In McLaren Automotive Incorporated c. 9727272 Canada Inc (unreported, rendered on August 2, 2024 in File no. 540-17-015649-328), the Superior Court of Quebec confirmed that parties may agree upon an arbitral appeal mechanism, despite article 648 of the Code of Civil Procedure (“CCP”), which states the only recourse against a final award is homologation or annulment. In this case, an arbitration appeal panel appointed by the parties overturned the decision of the arbitrator, in which he denied having jurisdiction over the dispute. The Claimant then applied to the Superior Court of Quebec, requesting the homologation of the arbitrator’s decision and the annulment of the appeal panel’s decision. In this first decision addressing the validity of an arbitral appeal process, the Court confirmed the validity and jurisdiction of the appeal panel and concluded that the existence and the decision of the appeal panel was valid, considering both the relevant articles of the CCP and the UNCITRAL Model Law on International Commercial Arbitration (the “Model Law”).
As explained in an earlier Arbitration Matters summary of this case, Case Note #826 “No stay of arbitration without exceptional circumstances”, the Applicant had already unsuccessfully sought a stay of the arbitration, which continued following the decision of the appeal panel, until the Court ruled on the merits of the homologation and annulment application. The Court hearing the application to stay determined that there were no exceptional circumstances that justified the stay of the arbitral proceedings. In so doing, the Court reaffirmed the principle of limited court intervention in arbitration matters.
Background to the Dispute:The Applicant McLaren Automative Incorporated (“McLaren”) was the exclusive manufacturer and distributor of McLaren vehicles and parts in Canada. Since 2016, McLaren was in business with the Defendant 9727272 Canada Inc. (“Canada Inc.”), a retailer based in Laval, Quebec.
The application of an adhesion contract, McLaren Dealer Sales and Service Agreement(the “DSSA”) which contained an arbitration clause, was at the heart of the dispute in arbitration. The parties never signed the DSSA. However, in 2017, the parties signed a conditional agreement, which required that the DSSA be signed by the parties. Further, in August 2022, McLaren signed the agreement McLaren Service Plan Agreement (the “SPA”), which stipulated that it supplemented the DSSA.
In June 2023, upon learning that McLaren was planning to do business with a new dealer in Quebec, Canada Inc. invoked the arbitration clause in the DSSA to resolve the dispute. McLaren challenged the jurisdiction of the arbitrator, arguing that the DSSA never came into force.
The Arbitrator’s Decision:The arbitrator declined jurisdiction over the dispute because the DSSA was never signed and, therefore, there was no arbitration agreement. Further, the conduct of the parties could not circumvent the formalities stipulated by the agreement, which required that the DSSA be signed by the parties, and there was insufficient evidence to show that the DSSA governed the relationship between the parties.
The Appeal Panel’s Decision: Canada Inc. availed itself of the arbitration appeal process provided for in the DSSA. The appeal panel, composed of three members, concluded that the Arbitrator erred in fact and law by declining jurisdiction. It also held that it had jurisdiction to decide an appeal of the arbitrator’s jurisdiction decision pursuant to the National Automobile Dealer Arbitration Program Rules for Dispute and Resolution and that Article 632 CCP. It confirms the jurisdiction of the Superior Court over annulment proceedings but does not explicitly preclude parties from agreeing upon an arbitral appeal mechanism.
The Application before the Superior Court: McLaren’s application sought to homologate the arbitrator’s decision and to annul the appeal panel’s decision on the basis that the terms of the DSSA providing for the appeal process were null. With respect to the validity of the appeal panel’s decision, McLaren argued that the appeal process in the DSSA was incompatible with the jurisdiction granted to the Quebec courts pursuant to Article 648, para. 1 CCP and contravened the principle of proportionality enshrined in Article 622, para. 3 CCP. McLaren argued that by providing that, “[a]n arbitration award may only be challenged by way of an application for its annulment”, Article 648 CCP means that the only form of review or challenge available to parties is an application for annulment. In that same vein, Article 622 CCP prohibits parties from departing from the provisions of the CCP that determine the jurisdiction of the court. McLaren made additional arguments regarding the application of the language of the arbitration agreement, the sufficiency of the consent to the arbitration agreement in the DSSA, and the jurisdiction of the arbitrator and of the appeal panel to determine whether the DSSA did, in fact, bind the parties.
The Superior Court’s Decision:The Court dismissed McLaren’s application for homologation of the arbitrator’s decision and the annulment of the appeal panel’s Decision.
