Québec – court challenges basis of familiar objections to stay applications – #105

In Amusements Extra Inc. v. DEQ Systems Corp., 2018 QCCS 3198, Mr. Justice Michel Beaupré (i) refused to qualify defendant’s reliance on the arbitration agreement as dilatory, (ii) dismissed as ‘incoherent’ the argument that defendant’s alleged breach of the contract containing the arbitration agreement could be grounds to refuse a referral to arbitration and (ii) accepted that arbitration on one issue would proceed in parallel to litigation on several others because that very situation was what the parties had provided for when submitting only part of their business dealings and contractual relations to arbitration.  His reasoning on those and other arguments serves to pre-empt others raising similar objections automatically or without sufficient facts.
Located in Québec, Las Vegas and Panama, the parties do business in various countries on different continents. They operate in the conception, sale and/or distribution of electronic systems to manage game tables as well as their components. Their clientele are casinos. The parties were variously bound by contracts dealing with rights in and to a particular software system, G3, and its improvements.

Disputes arose between the parties and Plaintiffs – Amusement Extra Inc. (“Extra”), Prodiversion Extra de Canada S.A. (“ProDiversion”) and DEQ Promo Plus S.A. (“DEQ Promo”) initiated litigation against Defendants – DEQ Systems Corp. (“DEQ Systems”), Scientific Games Corporation (“Scientific Games”) and Bally Gaming Inc. (“Bally Gaming”) – as well as one Mise-en-cause Iron Mountain Intellectual Property Management Inc. (“Iron Mountain”). The disputes mainly involved two (2) key contracts:

– A July 21, 2016 Three-Party Escrow Service Agreement (“Escrow Agreement”) between ProDiversion Extra, DEQ Systems and Iron Mountain, identified as exhibit P-10 in the reasons; and,

– December 1, 2013 Distribution and Licensing Agreement (“Distribution and Licensing Agreement”) between DEQ Systems and ProDiversion and DEQ Promo, identified as exhibit P-6 in the reasons.

Plaintiffs filed a motion for interlocutory injunction. For a more complete set of facts, Beaupré J. referred readers to paras 34-97 of his other decision, Amusements Extra Inc. v. DEQ Systems Corp., 2018 QCCS 3197, issued the same day between the same parties, on the motion for interlocutory injunction. The complexity of the case required paras 14-33 of that decision merely to identify the parties and their respective roles in the dispute. Beaupré J. ably condensed this complexity into a highly-readable presentation for readers.

In addition to contesting the injunctive relief, Defendants also applied to have three (3) of Plaintiffs’ conclusions referred to arbitration: h), i) and j).

(unofficial translation) “h) REMIT to plaintiffs all the material and elements which ought to have been put in escrow according to the terms the escrow agreement corresponding to the definition of “Escrow Material” provided at article 1.1 and annex F1 of the escrow agreement (annex J of the distribution and license agreement P-6) which are related to and necessary for the fabrication of G3, including the intellectual property in the improvements, in particular the PRSM and the creation of the unlock codes.

(unofficial translation) “i) COMMUNICATE to plaintiffs the identity of the past and current suppliers of the different components of the G3 system (the “Suppliers”);

(unofficial translation) “j) NOT TO PREVENT OR IMPEDE in any manner whatsoever efforts taken by plaintiffs with Suppliers regarding the manufacture or supplier of all pieces or components of the G3 system or PRSM system.

The arbitration clause contained in the Escrow Agreement reads as follows:

13n) Disputes. Any dispute, difference or question relating to or arising among any of the Parties concerning the construction, meaning, effect or implementation of this Agreement or the rights or obligations of any Party hereof will be submitted to, and settled by arbitration. Three arbitrators shall be selected. The Depositor [DEQSystems/Bally Gaming] and Beneficiary [ProDiversion] shall each select one arbitrator and the two selected arbitrators shall select the third arbitrator, or failing agreement on the selection of the third arbitrator, the third arbitrator shall be appointed pursuant to the Arbitration Act (Ontario) or similar legislation. If Iron Mountain is a party to the arbitration, Iron Mountain shall select the third arbitrator. The decision of such arbitrators appointed pursuant to this Agreement or such Act will be final and binding on the Parties and no appeal will lie therefrom.” (Beaupré J. added the clarifications in the [ ].)

