Québec – no legal principle to support applying competence-competence for mediation – #415

In a proposed class action involving claims under an insurance policy for indemnification for business interruption due to COVID-19 measures, Mr. Justice Gary D.D. Morrison in 9369-1426 Québec inc. (Restaurant Bâton Rouge) v. Allianz Global Risks US Insurance Company, 2021 QCCS 47 referred the parties to mediation and arbitration and dismissed the application for authorization.  While Québec law did not state that parties to an insurance contract can submit their disputes to arbitration, it also does not stipulate that they cannot.  The Code of Civil Procedure, CQLR c C-25.01’s class action provisions are procedural and do not modify substantive law or create jurisdiction for the courts over disputes which parties have lawfully excluded. Having relied in part on proportionality to refer the parties, Morrison J. declined to comment on whether his order would “require each individual insured to proceed by way of the lengthy and costly dispute resolution process, which may discourage many from exercising their rights”.  Morrison J. also held that competence-competence does not arise in referral to mediation “as there exists no legal principle in support of such an approach”.

9369-1426 Québec Inc./Restaurant Bâton Rouge (“BR”) applied for authorization to institute a class action (“Application”) against Allianz Global Risks US Insurance Company (“Allianz”).  The proposed class action claimed indemnification from Allianz for business interruption losses sustained by BR and proposed class members resulting from complete closures related to COVID-19 measures.

Allianz applied for an order declining jurisdiction in favour of the mediation and arbitration process contained in the insurance policy Allianz issued to franchisor MTY Food Group Inc.’s (“Franchisor”) franchisees as insureds and dismissing the Application (“Motion”).

Morrison J. identified two (2) issues: (i) should the court decline to hear the matter and refer it to a mediator and arbitrator appointed in accordance with the Policy’s dispute resolution process; and, (ii) should the court immediately determine the competence of a mediator and arbitrator to act in the matter of BR’s personal claim?

(1) The Policy – The Policy comprised one (1) of two (2) versions issued by Allianz to the Franchisor: fast food and casual dining.  BR qualified under the latter.

The Policy was a commercial lines policy including different coverage, divided into sections – property, business interruption, commercial general liability and boiler and machinery – along with supplemental declarations and endorsements.  As a franchisee for Franchisor, BR obtained coverage under the Policy through Franchisor.

The Policy included an agreement to mediate and arbitrate but anticipated different applicable lex arbitri tied to the location of the insured.  The relevant portions of the Policy appear at paras 12-13 of Morrison J.’s reasons.  The Policy included a clause entitled “Policy Jurisdiction”.

2. This policy shall be deemed to have been made under and shall be governed by the laws and decisions of the province or territory shown in the mailing address of the Named Insured, as it is shown in the “Policy Declarations”.  The Courts in the Court District in which the Named Insured is located shall have exclusive jurisdiction in case of a coverage dispute”.

In addition to sections argued by the parties at the hearing, Morrison J. highlighted the following for those insureds located in Québec in clause 5 “Dispute Resolution”.

5. In the event that the Insurer and the Insured(s) cannot agree concerning either the coverage or the quantum afforded by this Policy, it is agreed that the dispute shall be resolved in accordance with the dispute resolution process hereinafter described:

a. Mediation with a Mediator mutually agreed by the parties to the dispute. If the parties fail to concur on the choice of the Mediator, a Court shall appoint a Mediator on a Motion by one of the parties.

b. If settlement at Mediation is not possible, the dispute will be referred to Arbitration in accordance with the applicable Arbitration legislation/regulations in the jurisdiction in which the Policy is issued.  The decision of the Arbitrator will be binding on all parties to the dispute with no right of appeal.

c. Each party shall bear its own costs and expenses in connection with the dispute resolution process. The costs and expenses of Mediation and Arbitration shall be shared equally by the parties to the dispute.  By agreement in writing, the Insurer and the Insured(s) may waive compliance with this section or any part thereof for purposes of a specified dispute”.

