Québec – court litigation deemed abusive attempt to evade res judicata of homologated award – #292

In Papadakis v. 10069841 Canada inc., 2020 QCCS 32, Madam Justice Judith Harvie held that a litigant cannot avoid application of an arbitral award’s res judicata by litigating new arguments on old facts.  Harvie J. held that the litigant ought to have raised its new arguments in arbitration and that it would be against public interest and stability of social relations to allow it to raise new arguments to plead the same cause of action.  Harvie J. further declared the proceeding abusive and ordered the litigant to pay some but not all of the other litigant’s legal fees.

Plaintiff (“Landlord”) leased commercial space to 10069841 Canada Inc. (“Tenant”) by way of February 2017 lease (“Lease”).  Soon after, a dispute arises and Landlord files an action in Superior Court.  Tenant files a declinatory exception invoking the arbitration agreement in the Lease and Landlord subsequently agrees to submit their dispute to arbitration.

Tenant filed a notice of arbitration (“Notice”) seeking payment for cost of repairs to windows and the lift as well as restoration of the roof.   Landlord responded to the Notice requesting that the arbitrator declare the Lease terminated as of March 2017.  Landlord argued that Tenant’s delay in reporting issues with the lift prevented him from terminating the Lease in the delays agreed to in the Lease.  Failing termination of the Lease, Landlord sought an order requiring Tenant to share the costs of the window repairs and assume full payment for the roof.

The arbitrator issued a November 26, 2018 award (“Award”) concluding that the Lease was valid and making various determinations of fact.

On January 9, 2019, Landlord initiated new litigation in court seeking termination of the Lease and annulling the Award.  Tenant filed a January 10, 2019 motion to homologate the Award.  On February 1, 2019, Landlord did not contest homologation.  Tenant argued that, in not contesting homologation, Landlord had acknowledged the validity of the Lease.

Despite consenting to homologation, Landlord argued that his consent was vitiated when entering the Lease.  Landlord alleged that the Lease did not correspond to his intention that it be “net-net-net” and that all expenses, including major ones, be at Tenant’s expense.  Landlord further argued that the automatic renewal of the Lease was so favourable to Tenant that he would never have agreed to it.  Based on his allegations, Landlord claimed that the Lease was void for lack of consent and, as a consequence of being void, the agreement to arbitrate was “ineffective” and therefore the Award must also be annulled.

In response to Landlord’s claims, Tenant filed a motion to dismiss and for a declaration that Landlord’s proceeding was abusive.

Harvie J. identified three (3) issues:

(i) can Landlord’s action be dismissed under article 168 of the Code of Civil Procedure, CQLR c C-25.01 (“C.C.P.”);

(ii) is Landlord’s action abusive under article 51 C.C.P.; and,

(iii) if abusive, can Tenant be awarded its extrajudicial legal fees?

(i) Admissibility – paras 19-54

Among other grounds, article 168(1) C.C.P. provides that a party may ask that an application or a defence be dismissed if there is lis pendens or res judicata. Article 642 C.C.P. stipulates that an arbitral award binds the parties and can be challenged only on the grounds set out in article 648 C.C.P. and homologation cannot be refused unless one (1) of the grounds in article 636 C.C.P. “is proved”.

Harvie J. confirmed that Landlord invoked none of the grounds listed in those articles and had not contested homologation. Despite these facts, Landlord maintained that the Lease was null for want of consent and challenged the Award as resulting from a void contract.

Harvie J. held that the Award benefitted from res judicata, citing Carboni v. Financière Banque Nationale, 2004 CanLII 76553 (QC CS) paras 36 and 47 which itself relied on Zodiak International v. Polish People’s Republic, 1983 CanLII 24 (SCC), [1983] 1 SCR 529.  Harvie J. added that article 2848 of the Civil Code of Québec, CQLR c CCQ-1991 (“C.C.Q.”) stipulates in part that “[t]he authority of res judicata is an absolute presumption; it applies only to the object of the judgment when the demand is based on the same cause and is between the same parties acting in the same qualities and the thing applied for is the same.

