Ontario Court of Appeal Finds Stepped Dispute Clause Does Not Bar Arbitration

In J.P. Thomson Architects Ltd. v. Greater Essex County District School Board (Thomson v. Essex School Board), the Court of Appeal for Ontario found that a “stepped” dispute resolution clause did not bar recourse to arbitration when pre-arbitration steps were not completed within the timeframe specified in the clause.

The decision demonstrates the commercially sensible approach courts take to stepped dispute clauses, and highlights that arbitrators, rather than courts, will generally be allowed to decide whether they have jurisdiction over a dispute under an arbitration clause.

Background

A “stepped” or “multi-tiered” dispute resolution clause requires parties to take certain steps, such as negotiation or mediation, before commencing arbitration. A common question faced by parties is whether arbitration can be started if those steps have not been completed.

In Thomson v. Essex School Board, the appellant, J.P. Thomson Architects Ltd. (Thomson), entered into agreements (Contracts) with the Greater Essex County District School Board (Board). The Contracts incorporated a stepped dispute resolution clause (Clause), which provided that:

• Any dispute which cannot be resolved by the parties within 30 days of the dispute arising shall be referred to mediation upon the request of either party; and
• If the dispute has not been resolved by mediation within 30 days following selection of the mediator, such dispute shall be settled and determined by binding arbitration

Thomson requested mediation under the Clause regarding disputes arising from letters sent by the Board over the preceding 15 months.

The Board refused to appoint a mediator, asserting that the 30-day period for requesting mediation had expired. Thomson then issued a Notice of Arbitration, which the Board also refused to recognize on the same basis.

Thomson applied to the Ontario Superior Court of Justice under section 10(1) of the Arbitration Act, 1991 for an order appointing an arbitrator. The application judge dismissed the request, holding that the Clause required Thomson to have initiated mediation within 30 days of the dispute arising.

Court of Appeal’s Decision

The Court of Appeal unanimously allowed Thomson’s appeal. The Court emphasized that dispute resolution clauses must be read purposively and commercially, not technically. On this reading, the 30-day period for requesting mediation referenced in the Clause was to be read as a minimum period for negotiation, not a hard deadline.

The Court observed that a strict “use it or lose it” interpretation of the dispute resolution Clause would be inconsistent with:

• The text and structure of the Clause, which clearly contemplated a staged process
• The commercial reality of long-term contracts, where disputes may take time to crystallize
• The purpose of promoting consensual resolution

The Court also reaffirmed the competence-competence principle, which holds that arbitrators should determine their own jurisdiction under an arbitration clause in the first instance. The application judge had erred in engaging in factual analyses about whether Thomson’s disputes fell within the arbitration clause. Those questions are for the arbitrator to decide.

The Court ordered the parties to proceed to mediation within 60 days, following which Thomson retained its recourse to arbitration.

Conclusion

The Court of Appeal’s decision reinforces the Ontario courts’ preference to prevent parties from avoiding arbitration based on a technical interpretation of stepped dispute resolution clauses. By rejecting the trial judge’s reading, the Court preserved the Clause’s purpose and ensured that recourse to arbitration was not lost. It also highlighted the jurisdiction of arbitrators, not courts, to decide whether a dispute falls under an arbitration clause.

Although this case affirms that the selection of arbitration will generally be respected, parties should consider whether stepped arbitration clauses are necessary, given that they may delay proceedings or cause confusion as to when or how the parties may access dispute resolution. Where there is a will to negotiate or mediate, parties can always agree to do so at any stage of the proceeding.

For more information, please contact the authors or any other member of our Arbitration group.