(2) Legal principles

Morrison J. set out the legislative rules as well as some key applications of them. Article 3148 of the Civil Code of Québec, CQLR c CCQ-1991 (“C.C.Q.”) stipulates that, in matters involving personal actions of a patrimonial nature, the Québec courts have no jurisdiction “where the parties have chosen by agreement to submit the present or future disputes between themselves relating to a specific legal relationship to … an arbitrator, unless the defendant submits to the jurisdiction of the Québec authorities”.

Given that the dispute involved the contractual relationship created by an insurance policy, Morrison J. added a short gloss on the parties’ autonomy.

[16] As regards actions based on insurance contracts, Article 3150 C.C.Q. stipulates that Quebec authorities have jurisdiction to hear such actions.  Although it does not state that the parties can choose to submit the matter to arbitration, it also does not stipulate that they cannot”.  See Mega Bloks Inc. v. American Home Insurance Company 2006 QCCS 5083 para. 16 in which the Superior Court acknowledged the ability of parties to do just that.

Morrison J. added that party autonomy to opt for private dispute resolution was consistent with the “emphasis by the Quebec legislator on private dispute prevention and resolution process”, referring to article 1 of the Code of Civil Procedure, CQLR c C-25.01 (“C.C.P.”).

Article 1 C.C.P. To prevent a potential dispute or resolve an existing one, the parties concerned, by mutual agreement, may opt for a private dispute prevention and resolution process.

The main private dispute prevention and resolution processes are negotiation between the parties, and mediation and arbitration, in which the parties call on a third person to assist them. The parties may also resort to any other process that suits them and that they consider appropriate, whether or not it borrows from negotiation, mediation or arbitration”.

Morrison J. continued, noting that “[o]nce the parties do stipulate a mandatory dispute resolution process, Article 622 C.C.P. confirms that the Quebec authorities can be excluded” and added that the result was consistent with the definition in article 2638 C.C.Q. for an arbitration agreement by which parties undertake to submit disputes to arbitration “to the exclusion of the courts”.

He referred to the requirements set out in Zodiak International v. Polish People’s Republic, 1983 CanLII 24 (SCC), [1983] 1 SCR 529, adopted readily and early by C.C.I.C. Consultech international v. Silverman, 1991 CanLII 2868 (QC CA), for what qualifies as a “complete undertaking to arbitrate”.  Morrison J. summarized that such a clause “must be mandatory, clear, unambiguous, final and binding”, referring readers to Zodiak International v. Polish People’s Republic p. 533.

A complete undertaking to arbitrate, described variously as true, real or formal, is that by which the parties undertake in advance to submit to arbitration any disputes which may arise regarding their contract, and which specifies that the award made will be final and binding on the parties.

This may be contrasted, first, with a clause which is purely optional. It may also be contrasted with a “pre-judicial” or “condition precedent” arbitration clause, which requires the parties to submit their dispute to arbitration, but does not preclude an action in the ordinary courts of law once the arbitration is completed”.

(3) Application to the Policy

Morrison J. read the dispute resolution clause as applying throughout unless stipulated otherwise and, “on its face, it is a mandatory, clear, unambiguous, final and binding arbitration clause”, adding also that its “unconditional” and “not purely optional”.  He agreed with BR that the agreement to mediate and arbitrate “must be seen in the light of the entire agreement” and that “the clauses must be viewed together”, referencing Trade Finance Solutions Inc. v. Equinox Global Limited, 2018 ONCA 12.   The latter at paras 35-36 had the following to say about contractual interpretation.

[34] The general principles of contractual interpretation are straightforward: “the court construes the contract as a whole, in a manner that gives meaning to all of its terms, and avoids an interpretation that would render one or more of its terms ineffective”: Salah v. Timothy’s Coffees of the World Inc., 2010 ONCA 673, 74 B.L.R. (4th) 161, at para. 16. The motion judge, at para. 8, expressed an appreciation of these principles and said he was proceeding with his analysis accordingly.

