B.C. – Court recognizes/enforces Swiss award, rejecting public policy defence – #597

In Enrroxs Energy and Mining Group v Saddad, 2022 BCSC 285, Justice Crerar granted a petition to enforce a foreign arbitral award under the International Commercial Arbitration Act, RSBC 1996, c 233 (ICAA) and the Foreign Arbitral Awards Act, RSBC 1996, c 154 (FAAA). He rejected the respondent’s attempts to resist enforcement based on the public policy ground in subparagraph 36(1)(b)(ii) of the ICAA and art. V(2)(b) of the FAAA. Justice Crerar also rejected the respondent’s request to stay execution pending a valuation of certain assets that the petitioner had seized, which the responded complained could result in double recovery.

Background – In 2014, the parties set out on a business venture to operate in the upstream oil and gas sector. They incorporated a Cayman Islands corporation called Caspian Energy Solutions (“Caspian”). The respondent was Caspian’s sole shareholder. The parties entered into a series of agreements, all of which provided for Swiss law as the substantive applicable law, and arbitration in Geneva under the auspices of the Swiss Chamber of Commerce.

Under one agreement, the petitioner loaned the respondent $2M. Under a second agreement, it loaned a further $4.4M to Caspian. The loan agreements permitted the petitioner to demand payment upon default. Under a third, related agreement, the respondent irrevocably agreed to resign from Caspian and “immediately waive, assign and transfer” his shares to the petitioner in the event of a breach.

By mid-2015, the parties’ relationship deteriorated. The petitioner’s principal, Mr. Pacha, became displeased with the business’s progress and the fact that the respondent transferred the business’s equipment from the UAE to Iran without his permission. This prompted Mr. Pacha to commence a series of civil and criminal proceedings against the respondent in the UAE. In September 2015, the respondent was arrested and placed in pre-trial confinement for six months. The UAE Court dismissed the criminal charges in February 2016, concluding the dispute between the parties was a civil matter. The petitioner was also permitted to seize the equipment and the respondent’s shares in Caspian.

The arbitration and the award – Pursuant to the arbitration clauses in the parties’ agreements, the petitioner commenced arbitral proceedings in Geneva on November 6, 2017. The petitioner sought repayment of “13 individual loan components”. The respondent retained Swiss counsel, participated in the proceedings and did not object to the arbitral tribunal’s jurisdiction.

The arbitrator issued an award in the petitioner’s favour on January 28, 2020. The award required the respondent to pay the petitioner approximately $4.8M. The respondent did not pay the award or his share of the arbitrator’s fees.

In his post-hearing submissions, the respondent advanced a new argument, namely that he should benefit from a set-off representing the value of the equipment he acquired with the loaned funds. The arbitrator declined to decide the set-off issue. He also refused to determine who, the petitioner or respondent, owned the equipment at issue. Interestingly, the arbitrator left open the possibility of the respondent advancing a set-off claim in the future, but ruled that he failed to make a “contention/claim” in the instant proceeding (presumably in the pleadings or pre-hearing memorials, given the respondent raised the issue in the post hearing submissions).

Appeal to the Swiss Court – The respondent attempted to appeal the award to the Swiss Federal Tribunal. That court rejected the filing since it was not made in one of Switzerland’s official languages.

The UAE proceedings– The respondent succeeded in having the UAE Court declare him the equipment’s owner. However, the UAE Court dismissed the respondent’s damages claim for lost profits flowing from the petitioner having seized the equipment. The UAE Court also declined to order the petitioner to return the equipment, considering such relief premature given the unpaid arbitral award. The respondent lost successive appeals at the Dubai Court of Appeal and Dubai Court of Cassation. Mr. Pacha also launched an unsuccessful defamation claim against the respondent before the UAE Courts.

The B.C. proceedings– Shortly after filing the petition for an order enforcing the arbitral award, the petitioner moved ex parte for, and obtained, a Mareva injunction freezing the respondent’s assets in B.C. The Court refused to vacate the order when the petition was returned on notice (Enrroxs Energy and Mining Group v Saddad, 2021 BCSC 291).

On the enforcement petition, Justice Crerar began by setting out the applicable legal regime. He referred to subsection 35(1) of the ICAA (which is functionally identical to, though not a verbatim adoption of, article 35 of the UNCITRAL Model Law on International Commercial Arbitration) and Article III of the FAAA (B.C.’s adoption of the New York Convention), the key award enforcement provisions under those statutes. Justice Crerar also referenced jurisprudence and scholarly authorities confirming the strong policy favouring enforcing foreign arbitral awards in B.C.

Of note, he referenced authority that, when considering whether to enforce an arbitral award, case law on public policy as a ground for refusing to enforce a foreign judgment can inform the analysis (Bad Ass Coffee Company of Hawaii Inc. v. Bad Ass Enterprises Inc., 2007 ABQB 581 (Master) at paras. 66-67, aff’d 2008 ABQB 404). He quoted extensively from the Supreme Court of Canada’s decision in Beals v. Saldanha, 2003 SCC 72 [Beals], which addressed this issue. The court in Beals provided two examples that trigger the public policy exception to enforcement: 1) where the foreign judgment is based on law contrary to the fundamental morality of the Canadian legal system; and 2) where the foreign court is shown to have been corrupt or biased.

The respondent based his public policy argument on the rule against double recovery. He argued that the petitioner had already seized the equipment and the respondent’s shares in Caspian. It would offend public policy, the respondent argued, to allow the petitioner to enforce the award without ensuring that execution against local assets would not exceed the award quantum (after discounting the value of  the assets the petitioner already seized).

