QUÉBEC – Court favors arbitration even for related, but non-signatory, parties – #541

In 10053686 Canada inc. v. Tang, 2021 QCCS 3467 (unreported), Justice Geeta Narang declined jurisdiction with respect to a dispute arising out of a Franchise Agreement. Plaintiffs were the franchisees and a director of a franchisee. Defendants were directors and shareholders of the franchisor. Justice Narang referred the case to private arbitration following Defendants’ demand for declinatory exception because the Franchise Agreement contained an arbitration clause. Justice Narang first concluded that the arbitration agreement was a “complete undertaking to arbitrate”, in conformity with the Supreme Court of Canada decision in Zodiak International v. Polish People Republic, [1983] 1 S.C.R. 529. She concluded that all allegations in the Plaintiffs’ claim were related to the franchisor-franchisee relationship and covered by the arbitration agreement. Secondly, she recognized the Legislator’s intention to favor a private dispute resolution mechanism over the public justice system whenever the parties have expressed the intention to resolve their dispute out of court. Thirdly, she granted Defendants’ demand for a declinatory exception, even though all Defendants and one of the Plaintiffs were non-signatories to the arbitration agreement. In interpreting the arbitration agreement liberally, she concluded that in this context ignoring the arbitration agreement because the Defendants were not parties to the arbitration agreement would be to rely upon a “blind technicality”.

Plaintiffs were Cacao 70’s franchisees and a director of one of the franchisees. They filed a demand against the individuals acting as directors and ultimate shareholders of the franchisor. Plaintiffs claimed that Cacao 70 did not sell them viable franchises and that Defendants convinced them to invest large amounts of money in the franchises, which ended-up failing. Accordingly, Plaintiffs brought direct claims against the Defendant directors and shareholders of the franchisor. The franchise agreement signed by two of the three Plaintiffs included an arbitration agreement, which Justice Narang described as follows:

“The clause provides that “any dispute, controversy or claim arising, out of or relating to this Agreement (…) including, without limitation, its formation, validity, binding effect, interpretation, performance, breach or termination, as well as non-contractual claims, shall be determined by final and binding arbitration, to the exclusion of the courts.”

The clause ends with the following statement: “This Section constitutes an arbitration agreement between the parties.”

Justice Narang’s analysis was as follows.

First, based on the well-known criteria established by the Supreme Court of Canada decision Zodiak International v. Polish People Republic, [1983] 1 S.C.R. 529, Justice Narang concluded that the arbitration agreement included in the Franchise Agreement was a “complete undertaking to arbitrate (…) which contains the essential ingredients, namely that the parties have undertaken to execute a submission and that the arbitration award is final and binding on the parties.

Second, Justice Narang referred to the Legislator’s intention with respect to arbitration:

“[17] As explained by Justice Pierrette Rayle, formerly of this Court and the Court of Appeal, in a case involving a franchisor-franchisee agreement, “the Legislator finds it desirable, as opposed to merely possible, for the parties to resolve their disputes by means other than by resort to the courts. If, at a time when the relationship was harmonious, the parties agreed that a dispute resolution mechanism was desirable, such a commitment must continue to be honoured when a conflict occurs. The original intention of the parties should not be buried in more recent manifestations of their dispute.” (Bridgepoint International (Canada) Inc. c. Ericsson Canada Inc., 2001 CanLII 24728 (QC CS))

Third, Justice Narang interpreted the arbitration agreement liberally, relying upon the Supreme Court of Canada decision in Desputeaux v. Éditions Chouette (1987) inc., 2003 SCC 17. She concluded that the allegations in Plaintiffs’ claim were all closely related to the franchisor-franchisee’s relationship and as so fell within the arbitrator’s jurisdiction. Based on the Quebec Court of Appeal’s decision in Décarel inc. v. Concordia Project Management Ltd., 1996 CanLII 5747, Justice Narang granted Defendants’ demand for declinatory exception, even though Defendants did not personally sign the arbitration agreement, which was concluded through their corporation. In Décarel, the Court of Appeal stated that depending upon the circumstances, it would be an error to ignore an arbitration agreement based on a “blind technicality”.

Contributor’s Note:

Justice Narang’s decision focuses on the willingness of the parties to the Franchise Agreement to resolve their dispute by way of a private dispute resolution mechanism. Based on a 2001 Superior Court decision in Bridgepoint International (Canada) inc. v. Ericsson Canada inc., 2001 CanLII 24728, she confirmed the Legislator’s intent to favor private dispute resolution mechanism over the traditional justice system, which is also in conformity with the jurisprudence as it has evolved and the 2016 modifications of the Code of Civil Procedure. The very first section of the 2016 CCP states as follows:

“To prevent a potential dispute or resolve an existing one, the parties concerned, by mutual agreement, may opt for a private dispute prevention and resolution process.

The main private dispute prevention and resolution processes are negotiation between the parties, and mediation and arbitration, in which the parties call on a third person to assist them. The parties may also resort to any other process if that suits them and that they consider appropriate, whether or not it borrows from negotiation, mediation or arbitration.

Parties must consider private prevention and resolution processes before referring their dispute to the courts.”

Since 2016, in Quebec, parties have a positive obligation to consider a private dispute resolution mechanism. Therefore, Justice Narang’s decision, giving effect to an arbitration agreement, is consistent with the Legislator’s intention.

However, referring non-signatory parties to arbitration is unusual and depends, as Justice Narang stated, on the context of the case. In this decision, it is interesting to note that the non-signatory Defendants were the ones asking the Court to decline jurisdiction in favor of arbitration. The Court did not address this particularity which arguably constituted an agreement to be bound by the arbitration agreement. Neither did the Court address the fact that one of the Plaintiff was also a non-signatory party.

There are very few cases in Quebec that refer non-signatory parties to arbitration and they all have a very specific context such as the Court of Appeal’s decision in Décarel inc. v. Concordia Project Management inc., 1993 CanLII 5747 quoted by Justice Narang. See also Justice Rothman’s conclusion in Guns N’ Roses Missouri Storm inc. v. Productions musicales Donald K. Donald inc., 1994 CanLII 5694 (QC CA) stating the following:

“(24) I do not believe that the presence of a third party in the dispute, or even the fact that a third party has initiated proceedings, should, in itself, render the arbitration clause inapplicable and deprive the parties of a forum for the settlement of their disputes which they have chosen in their contract. It is not difficult to imagine any number of commercial disputes where it would be entirely appropriate to proceed to arbitration under the arbitration clause agreed upon between two parties notwithstanding a claim against one of the parties by a third party.

[…]

(38) I do not wish to suggest that the mere initiation of a suit by a third party will permit a party to an arbitration clause to defeat the purpose and intention of the clause by exercising warranty proceedings. There will doubtless be cases where the parties should be referred to arbitration, notwithstanding the existence of a suit by a third party. Much will depend on the nature of the claims and the circumstances of each case.”

Québec courts rarely refer non-signatory parties to private arbitration, unless there is strong evidence that the situation is one of interrelated companies or contracts. This situation was discussed notably by Justice Déziel in the Québec Superior Court’s decision in 3879607 Canada inc. c. Hôtel Cadim (Godin) inc., 2006 QCCS 4609.

For more comments on a similar case, see previous Case Note B.C. – court grants stay to non-signatories to arbitration agreement – #004 where non-signatory were also referred to arbitration.