[35] With respect, although the motion judge expressed the correct legal principles, he was in error when he interpreted the Action Against Insurer endorsement clause as an alternative dispute resolution provision. It was unnecessary and an error for him to “widen” the meaning to the Action Against Insurer endorsement clause and turn it into an alternative dispute resolution provision in order to give it effect. This is because the plain language of the clause can be given meaningful effect without conflicting with the mandatory language of the arbitration clause, thereby giving effect to all of the terms of the insurance policy”.

Morrison J. disagreed with BR that other provisions in the Policy rendered the dispute resolution provision ambiguous, created confusion or conflicted with the mandatory nature of the agreement to arbitrate.  He determined that parties to an insurance contract are permitted under Québec law to exclude some risks by certain endorsements without affecting the otherwise valid agreement to arbitrate.

[32] The endorsements to which Applicant refers in this regard are not, in the Court’s view, relevant or applicable to the issue at hand.  They do not override the dispute resolution clause.  As stated above, the Quebec provincial statutory conditions stipulated in the Policy are not secondary or subservient modifications to it but rather, they constitute an integral part of the general terms and conditions which govern the Policy.

[33] Accordingly, the fact that certain endorsements or coverage portions of the Policy may by specific intent be different than the dispute resolution clause, section 5, does not change the conclusion that the dispute resolution clause, which is of general application, is clear, unambiguous and applicable”.

Morrison J. added that the Policy’s mention of courts having exclusive jurisdiction in case of a coverage dispute did not conflict with the agreement to mediate and arbitrate. He determined that the wording involved territorial jurisdiction and not subject matter and should not be read in isolation.  The mention of “[t]he Courts in the Court District in which the Named Insured is located shall have exclusive jurisdiction in case of a coverage dispute” served to identify where the parties would apply to have an arbitrator named or where Allianz would, is it did, file its Motion presented bene esse.

The agreement to arbitrate was not illegal or contrary to public order and the overlay of the class action procedure did not modify his conclusion. “The class action provisions contained in the Code of Civil Procedure are merely of a procedural nature. They do not modify substantive law. Nor do they create competence for the Superior Court over certain disputes where the parties have lawfully decided to exclude it”.

Morrison J. considered that Allianz’s claims for business interruption losses and additional damages fell within the scope of the agreement to mediate and arbitrate. “The mere fact that [BR] alleges that Allianz’s denial of coverage is an abuse of right, without seeking a specific monetary award for same, does not automatically put an end to the mediation/arbitration clause”.   Morrison J. closed by adding a caution. “Courts must be careful not to allow vague allegations of abuse of right to obviate or negate the contractual intent of the parties”.

BR argued that, by granting Allianz’ application, “the Court would for all intents and purposes require each individual insured to proceed by way of the lengthy and costly dispute resolution process, which may discourage many from exercising their rights”. Morrison J. expressly declined to comment on the possible outcome of his decision to refer the parties to mediation and arbitration, noting only that BR did not plead that the agreement to mediate and arbitrate was invalid per se

(4) Whether the court should immediately determine jurisdiction

Morrison J. clearly identified the default approach to jurisdictional disputes, citing Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34 (CanLII), [2007] 2 SCR 801 and Rogers Wireless Inc. v. Muroff, 2007 SCC 35 (CanLII), [2007] 2 SCR 921.  Dell Computer Corp. v. Union des consommateurs para. 84 articulated the general approach.

