) ) L-3 Communication SPAR Aerospace Limited Applicant – v. –, 2010 ONSC 7133

CITATION : L-3 Communication SPAR Aerospace Limited v. CAE Inc ., 2010 ONSC 7133 COURT FILE NO.: 09-44831 DATE: 20101223 ONTARIO SUPERIOR COURT OF JUSTICE BETWEEN: ) ) L-3 Communication SPAR Aerospace Limited Applicant – and – CAE Inc. Respondent ) ) ) ) ) ) ) ) )) ) ) Brian Elkin and Mary Delli Quadri, for the Applicant Adrian Lang and Paloma Ellard, for the Respondent ) ) HEARD: August 19, 2010 ) REASONS FOR DECISION KERSHMAN J.

Introduction [ 1 ] This Application is brought by L-3 Communication SPAR Aerospace Limited (“SPAR”) for a declaration that CAE Inc. (“CAE”) is statute-barred from bringing a request for arbitration pursuant to a written agreement between the parties. Factual Background The Subcontract [ 2 ] SPAR was awarded a contract by the Royal New Zealand Air Force (“RNZAF”) to develop various hardware and software systems in relation to certain aircraft. On or about June 28, 2005, SPAR entered into a subcontract (the “Subcontract”) with CAE to implement a number of the deliverables due under the main contract.

The Subcontract provided that SPAR was to supply CAE with Government Furnished Material (“GFM”) and Spar Furnished Material (“SFM”) contained in Annex E; this data was necessary for CAE to complete the design in accordance with the specifications provided by RNZAF. The relevant

Article of the Subcontract provides as follows: 25.3 Delivery: 25.3.1. Spar shall deliver the GFM and SFM to CAE on or before the respective dates for delivery of the GFM and SFM, which are specified in the Government Furnished List and the Spar Furnished Material List at Annex E.

If an item of GFM/SFM is not delivered 90 days after the dates specified at Annex E and the parties cannot agree to a price adjustment due to the delay of the GFM/SFM beyond the 90 days, CAE shall be relieved of its obligations under this Subcontract only to the extent that performance is not possible as a direct result of the failure of Spar to provide that GFM or SFM.

The price and other adjustments that are not agreed between the parties may be referred to arbitration under clause 42 by either party. [Emphasis added.] [ 3 ] Whether or not SPAR was obligated to provide data beyond that listed in Annex E is a contentious issue between the parties, and is unnecessary to decide for the purposes of resolving this Application. Arbitration is provided as the dispute resolution mechanism in

Article 42 for disagreements arising under the Subcontract.

Correspondence Between the Parties [ 4 ] In September 2005, SPAR provided various data to CAE pursuant to its contractual obligations. After receiving the data, CAE took the position that it was outdated and could not be used. It wrote to SPAR on October 19, 2005, notifying SPAR of the deficiencies in the data, and proposed that it obtain quotes for the cost of directly procuring the required data from SPAR’s vendors, those being IS&S, Honeywell and ProScan.

CAE further requested that SPAR confirm what information it intended to provide under the Subcontract. [ 5 ] In response, on October 26, 2005, SPAR sent a letter indicating that its only contractual obligation was to provide the data in Annex E. SPAR agreed to help CAE retrieve the data from its vendors but stated that the associated costs would be the sole responsibility of CAE. [ 6 ] On November 23, 2005, SPAR sent a further letter to CAE emphasizing that it was CAE’s obligation to obtain the necessary data not included in Annex E.

It is SPAR’s position that after receiving this letter, CAE knew or ought to have known that SPAR would not be providing any data outside of that listed in Annex E, and that any breach of contract arising from its failure to do so would have crystallized at that time. [ 7 ] The next day, on November 24, 2005, CAE responded to SPAR’s letter. It advised SPAR that it was under no obligation to obtain any of the data excluded from Annex E on its own.

This was the last written correspondence for some time. [ 8 ] After November 2005, CAE proceeded to procure the necessary data directly from SPAR’s vendors and pay the associated costs. The evidence indicates that there were ongoing discussions between the managerial levels of both companies about how the costs of the data should be apportioned between the two parties. There was some discussion that the costs of the data might be split equally. [ 9 ] Ms. Suzanne Roy, a project manager for CAE, swore in her affidavit that on May 10, 2007, she discussed the issue of costs with her counterpart at SPAR, Mr.

