B.C. – anti-suit injunction based on contract enjoins party from pursuing arbitration administered outside Canada – #235

In a novel decision, B.C.’s Court of Appeal Li v. Rao, 2019 BCCA 264 upheld an anti-suit injunction preventing a party from taking further steps in a pending arbitration administered beyond the court’s jurisdiction.  Exercising its in personam jurisdiction over the party, the Court enforced that party’s agreement not to take further steps in its arbitration.  The Court held that an injunction based on contract did not engage the jurisdiction of the foreign tribunal or raise issues of comity but did involve an assessment of the conduct of a party and whether to enforce a promise it made.

Ms. Li (“Li”) and Mr. Rao (“Rao”) disputed a commercial investment and the reasons for and the consequences of the dissolution of their personal relationship as a couple. 

Ms. Li and Mr. Rao met in August 2015 and married in April 2016 in Las Vegas.  Mr. Rao was still married to another woman at that time.  Mr. Rao and Ms. Li dispute whether and when Ms. Li had knowledge of Mr. Rao’s existing marriage.

In September 2015, Ms. Li and Mr. Rao incorporated LPP Properties Inc. (formerly Zoe Commercial Real Estate Inc.) “LPP Inc.”).  In October 2015, Li and Mr. Rao signed a Capital Increase and Share Expansion Agreement (“Agreement”) by which Mr. Rao agreed to invest $20 million in LLP Inc. and thereby become a 50% shareholder.   Li would invest $1,000.00 and become a 50% shareholder.  The Agreement contained the following dispute resolution clause:

The laws applicable to this agreement are Canadian laws and regulations.

Should there be any dispute arising during the performance of the agreement, each party shall try to resolve through discussion and consultation. If such discussion and consultation fail, parties shall submit such dispute to Shenzhen branch of the Chinese International Economic and Trade Arbitration Commission for an arbitration. Such arbitration is final and legally binding for both parties.

Over a period of five (5) months, Mr. Rao contributed $17.65 million in LLP Inc. by way of three (3) payments – January 2016 $2.2 million, February 2016 $6.4 million and May 2016 $9.05 million.  A few months later, by November 2016, Ms. Li’s and Mr. Rao’s relationship – both commercial and matrimonial – had soured, leading to three (3) separate dispute resolution proceedings:

(i) on December 5, 2016 Mr. Rao initiated litigation against Ms. Li and LPP Inc. to recover the $17.65 million (“Civil Action”);

(ii) on January 24, 2017 Ms. Li filed a notice of family claim seeking, among other things, spousal support, reapportionment of property and an order regarding the money invested in LPP Inc. (“Family Proceeding”).  Mr. Rao counterclaimed in the Family Proceeding; and,

(iii)  in June 2017 Mr. Rao initiated arbitration before Chinese International Economic and Trade Arbitration Commission (“CIETAC”), case no. SXS20170099 (“CIETAC Arbitration”).

Ms. Li and Mr. Rao had appeared before the B.C. courts, in first instance and on appeal, in earlier cases related to their disputes: Li v. Rao, 2019 BCCA 265, an appeal from Li v. Rao, 2018 BCSC 142.  Regarding appeals involving matters touching on or affecting the CIETAC Arbitration, see Li v. Rao, 2018 BCCA 244 and Li v. Rao, 2019 BCCA 56.

The essence of the procedural question before the Court of Appeal in the current decision stemmed from the parties’ attempts to coordinate their competing venues in the Civil Action and the CIETAC Arbitration.  An August 2017 attempt by Mr. Rao’s attorneys to complete service on Ms. Li of the CIETAC Arbitration lead to an agreement to stay the arbitration pending a summary judgment determination in the Civil Action.  In its reasons, the Court of Appeal styled the agreement as a “Standstill Agreement”:

[17] On August 29, 2017, counsel for Mr. Rao again sent counsel for Ms. Li a copy of the CIETAC notice of arbitration and requested acceptance of service. Counsel for Ms. Li responded by letter dated September 8, 2017, advising that Ms. Li would accept service on two conditions. The first condition was that Mr. Rao covenant not to take any steps in the CIETAC Arbitration, and not to require Ms. Li to take any steps in such arbitration, until the Supreme Court had ruled on the extant applications in the Civil Action (namely, Ms. Li’s application for summary judgment and Mr. Rao’s application for a stay of proceedings). The second condition was that Ms. Li’s acceptance of service was without prejudice to any position or argument she may have as to CIETAC’s jurisdiction and the merits of the CIETAC Arbitration itself. Counsel for Mr. Rao advised by email on September 12, 2017, that Mr. Rao agreed to the conditions. I will refer to this exchange of correspondence and emails as the “Standstill Agreement”.

