Parties to an arbitration agreement may not always agree whether a dispute is subject to arbitration. However, it is crucial that the parties identify the applicable limitation period for arbitration if there is even a possibility that a case is subject to arbitration. Doing so will allow the claimant to preserve its right to arbitrate and prepare the respondent to defend against a potentially stale claim – regardless of their respective positions regarding the applicability of the arbitration clause. Recent case law indicates that a party's claims may be statute-barred under limitation period legislation if that party fails to commence an arbitration in time while disputing the arbitrability of the dispute.
In Ontario, pursuant to section 52(1) of the Arbitration Act, the standard two-year limitation period under the Limitations Act, 2002, SO 2002, c 24, Sch B ("Limitations Act") applies in respect of arbitration proceedings. In other words, the law with respect to limitation periods applies to an arbitration as if the arbitration was an action and a claim made in the arbitration was a cause of action.
In Suncor Energy Products Inc. v. Howe-Baker Engineers, Ltd., the Alberta Court of Queen's Bench concluded that the defendant had two years from the date when its claim arose or from the date when a reasonable person would have known that a claim had arisen, to pursue its claim by arbitration or litigation. In that case, since the contracts provided for an arbitration process to be used, that would mean it would have two years from the date the claim arose to commence arbitration proceedings.
A franchisee's limitation period for pursuing a rescission claim begins to run on the earlier of the expiry of the 60 day window in which the franchisor may respond to the franchisee's notice of rescission under section 6(6) of the Arthur Wishart Act, or the date on which the franchisor rejects the notice of rescission. As stated by the Ontario Court of Appeal in 2130489 Ontario Inc. v. Philthy McNasty's (Enterprises) Inc., it is at that time, when the franchisee knows for certain that the franchisor will not comply with any obligations under section 6(6), effectively giving rise to a potential claim for damages. In these cases where the franchisee purports to rescind the franchise agreement, and the franchisor subsequently rejects the rescission, the limitation period begins to run.
In Alpina Holdings Inc. v. Data & Audio-Visual Enterprises Wireless Inc., the defendants moved to stay the action pending arbitration pursuant to an arbitration agreement, also noting that the limitation period had expired. The plaintiff's position that the combination of the stay and the expired limitation period would result in unfairness was ultimately rejected by the court, highlighting the strict application of limitation periods and that they are designed to protect defendants against stale claims.
An arbitration may be commenced "in any way recognized by law" pursuant to section 23 of the Arbitration Act. However, in Lafarge Canada Inc. v. Edmonton, the Alberta Court of Appeal held that the plaintiff's statement of claim did not commence arbitration under the equivalent provision of Alberta's Arbitration Act. Accordingly, parties should not rely on their pleadings in an action as having also commenced arbitration proceedings. Rather, a party seeking to commence arbitration should consult the terms of the arbitration clause for any required provisions and, in any event, communicate a clear and unequivocal intention to arbitrate to the opposing party.
Parties to franchise agreements and their counsel ought to be mindful of the fact that, if the limitation period expires after the commencement of the action (which is subsequently stayed) but before the commencement of arbitration proceedings, the plaintiff may be without a remedy as it will be too late to arbitrate. The bottom line is that the limitation period is not stayed while the court determines whether the action should be resolved by way of court litigation or arbitration and for this reason, parties need to be cognizant of when the clock starts ticking.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