Harvie J. drew on Roberge v. Bolduc, 1991 CanLII 83 (SCC), [1991] 1 SCR 374 which stated that res judicata avoided anarchy, citing doctrine in support of res judicata:

[translation] (To the same effect, see Aubry and Rau, Droit civil français (6th ed. 1958), t. 12, No. 769, p. 319; Laurent, Principes de droit civil (5th ed. 1893), t. 20, at No. 1, p. 5.)

 The rationale for this irrebuttable legal presumption of validity of judgments is anchored in public social policy to ensure the security and stability of relations in society. The converse would be anarchy, with the possibility of endless trials and contradictory judgments.

Res judicata requires that three (3) elements exist: the identity of parties, object (thing) and cause.  The identity of the cause rests on the juridical nature of the facts on which it is bases.  See Rocois Construction Inc. v. Québec Ready Mix Inc., 1990 CanLII 74 (SCC), [1990] 2 SCR 440.

The identify of object focuses on the benefit sought by the action and Harvie J. noted that the doctrine supports a broad approach to this element.  See Ghanotakis v. Laporte, 2013 QCCA 1046 (leave to appeal denied, Georges Ghanotakis, et al. v. René Laporte, et al., 2014 CanLII 5978 (SCC)).

The effect of res judicata applies not only to the dispositive but also to the essential grounds, including implicit conclusions flowing necessarily from the dispositive of the earlier decision. See Jean-Paul Beaudry ltée v. 4013964 Canada inc., 2013 QCCA 792, paras 36-39.

Having set out the applicable principles, Harvie J. then turn to their application to the facts before her.

She held that the parties were the same and, for the cause, the same facts were at the root of the dispute in court.  In addition, the legal qualification of those facts was the same, namely the meaning to give to the terms of the Lease.

Harvie J. examined the arbitral process to see how the parties framed their approach, including their list of issues, and excerpted from the Award addressing those very issues.  The Award, for example, clearly addressed the issues raised by Landlord in court and the consequences of the facts proven in arbitration.  She did note that Landlord intended to make new arguments on old facts and that certain argument had not been made before the arbitrator.

Harvie J. determined that, on the basis of the same facts, Landlord sought to raise new arguments and re-argue the same cause of action, namely the validity of the Lease. She held that Landlord ought to have raised these arguments before the arbitrator and that it would be against public interest and stability of social relations to allow Landlord to raise new arguments at this stage to plead the same cause of action.

(ii) abuse of right and extrajudicial fees – paras 55-72

Article 51 C.C.P. et seq. codifies the courts’ jurisdiction to declare an action or a pleading abusive:

Article 51 C.C.P. The courts may, at any time, on an application and even on their own initiative, declare that a judicial application or a pleading is abusive.

Regardless of intent, the abuse of procedure may consist in a judicial application or pleading that is clearly unfounded, frivolous or intended to delay or in conduct that is vexatious or quarrelsome. It may also consist in a use of procedure that is excessive or unreasonable or that causes prejudice to another person, or attempts to defeat the ends of justice, particularly if it operates to restrict another person’s freedom of expression in public debate.

Articles 52-56 C.C.P. stipulates further measures applicable once a court determines that there has been an abuse of procedure.

Tenant objected not only to the litigation in court but also to the manner in which Landlord participated in the arbitration.  It sought three (3) sums in payment of its legal fees and expenses:

(a) $90,055.33 – initial action for annulment and resiliation of the Lease;

(b) $63,215.73 – arbitration; and,

(c) $17,873.70 – application before Harvie J.

Landlord defended, arguing that he had never raised the lack of consent argument before and was therefore not abusive.

