Québec – Arbitration 101: parallel proceedings, multiple arbitration clauses, competence-competence, arbitrability, separability, waiver – #577

In Specter Aviation v Laprade, 2021 QCCA 1811, the Court of Appeal faced circumstances in which both the court and an arbitral tribunal found that they had jurisdiction over the parties’ dispute. The applicant/appellant Specter and related corporation third-party/appellant United Mining Supply appealed the order of Justice Castonguay, who dismissed their request to stay the defendants’/respondents’ defence and counterclaim for lack of jurisdiction on the basis of an arbitration clause in one of the parties’ agreements. At about the same time, an arbitral tribunal ruled that it had jurisdiction over the parties’ dispute. Justice Sansfaçon, for the Court of Appeal, granted the appeal and stayed the counterclaim pending determination of the parties’ dispute by arbitration.

The dispute arose out of a 2012 joint venture between defendant/respondent Laprade and appellant United Mining Supply to develop air transportation services in Africa. The joint venture did not succeed and Laprade, United Mining Supply, Specter, and respondent World Aircraft Leasing Inc. signed a “liquidation agreement” in early 2019. It provided, among other things, that a particular aircraft was to be returned to World Aircraft Leasing. There was a clause in each agreement that provided, in different language, that any unresolved dispute would be referred to arbitration, after mediation, under the aegis of the International Arbitration Chamber in Paris.

The parties soon disputed the ownership of the aircraft and which of their two agreements with different arbitration clauses was relevant in four proceedings commenced by the applicants:

1. The Québec application: In late 2019, Specter and United Mining Supply brought an application in the Québec Superior Court and obtained an order seizing the aircraft, claiming that they owned it and it had been hijacked by Laprade. The respondents sought an order for the return of the aircraft to World Aircraft Leasing pursuant to the terms of the liquidation agreement. In October 2019, and March 2020, the Court rejected requests by Laprade to annul the seizure order and found that Specter and United Mining Supply had established a prima face ownership right. In June 2020, the respondents filed a counterclaim, in which they argued that there was a “clerical error” in the liquidation agreement that went to the ownership issue and sought an order that they owned the aircraft. They also sought damages for the appellants’ breach of the liquidation agreement. In July, 2020, the appellants moved to stay the counterclaim and requested referral of the ownership dispute to arbitration because of the arbitration clauses in both the liquidation agreement and the joint venture agreement (even though they took the position that the liquidation agreement was not relevant to the question of ownership and that the courts maintained jurisdiction over their originating seizure application). Ultimately, Justice Castonguay dismissed this stay motion, which led to this appeal.

2. The Guinea action:  In late 2019, United Mining Supply brought an action against Laprade, in which it alleged that it was the owner of the aircraft. It sought an order quashing the liquidation agreement on the ground of the alleged “clerical error”. Laprade asked that this dispute be referred to arbitration, relying upon the arbitration clause in the liquidation agreement. Specter and United Mining Supply agreed to the referral to arbitration of the ownership issue while the decision on the stay motion before the Québec Superior Court was under reserve. Justice Castonguay was apparently informed of this resolution before he rendered his decision. Therefore, it appears that the Guinea action did not proceed.

3. The arbitration: In October, 2020, before Justice Castonguay had ruled on the stay motion, Specter and United Mining Supply commenced an arbitration before the International Arbitration Chamber in Paris, in which they sought an order, inter alia, that the liquidation agreement had not effected a transfer of ownership of the aircraft to World Aircraft Leasing Inc. They advised Justice Castonguay of this step. He declined to refer the ownership dispute in Québec action to arbitration, while the International Arbitral Chamber of Paris issued a partial award in which it decided that it had jurisdiction to decide the dispute between the parties relating to the liquidation agreement. The result was that the issues were before both the tribunal and the court. Justice Castonguay apparently did not order the suspension of the arbitration.

4. The Oklahoma action: In November, 2020, the applicants filed an action in Oklahoma against World Aircraft Leasing and other defendants. They asked for an order that they owned the aircraft. It is not clear from the reasons what happened to this action.

The Québec Court of Appeal allowed the appeal and set aside Justice Castonguay’s order. It provided for the matter to return to the Superior Court for the appropriate orders relating to the seizure of the aircraft, pending the award of the International Arbitral Chamber in Paris on the merits of the dispute as to the ownership of the aircraft.

It found that Justice Castonguay had erred in finding that: (1) the dispute was not arbitrable under Québec legislation, which the Court found was not consistent with the Supreme Court of Canada decision in Desputeaux v Chouette Publishing (1987) inc., 2003 SCC 17;  (2) the appellants had waived the jurisdiction of the arbitrator by suing in the courts; and (3) he had applied only the arbitration clause contained in the joint venture agreement, which he found was ambiguous and did not contain mandatory language requiring arbitration of disputes, because the appellants disputed the validity of the liquidation agreement. Further, the Court of Appeal stated:

“[ 19 ]That said, the resolution of this question, moreover all those relating to the prioritization of arbitration clauses when several are present, as well as generally the resolution of questions relating to clarity, scope or the validity (subject to the limits provided for in the law) of an arbitration clause, does not fall primarily to the judge, but to the arbitrator, to whom the judge should have referred them by virtue of the principle of competence-competence.”

