Québec – arbitrator may have default jurisdiction to grant leave to institute derivative action despite legislation assigning it to court – #229

In Gestion Michel Gagné inc. v. Gaston Gagné inc., 2019 QCCS 3260, Mr. Justice Simon Hébert declined to hear a motion for leave to institute a derivative action if doing so would encroach on an arbitrator’s jurisdiction to consider that same motion.  The corporate legislation which permitted the proposed derivative action stipulated that an application for leave be submitted to the Superior Court.  Since the proposed derivative action also included claims subject to arbitration, Hébert J. determined that the motion for leave was best heard at the same time as the motion to refer the parties to arbitration.

Gestion Michel Gagné Inc (“Gestion”) applied under section 445 of Québec’s Business Corporations Act, CQLR c S-31.1 (“B.C.A.”) for leave to bring an action in the name and on behalf of Les Immeubles G. Gagné Inc. (“LIGG”). 

Gastion Gagné Inc. (“GG”) opposed Gestion’s application by filing its own motion to stay Gestion’s application and refer the parties to arbitration.   GG argued that its motion be heard before Gestion’s.  Section 445 B.C.A. required that Gestion’s motion be presented to the “court”, defined by section 2 B.C.A. as the “Superior Court of Québec”.  

Section 445 B.C.A. An applicant may apply to the court for leave to bring an action in the name and on behalf of a corporation or a corporation that is one of its subsidiaries, or intervene in an action to which the corporation or subsidiary is a party, for the purpose of prosecuting, defending or discontinuing the action on behalf of the corporation or subsidiary.

Hébert J. qualified Gestion’s proposed action as a derivative or oblique action. Relying on paras 25 and 37 of Rea v. Wildeboer, 2015 ONCA 373 which involved section 245 of Ontario’s Business Corporations Act, RSO 1990, c B.16, Hébert J. considered the court’s role on Gestion’s application to be one of filtering.

[25] In such cases, they argue, the leave requirement fulfills its important threefold purpose of (i) preventing strike suits, (ii) preventing meritless suits, and (iii) avoiding a multiplicity of proceedings – all of which may lead to the corporation incurring significant and unwarranted costs, concerns that are less acute for closely-held corporations.

[37] The requirements for leave are straightforward and are set out in s. 246(2) of the OBCA: the directors must be given 15 days’ notice of the intention to bring the application, and the court must be satisfied: (i) that the directors will not pursue the claim; (ii) that the complainant is acting in good faith; and (iii) that it appears to be in the best interests of the corporation that the action be brought. In this way the legislative goals of avoiding strike suits, meritless actions and a multiplicity of proceedings against the corporation – and the potentially unwarranted costs that accompany them – are strengthened. Although they have been the subject of some academic criticism,[3] these remain valid legislative objectives and concerns, in my view, particularly in the context of actions against publicly-traded corporations.

Citing key commercial law doctrine, Hébert J. observed that the Québec legislation followed the Federal legislation (239 of the Federal Canada Business Corporations Act, RSC 1985, c C-44) and that the doctrine considered that case law developed under the Federal legislation applied mutatis mutandis to its provincial equivalent.  See “Paul Martel, La société par actions au Québec”, vol.1, (Montréal, Éditions Wilson et Lafleur Martel Ltée, 2019) para. 31-121.  

GG argued that authorization to initiate the derivative action was within the jurisdiction of the arbitrator and not the Superior Court as at least one of the three (3) transactions identified in Gestion’s proposed derivative action was subject to an agreement to arbitrate.  

Hébert J. observed the parties had presented him with no case on point regarding whether the arbitral tribunal should decide the application assigned by legislation to the court.  He did flag the B.C. Supreme Court in Bennett v. Rudek, 2008 BCSC 1278 which had identified, but not answered, the question of whether it had jurisdiction to authorize a derivative action before another venue, namely the Federal Court.

[44] Because I believe that this application can be decided on the basis of the good faith requirement in s. 233(1)(c), it is unnecessary for me to address the issue whether this Court has jurisdiction under the [Business Corporations Act, SBC 2002, c 57] to grant derivative leave to commence proceedings in Federal Court, or in any court outside British Columbia.  However I note that the authorities indicate that such jurisdiction may be wanting:  Nova Ban-Corp Ltd. v. Tottrup, [1989] F.C.J. No. 828 (FCTD), A.C.F. No. 828, and LaRoche v. HARS System Inc., 2001 BCSC 140 (CanLII), 86 B.C.L.R. (3d) 166.  See also, Gordon D. Phillips, “Derivative Actions:  How They Work and How They Don’t”, in Shareholders’ Remedies:  materials prepared for the Continuing Legal Education Conference, Shareholders’ Remedies 2006, Vancouver, B.C., November 24, 2006.

Hébert J. considered court practice and the applicable provisions of the Code of Civil Procedure, CQLR c C-25.01 to determine whether GG’s motion to stay could or should go first or at least be heard in isolation to Gestion’s.  Hébert J. did accept that GG’s motion was intended to be heard at the onset of a court action, along with other preliminary matters, and in a condensed time frame.  Such motions should not be held back by other matters which require a more searching or involved fact finding.  That said, for the court’s proper appreciation of the facts, he thought it was not advisable to decide GG’s motion without considering Gestion’s motion for leave to institute a derivative action and the 18 exhibits communicated in support thereof.

Referring to Dell Computer Corp. v. Union des consommateurs, [2007] 2 SCR 801, 2007 SCC 34 para. 84, Hébert J. reiterated the default approach that jurisdictional questions should be decided first by the arbitrator.

84 First of all, I would lay down a general rule that in any case involving an arbitration clause, a challenge to the arbitrator’s jurisdiction must be resolved first by the arbitrator.  A court should depart from the rule of systematic referral to arbitration only if the challenge to the arbitrator’s jurisdiction is based solely on a question of law.  This exception is justified by the courts’ expertise in resolving such questions, by the fact that the court is the forum to which the parties apply first when requesting referral and by the rule that an arbitrator’s decision regarding his or her jurisdiction can be reviewed by a court.  It allows a legal argument relating to the arbitrator’s jurisdiction to be resolved once and for all, and also allows the parties to avoid duplication of a strictly legal debate.  In addition, the danger that a party will obstruct the process by manipulating procedural rules will be reduced, since the court must not, in ruling on the arbitrator’s jurisdiction, consider the facts leading to the application of the arbitration clause.

Hébert J. was alert to how, by dismissing Gestion’s motion, the court would encroach upon the arbitrator’s authority to decide jurisdiction.  Despite the B.C.A. granting jurisdiction to the court to authorize derivative actions, Hébert J. accepted that case law was also open to accepting that such jurisdiction might lie with the arbitrator.

Hébert J. then ordered that both Gestion’s and GG’s motion be heard at the same time before the same judge.

urbitral note – At the time of posting this note, the decision, if any, on the two (2) motions had not yet been posted.  The decision will be a novel one. If the reasons are correct, the decision will be the first to consider whether an arbitrator has default jurisdiction to grant leave to a derivative action subject to an agreement to arbitrate even though the legislation permitting that action expressly assigns that jurisdiction to a court.