Defendants argued:
D1 – in addition to the ‘known advantages’ of adjudicating a private dispute by arbitration, the Escrow Agreement was entered into because of the great commercial importance and confidentiality of the intellectual property to DEQ Systems and Scientific Games/Bally Gaming;
D2 – article 13n) is a valid arbitration clause;
D3 –conclusions h), i) and j) identified by Defendants qualify as “dispute, difference or question relating to … the construction, meaning, effect or implementation” of the Escrow Agreement; and,
D4 – the Superior Court ought therefore refer the adjudication of those three (3) conclusions to arbitration as the parties had agreed to do.

Plaintiffs argued:
P1 –conclusions h), i) and j) do not relate or involve the construction, meaning, effect or implementation of the Escrow Agreement and Defendants’ motion is unfounded on its face;
P2 – alternatively, article 13n) is not a valid arbitration agreement and the arbitral tribunal does not have jurisdiction to deal with the dispute;
P3 – Defendants’ reliance of the arbitration agreement is a dilatory maneuver designed to obstruct Plaintiffs’ litigation which has properly seized the Superior Court and which addresses Defendants’ breach of the Distribution and Licensing Agreement;
P4 – Defendants are poorly placed to invoke the arbitration agreement as they have not respected their obligations under the Escrow Agreement by not filing the G3 intellectual property in a timely manner and disentitles Defendants from invoking the arbitration agreement;
P5 – conclusions h), i) and j) are simple, require only a superficial review of the evidence and the Superior Court should not decline jurisdiction regarding those conclusions;
P6 – the arbitral procedure does not allow an effective way to resolve the dispute between the parties because the core issue is whether Defendants have respected their obligations under the Distribution and Licensing Agreement the arbitral tribunal has no jurisdiction over that issue;
P7 – the dispute over Iron Mountain’s return to Defendants of the intellectual property is only accessory to the main dispute;
P8 – the partial referral of conclusions h), i) and j) to arbitration is contrary to the interests of justice as the arbitral tribunal lacks jurisdiction over all aspects of the dispute between the parties and there is a risk of contradictory judgments, in breach of the rule of proportionality provided in articles 18 and 622 of Québec’s Code of Civil Procedure, CQLR c C-25.01 (“C.C.P.”);
P9 – one of Plaintiffs is not party to the arbitration agreement and that clause cannot be imposed on it; and,
P10 – alternatively, even if the referral to arbitration is made under article 623 C.C.P., the Superior Court retains jurisdiction to issue an interlocutory order for conclusions h), i) and j).

Beaupré J. identified two questions: is the arbitration agreement in the Escrow Agreement valid; and, should the Superior Court decline jurisdiction in favour of arbitration for conclusions h), i) and j)?

Beaupré J. readily held that the arbitration agreement in article 13n) was a valid, complete undertaking. He cited articles 2638 and 2642 of Québec’s Civil Code of Québec, CQLR c CCQ-1991 as well as Zodiak International v. Polish People’s Republic, [1983] 1 SCR 529, 1983 CanLII 24 which identified the few, minimum requirements for a valid undertaking:

A complete undertaking to arbitrate, described variously as true, real or formal, is that by which the parties undertake in advance to submit to arbitration any disputes which may arise regarding their contract, and which specifies that the award made will be final and binding on the parties.

Beaupré J. dismissed Plaintiffs’ argument that the clause was not complete as it failed to mention expressly that it excluded the courts’ jurisdiction. Such exclusion, he wrote, can be inferred by the parties’ stated intention to refer their dispute to arbitration and to consider that the resulting award is final and binding, as was the case before him. See also Collines-de-l’Outaouais (MRC des) v. Cascades Inc., division récupération, 2007 QCCS 1960 at paras 34-37.

At paras 21-28, Beaupré J. identified what he grouped as ‘certain applicable principles’. In addition to its validity, the agreement in article 13n) was broad. He focused on the use of the phrase “relating to” in the agreement and drew readers’ attention to Nowegijick v. The Queen, [1983] 1 SCR 29, 1983 CanLII 18. Though the latter decision concerned wording adopted to address income tax exemptions applicable or not to aboriginal peoples, the reasoning supported Beaupré J.’s statement that certain phrases conveyed a broad connection:

The words “in respect or’ are, in my opinion, words of the widest possible scope. They import such meanings as “in relation to”, “with reference to” or “in connection with”. The phrase “in respect of” is probably the widest of any expression intended to convey some connection between two related subject matters.

