The last year has seen several judgments which bind third parties to arbitration, specifically in Québec. The basic principles remain unchanged: the rule is still that a contract has effect only between the contracting parties (sec. 1440 CCQ). However, there is a trend, which seemed clear starting in 2021 and continues into 2022, to bring non-signatories into arbitration in certain circumstances, as set out in Québec’s recent judgments. Many reasons explain these decisions: let’s explore why this new trend is arising in Québec.
The trend seems to take root in a Québec Court of Appeal judgment released in 1996: Décarel Inc. v. Concordia Project Management Ltd., [1996] RDJ 484. In Décarel, the Court of Appeal, in a majority decision, stated the following principles:
- The rules applicable to referral to arbitration have been largely liberalized;
- Each situation is unique and shall be examined independently; and
- The arbitration clause shall apply to intertwined/closely related parties to a dispute, even where some are non-signatories, to avoid multiplicity of proceedings and contradictory judgments.
In Décarel, two companies forming a joint venture disputed their respective obligations toward the joint venture’s project. As the majority shareholders and principals acted for the joint venture, the defendant brought them personally into the litigation – even though they were not signatories to the arbitration clause in the joint venture agreement. Justice Vallerand stated that refusal to apply the arbitration clause to the two shareholders, directors and principals personally based on the fact that only the company was the signatory party to the arbitration agreement would be to rely upon a “blind technicality”.
Several other decisions were rendered following Décarel. Here are the recent decisions fostering the trend:
In Cesario v. Regnoux, 2021 QCCS 3009 (see recent Case Note:- Case referred to arbitration despite some parties and some claims possibly not covered by the arbitration agreement #517), Justice Mainville chose to refer parties to arbitration, even thought one of the Plaintiffs did not sign the arbitration agreement, reyling upon the competence-competence principle. After reviewing Canada Supreme Court of Canada decisions confirming the large and liberal interpretation that shall apply to arbitration clauses (Desputeaux v. Éditions Chouette (1987) inc., 2003 SCC 17) and the prescription to favor arbitration if any doubt remains (GreCon Dimter inc. v. J.R. Normand inc., 2005 SCC 46), she decided to refer parties to arbitration to allow the arbitrator to decide about his/her own jurisdiction.
Without specifically mentioning Décarel, one of the reasons supporting Justice Mainville’s decision was the intertwined role played by the non-signatories into the litigation: they were the ultimate shareholders and directors of the main actors involved in the litigation.
In his Case Note on this decision, Contributor Éric Bédard also outlined the following:
“Justice Mainville arrived at that conclusion despite noting (at para. 52) that one of the claims made in the originating application might not fall within the purview of the arbitration agreement. Indeed, that claim was made by one of the Plaintiffs who did not sign the arbitration agreement and was based on agreements formed before the arbitration agreement was signed. Yet, Justice Mainville stated that [informal translation] “nothing precludes the arbitrator from enforcing those agreements for the sake of an efficient process or if the parties consent. In any event, the Court is of the view that this part of the claim is insufficient in itself to conclude to the jurisdiction of the Superior Court at this stage of the proceedings and to empty the arbitration agreement of meaning”.”
More recently, in Tessier v. 2428-8516 Québec inc., 2022 QCCS 3159 (see Case Note – Interests of justice require closely linked disputes to be arbitrated #664), Justice Dufresne referred two disputes concerning the ownership of two companies to arbitration, even though the shareholders of only one of the companies was bound by an arbitration agreement. Justice Dufresne found that the disputes and the companies were closely linked and that, therefore, it would be consistent with the rule of proportionality to refer both disputes to arbitration instead of having them heard separately. Justice Dufresne also relied on section 1 of the Code of Civil Procedure, specifically, on the obligation for the Parties to consider ADR modes like arbitration prior to bringing proceedings before the Court.
Once again, the intertwined relationship between the signatories and the non-signatories’ parties and the dispute was the main factor supporting the decision to refer all the parties to arbitration. The rule of proportionality as well as section 1 and Preliminary Provision of the of CCP that favor ADR modes are also playing an important role in the trend arising out in Québec.
This is clearly summarised in Contributor Rachel Howie’s Case Note about this case:
“Justice Dufresne held that in [informal translation] “the interests of justice, including the principle of proportionality” require that both disputes must proceed by way of arbitration. This was because the disputes were “intimately linked”, and it would be “inappropriate” to deprive 2428’s shareholders (whoever they were) of the arbitration clause in the unanimous shareholders agreement simply because 9217’s shareholders had not similarly consented to arbitration. Justice Dufresne found support for the connectedness of the disputes in the fact that the Applicants had initiated a single court proceeding to resolve the ownership disputes of both companies, in the “factual framework” presented by the Applicants, and in the fact that an arbitrator had all powers necessary to hear the matter.
In sum, Justice Dufresne found that because the disputes were linked, [informal translation] “rather than depriving the shareholders of the first [company] of the effects of the arbitration clause, the shareholders of the second [company] should be ordered to be subject to it.” The Respondents’ application to dismiss the originating application and refer the entire dispute to arbitration was granted.”
In 10053686 Canada inc. v. Tang, 2021 QCCS 3467 (Case Note – Court favours arbitration even for related, but non-signatory parties #541), non-signatory parties were once again referred to arbitration. Justice Narang based her decision directly on the Québec Court of Appeal’s decision in Décarel. The non-signatory parties were closely related parties, as they were the sole shareholders and directors of the company bound by the arbitration clause.
