International commercial arbitration in Canada operates under a well-developed legal framework designed to promote the use of arbitration and minimise judicial intervention. Canadian courts have consistently upheld the integrity of the arbitral process; recent case law has further established Canada as a leader in the development of reliable jurisprudence relating to the UNCITRAL Model Law on International Commercial Arbitration (the Model Law) and the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) by giving broad deference to the jurisdiction of arbitral tribunals and supporting the rights of parties seeking to enforce international arbitral awards. Canadian courts have also been instrumental in supporting the arbitral process when necessary.
UNCITRAL adopted the Model Law in 1985, and Canada and its provinces were the first jurisdictions in the world to enact legislation expressly implementing the Model Law. At the time, however, Canada’s provinces were not uniform in adopting the Model Law and a number of provinces deviated from it in certain respects. The lack of complete uniformity among the provinces led to some discrepancies in how the courts addressed arbitration issues. Nevertheless, there was broad acceptance of international commercial arbitration as a valid alternative to the judicial process and a high level of predictability for parties to international arbitrations in Canada and those seeking to enforce international awards in Canada.
In late 2011, a working group of the Uniform Law Conference of Canada (the ULCC) commenced a review of the existing model International Commercial Arbitration Act, with a view to developing reform recommendations for a new model statute. Catalysed by the 2006 Model Law amendments, the review process also sought to reflect changes to international arbitration law and practice in the past three decades and to enhance the uniformity and predictability with which international commercial arbitral awards may be enforced in Canada. In 2014, the ULCC approved the working group’s final report, which included a proposed new uniform International Commercial Arbitration Act for implementation throughout Canada.
Among other things, the new model statute adopts all of the 2006 Model Law amendments (except option II for article 7), including those that broaden the jurisdiction of courts and arbitral tribunals to order interim relief. The new statute also establishes a 10-year limitation period to commence proceedings seeking recognition and enforcement in Canada of foreign international commercial arbitral awards. The new model statute will become law as it is enacted by the various Canadian federal, provincial and territorial legislatures. A number of provincial governments across Canada have begun consultations with a view, hopefully, to implementing legislation in the near future.
An arbitration-friendly jurisdiction
The Model Law and the New York Convention provide narrow grounds for judicial intervention in international commercial disputes that are subject to arbitration agreements. Canadian courts have consistently expressed their approval of these principles and frequently defer to arbitral tribunals for determinations regarding the tribunal’s own jurisdiction and complex issues of fact and law. For example, in discussing the governing principles of the Model Law, one Canadian court stated that:
[T]he purpose of the United Nations Conventions and the legislation adopting them is to ensure that the method of resolving disputes in the forum and according to the rules chosen by parties, is respected. Canadian courts have recognized that predictability in the enforcement of dispute resolution provisions is an indispensable precondition to any international business transaction and facilitates and encourages the pursuit of freer trade on an international scale.1
Courts across Canada have echoed these sentiments, consistently applying the competence-competence principle, showing broad deference to the decisions of arbitral tribunals, and narrowly interpreting the grounds for setting aside arbitral awards. In addition, some provinces have explicitly accepted that international arbitral awards are akin to foreign judgments, providing parties with jurisdictional advantages and longer limitation periods for enforcing their award.2
The integrity of the international commercial arbitration process has further been endorsed in recognition and enforcement proceedings. When faced with challenges to the recognition of foreign awards, Canadian courts have consistently emphasised the mandatory nature of the enforcement provisions in the Model Law. Similarly, article V of the New York Convention, which sets out the limited grounds on which enforcement may be refused, is narrowly interpreted, and arbitral debtors have the burden of proving any allegation of injustice or impropriety that could render an award unenforceable.
Widespread support for international commercial arbitration in Canada has also led to the establishment of a number of arbitration groups and institutions, including the Western Canada Commercial Arbitration Society, the Toronto Commercial Arbitration Society, the Vancouver Centre for Dispute Resolution and Vancouver Arbitration Chambers, Arbitration Place, ICC Canada’s Arbitration Committee, the British Columbia International Commercial Arbitration Centre, the ADR Institute of Canada (ADRIC), the International Centre for Dispute Resolution Canada (ICDR Canada) and the Canadian Commercial Arbitration Centre. These organisations provide parties with a variety of useful resources and services, including sets of procedural rules, contact information for qualified arbitrators and meeting facilities.
