Commercial Arbitration in Quebec

Québec Court of Appeal Upholds the Autonomy and Effectiveness of Commercial Arbitration in Quebec

Langlois Kronström Desjardins has won an important appellate case dealing with the autonomy and limits of commercial arbitration in the Province of Quebec.  In a highly anticipated decision, the Québec Court of Appeal confirmed that commercial arbitrators have the power and jurisdiction to interpret and enforce commercial agreements through orders of specific performance.  In so doing, the Court of Appeal upheld the autonomy and effectiveness of commercial arbitration in Quebec.

Background

This case originates in a dispute between Canadian Royalties and Nearctic Nickel Mines concerning their respective ownership interests in a mining property in the area of the Plan Nord in Northern Quebec called the Expo Ungava Property (the “Property”). Situated just south of Xstrata’s Raglan Mine, the Property has been found to contain significant nickel-copper PGE mineralization and is currently being developed by Canadian Royalties, which has invested in excess of $500 million in developing its Nunavik Nickel Project.

In 2007, after years of exploration success, a bankable feasibility study (“BFS”) was completed and, on the basis thereof, two financial institutions agreed to act as lead arrangers for a project loan facility of at least $250 million.  At the same time, Canadian Royalties, until then the owner of 70% of the Property, asserted an entitlement to an additional 10% interest in the Property, on the ground that it had satisfied the requirements of the fourth and final vesting option set out in the option and joint venture agreement (the “Agreement”) between the parties.

Nearctic Nickel refused to transfer the additional 10% ownership interest to Canadian Royalties on the ground that the BFS did not respect the requirements of the Agreement.  More specifically, Nearctic Nickel took the position that the BFS had to be accepted by a bank, which meant that a bank had to commit to finance, on a non-recourse basis, 100% of the capital costs required to build the mine.

The Arbitration

Canadian Royalties brought the matter to arbitration. The central issues in the arbitration were (a) whether the BFS satisfied the requirements of the Agreement; (b) whether the Agreement required that the BFS be “accepted” by a bank or financing entity; (c) if “acceptance” was a prerequisite, what constitutes “acceptance”; and (d) whether the BFS had in fact been “accepted” by a bank or other financing entity.

After an extremely lengthy process and hearing, the arbitrator decided that Canadian Royalties had satisfied the requirements of the Agreement by delivering an acceptable BFS to Nearctic Nickel Mines.  According to the arbitrator, acceptance of the BFS by a financial institution was not a requirement for vesting. The arbitrator therefore ordered Nearctic Nickel to convey title to an additional 10% interest in the Property and sign the documents required to do so, failing which the award would constitute valid title.

The Court Proceedings

Nearctic Nickel then moved before the Superior Court to vacate the final arbitral award on a number of different grounds. Canadian Royalties simultaneously applied for homologation of the award.

In support of its request to vacate the award, Nearctic raised a number of arguments, including two which challenged the autonomy and effectiveness of arbitration in Quebec.  First, Nearctic Nickel argued that the award should be vacated because the arbitrator had exceeded his jurisdiction by re-writing the requirements of the Agreement for vesting. Relying on the case of Coderre v. Coderre¹, decided by the Court of Appeal in 2008, Nearctic argued that an arbitrator, in contradistinction to a judge, could not vary or contradict the terms of a written contractual instrument in accordance with the rules of evidence and interpretation of contracts which permit this when there is a commencement of proof which shows that the common intention of the parties was other than what was set out in their written contract.  Second, Nearctic argued that the relief granted by the arbitrator was beyond his jurisdiction because it amounted to an injunction, which is a remedy reserved to the Superior Court of Quebec.

The matter came before the Honourable William Fraiberg of the Superior Court, who presided over a two week hearing and issued what has been described by learned commentators as a “very rich and thoroughly reasoned decision”² in which he ruled that an arbitrator has the same ability as a judge to interpret and apply contracts, in the latter case by issuing orders of specific performance, which are not injunctions.

The Judgment of the Québec Court of Appeal

Nearctic brought the case to appeal on leave and the Court of Appeal issued its ruling on February 29, 2012.  In the result, the Court of Appeal upheld the judgment below and refused to vacate the arbitration award.

Specifically at issue before the Court of Appeal was whether an arbitrator could seek the common intention of the parties outside of the four corners of their written contract, when the evidence revealed that the written contract did not adequately set out the agreement between the parties. Canadian Royalties argued in the affirmative, and advanced the position that arbitrators were afforded the same interpretative license as judges. Nearctic Nickel Mines’ position was that the arbitrator was, in contrast to a judge, held to apply the written instrument. To depart from the text, according to Nearctic Nickel, was tantamount to rewriting the agreement between the parties, which is specifically prohibited by Article 944.10 of the Code of Civil Procedure (“CCP”), which provides that arbitrators must “in all cases decide according to the stipulations of the contract.”

The Court of Appeal took the opportunity to revisit its findings in the leading case Coderre v. Coderre, and stated that Coderre did not stand for the proposition that an arbitrator cannot resort to interpretation to determine the true intention of the parties. Such interpretation, however, must be undertaken in accordance with the applicable rules of law. Moreover, according to the Court of Appeal:

Intentionally inaccurate interpretation is without question an excess of jurisdiction, as is interpretation devoid of any reasonable foundation. Hence, an arbitrator cannot pretend to determine the true intentions of the parties while, as a matter of fact, modifying their rights by adding to or removing from the agreement obligations which are the result of the meeting of the parties’ minds.

Once the arbitrator interprets the contract and renders his award, deference is owed by the court to the conclusions he comes to.  According to the Court, “the judge […] [must limit] his intervention once he [is] convinced that the Arbitrator’s reasoning followed the path of interpretation.”

On another important legal issue, the Québec Court of Appeal held that arbitrators had the power to render orders of specific performance to force a party to perform its contractual obligations.  The Court of Appeal thereby reaffirmed its findings in Services Bérubé Ltée,that an injunction is only required where there is a real possibility that compliance with the order sought could only be ensured by State imposed penal consequences in the event of non-compliance. Drawing the distinction between orders of specific performance and injunctions, the Court of Appeal made the following remarks:

In order to appreciate whether an arbitrator issued a particular order which would be tantamount to an injunction, one should look at the commercial agreement, determine the true intention of the parties and decide whether, in light of all the circumstances, the pith and substance of the order truly constitutes an injunction with all of its know penal implications or whether it is more of a declaratory nature which serves the purpose of giving full effect to the Arbitrator’s determination of the parties’ rights.

Conclusion

The Court’s judgment is important in at least three respects. First, it confirms that an arbitrator has the same leeway as a judge to interpret contracts.  If Quebec law applies to the contract, the same rules of interpretation apply before the arbitrator in the same way as they would before a judge.  Second, even in the absence of specific contractual or legislative language to this effect, arbitrators have the power to compel parties to comply with their contractual obligations by issuing orders of specific performance.  Until Service Bérubé and the present case, this was a hotly debated issue.

Finally, the judgment recognizes the limited scope of review available to a judge once an award has been rendered.  A judge asked to vacate the award can only do so in extremely limited circumstances, and certainly cannot reconsider any decision made by the arbitrator on the merits.  In the face of a claim that the arbitrator “re-wrote” the contract in the guise of interpretation, a judge must simply assess whether the arbitrator “followed the path of interpretation” and not whether the interpretation was correct.