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Canada – Agreement Giving One Party Privileged Position to Designate Arbitrator Subject to “Blue-Pencil” Severance

by Daniel Urbas

October 2020

Daniel Urbas

This article first appeared on Urbas Arbitral, here.

In Caron v. 7834101 Canada inc. (Triviom à Charlemagne), 2020 QCCS 2859, Mr. Justice Stéphane Lacoste severed a portion of an agreement to arbitrate which violated the rule against places one party in a privileged position with respect to the designation of the arbitrator.  Rather than declare null the entire agreement to arbitrate, as had an earlier court when faced with the same agreement, Lacoste J. struck the provision, likening the relief to the “blue-pencil” severance explained and applied in Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6 (CanLII), [2009] 1 SCR 157.  To do so, Lacoste J. combined article 2641 and 1438 of the Civil Code of Québec, CQLR c CCQ-1991 and, having done so, referred the parties to arbitration.

Plaintiff and Defendant entered into an April 14, 2017 agreement for the construction and sale of a condominium unit (“Condo Contract”).  Despite a promised November 2017 date of delivery, the unit had yet to be delivered. Plaintiff had since October 2017 occupied another unit lent free of charge by Defendant.

In response to a letter from Defendant requesting that Plaintiff either leave the lent unit or pay rent, on July 23, 2020 Plaintiff filed an action in Superior Court.  In her action, Plaintiff sought orders authorizing her continued occupation of the lent unit, without cost and requiring Defendant to complete the work on the unit purchased, transfer title to the unit purchased and pay Plaintiff $190,000.00 damages.

Defendant responded by application for an order referring the parties to arbitration pursuant to the terms of their agreement to arbitrate contained in their Condo Contract.  Plaintiff resisted Defendant’s motion.  She argued that:

(i) the dispute regarding Plaintiff’s ongoing use of the lent unit was not within the jurisdiction of the arbitrator and could not be dissociated from the balance of the dispute which therefore required dismissal of Defendant’s declinatory motion;

(ii) Defendant was foreclosed from requesting referral to arbitration because it had renounced to that right in writing April 29, 2020;

(iii) Defendant’s reliance on the agreement to arbitrate was abusive given that the issue had been determined in an earlier decision involving Defendant in Saindon v. 7834101 Canada inc., 2015 QCCQ 682; and,

(iv) Plaintiff sought legal fees incurred in response to Defendant’s declinatory motion.

Lacoste J. turned first to the impact of the earlier court decision in Saindon v. 7834101 Canada inc., 2015 QCCQ 682 which involved a similar agreement to arbitrate binding Defendant and another of its clients.

The challenged passage in the agreement to arbitrate gave the Defendant control over the pool of choices of arbitrator.

[informal translation] ‘The arbitrator must be determined by agreement of the parties. Failing agreement on the identity of the arbitrator within 10 days following a request of a party to refer the dispute to the arbitration, [Defendant] may suggest the identity of 3 arbitrators and the Buyer must choose an arbitrator from among those’.

L’arbitre devra être déterminé d’un commun accord entre les parties. À défaut d’entente sur l’identité de l’arbitre dans les 10 jours suivant Ia demande d’une partie de référer le différent [sic] à l’arbitrage, l’Entrepreneur pourra suggérer l’identité de 3 arbitres et le Promettant-acheteur devra choisir un arbitre parmi ceux-ci”.

In the earlier Saindon v. 7834101 Canada inc., the Court of Québec had refused to grant Defendant’s declinatory motion because the agreement to arbitrate violated article 2641 of the Civil Code of Québec, CQLR c CCQ-1991 (“C.C.Q.”).

Article 2641 C.C.Q. A stipulation which places one party in a privileged position with respect to the designation of the arbitrators is null”.

Defendant did not appeal that January 22, 2015 decision but, despite that result and the reasoning, Defendant included the same agreement to arbitrate in the April 14, 2017 Contract between it and Plaintiff.

In response to Defendant’s declinatory motion, Plaintiff amended her pleadings to add two (2) allegations and one (1) conclusion:

70. The Arbitration Clause, more fully set forth at section 5.10 of the Contract, Exhibit P-1. Confers an unfair advantage to defendant in the selection of the arbitrator’s) an places Defendant in a privileged position with respect to the designation of the arbitrator(s) and is, in this respect, null and void as contravening a public order provision of law, namely, Article 2641 CCQ;

71. Moreover, without prejudice to that which is pleaded in paragraph 70 hereof, Defendant specifically renounced to arbitration as the exclusive reourse1jurisdiction for dispute resolution in the present case, the whole as more fully appears form the letter from Defendant’s attorney to Plaintiff, already communicated as Exhibit P-13;

DECLARE the Arbitration clause in section 5.10 of the Contrat préliminaire de vente de condominium (the “Contract”) entered into between Plaintiff and Defendant on April 14, 2017, null”[.]

