Québec – Light touch to determining arbitration clause application (except to the non-signatory, maybe!) – #638

In Cannatechnologie inc. c. Matica Enterprises Inc., 2022 QCCA 758, the Québec Court of Appeal (Justices Bélanger, Rancourt and Moore) affirmed the principle that a court should limit itself to a prima facie assessment of whether or not a dispute comes within the scope of an arbitration clause. If it does, a court proceeding regarding the dispute should be stayed so that the arbitrator can rule on his or her own jurisdiction.

This dispute related to shareholdings in a medical cannabis company. Three parties signed an investment agreement under which the company’s shares were divided according to certain funding obligations. A fourth party, which did not sign the investment agreement, alleged that it had acquired shares in the company and that the Respondents had acted oppressively by, among other things, failing to make payments it claimed were owing to it, issuing additional shares to themselves, and refusing to allow access to the company’s production areas and to its books and records. The fourth party Plaintiff/Appellant commenced litigation in the Québec Superior Court against the three Respondents.

One of the Respondents brought a motion to dismiss the litigation because the investment agreement contained an arbitration clause. The judge at first instance granted that motion. The Plaintiff/Appellant argued on appeal that the motion should not have been granted because: it was not a signatory to the investment agreement containing the arbitration clause; the payment owed it stemmed from a verbal agreement; and only the allegation that the Respondent defaulted under the investment agreement should have been submitted to arbitration, because it was based on the investment agreement, which contained the arbitration clause.

The court rejected the Plaintiff/Appellant’s arguments, affirming the principle that if, on a prima facie review, an arbitration clause applies, the court should refer the matter to arbitration (para. 10):

“[P]ursuant [to the principle of competence-competence], arbitrators have the competence to rule on their own jurisdiction over a given dispute and, furthermore, courts cannot rule on the issue of jurisdiction until the arbitrator, himself or herself, has done so. In this context, when proceedings are instituted before the Superior Court and a declinatory exception is raised seeking to have the matter referred to arbitration, the court must, pursuant to art. 622 of the Code of Civil Procedure (“C.C.P.”), limit itself to a prima facie assessment of whether or not the dispute comes under the arbitration agreement. If it determines that the arbitration agreement prima facie applies, it must refer the matter to arbitration so that the arbitrator can rule on the issue in accordance with the procedure he or she sees fit. Only once the arbitrator has exercised jurisdiction can the aggrieved party challenge the decision in court pursuant to art. 632 C.C.P.”

Contributor’s Notes:

First, this decision is a reminder of the generally pro-arbitration approach in Canadian law to arbitration clauses. Canadian courts are generally inclined to refer, at least in the first instance, to arbitrators to determine their own jurisdiction.

Second, the decision is also important, as the court elaborated on what the prima facie approach entails when the court must determine the application of the arbitration clause. In this case, it was enough that the record “contained sufficient elements to support the application of the arbitration clause” even if the court did not itself answer any of the questions of fact needed to ultimately conclude whether or not the arbitration clause applied, including whether the Plaintiff/Appellant was even a party to the arbitration agreement (paras. 12 and 13):

“[T]he record indicates that numerous questions of fact must be decided in order to understand the effect of the arbitration clause on the present dispute. For one thing, [the Plaintiff/Appellant] is not one of the signatories to the Investment Agreement, notwithstanding the allegation that, at that time, it already held shares of [the cannabis company] through [one of the Respondents]. Likewise, the respondents dispute the scope of the collateral agreement which the trial judge referred to and which pertains to the claim asserted by [the Plaintiff/Appellant]. Finally, as another example, the link between [one of the Respondent’s] increased shareholding and the Investment Agreement is also ambiguous or uncertain.

These questions require more than a superficial analysis of the documentary evidence. They can only be adjudicated after sufficient evidence has been adduced so as to allow a decision-maker to determine whether or not the arbitration clause should apply. It is the arbitrator who must perform that analysis. At this stage, it was therefore sufficient for the judge to note, as is indeed the case, that, prima facie, the record contained sufficient elements to support the application of the arbitration clause.”

Third, the court also made a technical point about the type of relief that should be granted in circumstances where a matter should be referred to arbitration – the court proceeding in should be stayed, not dismissed, in the face of an arguably applicable arbitration clause (para. 9):

“In the particular circumstances of the case at bar, the judge should not have dismissed the appellant’s originating application; rather, he should have stayed it so that the arbitrator could rule on the issue of his or her own jurisdiction by applying the “competence-competence” principle developed in well-established jurisprudence. The judge, however, cannot be faulted for not having done so, given that neither party raised this principle.”