Québec – court disallows amendment seeking to add claim subject to arbitration agreement – #129

In Lashchuk v. Zambito, 2018 QCCS 4553, Mr. Justice Michel A. Pinsonnault affirmed the court’s support for arbitration and disallowed Plaintiff’s application to amend its proceeding to include a dispute covered by a valid arbitration agreement. Analysing the role of wording such as “may”, “shall” and “must” in the parties’ arbitration agreement, Pinsonnault J. accepted that parties’ use of the term “may” can unconditionally grant each other the right to undertake arbitration without rendering their agreement unenforceable or otherwise less obligatory. The use of “may” still allowed Pinsonnault J. to hive off part of a complex dispute and exclude it from the litigation going forward.

The litigation involved a set of sophisticated contracts designed to organize shareholdings in a particular corporation, 4446208 Canada Inc. (“4446208”). Those contracts provided for shareholdings through direct holdings, either personal or corporate, or by way of a nominee arrangement, and also included a detailed shareholders agreement. The original contractual matrix had been further complicated by the need to involve a trustee in bankruptcy following one of the initial shareholder’s June 3, 2013 assignment in bankruptcy.

Steps taken because or following the bankruptcy altered the original shareholding design. Those steps added new shareholders and created disputes over who owned the shares in question and how those shares could be voted. One of the issues stemmed from the role of a December 14, 2007 nominee agreement (“NA”) and how it clouded how the shares would or could be voted in light of a subsequent April 29, 2008 shareholders agreement (“SA”).

In particular, if two parties were ostensibly the owners of 100 of one shareholder’s shares, could those shares be voted in separate blocks of 50 shares according to each of the shareholding interests or only as one block of 100? The answer to that latter question would affect how votes would be calculated for the purpose of specific corporate decisions and actions. Pinsonnault J. acknowledged that the underlying contractual matrix had been ‘complicated’ by facts which he set out at paragraph 9 of his reasons, including an organigramme of the shareholdings.

Plaintiff has instituted litigation seeking to have the court declare, among other things, (a) who is the real owner of 50 of 4446208’s shares which Plaintiff held as nominee and, as result, (b) in favour of whom should those shares be voted. Should Plaintiff issue those 50 shares in favour of the original shareholder or the corporation which, subsequent to that original shareholder’s bankruptcy, now claimed to be the beneficial owner of the 50 shares?

Pinsonnault J. had three different motions to consider. Only the first of those motions is considered in this note, namely whether to allow Plaintiff to amend its litigation and add two conclusions. One of the parties, 9377-9619 Québec Inc. (“9377”) contested the amendments. 9377 had successfully obtained assignment of 50 shares in the bankruptcy by a contract of sale 9377 entered into with the trustee.

Plaintiff’s proposed amendments mentioned the following two conclusions to its litigation : (informal translation)

A – ‘SAY and DECLARE what are the rights, if such exist, which the trustee assigned pursuant to the sale and assignment contract P-30
B – ‘SAY and DECLARE how should the votes be counted pursuant to the terms of article 5.8 and 5.9 of the Shareholders Agreement and if the vote of 4446208 Canada Inc. is divisible

9377 did not contest A but contested B. 9377 considered that B was covered by the arbitration agreement contained in the SA at article 11.

11.1 Dispute Resolution Procedures
11.1.1 The Parties shall, ln good faith, use their reasonable efforts to cooperate and work together to preserve the intentions and mutual benefits contemplated by this Agreement, and to ensure the effective and efficient performance of its terms and conditions.
11.1.2 Any dispute, controversy or claim between the Shareholders relating to the construction and/or interpretation of this Agreement (a “Dispute’) shall be resolved in accordance with the provisions of this Article 11.
11.2 First Level
All Disputes shall be referred to each of Peter Lashchuk and Gille LeBlanc for review, consideration and resolution. If such individuals are unable to resolve the Dispute within ten (10) Business Days after referral of the matter to them, the Parties shall submit the Dispute for resolution pursuant to Section 11.3. […]

Plaintiff provided two replies. First, it alleged that the arbitration agreement was only triggered by a dispute involving two shareholders. The current dispute was not submitted by any shareholder but, rather, parties competing over who was/were the shareholder(s). Second, it alleged that the arbitration agreement was not perfect in that it was not mandatory. The use of the word “may” did not serve to exclude the courts and the clause did not expressly exclude access to the courts.

