Foreign Suppliers can Play Hard Ball in CCAA Proceedings

Foreign critical suppliers, if located in a country where enforcement of a Canadian judgment would be difficult, may be able to require payment in full despite an order in a CCAA proceeding requiring suppliers to the debtor company to continue supplying goods.   Such was the recent decision of Brown J. in ReNorthstar Aerospace.  Changsha Zhongchuan Transmission Machinery Co. Ltd. (“Changsha”) refused to ship certain components to Northstar Aerospace Inc., despite an order to do so, unless paid US$135,266 for certain pre-CCAA- filing shipments.  Without Changsha’s products, the debtor could not continue to operate, and a sale of the debtor would abort.  No practical alternative source for the goods existed. No creditor opposed an order for Changsha to be paid. 

Justice Brown, noting that enforcement of the order against Changsha could not occur in a timely fashion, acknowledged that allowing payment amounts to “rewarding the improper conduct by a critical supplier who has ignored an order of this court”  and to “countenancing a form of hard-ball queue jumping”. That said, the only practical course of action to keep Northstar operating pending closing of the sale of Northstar was to ensure continued supply from Changsha by paying it.    

Orders of the type issued against Changsha, namely an injunction (to continue supplying  Northstar) as opposed to an order for payment of damages, are enforceable as a foreign judgment in very few jurisdictions outside Canada.   In other words, suppliers in many countries can consider the hard ball strategy Changsha successfully deployed against Northstar.  However, this is not an option for suppliers in other Canadian provinces.

In the result, the funds available to pay the debts of Northstar’s creditors, including other suppliers that continued to supply Northstar at their financial risk, was reduced by US$135,266.

This outcome highlights the need for Canada to negotiate treaties to ensure that Canada’s openness to enforcement of judgments is matched by its trading partners.   In the six years since the Supreme Court of Canada repealed the ban on enforcement of foreign non-monetary judgments in ProSwing Inc. v Elta Golf,  Canadian courts have enforced several such judgments, and have rarely refused to enforce them.   Few countries besides Canada will enforce foreign non-monetary judgments at all.   Enforcement of a Canadian judgment in the People’s Republic of China, even one for damages only let alone one for a mandatory injunction, is practically impossible.   The B.C. Supreme Court recently ruled that enforcement of foreign arbitral awards in that country is “irregular”, despite being a signatory to the New York Convention: see Blue Horizon Energy v. Ko Yo Development andGuangan Lotusan Natural Gas Chemical

Procedure for Enforcing a Quebec Judgment In Ontario

At first glance, an application seems clearly a better choice than an action for enforcing a foreign judgment, absent any indication of any viable defence to enforcement.  After all, the court will not be considering the merits of the foreign judgment -- those issues are all res judicata – and an application is available where it is unlikely that there will be any material facts in dispute (see Rule 14.05 (3) (h) of the Ontario Rules of Civil Procedure).  Discoveries are not necessary. 

However, the Superior Court of Justice recently dismissed such an application, ruling that a proceeding to enforce a judgment from a non-reciprocating jurisdiction such as Quebec must be brought as an action: see Noelet Associes v. Sincennes [2012] O.J. No. 3742 (P.B. Kane J.).  The case departs from previous decisions that clearly stated that such proceedings may be brought by application:  see for example, Commission de la Construction v. Access Rigging (2010), 104 O.R.(3d) 313 (S.C.J.), Nuvex Ingredients v.Snack Crafters (2005), 74 O.R. (3d) 397 (S.C.).  See also the recent case of Blizzard Entertainment v. Simpson [2012]O.J. No. 3807 (proceeding to enforce a judgment from California, a non-reciprocating jurisdiction, brought by application), and Cross Border Litigation – Interjurisdictional Practice and Procedure, by Kenneth MacDonald, at p. 272. 

            The Court in Noel explained that when one sues to enforce a foreign judgment, in fact one is suing to enforce a debt based on an implied promise to pay the foreign judgment, and that an application is not available to enforce a debt.  As such, Rule 14.02, which states that every proceeding shall be by action, as opposed to an application, unless the rules or a statute provide otherwise, bars the use of an application for enforcement of a foreign judgment. With respect, there is no reason why a proceeding to collect a debt cannot be brought by application, provided it is unlikely that there will be any material facts in dispute.    In Noel, it was abundantly clear that there were no facts in dispute -- no one appeared for the respondent. 

            The Court said its ruling does not apply to judgments from reciprocating jurisdictions because they can be enforced after registration, pursuant to the Reciprocal Enforcement of Judgments Act, R.S.O. 1990, ch. R.5.   However, the Court overlooked the fact that for enforcement of judgments even from reciprocal jurisdictions, a proceeding will be brought if the judgment debtor asserts a defence to enforcement.  Based on the reasoning in Noel, presumably the creditor would have to proceed by action.   That statute, on the other hand, permits a judgment debtor with a defence to enforcement to use an application to set aside registration – see s. 6.

