Canada: Arbitrating Essential Terms Of A Construction Contract

The popularity of non-traditional dispute resolution mechanisms is on the rise in Alberta. The construction industry is particularly well-suited to arbitration, where both parties can benefit from the ability to select an arbitrator with the practical and technical expertise to quickly resolve a dispute in an informed and cost-effective manner.

That being said, there are some risks associated with arbitrating a construction dispute, particularly where the arbitrator, who may or may not have a legal background, is called upon to interpret the terms of a contract between the parties. This can be a complicated exercise, and may involve the application of abstract legal concepts and/or convoluted rules of interpretation and construction.

If an arbitrator errs in any way, s.44 of the Arbitration Act provides a mechanism whereby a dissatisfied party can (subject to the unique terms of their arbitration agreement) appeal the award. However, the Court's ability to ultimately over-rule an arbitrator's award always depends on whether the appeal is based on a question of law, of fact, or of mixed law and fact. If the issue is one of contractual interpretation that's a question of law, and a judge is empowered to over-rule the arbitrator's award if any error was made with respect to same.

Interestingly, the Court of Queen's Bench recently ruled that an arbitrator's decision on what constitutes a "fundamental" change to a construction contract shall, in circumstances analogous to the case discussed below, not be characterized as a question of law, but instead as a question of fact, or at best, of mixed law and fact, and as such, shall not be interfered with absent a "palpable and overriding error." This is a tighter test, and one that makes it harder for a Court to over-rule an arbitrator's award.

In Denali Construction Inc. v. Tremore Contracting Ltd., 2013 ABQB 321, a contractor appealed an arbitrator's decision to compensate a sub-contractor for additional work performed over an extended period of time, notwithstanding the fact that the contract between the parties was a stipulated price contract and did not contain a term relating to time to complete.

The contractor appealed on the basis that the arbitrator, who was a professional engineer, erred in law when he characterized the subcontractor's investment of additional work and time as a "significant" or "fundamental" change to the contract between the parties. In particular, the appellant argued that the arbitrator failed to apply the correct test to the facts before him, and set too low a standard for the circumstances in which time and materials could be charged to a stipulated price contract.

The Honourable Madam Justice Veit accepted the arbitrator's "clear reasons" for reaching the conclusions that he did. She dismissed the appellant's characterization of the arbitrator's alleged errors as ones of law, holding instead that where an arbitrator has to make findings of fact in order to determine the essential terms of a contract, those findings warrant deference.

This decision hammers home the necessity of carefully selecting an arbitrator, particularly in situations where the arbitrator will be asked to decide if additional work constitutes a fundamental change to a contract between the parties. His or her determination on that issue will be final, absent a palpable and overriding error.

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.

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