Québec – Arbitration clause interpreted liberally; ambiguity resolved using regular contract interpretation principles – #551

In 9369-1426 Québec Inc. DBA Restaurant Bâton Rouge v. Allianz Global Risks US Insurance Company, 2021 QCCA 1594, the parties disagreed about whether the plaintiff could bring a class action to resolve a coverage dispute or whether the dispute was required to go to arbitration. The policy contained both a stepped arbitration clause and a clause that said that the courts in the Court District in which the insured was located shall have exclusive jurisdiction in case of a coverage dispute. The Québec Court of Appeal confirmed that arbitration clauses should be interpreted in a large and liberal manner. If there is ambiguity, the usual principles of contractual interpretation apply without regard to any presumption that ambiguities are to be resolved to preserve a plaintiff’s right to resort to courts. The court found that the proper interpretation of the policy required coverage disputes to be arbitrated.

The dispute related to insurance claims for business interruption arising from the COVID-19 pandemic. After the appellant Restaurant Bâton Rouge’s coverage was denied, it sought to commence a class action on behalf of similarly situated insureds. The respondent insurer sought to refer the matter to arbitration based on a dispute resolution clause found in the policy. The clause was a tiered, mediation/arbitration clause entitled Provincial Statutory Conditions Applicable to the Province of Quebec only, that provided as follows:

5. Dispute Resolution

In the event that the Insurer and the Insured(s) cannot agree concerning either the coverage or the quantum afforded by this Policy, it is agreed that the dispute shall be resolved in accordance with the dispute resolution process hereinafter described:

a. Mediation with a Mediator mutually agreed by the parties to the dispute. If the parties fail to concur on the choice of the Mediator, a Court shall appoint a Mediator on a Motion by one of the parties.

b. If settlement at Mediation is not possible, the dispute will be referred to Arbitration in accordance with the applicable Arbitration legislation/regulations in the jurisdiction in which the Policy is issued. The decision of the Arbitrator will be binding on all parties to the dispute with no right of appeal.

c. Each party shall bear its own costs and expenses in connection with the dispute resolution process. The costs and expenses of Mediation and Arbitration shall be shared equally by the parties to the dispute….”

The appellant argued that it was not clear that the parties had agreed to binding arbitration, submitting that the following clause found in the General Terms and Conditions was contradictory:

2. Policy Jurisdiction

This policy shall be deemed to have been made under and shall be governed by the laws and decisions of the province or territory shown in the mailing address of the Named Insured, as it is shown in the “Policy Declarations”.

The Courts in the Court District in which the Named Insured is located shall have exclusive jurisdiction in case of a coverage dispute.”

The Superior Court rejected this argument and found that coverage disputes were to be arbitrated, holding that the “policy jurisdiction” clause related only to territorial jurisdiction and that there was no conflict with the dispute resolution clause. The Superior Court also held that the competence-competence principle did not prevent the court from making a final determination regarding jurisdiction.

On appeal, the appellant insured argued that the judge had erred in finding that the “policy jurisdiction” clause related only to territorial jurisdiction. It argued that the dispute resolution clause explicitly stated that it “may be modified or supplemented by any of the Clauses or Endorsements contained in the Policy”, and that the dispute resolution clause was clearly in conflict with, and modified by, the “policy jurisdiction” clause.

The Court of Appeal dismissed the appeal. It started by setting out the proper approach to competence-competence. The Court confirmed that any challenges to the jurisdiction of an arbitrator must first be referred to the arbitrator to consider. However, courts can rule on jurisdiction first where the challenge to an arbitrator’s jurisdiction is a question of law alone. This is the case with respect to standard-form contracts, where the interpretation at issue may have precedential value and there is no meaningful factual matrix specific to the parties that would assist with the contractual interpretation process. Such was the case here, and the Court’s decision to do so is consistent with previous law.

The Court of Appeal then set out to determine whether the parties had agreed to binding arbitration. In doing so, the Court set out two propositions with respect to interpretation of arbitration clauses: first, that arbitration clauses are to be interpreted in a large and liberal manner; second, that any ambiguity as to an arbitration clause’s scope is to be resolved by the usual rules of contractual interpretation. The Court also referred to the principle of severability/separability – and said that arbitration clauses must always be considered as legally distinct from the contracts in which they are embedded.

The Court of Appeal then set out to interpret the contract. The basic principles of contractual interpretation as articulated by the court are as follows: 

“At the first step, the key question is whether the relevant contractual terms are clear or ambiguous, and that question is to be answered in light of the contract’s other clauses as well as the circumstances in which it was concluded. If the terms are ambiguous, the analysis proceeds to a second step guided by the cardinal principle according to which “[t]he common intention of the parties rather than adherence to the literal meaning of the words shall be sought…It is only here that recourse may be had to other rules of interpretation….”

Although the Court of Appeal disagreed with the Superior Court that the terms of the contract were clear and unambiguous, it found that ambiguity was easily resolved at the second step of the analysis. It was clear, in the Court’s view, that the language used in the “general terms” section was supplemented by terms that varied the contractual provisions depending on the province or territory in which the insured was located. The forum selection clause was intended to apply only in common law provinces and territories, while the arbitration clause was intended to apply in Quebec.

The appellant had also raised the contra proferentem rule in support of its position, but the Court held that rule would only apply if an ambiguity remained unresolved after other rules of interpretation had been applied, which was not the case here.

The Court of Appeal concluded that a proper reading of the policy was that that the parties had agreed to binding arbitration.

Contributor’s Notes:

For a more comprehensive discussion of the Superior Court decision, see No legal principle to support applying competence-competence for mediation – Note #415; however, be aware that the Court of Appeal did not adopt all the Superior Court’s reasoning, as outlined above. For a related discussion of the enforcement of arbitration clauses in class actions brought with respect to business interruption insurance, see Arbitration clause cannot be avoided by bringing a class action – Note #531.

From a contract drafting perspective, this case highlights the importance of ensuring that the dispute resolution clause is consistent with other terms of the agreement. Here, the court found that it was, but that is not always the case. Although the principle of severability applies, the agreement should be reviewed to ensure that there are no inconsistencies that will defeat the intention of the parties in seeking to arbitrate their disputes.

For those who are not familiar with the doctrine of severability, in the context of arbitration clauses it provides that the arbitration clause is an agreement separate from the underlying agreement. Although the arbitration clause is part of the broader agreement, it is essentially independent from the remainder of the agreement. This becomes relevant when enforceability of aspects of an agreement is in issue and also when determining what substantive and procedural law applies to the arbitration (i.e. it could be different than the law of the rest of the contract).