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“The Perils of Not Having a Dispute Resolution Mechanism”

A recent decision of the Alberta Court of Queen’s Bench, in the judge’s words “highlights the perils of not having a dispute resolution mechanism built into a contract.”

Madam Justice Loparco described the lawsuit in North Pacific Properties Ltd v Bethel United Churches of Jesus Christ Apostolic of Edmonton as a “Jenga tower.”

The case involved a very complicated real estate deal (119 paragraphs summarizing the evidence). The saga started in 2006, with an agreement to sell property to a developer and transfer of part of it back to the Bethell church. The original buyer assigned the purchase agreement to another developer along with a larger neighbouring property as part of a proposed subdivision project. The developer discovered that the church property was smaller than the agreement said. To make matters worse, the province also expropriated part of the land. In the meantime, work had been done to get development approval from the city and to prepare the property and neighbouring land for development.

Attempts to extend the closing date and renegotiate the agreement failed when the seller refused to reduce either the purchase price or the size of the piece of land it was retaining for itself. In 2011, the seller declared the agreement null and void. The buyer abandoned the project, sold off the remaining property and sued for damages for breach of contract.

After almost a decade of litigation, the judge found that there was no valid agreement to extend the time for closing the deal, that the church had breached the contract because the property was smaller than it said, and the developer was entitled to damages of $5,770,000. (With interest and costs, likely about double the original $3.5 million purchase price for the property.)

The judgment notes that “the entire deal collapsed because the parties could not determine who should take less. Unfortunately, they had no prescribed means of resolving their dispute prior to closing.”

The original purchase agreement apparently had no arbitration or other dispute resolution clause.

Although the parties tried to negotiate an agreement to extend the original closing, to give more time to resolve the issues in dispute – or to arbitrate them if they couldn’t agree – the judge concluded that they were never ad idem on the terms of the extension agreement. For the same reason, she concluded that they had not agreed to arbitrate the dispute, despite correspondence proposing to arbitrate.

“In the end,” Justice Loparco concluded, “this is an unfortunate tale of two well-meaning parties who had no means of resolving their disputes prior to the Closing; the result was protracted and costly litigation. It highlights the perils of not having a dispute resolution mechanism built into a contract.”

The decision is a valuable cautionary tale, especially for complex business agreements where unknown or changing conditions are more likely to cause disputes over time.

(Hat-tip to arbitrator Daniel Urbas who featured a comment on the case in his Arbitral Matters blog.)

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