involve multiple players, multiple contracts and complex relationships, which poses challenges for the use of bilateral arbitration proceedings as an effective dispute resolution approach. This has not caused the drafters of construction contracts to avoid using arbitration clauses and tiered dispute resolution provisions. However, there is a risk that the same set of facts on a project may give rise to some claims that are the subject of an arbitration agreement and some claims that the parties wish to litigate.

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Section 15 of the Commercial Arbitration Act, R.S.B.C. 1996, c.55 allows a stay to be sought from the court of any litigation in respect of a matter that has been agreed to be submitted to arbitration. Conversely, if the arbitration agreement is found to be “void, inoperative or incapable of being performed,” the stay order will be denied, and the litigation may proceed.

Disputants have relied on this provision to argue that an arbitration clause cannot be enforced in a multi-party dispute context.

The case law tells us that “incapable of being performed” does not mean merely difficult, but requires some incapacity beyond the control of the parties.

In addition, “inoperative” requires more than a mere overlap of issues with non-parties to the arbitration. 3 The presence of a non-party to the arbitration agreement in litigation does not make the arbitration agreement “inoperative,” and the defendant party to the arbitration agreement is entitled to the stay of proceedings provided the other requirements of s. 15 are met. 4

The court also has the discretion to stay an action of a non-party to the arbitration agreement under ss. 8 and 10 of the Law and Equity Act, R.S.B.C. 1996, c.253, and this provision has been successfully employed in order to avoid a multiplicity of proceedings, particularly where the issues are intertwined with the issues in the arbitration and the risk of inconsistent decisions is high. 5

Some tools available to manage the multi-party facet of construction disputes include:

(1)

aligning contracts;

(2)

project protocols;

(3)

addressing issues required by statute to be litigated.

1. Aligning Contracts

The parties to the multiple contracts on a project may attempt to use similar dispute clauses in their separate contracts. They may name the same Project Mediator or Project Referee. They may agree to use the same arbitration rules. They may also specifically address disputes that are the subject of another contract (see Canada Line Contract, s. 19).

Within their own contracts the parties may include consolidation provisions in relation to all disputes arising on a project (see CCDC – 2008, G.C. 8.2.7.2), or arising from the same facts (see CCDC 40, Rule 21.1). Here is an example of language recommended by the American Arbitration Association on construction projects to address multi-party issues:

The owner, the contractor, and all subcontractors, specialty contractors, material suppliers, engineers, designers, architects, construction lenders, bonding companies and other parties concerned with the construction of the structure are bound, each to each other, by this arbitration clause, provided that they have signed this contract or a contract that incorporates this contract by reference or signed any other agreement to be bound by this arbitration clause. Each such party agrees that it may be joined as an additional party to an arbitration involving other parties under any such agreement. If more than one arbitration is begun under any such agreement and any party contends that two or more arbitrations are substantially related and that the issues should be heard in one proceeding, the arbitrator(s) selected in the first filed of such proceedings shall determine whether, in the

3 Prince George (City) v. McElhanney Engineering Services Ltd. (1995), 9 B.C.L.R. (3d) 368 (C.A.) at paras. 33-35, leave to appeal to S.C.C. denied, [1995] S.C.C.A. No. 467.

4 Ibid., at para. 37.

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interests of justice and efficiency, the proceedings should be consolidated before that (those) arbitrators(s). 6

2. Project Protocols

On large construction projects, the participants may agree to a project protocol that can be incorporated into multiple contracts. This is designed at an early stage of the project when the parties are perhaps best motivated to avoid disputes. This document would address the same topics referenced in the immediately preceding section, but may also go further to set out detailed procedural rules for the specific dispute processes contemplated for the project. Often the process starts with a pre-construction workshop designed

to set a collaborative tone for the project.

3. Addressing Issues Required to be Litigated

Where a dispute resolution agreement provides for mandatory arbitration, the drafter may wish to consider whether any disputes may arise that are required by statute to be the subject of litigation. This may help avoid an application under s. 15 of the Commercial Arbitration Act.

For example, the Builders’ Lien Act, S.B.C. 1997, c.45, requires that any action to enforce a claim of lien must be commenced in the BC Supreme Court within particular time limits in order to maintain the lien.