Indy Jaswal, and they agreed that once the total cost of the data was ascertained they would reach a business resolution as to the question of costs. Ms. Roy provided an affidavit on behalf of CAE describing her first-hand interactions with SPAR representatives on the disputed issue of costs. SPAR, however, did not provide an affidavit from Mr. Jaswal. Rather, it provided an affidavit from Mr. Robin St-Arnaud, the Vice-President of Contracts & Legal Services at SPAR who did not begin to provide legal services on behalf of SPAR until March 2008. Mr.

St-Arnaud conceded in cross-examination on his affidavit that he had no personal knowledge of events which occurred prior to March 2008 and he had made no attempts to contact Mr. Jaswal to obtain information regarding the negotiations which had transpired between Ms. Roy and Mr. Jaswal. [ 10 ] Later, on July 11, 2007, another project manager at CAE, Mr. Frank Segal, wrote to SPAR requesting confirmation that the companies would share the costs of procuring the data equally. General Counsel for SPAR responded with the following on July 12, 2007: Youssef has passed on your email of today for review.

In concert I have reviewed the email from Suzanne related to discussion of licences fees. Both Suzanne and Indy were in agreement that the discussion of license fees would be the subject of a follow-on meeting either in Montreal or at SPAR at some time in the future. CAE’s request to confirm agreement “to split the costs in half” before CAE can issue a confirmation to Honeywell is a topic for future discussion between management of both companies.

CAE’s duty to perform their obligations under the terms of the contract is paramount and cannot be minimized by a request to obtain advance confirmation. [Emphasis added]. [ 11 ] It is clear from this response that as of July 12, 2007, CAE and SPAR were engaged in ongoing discussions regarding the costs of the additional data, and that SPAR had not taken the position that it would not be responsible any of the associated costs. [ 12 ] CAE continued to directly procure the required data from SPAR’s suppliers.

On December 2008, it ceased discussions with SPAR and sent a demand letter requesting payment for the costs arising from the data procurement. SPAR’s response dated January 29, 2009, indicated that CAE’s demand was premature and that it ought to follow the dispute resolution mechanism provided for in the Subcontract. CAE then sent a Request to Arbitrate in accordance with the Subcontract. SPAR now takes the position that CAE’s Request to Arbitrate is statute-barred because it should have sent the Request to Arbitrate within two years of November 23, 2005.

Position of the Applicant - SPAR [ 13 ] SPAR’s position is that CAE’s claim is a breach of contract claim arising from SPAR’s alleged failure to provide all the required data under the Subcontract. As such, SPAR argues that the claim crystallized when SPAR sent its letter dated November 23, 2005, indicating that it had no obligation to provide any data beyond that provided in Annex E. SPAR claims that it never backed down from its position and that CAE knew or ought to have known in November 2005, that it never had any intention of providing additional data.

At that time, SPAR maintains that CAE could have invoked

Article 25.3 of the Subcontract relieving itself of any obligations under the contract, or, alternatively, could have commenced arbitration. Therefore, because CAE could have requested arbitration in November 2005, SPAR, relying on the two-year limitation period in the Limitations Act, 2002 , argues that CAE’s ability to arbitrate expired in November 2007. [ 14 ] Additionally, SPAR argues that this Court has jurisdiction to render the Request to Arbitrate statute-barred; it is not necessary for an arbitrator to decide the issue. It cites Bell Canada v.

The Plan Group , 2009 ONCA 548 , for the proposition that whether a dispute raised in arbitration is time barred is not “a question regarding the jurisdiction of the arbitrator, but rather a question of whether there is an arbitration within which the arbitrator may or may not exercise a jurisdiction” (emphasis in original).

Position of the Respondent - CAE [ 15 ] CAE has three main positions in response to this Application. First, it argues that the claim is not statute-barred because the matters giving rise to the claim were not fully known by CAE until at least the fall of 2007. Second, SPAR’s conduct following the initial exchange in November 2005 should result in it being estopped from relying on the limitation period.