ADRIC and ICDR Canada have recently revised and updated the procedural rules available to parties, bringing them in line with international best practices and offering an improved option for parties. ADRIC’s revisions came into force on 1 January 2014, and seek to limit the tendency of parties to domestic arbitrations to adopt litigation-like procedures. Specific changes include a narrower test for document production that accords with international standards, an interim arbitrator mechanism for urgent relief, and a prohibition on examinations for discovery. ICDR Canada’s new rules came into force on 1 January 2015, and reflect the ICDR International Arbitration Rules. The new rules include expedited procedures for claims under C$250,000, an emergency arbitrator process for urgent relief, and recognition that court procedures such as oral and document discovery are generally not appropriate in arbitration.
Recent Canadian case law
The commitment of Canadian courts to the tenets of the Model Law and the New York Convention has been confirmed by recent case law. Significant recognition and enforcement decisions clearly demonstrate the Canadian judiciary’s respect for the integrity of the international arbitration process and the importance of deference to international arbitral tribunals. Some of these cases are summarised below.
Popack v Lipsyzc3
In Popack v Lipsyzc, the Ontario Court of Appeal affirmed a lower court’s decision that an arbitral award may be enforced despite non-compliance with the Model Law so long as neither party is unduly prejudiced.
After the parties’ business relationship broke down, their dispute was referred to arbitration in a rabbinical court, through which Rabbi Schwei ordered Lipszyc to sell his interest in the business to Popack. Popack then alleged that the share purchase agreement was based on misrepresentations by Lipsyzc, which instigated a second dispute. Rabbi Schwei was unavailable to preside over the second dispute, and the parties agreed to the jurisdiction of an alternate rabbinical court.
During the second arbitration, Lipsyzc suggested that the tribunal might speak with Rabbi Schwei. Popack did not object. After hearings had concluded, the tribunal met with Rabbi Schwei on its own accord and without notice to or participation by either party. A month later, the tribunal ordered Lipsyzc to pay Popack C$400,000.
Eventually, the parties discovered the ex parte meeting, and Popack’s counsel suggested that if the tribunal planned to consider Rabbi Schwei’s evidence, there should be a full hearing. The tribunal responded by confirming that Rabbi Schwei’s evidence had not affected its decision.
In applying to set aside the award pursuant to article 34 of the Model Law, Popack argued that the secret meeting between the tribunal and Rabbi Schwei violated the applicable notice requirements under the arbitration agreement and the Model Law, prevented Popack from presenting his case, and was contrary to Ontario public policy.
Ontario Superior Court of Justice
The application judge upheld the arbitral award, noting that although there had been a breach of the parties’ arbitration agreement, article 34(2) is discretionary. Although Popack had satisfied the prerequisites for setting aside the award, the court was not required to do so. After weighing the seriousness and potential impact of the breach, potential prejudice flowing from the breach and parties’ conduct after learning of the breach, the Court held that it was not an appropriate case to set aside the award. The lower court also considered the terms of the parties’ arbitration agreement.
Ontario Court of Appeal
On appeal, Popack’s counsel argued that the application judge had erred by failing to exercise her discretion in a way that was consistent with international judicial decisions. Popack’s counsel submitted that the adoption of the Model Law was a clear legislative signal to courts to recognise and enforce awards in line with the approach followed in other Model Law jurisdictions.
The Court commenced its assessment of the case by affirming the considerable deference owed to arbitrators:
The parties’ selection of their forum implies both a preference for the outcome arrived at in that forum and a limited role for judicial oversight of the award made in the arbitral forum…The application judge’s decision to not set aside the award is consistent with the well-established preference in favour of maintaining arbitral awards rendered in consensual private arbitrations.
The Court then reviewed several international cases and concluded that there is no bright-line rule as to the nature of the discretion under article 34(2). Instead, the application judge held that ‘the scope of discretion under Article 34(2) is significantly affected by the ground upon which the award could be set aside’. Where a party establishes that there was no valid arbitration agreement, for example, the court held that there would be considerably less discretion to uphold the award than in the face of a procedural error.
Accepting that the purpose of the discretion in article 34(2) is to prevent ‘real unfairness and real practical injustice’, the Court went on to hold that when faced with a procedural breach, an application judge should focus on the nature of the breach and ‘the extent that the breach undermines the fairness or the appearance of fairness of the arbitration and the effect of the breach on the award itself’. The Court held that the application judge had weighed the relevant factors – including Popack’s ex parte communications with the panel after learning of the breach and the death of a material witness – and concluded that she had properly exercised her discretion.
