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Court of Appeal of Quebec: Insurance Policy Arbitration Clause Trumps COVID-19 Class Action

By Nick Krnjevic, from our Insurance Law Practice Group

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November 3, 2021 — Multi-tiered “mediation-arbitration” clauses are increasingly popular since they not only offer flexibility in the manner of resolving disputes, but also provide a timely, cost-effective dispute-resolution option that enables the parties to proactively intervene in the early stages of the dispute.

The Court of Appeal of Quebec has rendered an important decision that enables insurance companies to use multi-tiered dispute resolution clauses to more efficiently manage commercial insurance coverage disputes, and effectively resolve their exposure to class actions brought by commercial insureds.

On October 26, 2021, speaking in 9369-1426 Québec Inc. DBA Restaurant Bâton Rouge v. Allianz Global Risks US Insurance Company, 2021 QCCA 1594, the Quebec Court of Appeal [the Court] rejected the appeal brought by putative COVID-19 coverage class action petitioner Bâton Rouge, and enforced the following mediation-arbitration clause found in a section of the Allianz commercial insurance policy entitled “Provincial Statutory Conditions Applicable to the Province of Quebec only”:

5. Dispute Resolution

In the event that the Insurer and the Insured(s) cannot agree concerning either the coverage or the quantum afforded by this Policy, it is agreed that the dispute shall be resolved in accordance with the dispute resolution process hereinafter described:

a. Mediation with a Mediator mutually agreed by the parties to the dispute. If the parties fail to concur on the choice of the Mediator, a Court shall appoint a Mediator on a Motion by one of the parties.

b. If settlement at Mediation is not possible, the dispute will be referred to Arbitration in accordance with the applicable Arbitration legislation/regulations in the jurisdiction in which the Policy is issued. The decision of the Arbitrator will be binding on all parties to the dispute with no right of appeal.

c. Each party shall bear its own costs and expenses in connection with the dispute resolution process. The costs and expenses of Mediation and Arbitration shall be shared equally by the parties to the dispute.

By agreement in writing, the Insurer and the Insured(s) may waive compliance with this section or any part thereof for purposes of a specified dispute. [Par 2; Emphasis added]

The insured petitioner had argued that an ambiguity arose because the clause conflicted with the following forum selection clause found in a section of the insurance policy entitled “General Terms and Conditions”:

2. Policy Jurisdiction

This policy shall be deemed to have been made under and shall be governed by the laws and decisions of the province or territory shown in the mailing address of the Named Insured, as it is shown in the “Policy Declarations”.

The Courts in the Court District in which the Named Insured is located shall have exclusive jurisdiction in case of a coverage dispute. [Par 3; Emphasis added]

The Court’s conclusions

First, the Court found the mediation-arbitration clause to be both mandatory and all-encompassing.

Secondly, the Court held that the judge seized of the class-action certification motion [the “Class Action Motion Judge”] is competent to rule on the application of an arbitration clause if the core issue involves interpreting a standard-form adhesion contract. Per the Supreme Court of Canada, speaking in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, [2016] 2 SCR 23, at par 24, interpreting such a contract is a question of law, the standard of review for which is correctness. By contrast, per the “competence-competence” principle, had the resolution of the arbitration clause question required more than a merely superficial consideration of factual issues, the Class Action Motion Judge would have had to refer the matter to the mediator/arbitrator to rule on his/her own competence.

Thirdly, the Court held that the Class Motion Judge had correctly conducted a full legal analysis of the arbitration issue, and not the prima facie review applicable to class action certification requirements.

Fourthly, the Court emphasized that “arbitration clauses — which must always be considered as legally distinct from the contracts in which they are embedded (article 2642 C.C.Q.) — are to be interpreted in a large and liberal manner.” [par 13] The Court rejected the “antiquated” view that arbitration clause ambiguity is to be resolved in favor of the civil courts; instead, the question is to be resolved by applying the traditional rules of contractual interpretation. As such, if the terms are ambiguous, “the analysis proceeds to a second step guided by the cardinal principle according to which ‘[t]he common intention of the parties rather than adherence to the literal meaning of the words shall be sought’” [par 14, quoting art 1425 of the Civil Code of Québec].

Fifthly, the Court disagreed with the Class Action Motion’s Judge’s conclusion that the policy’s jurisdiction clause unambiguously pertained solely to territorial jurisdiction. Given the absence of clarity as to both the scope of the second clause, and the relationship between the General Terms and Conditions and the “Quebec Only” conditions, the Court held that at the first stage of the analysis a conflict existed between the forum selection clause, which afforded exclusive jurisdiction to the Court of the district in which the insured was located, and the mandatory arbitration clause.

Sixthly, the Court held that this ambiguity was easily resolved at the second stage of the analysis when the clauses were read in the context of the policy as a whole. “[T]he forum selection clause was intended to apply only in common law provinces and territories, while the arbitration clause was intended to apply in Quebec.” [par 20] This conclusion was consistent with the rules of contractual interpretation which provide that the specific prevails over the general, and the clauses are to be construed in a manner that gives effect to each.

Finally, the Court noted that contra proferentem — which was the only interpretative rule that supported the insured’s position — “is only applicable when an ambiguity remains unresolved after other rules of interpretation have been applied, which is not the case here.” [par 21]

This is an important ruling for insurers, who should increasingly consider adopting multi-tiered dispute resolution clauses in order to both flexibly manage their insurance coverage disputes, and effectively control their commercial class action exposure.