Referring to the earlier Compagnie d’assurance Standard Life v. Boulianne, 1999 CanLII 13694, as well as the two cases cited therein, namely Condominiums mont Saint Sauveur Inc. v. Lese, 1990 CanLII 2867 (and Mousseau v. Société de gestion Paquin ltée, 1994 CanLII 3745, Beaupré J. reiterated the Court of Appeal’s confirmation that an arbitration agreement must receive a broad interpretation because it reflects the parties’ contractual wishes. As an example, he wrote that a party cannot resist being sent to arbitration for only part of its dispute merely because the balance will stay before the courts. In addition, article 622 C.C.P. requires the court to refer to arbitration those questions which the court finds are covered by the parties’ arbitration agreement.

622 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.

The courts conserve jurisdiction under article 623 C.C.P. for provisional relief.

623 The court, on an application, may grant provisional measures or safeguard orders before or during arbitration proceedings.

Beaupré J. was prompt to note that arbitrators too can provide provisional measures.

638 The arbitrator may, on a party’s request, take any provisional measure or any measure to safeguard the parties’ rights for the time and subject to the conditions the arbitrator determines and, if necessary, require that a suretyship be provided to cover costs and the reparation of any prejudice that may result from such a measure. Such a decision is binding on the parties but one of them may, if necessary, ask the court to homologate the decision to give it the same force and effect as a judgment of the court.

Having articulated the applicable principles, Beaupré J. addressed the parties’ submissions. He began by determining that two of the three conclusions, i) and j), did not concern, even remotely, the Escrow Agreement. Nothing in those two conclusions or any clause of the Escrow Agreement permitted one to conclude or infer that the parties had agreed to submit those to arbitration.

He therefore limited the balance of his analysis to conclusion h), namely Plaintiffs’ demand that Defendants remit to Plaintiffs the escrow material. He readily held that conclusion h) fell directly within the parties’ agreement to arbitrate. In five paragraphs, Beaupré J. then dismissed Plaintiffs’ alternative arguments.

First, he disagreed with Plaintiffs that Defendants’ decision to invoke the arbitration agreement was a dilatory maneuver. He found as fact that, soon after the November 29, 2017 service of Plaintiffs’ action, on December 20, 2017 Defendants served their notice to refer the parties to arbitration, deposited material in escrow and would have proceeded on their motion January 11, 2017 but for Plaintiffs’ own request to adjourn. Beaupré J. expressly noted that, in the circumstances, qualifying Defendants’ reliance on the arbitration agreement as dilatory risked opening the door to having any defendant, brought before the courts by a plaintiff, be accused of a dilatory maneuver because it insisted on enforcing the arbitration clause.

Second, Defendants’ alleged breach of the contract containing the arbitration agreement could not be grounds to refuse a referral to arbitration. Agreeing with Plaintiff on this point would be ‘incoherent’ with the parties’ own intention to submit to arbitration precisely if and when one party allegedly breached or did not perform the contract.

Third, the fact that the arbitration would proceed in parallel to litigation was not, in and of itself, an obstacle to referring the parties to arbitration. That very situation was what the parties had provided for when submitting only part of their business dealings and contractual relations to arbitration. In addition, the parties had decided to apply Ontario law to this part but Québec law to the rest.

Fourth, though secondary and not determinative, Beaupré J. disagreed that the court could decide the jurisdiction on a superficial review of the materials especially in light of the number of pages and documentary evidence filed by the parties and the complexity of even basic though key terms such as “Deposit Material”.

Fifth, Beaupré J. acknowledged that one of the Plaintiffs was excluded from the arbitration but its rights ‘flowed’ from the other Plaintiff’s rights. He noted that the courts in other cases had not allowed such impacts to prevent the courts from referring some of the parties to arbitration.

In closing, he also held that, if he did accept to adjudicate conclusion h), he would effectively decide the merits and usurp the arbitral tribunal’s jurisdiction.