Canada – Statute Gives Unintended Economic Incentives to Avoid Mandatory Arbitration

This article was first published on the Arbitration Matters blog, here.

In Metropolitan Toronto Condominium Corporation No. 1171 v Rebeiro, 2022 ONSC 503, Justice Myers granted a stay of an application brought by a condominium corporation to require the respondent unit holder to comply with the condominium by-laws and rules, and ordered the dispute to go to mediation and arbitration. Justice Myers found that the condominium corporation had deliberately framed its relief to avoid the provisions of the Ontario Condominium Act, 1998, S.O. 1998, c. 19, which require mediation and arbitration pursuant to the Ontario Arbitration Act1991, S.O. 1991, c. 17, if certain relief is sought. Significantly, he found that the Act provides economic incentives to the condominium corporation to seek relief from the courts rather than to go mediation and arbitration. First, the Act states that if the condominium corporation wins damages or costs in court, its full legal costs can be added to the owner’s common expenses. Second, it allows the condominium corporation to demand payment of ongoing legal costs, such as for lawyers letters, in the midst of the dispute. If the unit holder refuses to pay, the condominium corporation may file a lien against the unit, which escalates the existing dispute and creates a new one.

In this application, the applicant condominium corporation sought an order requiring the respondent to sell her unit or, alternatively, to comply with the condominium’s rules. The underlying issue was a neighbour dispute between the respondent and the unit owner next door that had escalated to the point that police were involved. The condominium corporation sided with the neighbour, whose health and safety it claimed were at risk. The respondents moved to say the application pending mediation and arbitration, as required under s. 132(4) of the Ontario Condominium Act, 1998, S.O. 1998, c. 19, which provides for mediation and arbitration pursuant to the Ontario Arbitration Act1991, S.O. 1991, c. 17.

Justice Myers was critical of the condominium corporation for having brought the application:

“[8] I agree completely with Dunphy J. who discussed condominium neighbours’ disputes in TSCC 2204 v. Panagiotou, 2021 ONSC 8199 (CanLII).

[13] This fiasco has gone on long enough. The root of the problem is the ill-advised decision to escalate this dispute to an “on the meter” legal level with an ever-increasing conveyer belt of demands for legal fees instead of deescalating it through mediation as the Legislature plainly intended to occur.

[9] I also agree with and adopt his assessment at para. 1 of the Panagiotou decision,

         [1] This motion and proceeding should never have happened.

[10] In light of the finding that this application should not be in court, I will not make findings of fact. There is a big credibility issue facing [the respondent]. There is no evidence at all from [the neighbor] and no evidence supporting the allegation that her health or safety is at risk. Moreover, it is clear that the condominium corporation has chosen sides. But it is not at all clear whether it has made a fair assessment.

[11] I could not decide this application on a written record even if it was appropriate for the matter to be here. It is infused with “she said/she said” credibility issues.

The parties disagreed on the nature of the dispute, specifically, whether or not it was one that required mediation and arbitration before court proceedings.  

The respondent asserted that the dispute was, at its core, a dispute over the breach of the condominium’s declaration, by-laws and rules, which was required to be mediated and arbitrated first under sections 132 and 134 of the Act. Section 132(4) states that every declaration is “deemed” to contain an arbitration clause that requires any disagreement as to the declaration, by-laws or rules to go to mediation and arbitration.

The condominium corporation’s position was that its claims were based upon breaches of the Act, which did not require mediation and arbitration before court proceedings. It relied upon s. 117, which provides that no person shall permit any activity in a unit or the common elements that would likely cause injury to an individual. It also relied upon s. 119, which provides that owners are required to take reasonable steps to ensure that an occupier of the owner’s unit complies with the Act, the declaration, the by-laws, and the rules of the corporation and that the corporation and any owner have the right to require that a person who is required to comply with the Act, the declaration, the by-laws, and rules shall do so.

Therefore, both parties relied upon provisions that addressed breaches of the condominium declaration, by-laws, or rules, but only those relied upon by the respondent appeared to require mediation and arbitration.

Justice Myers found that the condominium corporation had fashioned its relief deliberately to try to avoid arbitration:

“[42] In this case, there is no question that the core issues are the disputes under the condominium’s documents. The assertions [by the condominium corporation ] that ss. 117 and 119 apply are weak and clear efforts to pigeonhole the facts into statutory claims to get out of arbitration.

[43] Section 117 deals with acts that cause injury to people. As noted previously, there is no evidence from [the neighbor]. There is no medical evidence. The President [of the condominium corporation] … fears for her health.

[45] It is perfectly clear that this application is not about the risk of injury to [the neighbour] or others. The core of this dispute is the ongoing misbehaviour of one or both neighbours and others who have taken one side. I make no suggestion that either side is right or wrong.”