A builders’ lien claimant who is a party to a contract with a mandatory arbitration clause is faced with the

unfortunate predicament of selecting either arbitration or litigation and risk being in breach of either the contract or the lien legislation, or he may attempt to comply with both by arbitrating and litigating the same dispute. Some of the principles the courts have applied to address this problem include:

(a)

there is a strong judicial policy in favour of arbitration since it preserves the intention of the parties, is harmonious with the objectives of the commercial arbitration acts and encourages arbitration as a viable dispute resolution alternative 7 ;

(b)

arbitration and builders’ lien legislation are not necessarily inconsistent on this point. They can co-exist 8 ;

(c)

the courts prefer to stay the lien action to allow the arbitrator to make the decision as to the quantum of monies owing under the contract, which can then be enforced under the lien in the action 9 ;

(d)

if the arbitrator finds that there is no amount owing, the lien action is resolved;

(e)

a finding for some monetary award under the contract will assist the court in determining how much, if any, to secure through the lien;

(f)

staying the lien action avoids multiple proceedings, duplication of evidence, further complexity in issues and allows the court to focus on issues of law and the arbitrator to focus on issues within his technical expertise; and

6 National Construction Dispute Resolution Committee, “The AAA Guide to Drafting Alternative Dispute Resolution Clauses for Construction Contracts” (2007) http://www.adr.org/sp.asp?id=29575.

7 Sandbar, supra, n. 4.

8 BWV Investments Ltd. v. Saskferco Products Inc., [1995] 2 W.W.R. 1, 17 C.L.R. (2d) 165 (SK.C.A.). See also Kvaerner Enviropower Inc. v. Tanar Industries Ltd., [1995] 2 W.W.R. 433, 157 A.R. 363 (C.A.).

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(g) commencing an action under builders’ lien legislation does not waive one’s right to arbitration. 10

GC 8.3.2. in CCDC 2 – 2008 addresses this topic by expressly providing that the commencement of proceedings to enforce a lien is not a waiver of a right under the contract to require arbitration to adjudicate the merits of the claim on which the lien is based.

A non-construction example of such a situation is a shareholder oppression claim under the Canadian Business

Corporations Act, R.S.C. 1985, c. 44, which is required to be adjudicated by the BC Supreme Court. Where the oppression claim is based on a dispute as to the interpretation of a shareholders agreement containing an arbitration clause, the BC Court of Appeal has found that the oppression proceedings should be stayed under s. 15 of the Commercial Arbitration Act until after the arbitrator has made his findings. 11

For a recent consideration of the applicability of s. 15 of the CAA in a builders lien context, see Tylon Steepe Homes Ltd. v. Pont, 2009 BCSC 103. Justice Burnyeat found an arbitration clause in a construction contract to be void or incapable of being performed, as well as inoperative for several reasons, including that the clause:

provided that if two arbitrators cannot agree on a third arbitrator, either party can apply to “the Justice of the Court of Queen’s Bench for British Columbia”;

provided that the cost of the arbitration is to be paid in accordance with the direction of the arbitrator(s) “failing which the procedures of the Arbitration Act of Canada shall govern”;

entitling a party to “demand” arbitration, failing which the parties “shall … select” an arbitrator and the arbitrator’s decision shall be final and binding, did not make arbitration mandatory.

V. Conclusion: Best Practices from the CCA Protocols

In 2009, the American College of Commercial Arbitrators convened a summit to address concerns that

arbitration had become too much like litigation, and published a number of protocols for expeditious and cost-effective commercial arbitration. 12 They represented a call for a return to fundamentals of arbitration.

The following recommendations of relevance to the scope of this paper flow from the findings of the CCA:

(1)

Where speed, economy and efficiency are important to a client, tailor dispute resolution processes to achieve those needs.

(2)

Avoid using boiler plate dispute provisions that include loose procedures leaving considerable leeway to counsel and arbitrators, unless there are good reasons for doing so. Be deliberate and proactive in drafting these clauses.

(3)

Make sure the dispute clause gets appropriate attention at the deal table and get input on goals and options from the client, in-house counsel and, a litigator/disputes lawyer.

(4)

Consider mandatory pre-arbitration negotiations and/or mediation.

(5)

Consider putting limits on discovery in the clause.

(6)

Consider time limits for arbitration.

As lawyers, we have professional obligations to advise our clients to avoid or end litigation where a dispute will admit of fair settlement. We also have general obligations to our clients to have adequate knowledge of the

10 See Sandbar, supra, n. 4 and Prince George, supra, n. 2.

11 ABOP LLC v. QTrade Canada Inc., 2007 BCCA 290.

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substantive law and the practice and procedures by which that law can be effectively applied in order to provide competent legal services. 13

The standard form dispute clauses used in the construction industry represent an attempt by one industry, or particular players in that industry to design a dispute resolution process that is tailored to the types of disputes that commonly arise on construction projects. A similar approach may be used by solicitors drafting dispute resolution clauses to address their clients’ business goals. The ability to refer to a particular provision in a dispute clause can be a powerful tool for disputes lawyers attempting to assist clients to settle their disputes.

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VI. Appendix A—Sample Dispute Resolution Clauses

1.3.11 VI. Appendix A—Sample Disp ute Resolution Clauses

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VII. Appendix B—Section 108 of the Housing Grants, Construction and Regeneration Act 1996

1.3.28 VII. Appendix B—Section 108 of the Housing Grants, Construction and Regeneration Act 1996