The Court also commented on Popack’s argument that the judge had erred by failing to independently consider his alternative grounds of appeal (ie, the opportunity to be heard and public policy). In holding that there was no obligation to consider each ground separately, the court said:
I do not see how the outcome of that balancing exercise can depend on the specific label placed on the procedural error giving rise to the Article 34(2) complaint. For example, characterizing the procedural failure as a breach of Ontario ‘public policy’ if it could be so characterized, would not, in my view, automatically make the breach more serious or tip the scale in favour of setting aside the award. Whatever label is placed on the procedural error, and whichever subsection of Article 34(2) is invoked, the essential question remains the same – what did the procedural error do to the reliability of the result, or to the fairness, or to the appearance of the fairness of the process?
Although arising from certain unique facts, this case confirms Canadian courts’ commitment to upholding the underlying objectives of the Model Law and New York Convention, even in the face of a procedural breach. Establishing grounds to set aside an award may be insufficient to prevent enforcement; the applying party must also show that the prejudice in having the award enforced outweighs the prejudice associated with setting the award aside.
It remains to be seen how this analysis will be applied to the various grounds of appeal under available under the Model Law; however, for procedural breaches, the court has clarified that an award should be set aside only if – after considering the seriousness of the breach, the potential impact of the breach, the potential prejudice flowing from setting aside the award and the parties’ conduct – the court concludes that the error caused ‘real unfairness or real practical injustice’.
Stans Energy Corp v Kyrgyz Republic4
Proceedings in Stans Energy Corp v Kyrgyz Republic are ongoing, and involve a myriad of complex legal and factual issues. Stans Energy’s application to enforce its arbitral award in Ontario is currently pending, but its efforts to obtain interim relief in Ontario and the Kyrgyz Republic’s attempts to set aside the award have muddied the waters.
Stans Energy, a publicly traded Ontario company, owned a mining licence in the Kyrgyz Republic that was cancelled in 2012. Alleging that the cancellation of its licence amounted to unlawful expropriation and violated its rights as an investor under the Moscow Convention, Stans Energy initiated arbitration in the Arbitration Court of the Moscow Chamber of Commerce and Industry (MCCI). The Kyrgyz Republic disputed the tribunal’s jurisdiction from the beginning and refused to participate in hearings. The tribunal rejected the Kyrgyz Republic’s jurisdictional arguments and issued a US$118 million award in favour of Stans Energy.
The Kyrgyz Republic commenced two simultaneous jurisdictional challenges, one in the Economic Court of the Commonwealth of Independent States (CIS Court), which has sole authority under the Moscow Convention to determine jurisdictional disputes, and the other in the Moscow State Court to set the award against it aside. The Kyrgyz Republic’s application to set aside the award was dismissed and the Kyrgyz Republic appealed. By the time the Federal Arbitration Court heard the appeal, the CIS Court’s decision had been released. The decision found that MCCI was not a competent court to decide matters under the Moscow Convention. As such, the Federal Arbitration Court ordered the Moscow State Court to reconsider its decision de novo.
In the meantime, Stans Energy had commenced enforcement proceedings in Ontario. On 10 October 2014, the Ontario Court granted Stans Energy a Mareva injunction, freezing shares in an Ontario company in which the Kyrgyz Republic held an equitable interest. The Kyrgyz Republic had publicly announced that it had no intention of satisfying Stans Energy’s award and was planning on moving the shares outside of the jurisdiction, leaving Stans Energy with no assets upon which to execute. The Court held that, based on the mandatory nature of the Model Law and New York Convention, Stans Energy had a strong prima facie case for enforcement and was entitled to injunctive relief.
Ten days later, Stans Energy applied to extend the Mareva injunction indefinitely. The Kyrgyz Republic argued that Stans Energy had failed to make full and frank disclosure on the original ex parte application by not providing the court with a translated copy of the CIS Court’s decision and disclosing that the award might be set aside in Russia. The Court acknowledged the lack of translation of the CIS decision, but held that Stans Energy had made it sufficiently clear that the Kyrgyz Republic disputed the Tribunal’s jurisdiction. As a result, the injunction was extended. 5 The Kyrgyz Republic was granted leave to appeal.6
By the time the Ontario Divisional Court heard Stans Energy’s appeal, the Moscow State Court had rendered its decision. On reconsideration, Stans Energy’s award was set aside on the basis that the MCCI did not have jurisdiction over the dispute, pursuant to the CIS Court’s ruling.
On appealing the lower Court’s decision to extend the Mareva injunction against it, the Kyrgyz Republic again argued that Stans Energy had failed to make full and frank disclosure to the Court by failing to provide an accurate depiction of the CIS Court’s decision and its effect on the Russian proceedings. Further, after having the Moscow State Court’s decision to set the award aside admitted as fresh evidence, the Kyrgyz Republic submitted that the injunction had to be set aside since the foundation for the relief was now absent.
