Québec – parties ordered to mediate according to express, imperative agreement even if dispute not arbitrable – #222

In Capital JPEG Inc. v. Corporation Zone B4 Ltée, 2019 QCCS 2986, Mr. Justice Babak Barin enforced the express terms of the shareholders’ agreement to mediate before they arbitrated, staying the court litigation pending the result of the mediation.  The court litigation sought dissolution of a corporation and, despite considering that dissolution could be arbitrated, Barin J. refrained from referring the parties to arbitration as that stage had not yet been reached or requested.  He held that parties could agree to mediate topics which could not also be arbitrated.

Capital JPEG Inc. (“JPEG”), Corporation Zone B4 Ltée (“B4”) and Trillion Way Investment Co. Ltd. (“Trillion”) were parties to a December 16, 2013 Shareholders Agreement (“SA”) which governed their shareholdings in 3202 Beaubien Ltée (“3203 Beaubien”), a company  incorporated under Québec’s Business Corporations Act, CQLR c S-31.1 (“B.C.A.”) whose sole purpose was to build and sell commercial and residential condominiums.

The SA contained a tiered dispute resolution process which required the shareholders to (i) first, negotiate in good faith, (ii) next, mediate and (iii) if need be, arbitrate any remaining dispute to a binding resolution.  Para. 2 of the reasons reproduces the detailed section.

JPEG instituted litigation before the Québec Superior Court seeking dissolution of 3202 Beaubien under sections 463 and 464 of the B.C.A.  

B4 and Trillion contested the substance of JPEG’s claims and the disruptive impact dissolution would have on the purpose for which 3203 Beaubien had been created. 

They also challenged JPEG’s decision to file court proceedings instead of following the SA’s stepped dispute resolution.  B4 and Trillion applied to the Superior Court under article 167 of the Code of Civil Procedure, CQLR c C-25.01 (“C.C.P.) asking the Court to (i) name a mediator, (ii) refer the parties to mediation and (iii) stay the litigation for two (2) months in order to hold at least one (1) mediation session.

Article 167 C.C.P.  If 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.

Lack of subject-matter jurisdiction may be raised at any stage of the proceeding, and may even be declared by the court on its own initiative, in which case the court adjudicates as to legal costs according to the circumstances.

Barin J. noted that the SA contained three (3) distinct dispute prevention and resolution processes:

negotiation – the shareholders had to meet and negotiate in good faith and do so within no more than 30 days from when the dispute arose;

mediation – in a confidential process conducted with a mediator chosen by the parties, by way of at least one (1) mediation session, to be completed within 30 days of the mediator’s nomination; and,

arbitration –any remaining dispute regarding a claim under the SA as well as any dispute concerning its execution, annulment, interpretation, would be submitted to binding arbitration under the provisions of the C.C.P., initiated by a written statement requiring a response within 15 days, a delay within which to choose an arbitrator, the hearing to start 10 days from the nomination of the arbitrator and an award to issue 60 days from the date of nomination.

He observed that, despite each being a separate process, each brings a supplementary element to the overall resolution process.  A reading of the SA in its entirety indicated that each process was subject to its own sequence and served also a condition precedent to progressing to the next.   JPEG claimed that the three (3) processes were inseparable.  Barin J. disagreed, considering that they could be separated.

Barin J. held that the shareholders, well aware of the commercial issues in play, had expressly agreed to a tiered process having a broad scope.  He examined the negotiation, mediation and arbitration steps in light of both the wording of the SA and the provisions of the C.C.P. which endorsed each. 

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.

Parties must consider private prevention and resolution processes before referring their dispute to the courts.

Article 2 C.C.P. Parties who enter into a private dispute prevention and resolution process do so voluntarily. They are required to participate in the process in good faith, to be transparent with each other, including as regards the information in their possession, and to co-operate actively in searching for a solution and, if applicable, in preparing and implementing a pre-court protocol; they are also required to share the costs of the process.

They must, as must any third person assisting them, ensure that any steps they take are proportionate, in terms of the cost and time involved, to the nature and complexity of the dispute.

In addition, they are required, in any steps they take and agreements they make, to uphold human rights and freedoms and observe other public order rules.

Barin J. referred to the Minister of Justice’s comments on article 2 C.C.P. which emphasized the role of good faith in negotiation and which, by its absence, could pervert the quality and effectiveness of negotiations.  The minimum delay provided in the SA for negotiation imposed a “cooling-off period” which, by its existence, gave the parties an opportunity to meet their obligation of good faith.

Failure of negotiations brought the parties to the next tier which, Barin J. noted, required expressly that the parties attend at least one (1) mediation session.

