In B Smart Technology Inc. v Norstan Communications Inc., 2024 QCCS 2416 (“B Smart”), the Court considered an application by Norstan Communications Inc. (“Norstan”) to dismiss originating applications of B Smart, in which B Smart sought an order to replace the arbitrator who was appointed to resolve their dispute. B Smart alleged that the arbitrator was biased and that his appointment was improper. What was important to the Court’s analysis was that B Smart had brought an earlier application before the Court to challenge this same arbitrator’s appointment. That judge held that the arbitrator was impartial and that his appointment was proper. Given those findings, the Court found that res judicata applied as a full answer to B Smart’s allegations and the application was dismissed. The Court also found that B Smart’s multiple attempts to challenge the arbitrator were an abuse of process.
Procedural History
(a) The First Arbitration – B Smart had a contract with Norstan in which B Smart provided certain services to Norstan. The contract contained a mandatory arbitration clause that required the parties to arbitrate any disputes in accordance with the American Arbitration Association (“AAA”) Rules.
On June 1, 2018, B Smart filed a request for arbitration with AAA claiming unpaid fees from Norstan (“First Arbitration”).
The first arbitrator who was appointed died during the arbitration.
In March 2019, a new arbitrator was appointed. B Smart did not oppose the appointment. The arbitration proceeded. Approximately eight months later, B Smart applied to the AAA to disqualify the new arbitrator on the grounds of bias and improper conduct in the proceeding. AAA rejected B Smart’s application, but the reasons are not known.
On October 16, 2020, the second arbitrator notified the parties that the arbitration was suspended because B Smart had failed to pay its arbitration fees. He gave B Smart multiple extensions of time to pay. On September 1, 2021, he issued a procedural order that ended the First Arbitration due to B Smart’s failure to pay the arbitrator’s fees.
(b) The First Application – On November 16, 2020, B Smart brought an action in the Superior Court of Québec against AAA, the second arbitrator, and Norstan. B Smart alleged, among other things, that the second arbitrator’s appointment was improper or that the second arbitrator was biased. B Smart asked the Court to order that the second arbitrator’s appointment be set aside and allow the parties to appoint a new arbitrator (“First Application”).
The First Application was heard on May 3, 2022, and the judge dismissed it in its entirety in B Smart Technology Inc. v American Arbitration Association, 2022 QCCS 1526 (“First Application Decision”). That judge found, among other things, that:
- The arbitrator was impartial and took great care in the performance of his duties;
- The arbitrator’s fees were reasonable;
- B Smart agreed to participate in the proceeding and did not challenge the arbitrator’s appointment until approximately eight months after he was appointed and only after he had issued decisions that were not favourable to B Smart;
- The arbitrator’s decision to suspend the First Arbitration was a result of B Smart’s failure to pay arbitrator fees was done in accordance with the AAA Rules; and
- Arbitration proceedings are not subject to the supervision of the courts.
This decision is described in the Case Note: Québec – Court extends arbitrator’s immunity to appointing authority – #619.
The Québec Court of Appeal affirmed the First Application Decision on September 26, 2022.
(c) The Second Arbitration – On March 25, 2021, after B Smart had already commenced the First Application but before the First Application Decision was issued, B Smart filed a request to the AAA for a second arbitration in which B Smart claimed unpaid fees from Norstan arising from the Contract (“Second Arbitration”). AAA referred the case to the same arbitrator.
(d) The Second and Third Applications – On September 24, 2021, B Smart filed an application before the Superior Court of Québec (“Second Application”). It alleged, among other things, that AAA did not comply with the AAA Rules by assigning the Second Arbitration to the same arbitrator. B Smart asked the Court to appoint a new arbitrator.
On November 21, 2021, B Smart filed a third application to the Superior Court of Québec alleging among other things that the arbitrator had acted in a biased manner and that his appointment was improper and not in accordance with the AAA Rules (“Third Application”).
Norstan thereafter applied to the Superior Court of Québec to dismiss the Second and Third Applications. The dismissal application was heard on April 30 and May 1, 2024.