Harvie J. held that there was no evidence that the initial court litigation or arbitration had been conducted in an abusive manner.  Had Tenant wanted to present that argument, it ought to have produced evidence or presented its demands in those instances. Harvie J. did agree with Tenant that, by its proceeding, Landlord tried to challenge the Award and raise arguments it could have made before the arbitrator and that the proceeding was a disguised attempt to appeal the Award.

Thought Landlord had not challenged homologation of the Award it now did so.  Harvie J. held that such an approach was manifestly unfounded and dilatory and violated the principles stated in the Preliminary Provision at the beginning of the C.C.P.

This Code is designed to provide, in the public interest, means to prevent and resolve disputes and avoid litigation through appropriate, efficient and fair-minded processes that encourage the persons involved to play an active role. It is also designed to ensure the accessibility, quality and promptness of civil justice, the fair, simple, proportionate and economical application of procedural rules, the exercise of the parties’ rights in a spirit of co-operation and balance, and respect for those involved in the administration of justice.

Following the grounds set out in Groupe Van Houtte inc. (A.L. Van Houtte ltée) v. Développements industriels et commerciaux de Montréal inc., 2010 QCCA 1970 paras 124-125, Harvie J. determined that she would consider awarding $10,000.00 of the $17,783.70 demanded under the third heading of Tenant’s claim.   See para. 69 of her reasons.

Tenant had filed its invoices in support of its claims.  Harvie J. refused Tenant’s request that the invoices in support of all three (3) claims be filed and kept under seal.  She held that the request was not supported by argument and was contrary to the rule at article 11 C.C.P. that court hearings were public.  Once a party claims for payment of its legal fees, it must make evidence of it and thereby renounces to solicitor-client privilege in order to make sufficient proof of those services.  See Groupe Van Houtte inc. (A.L. Van Houtte ltée) v. Développements industriels et commerciaux de Montréal inc. and Jean-Paul Beaudry ltée v. 4013964 Canada inc., 2013 QCCA 792.

Harvie J. not only ordered that Landlord pay legal fees to Tenant but her order issued with a dispositive that included an order that Landlord also pay judicial fees according to the tariff.

urbitral note – First, article 56 C.C.P. exposes directors and officers of a corporate litigant, found responsible for abuse of procedure, to pay damages personally if they “participated in the decision”.

Second, the Supreme Court in Rocois Construction Inc. v. Québec Ready Mix Inc. acknowledged that the same facts can give rise to more than one (1) cause of action, subject to further analysis by the court on res judicata.

As a general rule, the same body of facts can thus give rise to as many causes of action as there are legal characterizations on which a proceeding can be based.

It is equally clear that a rule of law removed from the factual situation cannot be a cause of action in itself.  The rule of law gives rise to a cause of action when it is applied to a given factual situation; it is by the intellectual exercise of characterization, of the linking of the fact and the law, that the cause is revealed.  It would certainly be an error to view a cause as a rule of law regardless of its application to the facts considered.  Accordingly, the existence of two applicable rules of law as the basis of the plaintiff’s rights does not lead directly to the conclusion that two causes exist.

Of course, the existence of two rules of law applicable to a factual situation in practice gives rise to a duality of causes in the vast majority of cases, because separate rules generally require different legal characterizations.  However, it is not the fact that there are two applicable rules which is conclusive in itself:  it is the duality of legal characterizations which may result therefrom.  When the essence of the legal characterization of the facts alleged is identical under either rule, it must follow that there is identity of cause.  This identity of treatment is not easy to determine and in my opinion calls for a two‑stage analysis when two rules are apparently applicable to the same facts.

Third, the result on Tenant’s request to keep solicitor-client materials confidential underlines the important confidentiality and privacy promises made by arbitration.  Of course, such promises are not met if and when a party to the arbitration agreement applies to a court for assistance in enforcing the arbitration agreement or challenging or homologating the resulting award.  The proliferation of appeals provided in various domestic arbitration acts in Canada – upon consent or with leave – increases the opportunities to break those promises.