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Court Applies Arbitration Clause to Dismiss Class Action Launched in the Wake of Covid-19 Business Closures

Court Applies Arbitration Clause to Dismiss Class Action Launched in the Wake of Covid-19 Business Closures
February 26, 2021

On January 14, 2021, Justice Gary D.D. Morrison of the Superior Court of Quebec (Court), issued an important decision, declining jurisdiction over an application to authorize (certify) a class action (Application) brought by a restaurant owner (Bâton Rouge) against its insurer (Allianz) in the wake of COVID-19 and the government-mandated business closures that ensued. The Application was based on the business interruption (BI) coverage included in Bâton Rouge’s insurance policy with Allianz (Policy). The policy also contained a multi-tiered arbitration clause respecting coverage disputes. The Court ruled that it did not have subject matter jurisdiction over the dispute because it fell within the scope of that arbitration clause and that the dispute needed to be referred to an arbitrator.

Multi-tiered arbitration (or dispute resolution) clauses establish a series of escalating steps (negotiations between high-level executives of each party, mediation, etc.) leading to a binding arbitration if they have failed to yield a resolution to the dispute. These clauses have become popular in commercial contracts as they seek to leverage the upsides and mitigate the downsides of various forms of alternative dispute resolution mechanisms.

By declining jurisdiction on that basis, the Court not only dismissed the proposed class action at a preliminary stage but also confirmed that a multi-tiered dispute resolution clause may prevent a party from proceeding before Quebec courts. To be effective, the clause must qualify as a complete undertaking to arbitrate in that the dispute resolution process must end either with an out-of-court settlement of the dispute or a final and binding arbitration process.

THE PROPOSED CLASS ACTION

In its application, Bâton Rouge claimed under its BI coverage alleging that it suffered losses due to governmental orders forcing the closure of its restaurants or limiting their activities to take-out orders in the wake of COVID-19. Bâton Rouge sought to institute a class action on behalf of all similarly situated operators of restaurants and bars in Quebec who were denied BI coverage by Allianz. Allianz filed a “declinatory exception” asking the Court to decline jurisdiction over the dispute on the basis of a multi-tiered dispute resolution clause included in the Policy, pursuant to which the parties agreed to resolve coverage disputes first by mediation and then by final and binding arbitration.

THE JUDGMENT

A guiding principle of the Code of Civil Procedure of Quebec (Code) is the deference granted by the legislator to private dispute resolution mechanisms. Based on this guiding principle and the relevant provisions of the Code, the Court concluded that it had to decline jurisdiction and refer the dispute to a mediator and, if it could not be resolved amicably, to an arbitrator. The Court found that the dispute resolution clause was mandatory, clear, unambiguous, as well as final and binding. In other words, it constituted a complete undertaking to arbitrate respecting the subject matter of the dispute. The fact that the clause was multi-tiered did not affect its validity.

Bâton Rouge argued that the Policy was at best ambiguous in that regard since it also included a clause stating that “[t]he Courts in the Court District in which the Named Insured is located shall have exclusive jurisdiction in case of a coverage dispute.” The Court concluded that, in the face of the arbitration clause, this clause did not give it subject matter jurisdiction over the dispute but only dealt with the issue of territorial jurisdiction.

The Court underlined that both the Quebec Court of Appeal and the Supreme Court of Canada have determined that arbitration clauses do not violate public order even in cases where a plaintiff seeks to bring a class action against the defendant.

Finally, the Court refused to accept Bâton Rouge’s argument based in equity to the effect that declining jurisdiction over the proposed class action would compel each insured to proceed by way of individual mediation and arbitration, as “class arbitrations” are not recognized in Quebec law. Bâton Rouge argued that this would be costly and lengthy, and that it would discourage class members from exercising their rights. The Court ruled that subject matter jurisdiction over a dispute “is a matter of public order […] not a matter of equity.”

Thus, Bâton Rouge was unsuccessful in demonstrating that the multi-tiered dispute resolution clause was illegal or contrary to public order, or that it was not a complete undertaking to arbitrate, which led the Court to decline jurisdiction over the proposed class action. Given that the arbitration clause was included in every Policy concluded with class members, the Court found that the Application became moot and dismissed it as a whole.

CONCLUSION

It did not take long for the Bâton Rouge decision to be cited in other cases. Recently the Court cited Bâton Rouge to exclude certain businesses from a class action because their agreements included an arbitration clause.

Quebec law recognizes the validity of arbitration agreements even in the face of applications to authorize (certify) class actions, save in exceptional cases specifically identified by the legislator such as consumer claims. The issue is one of public order that goes to the very jurisdiction of the Court over the dispute and thus cannot be affected by equity considerations. In Bâton Rouge, the Court confirmed that multi-tiered alternative dispute resolution clauses will have the same effect as “pure” arbitration clauses insofar as they qualify as complete undertakings to arbitrate. The inclusion of arbitration or multi-tiered alternative dispute resolution clauses in commercial agreements should be seriously considered as a means of effectively dealing with potential disputes and managing the risk of disruptive class action proceedings.

The Bâton Rouge decision will soon be reviewed by the Quebec Court of Appeal – a notice of appeal was recently filed by Bâton Rouge in this regard.

For more information, please contact:

Claude Marseille                     514-982-5089
Matthew Liben                        514-982-5091
Anthony Cayer                        514-982-4070

or any other member of our Class Actions group.