Barin J. identified a key difference between mediation and arbitration, pointing out that, unlike arbitration, mediation does not involve confiding to a third party the task of deciding a dispute according to the law.  The mediator is there to assist the parties to arrive at an agreement and she is not required to impose her own resolution. Barin J. cited an extract of article 605 C.C.P. which speaks to the roles and duties of a mediator:

The mediator helps the parties to engage in dialogue, clarify their views, define the issues in dispute, identify their needs and interests, explore solutions and reach, if possible, a mutually satisfactory agreement. The parties may ask the mediator to develop with them a proposal to prevent or resolve the dispute.

The parties could consider a vast number of issues and solutions in coming to an agreement, called a “transaction” under article 2631 of the Civil Code of Québec, CQLR c CCQ-1991: (“C.C.Q.”), limited only by article 2632 C.C.Q.

Article 2631 C.C.Q. Transaction is a contract by which the parties prevent a future contestation, put an end to a lawsuit or settle difficulties arising in the execution of a judgment, by way of mutual concessions or reservations.

A transaction is indivisible as to its subject.

Article 2632 C.C.Q. No transaction may be made with respect to the status or capacity of persons or to other matters of public order.

JPEG argued that arbitration is only required if mediation fails and there is no need to mediate if the dispute is not subject to arbitration.  JPEG argued that the dissolution of 3203 Beaubien could not be subject to arbitration and therefore there was no need to mediate.

Barin J. disagreed. 

First, he pointed out that the authority relied on by JPEG, Investissement Charlevoix inc. v. Gestion Pierre Gingras inc., 2010 QCCA 1229, did not support JPEG’s argument.  Rather, the Court of Appeal had decided that the dissolution of a corporation was not of public order and Barin J. held that dissolution would not be contrary to article 2639 C.C.Q.

Article 2639 C.C.Q. Disputes over the status and capacity of persons, family matters or other matters of public order may not be submitted to arbitration.

An arbitration agreement may not be opposed on the ground that the rules applicable to settlement of the dispute are in the nature of rules of public order.

Second, he pointed out that JPEG has invoked article 463 and not article 461 of the B.C.A.  Contrary to article 461, article 463 allows that dissolution can be sought on application by a shareholder and not an interested party.

Barin J. held that, despite those reasons identified, he was only asked at this point to decide whether to refer the parties to mediation.  He was not tasked with deciding a stay application in favour of arbitration.   In comments he expressly identified as obiter dictum, he did not see that article 463 of the B.C.A. expressly excluded the jurisdiction of an arbitrator.

He noted that his decision was limited strictly to the issue of mediation as sought by B4 and Trillion and that he was not deciding the arbitrability of a dissolution under article 463 of the B.C.A.

As a closing note, Barin J. added that even if such issues could not be arbitrated, there was no prohibition on mediating them and he gave effect to the express, imperative wording of the SA which obliged the parties to mediate.

Barin J. therefor granted the application, ordered the shareholders to engage in mediation as set out in the SA, suspended the court litigation for two (2) months calculated from the date of the nomination of the mediator and, should mediation fail, file a litigation protocol with the court within 15 days of such failure.

Should the parties fail to name a mediator, Barin J. remained seized of the matter.

urbitral note : A settlement agreement which can issue from either negotiation or mediation can qualify as a “transaction” under Québec civil law.  A “transaction” has a special status and enjoys the additional authority of res juidicata, as provided by article 2633 C.C.Q.

Article 2633 C.C.Q. A transaction has, between the parties, the authority of res judicata.

A transaction is not subject to forced execution until it is homologated.

Arbitration practitioners, familiar with homologation (recognizing and enforcing) of arbitration awards, can readily anticipate the added value of being able to homologate such transactions.  Case law has established an approach which favours a summary procedure focused on proving that the parties had entered into the transaction. For homologating transactions, there are no equivalent, legislated criteria similar to those for homologating arbitration awards, under article 646 C.C.P. 

Article 646 C.C.P. The court cannot refuse to homologate an arbitration award or a provisional or safeguard measure unless it is proved that

(1)   one of the parties did not have the capacity to enter into the arbitration agreement;

(2)   the arbitration agreement is invalid under the law chosen by the parties or, failing any indication in that regard, under Québec law;

(3)   the procedure for the appointment of an arbitrator or the applicable arbitration procedure was not observed;

(4)   the party against which the award or measure is invoked was not given proper notice of the appointment of an arbitrator or of the arbitration proceedings, or it was for another reason impossible for that party to present its case; or

(5)   the award pertains to a dispute not referred to in or covered by the arbitration agreement, or contains a conclusion on matters beyond the scope of the agreement, in which case only the irregular provision is not homologated if it can be dissociated from the rest.

The court cannot refuse to homologate the arbitration award on its own initiative unless it notes that the subject matter of the dispute is not one that may be settled by arbitration in Québec or that the award or measure is contrary to public order.