In Fiducie Groupe Carmen Forino v Fermes v. Forino & Fils inc., 2022 QCCS 2215, Justice Gagnon granted an application to homologate a final award. He found that the Defendants were asking the court to exceed the narrow scope of intervention available in that context and refused to revisit the arbitrator’s determination on the merits, even where the award might be based upon “shaky” legal grounds.
The Plaintiffs had sold their vegetable gardening enterprise to the Defendants pursuant to a shares sale agreement, which provided for the price to be paid in five yearly installments. On August 13, 2021, the Plaintiffs submitted to arbitration a dispute regarding the Defendants’ failure to pay the last installment. On January 28, 2022, the arbitrator issued a final award. He concluded that the Defendants were in default and ordered them to pay the balance owed of $750,000. The arbitrator added to that monetary order an additional sum pursuant to a penalty clause in the shares sale agreement, which allowed a party which retained lawyers to enforce the other party’s obligation to pay legal costs of 75% of the amount claimed. The arbitrator determined that it would be abusive in the circumstances to grant the Plaintiffs $562,500 (75% of $750,000) for its legal costs and limited the penalty to $187,500. In doing so, he relied on article 1623(2) of the Civil Code of Québec, CQLR c CCQ-1991 (“C.C.Q.”), which authorizes the Court to reduce the amount of the stipulated penalty “if the clause is abusive”. He also applied interest to both the last installment owed and the penalty imposed at the yearly contractual rate of 8% as of the date of default. The Defendants voluntarily paid the award, except with respect to the conclusions pertaining to the application of the penalty clause and of the interest to the penalty imposed.
On March 22, 2022, the Plaintiffs filed their application to homologate the award. The Defendants only contested it with repect to the application of the penalty clause and the award of interest on the penalty imposed, which they said fell outside the scope of the arbitration agreement. They claimed that this constituted reasons to refuse homologation pursuant to article 646(5) of the Code of Civil Procedure, CQLR c C-25.01 (“C.C.P.”). First, they contended that the arbitrator erred in interpreting and applying the penalty clause, alleging that the Plaintiffs ought to have been entitled only to the fees and disbursements actually incurred and that the amount granted largely exceeded what should have been charged for brief arbitration proceedings. Second, they submitted that the contractual interest rate only applied to “any unpaid balance” of the sale price and not to the amount granted with respect to the penalty clause. The Defendants took the position that those two parts of the award should not be homologated, because they could be “dissociated from the rest” (article 646(5) C.C.P.). Indeed, the conclusions challenged both pertained to the penalty imposed, which could be dissociated from the orders pertaining the unpaid balance owed.
Narrow scope for intervention – Justice Gagnon referred to article 622(1) C.C.P., noting that “the issues on which the parties have an arbitration agreement cannot be brought before a court”. The Court referred for guidance to the seminal decision of the Supreme Court of Canada in Desputeaux v. Éditions Chouette (1987) inc., 2003 SCC 17 and to its application by the Québec Court of Appeal in Endorecherche inc. v. Endoceutics inc., 2015 QCCA 1347. In short, once an award is issued, the Court’s intervention is limited to verifying [informal translation] “whether the award or the arbitral process that led to it is affected by one of the defects” set out at article 646 C.C.P.; it cannot examine the merits. Justice Gagnon thus insisted that the solution arrived at by the arbitrator need not be the one favoured by courts in analogous situations (par. 40) and that even a surprising decision, made on [informal translation] “shaky” legal grounds, will not be revised (referring to the language used by the Court of Appeal in Endorecherche).
In the present dispute, the arbitrator was bound to decide “in accordance with the stipulations of the contract between the parties and [to take] into account any applicable usages” (article 620(1) C.C.P.). He applied the rules of contractual interpretation provided in articles 1426, 1427, and 1429 of the Civil Code of Québec, CQLR c CCQ-1991 (“C.C.Q.”) and it was not open to the Court to opine on whether he should rather have solely relied on the rule set out at article 1425 C.C.Q., as the Defendants contended. Even an [informal translation] “interesting” debate pertaining to the interpretation of the clauses relative to the challenged conclusions did not concern the court (par. 51, 55).
Arbitration as one mode of dispute resolution – Justice Gagnon briefly addressed the particularities of arbitration in contrast to other dispute resolution processes, noting that the Québec legislator has accorded greater importance to private modes of resolution such as arbitration since 2016 (par. 29). Justice Gagnon underscored that the limited judicial intervention available after the award is issued follows from affirming the autonomy of arbitration: its scope is even stricter and more restrictive than that of the general power of judicial review by the court provided by article 34 C.C.P. (par. 38-39).
In the end, the recourse to arbitration may favour the winning party and disadvantage the losing one by greatly insulating the result from court intervention on the merits, and this somethine the parties willingly chose for themselves by an including arbitration agreement in their contract (par. 56).
First, this case continued a line of jurisprudence where Québec judges comment on the advantages and disadvantages of arbitration, in a manifest attempt at pedagogy in the context of the latest reform of civil procedure. Indeed, since 2016, the Code of Civil Procedure is animated by the objective to “avoid litigation through appropriate, efficient and fair-minded processes that encourage the persons involved to play an active role” (Preliminary Provision, C.C.P.). This legislative intent was discussed in a recent Case Note: Québec – confidentiality order denied in court proceedings; parties reminded of confidential arbitration as an alternative – #526.
Second, Justice Gagnon distinguished the recourse available to the party challenging an award as more restrictive than that afforded by judicial review. The unavailability of judicial review in the context of contractual arbitration according to the Superior Court of Québec was addressed in a previous Case note: Québec – court’s intervention on challenge to award on jurisdiction is not judicial review – #296, which is to be contrasted with other statutory or labour relations arbitrations (note 10, at par. 56), where it may be available.
Third, for a more complete treatment of the court’s power to intervene at the stage of an application for annulment of an award, the Québec Court of Appeal ruling in Endorecherche inc. v. Endoceutics inc., 2015 QCCA 1347 must be read in conjunction with the related ruling in Endoceutics inc. c. Philippon, 2015 QCCA 1346, which more specifically addresses the applicant’s burden of proof. The ruling was discussed in Arbitration Matters Case Note Québec – court holds parties to their bargain to refuse challenge to arbitral award – #036.