Quebec – No abuse of process where parallel arbitration and court proceedings – #815

In Gaston Gagné inc. c. Gagné, 2023 QCCS 4552, the Court confirmed that arbitration clauses should receive a broad and liberal interpretation, dismissed an application to annul a final arbitral award, homologated the award, and dismissed a claim in damages based on an alleged abuse of process by the party opposing homologation. Even though one party decided to bring court proceedings on the same issue he put before the arbitrator, there was no abuse of process because his court proceeding did not impede the arbitration.

The facts underlying the dispute – Gaston Gagné, through a holding company (“GGI”), and his two sons, Michel and Réjean, were shareholders of Immeubles G. Gagné inc. (“the Company”), a real estate development company. In 2013, a transaction occurred whereby the shareholders of the Company agreed that Gaston, Michel and Réjean would be appointed directors and that their decisions would be required to be unanimous. In 2016, another transaction occurred whereby Gaston, Michel and Réjean agreed that should the Company sell a particular lot to GGI, it would pay to the Company the difference between the sales price and the greater of $19 per square foot or the lot’s “fair market value” as determined by a named valuation firm. Both transactions provided that any matter that could not be resolved unanimously by Gaston, Michel and Réjean, as sole directors of the Company, would be submitted to arbitration. 

Acting on his own, Réjean agreed to the sale of the lot by the Company. A dispute arose between Michel and Réjean regarding the value to be used to assess the amount payable to the Company by GGI under the 2016 transaction. The dispute arose because the named valuation firm assessed the lot’s “opportunity value” at $46.50 per square foot but did not determine its “fair market value”, as required in the agreement relating to the 2016 transaction. Réjean consulted another valuation firm, which determined that the lot’s “fair market value” was $20 per square foot. 

The arbitral and court parallel proceedings – Michel initiated an arbitration, contesting the named valuation firm’s valuation of the lot. However, at the first case management hearing, he argued that the arbitrator did not have jurisdiction to consider whether that valuation of the lot was in accordance with the terms of the transaction. Réjean filed a crossclaim requesting the dismissal of the valuation of the named valuation firm. The arbitrator issued an interlocutory award, finding that Michel’s claim and Réjean’s crossclaim both related to the value of the lot, that they would proceed at the same time, and that a single award would be made regarding this issue. 

Michel then filed a discontinuance of his claim in the arbitration and filed two separate proceedings before the Quebec Superior Court, which Réjean opposed on the ground of jurisdiction – the matters relating to the validity of the valuation of the named valuation firm were properly before the arbitrator. 

The arbitrator heard Réjean’s crossclaim and rendered his final award before the Superior Court could issue its judgment on the jurisdiction issue. In his final award, the arbitrator found that he had jurisdiction over the directors’ dispute regarding the validity of the valuation of the named valuation firm.. He rejected that valuation, finding that it should have determined the lot’s fair market value and not its opportunity value. He also found that Michel had deprived Réjean the opportunity to settle the matter by pursuing separate proceedings before the Superior Court and awarded Réjean $ 50,000 in damages for this reason.

Homologation/annulment proceeding – GGI and Réjean sought homologation of the final award pursuant to article 645 of the Code of civil Procedure. Michel filed a crossclaim for the annulment of the award, arguing that the arbitrator’s jurisdiction was limited to disputes between the directors regarding the management of the Company and that it did not extend to a dispute pertaining to amounts owing to the Company by GGI. Michel’s arguments were founded on articles 645, para. 5 and 648 of the Code of civil Procedure, which provide that the court may refuse to homologate an award and annul an award that “pertains to a dispute not referred to in or covered by the arbitration agreement”. 

The Superior Court dismissed Michel’s crossclaim and homologated the award. It held that arbitration clauses should receive a broad and liberal interpretation, and proposed a two-pronged test to determine whether the clause applies to a given dispute. This test requires that the court: (1) identify the nature and the extent of the arbitrator’s mission as described in the arbitration agreement; and (2) determine whether the nature of the dispute falls within the ambit of the arbitration clause.

Applying this test, the Court found that; (1) the arbitration clause covered any dispute between Gaston, Michel and Réjean regarding any decision relating to the Company, including any dispute relating to the conditions of the sale of the lot; and (2) the dispute between Michel and Réjean related to a disagreement between the directors with respect to the amount owing to the Company by GGI after the sale of the lot. That dispute therefore fell within the ambit of the arbitration agreement. The Court noted that Michel’s own decision to commence an arbitration was indicative of the parties’ intention that such a dispute should be settled by arbitration.

The Court dismissed Réjean’s argument that the application for an annulment of the award should be dismissed because it had not been filed within the time period provided for in article 649 of the Code of civil Procedure. It provides that, “the application for annulment must be presented within three months after receipt of the arbitration award”. Réjean argued that this time period should run from the date of the interlocutory award, in which the arbitrator had implicitly recognized his jurisdiction over the dispute. The Court disagreed and found that the interlocutory award was only procedural in nature and that it did not dispose of the jurisdictional arguments, which were only decided in the final award. The time period provided in article 649 therefore ran from the date of the final award.

Finally, the Court dismissed GGI and Réjean’s claim for punitive damages for abuse of process against Michel. It noted that Michel could not be responsible for the delays incurred in the arbitration because the discontinuance of his claim in arbitration and the parallel court proceedings did not impede the progress of the arbitration. Indeed, pursuant to article 622 of the Code of civil Procedure, arbitration proceedings may be continued and an arbitral award may be rendered despite court proceedings, so long as the court has not yet ruled on its jurisdiction over the dispute. As a result, Réjean was free to advance his crossclaim before the arbitrator, despite Michel’s court proceedings. Furthermore, although Michel’s crossclaim for the annulment of the award was dismissed, the Court found that it raised serious issues and was therefore not abusive. 

Contributor’s Notes: This decision reminds us that arbitration agreements will be given a broad and purposive interpretation. It also illustrates that it may prove difficult for a party who has initiated arbitration to subsequently convince a court that he has made a mistake and that the dispute was not covered by the arbitration clause. Finally, the court provides some guidance with respect to the computation of the time period to seek the annulment of an award pursuant to article 648 of the Code of civil Procedure:  the time period will start from the day that the arbitrator has explicitly disposed of the matter of his jurisdiction. In that case, the time period did not begin when the arbitrator issued an interlocutory award, because this award was only procedural in nature and did not address the matter of jurisdiction.