Québec – parties can give court role to examine merits of settlement but not to examine merits of identical consent award – #358

In Gestion S. Cantin Inc. v. Emblème Canneberge Inc., 2020 QCCS 2259, Mr. Justice Daniel Dumais distinguished the leeway available to arbitral parties to agree, subsequent to a settlement arrived at during arbitration, if/how to grant the court jurisdiction to examine the merits of the resolution of their dispute.  On a transaction (settlement agreement), arbitral parties can give the court jurisdiction to examine the merits.  On a consent award recording that same settlement, parties cannot give the courts jurisdiction to examine the merits.  The arbitral parties had negotiated a settlement agreement and obtained a consent award recording it but, disputing performance post-settlement, were allowed to dispute only the merits of the agreement but not the award, despite being identical in terms.

A dispute arose between two (2) groups of shareholders which lead to one group initiating court litigation in October 2018.  Their shareholders agreement contained an agreement to arbitrate and the shareholders agreed to arbitrate their dispute.

The shareholders entered into a transaction (settlement agreement under article 2631 of the Civil Code of Québec, CQLR c CCQ-1991 (“C.C.Q.”) which settled their dispute (“Transaction”).

Article 2631 C.C.Q. Transaction is a contract by which the parties prevent a future contestation, put an end to a lawsuit or settle difficulties arising in the execution of a judgment, by way of mutual concessions or reservations.

A transaction is indivisible as to its subject”.

The arbitrator records the Transaction as an April 1, 2019 award (“Award”) and orders the parties to abide by it.

The Transaction leads to the signature of a share sale agreement and a release and payment of the sale price by the buyers.  One group of shareholders (“Plaintiffs”) consider that the other group (“Defendants”) have not fully performed their obligations under the Transaction, alleging three (3) breaches: an unpaid balance of from the sale of produce marketed by the corporation; an incomplete release of the guarantees; and an unauthorized merger.

Plaintiffs file a second notice of arbitration before the original arbitrator but Defendants contest jurisdiction.  The arbitrator agreed, declining jurisdiction.

Plaintiffs filed an application in Superior Court seeking: (i) homologation of the Transaction and (ii) homologation of the Award (“Application”).  Defendants challenge the procedural approach taken by Plaintiffs, insisting that Plaintiffs ought to institute an action to seek performance of the Transaction.  Defendants file a declinatory motion, seeking dismissal of the Application for want of jurisdiction.

Plaintiffs challenge the declinatory motion, justifying their procedural approach as seeking homologation of the terms of the Transaction following which they would obtain an executory judgment conferring on them the right to have security on the assets of the corporation.

The Transaction contained the following clauses 14 and 17 and the shareholders agreement contained the following recital:

[informal translation] Article 14 Transaction – The present agreement constitutes a transaction within the meaning of articles 2631 and following the Civil Code of Québec and the parties recognize that it, between them, has the authority of res judicata.  This transaction cannot be homologated by the court unless there is a default of the terms of the present”.

[informal translation] Article 17 Arbitration Award – By virtue of the present, the parties require that the present agreement of settlement of the Litigation be recorded in an arbitration award to be rendered by [the arbitrator], as provided by article 642 Code of Civil Procedure and that said award not be subject to homologation by a court unless there is a default of the terms of the present.

[informal translation] WHEREAS the Transaction and the Award are an integral part of the present as if recited herein at length and that in the event of default of the part of [E] to pay the Balances of the sale of cranberries due to 9176 (Totem) and 9188 (BC), the latter as well as Plaintiffs other than 9398 will be entitled to have homologated the Transaction and the Award subject to the right of Defendants to contest that homologation in order to confer on them the status of an executory judgment and to publish that judgment against the assets of [the corporation] as a legal hypothec, without prejudice to their other rights of recourse for payment of the sums due”.

Defendants challenged the standing of (at least some of) Plaintiffs to institute the Application.  It may be because the provisions reproduced above provide rights of homologation to entities not party to either the Transaction or the Award.

Defendants argued that Plaintiffs had adopted the wrong procedural vehicle.  The Transaction had been performed and it was theoretical to decide an application which will settle nothing.  The debate on homologation would not allow one to determine breach of the Transaction and would not resolve the dispute and have no practical effect.  Rather, the parties should proceed to a request to execute and not homologate.

In his analysis, Dumais J. readily observed that Plaintiffs’ application had two (2) components: homologation of the Transaction and homologation of the Award.  Upon a declinatory, he was to take the allegations in Plaintiffs’ Application as proven and was not tasked with actually deciding the merits of the Application.

(i) Transaction – Dumais J. also noted that the parties had expressly agreed that they could debate performance of the Transaction during the homologation phase and only questioned whether, despite agreement, it was legal to do so.  Referring to article 528 of Québec’s Code of Civil Procedure, CQLR c C-25.01 (“C.C.P.”), he held that the parties could give and had given the court jurisdiction to do both and that doing so was legal.

Article 528 C.C.P. Homologation is approval by a court of a juridical act in the nature of a decision or of an agreement. It gives the homologated act the same force and effect as a judgment of the court.

The homologating court only examines the legality of the act; it cannot rule on its advisability or merits unless a specific provision empowers it to do so”. (underlining added)

Dumais J. distinguished cases cited by Defendants which relied on the absence of any contractual mechanism and the lack of contestation that the settlement had been performed. See Shannon (Municipalité) v. Canada (Procureur général), 2004 CanLII 41402 (QC CS) and Prometic Sciences de la vie Inc. v. Banque de Montréal, 2007 QCCA 1419. As well, Société d’habitation du Québec v. Leduc, 2008 QCCA 2065 advised that a judgment ought not to issue on a theoretical question whose executory force would depend on a subsequent proof.