Justice Narang also relied on the Legislator’s intention to favor arbitration. She quoted Justice Pierrette Rayle, formerly of the Quebec Court of Appeal, who affirmed Legislator’s intention as early as in 2001:
“[17] As explained by Justice Pierrette Rayle, formerly of this Court and the Court of Appeal, in a case involving a franchisor-franchisee agreement, “the Legislator finds it desirable, as opposed to merely possible, for the parties to resolve their disputes by means other than by resort to the courts. If, at a time when the relationship was harmonious, the parties agreed that a dispute resolution mechanism was desirable, such a commitment must continue to be honoured when a conflict occurs. The original intention of the parties should not be buried in more recent manifestations of their dispute” (Bridgepoint International (Canada) inc. v. Ericsson Canada inc., 2001 CanLII 24728)”
Finally, in Newtech Waste Solutions inc. v. Asselin, 2022 QCCS 3537 (Case Note – Court dismisses application shallenging arbitral tribunal’s joinder of non-signatory #680), the Superior Court validated an arbitral tribunal’s decision on a challenge to its jurisdiction to join a non-signatory party to an ongoing arbitration. Justice Bellavance agreed with the arbitrator’s decision that it was appropriate to join the non-signatory’s party based on the fact that it was the alter ego of one of the parties.
Again, quoting Décarel, the Court relied on the close link, the intertwined relationship, and the alter ego concept, which are all similar, to join non-signatories’ parties to an arbitration. The risk of contradictory decisions as well as proportionality were also considered by Justice Bellavance. Contributor James Plotkin in his Case Note about this case stated:
“Justice Bellavance began by recognizing that his task was not to “review” the arbitral tribunal’s decision, but to decide for himself whether the tribunal had jurisdiction to join Newtech. Accordingly, no standard of review applied. He then considered the jurisprudence in Québec pursuant to which a non-signatory may be joined to an arbitration. He referenced the Court of Appeal’s decision in Société Asbestos Itée c. Lacroix, 2004 CanLII 76694 (C.A.). That case stands for the proposition that, where the situation warrants, the arbitral tribunal may properly join a stranger to the arbitration agreement to the proceedings. Recognizing that privity of contract demands this power be exercised cautiously, the Court of Appeal stated that each case will turn on its own facts.
[…]
Although having acknowledged that the Court’s task was not to review the arbitral tribunal’s decision, Justice Bellavance nonetheless noted that he found no error in the tribunal’s reasoning. He summarized his conclusions as follows:
- The arbitral tribunal committed no error in concluding that it was necessary to determine whether Bélanger used Newtech as a vehicle to breach his non-compete obligation under the SPA.
- The arbitral tribunal did not prejudge the merits of the case in relying on the allegations in the parties pleadings.
- Conflicting judgments could result should the arbitral tribunal be precluded from examining the acts of Bélanger “via Newtech” that might be actionable before the Superior Court.
- It is inappropriate to split the litigation, which would multiply proceedings and slow or add complexity to the adjudication process.“
Contributor’s Notes:
In light of the above, it appears that a trend is arising in Québec, in which non-signatory parties may be brought into arbitration for the following reasons:
- Because the non-signatory’s party has an intimate or intertwined relationship with the dispute and the parties to the arbitration agreement;
- Because contradictory decisions are to be avoided;
- Because proportionality isto be favored and multiplicity of proceedings avoided; and
- Because arbitration is a favored dispute resolution process.
What explains this trend?
First, it may be explained by the reform of the CCP in 2016. ADR modes, including arbitration, have been largely encouraged and favored by the Legislator, more specifically in its drafting of the Preliminary Provision as well as section 1, which reads as follows:
“Preliminary Provision
[…]
This Code is designed to provide, in the public interest, means to prevent and resolve disputes and avoid litigation through appropriate, efficient and fair-minded processes that encourage the persons involved to play an active role. It is also designed to ensure the accessibility, quality and promptness of civil justice, the fair, simple, proportionate and economical application of procedural rules, the exercise of the parties’ rights in a spirit of co-operation and balance, and respect for those involved in the administration of justice.
[…]
1. To prevent a potential dispute or resolve an existing one, the parties concerned, by mutual agreement, may opt for a private dispute prevention and resolution process.
The main private dispute prevention and resolution processes are negotiation between the parties, and mediation and arbitration, in which the parties call on a third person to assist them. The parties may also resort to any other process that suits them and that they consider appropriate, whether or not it borrows from negotiation, mediation or arbitration.
Parties must consider private prevention and resolution processes before referring their dispute to the courts.”
Second, this trend may also be explained by the major issues the justice system is facing concerning accessibility to justice. The Courts’ delays are getting longer and the costs are exploding. Efficient arbitration, proportionality and avoiding multiplication of proceedings before several forums are surely solutions available to mitigate these issues.
Lastly, the Legislator included a specific section concerning proportionality in arbitration. Since 2016, section 622 in fine requires parties to respect the principal of proportionality in their conduct of the arbitration process. This new section might contribute to the trend developing in Québec.
Let’s see if 2023 will confirm this growing trend and if echoes will be heard from the rest of Canada. Happy New Arbitration Year to all!