Quebec Superior Court held that internal arbitration appeal mechanisms do not violate public policy, do not derogate from the jurisdiction of the courts, and do not violate the principle of proportionality.

Facts

The Applicant, McLaren Automotive Incorporated (“McLaren”), based in Texas, is the exclusive automotive manufacturer and distributor of McLaren vehicles and parts in Canada. The Respondent, 9727272 Canada Inc. (“972”), is an automotive retailer based in Laval, Québec, that began doing business with McLaren in 2016.

The contract at issue was a Dealer Sales and Services Agreement (the “DSSA”), which contained the relevant arbitration agreement, but which McLaren never signed. The Parties entered into a conditional agreement in 2017, which laid out the steps to conclude the DSSA. In 2022, the Parties also entered into a McLaren Service Plan Agreement (the “SPA”) which provided for McLaren to be added to the DSSA.

In June 2023, 972 allegedly learned that McLaren was preparing to do business with a new retailer in Québec City. In response, 972 filed applications requesting mediation, interim remedies, and arbitration under the DSSA’s dispute resolution clause. McLaren opposed the requests on the basis that the DSSA was not binding between the Parties.

In August 2023, the arbitrator declined jurisdiction, primarily on the basis that the DSSA (and its dispute resolution provisions) had not entered into force because it had not been signed by McLaren. 972 appealed the arbitrator’s decision to a three-person arbitral “Appeal Committee”, a bespoke appeal mechanism created in the arbitration agreement in the DSSA. The Appeal Committee found that the original arbitrator erred by declining jurisdiction and returned the case for a decision on the merits.

McLaren then brought a motion before the Superior Court to institute proceedings and sought homologation of the arbitrator’s decision declining jurisdiction and sought a finding that the contractual appeal mechanism was invalid on public policy grounds.

Decision

The Court rejected McLaren’s arguments and dismissed the motion to institute proceedings. The Court found that McLaren was bound by the DSSA and its arbitration agreement because the Parties conducted themselves as if the DSSA was governing their relationship. Further, McLaren signing the SPA, which was an addition to the DSSA, signified that McLaren was party to the DSSA. The Court’s reasons, however, primarily focused on McLaren’s arguments that the arbitration agreement, particularly the appeal mechanism contained within it, violated public order.

First, McLaren argued that the right to appeal contained in the arbitration agreement illegally derogated from the jurisdiction of the courts in violation of article 622 of the Code of Civil Procedure (the “C.c.p.”), which provides that parties cannot derogate from the C.c.p. provisions that establish the courts’ jurisdiction. According to McLaren, the arbitration agreement, by creating a contractual right to appeal to another arbitral tribunal, sought to avoid the courts’ jurisdiction to review decisions of arbitrators.

The Court rejected this approach as unduly restrictive. Rather, so long as an arbitration agreement preserves the courts’ ultimate jurisdiction, a contractual appeal mechanism to a further arbitral tribunal is within the law. In coming to this conclusion, the Court noted that no article in the C.c.p. or the Civil Code of Quebec (the “C.c.Q.”) expressly prevents an arbitral appeal process. Further, according to article 2643 C.c.Q., so long as the C.c.Q.’s mandatory provisions are respected, an arbitration is governed by the relevant contract.  Here, the courts still had jurisdiction to review any decisions after the appeal process was completed, thus there was no attempt to derogate from the courts’ jurisdiction.

In support of this finding, the Court cited the explanatory note of the UNCITRAL Model Law on International Commercial Arbitration, on which Quebec’s arbitration provisions are based, which states that a party may appeal to an arbitral tribunal of second instance where the parties have so agreed. The Court also noted that the relatively widespread presence of appeal mechanisms within the arbitration process in various international arbitration institutional rules, and the desire for consistency across jurisdictions, militated in favour of allowing appeal mechanisms.

Second, McLaren argued that the right to appeal violated the principle of proportionality. The Court rejected this argument, finding that the principle of proportionality applies during arbitral proceedings themselves and not when the arbitration agreement is entered into. Further, the Court held that while a right of appeal can be abused, such a right cannot be said to be abusive or disproportionate in and of itself. As such, the Parties cannot be said to have been disproportionate by agreeing to an appeal mechanism.

Third, McLaren argued that the arbitration agreement violated public order because the appeal mechanism did not provide for the availability of French in the proceedings. The Court also rejected this argument, finding that McLaren waived its right to justice in French in the arbitration by providing in the arbitration agreement that the language of arbitration was English. In any event, McLaren did not articulate any injury associated with the alleged breach of the right to justice in French. McLaren did not request justice in French at any point during the arbitration and the relevant arbitration rules did not prevent access to justice in French if the parties had so chosen.

Finally, the Court rejected McLaren’s argument that the lack of a civil law trained arbitrator in the appeal process violated public order, noting that it is normal for arbitrators and jurists to have to consider and interpret legal traditions from other jurisdictions.

Analysis

The fundamental underpinning of arbitration is freedom of contract—the right of parties to choose how to resolve their disputes. The decision in McLaren Automotive is very much rooted in that principle, and it is difficult to disagree with the approach taken by the Court.

If the Parties did not want an appeal mechanism, they did not need to include one. If the Parties wanted arbitration in French, they could have provided for it. If the Parties wanted a civil law trained arbitrator, they could have made it a requirement. These are all decisions that parties regularly make. Instead, the Parties agreed to arbitrate, agreed to a contractual appeal mechanism, and agreed to proceed in English without the need that one or more of the arbitrators be trained in the Civil Law.

By rejecting the argument that arbitral appeal mechanisms violate public order, the Court reinforced the principle that parties are free to agree to the terms upon which they settle their disputes. In essence, the decision to include an appeal mechanism is a decision to add another layer to the arbitration process. As explained by the Court in this case, courts retain jurisdiction to review an arbitral award through the powers of enforcement and set aside, regardless of whether a first-instance or second-instance arbitral tribunal renders the award.

On a final note, the Court also took the opportunity in this case to highlight the importance of another principle of international arbitration: interpreting domestic arbitration law consistently with international trends. The actual prevalence of arbitral appeal mechanisms notwithstanding, it is significant that the Court used international trends as part of its reasoning. The UNCITRAL Model Law, the foundation for every Canadian international arbitration statute, calls for consideration of its international character when interpreting its provisions. Though perhaps a minor part of the Court’s reasons, it is significant that the Court opted to rely on international practice when it arguably did not need to in order to come to the conclusion that it did. Arbitration is an increasingly important mechanism of international commerce and recognition of that international character is critical to Canada’s growth as an arbitral seat.