Mediation Precondition in Arbitration Clause is Key to Limitation Period

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Authors: Ben Hanuka and Anthony Pugh, Law Works P.C.

In PQ Licensing S.A. v. LPQ Central Canada Inc., an April 5, 2018 decision of Court of Appeal for Ontario, the franchisor, PQ Licensing S.A., appealed a decision of a judge, who in turn dismissed the franchisor’s appeal of an arbitrator’s decision. The arbitrator ruled that the arbitration was not time-barred by the Limitations Act, 2002, because mediation was a pre-condition to the arbitration and the limitation period only started to run after the franchisor requested mediation.

The Court of Appeal held that the arbitrator’s decision that the limitation period started to run only after mediation was requested was reasonable.

In addition, the court held that the arbitrator’s decision to sever a reference to Delaware from the mediation agreement was reasonable. It held that discarding the entire mediation agreement based only on the reference to Delaware would have been unreasonable in the circumstances.

Procedural background

In 2008, the parties entered into a franchise agreement for the development of thirteen “Le Pain Quotidien” franchises in Ontario and Quebec. The franchisee delivered a notice of rescission in 2009, claiming that the franchisor breached its disclosure obligations. Shortly afterwards, the franchisor disputed the validity of the notice of rescission.

Almost two years later, in 2011, the franchisee started an action in the Ontario Superior Court. The dispute resolution provisions in the franchise agreement required the parties to settle disputes through arbitration, after mediation.

The franchisee claimed that the mediation requirement was void because it required mediation in Delaware, in breach of section 10 of the Arthur Wishart Act (Franchise Disclose), 2000, which prevents franchise agreements from requiring adjudication of disputes in a location outside Ontario.

The franchisor claimed that the mediation clause was not void and requested mediation in Toronto.  The franchisee rejected the request for mediation.

The franchisee’s court action was dismissed for delay in 2013. A Superior Court judge stayed the action after the franchisee attempted to revive it. The franchisor claimed that the franchisee failed to commence the arbitration within the limitation period. The Superior Court judge referred this issue to an arbitrator. The franchisee then served a notice of arbitration.

The arbitrator ruled that the franchisee was not out of time because its notice of arbitration was served within two years from when the franchisor requested mediation (to be exact, the limitation period in that case started to run sixty days after the franchisor’s request for mediation, based on a provision in the franchise agreement).

The standard of review of the arbitrator’s decision is reasonableness

Following the recent Supreme Court decision in Creston Moly Corp. v. Sattva and Teal Cedar Products Ltd. v. British Columbia, the Court of Appeal held that the standard of review of an arbitrator’s decision is almost always ‘reasonableness’ (this implies more deference to the arbitrator’s decision than a standard of ‘correctness’).

The franchisor argued that the dispute resolution provisions were commonplace and that a standard approach to their interpretation would be of value to other parties, and that therefore the standard of review should be that of ‘correctness’ (which is a stricter and less deferential standard). It relied on another recent decision of the Supreme Court in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co, where Wagner J. (as he then was) wrote that interpretation of a standard form contract can, in certain situations, be a question of law subject to correctness review standard (the stricter and less deferential review standard).

However, Ledcor was an appeal of a court action, not a review of an arbitrator’s decision. Questions of law in the civil litigation context are reviewed on a correctness standard, but review of arbitrators’ decisions will generally be based on a reasonableness standard.

The court wrote that the Supreme Court instructed courts in Sattva to only apply a correctness standard on exceptional questions of law, such as constitutional questions, or general questions of law that are of central importance to the legal system as a whole and outside the adjudicator’s area of expertise. In this case, the arbitrator’s interpretation of the Limitations Act, 2002 and the Wishart Act did not attract that kind of strict and less deferential standard of review of correctness.

Limitation period starts after mediation requested

The arbitrator determined that the franchisee’s claim was not time-barred. He interpreted the dispute resolution provision as requiring mediation as a pre-condition to arbitration and held that arbitration was not an appropriate means to remedy the franchisee’s claimed loss until the parties had complied with the contractual mediation requirement – in this case at least requesting mediation.

The franchisor characterized the suspension of the limitation period as a ‘tolling’ of the limitation period under section 22 of the Limitations Act, 2002 a provision which the arbitrator explicitly found did not apply.

The franchisor also argued that enforcing the mediation precondition would create an open-ended limitation period, permitting the franchisee to delay arbitration indefinitely.  The arbitrator rejected this argument.  He found that the precondition was bilateral and that either party could have stopped the limitation clock by requesting mediation. He also found that the franchisor eventually requested to hold mediation.

There was no dispute that, apart from the mediation precondition, the claim would have been discovered when the franchisee delivered its notice of rescission.  But the court ruled that the statutory presumption under the Limitations Act, 2002 that a claim is discovered when the facts underlying that claim occur did not apply here. The question was not when the franchisee knew that it had a claim, but when it knew that arbitration was the appropriate means to resolve the dispute. This depended on the dispute resolution provisions in the franchise agreement – and in this case complying with the mediation precondition.

The franchisor argued on appeal that it would have no reason to start mediation of a dispute that might simply go away. However, the court held that the mediation process is no less certain or available even if a party chooses not to invoke it for whatever reason. It also noted that the franchisor in fact demanded mediation.

Furthermore, the court found that, along with the time limits contained in section 6 of the Wishart Act (the rescission section), the franchise agreement itself had its own internal time limit of one year for the franchisee to give notice of any claims to the franchisor. Because a claim would be time-barred after expiry of this one-year period, a franchisee could not indefinitely delay giving notice and pursuing its claim.

Reference to Delaware may be severed from the mediation clause

At arbitration, the franchisor argued that the mediation provision in its own franchise agreement was void because it required mediation in Delaware. The arbitrator took a “blue pencil” approach and severed the reference to Delaware from the rest of the provision, because in his view this was consistent with the remedial purpose of the Wishart Act.

The court found that this decision of the arbitrator was reasonable. It also noted that the parties’ own franchise agreement provided that any provision which conflicted with any law would be limited only to the extent required by the law. Removal of the reference to Delaware upheld the intentions of the parties, as well as the purpose of the Wishart Act.

The court also held that not only was the decision reasonable, it would have been unreasonable for the arbitrator to exclude the entire mediation clause, especially in circumstances where the franchisor had previously relied on the mediation clause.

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For more information about Law Works’ expertise and how we may be able to help you, please contact Ben Hanuka at https://www.lawworks.ca/book-a-consultation or by phone in Ontario at (855) 978-5293 and in British Columbia at (604) 262-1711.