Québec – court considers challenge on arbitrator’s procedural irregularities and jurisdiction to issue safeguard orders – #055

In deciding competing applications to homologate and to annul two arbitral awards and an interim safeguard oder, the Québec Superior Court in Hachette Distribution Services (Canada) Inc. v. 2295822 Canada Inc., 2018 QCCS 1213 set out the standard of review applicable to alleged procedural defects committed during an arbitration and the extent to which an arbitral tribunal can issue orders having an injunctive effect.

The dispute between Hachette Distribution Services (Canada) Inc. (“HDS”), Claimant, and 2295822 Canada Inc. dba ‘Messageries de Presse Benjamin Inc. (“MPB”) and Paul Benjamin (“PB”), Respondents, stemmed from two asset purchase agreements by which HDS purchased certain assets of MPB.

The arbitration had proceeded in two phases.  The first commenced in October 2016 and resulted in a May 6, 2017 decision (“Phase I”).  Phase I dealt with HDS’ claim to annul the contract between the parties.  The second phase was to deal with the consequences of the annulment (“Phase II”).

In her May 6, 2017 award on Phase I, the arbitrator granted HDS’ claim to annul.  By May 22, 2017 application, MPB and PB applied to the Superior Court to annul that May 6, 2017 award and on May 22, 2017 also applied to the arbitrator to suspend the arbitration of Phase II.  The arbitrator refused to suspend Phase II.  MPB and PB advised that they would not participate in Phase II.

The arbitrator proceeded with Phase II with a hearing on May 31, 2017 and on June 6, 2017, issuing her award on Phase II on July 4, 2017.  In the interim, between issuing her May 6, 2017 and July 4, 2017 awards, the arbitrator also issued a June 15, 2017 safeguard order in favour of HDS and against MPB and PB.  That order mainly targeted PB and various companies in which he held a controlling interest to effectively freeze the assets of those companies.

The reasons for the Superior Court’s decision provide the full text of the safeguard order which has the characteristics of a mareva injunction against PB personally.

Mr. Justice Martin Castonguay dealt with five (5) applications presented by the parties following an arbitration betweenHDS Claimant and MPB and PB as Respondents:

(1) HDS’ July 31, 2017 application to homologate a May 6, 2017 and a July 4, 2017 arbitration award;

(2) MPB’s and PB’s May 22, 2017 application to annul a May 6, 2017 arbitration award;

(3) MPB’s and PB’s July 26, 2017 application to annul a July 4, 2017 arbitration award;

(4) HDS’ October 2, 2017 application to homologate a June 15, 2017 safeguard order; and,

(5) July 21, 2017 contestation to homologate a June 15, 2017 safeguard order and to annul it.

Castonguay J. granted two of HDS’ motions to homologate two awards, dismissed HDS’ third motion to homologate a safeguard order and granted MPB’s and PB’s application to annul the safeguard order.

His reasons set out the standard for: (a) judicial intervention on allegations of an arbitrator’s violation of procedural fairness; and, (b) the extent to which arbitrators can issue orders with injunctive effect.

Procedural fairness

The parties’ applications triggered articles 646 and 648 of the Code of Civil Procedure which Castonguay J. reproduced in full in his reasons, along with the Minister of Justice’s comments on those two articles.  Castonguay J. observed that the combined effect of those articles considerably limited the grounds on which a court could refuse to homologate an arbitral award. The legislation favoured the resolution of disputes through arbitration as well as providing arbitral awards the effect of a court judgment.

Respondents argued that the award for Phase I should be annulled due to procedural irregularities and that the award for Phase II should be annulled due to a breach of audi alteram partam.

Castonguay J. set out the applicable law on procedural irregularities leading to a court’s intervention.  His analysis started with the Québec Court of Appeal in Rhéaume v. Société d’investissements l’Excellence inc., 2010 QCCA 2269.

That 2010 decision reviewed the state of the law and noted that

[52] In Quebec, as is the case elsewhere in Canada, there is a distinct jurisprudential trend affirming the existence of a residual discretion not to grant contestations of motions to homologate or to annul arbitral awards for what appears to be a procedural defect.

The 2010 Court of Appeal decision drew on a prior decision of Mr. Justice Joel A. Silcoff in Holding Tusculum, b.v. c. Louis Dreyfus, s.a.s. (SA Louis Dreyfus & Cie), 2008 QCCS 5904 in which Silcoff J. refused to rely on inconsequential irregularities to annul the award.  In doing so, he relied on expert testimony on international commercial arbitration provided by Fabien Gélinas and William Lawrence Craig.  In doing so, Silfcoff J. recognized that judicial intervention was narrowly defined and that intervention was reserved for extreme cases  in order to prevent flagrant denials of due process.

As Prof. Gélinas wrote in his expert report excerpte by Silcoff J. in his reasons:

“The standard of a “material breach of procedure” or a breach that “presumably affected the award” and the requirement of a prejudice, simpliciter, sufficient or substantial, have one thing in common: they all operate to avoid the trivialization of judicial review in cases of minor violation of the procedure while at the same time avoiding the risk of subsuming this separate ground of review under other grounds referring to due process or public order.”

Castonguay J. summarized the state of law as being:

(a) an arbitrator’s minor violation of a rule of natural justice cannot result in a court’s refusal to homologate the award; and,

(b) as a corollary, a serious violation can result in the rejection of the whole or part of the award.

Castonguay J held that, on the facts before him, in both Phase I and in Phase II, the standard justifying a court’s discretion to annul the award had not been met.  He qualified the attacks on the arbitrator’s handling of Phase I as attacks on the reasoning and not a demonstration of a material breach and that the Phae II attacks were due to Respondents’ own decision and strategy not to participate.

Orders with injunctive effect

Respondents argued that only a superior court could issue a safeguard order with a Mareva effect.  Castonguay J. reviewed the leading doctrine by the honourable Pierre J. Dalphond, and comments by the Court of Appeal in decisions submitted by the parties.  HDS referred to two cases:  Service Bérubé ltée v. General Motors du Canada ltée, 2011 QCCA 567 in which the Court of Appeal recognized that an arbitrator could issue an order for specific performance; and, Nearctic Nickel Mines Inc. v. Canadian Royalties Inc., 2012 QCCA 385 in which the Court of Appeal held that an arbitration clause granting powers to an arbitrator must be interpreted in a broad manner and that an arbitrator can, if authorized by the parties, issue an order with an injunctive effect.

Castonguay J.’s review of the case law and doctrine lead him to conclude that an arbitrator can issue orders having an injunctive effect as a provisional or safeguard measure but doing so must be linked to the arbitrator’s mandate which must be interpreted in a broad manner.  The arbitrator’s jurisdiction to issue provisional and safeguard measures is implicit in article 646 C.C.P. which mentions a court’s discretion to refuse to homologate arbitration awards and such measures on the limited grounds listed in article 646 C.C.P.

On the facts before him Castonguay J. refused to homologate the arbitrator’s safeguard order and granted the application to annul it.  He held that the order exceeded the mandate given to her and in his appreciation had an effect on third parties.

“(translation) (76) The safeguard measure issued June 15, 2017 sought to freeze the assets of non parties not subject to the parties’ dispute and not identified by the arbitrator when confirming her jurisdiction.  Furthermore, this measure was granted before the decision on damages and had the result of freezing the assets of MPB and Benjamin while no decision of a monetary nature had issued.