The Court of Appeal for Ontario recently decided a case that has implications for many franchise relationships, given the prevalence of two-stage (mandatory mediation followed by arbitration) ADR provisions in franchise agreements. In PQ Licensing S.A. v. LPQ Central Canada Inc., 2018 ONCA 331, the Court held that the limitation period for a claim that is subject to a contractual ADR provision which requires the parties to first mediate their dispute does not begin to run until that precondition has been satisfied.
The franchisee in PQ Licensing S.A. delivered a notice of rescission on August 11, 2009. The franchisor disputed the validity of the notice of rescission on October 8, 2009. Almost two years later, on October 6, 2011, the franchisee commenced an action in Superior Court. That action was stayed in July 2013 on the basis that the franchise agreement contained a mandatory arbitration clause. The franchisee ultimately delivered a notice of arbitration on October 7, 2013.
Not surprisingly, the franchisor asked the arbitrator to find that the arbitration was time-barred since the franchisee’s notice was served almost four years after the franchisor had disputed the notice of rescission. However, the arbitrator held that the franchisee’s claim was not time-barred because the parties’ franchisee agreement required disputes to be mediated first, before they could be submitted for arbitration. The arbitrator held that the effect of this two-stage ADR process was that the claim was not “discovered” until after the condition precedent to mediate the dispute had been satisfied.
The arbitrator’s decision was upheld on appeal to the Superior Court and then again affirmed by the Court of Appeal. The Court of Appeal confirmed that the decision was not based on any tolling of the limitation period, but rather, on the principle of discoverability. In PQ Licensing S.A., the limitation period did not begin to run until early 2012, when the franchisor proposed mediation and the franchisee refused to engage.
Since the decision was an appeal of an arbitrator’s decision, the deferential reasonableness standard of review was applied. The Court reviewed the decision to determine whether it was “within a range of possible, acceptable outcomes which are defensible in respect of the facts and the law.” Therefore, it remains to be seen whether the Court will decide the issue the same way in a case that does not involve such a deferential standard of review.
Parties to a franchise agreement that includes a mandatory mediation/arbitration clause should be aware of the limitation period considerations arising from PQ Licensing S.A.. The party subject to the claim should ensure that it takes proper steps to trigger mediation if it wants to trigger the limitation period applicable to the other party’s claim.