In 9429-1143 Québec inc. c. Mishmash — Collectif expérientiel, 2022 QCCS 351, Justice Collier declared that a decision issued by an accounting firm did not constitute an arbitration award in the circumstances of the case and could therefore not be homologated. He concluded that the parties did not intend to submit a question for final determination by the accounting firm and that the latter had not exercised quasi-judicial functions.
The decision of the accounting firm was issued in the context of a dispute over price adjustments pursuant to a share purchase and sale agreement (the “Agreement”). On October 15, 2019, the plaintiff 9429-1143 Québec inc. (“QMI”) agreed to purchase the minority interest of defendant Mishmash – Collectif expérientiel (“Mishmash”) in 9345-3546 Québec inc. (“Multicolore”), which was in the business of events design, development, and production. The Agreement provided for adjustments to the sale price based on eventual discrepancies between the actual and the projected indebtedness and operating capital of Multicolore. The latter was to provide financial statements 60 days after closing, binding the parties unless a notice of opposition was sent within 30 days.
The draft financial statements provided appeared to justify a price reduction, but QMI disagreed with their content and took the position that the financial situation of Multicolore actually justified an even greater price reduction. It notified Mishmash of its opposition (slightly outside the 30-day period, but apparently without that issue being raised) and advised that the dispute settlement mechanism stipulated in the Agreement would be triggered absent an agreement between the parties.
This mechanism was described in clause 2.5.3 of the Agreement, which read as follows [informal translation]:
If the draft closing allotment or closing financial statements are contested […], the dispute will be submitted to Deloitte […] (the “Accounting-Experts”) by the Purchaser or the Seller, as applicable. The decision of the Accounting-Experts, who will act as experts and not as arbitrators, will be final and binding upon the Purchaser and the Seller and must be reflected in the closing allotment, which will therefore be final.
On April 24, 2020, QMI and Mishmash mandated Deloitte to opine on their dispute over the financial statements and remitted an Excel spreadsheet for that purpose, containing each party’s position on each contentious item. Deloitte issued its report on June 9, 2020 (the “Report”), concluding that the adjustments resulted in a substantial reduction of the price to be paid by QMI for Mishmash’s shares.
On August 21, 2020, QMI filed an application to homologate the Report as an arbitration award and claimed from Mishmash an amount corresponding to what it overpaid for the Multicolore shares according to Deloitte pursuant to the terms of the Agreement. Mishmash opposed the homologation on the basis that the Report was not an arbitratal award.
Justice Collier relied on the seminal Supreme Court decision in Sport Maska Inc. v Zittrer,  1 SCR 564 to determine whether the Report was an arbitration award, which depended upon the characterization of the parties’ intention (par. 25-27). The Supreme Court set out several factors to be considered in assessing whether parties have agreed to submit an issue to arbitration. First, a dispute between the parties must clearly exist and the parties must have agreed to submit it to the determination of a third party. Second, the parties must have intended to confer quasi-judicial powers upon the third party. In making that assessment, consideration is to be had of the terms of the parties’ agreement, the other communications and documents exchanged, and the circumstances of the dispute. The closer the decision-making process agreed upon is to a judicial process, the likelier it is that it can be characterized as arbitration. The possibility for the parties to submit evidence and make representations, have legal representation at the hearing, and the expectation of a reasoned decision that is final and binding all weigh towards arbitration.
Applying this framework to the Report, Justice Collier refused to homologate it considering that: (i) the Agreement excluded recourse to arbitration and expressly provided for recourse to an independent expert (para. 28): (ii) Deloitte did not exercise quasi-judicial functions – its engagement letter stipulated that it was acting as an independent expert (para. 30-32); and (iii) Mishmash did not intend to submit to Deloitte the issue of whether a partial reimbursement of the sale price would be payable. The parties’ correspondence showed that they submitted for determination their dispute over discrepancies in the financial statements and not that they granted to Deloitte the power to order any reimbursement of any portion of the sale price. In any event, the process followed involved no factual investigation or argument (para. 33-35).
Justice Collier distinguished the British Columbia Supreme Court decision in Hanzek v TRM (Canada) Corp., 2007 BCSC 418 in that respect at para. 34. In Hanzek, despite the parties’ agreement that accountants would act “as experts and not as arbitrators”, the Court had found evidence that the accountants were actually vested with quasi-judicial powers and had acted as arbitrators. Justice Collier indicated that for such a conclusion to be reached regarding the Deloitte Report: (i) the parties would have had to expressly stipulate in the Agreement that Deloitte was mandated to make a final determination as to the sale price and to order reimbursement by Mishmash; and (ii) an adversarial process would have had to be held (par. 39).
First, the case underscores the importance of careful drafting to ensure a clear expression of the parties’ intent. Even though Québec law requires several factors to be considered in determining the parties’ intent – as provided by Articles 1425 and ff. of the Civil Code of Québec, CQLR c CCQ and as recognized by the Supreme Court in Zittrer – the text of the arbitration agreement will be the main focus of that exercise. In the present case, it certainly helped that the dispute settlement clause went further than describing the role of the independent expert in expressly excluding its characterization as arbitrator. But the ruling in Hanzek serves as a cautionary tale: such a stipulation is insufficient to prevent the court from finding that the parties formed an arbitration agreement. In that case, the fact that the independent expert was to have access to evidence, namely books and records, was sufficient for the court to characterize the role of that expert as an arbitrator tasked with finally resolving “disputes falling within the ambit of the clause” (para. 24). The emphasis was on the decision-making process to be followed by the expert and should therefore inspire drafters to be explicit about that process rather than leaving it to be determined once a dispute has arisen. Ultimately the nature of the role to be undertaken, rather than the label given to the role, will determine the outcome.
Second, for other judicial treatment of the distinction between arbitration and expert determination, see Alberta – expert determination allows expert to decide questions of mixed fact and law – #121 and Ontario – Court rejects cross-applications to appoint valuators as the arbitrator – #593.
Third, Justice Collier’s decision is a reminder to parties opposing homologation. Article 646 of the Code of Civil Procedure (“CPC”) lists the possible grounds for which the Court can “refuse to homologate an arbitration award”, which does not include a dispute as to the characterization of the decision as an award. Yet, it only makes sense that the homologation of an arbitration award can also be refused if the purported award fails to qualify as such. The Court does not mention Article 642 CPC in its reasoning, but the description of an arbitral award set out in that provision can serve as a basis to argue that a given decision falls short of being an award.