(1) Inseparable disputes – Both parties argued that the agreement to allow Plaintiff to occupy the lent unit was inseparable from the Contract.  Plaintiff argued that this meant that the parties could not be referred to arbitration and Defendant argued that this meant that they had to be referred.  During oral submissions, Defendant undertook not to initiate expulsion proceedings without seizing the arbitrator of that question. Lacoste J. held that, in doing so, Defendant eliminated Plaintiff’s argument of urgency and the need for the Superior Court to consider issuing any injunctive relief.

Lacoste J. held that the parties’ will, expressed in the Contract, was clear and must be given its effect.  He held that the action, as framed by Plaintiff, qualified as a dispute within the meaning of their agreement to arbitrate.

(2) Alleged waiver – Regarding Defendant’s alleged waiver of the agreement to arbitrate, Lacoste J. considered the wording in the April 29, 2020 letter and determined that it fell short of the clear and unequivocal renunciation required.  He dismissed this ground raised by Plaintiff.

(3) Abuse of procedure – Plaintiff argued that Defendant’s declinatory motion constituted an abuse of proceeding because the Court of Québec had already determined that the agreement to arbitrate was null, due to the violation of article 2641 C.C.Q.  She acknowledged that there was no res judicata due to the lack of identity of the parties but invoked the theory of abuse of procedure set out in Construction S.Y.L. Tremblay inc. v. Agence du revenu du Québec, 2018 QCCA 552 and G.J. v. Auguste, 2019 QCCS 1267 following Toronto (City) v. C.U.P.E., Local 79, 2003 SCC 63 (CanLII), [2003] 3 SCR 77.

Defendant objected to the characterization, specifying that the earlier decision did not consider its new argument, made before Lacoste J., that the agreement to arbitrate was divisible.  It would be unfair for the court to deprive Defendant of its right to raise the argument for the first time.

Despite finding Plaintiff’s argument ‘seductive’, Lacoste J. distinguished the result and reasoning in the earlier decision from the application before him.  In Saindon v. 7834101 Canada inc., the issue was the application of article 2641 C.C.Q. to the entire agreement to arbitrate, making the issue an ‘all or nothing’.  In the case before him, Defendant acknowledged that the agreement violated article 2641 C.C.Q. but that one must apply article 1438 C.C.Q.

Article 1438 C.C.Q. A clause which is null does not render the contract invalid in other respects, unless it is apparent that the contract may be considered only as an indivisible whole.

The same applies to a clause that is without effect or that is deemed unwritten”.

Lacoste J. agreed with Defendant that article 2641 C.C.Q. did not render the agreement to arbitrate null in its entirety.  By applying article 1438 C.C.Q., Lacoste J. hived off the portion which placed Defendant in a privileged position with respect to the designation of the arbitrator.  He held that it could be severed from the agreement to arbitrate which, by analogy, the Court of Appeal had done regarding a servitude in Zhang v. Bell Canada, 2018 QCCA 1582.  See also Nadeau v. Habitations Jeandami inc., 2019 QCCS 5273.

Lacoste J. observed that the approach in Civil Law was not unique and reflected the approach taken in Common Law, referring to the “blue pencil” approach commented on in Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6 (CanLII), [2009] 1 SCR 157.

(4) Default approach to naming arbitrator – Lacoste J. held that striking out the passage in the agreement to arbitrate gave automatic application to articles 624 and 625 of the Code of Civil Procedure, CQLR c C-25.01 (“C.C.P.”).

Article 624 C.C.P. The parties appoint an arbitrator to decide their dispute. They do so by mutual agreement, unless they ask a third person to make the appointment.

The parties may choose to appoint a panel of arbitrators, in which case each party appoints one arbitrator, and the two so appointed appoint the third.

If an arbitrator must be replaced, the procedure for the appointment of an arbitrator applies.

Article 625 C.C.P. If the appointment of an arbitrator proves difficult, the court, on a party’s request, may take any necessary measure to see to the appointment.