Finally, this is not an appropriate case to be determined by way of Application because the parties agreed to submit all disputes to arbitration, and because there are serious material facts in dispute which ought to be determined on the basis of a full evidentiary record. CAE requests that this Application be dismissed in its entirety on its merits, or, alternatively, dismissed in favour of having the issue determined by the arbitrator. [ 16 ] CAE characterizes its position differently than SPAR. In its view, pursuant to

Article 25.3.1 SPAR’s obligation under the Subcontract was to provide CAE with the required data, and if it failed to do so, negotiate with CAE appropriate price adjustments. Therefore, SPAR’s refusal to provide data beyond that listed in Annex E did not, on its own, give rise to a right to arbitrate. Pursuant to

Article 25.3.1, the parties only had a right to arbitrate if the data was not provided and the parties could not agree on the resulting price adjustments. As such, CAE argues that its right to arbitrate did not arise until it became clear that SPAR would not agree to a reasonable sharing of costs. In its view, this could not have been known until at least the fall of 2007.

Up until that point, both companies were engaged in ongoing discussions about how much each company would ultimately pay for the procurement of the data. [ 17 ] In the alternative, if the breach of contract claim crystallized in November 2005, CAE argues that SPAR should be estopped from relying on the two-year limitation period under the Act . Its position is that SPAR fully understood that CAE was continuing to obtain the necessary data only because it believed that SPAR would engage in good faith negotiations related to the sharing the costs of obtaining the data at a later date.

Analysis [ 18 ] The issue to be determined on this Application is whether the Request to Arbitrate is statute-barred under the Limitations Act . A consideration of the case law is not required because the resolution of this Application is, in my view, entirely dependent on the

interpretation given to

Article 25.3.1 of the Subcontract.

Article 25.3.1 reads, in part, as follows: … If an item of GFM/SFM is not delivered 90 days after the dates specified at Annex E and the parties cannot agree to a price adjustment due to the delay of the GFM/SFM beyond the 90 days, CAE shall be relieved of its obligations under this Subcontract only to the extent that performance is not possible as a direct result of the failure of Spar to provide that GFM or SFM.

The price and other adjustments that are not agreed between the parties may be referred to arbitration under clause 42 by either party. [Emphasis added.] [ 19 ] I disagree with SPAR’s submission that the limitations clock began to run as soon as CAE was aware that SPAR had no intention of delivering data excluded from Annex E. This is because CAE’s right to arbitrate did not arise at that time. The two year limitation period could not have begun to run until CAE’s right to arbitrate under the Subcontract arose.

I agree with CAE that its right to relieve itself of its obligations under the Subcontract did not arise until the parties could not agree on a proper price adjustment. Based on the wording of

Article 25.3.1, a failure to deliver an item of the GFM/SFM did not, on its own, give CAE a right to abandon its contractual obligations. This right only accrued once SPAR refused to deliver the data and the parties failed to agree on a price adjustment. Indeed, a Request to Arbitrate issued directly after SPAR’s alleged failure to provide the data would have been premature if attempts to negotiate a price adjustment had not yet taken place.

Furthermore, in my view, the ongoing communications between SPAR and CAE over the course of 2005 to 2007 were exactly that; they were attempts by CAE to come to some reasonable compromise regarding the costs of procuring the required data. CAE had acted reasonably in the context of its business relationship with SPAR and its contractual obligation to negotiate. [ 20 ] This view is also supported by the last sentence in

Article 25.3.1. Pursuant to the Article, the arbitrator was to deliberate on the “price and other adjustments that [were] not agreed between the parties.” This language presupposes that the parties would have already attempted to negotiate a reasonable compromise. [ 21 ] CAE emphasizes two prerequisites under the Limitations Act that must be satisfied before the clock begins to run. According to

section 5, the injury or damage had to have “occurred” and arbitration had to have become the “appropriate” remedy. CAE claims that both of these requirements were not satisfied until at least the fall of 2007. Discovery 5.

(1) A claim is discovered on the earlier of, (

a) the day on which the person with the claim first knew, (

i) that the injury, loss or damage had occurred , (ii) that the injury, loss or damage was caused by or contributed to by

an act or omission, (iii) that the act or omission was that of the person against whom the claim is made, and (iv) that, having regard to the nature of the injury, loss or damage, a proceeding would be an appropriate means to seek to remedy it ; and (

b) the day on which a reasonable person with the abilities and in the circumstances of the person with the claim first ought to have known of the matters referred to in clause (a). 2002, c. 24 , Sched. B, s. 5 (1).