(ii) Award – Dumais J. then turned to the role of the agreement as having been recorded in the Award.

Focusing in on the second paragraph of article 645 C.C.P., Dumais J. underlined the prohibition placed on examining the merits of an award when asked to homologate.

Article 645 C.C.P. A party may apply to the court for the homologation of an arbitration award. As soon as it is homologated, the award acquires the force and effect of a judgment of the court.

The court seized of an application for the homologation of an arbitration award cannot review the merits of the dispute. It may stay its decision if the arbitrator has been asked to correct, supplement or interpret the award. In such a case, if the applicant so requires, the court may order a party to provide a suretyship”. (underlining added)

Referring back to article 622 C.C.P., Dumais J. emphasized that the prohibition against examining the merits was public order.  The third para. or article 622 C.C.P. prevented arbitral parties from contracting out of the terms relating to homologation.

Article 622 C.C.P. Unless otherwise provided by law, the issues on which the parties have an arbitration agreement cannot be brought before a court even though it would have jurisdiction to decide the subject matter of the dispute.

A court seized of a dispute on such an issue is required, on a party’s application, to refer the parties back to arbitration, unless the court finds the arbitration agreement to be null. The application for referral to arbitration must be made within 45 days after the originating application or within 90 days when the dispute involves a foreign element. Arbitration proceedings may be commenced or continued and an award made for so long as the court has not made its ruling.

The parties cannot, through their agreement, depart from the provisions of this Title that determine the jurisdiction of the court or from those relating to the application of the adversarial principle or the principle of proportionality, to the right to receive notification of a document or to the homologation or the annulment of an arbitration award”.

As a result of the above, Dumais J. concluded that the homologation sought by Plaintiffs could not allow for debate on the merits despite agreement by the parties.  As a result, he observed that it would up to the judge at the merits hearing to decide, if necessary, whether to homologate an arbitral award which does not settle the existing dispute.  He dismissed Defendants’ declinatory motion leaving Plaintiffs’ Application to proceed to a merits hearing.

urbitral note – First, article 2633 C.C.Q. provides special status for a settlement agreeing qualifying as a transaction under article 2631 C.C.Q.

Article 2633 C.C.Q. A transaction has, between the parties, the authority of res judicata.

A transaction is not subject to forced execution until it is homologated”.

Second, many arbitration provisions allow an arbitral tribunal to adopt a settlement as an award.  The decision distinguishes between the parties’ leeway to agree, subsequent to a resolution, if/how to give them and the courts room to examine more about the resolution of their dispute.  

On a transaction, the parties can give the court more jurisdiction to examine the merits.  On an award, the parties cannot.  Parties should therefore pay special attention to the role they wish the court have post-resolution and adopt the correct form: transaction or award.

For example, the Canadian Commercial Arbitration Centre in its International Arbitration Rules at article 32 “Settlement and Award by Consent” provides as follows:

Article 32 1. If, before a final Award is made, the parties reach a settlement, they may notify the Centre of their intention to terminate the arbitral procedure.

2. At the request of the parties, the Tribunal may record the settlement in the form of an Award. Such Award shall indicate that it is made by consent of the parties; it need not state any other reasons”.

For further example, the International Centre for Dispute Resolution in its Canadian Dispute Resolution Procedures Arbitration Rules at article 32 “Settlement or Other Reasons for Termination” para. 1 provides as follows:

If the parties settle the dispute before a final award is made, the arbitral tribunal shall terminate the arbitration and, if requested by all parties, may record the settlement in the form of a consent award on agreed terms. The tribunal is not obliged to give reasons for such an award”.

Third, for more on the finality of settlements and attempts to rescind them, see the recent Arbitration Matters note “Settlement rescinded based on innocent misrepresentation of material fact unknown to Defendant” regarding Deschenes v. Lalonde, 2020 ONCA 304.  In that decision, Ontario’s Court of Appeal upheld rescission of a settlement on the basis of Defendant’s innocent misrepresentation regarding a fact material to Plaintiff’s decision to settlement.  Defendant’s actual or constructive knowledge that the representation was false was unnecessary.  The Court distinguished rescission based on innocent misrepresentation from rescission based on unilateral mistake. Despite the strong presumption favouring finality of settlements, the Court reiterated that the ways to “upset” a settlement are the same as those applicable to other contracts, including fraud, misrepresentation, duress, undue influence, unconscionability, or mutual or unilateral mistake.

The list of requirements for rescission based on innocent or non-fraudulent misrepresentation are listed in Kingu v. Walmar Ventures Ltd., 1986 CanLII 142 (BC CA), referred to by the Court of Appeal in its reasons. 

Fourth, for more on different challenges to settlements and defenses to alleged breach of settlement, see “Absent party bound by disputed settlement terms signed by authorized solicitor/agent” regarding Bakken v. Bakken, 2020 SKQB 127.  In that decision, Madam Justice Brenda R. Hildebrandt held defendant to a mediated settlement regarding sale of land, holding that defendant authorized counsel to attend as her solicitor/agent and consulting her by telephone during the mediation prior to counsel’s signature. Disagreement between the parties regarding the settlement lead to litigation to enforce purportedly unclear terms documented by the settlement.  Litigation, filed May 20, 2010, was resolved ten (10) years later by trial judgment on May 7, 2020.  Hildebrandt J.’s reasons explore possible, but unsuccessful, defenses to a breach of settlement claim, including frustration and three (3) types of contractual mistake: common mistake, unilateral mistake, mutual mistake.