Pinsonnault J. reproduced the wording of the mediation process at 11.3 of the SA as well as the wording of the arbitration agreement at 11.4:

11.4 Arbitration
11.4.1 If any Dispute is not resolved pursuant to Section 11.3, either Party may, within fifteen (15) Business Days after the completion of the procedures set forth in Section 11.3, refer such Dispute to arbitration by serving written notice of its intention Io arbitrate the Dispute to the other Party.
11.4.2 Arbitration of any Dispute shall be conducted in accordance with the Code of Civil Procedure (Quebec), except that such arbitration shall be conducted by a single arbitrator to be mutually agreed to by the Parties within three (3) Business Days following the date of the referral of the Dispute to arbitration. The arbitrator shall have reasonable expertise and experience in arbitrating business and commercial disputes.
11.4.3 All arbitrations shall take place in Montreal, Quebec.
11.4.4 Any decision of the arbitrator shall be final and binding on the Parties. The costs and expenses of the arbitration shall be paid as the arbitrator determines. The Party to whom any amount is owed as a result of an award of the arbitrator shall be entitled to payment within ten (10) Business Days of the date of award.
11.4.5 Each of the Parties agrees to cooperate promptly and fully with the other Party with respect to all aspects of arbitration, including the appointment of the arbitrator and compliance with any requests or orders of the arbitrator.
11.4.6 During the arbitration proceeding, the business of the Company and any Subsidiaries shall be carried on in the ordinary course.

Pinsonnault J. granted Plaintiff’s application to amend but only in part. He held that the arbitration agreement was valid and that it covered part of the conclusions covered by the proposed amendments. He therefore allowed Plaintiff to make its amendment but struck the mention of ‘how should the votes be counted pursuant to the terms of article 5.8 and 5.9 of the Shareholders Agreement, holding that such matters were to be determined in arbitration.

To do so, Pinsonnault J. analysed the imperative force of “may”, “shall” and “must”. He drew extensively on earlier guidance contained in paras 7,16 18-22 and 27-41 of the Québec Superior Court decision in Bridgepoint International (Canada) Inc. v. Ericsson Canada Inc., 2001 CanLII 24728.  Pinsonnault J. excerpted those paragraphs into his own reasons, signalling emphasis by underlining and bolding terms. That emphasis and the excerpts serve as persuasive guidance for Québec courts’ current approach to the binding force of arbitration agreements, provide helpful guidance for drafting arbitration agreements and are recommended reading.

The earlier Bridgepoint International (Canada) Inc. v. Ericsson Canada Inc. did not issue in isolation. At paragraph 35 it also identified its reliance on the Ontario Court of Appeal reasoning in Canadian National Railway Company v. Lovat Tunnel Equipment Inc., 1999 CanLII 3751, paras 11-14.

Pinsonnault J. determined that the wording of the SA was sufficiently clear and precise to impose arbitration on the parties for the portion of the proposed conclusion and he hived that portion of the conclusion off from the amendment. The fact that one of the shareholders had not submitted the dispute did not affect the outcome given that the SA wording applied to ‘parties’ and not just ‘shareholders’. Because the resolution of that conclusion involved interpreting the SA, Pinsonnault J. refused to allow Plaintiff to amend its litigation to include a dispute subject to arbitration.

By allowing the balance of the sought after amendment, Pinsonnault J. underlined that he was not ruling on the merits or pronouncing himself on the usefulness or relevance.

Pinsonnault J. recognized that, in sending the parties to arbitrate under the SA, doing so would likely delay adoption of resolutions authorizing the transactions anticipated. Despite this recognition and reflecting the court’s support of arbitration, he then allowed the amendment but only in part, effectively sending the parties to arbitration for the portion which he disallowed.