[ 22 ] As previously stated, I agree with CAE’s claim that the damage did not occur within the meaning of the Limitations Act until it became clear that SPAR would not absorb any of the additional costs. It is not necessary to determine the exact point at which this transpired because I am satisfied that it was not until at least the fall of 2007.

As noted above, in the summer of 2007, SPAR was still making representations to CAE that the question of costs would be the subject of “further discussions.” [ 23 ] CAE further claims that arbitration could not have become the “appropriate remedy” until all the data had been secured, the associated costs ascertained, and the parties were no longer discussing the allocation of costs.

Although it is not strictly necessary to address this issue because I have already held that the right to arbitrate did not arise until 2007, I would disagree with CAE on whether all the costs had to be known before arbitration could have become the appropriate remedy. As submitted by SPAR, it is not necessary to quantify fully the extent of one’s damages before the limitations clock begins to run. The same principles apply with respect to arbitration.

However, I do find that arbitration did not become the appropriate remedy until SPAR indicated its intentions to avoid any and all financial responsibility for the increased costs associated with procuring the data. Indeed, the right to arbitrate under the Subcontract did not arise until that time. [ 24 ] If I am wrong and the cause of action arose in November 2005 when SPAR expressed its position regarding delivery of the data, then I agree with CAE that SPAR should be estopped from relying on the limitation period under the Limitations Act .

SPAR submits that the alleged breach occurred in November 2005 and that discussions after that date were merely discussions regarding the financial consequences of the alleged breach, but did not have the effect of changing the nature of the claim. This position lends support to CAE’s estoppel argument. SPAR was clearly aware that CAE expected to receive some financial compensation regarding the expenses it incurred to acquire the data. Indeed, in CAE’s letter dated July 11, 2007, CAE requested confirmation that SPAR would split the additional costs before CAE obtained the data from one of the suppliers.

In response, SPAR advised CAE to continue to honour its obligations under the Subcontract and that costs would be the subject of further discussions. Having relied on this representation, CAE agreed in good faith to continue to perform its contractual duties by obtaining the data necessary to fulfil those responsibilities.

If SPAR had no intentions of engaging in such discussions, it ought not to have made such representations. [ 25 ] Therefore, I find that SPAR was aware that CAE was performing its obligations under the Subcontract because of SPAR’s representations about engaging in discussions related to price adjustments at a later date. SPAR understood that CAE expected to be compensated, at least partially, for its increased costs.

I find that the doctrine of promissory estoppel has application in these circumstances because SPAR made representations to CAE, fully intending for CAE to rely upon them, and that CAE did, in fact, rely upon those representations when continuing to perform its obligations under the contract. Conclusion [ 26 ] In conclusion, I am persuaded that the two year limitation period for arbitration did not begin to run until at least the fall of 2007 when the parties failed to reach an agreement on price adjustments. CAE’s Request to Arbitrate made in early 2009 was issued within the two year period.

This Application is therefore dismissed. Costs [ 27 ] Costs outlines were received by both parties. [ 28 ] The Respondent was successful on this Application. It seeks costs of $28,855.53 plus HST on a partial indemnity basis. While the Application does not make a monetary claim, the amount at issue in the underlying arbitration is approximately $700,000. [ 29 ] The facts surrounding the Application were somewhat complex as were the issues.

Furthermore, some of the matters involved in the Application were highly technical in nature as they related to the aviation industry. [ 30 ] In fixing costs, the issue of proportionality to the issues in question is an important one. Having regard to the factors in Rule 57.01(1) of the Rules of Civil Procedure , and in particular, what an unsuccessful party could reasonably expect to pay for an Application of this nature, an appropriate amount for costs in this case is $28,000, inclusive of disbursements and HST. [ 31 ] Accordingly, the Applicant is to pay the Respondent’s costs of $28,000 within 30 days. Mr.

Justice Stanley J. Kershman Released: December 23, 2010 CITATION : L-3 Communication SPAR Aerospace Limited v. CAE Inc , 2010 ONSC 7133

COURT FILE NO.: 09-44831 DATE: 20101223 ONTARIO SUPERIOR COURT OF JUSTICE BETWEEN: L-3 Communication SPAR Aerospace Limited – and – CAE Inc. REASONS FOR DECISION Kershman J. Released: December 23, 2010