For example, if a party fails to appoint an arbitrator within 30 days after having been required by another party to do so, the court may make the appointment. As well, the court may appoint an arbitrator if, 30 days after two arbitrators are appointed, they cannot agree on the choice of the third arbitrator”.

urbitral notes – First, the agreement to arbitrate contained two (2) mentions of the choice to be made by Defendant: one for the appointment of a mediator and one for the appointment of an arbitrator.  The reasons at para. 42 and the conclusions at para. 52 both mention the choice of the mediator and that the choice be struck from the agreement.  The reasoning and the legislation referred to deal instead with the choice of the arbitrator.

Second, regarding “blue-pencil”, the Supreme Court made the following comments:

[2] Severance, when permitted, appears to take two forms. “Notional” severance involves reading down a contractual provision so as to make it legal and enforceable. “Blue-pencil” severance consists of removing part of a contractual provision.  For reasons I set out below, notional severance is not an appropriate mechanism to cure a defective restrictive covenant.  As for blue-pencil severance, it may only be resorted to in rare cases where the part being removed is trivial, and not part of the main purport of the restrictive covenant.  These circumstances are not present in this case and hence the ambiguity cannot be cured by severing the word “Metropolitan””.

The Supreme Court cautioned:

– at para. 32 that it “must be recognized, however, that the court is altering the terms of the original contract between the parties by applying the doctrine of severance, whether blue-pencil or notional”; and,

– at para. 49, that blue-pencil severance must be applied narrowly and only in particular circumstances.

At para. 29, when referring to the dissent at para. 57 in Transport North American Express Inc. v. New Solutions Financial Corp., 2004 SCC 7 (CanLII), [2004] 1 SCR 249, the excerpt reminds that, when applying the blue-pencil, the court must not affect the meaning of the part which remains.

Under the blue-pencil test, severance is only possible if the judge can strike out, by drawing a line through, the portion of the contract they want to remove, leaving the portions that are not tainted by illegality, without affecting the meaning of the part remaining.  In other words, the offending provision must constitute a separate promise, and one that is not part of the main purport and substance of the contract.  The provision must appear severable”.

Third, the parties retained their ability to agree on an arbitrator and, absent agreement, apply to the court for the appointment of an arbitrator under article 625 C.C.P.

 

 

 

Daniel Urbas is an experienced litigator, arbitrator and mediator with over 25 years of dispute resolution experience. He has earned a variety of repeat, annual peer recognitions including “Leading Lawyer” in “Commercial Arbitration” in the 2019 edition of the Lexpert ® / American Lawyer Guide to the Leading 500 Lawyers in Canada, “Most Frequently Recommended” in the 2019 edition of The Canadian Legal Lexpert® Directory for Commercial Arbitration, “Thought Leader” in 2019 edition of Who’s Who Legal – Litigation and AV® Preeminent™ by Martindale-Hubbell®.
 

Daniel focuses exclusively on serving as an arbitrator and mediator.  As arbitrator, Daniel serves as a sole arbitrator, as chair or as party-nominated member of three (3) member arbitration tribunals. His appointments have been made by individual parties, by the parties jointly on consent, by court orders and by various administering institutions including ICC, CCAC and IATA.
 

A Fellow of the Chartered Institute of Arbitrators (“CIArb”) based in London, UK, as well as a founding Director of the CIArb’s Canada Branch, Daniel is listed on various rosters including general commercial rosters organized by the ICDR, CIETAC and BCICAC and on more specialized, industry/activity specific rosters such as the Canada Transport Agency’s roster.

 

Daniel’s dispute resolution experience spans a variety of commercial and civil matters, intellectual property (including anti-piracy and anti-counterfeiting litigation) and information technologies, energy (wind, bio), natural resources (mining, forestry, fishing), shareholder disputes, real estate and lease disputes, product liability, construction, distribution and franchise, Aboriginal law matters including treaty and land claims litigation and dispute resolution of agreements relating to governance and natural resource development on native peoples’ territories.

 

He handled trial and appellate advocacy, as well as urgent and extraordinary applications. He has appeared before the provincial and federal courts, including the Supreme Court of Canada, as well as before arbitration tribunals and various administrative tribunals. Fluently bilingual in both English and French with degrees in both Common Law and Civil Law, Daniel is an active member of the Barreau du Québec, the Law Society of Ontario and the Law Society of British Columbia.  At his former national law firm, up until June 2017, Daniel served as Regional Leader of the International Trade Litigation and Arbitration group and Regional Leader of the Intellectual Property Litigation group. Formerly, Daniel was also Regional Leader of the Commercial Litigation group and National Leader of the Intellectual Property Litigation group.



Website: urbas.ca

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