            The take home message from Noel is that even though a proceeding to enforce a foreign judgment may be well suited for an application, a creditor runs the risk of dismissal, and thus an action may be the safer choice.  

India Abolishes Its Power to Set Aside Foreign Arbitral Awards

For many years, India has been considered somewhat of a outlier in international arbitration circles because of its courts’ power to set aside foreign-seated awards, despite the New York Convention.  The Indian Supreme Court ruled a few weeks ago, in Bharat Aluminum v. Kaiser Aluminum, that Part I of the Indian Arbitration Act does not apply to international commercial arbitration awards issued outside India. Practically, this means that Indian courts will no longer have power to set aside such awards.  Until now,  this power was applicable unless the arbitration agreement excluded it.  (This power will continue for awards issued in India).  This power has been used, for example, to set aside awards after the Supreme Court decided in 2003 that awards that conflicted with Indian law are contrary to public policy and thus unenforceable.   With this ruling, the Supreme Court has endorsed the UNCITRAL Model Law principle that the law of the seat of the arbitration governs the conduct of the arbitration, and annulment actions are generally not brought outside the arbitral seat. 

Unfortunately, this ruling also means that other Part I powers such as to issue interim relief and interim injunctions to preserve assets will also no longer apply to foreign-seated arbitrations. 

This ruling affects only arbitrations arising from arbitration agreements signed after the ruling.  Thus the Part I powers will continue to be applicable to foreign seated awards for some time to come.

Hague Conference Resumes Work on its Judgment Convention

             The Hague Conference on Private International Law has announced that it plans to resume work on its long moribund Convention on the Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters (the Judgment Convention).  Only five countries have ever ratified or acceded to this convention, which was concluded in 1971 and came into force in 1979.   

            The need for such a convention remains as great as ever.  Several countries that are prominent in international trade do not recognize foreign judgments except on a reciprocal basis, including the People’s Republic of China.

At the fall meeting of the International Section of the ABA held earlier this month,  Prof. Louise Ellen Teitz of the Hague Conference announced that work on the Judgment Convention is to resume.  Attention will be given to the provisions regarding the procedures for enforcement. 

Current projects at the Hague Conference include one pertaining to draft principles on choice of law in commercial contracts.

Corporate Veil Pierced to Enforce Forum Selection Clause

The recent Ontario Court of Appeal decision in Downey v. Ecore International  [2012] O.J. No. 3086 suggests that the courts’ pro-enforcement policy toward forum selection clauses (“FSC’s”) goes beyond the presumption of enforceability approach laid down by the Supreme Court of Canada in ECU Line v Z I Pompey Industrie. The Supreme Court decided there that FSC’s are to be enforced unless there is  “strong cause” on the facts of a particular case not to enforce them.  Downey strongly signals that  a court will even pierce the corporate veil if necessary in order to give effect to an otherwise enforceable FSC.   

The Facts

The facts are that Ecore, a Pennsylvania company, offered Paul Downey employment.  Downey arranged instead, for tax reasons, for a contract between his consulting company CSR and Ecore, whereby CSR would provide Downey’s services to Ecore.  Ecore signed the consulting agreement with CSR, not Downey.  This agreement required CSR to sign a confidentiality agreement.  CSR never signed one, but Ecore had Downey sign one in his personal capacity on his first day at work in 1999.  That agreement did not mention CSR at all, and referred to Downey as an employee, contrary to the consulting agreement. That confidentiality agreement contained an FSC that required Ecore and Downey to litigate in Pennsylvania any action that “in any way relates to [Ecore’s] business relations with the Employee”.    The consulting arrangement continued from 1999 to 2011; the parties never replaced it with an employment agreement with Downey personally.  In 2011, Downey sued Ecore in Ontario, in his personal capacity, to enforce a separate 2001 assignment agreement between Downey and Ecore pertaining to a product he had invented then assigned to Ecore.  Ecore moved to stay that action, saying that the invention was governed by that confidentiality agreement and thus the FSC should apply. 

The motion court dismissed the motion on the ground that the FSC was invalid because the confidentiality agreement lacked consideration for Downey, in that the recipient of the confidential information would be CSR, not Downey himself.  That court held that but for the lack of consideration, the FSC would have been enforceable in that it covered the subject matter of the dispute and there was no strong cause not to enforce it.

The Appellate Ruling

The Court of Appeal held unanimously that Downey did get consideration under the confidentiality agreement, and that therefore the FSC is valid and the action should be stayed.   The consideration for Downey was that he gained access to Ecore’s proprietary, confidential information which was necessary if the services under the consulting agreement were to be provided, which “thereby permitted Downey, both personally and through CSR, to realize the benefits of the Consulting agreement”.  The Court stated the “de facto relationship between the parties was between Downey and Ecore”, having regard for the intentions of the parties as shown by the two agreements read together as a whole.  The consulting agreement identified Downey as being a “Key person”.   The parties must have intended the confidentiality agreement to bind Downey personally because as a practical matter it would be Downey who would actually receive Ecore’s confidential information.   The Court called the consulting arrangement with CSR “simply a tax device”. 