The Court agreed that the Moscow State Court’s ruling made it necessary to set aside Stans Energy’s injunction. Relying on article 36(1)(v) of the Model Law, the Court implied that since the award had been set aside, there could be no strong prima facie case for enforcement on which to grant the injunction.
On the issue of full and frank disclosure, the Divisional Court held that Stans Energy had not met its duty. In addition to failing to provide a translation of the CIS Court decision, Stans Energy had failed to disclose that the CIS Court had decided that MCCI did not have jurisdiction and that the Federal Arbitration Court had remitted the case to the Moscow State Court for reconsideration on the basis of the CIS Court decision. In setting the injunction aside, the Divisional Court held that these issues were clearly relevant to whether Stans Energy had a strong prima facie case for enforcing its award.
Stans Energy’s application to enforce its award in Ontario remains pending. Article 36(1)(v) of the Model Law provides enforcing courts with the discretion to enforce an arbitral award that has been set aside at the seat of arbitration, as was the case here. However, given the Divisional Court’s holding on whether Stans Energy had a strong prima facie case for enforcement, it appears that its success may be in doubt. Further, the Kyrgyz Republic is now at liberty to move its only asset in Ontario (the shares) out of the jurisdiction, removing any impetus for Stans Energy to have the award enforced in Canada. Nevertheless, as is clear in the preceding cases, Ontario courts retain discretion to enforce Stan’s award notwithstanding the Moscow State Court’s decision to set it aside.
Collectively, these cases demonstrate the proclivity of Canadian courts to respect the conclusions of arbitral tribunals and refuse to allow arbitral debtors to reargue the merits of their case in enforcement proceedings.
Jacob Securities Inc v Typhoon Capital BV7
In Jacob Securities Inc v Typhoon Capital BV, the Ontario Superior Court of Justice refused to set aside an arbitral award on the basis that the arbitrator’s failure to disclose potential conflicts to the parties to the arbitration amounted to circumstances that gave rise to a reasonable apprehension of bias.
Jacob Securities, a Canadian investment bank specialising in providing financial advisory services to renewable energy companies, entered into an engagement agreement for equity project financing with Typhoon Capital BV, a company based in the Netherlands and carrying on business in the renewable energy sector. As part of the agreement, Northland Capital Inc provided financing to Typhoon Offshore (a wholly owned subsidiary of Typhoon Capital BV) for Typhoon’s ‘Project Gemini’ wind project. Jacob Securities made a claim for compensation for its role in introducing Northland to Typhoon, and Northland’s subsequent investment and financial participation in Project Gemini. Subsequently, Jacob Securities submitted a notice of request to arbitrate pursuant to an arbitration clause in the engagement agreement.
Following the arbitration, which resulted in Jacob Securities’ claim being dismissed, Jacob Securities became aware of a possible relationship among the arbitrator’s former law firm, Northland, and the underwriters in Project Gemini. The arbitrator had worked as a litigator for over 40 years at McCarthys, a Canadian law firm, which had previously represented Northland and the Underwriters, including representing the underwriters in the Project Gemini transaction. The connection between the arbitrator’s former firm and its representation of those parties prompted Jacob Securities’ application to challenge the final arbitration award. While Jacob Securities did not dispute that the arbitrator had no knowledge of his former firm’s relationship with the parties at the time of arbitration, it asserted that the arbitrator’s failure to undertake a conflict check with his former firm amounted to ‘circumstances that give rise to justifiable doubts as to his independence or impartiality and, thus, to a reasonable apprehension of bias.’
The Court first considered whether it had jurisdiction to consider the application and whether the remedies sought by Jacob Securities were available under the Model Law. It was determined that the only recourse available to the applicant was to challenge the award or its enforcement under articles 34 and 36. The applicant could not rely on articles 12 and 13, which both involve challenging an arbitrator. Articles 12 and 13 address situations where the arbitration remains ongoing and have no effect where an award is being challenged after the final award has been released, as was the case here.
The Court then considered whether the arbitrator’s failure to conduct a conflict search with his former law firm established a reasonable apprehension of bias. More specifically, the Court considered whether the connection between the arbitrator’s former firm and the underwriters and Northland was sufficient to establish a reasonable apprehension of bias, and whether the arbitrator himself had a duty to investigate any possible conflicts of interest with his former firm. The Court set out the test for reasonable apprehension of bias in Canada:
[T]he apprehension of bias must be a reasonable one, held by reasonable and right minded persons, applying themselves to the question and obtaining thereon the required information…that test is ‘what would an informed person, viewing the matter realistically and practically – and having thought the matter through – conclude?’