Justice Meyers asked himself why “these cases” keep coming to court with “she said/she said” neighbour disputes instead of going to mediation and arbitration, which he said would be faster, cheaper, and more conciliatory. He concluded that the statute itself “provides an unintended incentive for condominium corporations to inflame the dispute and then come to court”. He found that there were economic incentives to the condominium corporation to bring court proceedings rather than mediate and arbitrate:

“[51]First, subsection 134 (5) provides that if the condominium corporation wins a dollar in damages or costs, then its full legal costs can be added to the owner’s common expenses. This subsection prevents an unreasonable unit owner from foisting very substantial costs on all of the other unit owners in the condominium building. It is understood that the normal award of partial indemnity costs to a successful litigant can leave 40% or more of the successful litigant’s actual costs outstanding. This subsection provides that the corporation can recover that remaining portion from the unit owner who has been held to have been in the wrong.

[52]But consider the economic incentives at play. By coming to court to obtain a damages or costs award, no matter how small, the condominium corporation understands that it gets a free legal ride. Worse still, counsel understands that the normal cost sensitivity of his or her own client does not apply. The case reports are replete with cases that note that it appears that the condominium corporation engaged in overkill and brought a bazooka to a knife fight. Maximizing costs to be paid by the unit owner is the economic incentive of s. 134 (5). Why go to mediation when you can go to court for free? By protecting the innocent owners from costs, the statute unintentionally arms the board of directors with a huge weapon and removes the usual limits imposed by clients on their own lawyers’ spending.

[53]Second, …condominium corporations in the midst of a dispute with unit owners, send legal letters and then try to pass on the fees of their lawyer for drafting the letter. When the unit owner balks because the matter is still in dispute, the condominium corporation files a lien against the condominium unit for the amount of the fees already charged plus the fees incurred to file the lien. This inflames the parties and escalates the dispute. Instead of fighting over a discrete issue, there is now a new dispute about the propriety of the lien. Many a case morphs into an emotional dispute over allegations of bullying by liens with the initial issue relegated to secondary status.

[54]The statute causes this problem too. The condominium corporation’s right to indemnity for its legal fees is usually set out in its declaration or by-laws. Subsection 85 (2) of the statute provides that a claim for lien expires unless it is registered against title to the unit within three months after the date of the default for which a lien is claimed. The condominium corporation therefore has to act quickly to assert and file a lien or risk losing it”.

[55]Both of these economic incentives work against the central preference of the statute for mediation and arbitration…

Justice Meyers held that there was nothing in the provisions relied upon by the condominium corporation that prevented the resolution of issues by mediation and arbitration if they fall under the arbitration agreement imposed upon the parties by the Act.

Therefore, Justice Meyers stayed the application while the “core” dispute went to mediation and arbitration. If there remained anything outstanding under sections 117 and 119 of the Act after that, the parties were free to move to lift the stay and continue the application – or convert it to an action.

Editor’s Notes:

This is an example of a growing number of cases in which judges are exercising their discretion, where possible, to divert the parties to alternative dispute resolution as a better option for the parties.

First, Justice Meyers found that the solution to the parties’ “neighbours dispute” was not a court proceeding:

“[46] The fix for neighbours’ disputes, whether in condominiums or houses, is not found in an expensive, drawn out court proceeding. The court certainly can find facts and impose a remedy after an expensive trial perhaps. But, until the neighbours agree to cease hostilities, the court’s decision is just a battle in an ongoing war. It becomes fodder for the next salvo.

[47]The fix is in making the parties sit down, hear each other, and realize that the only win-win is peace. As said in the movie WarGames, “The only winning move is not to play”.

Second, Justice Myers considered whether the respondent’s stay application was too late. He noted that  “undue delay” can be a defence to a request to stay a claim in favour of arbitration pursuant to s. 7(2)4 of the Ontario Arbitration Act, 1991. In this case, the court application was ready for a hearing – the parties had agreed to a schedule, cross-examinations were held, and the hearing date was set, but was converted to this stay motion. The condominium corporation argued that the respondent was too late to bring a stay motion. Justice Myers stated that the delay was not “undue” because there was no prejudice to the condominium corporation and that in this case, arbitration was preferable. His rationale was as follows:

[61] … If the parties have agreed to arbitrate or are deemed to have done so, it is not just their preference, but the law’s distinct preference that they do so. Moving in court may be inappropriate or less appropriate for any number of reasons – perhaps because it fails to respect the parties’ autonomy or because it fails to respect the Legislature’s view that the subject matter of the dispute is best resolved through an alternative form of dispute resolution.

[62] But, where a party brings the proceeding in the less preferable venue of a courtroom and the other party delays in moving to stay the action, the underlying reasons for the preference for arbitration do not change. Arbitration remains preferable. But what is at issue is a supervening risk that the moving party is abusing the process by delaying, running up the other parties’ costs, perhaps benefiting from some delay in the outcome, or otherwise causing unfair prejudice to the applicant.

author

Lisa C. Munro

Lisa Munro is a partner at Lerners LLP, whose practice is limited to work as an arbitrator in domestic and international commercial arbitrations (both ad hoc and under institutional rules). She brings to this role more than 25 years of experience as counsel in commercial/business litigation and both international and…

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