At the outset, the Court stated that the arguments presented all supported the application for annulment pursuant to Article 632, para. 2 CCP, which provides that either party may apply to the court to have it rule on a decision of the arbitrator ruling on the arbitrator’s own jurisdiction, and it was neither necessary nor useful to homologate the arbitrator’s decision on jurisdiction.
Instead, the Court turned directly to the question of the validity of the appeal process and the appeal panel’s decision, finding that an arbitration agreement that provides for an appeal mechanism process does not encroach upon the jurisdiction of the Court, nor does it contravene Article 622, para. 3 CCP for the following reasons:
(i) Jurisdiction of the Courts. McLaren argued that an arbitral appeal mechanism was inconsistent with Article 648 CCP, which stipulates that the only way to challenge an arbitration award is through an application for annulment before the Court. The Court qualified this approach as unduly restrictive and inconsistent with the principles of modern statutory interpretation. The Court concluded that Article 648, para. 1 CCP, interpreted in the context of Articles 2638 and 2643 of the Civil Code of Quebec (defining arbitration agreements under Quebec law) and Articles 622 and 649 CCP (regarding the Model Law where international trade interests are at play), does not preclude the parties from agreeing to an arbitral appeal mechanism insofar as the jurisdiction of the courts is preserved once the final arbitral award is rendered.
The Court noted various examples of arbitration rules that provide for appeal mechanisms, including the AAA Optional Appellate Arbitration Rules, the CPR Arbitration Appellate Procedure, the Arbitration Rules of the European Court of Arbitration, and the Code of Sports-Related Arbitration of the Court Arbitration for Sport, to show that an appeal process was not unprecedented.
As the dispute in this case involved international trade interests, the Court considered provisions of the Model Law pursuant to Article 649 CCP. It addressed a slight difference in wording between Article 648, para. 1, which states that an “arbitration award may only be challenged by way of an application for its annulment”, and Article 34 (1) of the Model Law, which states that “recourse to a court against an arbitral award may only be made by an application for setting aside”. The Court found that the specific wording of Article 648 was not determinative in light of the global context and its conclusion that the intention of the legislator was not to be restrictive. Thus, that wording cannot preclude parties from validly agreeing upon an appeal mechanism within the arbitration agreement.
(ii) Principle of Proportionality: McLaren also argued that providing for an arbitral appeal process contravened Article 622, para. 3 CCP, which provides that the parties cannot, through their agreement, depart from the principle of proportionality. Arbitrators are also bound by the principle of proportionality by Article 632, para. 1 CCP. The Court found, however, that the principle of proportionality applies to the behaviour of the parties in the conduct of the arbitration and not to the choice to include an appeal process in their arbitration agreement. Once an appeal is included in the arbitral process, the parties have the right to avail themselves of it. Barring situations of abuse of procedure, the mere exercise of that right should not be qualified as disproportionate.
(iii) Court’s conclusion: Having dealt with the principal arguments regarding the validity of the appeal mechanism, the Court dismissed the remaining arguments and, on a de novo review pursuant to Article 632, para. 2 CCP, confirmed the arbitrator’s jurisdiction over the dispute. As noted by the Court, its decision was not subject to appeal.
Contributor’s Notes:
Importantly, this is the first decision in Québec that addresses the validity of an arbitral appeal process in light of the wording Article 648, para. 1 CCP. By favouring the modern approach to statutory interpretation, the Court contributed to a generally strong tradition in Québec case law recognizing the importance and legitimacy of arbitration.
In that vein, when addressing the difference in wording of Article 648, para. 1 CCP and Article 34 (1) of the Model Law, the Court considered that the difference in the drafting of Article 648 could be chalked up to local particularities and that, as noted in in Specter Aviation v. Laprade (2021 QCCA 1811), local law should develop to align itself with normative trends arising from a general consensus in comparative law. (See Case Note #577 discussing the Court of Appeal’s decision in Specter). The Court, here, echoed the Court of Appeal in Specter:
“The relevance of such a perspective can be explained by the fact that the interests of participants in international arbitration are generally best served by a legal framework that limits the impact of local particularities that are likely to thwart their legitimate expectations.” (Specter, para. 47, contributor’s translation)
The Court’s decision here, driven both by an analysis of the legislative intent in respect of the relevant articles as a whole and taking into account the global context in which they must be read, including the less restrictive wording of the Model Law and the relatively common use of arbitral appeal mechanisms, sends a strong message reinforcing the rights of the parties to arbitration agreements to provide for the dispute resolution process that best serves their needs.