Québec – Stay of arbitrator’s decision to add third parties, force them to meet timetable, and refusal to hear them without payment – #553

In Mullen v Nakisa inc., 2021 QCCS 4388, Justice Granosik granted applications to stay an arbitration as against parties who were added as cross-respondents, even though they were not parties to the arbitration agreement, pending judicial review of the arbitrator’s decision to add them. Justice Granosik was concerned that the applicants could be deprived of their right to have a matter determined by a court, and even risked having the arbitration take place in their absence.

Nakisa Inc. and Sierra Digital Inc. were bound by a contract of service that contained an undertaking to arbitrate. On March 22, 2019, they entered into a Memorandum of Agreement by which they agreed to submit to an arbitration seated in Montreal any dispute pertaining to that contract. The matter was to be decided by an arbitrator appointed by the Canadian Commercial Arbitration Center according to Québec law. Sierra commenced an arbitration against Nakisa. An arbitrator was appointed. In response, Nakisa alleged that Sierra’s president, Kumar, and Sierra’s project manager according to the contract, Mullen, committed faults in the performance of their duties.

On February 12, 2020, Nakisa sued Kumar and Mullen (the applicants) in the Superior Court of Québec and, on August 12, 2020, the Court found that no injury was suffered in Québec and declined jurisdiction, Nakisa failing to meet its prima facie burden under article 3148(3) of the Civil Code of Québec (“C.C.Q.”). On December 18, 2020, the Court of Appeal dismissed Nakisa’s appeal on the application of Sierra on the basis that it had no reasonable chance of success as per article 365 of the Code of Civil Procedure (“C.C.P.”) (see Nakisa inc. v Kumar, 2020 QCCS 2487 and Nakisa inc. v Mullen, 2020 QCCA 1808).

Nakisa then sought from the arbitrator leave to amend its cross-application to add the applicants as cross-respondents, without notifying them. On July 14, 2021, the arbitrator granted leave, based on the majority reasons in the Court of Appeal decision in Décarel inc. v Concordia Project Management Ltd, J.E. 96-1612 (C.A.) (“Décarel”), where the main shareholders and officers of a party to an arbitration were found to be “so interested and involved that they must follow their corporate entity to the arbitrator”, and that to “exclude the application of the arbitration clause in such circumstances on the ground that it concerns only corporate entities would […] be nonsense based on a blind technicality”. The applicants were notified of that decision the next day. On July 30, 2021, in their absence, the arbitrator issued orders providing that they were to appear before him, they would have to accept the timetable already set, and would not have the right to seek postponement of the arbitration. The timetable provided that the filings must be ready on October 27, 2021, for a hearing to begin on November 29, 2021. On August 13, 2021, the applicants informed the arbitrator that they intended to challenge his jurisdiction over them, to which the arbitrator responded that he would only hear them if they provided a fee retainer. The applicants refused to do so.

On September 14 and 17, 2021, each of the applicants filed an application for judicial review of the arbitrator’s decision, asking for the arbitration to be stayed as against them in the meantime, pursuant to article 530 C.C.P. That provision grants the Court discretion to stay proceedings pending during the judicial review. The applicants argued that they were parties neither to the dispute nor to the contract of service or the undertaking to arbitrate, that they did not accept the arbitrator’s jurisdiction, and that they had never renounced the Court’s jurisdiction. Nakisa opposed the application, relying on the arbitrator’s power to rule on his own jurisdiction and on the relevance of having the applicants as parties on account of the role they played in the relationship between Sierra and Nakisa.

Applicable Test – At para. 10, Justice Granosik noted that, as is the case for an interlocutory injunction, the application to stay must demonstrate an appearance of right, a serious or irreparable prejudice, and a balance of inconvenience, as confirmed by the Court of Appeal in Alliance internationale des employés de scène, de théâtre, techniciens de l’image, artistes et métiers connexes des États-Unis, ses territoires et du Canada, FAT-COI, FTQ, AIEST/IATSE, section locale 262 v Cineplex Divertissement (Cinéma Ste-Foy), 2019 QCCA 187. He further noted that:

(1) a stay of proceedings pending judicial review is only granted in exceptional circumstances;

(2) in regard of arbitral proceedings, serious reasons must be demonstrated; and that

(3) all criteria must be met for the stay to be ordered.