The Dismissal Application Reasons – The Court explained that a party may ask for a claim to be dismissed based on res judicata. It emphasized that multiple proceedings and possible contradictory decisions are to be avoided. If a final decision is issued and a subsequent action is brought that has the same parties, the same issues, and the same causes of action, res judicata applies and the issues should not be re-heard and re-decided (citing Jean-Paul Beaudry Ltd. v 4013964 Canada Inc., 2013 QCCA 792 at para 33).
The Court noted that B Smart and Norstan were parties to each of the First, Second, and Third Applications. B Smart’s allegations that the arbitrator was biased and that his appointment was improper were decided in the First Application Decision. These same issues, facts, and allegations were raised in the Second and Third Applications. The Court held that B Smart could not invoke the same allegations that were already determined in the First Application Decision in an attempt to obtain a different result.
In addition, the Court found that the B Smart’s applications to challenge the appointment of the arbitrator were redundant and without merit. B Smart had the opportunity to challenge the appointment of the arbitrator in the First Arbitration, but did not do so for eight months. It also did not provide any reasons to explain why it alleged that it was improper for AAA to appoint the same arbitrator in both the First Arbitration and Second Arbitration. The Court concluded that the allegations about arbitrator bias had already been considered and dismissed in the First Application Decision. The multiple applications were an unnecessary use of the parties’ time and the Court’s time. They were about the same parties, the same facts, and the same allegations.
The Court granted Norstan’s application to dismiss the originating applications of B Smart and found that the B Smart’s Second and Third Applications were an abuse of process. Noting B Smart’s prolific procedural applications, the Court awarded enhanced awarded costs against B Smart. The Court awarded full indemnity fees from the date that the Québec Court of Appeal affirmed the First Application Decision.
Contributor’s Notes:
First, this is a good example of when a court will use its powers to assist the conduct of arbitrations and to ensure that they are conducted in accordance with the agreements of the parties. The principle of res judicata and enhanced cost awards are tools that allow it to do so.
Second, the timing of B Smart’s challenge of the arbitrator’s appointment was an important factor in the First Application Decision. B Smart did not challenge the arbitrator’s appointment until eight months after the appointment. This was too late. B Smart had only 30 days to challenge the arbitrator pursuant to Article 632 of the Québec Code of Civil Procedure, CQLR c C-2501. This is consistent with the timing that is recommended in the IBA Guidelines on Conflicts of Interest in International Arbitration (“IBA Guidelines”). Section 4 of the IBA Guidelines says that if parties do not object to an arbitrator’s appointment within 30 days after a party learns about a fact or circumstances that could constitute a potential conflict of interest, the party is deemed to have waived that conflict of interest. B Smart’s challenge of the arbitrator well exceeded 30 days. For further discussion about the IBA Guidelines, see the Case Note: Ontario – Arbitrator’s relationship with party’s lender not sufficient for bias – #832.
Third, parties to arbitrations that are commenced pursuant to institutional arbitration rules should also consider if the particular rules have a deadline for parties to challenge an arbitrator’s appointment for alleged conflicts or other reasons. For example, section 14(2) of the ICC Rules requires parties to challenge the arbitrator within 30 days of the appointment of relevant circumstances becoming known. In contrast, Article 15(1) of the International Centre for Dispute Rules and Rule 13(b) of the Vancouver International Arbitration Centre Rules require parties to provide notice of an arbitrator challenge within 15 days of the relevant circumstances becoming known to the parties. This same 15-day requirement is set out in Article 15 of the International AAA Rules. It is not known if B Smart’s failure to meet the 15 day deadline was the reason, or one of the reasons, that AAA rejected B Smart’s application to replace the arbitrator. The AAA Rules likely were not raised in this case because B Smart instead sought to challenge the arbitrator pursuant to the Québec Code of Civil Procedure.
Fourth, this case is a warning to parties to an arbitration that if a party uses the court process to challenge the appointment of an arbitrator, this may have the effect of significantly delaying the arbitration proceeding. The Court found that the Second and Third originating applications of B Smart to seek a replacement arbitrator had no merit and were an abuse of process. However, nearly three years passed before these applications were heard and dismissed. This kind of strategy undermines the efficiencies and speed that attract parties to arbitration. It is hoped that courts will support arbitration through adverse costs awards. This was done by the Superior Court of Québec in this case, when it awarded full indemnity fees to Norstan for all steps taken after the Court of Appeal affirmed the First Application Decision.