(The Court’s reasons were written by Mr. Justice John E. D. Savage just prior to his September 1, 2019 retirement from the Court of Appeal.)

In November 2017, Mr. Rao advised Ms. Li that he would proceed with the CIETAC Arbitration.  Ms. Li took steps in the Civil Action to prevent Mr. Rao from unilaterally discontinuing the Civil Action.  Learning that the CIETAC Arbitration might also proceed in January 2018, Mr. Rao applied for and obtained an injunction enjoining Mr. Rao from taking further steps in the CIETAC Arbitration.  See Mr. Justice Gordon S. Funt’s reasons in Li v. Rao, 2018 BCSC 47.

For Funt J., the Standstill Agreement appears as only one, and then only the last, of relevant of considerations prompting Funt J. to enjoin Mr. Rao from taking any further steps in the arbitration or requiring Ms. Li to do so.  See para. 39 of Funt J.’s reasons.

On appeal by Mr. Rao, the Court framed the issues as follows:

(1) did the judge commit a palpable and overriding error in concluding that Mr. Rao’s proposed course of action in continuing with the CIETAC Arbitration was a breach of the Standstill Agreement?

(2) did the judge err in enjoining Mr. Rao from pursuing the CIETAC Arbitration as a means of enforcing the Standstill Agreement?

(3) did the judge err in proceeding on the basis that an anti-suit inunction is available in respect of a foreign arbitration proceeding?

(4) did the judge err in enjoining Mr. Rao from pursuing the CIETAC Arbitration without allowing the arbitral panel to first decline jurisdiction?

Further to its analysis at paras. 26-36, the Court accepted that the Standstill Agreement constituted a valid, enforceable contract by which Mr. Rao undertook not to proceed with the CIETAC Arbitration until the B.C. Supreme Court had ruled on the applications in the Civil Action.

The Court recognized that Mr. Rao had a dilemma.   His decision to discontinue the Civil Action impeded his ability to proceed with the CIETAC Arbitration because he could not do the latter “until the BC Supreme Court rules on the extant applications”.  The dilemma, however, was “a dilemma of his own making”.

The Court held that proceeding to CIETAC Arbitration would be a breach of the valid Standstill Agreement. It then considered whether a contract could be enforced by an anti-suit injunction restraining the contracting party from proceeding with the arbitration.

In order to answer that specific question, the Court first identified the general principles applicable to anti-suit injunctions.  It referred to Amchem Products Incorporated v. British Columbia (Workers’ Compensation Board), [1993] 1 SCR 897, 1993 CanLII 124 (SCC) and, at paras 42-48, underlined differences between a stay of proceedings and an anti-suit injunction and the two-stage test for issuing an anti-suit injunction.

[42] While a stay of proceedings and an anti-suit injunction both concern selection of the appropriate forum for resolving a dispute, they have a crucial difference. With a stay of proceedings, the domestic court determines for itself whether it should take jurisdiction. With an anti-suit injunction, the domestic court can be said to “in effect” determine jurisdiction for the foreign court. While an anti-suit injunction operates in personam on the plaintiff in the foreign suit, rather than on the foreign court itself, it has the effect of restraining continuation of a proceeding in the foreign court: Amchem at 912–913.

The anti-suit injunction raises issues of comity and requires the Canadian court to consider whether the foreign court departed from the Canadian test for forum non conveniens.

The Court observed that the parties required it to issue a novel order.  Courts in Canada had often considered whether to stay domestic proceedings to enforce forum selection agreements made in favour of foreign courts.  Courts in Canada, however, had not yet been asked to enforce a forum selection agreement in favour of a domestic court.

[50] It is not disputed that in Canada, courts routinely stay domestic proceedings to enforce forum selection agreements made in favour of foreign courts. That is, if parties have agreed to litigate elsewhere, but one party has commenced parallel litigation in Canada, the Canadian court will routinely stay the domestic proceeding in order to enforce the parties’ agreement. However, no Canadian court appears to have yet considered whether to grant an anti-suit injunction to enforce a forum selection agreement made in favour of a domestic court. Canadian courts have only granted anti-suit injunctions on the “interests of justice” basis developed in Amchem, applying the principles of forum non conveniens, as described above.

