This year, in a landmark decision, McLaren Automotive Incorporated c.9727272 Canada Inc, 2024 QCCS 3457, the Québec Superior Court rendered a first-ever ruling that considered the validity of an arbitration appeal mechanism whereby the parties’ arbitration agreement allowed the appeal of an award to a different arbitrator. As reported in Arbitration Matters case note no. 864 (“Parties May Agree Upon an Arbitral Mechanism”), the Court found that such a mechanism does not offend public order principles set out in art. 622(3) of the Québec Code of Civil Procedure (“CCP”). Therefore, it found that Québec law does not prevent the parties from agreeing to an appeal mechanism in their arbitration agreement, even though it is not provided for in Québec arbitration law, which is based on the UNCITRAL Model Law.
While the Court’s decision offers a detailed and interesting analysis of applicable principles, it opens the door to still more questions. Some issues relating to how a consensual arbitration appeal mechanism might interact with set-aside procedures in Model Law jurisdictions are discussed below.
Legal context – At the outset, it is important to note that Québec arbitration law (both domestic and international) is based on the UNCITRAL Model Law, as are most statutes in Canadian provinces governing international arbitration.
Québec law does not expressly provide for appeals of arbitral awards. As was argued before the court in McLaren Automotive, the only means of contesting an arbitral award provided for in the CCP is through an application to annul (i.e. set aside), or to contest an application to homologate (i.e. enforce) an award brought by the party prevailing in the arbitration (arts. 648 and 646 CCP). The grounds for annulment are limited, closely tracking those set out in art. 34 Model Law for set aside and include, for example, violation of due process rights or violation of public policy. Annulment is not possible for a mere error of fact or law in the arbitration award.
In addition, Québec arbitration law provides for rules governing arbitral awards, including that the award is “binding” on the parties (art. 642 CCP).
The “binding” nature of the arbitration award is an important aspect of the context of Québec arbitration law. Other rules governing arbitral procedure and awards, especially those concerning homologation and annulment, are premised on the final and binding nature of the award. The availability of appeal (even a consensual one to a second arbitrator) may therefore affect how other rules are interpreted or applied.
Against this backdrop, in this case note I consider two strategic issues that may arise on the heels of McLaren Automotive, namely (i) whether a decision made pursuant to a consensual arbitration appeal mechanism can constitute an “award” and (ii) how parties whose arbitration agreement provides for an arbitration appeal mechanism can preserve their rights given time limits to apply for set aside.
(i) Is a decision rendered by an appeal arbitrator an award?
A first issue may arise as to how the arbitration appeal decision ought to be characterized. This issue may, among other things, have a bearing on the means open to the parties to homologate or seek to annul the decision of the appeal arbitrator or the initial award.
Although this question may ultimately come down to how the arbitration agreement is constructed, one solution may be to consider that the award is not final and therefore not “binding” until the arbitration appeal mechanism set out in the arbitration agreement has been exhausted or has expired. Indeed, this appears to be supported by the court’s reasoning in McLaren Automotive (para. 29). But such a solution could raise other perplexing questions.
Consider, for example, a scenario in which an arbitrator renders an award granting the relief sought by the claimant. This initial award is then challenged by the respondent through an arbitration appeal mechanism to a different arbitrator, and the initial award is overturned by the appeal arbitrator. Which decision (the initial award or the decision of the appeal arbitrator), if any, is binding on the parties, at what point in time, and what are the recourses open to the parties to challenge the binding award?
- If the initial award (granting relief to the claimant) remains “binding” such that the claimant can apply for the initial award to be homologated notwithstanding appeal, what impact should the arbitration appeal have on the decision of the court seized of the homologation application?
- Conversely, if the arbitration appeal decision (overturning the initial award and denying relief) is the sole “binding” award, should this award be open to annulment by claimant? If so, must the arbitration appeal award be rendered pursuant to a de novo hearing of the merits in order to avoid annulment based on a violation of due process, as set out, for example at art. 34(2)(a)(ii) Model Law: “the party making the application (…) was otherwise unable to present his case” (see also, in Québec, art. 646(4) CCP: “(…) it was impossible for another reason for [the party against which the award or measure is invoked] to present its case”)?
Equally thorny issues may arise in the inverse scenario. If the initial award denies the requested relief, but this award is overturned by another arbitrator on appeal, then can the claimant homologate the appeal award granting relief? If so, will the appeal arbitrator’s decision be open to challenge by the respondent on due process grounds unless the appeal was reviewed on the merits de novo?
