Can the Existence of a Mediation or Arbitration Provision Postpone the Deadline By Which One Party Can Sue the Other?
This is the second installment in Hoffer Adler LLP’s continuing Legal Insight Series focusing on mediation and arbitration provisions in franchise agreements.
For Part 1 of this Series, click here.
In this article, we consider the following question:
Can the Existence of a Mediation or Arbitration Provision Postpone the Deadline By Which One Party Can Sue the Other?
It is often the case that the law imposes a strict deadline by which a party can commence a lawsuit after suffering a financial loss. This deadline marks the end of what is legally known as the “limitation period”. In Ontario, the deadline marking the end of the limitation period in most cases is 2 years from the date when the claim is “discovered”.
In the recent Ontario Court of Appeal decision in PQ Licensing S.A. v. LPQ Central Canada Inc.[1], the Court was given the opportunity to consider how a mediation provision in a franchise agreement affected the limitation period. That decision arose out of a dispute between the franchisor and the franchisee in the “Pain Quotidien” brand of bakeries/restaurants.
The franchisee in the Pain Quotidien case sued the franchisor for rescission. The franchisee commenced its lawsuit within the 2-year limitation period by which most lawsuits in Ontario must be commenced. Shortly after commencement of the lawsuit, the franchisor wrote to the franchisee taking the position that the alternative dispute provisions of the franchise agreement required mediation followed by arbitration prior to the pursuit of any lawsuit; the franchisee responded that the mediation provision was invalid and the entire franchise agreement voided by the franchisor’s conduct.
Following that exchange, however, the franchisee neglected to prosecute its lawsuit, such that the lawsuit was eventually dismissed by the court for delay.
When the franchisee sought to have the lawsuit re-instated, the franchisor successfully objected on the basis that the franchise agreement included provisions requiring mediation first, followed by arbitration. The court suspended the lawsuit and directed that the dispute be resolved instead by means of the alternative dispute resolutions contained in the franchise agreement.
The franchisee accordingly commenced an arbitration; however, this effort was also met with opposition by the franchisor. The franchisor now took the position, before the arbitrator, that, while the lawsuit was commenced within the 2-year limitation period, the arbitration was commenced outside of that 2-year limitation period.
The question the arbitrator needed to decide in this case was when the 2-year limitation period began to run. Under Ontario’s Limitations Act,[2] the 2-year limitation period starts to run from when a claim is “discovered”. The Act provides some guidance about when a claim can be said to have been “discovered”, and one of the factors in that calculation is when the person with the claim first knew, or ought to have known, that a proceeding would be an appropriate means to seek to remedy its losses.
In this case, the franchisor argued that the question to be asked was when the franchisee knew or ought to have known that any legal action was appropriate; the franchisor took the position that the franchisee knew that a proceeding would be an appropriate means to seek to remedy its losses when the franchisor had disputed the rescission claim following delivery by the franchisee of a rescission notice.
The franchisee, by contrast, argued that the question to be asked was when the franchisee knew or ought to have known that arbitration was appropriate, because the franchise agreement required mediation first, followed by arbitration; in support of that argument, the franchisee took the position that the franchisee only knew or could have known that a proceeding would be appropriate much later, when the franchisor had insisted on mediation and the franchisee refused to mediate.
The arbitrator agreed with the franchisee, and found that the 2-year limitation period did not begin to run until the mediation was refused. The arbitrator disagreed with the franchisor’s argument that such an interpretation would create an open-ended limitation period, permitting the franchisee to delay arbitration indefinitely. The arbitrator noted that either party could have started the limitations clock running by requesting mediation.
The franchisor attempted twice to appeal the arbitrator’s decision, both times unsuccessfully. The Superior Court of Justice and the Court of Appeal agreed that the arbitrator’s finding was “reasonable”.
In this case, it is doubtful that the parties intended the alternative dispute resolution provisions in the franchise agreement to modify either of their rights or obligations under the Limitations Act; however, that was the unintended effect.
Please consult with us if you are a franchisor or a franchisee and are concerned about whether your franchise agreement contains provisions that may create unintended rights or obligations.