Québec – Arbitrator wrong to extend arbitration agreement to include third-party employees – #769

The Superior Court of Québec in Mullen c. Nakisa inc., 2023 QCCS 2678 held that employees not party to an arbitration agreement should not be added as parties to an ongoing arbitration. There is no support for the proposition that all third parties that are in some way related to the signatory parties of an arbitration agreement should be bound by it. This decision on the merits follows the stay granted by the Superior Court in October 2021 (Mullen c. Nakisa inc., 2021 QCCS 4388), covered in Case Note Québec – Stay of arbitrator’s decision to add third parties, force them to meet timetable, and refusal to hear them without payment – #553.

The Court was presented with an application for judicial review by Mullen and Kumar relating to an arbitrator’s decision in proceedings involving Nakisa inc. (“Nakisa”) and Sierra Digital inc. (“Sierra”), wherein the arbitrator granted Nakisa’s application to add Mullen and Kumar as third parties to the arbitration.

The dispute – On March 22, 2019, Nakisa (as Claimant) and Sierra (as Respondent) submitted to arbitration a distribution dispute involving an alleged illegal appropriation by Kumar and Mullen, who were employees of Sierra.  A Memorandum of Agreement was signed, setting out the modalities of arbitration and the choice of an arbitrator. It is important to note that Mullen and Kumar were not involved in the choice of arbitrator, nor in any other aspect of the arbitration and were not parties to it.

On February 12, 2020, Nakisa instituted court proceedings against Kumar and Mullen before the Superior Court of Québec, claiming damages and, on August 12, 2020, the Court dismissed the action on the grounds of lack of territorial jurisdiction:  Nakisa inc. c. Kumar, 2020 QCCS 2487.

Thereafter, Nakisa changed its approach in the arbitration and sought leave to amend its claim against Sierra to add Kumar and Mullen as respondents in the arbitration. That request was granted by the arbitrator.

On this application, Mullen and Kumar argued that they could not be parties to the arbitration as they had not consented to it, and they were not signatories to the arbitration clause in the Memorandum of Agreement.

The Court’s decision – On July 13, 2023, the Court, relying on the Supreme Court of Canada’s judgment in Zodiak International Productions Inc. c. Polish People’s Republic, [1983] 1 R.C.S. 529, and recalling the importance of consent in arbitration, stayed the arbitration proceedings concerning Mullen and Kumar. The Court found that it could determine the question of whether the arbitrator had jurisdiction over these parties.

The Court acknowledged the compétence-compétence principle, which provides that questions relating to the competence of an arbitrator should be settled by the arbitrator, with certain exceptions, citing the recent Court of Appeal decision Gifran inc. c. 9225-2071 Québec inc., 2023 QCCA 311. This case was covered in Case note #725 – Québec: interpretation of two shareholder agreements requires more than a superficial analysis. However, the Court concluded that this matter could be resolved with a superficial examination of the facts at hand, asserting that a party forced into an arbitration proceeding to which it did not consent may seek immediate relief from the Court. In its superficial assessment of the facts, the Court noted the following:

  • Mullen and Kumar neither signed nor consented, by their acts, to the arbitration clause, and they never waived the jurisdiction of the American civil courts (they both reside in the U.S.);
  • This position was endorsed by Nakisa itself in the Superior Court proceedings against Mullen and Kumar. Nakisa itself wrote in its pleadings in the court proceeding that “the arbitration proceedings do not implicate Kumar and Mullen and no formal agreement is in place with Kumar and Mullen providing arbitration proceedings”;
  • Mullen was hired after the arbitration clause was signed;
  • The arbitrator was already chosen prior to their involvement, and the modalities of the arbitration, such as the timetable, had long been  established; and
  • The companies involved were not run by sole directors, unlike in recent Québec cases involving third parties to the arbitration agreement.

The Court heavily relied on the fact that: 

Nakisa argued tooth and nail that Mullen and Kumar could not be parties to the arbitration proceedings and tried to convince the Court of this, albeit unsuccessfully, to justify the survival of its personal lawsuit against them. With all due respect, Nakisa cannot now support an argument to the contrary. Nakisa’s judicial conduct even constitutes a clear waiver to arbitrate against Mullen and Kumar” (para. 18 – author’s translation)

Paired with the Court’s observation that the arbitrator demanded a substantial sum (more than CDN $11,000) from Mullen and Kumar in order for them to present to him their arguments against forced participation in arbitral proceedings, the Court concluded that its intervention was necessary, and that Muller and Kumar should not bear the consequences of Nakisa’s “dubious tactical about-face”.

The Court was not convinced by Nakisa’s reliance on Québec precedents accepting the extension of arbitration agreements to third parties such as Décarel (Décarel inc. v Concordia Project Management Ltd, J.E. 96-1612 (C.A.)) and Guns N’Roses (Guns n’ Roses Missouri Storm Inc. v Productions musicales Donald K. Donald inc., 1994 CanLII 5694), finding that this case turned on Nakisa’s tactics. 

As a final note, the Court observed that Mullen and Kumar’s request for judicial review of the arbitrator’s decision to permit Nakisa to amend its pleading to add Mullen and Kumar as parties pursuant to article  529 of the Code of Civil Procedure, CQLR c C-25.01 (“C.C.P.”) was not the appropriate procedural vehicle. The court referred to Desputeaux c. Éditions Chouette, [2003] 1 R.C.S. 178 and recalled that recourse against an arbitral decision is governed by articles 622 and 632 C.C.P.  The Court therefore rectified the claims for relief sought by Mullen and Kumar by declaring that the arbitrator lacked jurisdiction within the meaning of article 632 C.C.P.

Contributor’s Notes:

First, this case the latest decision in the judicial saga involving the dispute among these parties (see Arbitration Matters Case Note Québec – Stay of arbitrator’s decision to add third parties, force them to meet timetable, and refusal to hear them without payment – #553 and Québec – Intervention by appointing authority not permitted on challenge to decision – #613).

Second, the facts in Mullen v. Nakisa were more favorable to the third parties resisting inclusion in the arbitral proceedings than in other recent Québec cases where third parties were included in arbitration proceedings: the third parties were employees as opposed to shareholders, and Nakisa had itself earlier argued in Court pleadings that the employees were not bound by the arbitration agreement (see above).Also, the Court disagreed with Nakisa that the Décarel and Guns N’Roses decisions stood for the notion that all third parties that are in some way related to the signatory parties of an arbitration agreement should be bound by it. This was in line with the Court’s comment in the earlier stay decision that the Décarel precedent has been criticized and distinguished by subsequent case law (para. 16). The  comments in these two decisions thus perhaps mark a reversal in the trend pertaining to the addition of third parties to arbitration agreements in Québec noted by Marie-Claude Martel in her 2022 round-up.