New Brunswick – Party autonomy includes ability to contract out of award – #821

The decision in Purrestore Management Services Inc., Gordon Gamble and Jason Reis v. Doiron, 2023 NBCA 110 concerns whether an arbitration clause in a franchise agreement that allowed a party to seek a de novo court trial if an arbitration award exceeded $100,000, conflicted with the mandatory provisions of the New Brunswick Arbitration Act, LRN-B 2014, c 100 (“Arbitration Act”).  The franchisor had obtained an arbitration award against the franchisees for over $100,000 (“Arbitral Award”).  The franchisees then sought a de novo trial, while the franchisor applied for judgment to enforce the Arbitral Award under s. 50 of the Act. The application judge affirmed the franchisees’ right to a de novo trial and dismissed the application for judgment.  The franchisor appealed, arguing that the Arbitration Act provided that s.50 could not be contracted out of and, therefore, in the absence of an appeal or an application to set aside the Arbitral Award the franchisor was entitled to judgment.  The Court of Appeal dismissed the appeal, concluding that the arbitration clause was not contrary to the Act as the Act permitted parties to contract out of s. 37, which provides that “an award binds the parties, unless it is set aside or varied under section 45 (appeal) or 46 (set aside)”.  To obtain a judgment to enforce an award under s. 50, a binding award under s. 37 was required but the parties had contracted out of 37 with their agreement. 

The provisions at issue – s. 17.2 of the Franchise Agreement provided:

“17.2 … the parties hereby agree that any and all disputes and claims arising out of (either directly or indirectly) or related to the Franchise Business, this Agreement or related agreement(s), including breach thereof and including any alleged violation of law shall be submitted to binding arbitration under the arbitration statute of the province in which the Franchised Business will be operated and any such arbitration shall be conducted in accordance with that province’s arbitration act( the “Arbitration Act”). Subject to the Arbitration Act, and to the extent applicable thereunder, the following shall apply…

17.2.2 The decision of the Arbitrators may be filed as a judgment in any court of competent jurisdiction and will be binding in any other jurisdiction. If the arbitration award exceeds $100,000, the party required to pay such judgment shall have the right to a de novo action on the merits by a court of competent jurisdiction […]. [Emphasis added in decision]”

The arbitration protocol provided in part under Article 5:

“5.4 The award will be binding on the Parties from the time when the Arbitrator serves a signed copy of it on them in accordance with paragraph 8.2 below.

5.5 The Parties may appeal the arbitral award to the court in accordance with section 45 of the N. B. Arbitration Act.

5.6 In the event that the arbitral award exceeds $100.000.00, the party required to pay such judgment reserves the right to commence a de novo action in the courts of the Province of New Brunswick as per sec. 17.2.2 of the Franchise Agreement and as per sec. 11 of the Franchises Act. [Emphasis added in original]”

Franchisor’s arguments – The franchisor argued before the application judge that the proper interpretation of the Franchise Agreement limited the franchisees to the remedies against awards set out in the Arbitration Act and, as the franchisees’ application disclosed no basis for a viable appeal or an application to set aside the Arbitral Award, their application must be dismissed.  It noted that section 17.2 of the Franchise Agreement provides that section 17.2.2 is “subject to” the Arbitration Act and only applies “to the extent applicable thereunder”.  It argued the “de novo action” in the Franchise Agreement is incompatible with the mandatory scheme for remedies against arbitral awards under the Arbitration Act which cannot be contracted out of and does not allow parties to create new remedies against arbitral awards outside of those provided for in the Act.  It further argued that clause 17.2.2 of the Franchise Agreement was in effect an appeal clause providing for a broader scope of appeal and a more permissive standard of review.  

Decision of the application judge – The application judge dismissed the application for judgment enforcing the award and ordered a de novo trial.  He found the Franchise Agreement conferred the right to a de novo action, when an award exceeded $100,000, and the franchisees were entitled to a new trial.  He concluded that this right was not inconsistent with the Arbitration Act. He stated, among other things, “[t]his is not an appeal from an arbitration award where a court must determine the reasonableness of the arbitrator’s decision. The de novo action has nothing to do with the arbitrator’s decision other than meeting the conditions of when a party is entitled to a de novo action, such as in this case” and …”a new trial, as in this case, makes the Arbitral Award unenforceable and unappealable under the circumstances” (paras. 34 to 37).  

Decision on appeal – On appeal the Court of Appeal also rejected the argument that the agreement of the parties was incompatible with the Arbitration Act. It found their agreement reflected a clear intention to create alternative rights in response to an arbitral award: (1) an appeal of the award regardless of the amount or nature of the award, pursuant to s. 45(1), and (2) a separate right to a de novo action if an award exceeded $100,000. The latter right implicitly reflected an agreement that, if this right is exercised, the award is not binding and enforceable.  As the Arbitration Act permits parties to vary or exclude s. 37, which provides that “an award binds the parties, unless it is set aside or varied under section 45 or 46,” the conclusion that the award was not binding was sound. 

The Court further stated at para. 47 that it was, “difficult to appreciate how the parties’ agreement to a de novo action, or any variation of the generally binding effect of an award, under s. 37, would be inconsistent with s. 45(1)”. It noted that of the appeal provisions under the Arbitration Act, only the right to appeal with leave under s. 45(1) is “mandatory,” whereas the parties’ right to provide for expanded rights of appeal is allowed.  Sections 45(2) and (3) may be varied by the agreement of the parties.

In response to the franchisor’s argument that relied on the mandatory language of s. 50(3) (which requires a court to give a judgment based on an award in the prescribed circumstances) it noted that the provision begins with: “A person who is entitled to enforcement of an award” may apply (s. 50(1)). It pointed out that although this language refers to the applicant meeting the criteria set out in ss. 50(1) to (8), read in the context of the Arbitration Act as a whole, it must also require the applicant to have a binding award consistent with s. 37.

Contributor’s Notes:

The decision contains an overview of the domestic arbitration legislation of the Canadian common law provinces. As the Court of Appeal points out, the majority of the common law provinces (Alberta, Manitoba, New Brunswick, Nova Scotia, Ontario and Saskatchewan) have similar legislation based on the Uniform Law Conference of Canada Uniform Arbitration Act (1990) which is, in turn, based on the Model Law.  

In its analysis, the Court of Appeal noted that the legislation gives effect to the consensual nature of arbitration for dispute resolution by permitting parties to “vary or exclude” its provisions, with certain limited and express exceptions. The franchisor had argued that the “de novo” clause, unless it was constrained by the Arbitration Act, was commercially unreasonable, offended good business sense and would result in absurdity by robbing the arbitration provision of any efficacy and the recognized commercial purposes of arbitration clauses.  The Court of Appeal, having found the agreement was not prohibited by the Arbitration Act, was not prepared to save a party from its consequences, stating at para. 51: “The reasons why the parties found that the right to proceed de novo was acceptable (when the arbitral award awarded damages in excess of $100,000), regardless of the duration and cost of arbitration, are not known; however, the argument of commercial efficiency cannot justify canceling their agreement”.  

This decision provides a reminder that the power to agree to an arbitration process comes with the requirement to live with that agreement and its consequences.