Many construction contracts in Ontario provide for a tiered dispute resolution process. Often, the parties contractually agree to negotiate, mediate and then arbitrate disputes. The presumption has been that the parties have two years from the date the dispute arose to arbitrate the dispute. However, a recent case from the Ontario Court of Appeal extends this limitation period.

The Limitations Act, 2002

The Limitations Act, 2002, SO 2002, c 24, Sched B governs limitation periods in Ontario. Section 4 provides for a basic limitation period whereby claimants have two-years from the date a claim is discovered in which to commence their litigation claim. The determination of the date that the limitation period starts to run is very fact specific and turns on the particular circumstances of each case.

Section 5 of the Limitations Act, 2002, defines when a claim is discovered. Section 5(1) provides the following:

(1) A claim is discovered on the earlier of,

(a) the day on which the person with the claim first knew,

(i) that the injury, loss or damage had occurred,

(ii) that the injury, loss or damage was caused by or contributed to by an act or omission,

(iii) that the act or omission was that of the person against whom the claim is made, and

(iv) that, having regard to the nature of the injury, loss or damage, a proceeding would be an appropriate means to seek to remedy it; and

(b) the day on which a reasonable person with the abilities and in the circumstances of the person with the claim first ought to have known of the matters referred to in clause (a).

A person is presumed to have known the claim is discovered on the day the act or omission on which the claim is based occurred, unless the contrary is proven.

Section 5(1)(a)(iv) may have the effect of delaying the discovery of a claim in construction litigation claims.

PQ Licensing S.A. v LPQ Central Canada Inc.

The Ontario Court of Appeal in PQ Licensing S.A. v LPQ Central Canada Inc. held that a claim is not discovered until after the mandatory mediation provisions in the contract have been satisfied.

Although not a construction claim, in PQ Licensing S.A. the franchise agreement provided that the parties must mediate a dispute before proceeding to arbitration. The franchise dispute arose on October 8, 2009. The parties proceeded to mediation on January 16, 2012 but were unable to resolve the dispute. A notice of arbitration was served on October 7, 2013. The arbitrator held that the parties had agreed to a comprehensive scheme for the resolution of their disputes within the franchise agreement. Mediation, according to the arbitrator, was a precondition to arbitration and thus, the limitation period did not begin to run until after mediation was completed. The arbitration was therefore not time-barred.

This was upheld by the Ontario Court of Appeal, which held that the limitation period was suspended until the parties’ obligations under the contract to mediate was met. The discoverability of section 5(1)(a)(iv) of the Limitations Act, 2002 will be dependent on the parties completing the mandatory mediation step as a party would not have known that a proceeding would be an appropriate means to seek a remedy until after mediation was completed. Thus, the Court of Appeal held that the limitation period in PQ Licensing S.A. did not start to run until the date that the mediation was held (i.e., January 16, 2012) and so the arbitration was commenced within the limitation period.

Limits of Section 5(1)(a)(iv) of the Limitations Act, 2002

But, there are limits of section 5(1)(a)(iv). In Davies v Davies Smith Development Partnership, the Ontario Court of Appeal held that a party cannot “sit on its hands” and make no effort to discover a potential claim and use section 5(1)(a)(iv) to postpone the running of a limitation period.

The question therefore becomes: how long can a party wait before triggering the mandatory mediation under a contract? This uncertainty has yet to be addressed by the Court. The cautious approach is to negotiate and mediate as soon as possible after the dispute arises and the loss or damage is discovered.

Impact on Construction Lien Claims

This does not suspend the limitation periods for preserving and perfecting a construction lien. Rather, the Court of Appeal’s decision will impact disputes that fall outside of the construction lien landscape.

Want to know if you have a claim under a construction contract? Speak to one of our construction lawyers at Augustine Bater Binks LLP today!

[This article is for informational purposes only and does not constitute legal advice, which cannot be given without consideration of your individual circumstances.]

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