This test has also been held to apply to arbitrators. The Court noted that there is a strong presumption of judicial impartiality that is equally applicable to arbitrators and that the burden to rebut the presumption falls on the party making the allegation. Finally, the Court considered the IBA Guidelines on Conflicts of Interest in International Arbitration (IBA Conflicts Guidelines) and determined that the present case did not fit the specific situations listed in the ‘Non-Waivable Red List’ given that the arbitrator did not work on any matters involving Northland while he was at the firm and that he had no knowledge of the relationship between Northland, the underwriters and his firm at the time of the arbitration. On the issue of establishing a reasonable apprehension of bias on the part of the arbitrator, the Court held that the connection between Northland, the underwriters and McCarthys was ‘far too remote’.
With respect to the arbitrator’s duty to conduct a conflict search with his former firm, the Court asserted that while an arbitrator who currently works for a law firm has a positive duty to investigate any potential conflicts of interests with his or her law firm, an arbitrator who no longer works for a law firm, does not. As a practical matter, the arbitrator did not have the ability to conduct a conflict check with his former firm. Law firms owe a duty to their clients not to disclose confidential information to third parties, which would include former partners and lawyers. That being the case, the Court determined that it was of little consequence that the arbitrator had only been retired from McCarthys for approximately one year when he accepted the appointment as arbitrator in this case.
The Court dismissed Jacob Securities’ application, going so far as to find that the application was a ‘thinly disguised attempt [by the applicant] to avoid the consequences of an adverse decision on the merits’. The Court initially ordered substantial indemnity costs to be paid by the applicant but, upon hearing submissions, determined that consideration should be given to the fact that a novel claim was raised. Costs were ultimately awarded on a partial indemnity basis.8
A similar finding was made in a recent case before the English courts involving a Canadian arbitrator.9 Shortly after the Canadian arbitrator had rendered an award in an LCIA arbitration, the losing party raised a challenge to the award on the basis that a key client of the arbitrator’s law firm had been purchased by the parent company of the claimant in the arbitration. In deciding to uphold the award, the English High Court identified what it saw as a number of weaknesses in the IBA Conflicts Guidelines, including the fact that the ‘Non-Waivable Red List’ does not allow for case-specific judgment. In essence, the Court held that there could be no reasonable apprehension of bias arising from circumstances the arbitrator did not know, and could not know through any reasonable conflicts searching policy.
Recently, however, the French courts have taken a more strict approach, refusing to enforce an arbitral award even where the facts revealed that the arbitrator was unaware of the late-alleged potential conflict. The Canadian arbitrator in that case had not disclosed his law firm’s continuing representation of the parent company of one of the parties to the dispute, which came to light only after the office of the firm in another city released information on the retainer publicly. Rather than applying the IBA Conflict’s Guidelines, the Paris Court of Appeal applied a subjective test for bias under French law in reaching its decision. These discrepancies in approaches and outcomes demonstrate that conflicts issues are live in international arbitration.
Empresa Minera Los Quenuales SA v Vena Resources10
In Empresa Minera Los Quenuales SA v Vena Resources, the Ontario Superior Court of Justice considered article 36 of the Model Law to determine when it is appropriate for a court to exercise its discretion to order a party to post security in exchange for adjourning an enforcement application pending the outcome of a set aside proceeding at the seat.
Empresa Minera Los Quenuales SA (Empresa) is a Peruvian subsidiary of Glencore plc and Vena Resources Inc (Vena) is small mining company, with its head office in Toronto. An arbitral award ordered against Vena, rendered on 14 May 2014 in Peru, was for approximately US$2.3 million. In seeking to set aside the award, Vena started an annulment application in the Peruvian courts, which was heard in June 2015. It was anticipated that the Court’s decision would be delivered by the fall of 2015. Although Vena’s CEO believed the Peruvian annulment application had a good chance of success, the Ontario Superior Court of Justice accepted Empresa’s evidence that Vena’s chance of success was, in reality, very low.
Empresa applied for an order for recognition and enforcement of the award against Vena in Ontario. Vena brought a motion to adjourn the enforcement application pending the outcome of the annulment application. The Court had to decide whether to exercise its discretion not to enforce an authenticated and certified arbitral award on the basis that it may be set aside at the seat. If the Court exercised its discretion not to enforce then the issue would be whether it should further exercise its discretion to order Vena to post security for the award.
