Québec – Arbitrator has jurisdiction to decide derivative action without court authorization – #753

In Tidan inc. c. Trria Design inc., 2023 QCCS 1746, the Superior Court of Québec dismissed an application by the Respondent to an arbitration, Tidan inc., under article 632 of the Québec Code of Civil Procedure, C-25.01 (CCP) to find that the arbitrator had erred in concluding that he had jurisdiction to hear all the claims submitted to arbitration by the Claimant, Trria Design inc. The Respondent argued that some of the claims were unarbitrable as they were derivative claims, which must be authorized by the Superior Court pursuant to Article 445 of the Québec Business Corporations Act (BCA). The Court found that the parties’ arbitration agreement was broadly drafted and gave the arbitrator the jurisdiction over, “any dispute which might arise as to the interpretation or the application of this agreement”, which included oppression remedy and derivative claims.

The parties were shareholders in 9268-2608 Québec inc. (IQuartier) bound by a unanimous shareholder agreement which provided for arbitration. In addition to the parties, IQuartier was a signatory to the unanimous shareholder agreement.

In 2022, the Claimant instituted arbitration proceedings relating to ten claims seeking oppression remedies. The Respondent argued that seven of these ten claims were unarbitrable as they related to damages incurred by IQuartier and thus required the institution of a derivative claim, which falls within the exclusive jurisdiction of the Superior Court. The Claimant, for its part, argued that it was not asking the arbitrator to authorize a derivative action, but merely to interpret the arbitration agreement in the unanimous shareholder agreement.

Justice Perreault first observed that, pursuant to article 632 of the CCP, the arbitrator had the power to rule on his jurisdiction, after which the Court may intervene to rule on the matter (“se prononcer sur la question”), which it could do without giving deference to the arbitrator’s analysis or decision (paras. 13 and 14).

Justice Perreault noted that the Superior Court is the competent “tribunal” which can authorize derivative actions under Article 445 of the BCA. She observed that, while other decisions grappled with the issue, no prior precedent had answered the question as to whether an arbitral tribunal could also authorize a derivative action when combined with an oppression remedy.

The Respondent relied upon the Québec Court of Appeal decision of Acier Leroux Inc. c. Tremblay, 2004 CanLII 28564 (QC CA) for the principle that arbitrators cannot authorize derivative actions. Paragraph 37 of Acier Leroux gave the example of derivative actions as being unarbitrable because they involve a determination of the legal capacity of persons:

“[37] An example of what was intended by the use of the expression “legal status of persons” found in article 2639 C.C.Q. can be seen by the conclusions in Mr. Tremblay’s action that sought permission to institute a derivative action on behalf of Poutrelles Delta under section 239 of the CBCA. Since the attribution of legal status to act in a manner that someone would not otherwise enjoy is at the heart of a derivative action, it is easy to see that the determination of whether such status should be granted is not one that is properly arbitrable, especially since the rights of third parties are involved”.

However, Justice Perreault distinguished that case on the basis that the scope of the arbitration agreement was narrow, a fact on which the Québec Court of Appeal had greatly relied. Acier Leroux had already been distinguished on this basis by a 2020 Québec Superior Court decision issued by Justice Bachand in Groupe Dimension Multi Vétérinaire inc. c. Vaillancourt, 2020 QCCS 1134 (CanLII).

In the case at bar, by contrast, Justice Perreault found that the arbitration agreement was drafted in a large and liberal manner, and that it did not restrict the arbitrator’s jurisdiction in any way. The arbitration agreement provided:

“20.1 Arbitration

Save and except where an injunctive remedy is expressly provided for herein or is necessary for the protection of a party’s rights hereunder, the parties acknowledge that any dispute which might arise as to the interpretation or the application of this agreement must be referred to arbitration in front of a sole arbitrator in accordance with the provisions of Articles 2638 and following of the Code civil of Québec and of Articles 940 and following of the Code of civil Procedure of Quebec to the exclusion of the courts. This arbitrator shall be a practising lawyer, a member in good standing of the Quebec Bar, or a retired judge of a court of the same province.

She also referred to established principles in the case law according to which the arbitrator’s mandate must not be interpreted restrictively but instead extend to issues closely connected to the dispute, and full effect should be given to the will of the parties who choose arbitration. So it was not necessary for the Court to authorize the arbitrator to determine derivative claims.

Finally, she further noted that it was settled case law, including in Acier Leroux, that arbitrators could rule on oppression remedies. Accordingly, she rejected the Respondent’s challenge to the jurisdiction of the arbitrator to rule on the seven claims on the basis that they were unarbitrable.

Contributor’s Notes

This is the latest decision  touching on whether an arbitrator can authorize a derivative action or whether such an authorization is within the exclusive jurisdiction of the Superior Court pursuant to the BCA.

In her analysis as to whether an arbitral tribunal can authorize a derivative action pursuant to section 445 of the BCA, Justice Perreault referred to a 2019 Superior Court decision which asked the same question but had not answered it.

In Gestion Michel Gagné inc. c. Gaston Gagné inc., 2019 QCCS 3260, a case covered by a previous case note: Arbitration Matters Case Note #229, Justice Simon Hébert declined to hear a motion for leave to institute a derivative action as doing so would encroach on the arbitrator’s jurisdiction to consider that same motion. Justice Hébert noted that there was no case on point regarding whether an arbitral tribunal could authorize a derivative action. However, he did not need to answer that question given the case management application before him, and accordingly did not do so.

Justice Perreault cited author Paul Martel, who commented on Gestion Michel Gagné inc. c. Gaston Gagné inc., opining that (Translation):

“Is it possible to confer to an arbitrator the power to authorize a derivative claim? This question is not yet settled. We do not see why not, if the arbitration clause allows it, given that an arbitrator can be granted the powers of the Court in oppression remedy claims”.

While Justice Perreault does not directly answer whether an arbitrator can authorize a derivative action under the BCA either, her decision comes one step closer to doing so, as she rejects Respondent’s argument that the Superior Court needed to authorize such claims in this case. It is unclear from the decision whether a derivative action was in fact required, as the Claimant argued that the case merely involved interpretation of the arbitration agreement in the context of oppression. However, the Respondent’s argument that an arbitrator cannot authorize such derivative action was rejected as a ground to challenge the arbitrator’s jurisdiction.

This case is an example of the evolution in the case law relating to the powers of arbitrators to rule on claims previously considered to be within the exclusive jurisdiction of the Superior Court.