The Court of Appeal reiterated the importance of arbitration clauses and cited the provisions in the Code of Civil Procedure, Art. 2638 3148, and 622 (paras. 20–24), that require referral to arbitration of any disputes that are subject to an arbitration clause. One rationale is that the judge is “custodian of judicial resources” (para. 32).

The Court also stated that there is no clear answer to the question of what constitutes sufficient proof of waiver of the right to arbitrate, but it must appear “clearly and evidently”. On the appeal, the respondents asserted that the appellants had acquiesced to the jurisdiction of the Québec courts by suing there, and also by failing to seek a referral of the dispute to arbitration within the time set out in the Code of Civil Procedure; the applicants waited 10 months before doing so. The applicants argued that they never intended to waive their rights to arbitrate disputes with the respondents by arbitration, but that only the Québec courts had jurisdiction to seize the aircraft, which they sought pending final determination of their rights to the aircraft on the merits. The Court of Appeal agreed with the applicants. Their application did not go to the merits of the dispute between the parties. Also, they had requested referral to arbitration on time, which was within 90 days of the respondents’ position that they owned the aircraft and that the liquidation agreement, not the joint venture agreement, applied to resolve the dispute. 

Therefore, the respondents’ claim was referred to arbitration. Intriguingly, the Court concluded by saying that it was not for it, at this stage of the proceeding, to deal with the correctness of the arbitral tribunal’s partial award in which it found that it had jurisdiction over the dispute.

Justice Bachand issued concurring reasons in which he stated that he “wish[ed] to add a few observations relating to certain general principles of international arbitration which seem to me to be particularly relevant in the present case” (para. 47) because of the desire that Québec law develop in accordance with international law, citing Dell Computer Corp. v Union des consommateurs,  2007 SCC 34, para. 47.

First, as to the arbitrability of private law disputes, Justice Bachand asserted that arbitrability is the rule rather than the exception and that any limits to arbitrable matters must be construed strictly. This is consistent with the parties’ “fundamental right to resort to arbitration” and he observed that Canada’s ratification of the New York Convention may even restrict it from limiting the arbitrability of disputes so that the objectives of the convention are not frustrated.

Second, as to the autonomy of the arbitration clause (the principle of separability), he found in Art. 2642 of the Code of Civil Procedure, that it is “universally regarded as a fundamental principle of international arbitration because of the essential role it plays in ensuring the effectiveness of arbitration clauses”. Justice Bachand had this to say:

“[ 53 ] In the judgment under way, the judge reproached the appellants for “pleading one thing and its opposite” by maintaining that the [liquidation agreement] was void while invoking the benefit of the arbitration clause… For the judge, the appellants could not benefit from an arbitration clause to which they denied having validly consented.

54 ] However – and as the arbitral tribunal currently seized of the dispute underlined in its partial award of May 12, 2021  – this reasoning disregards the principle of the autonomy of the arbitration clause by ignoring its main consequence, which is that the legal existence of the clause invoked by the appellants must be considered to be independent of that of the [liquidation agreement]. Any error or any fraud that may have tainted the validity of the [liquidation agreement] does not therefore did not necessarily (sic) result in the invalidity of the arbitration clause.

Third, as to the principle of party autonomy, a corollary of the cornerstone of international arbitration is that state judges should ensure that arbitration agreements in the international context produce the effects desired by the parties. This principle is also relevant to whether the parties have, by their subsequent conduct, waived the arbitration agreement. A finding of waiver should only be made in clear cases. In any event, in this case, that question ought to have been decided by the tribunal under the principle of competence-competence.

Editor’s Note:

This case raises a number of intriguing issues.

First, it is unusual that the party which opposes litigation on the basis of the arbitration clause is the party which has first sued in the courts. Ordinarily, the waiver issue before the court is whether the respondent has attorned to the jurisdiction of the court and thereby waived the right to arbitrate. Here, the facts were unique. The appellants’ court application was in the nature of an application for interim relief (seizure of the aircraft), to which the respondents answered by advancing a counterclaim on the merits of the dispute (ownership of the aircraft). The appellants did not commence the arbitration until its motion to stay the respondents’ counterclaim was already before the court. By that time the respondents argued that the appellants had “waived” their right to arbitration and the dispute should be dealt with in the court. The result of the decisions of the Quebec Court of Appeal and the tribunal is that the merits issues will be decided by arbitration.

Second, Justice Bachand’s concurring judgment is worth an additional note. 

It makes reference to the principle of “separability”, which is known to both international and domestic arbitration law and is found in both Article 16(1) of the Model Law and in Art. 2642 of the Code of Civil Procedure (and other domestic arbitration legislation). The Supreme Court of Canada has before it the principle of separabiity for the first time in Petrowest Corporation v Peace River Hydro Partners, 2020 BCCA 339. For earlier case notes on the Petrowest case see: Federal – confidentiality of arbitration must be re-established independently on appeal to court – #224 and B.C. – doctrine of separability allows receiver to disclaim agreement to arbitrate while litigating main contract – #399.

Justice Bachand also opined that Canadian arbitration law must be interpreted in accordance with international standards to ensure that Canada complies with its obligations under the New York Convention. While the Supreme Court of Canada has endorsed the idea (as Justice Bachand noted), this is arguably a stronger assertion of this concept. It is one that Justice Bachand borrowed from the analysis of international arbitration academic Gary B. Born.