The Court undertook a review of recent Canadian case law, in order to determine the current test for article 36. Following its review, the Court outlined the two-part test as follows: first, determine whether there is an issue to be tried; and second, consider the balance of convenience. The Court rejected the proposition that a ‘serious’ issue to be tried is required, and also asserted that no consideration need be given to ‘irreparable harm’ where the balance of convenience is concerned. Turning to the case at hand, the Court had no difficulty in finding there was an issue to be tried in this case, especially given its finding that there was a low prospect of success of the set-aside application. In its assessment of the balance of convenience, the Court considered several factors, including the fact that the outcome of the set-aside application was expected to be announced in a matter of months and that Empresa, as a subsidiary of the multibillion-dollar Glencore, did not require the award to carry on business.
Having found that the enforcement application should be adjourned based on the balance of convenience and there was a serious issue to be tried, the Court was left with the issue of security. The Court remained unconvinced by Vena’s argument that it should not have to post security as part of the adjournment because it did not have the resources to do so. However, the Court did consider the parties’ respective financial positions when determining the amount of security to be posted. The Court felt that requiring Vena to post security would show good faith on Vena’s behalf and ensure that it did everything in its power not to delay the annulment decision. Accordingly, Vena was ordered to post C$250,000 as a condition to the adjournment.
Belokon v The Kyrgyz Republic et al11
Like Stans Energy (discussed above) and Sistem Mühendislik I·ns¸aat Sanayi Ve Ticaret Anonim Sirketi v Kyrgyz Republic12 (Sistem) before it, Belokon v The Kyrgyz Republic et al (Belokon) involved the granting of a Mareva injunction in Ontario against Kyrgyzaltyn JSC (KJSC). All three proceedings were brought by unrelated claimants but were brought in a similar timeframe and raised similar issues. The proceedings all resulted in Mareva injunctions being granted against KJSC on the basis that KJSC nominally holds a 33 per cent interest in the common shares of Canterra, which are beneficially owned by the Kyrgyz Republic. In fact, issues raised by these three cases are so similar that a recent hearing at the Ontario Superior Court of Justice (discussed below) addressed all three together and had direct consequences for each.
Valeri Belokon, a citizen and resident of Latvia, purchased a local bank in the Kyrgyz Republic in 2007. In 2010, the Kyrgyz Republic took steps against Belokon, which he believed amounted to the expropriation of his bank. Belokon subsequently started arbitration proceedings under a bilateral investment treaty between Latvia and the Kyrgyz Republic. Belokon was awarded a C$20.5 million award against the Kyrgyz Republic on 24 October 2014. The Kyrgyz Republic appealed to the Paris Court of Appeal but no stay pending appeal was granted. Meanwhile, Belokon applied to have the arbitral award enforced in Ontario.
Motion to set aside or vary the Mareva injunction
The Mareva injunction in the Belokon case was initially granted ex parte on 25 February 2015. KJSC moved to set aside, or alternatively vary, the 5 March 2015 order continuing the injunction. KJSC submitted that the injunction should be set aside for Belokon’s failure to make full and frank disclosure, or because the prerequisites for granting a Mareva injunction were no longer present. In the alternative, KJSC argued that the injunction should be varied on the grounds that the frozen assets greatly exceeded the amount of the award that Belokon was seeking to enforce in Ontario.
Of the three injunctions recently granted against KJSC, Belokon was the most recent. As such, in making its decision the Court had to consider what had happened in the cases of Stans Energy and Sistem, including the fact that both the Stans Energy and Sistem injunctions had been set aside by the time this proceeding was heard. At the time the Belokon Mareva injunction was awarded, both the Stans Energy and Sistem injunctions were still standing; Belokon had relied on those two rulings in its Mareva application and did not include the factual record that otherwise would have been required to demonstrate KJSC’s beneficial interest in the Canterra shares. Unbeknownst to Belokon, both proceedings were the subject of appellate review. Following the Stans Energy and Sistem injunctions being overturned in June 2015, KJSC brought this motion to set aside the Belokon injunction.
The Court needed to consider whether it was still open for KJSC to challenge the Belokon Mareva on the sufficiency of the disclosure given when the injunction had initially been granted; if so, whether Belokon failed to make full and frank disclosure at the initial Mareva application; whether the Belokon Mareva should be set aside based on the two appeal decisions; and whether, if not set aside, the Belokon Mareva should nonetheless be varied.
On the first issue, the Court found that it was still open to KJSC to challenge Belokon’s disclosure on the ex parte motion on the basis that the continuation order granted on 5 March 2015 had expressly provided that the continuation of the injunction was without prejudice to any parties’ right to move to set aside or vary the injunction.
