The Québec Superior Court recently reaffirmed the fundamental principles of international arbitration law, including the importance of the principle of audi alteram partem. The court also recognized that an arbitral tribunal may terminate arbitral proceedings in situations where it finds the continuation of proceedings unnecessary or impossible.

On December 8, 2008 Justice Joël A. Silcoff of the Québec Superior Court rendered two decisions (presently under appeal) after hearing three motions requesting the annulment of two international arbitration awards issued in 1996 and 1997 by the same arbitration panel. The motions stemmed from a protracted dispute between Louis Dreyfus S.A.S. (Dreyfus), a French company, and Holding Tusculum B.V. (Tusculum), a Dutch company, about their shareholding interests in a German company (Beta) which owned a refinery in Germany.

Pursuant to an arbitration clause in the shareholders’ agreement (the Agreement) that governed the parties’ relationship concerning Beta, Tusculum filed a notice of arbitration at the International Chamber of Commerce (ICC) on November 10, 1993. The ICC convened an arbitral tribunal (Tribunal) and chose Montréal as the seat of the arbitration.

Judgment on Dreyfus Motion

The first motion was filed by Dreyfus in February 1996, shortly after the Tribunal had issued a partial award dismissing all claims of both parties. Without first consulting the parties, the Tribunal had also terminated their relationship on the basis that the Agreement’s purpose had been frustrated and devised a remedy according to which Dreyfus had to purchase Tusculum’s interest in Beta further to a valuation procedure.

This motion dealt with the violation of due process and lack of authority of the arbitrators to act as amiable compositeur. While recognizing the great flexibility and procedural freedom in arbitration proceedings, Silcoff J. confirmed the importance for the Tribunal to respect the audi alteram partem rule. The court noted that both Dreyfus and Tusculum were surprised by the Tribunal’s decision to terminate their relationship and that neither party was given the opportunity to present arguments about the termination or, more importantly, about the ad hoc buyout and valuation remedy fashioned by the Tribunal.

The court ruled that the Tribunal had not been asked to decide if and how the parties’ relationship should be terminated. Accordingly, the Tribunal had violated the audi alteram partem rule.

The court also confirmed that arbitrators can only act as amiable compositeur when specifically authorized by the parties to do so. By fashioning a buyout and valuation remedy as a means to “find a just solution,” the Tribunal had acted as an amiable compositeur without the parties’ consent. This action amounted to a failure to observe the applicable arbitration procedure.

Judgment on Tusculum Motions

The other motions, filed by Tusculum in April 1996 and September 1997, raised arguments about the principles of functus officio and res judicata, and the violation of applicable arbitration procedure. Even though Silcoff J. entirely granted Dreyfus’s motion, he nevertheless addressed the issues raised in the latter motions “for the benefit of appellate courts, should the need arise.”

The court ruled that Tusculum’s first motion (challenging the Tribunal’s order stating that the buyout and valuation process was not “finally determined” and that it could “reconsider the terms and conditions of the resolution of the relationship”) became moot because of the events following the issuance of the order – namely, the bankruptcy of Beta and the issuance of the Tribunal’s final award on May 29, 1997.

Tusculum’s second motion was aimed at annulling the Tribunal’s final award which had ruled that Beta’s German bankruptcy proceedings (which had been opened on April 30, 1996) had terminated the parties’ relationship and that the buyout and valuation remedy was therefore moot. Tusculum argued that the Tribunal had performed its mandate in issuing its partial award and could not reconsider its decision. Tusculum argued, in essence, that both the order and the final award violated the res judicata principle and were therefore against public policy.

The court ruled that the Tribunal was justified in taking into consideration the effect of the bankruptcy and that it would be contrary to public policy to seek the execution of the buyout and valuation remedy when the decisions of the German bankruptcy court had rendered said remedy impossible to execute and essentially moot.

More particularly, based on the expert evidence submitted, the court determined that the principle of res judicata and the conclusive or preclusive effects of an arbitral award are not generally recognized as a rule of international public policy. The court ruled that the analysis of this ground of annulment must focus on the “outcome” or the “actual result” reached by the Tribunal.

Furthermore, the court concluded that a violation of applicable arbitration procedure must be narrowly defined and that only a flagrant breach, such as a violation of due process, could justify annulment. Since Tusculum had the opportunity to present its arguments concerning the issues dealt with in the Tribunal’s final award, the court also rejected Tusculum’s other ground of annulment based on the violation of applicable arbitration procedure.

Significance

The two decisions by the Québec Superior Court are in line with recent arbitration decisions of the Supreme Court of Canada and international arbitration law. The two decisions also confirm that, in choosing Montréal as the seat of arbitration, commercial parties may be assured that Quebec courts will uphold and safeguard the most important tenets of international arbitration and intervene where to do so is justified. The court’s reference to national and international sources in analyzing the grounds for annulment of international arbitration awards renders these judgments relevant throughout Canada and internationally.