In court procedure, appeals are generally available to review discrete errors of fact and law. They rarely allow de novo hearings, and seldom, if ever, allow for live testimony of witnesses. This conception of an appeal is perhaps ill-suited to give rise to a “binding” award as conceptualized in Québec law, subject to annulment proceedings, including on due process grounds.
Parties wanting to include a consensual arbitration appeal process in their arbitration agreement must think strategically about how enforcement and set-aside procedures under the lex arbitri will play out. Any consensual arbitration appeal process should be carefully crafted, considering the particularities of the lex arbitri (normally the law of the seat of arbitration) to avoid unwanted inefficiency or court challenges. In other words, simply allowing for an appeal in an arbitration agreement will not be sufficient.
(ii) How should parties address time limits to challenge an award?
Under the Model Law (art. 34(3), an application for annulment must be made within 3 months of the date on which the party making the application received the award. A similar rule exists under Québec law (art. 648(2) CCP), and in the provincial statutes which adopt the Model Law. Québec law in fact specifies that the 3-month period is a “strict time limit”.
A question may arise as to when the 3-month period begins to run in circumstances where the arbitration agreement includes a consensual arbitration appeal mechanism to a second arbitrator.
The Model Law (and Québec law) contemplates that the 3-month period can run after receipt of the initial award if a party makes a request to correct, interpret or for an additional award (arts. 34(3) and 33 Model Law). But these procedures are in all cases directed to the initial arbitrator or arbitral tribunal, not a different “appeal” arbitrator as was the case in McLaren Automotive. The set-aside procedure in the Model Law does not expressly contemplate instructing a new arbitrator or panel of arbitrators to render an appeal of the initial award.
In the absence of clear direction in law or jurisprudence on this matter, a respondent that has grounds to seek both an appeal of an award pursuant to an arbitration appeal mechanism, and annulment on grounds akin to art. 34 Model Law, should carefully consider initiating both recourses in parallel to preserve their rights relating to time limitations for both recourses. Simply adding the possibility of appeal to a different arbitrator in an arbitration agreement, without due consideration of how this interacts with the lex arbitri, could create unwanted procedural inefficiency.
A final note on McLaren Automotive – In its decision, the Court found that the availability of a consensual appeal mechanism in international arbitration is “relativement répandue” (“relatively prevalent”, para. 44). The Court referred to the American Arbitration Association’s “Optional Appellate Arbitration Rules (2013) and Judicial Arbitration and Mediation Services (JAMS) Inc’s “Optional Arbitration Appeal Procedure” (2015), among other Rules. These Rules allow for appeals of international awards to a different arbitrator or arbitral tribunals. In citing these examples, the Court referenced the policy objective of interpreting Québec arbitration law consistently with international trends.
Notwithstanding the examples listed in the court’s decision, arbitration appeal mechanisms are by no means ubiquitous in the practice of international commercial arbitration. For example, neither the UNCITRAL Rules nor the ICC Rules, two of the most widely used institutional rules in the global practice of international commercial arbitration, do not provide for an appeal of an award. Art. 35.6 ICC Arbitration Rules states: “[parties] shall be deemed to have waived their right to any form of recourse insofar as such waiver can be validly made”. Similarly, art. 26.8 of the London Court of International Arbitration (LCIA) Rules 2020, another widely used institutional set of rule, leaves no doubt: “the parties also waive irrevocably their right to any form of appeal, review or recourse to any state court or other legal authority insofar as such waiver shall not be prohibited under any applicable law”.
Thus, parties thinking of including an arbitration appeal mechanism should not only consider how such a mechanism might interact with the lex arbitri but also any institutional rules they may wish to have govern their arbitration.
Conclusion – Consensual arbitration appeal mechanisms, whereby parties include in their arbitration agreement the possibility of appealing an award to a different arbitrator, appears to be a trending topic. The Québec Superior Court’s decision in McLaren Automotive suggests that courts, at least in the province of Québec, as part of their respect for party autonomy, will permit this type of consensual arbitration appeal mechanism. However, because Québec law (or the Model Law) does not explicitly provide for them, it will be up to parties to carefully consider how a consensual appeal mechanism might interact with the other rules of the applicable lex arbitri, in particular those concerning annulment and homologation procedures. I have identified some of the complexities, but certainly many more exist. In Model Law jurisdictions, an arbitration appeal mechanism may raise perplexing procedural issues that, if not properly accounted for, could lead to unwanted procedural inefficiency and court challenges.