Québec – Fragmentation of shareholders dispute stayed pending appeal on jurisdiction – #678

In Istanboulian v Kalajian, 2022 QCCA 1259, Justice Cournoyer granted leave to appeal from a judgment of the Québec Superior Court, which had referred part of a claim to arbitration. He found that the judgment under appeal caused irremediable injury to the Applicants by possibly preventing them from being heard in the appropriate forum and that it was in the interest of justice to immediately get to the bottom of the jurisdictional issue.

The litigation – Two of three Applicants and the Respondent each held 50% of the shares in one of the impleaded parties, 9200-1973 Québec Inc., which operated a coffee in Rosemère, Québec, under the name of Toi, Moi et Café (“TMC”). Their shareholder agreement contained an arbitration agreement at clause 12.1, which read (as cited at par. 4 of the judgment under appeal, Kalandjian v Istanboulian, 2022 QCCS 3400) as follows:

“12.1 Should a dispute arise among the Parties touching upon any decisions affecting the Parties of the carrying on of the business of the COMPANY pursuant to this Agreement or otherwise, the Parties covenant and agree to avoid the necessity of legal proceedings, that such dispute as a condition precedent must be submitted to and settled by arbitration.”

On November 30, 2021, the Respondent filed suit against the Applicants, seeking that they be solidarily ordered to pay him a total of $1,023,219, consisting of 50% of: (1) money owed to TMC for the sale of goods to other restaurants operated by the Applicants: (2) an outstanding loan from TMC to a corporation owned by two of the Applicants (only one of whom was a TMC shareholder): and (3) the sale price of the building where TMC operated, which was owned by a corporation held by the Respondent.

The Applicants asked the Court to decline jurisdiction and refer the parties to arbitration (declinatory exception). They submitted that the arbitration agreement provided that any dispute between the parties to the shareholder agreement should be subject to arbitration because of the words “or otherwise”, used in Clause 12.1, which made its scope very broad. The Respondent argued that, at most, one of his claims pertained to the “carrying on of the business” of TMC and could therefore be subject to the arbitration agreement.

The judgment under appeal – Justice Beaugé of the Superior Court agreed with the Respondent as to the scope of the arbitration clause and only referred to arbitration the dispute arising out of the sale of goods by TMC. First, she stated that “in presence of an imprecise arbitration agreement, the recourse to the courts should be favoured” (par. 7). Second, she found that the other disputes were not related to the operations of TMC and therefore not subject to the arbitration agreement.

To obtain leave to appeal, the Applicants argued that a liberal reading of the arbitration agreement covered issues connected to the ordinary business of TMC, and that included all the Respondent’s claims, which pertained to money owed to TMC to which he claimed to be entitled as a shareholder. In any event, the arbitrator should have ruled first on his jurisdiction regarding these matters.

The applicable threshold for leave to appeal – Justice Cournoyer applied the Court of Appeal’s consistent jurisprudence according to which a judgment dismissing a declinatory exception causes irremediable injury, which satisfies the condition for leave to appeal under article 31 of the Code of Civil Procedure, CQLR c C-25.01 (“CCP”) (par. 10). He noted that Justice Beaugé may have deprived the Applicants of their right to be heard by the arbitrator, as provided by the arbitration agreement, and that it was in the interests of justice to decide the issues before proceedings continued in the Courts, which may lack jurisdiction (par. 13-14). He therefore stayed the proceedings pending the appeal (par. 18).

Compétence-CompétenceCiting Dell Computer Corp. v Union des consommateurs, 2007 SCC 34 and Specter Aviation v Laprade, 2021 QCCA 1811, Justice Cournoyer noted that a challenge to the arbitrator’s jurisdiction must be resolved first by the arbitrator.

An interpretation favourable to arbitration – Justice Cournoyer did not expressly disagree with Justice Beaugé’s finding that doubts as to the scope of an arbitration agreement should be resolved in favour of the recourse to the courts, but he cited a seminal case to the contrary. He referred to the Supreme Court decision in Desputeaux v Éditions Chouette (1987) inc., 2003 SCC 17 and stated that the arbitrator’s mandate must not be interpreted restrictively by limiting it to what is expressly set out in the arbitration agreement, and that the mandate also includes everything that is closely connected with that agreement (par. 12). He also referred to the Québec Superior Court decision in Amusements Extra inc. v DEQ Systems Corp., 2018 QCCS 3198 in support of the proposition that a party cannot in principle oppose the application of the arbitration agreement on the grounds that part of the dispute is subject to arbitration, while another part is not. A liberal interpretation of the arbitration agreement should therefore be favoured (par. 11).

Update: The appeal was dismissed, in part because the arbitrator had no jurisdiction over the related non-parties to the arbitration agreement. This issue is raised in the Contributor’s Notes below. See Istanboulian v Kalajin, 2023 QCCA 298.

Contributor’s Notes:

First, it is noteworthy that neither the parties nor the courts appear to have made anything of the fact that the dispute involved non-signatories. Indeed, the arbitration agreement seems to have bound only two of the Applicants and the Respondent, but not one of the Applicants and the four impleaded corporations. The appeal is scheduled to be heard on February 24, 2023, and it will be interesting to see if this argument will be raised and addressed, especially considering a growing body of Québec courts’ decisions imposing arbitration on non-signatories and mostly ignoring the notion of consent so fundamental to arbitration. See for instance Newtech Waste Solutions inc. v Asselin, 2022 QCCS 3537 and a number of cases previously commented upon in Arbitration Matters: Québec – case referred to arbitration despite some parties and some claims possibly not covered by the arbitration agreement – #517, Québec – Court favors arbitration even for related, but non-signatory, parties – #541, Québec – Interests of justice require closely linked disputes to be arbitrated – #664.

Second, no mention is made of whether the arbitration agreement satisfies the conditions of a mandatory clause. Arguably, agreeing to “avoid the necessity” legal proceedings does not clearly exclude recourse to the courts, especially considering that arbitration is then qualified as “condition precedent” to legal proceedings.

Third, we are also eager to see if the Court of Appeal will take heed of Justice Beaugé’s view that arbitration agreements should be interpreted restrictively. This is certainly not consistent with the several cases involving non-signatories referred to above and appears to run against the provisions of article 622 CCP, which reads “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. (…)”. [Emphasis added.]

The wording of article 622 CCP is itself not perfectly aligned with the Supreme Court decision in Dell Computer (“A court should depart from the rule of systematic referral to arbitration only if the challenge to the arbitrator’s jurisdiction is based solely on a question of law”, par. 84 and “[w] here questions of mixed law and fact are concerned, the court hearing the referral application must refer the case to arbitration unless the questions of fact require only superficial consideration of the documentary evidence in the record”, par. 85). The Québec courts nevertheless interpret article 622 CCP in a manner consistent with that jurisprudence (see for instance Cannatechnologie inc. v Matica Enterprises Inc., 2022 QCCA 758 and Résidence Ville-Marie v Centre intégré universitaire de santé et de services sociaux de l’Ouest-de-l’Île-de-Montréal, 2022 QCCS 591).