Criteria for joinder – Justice Granosik determined that the questions raised by the applicants were “eminently” serious and gave an appearance of a right not be joined to the arbitral proceedings (par. 12, 18). He relied on Construction Stam inc. c. A. & J.L. Bourgeois ltée, 1998 CanLII 9602, where the Superior Court of Québec found that the relevance of involving certain parties in an arbitration is insufficient to force them to participate in such proceedings if they are not parties to the arbitration agreement. At par. 15, Justice Granosik found this to be consistent with the requirement under articles 2638 and 2640 C.C.Q. that the undertaking to arbitrate be evidenced in writing, which implies consent between the parties.

Accordingly, the Court was not convinced by the arbitrator’s reliance on the Court of Appeal decision in Décarel, noting that the majority reasons were based on the ruling of the Court of Appeal in Guns n’ Roses Missouri Storm Inc. v Productions musicales Donald K. Donald inc., 1994 CanLII 5694 (“Guns n’ Roses”), later criticized by the Supreme Court in GreCon Dimter inc. v J.R. Normand inc., 2005 CSC 46. Justice Granosik quoted with approval the dissent in Décarel, [informal translation]:

“The principles applied by this Court in respect of referral to arbitration do not go as far […] as to allow us to order an individual to personally submit to arbitral jurisdiction based on a contract and an undertaking to arbitrate by which he is not personally bound.” This reasoning is coherent with the more recent teachings of the Court of Appeal in Société Asbestos limitée v Lacroix, 2004 CanLII 76694; that is, that [informal translation] ’ordering third parties to submit to arbitration should be the exception, not the rule’”.

Prejudice and inconvenience – Justice Granosik found that to force the applicants to submit to arbitration to which they have not consented, presided by an arbitrator they did not appoint, and who appears to have no jurisdiction over them would constitute a serious and irreparable prejudice, even more so considering the arbitrator’s intent to proceed despite the applicants’ opposition or absence (par. 20).

Justice Granosik described the applicants’ situation as a “Sophie’s choice”: submit to arbitration without being a party to the dispute or avoid doing so and then face the risk of needing to meet the heavy burden of opposing the homologation of an ex parte award. On the other hand, Nakisa’s worst case scenario would be to see the Court refuse to quash the arbitrator’s decision to add the applicants as cross-respondents while the arbitration proceeds as planned in November 2021. Nakisa would then need to proceed to arbitration solely in regard of the applicants’ liability, which would be facilitated by the fact that the rights and obligations of Sierra and Nakisa will have been determined by the arbitrator. The balance of inconvenience therefore favoured the applicants.

Ultimately, the Court found that all applicable criteria were met and stayed the arbitration proceedings in regard of the Applicants pending a review judgment.

Contributor’s Notes:

First, reliance on Guns n’ Roses was the subject of a recent Arbitration Matters Case Note Québec – Court favors arbitration even for related, but non-signatory, parties – #541, which underscored the rarity in Québec of referral to arbitration of non-signatory to an arbitration agreement. It bears repeating that Justice Rothman underscored the highly specific context of his reasons in that case, stating that he did not see “why an arbitration clause agreed upon by two parties should necessarily become inapplicable merely because the dispute also involves a third party or third parties”, and that “much will depend on the nature of the claims and the circumstances of each case”. For that reason, Justice Rothman was willing to refer the matter to arbitration to allow the arbitrator to rule on his own jurisdiction.

Second, in obiter, the Court expressed the view that judicial review of the decision is the appropriate procedural vehicle, as opposed to resorting to articles 622 and 632 C.C.P. (referral to arbitration based on the arbitrators’ power to rule on their on jurisdiction). Twice Justice Granosik insisted that it is so because the question at issue regarded the personal jurisdiction of the tribunal and not jurisdiction stricto sensu, which would bear on the [informal translation] “nature or the essence of the dispute” (par. 13, 19). It is unclear how this distinction is relevant considering that the arbitrator had in fact ruled on his own jurisdiction by granting leave to add the applicants to the arbitration.