Comment

If the relationship was between Ecore and CSR, not Downey, the benefit of the confidentiality agreement would go to CSR, not Downey, and the FSC would not be enforceable.  The ruling that the de facto relationship between the parties was between Downey and Ecore is at odds with the law as to when courts will disregard separate corporate personality.  According to Anthony VanDuzer’s book The Law of Partnerships and Corporations (2^nd edition, 2003), courts will disregard separate corporate personality on three grounds:  a.) that to not do so is “flagrantly opposed to justice”; b.) that the corporation was created for an improper purpose, typically fraud, or c.)  that the corporation is merely an agent for a person or other corporation that completely dominates the first corporation and that corporation has been set up for an improper purpose.  None of these grounds apply here; Downey’s purpose for setting up CSR was certainly not improper.  The Court did not clearly explain which of these three grounds supported its ruling.   The inconsistencies between the consulting agreement and the confidentiality agreement (i.e. that the latter makes no mention of CSR and refers to Downey as an employee) and the fact the consulting agreement stated that the confidentiality agreement was supposed to be with CSR, not Downey, indicate the confidentiality agreement probably named Downey in error.   The fact that the Ecore-CSR consulting agreement continued for over eleven years is a further indication that the de facto relationship was between Ecore and CSR, not Downey.

The fact the confidentiality agreement arguably applied to the subject matter of the action likely carried great weight in the decision to find that agreement and its FSC valid.   Downey v. Ecore tells us that courts will go to considerable lengths to find an FSC enforceable.

Internal CEITAC Dispute Causes Confusion

             My May 18, 2012 post covered the new procedural rules of CEITAC, which went into effect on May 1, 2012.  Since then, a dispute has arisen between the head office of CEITAC and its Shanghai Sub-commission and its South China Sub-commission (earlier known as the Shenzhen Sub-Commission).  Last month the head office of CEITAC announced that because these two sub-commissions have not abided by the new rules, they are not permitted to take on or administer any CEITAC arbitrations.  The disputes are to be submitted instead to the CEITAC secretariat for it to administer.  The arbitration hearings will still take place in Shanghai and Shenzhen, as per the parties’ arbitration agreement.

It is said that the sub-commissions have taken exception to a new rule that says that where the arbitration agreement does not clearly specify the sub-commission, the choice of sub-commission will be made by the CEITAC secretariat.   The previous rule said it is the party commencing the arbitration who makes that decision.  

The sub-commissions have stated that they will continue to accept disputes for arbitration, and have established their own rules.  However, parties whose arbitration clauses require a CEITAC arbitration must consider whether arbitration by one of these sub-commissions absent CEITAC approval might undermine the validity and enforceability of the award.   

Recent Surge in Accessions to Hague Service Convention

The past few years have seen many accessions to the Hague Convention on the Service Abroad of Judicial and Extra-judicial Documents in Civil and Commercial Matters,  sponsored by the Hague Conference on Private International Law.  Columbia, Montenegro, Armenia have all acceded to the convention this year, and Moldova will next year.  In 2011,  Malta, Morocco, and Serbia acceded.  In 2010  Australia and Belize acceded, and  in 2010, and in 2009 another three – Iceland, Bosnia-Herzegovina and the former Yugoslav Republic of Macedonia acceded,  for a total of twelve new countries.

The convention  has been in force in most major trading nations and in most highly populated nations for several years, but this surge in accessions gives the Convention much needed momentum.    Too many important and populous nations have yet to accede, including Indonesia, Bangladesh and Singapore, and even Hague Conference members Brazil, Malaysia, and the Philippines.   Among  nations in the Middle East, a remarkable number  have yet to accede, including Saudi Arabia, Lebanon, Jordan, Bahrain, Yemen, the Sultanate of Oman, Qatar, Iran, Iraq, and – despite the importance of Dubai as an international centre -- the United Arab Emirates.   The convention is in force in Israel, Egypt and Kuwait.

Service of originating  process (e.g. statements of claim or notices of application) in non-Convention countries can be cumbersome.    In some of these countries,   personal service by a private process server  is illegal.   Instead, one must obtain letters rogatory. This is an instrument by which a Canadian court requests that the foreign country’s court permit service of the Canadian statement of claim.  The instrument is transmitted via diplomatic channels. Service of the claim can take a year or longer.   Even in countries where  service by private process server is not illegal, service by letters rogatory is nonetheless advisable if one intends to enforce the judgment in that country.