[84] First of all, I would lay down a general rule that in any case involving an arbitration clause, a challenge to the arbitrator’s jurisdiction must be resolved first by the arbitrator.  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.  This exception is justified by the courts’ expertise in resolving such questions, by the fact that the court is the forum to which the parties apply first when requesting referral and by the rule that an arbitrator’s decision regarding his or her jurisdiction can be reviewed by a court.  It allows a legal argument relating to the arbitrator’s jurisdiction to be resolved once and for all, and also allows the parties to avoid duplication of a strictly legal debate.  In addition, the danger that a party will obstruct the process by manipulating procedural rules will be reduced, since the court must not, in ruling on the arbitrator’s jurisdiction, consider the facts leading to the application of the arbitration clause”.

Morrison J. observed that he had already been required to analyse the underlying facts and law pertaining to jurisdiction. He pointed to Ferreira v. Tavares, 2015 QCCA 844 paras 19-24 and AEC Symmaf Inc. v. Poirier, 2018 QCCA 916 para. 7 as precedents for immediacy deciding jurisdiction when “possible on summary and superficial examination”.

Morrison J. added a key observation limiting the general approach of competence-competence at least insofar as concerned the mediator. He observed that “the issue of jurisdiction is certainly not to be referred to a mediator for determination, as there exists no legal principle in support of such an approach”.

Morrison J. paused to endorse the sequential approach taken in the Policy to pursue mediation and arbitration, commenting that doing so was “validated” by the C.C.P.’s express endorsement of private dispute prevention.

[66] The parties agreed to proceed firstly by mediation and then, if a settlement is not possible, to refer the dispute to arbitration.  As mentioned, the Court considers this to be a valid dispute resolution approach, one that is validated by the Preliminary Provision of An Act to Establish the New Code of Civil Procedure, which promotes fair-minded private dispute prevention and resolution processes that encourage persons involved to play an active role.  This does not only validate arbitration, but also mediation, which certainly can also be an appropriate first-step in the process”.

He determined that proportionality urged him to determine the role of the mediator and the arbitrator and as support to members of a class action seeking to “proceed quickly to exercise their legal rights on an individual basis”.

(5) Options when issuing a stay

Article 167 C.C.P. provides in part that “[i]f an application is brought before a court other than the court of competent jurisdiction, a party may ask that it be referred to the competent court or, failing that, that it be dismissed”.  Morrison J. acknowledged the apparent binary option but determined that in the context of a class action authorization process, it is more appropriate to do both: refer the matter to dispute resolution under the Policy and dismiss the Application.  He observed that the Application “has accordingly become moot and no longer serves any real purpose”.  He invoked the principle of proportionality in the C.C.P., the “different nature of a class proceeding” and the court’s general powers set out in article 49 C.C.P.

Article 18 C.C.P. The parties to a proceeding must observe the principle of proportionality and ensure that their actions, their pleadings, including their choice of an oral or a written defence, and the means of proof they use are proportionate, in terms of the cost and time involved, to the nature and complexity of the matter and the purpose of the application.

Judges must likewise observe the principle of proportionality in managing the proceedings they are assigned, regardless of the stage at which they intervene. They must ensure that the measures and acts they order or authorize are in keeping with the same principle, while having regard to the proper administration of justice”.

Morrison J. granted Allianz’s Motion, referred BR and Allianz to a mediator and arbitrator appointed in accordance with the dispute resolution process in the Policy and dismissed Allianz’s Application.

urbitral notes – First, with regard to proportionality urged upon litigants in the C.C.P., see the second paragraph to the preliminary provision leading into the C.C.P. and articles 2, 156, 158 and 341 as well as articles 622 and 632 C.C.P. specific to arbitration.

Second, Morrison J. referred to article 49 C.C.P. which reads as follows:

Article 49 C.C.P. The courts and judges, both in first instance and in appeal, have all the powers necessary to exercise their jurisdiction.

They may, at any time and in all matters, even on their own initiative, grant injunctions or issue protection orders or orders to safeguard the parties’ rights for the period and subject to the conditions they determine. As well, they may make such orders as are appropriate to deal with situations for which no solution is provided by law”.

Third, Allianz presented its motion bene esse which served to underline its refusal to attorn to jurisdiction.