This article previously appeared in Focus on Construction | Infrastructure - November 2010.
In a previous article, "Limitations Issues in Construction Law: Calculating Limitation Periods for Contractual Indemnity Provisions", we examined limitation periods in the context of contractual indemnity provisions. The within article considers the operation of limitation periods where the applicable contract contains a staged or stepped dispute resolution provision.
More particularly, the purpose of this article is to look at a common clause found in construction contracts and to illustrate how it can create a potential trap for the unwary. Most negotiated construction contracts contain a dispute resolution clause, and many of those clauses prescribe a mandatory staged dispute resolution process beginning with negotiation and ending with either litigation or arbitration. Parties to such contracts need to understand the potential limitation issues that arise with respect to commencing a lawsuit or arbitration proceedings.
In a 2010 decision of the Alberta Court of Queen's Bench, Suncor Energy Products Inc. v. Howe‐Baker Engineers, Ltd.,  A.J. No. 618, the court considered an application to strike an arbitration on the grounds that the arbitration proceeding was time barred, having been commenced after the relevant limitation period expired.
In 2004, the parties entered into two contracts whereby the contractor agreed to engineer, fabricate and ship equipment for use at a refinery in Ontario. Both contracts contained identical clauses which provided for a three‐step dispute resolution process: negotiation, followed by mediation, followed by arbitration.
At the end of the project, the owner withheld payment on several invoices on the grounds the contractor had breached the contract by failing to properly perform the work, and by causing delays and subsequent damages.
Thereafter, the contractor sent a number of letters demanding payment of the outstanding invoices. The owner replied that the invoices were not going to be paid due to the breaches of contract. A meeting was subsequently held between the parties, but no resolution was reached. The contractor then wrote and made an offer to settle the dispute, warning that if an agreement was not reached, a formal Notice of Dispute would be served under the dispute resolution procedure in the contract. Again, the owner responded that it had no intention of paying the amounts demanded by the contractor and that if the contractor pursued the matter, the owner would bring forward its own claim.
The contractor waited some period of time and then triggered the contractual dispute resolution procedure by serving a Notice of Dispute, but did not take any other steps. After waiting a further period, the contractor finally served a Notice to Arbitrate and sought the appointment of an arbitrator to hear the dispute.
By this time, a substantial period of time had passed since the invoices were rendered and, as a result, the owner took the position the contractor was out of time to pursue payment.
In deciding the limitation question, the court considered three key issues: a) whether the court had jurisdiction to hear the application; b) what the applicable limitation period was that governed commencement of the arbitration proceedings; and c) whether the contractor had commenced an arbitration within the applicable limitation period.
Although the contract called for mandatory arbitration, the court held it had jurisdiction to determine the limitation issue (it being a pure question of law) and thus whether there could even be an arbitration. In other words, it was unnecessary to refer the limitations issue to the arbitrator.
The court held that under the governing legislation, the contractor had two years from the date on which it knew it had a claim to commence the arbitration.
Commencement of Proceedings
In this case, the contractor served its Notice of Dispute within the two‐year limitation period, but served its Notice to Arbitrate outside that period. The key issue for the court then was whether the contractual dispute resolution procedure set out in the contract was to be treated as one integrated process – in effect a code – or a process with three separate and distinct steps: negotiation, mediation and arbitration.
The contractor argued the dispute resolution procedure was an integrated process such that when it triggered the first step of that procedure by serving its Notice of Dispute, that was sufficient to meet the limitation period. The court rejected this argument, holding that the Notice of Dispute simply commenced the dispute resolution procedure in the contract (which may or may not involve an arbitration), and that arbitration is a separate and distinct procedure to be commenced in a definitive manner. In the result, the contractor failed to commence the arbitration in time and thus could not pursue its claim for payment.
This case is both factually and legally complex, as are many construction disputes. It highlights the need for parties to obtain legal advice at the early stage of a dispute and to pay close attention to the time limits within which to commence litigation or an arbitration. Failure to do so might, as in this case, result in a party losing its claim.
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.