With respect to the issue of full and frank disclosure, the Court noted that the duty is not rigid and what is required to satisfy the duty will vary from case to case. In order to determine whether Belokon had met its duty at the ex parte motion, the Court first had to determine whether Belokon had made the proper inquiries regarding appeal proceedings in the Stans Energy case. The Court concluded that Belokon showed proper diligence in the circumstances. The searches Belokon conducted ought to have revealed the reasons for granting leave to appeal in the Stans Energy case; the fact that they did not was not the fault of Belokon’s counsel. Secondly, the Court had to consider whether Belokon’s failure to put forward the full appeal materials for both outstanding appeals, Stans Energy and Sistem, on the ex parte motion amounted to a failure to provide full and frank disclosure. In determining that Belokon met the full and frank disclosure requirements despite not having produced the appeal materials, the Court considered the fact that the judge hearing the motion would have been aware of the appeal and chose not to require the moving party to produce the materials. Further, the Court considered the timing of this motion. KJSC was itself aware of the status of Sistem and Stans Energy but chose to wait until the appeal decisions were released before raising the issue of material non-disclosure and moving to set aside the injunction. The Court refused to set aside the Mareva injunction for failure to make full and frank disclosure.
In order to meet the requirements to obtain a Mareva injunction, Belokon had to show a strong prima facie case that the Kyrgyz Republic had assets in Ontario, namely, that the Kyrgyz Republic was the beneficial owner of the Centerra shares. The Court found that Belokon could no longer rely on the findings made in Stans Energy and Sistem regarding beneficial ownership now that the injunctions had been set aside. Effectively, there was no longer a sufficient evidentiary record to support the Belokon Mareva injunction. The Court held that it was appropriate to set the injunction aside but delayed the setting aside by approximately two weeks in order to give Belokon the opportunity to put forward evidence that would demonstrate the requisite beneficial interest. The Court also left open the possibility for Belokon to bring a future motion for injunctive relief, so long as it is brought on notice.
The Court did determine that the Belokon Mareva should be immediately varied on the basis that the frozen assets more than doubled the amount of the arbitral award. The Court ordered that the Mareva continue to freeze C$10 million in cash and 3,787,879 Canterra shares, with the balance of cash and shares to be unfrozen immediately. These assets continued to be frozen until 28 September 2015.
Despite being successful in its motion to set aside the Mareva injunction on one of the grounds raised, KJSC sought leave to appeal the decision at the Ontario Divisional Court on the basis that the motions judge should have accepted its non-disclosure argument.13 The motion for leave to appeal was dismissed.
Motion to strike affidavit
On 25 September 2015, Belokon moved to strike out an affidavit on the basis that it might prejudice the fair hearing of its application, was scandalous, frivolous or vexatious, or was an abuse of process.14 The Court acknowledged that the question of whether evidence should be struck is typically best left to the judge hearing the application on its merits but that this case was an exceptional one. The motion to strike evidence could therefore be granted by a different judge at an earlier stage.
In the arbitration, the Kyrgyz Republic’s main defence to the claims made against it was alleged criminal activity of Belokon’s bank. The Republic asserted that the bank, Belokon and the bank’s employees were guilty of money laundering and other serious criminal activities. These allegations were rejected by the arbitral tribunal. In seeking the annulment of the award at the seat of arbitration in Paris, which proceedings were still ongoing at the time this motion was heard, KJSC was pursuing two grounds for relief, including relying on the alleged criminal involvement of the bank. In order to support its position regarding Belokon’s alleged criminal activity, KJSC had filed an affidavit in the annulment proceeding, the same one Belokon was seeking to strike on this motion. The affidavit was made by one Rahat Aiylchieva, a woman involved in the audit and investigation of Belokon’s bank.
In order to resist having the affidavit struck out, the Kyrgyz Republic had to demonstrate that the affidavit was either relevant or not clearly irrelevant. The Kyrgyz Republic relied on three of the defences under article 36 of the Model Law in an effort to demonstrate the affidavit’s relevance.
The Court determined that the Kyrgyz Republic could not rely on article 36(1)(a)(i), 36(1)(a)(iii), 36(1)(b)(ii) or 36(2) as a defence. The defence under article 36(1)(a)(i) was not applicable because there was no question that the arbitration agreement between the parties was valid; and to resist recognition and enforcement of the award under article 36(1)(a)(iii) would be to reopen the merits of the arbitral award in the Ontario proceedings, which is not allowed. The Court dismissed the Kyrgyz Republic’s reliance on the public policy defence under article 36(1)(b)(ii). Firstly, the public policy ground is meant to be narrowly construed and, further, it cannot be used to challenge a foreign arbitral award on its merits. The Court held that the Kyrgyz Republic was
[A]ttempting to ‘repackage’ its main defence at the arbitration as a public policy objection to recognition and enforcement…If a party could simply raise criminal allegations in an arbitration, fail to prove them, and embark on a trial of those same issues to resist enforcement, it would significantly undermine the purpose of the ICAA.
