Multi-tier dispute resolution clauses are increasingly common in commercial contracts. Many agreements require that parties conduct one or more of management negotiations, executive discussions, expert determination, or a formal mediation before arbitration or litigation. These steps can help to preserve long-term relationships between parties. In addition, multi-tier dispute resolution clauses can often lead to an early and very cost-effective resolution of the dispute. However, multi-tier dispute resolution clauses themselves can often be the source of disagreement. This article discusses potential issues arising from these clauses.

Mandatory or Optional Steps

A common issue is whether the parties must complete lower-tier dispute resolution steps before proceeding to the final binding dispute resolution process. The parties must determine if their agreement provides for mandatory or optional multi-tier dispute resolution steps.

Unsurprisingly, this will depend on the language.

For instance, recently, the Ontario Superior Court held that a clause was not a mandatory pre-requisite to arbitration.[1]The relevant provision stated that the dispute resolution process commenced with the delivery of a “Dispute Notice”. It also provided that the parties would then have to attempt to resolve the dispute by a settlement meeting, failing which the parties would have to submit the dispute to arbitration.[2]

The Court found that the steps in the multi-tiered clauses were only a path towards resolution, and not mandatory pre-requisites to arbitration.

On the other hand, in PQ Licensing v LPQ Central, the Ontario Court of Appeal held that arbitration did not become an “appropriate” remedy until the precondition of mediation had been satisfied.[3] In that case, the dispute resolution clause provided that, “before resorting to arbitration, litigation or any other dispute resolution procedure … [the parties] will first attempt in good faith to settle the dispute or claim by non-binding mediation”.

From a drafting perspective, parties should include express mandatory or optional language about each multi-tier step.

Unenforceability of Mandatory Steps

If a court or an arbitrator finds that a multi-tiered clause imposes mandatory pre-conditions to arbitration, it will generally hold the parties to their agreement. This can prevent the parties from proceeding with arbitration or litigation until the pre-conditions are met.

However, a risk still remains that a court could refuse to require the parties to take part in those steps prior to arbitration or litigation.

This applies to situations in which mandatory pre-condition steps have a very low likelihood of achieving resolution.[4]Similarly, when one party refuses to participate in a dispute resolution process to which it previously agreed, that party may be prevented from relying on the agreement to prevent arbitration or litigation.[5]

As a result, even the clearest mandatory language may not guarantee that all dispute resolution tiers will have to be followed. If a party does not participate in good faith in mandatory lower-tier dispute resolution steps, that party may lose the ability to prevent arbitration or litigation on the basis that the mandatory lower-tier steps have not been completed.

Limitations Considerations

Mandatory multi-tiered dispute resolution clauses can also create issues related to limitation periods.

In Maisonneuve,[6] the applicant sought to refer the dispute to arbitration. The respondent applied to dismiss the application arguing that it was limitations barred. The multi-tiered clause required informal resolution as a prerequisite to arbitration. The Ontario Superior Court of Justice confirmed that, when an arbitration clause includes a pre-condition to arbitration, arbitration is not proper until it is clear that no informal resolution is possible. As a result, the Court held that, until it was clear that no informal resolution was possible, the two-year limitation period did not begin to run.

More recently, the Nova Scotia Supreme Court held that the limitations period began to run once it was known or should be known that the respondent was not interested in mediation. In this case, the mediation was never completed because the respondent refused to participate in mediation.[7]

Accordingly, the decisions provide some assurance to parties that a limitation period will not expire while the dispute is still subject to a lower tier dispute resolution step. However, the limitation period may start to run as soon as it becomes clear that a party will not participate in the lower tier steps. Moreover, there is risk that a court will find that the limitation period begins to run on the date on which the basis for claim arose, with the potential result that the limitation period may expire while the preliminary steps must be undertaken, before the limitation period can be met by commencing arbitral or court proceedings.

In addition, there can be an added layer of complexity in cases in which it is unclear if the dispute is actually subject to the arbitration agreement. This can arise in the context of arbitration agreements that apply only to specific disputes. In these cases, the limitation period may expire even if a lower tier dispute resolution step was initiated. Specifically, this can occur if the dispute is ultimately held to be outside the scope of the arbitration agreement.

In this scenario, to ensure that its claim is preserved, a party may want to consider (i) obtaining agreement from the other party confirming that the dispute is subject to the arbitration agreement, (ii) time permitting, applying for an early determination about jurisdiction and the applicability of the dispute resolution provisions and, (iii) if needed, commencing both arbitration and litigation pending a resolution about the proper venue.[8]

Parties should be aware of limitations periods prior to and throughout the entire multi-tier dispute resolution process.

Conclusion

Multi-tier dispute resolution remains an effective tool for early and cost-effective dispute resolution. However, in some cases, additional steps can prolong the resolution of the underlying substantive dispute. In addition, they can add complexity to, and relative uncertainty about, limitation periods. To mitigate these risks, parties should approach multi-tier dispute resolution with strategic foresight and carefully consider the language to be included in the applicable contractual provisions.

[1] PCL Constructors v Johnson Controls, 2022 ONSC 1642.

[2] PCL at para 7.

[3] PQ Licensing SA v LPQ Central Canada Inc, 2018 ONCA 331.

[4] IWK Health Centre v Northfield Glass Group Ltd., 2016 NSSC 281.

[5] Dre Catherine Morin-Houde Dentiste inc. c Dre Marie-Ève Costisella inc., 2021 QCCS 4109.

[6] Maisonneuve v Clark, 2021 ONSC 1960.

[7] Install-A-Floor Limited v The Roy Building Limited, 2022 NSSC 67.

[8] This strategy should be employed cautiously, however, because it may well provide an option to the opposing party as to whether it is an arbitral or a court process that will govern the dispute.

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Mihai Tomos is an Associate with Blake, Cassels & Graydon LLP in Calgary. His practice is focused on complex commercial litigation and arbitration.