Having considered at paras 48, 52-54 existing examples from the U.K. courts, the Court held that “there is no reason for this Court to not adopt the English approach and grant anti-suit injunctions on a contractual basis in appropriate circumstances.

[57] Although issues of comity arise with any anti-suit injunction given the effect of an anti-suit injunction on a foreign court, in my view, comity concerns are less significant where the ground for imposing the injunction is contractual. Under the contractual ground for an anti-suit injunction, a court is not deciding that the domestic forum is the more appropriate forum; it is enforcing the parties’ contractual agreement to proceed in the domestic forum, in the absence of strong reasons not to. In this respect, it is the parties’ agreement, rather than a discretionary decision of the domestic court, or a commentary on the appropriateness of proceeding in a foreign court, which is the foundation of the remedy.

In the circumstances of the case before it, the Court found “no strong cause” to conclude that it would be “unreasonable or unjust” to require Mr. Rao to adhere to the Standstill Agreement.   To adhere meant that he would not proceed with the CIETAC Arbitration until the B.C. Supreme Court had ruled on the applications in the Civil Action.

Indeed, there are good reasons to enforce the Standstill Agreement: (i) the chambers judge found that Mr. Rao was trying to gain an unfair tactical advantage by switching forums; (ii) the underlying dispute concerns a contract that was formed in British Columbia and real property that is located in British Columbia; (iii) Canadian law applies to disputes under the Standstill Agreement and the LPP Agreement; (iv) one of the parties, Ms. Li, is located in British Columbia; (v) Mr. Rao freely entered into the Standstill Agreement with legal advice; and (vi) the Standstill Agreement was entered into after, and with knowledge of, the LPP Agreement and arbitration.

The Court added to its analysis, at paras 61-69, by also evaluating its order as merely another illustration of an injunction enforcing a negative covenant, something familiar to Canadian courts.   It considered that Mr. Rao’s undertaking not to proceed with arbitration – a negative covenant – could be enforced by injunction and applied the criteria, albeit in a summary manner.

Mr. Rao argued that the Court’s injunction pre-empted the arbitrator’s jurisdiction or competence-competence.  Mr. Rao argued that matters going to the arbitrator’s jurisdiction should generally be decided by the arbitrator, citing Seidel v. TELUS Communications Inc., [2011] 1 SCR 531, 2011 SCC 15 and Dell Computer Corp. v. Union des consommateurs, [2007] 2 SCR 801, 2007 SCC 34.

The Court responded by agreeing that courts should exercise caution before granting anti-suit injunctions which would affect the conduct of other proceedings but added that neither comity nor the objectives of arbitration “justify exceptional diffidence” when a court issues an injunction enforcing a contract.

The key conclusion of the Court appeared at para. 74 when it drew a bright line between comity owed to foreign courts and exercising in personam jurisdiction.

[75] In my view, a forum selection clause in the form of a negative covenant can be enforced by an anti-arbitration injunction. In so doing, the Court is exercising in personam jurisdiction over the litigant. While courts should exercise caution before granting any injunction affecting the conduct of foreign proceedings, whether those be judicial or arbitral in nature, a contract-based injunction does not involve a discretionary decision on the jurisdiction of the foreign arbiter, but an assessment of the conduct of the relevant party in invoking that jurisdiction in the particular circumstances of the case. In my view it was not an error to grant the injunction in this case.

The Court upheld the injunction “on a contractual basis” and dismissed the appeal.

urbitral note – In its opening sentence, the Court anticipated the grounds on which it would rely to resolve the appeal by framing the issue as “what a British Columbia court can do to control the conduct of a litigant”.  That frame draws attention to the litigant in court and away from a decision on the suitability of jurisdiction, side-stepping the need to either address or refine familiar comity arguments.  Further into its reasons, at para. 57, the Court expressly states how framing the issue re-directs the focus.

In more common cases, by issuing a stay of its own proceedings and sending parties to arbitration, a court enforces the parties’ agreement to arbitrate.  In the present case, by issuing an injunction over a party within its jurisdiction, the court enjoined the litigant from pursuing arbitration before an arbitral tribunal located outside the court’s jurisdiction in favour of the court’s own civil litigation.  Despite the ostensible difference, the basis in each case for the court’s orders – to stay or to enjoin – remains consistent: enforcement of a valid agreement.  The facts in the present case demonstrate that the earlier agreement to arbitrate had been modified, by mutual agreement.