Finally, the Court refused to adjourn the proceedings in Ontario under article 36(2) despite the ongoing annulment proceedings in Paris. There was no question that the Kyrgyz Republic could file a complete record of the annulment proceedings, including Aiylchieva’s affidavit, however, the Court was not persuaded that the affidavit was relevant to an adjournment request under article 36(2).
The Court granted the motion to strike out the affidavit. The Court emphasised that the Kyrgyz Republic was still at liberty to include the affidavit in its responding application materials but that it was to do so for the sole purpose of including a complete record of the annulment proceedings at the Paris Court of Appeal. Both parties applied for leave to appeal the order and both applications were dismissed.15
Determination of whether Kyrgyz Republic has ownership interest in Centerra shares
In July 2016, the Ontario Superior Court of Justice determined the common issue among four applicants as to whether the Kyrgyz Republic has an ownership interest in shares of Centerra Gold Inc, including whether the shares were registered in the Republic’s wholly owned subsidiary, KJSC. Three of the four cases underlining the applications – Belokon, Sistem and Stans – are described above; the fourth case involved Entes Industrial Plans Construction & Erection Contracting Co Inc. The Court considered the applications arising out of the four cases together to avoid inconsistent findings. The applicants argued that the ‘Republic has an ownership interest in the Centerra shares based on an agreement between the Republic and Kyrgyzaltyn or, alternatively, based on trust principles’. The Court dismissed the applications holding that ‘the Applicants have not met their burden of establishing any basis on which I can conclude, on a balance of probabilities, that the Republic has any such ownership interest in the Centerra shares.’ As the time of writing this article, the appeal period remains open and whether the Court’s decision will stand remains to be seen.
Canada is consistently recognised as an arbitration-friendly jurisdiction, and for good reason. First, the legislative framework governing international commercial arbitration and the enforcement of foreign arbitral awards closely mirrors the Model Law and New York Convention, and severely limits the ability of courts to intervene with decisions made by arbitrators. Secondly, Canadian courts are supportive of arbitration, and continue to uphold the integrity of the arbitral process by affording broad deference to tribunals on issues of jurisdiction, findings of fact and law, and with respect to relief granted. The approach of the Canadian judiciary to complex issues in international commercial arbitration should instil confidence in practitioners that Canada will remain a leader in the field of international commercial arbitration policy and jurisprudence.
The authors are grateful for the valuable assistance of Paige Burnham (a student with Borden Ladner Gervais LLP).
1 Automatic Systems Inc v Bracknell Corp (1994) 18 OR (3d) 257 at p. 264, cited with approval in Seidel v TELUS Communications Inc, 2011 SCC 15 and Desputeaux v Editions Chouette (1987) Inc, 2003 SCC 17.
2 For example, the definition of ‘local judgment’ in British Columbia’s Limitations Act specifically includes arbitral awards to which the Foreign Arbitral Awards Act or the International Commercial Arbitration Act apply, providing arbitral creditors with a 10-year limitation period for enforcement proceedings. Similarly, the British Columbia Court Jurisdiction and Proceedings Transfer Act presumes a ‘real and substantial connection’ (the standard for Canadian courts to assume jurisdiction over a dispute) in any proceeding to enforce a foreign arbitral award.
3 Popack v Lipsyzc, 2015 ONSC 3460.
4 Stans Energy Corp v Kyrgyz Republic, 2015 ONSC 3236.
5 Stans Energy Corp v Kyrgyz Republic et al, 2014 ONSC 6195.
6 Stans Energy Corp v Kyrgyz Republic et al, 2015 ONSC 42.
7 Jacob Securities Inc v Typhoon Capital BV, 2016 ONSC 604.
8 Jacob Securities v Typhoon Capital BV, 2016 ONSC 1478.
9 W Limited v M SDN BHD,  EWHC 422 (Comm).
10 Empresa Minera Los Quenuales SA v Vena Resources, 2015 ONSC 4408.
11 Belokon v The Kyrgyz Republic et al, 2015 ONSC 5570.
12 Sistem Mühendislik I·ns¸aat Sanayi Ve Ticaret Anonim Sirketi v Kyrgyz Republic, 2012 ONSC 4751.
13 Belokon v The Kyrgyz Republic et al, 2016 ONSC 995.
14 Belokon v The Kyrgyz Republic et al, 2015 ONSC 5918.
15 Belokon v The Kyrgyz Republic et al, 2016 ONSC 1075.