Justice Crerar rejected this argument. He found the risk of double recovery was insufficient to meet the high threshold under the public policy ground. The respondent also failed to demonstrate enforcement would indeed result in double recovery. In that connection, the petitioner “reassured” the Court that it would return the equipment once the respondent paid the award in full. Although the petitioner did not give the same undertaking in respect of the Caspian shares, Justice Crerar noted those shares might be valueless given the business’s lack of success.

Justice Crerar also found it fundamentally inappropriate to consider any potential set-off at the enforcement stage. This was particularly so given the parties’ arbitration agreement encompassed such a claim. As the arbitrator found, the respondent failed to raise properly the set-off in the arbitration, or otherwise failed to obey the required procedure.

The respondent relied on the Ontario Superior Court of Justice decision in Re. Lambert, 2001 CanLII 28474 (ON SC) (“Lambert”). In that case, the Court ruled that enforcing two U.S. judgments in a situation where doing so would result in double recovery would offend Ontario public policy. Justice Crerar found Lambert unpersuasive and distinguishable for four reasons.

First, there was expert evidence in that case indicating the judgments at issue would not have been enforceable under the judgement jurisdiction’s own law as the creditor failed to meet mandatory statutory conditions. That was not so in the present case. Second, here, and unlike in Lambert, the petitioner did not seize the equipment and the Caspian shares to satisfy the award. Rather, the petitioner seized those assets as security for future enforcement. Third, Lambert predates the Supreme Court of Canada’s decision in Beals and the other case law Justice Crerar relied on in rejecting the respondent’s position. Fourth, although Lambert was upheld on appeal, the Court of Appeal for Ontario confirmed the decision without relying on the lower court’s public policy finding.

Having rejected the respondent’s public policy argument, Justice Crerar turned to the alternative request for a stay of execution pending a valuation of the equipment and Caspian shares. This too was rejected. The parties agreed, and the Court confirmed, that the three-part analysis set out in RJR-MacDonald Inc. v. Canada (Attorney General), 1994 CanLII 117 (SCC), [1994] 1 SCR 311 applied to the stay request. In argument, the respondent more or less relied on the same arguments advanced in support of his public policy defence.

In refusing the stay, the Court noted that stays of execution are extraordinary remedies, and that there is nothing unusual about a potential set-off claim justifying such relief. The Court also adverted to the fact that set-off should have been raised much earlier, and before the arbitral tribunal rather than the Court on the enforcement petition.

In the result, the Court recognized the award as binding and enforceable in B.C and awarded interest thereon.

Contributor notes:

First, the public policy ground under both the ICAA (Model Law) and FAAA (New York Convention) imposes a high threshold for denying recognition and/or enforcement. To quote an old English decision, “[p]ublic policy is a very unruly horse, and when once you get astride it you never know where it will carry you” (Richardson v. Mellish (1824), 2 Bing. 229 (Eng. C.P.) at p. 252).

There are clear-cut instances in which an award cannot stand based on the public policy exception to enforcement. For example, the court will not lend its assistance to furthering a criminal act. This means an arbitral award providing for a usurious rate of interest contrary to section 347 of the Criminal Code should not be enforced (at least not without severing the interest rate to bring it within legal bounds. See: Transport North American Express Inc. v. New Solutions Financial Corp., 2004 SCC 7). Courts in Austria, Egypt and Lithuania have refused enforcement on this very basis, applying their own laws on interest rates (Supreme Court, Austria, Case 3Ob221/04b, 26 January 2005, XXX Y.B. Com. Arb. 421 (2005); Ahmed Mostapha Shawky v. Andersen Worldwide & Wahid El Din Abdel Ghaffar Megahed & Emad Hafez Raghed & Nabil Istanboly Akram Instanboly (23 May 2001) (Court of Appeal of Cairo, Egypt); Belaja Rus v. Westintorg Corp. (10 November 2008), 3K-3-562/2008 (Court of Cassation, Lithuania)).

Illegality or outright fraud is not a hard requirement to meet to refuse enforcement on public policy grounds. In Profilati Italia S.r.l. v. Paine Webber Inc., [2001] 1 Lloyd’s Rep. 715, the England and Wales High Court acknowledged that where a successful party deliberately withholds an important document that ought to have been disclosed under the applicable procedure, the Court may refuse enforcement on the basis that the award offends public policy. The ground was not made out in that case.

Second, Justice Crerar correctly observed that a public policy defence is not an open invitation to re-litigate the merits. That said, since a purported public policy violation could go to either the award’s procedure or substance, examining the substance in some detail might prove necessary to assess whether it actually offends the enforcement jurisdiction’s public policy. A corollary is that, where the arbitral tribunal assesses public policy compliance in the first instance, the enforcement court owes no deference. For example, in BCB Holdings Limited and The Belize Bank Limited v. The Attorney General of Belize, [2013] CCJ 5 (AJ), the arbitral tribunal considered an argument that a contract was void for illegality. The Caribbean Court of Justice (Appellate Jurisdiction) reasoned it was not bound by the tribunal’s decision in the enforcement proceeding and could assess the matter afresh (the Court in that case relied on Westacre Investments Inc v Jugoimport-SPDR Holding Co. Ltd [1998] 2 Lloyd’s Rep. 111, 118 in supporting this conclusion).

Not all courts agree with this approach. The German Oberlandesgericht Karlsruhe held that, in an enforcement application under the New York Convention, the court cannot delve into the merits; it may only refuse recognition when the arbitral award is so incoherent that it cannot reasonably stand (9 Sch 02/05, 27 March 2006). [again, we are providing no link]

Enforcing an award that materially violates the enforcement jurisdiction’s public policy risks bringing the administration of justice into disrepute. Accordingly, it seems preferable for the enforcement court to satisfy itself, undertaking as deep or superficial an inquiry as it deems necessary in the circumstances, that the award is public policy-compliant. This will sometimes, but not always, require the court to go beyond assuring the award is minimally coherent.

Third, and as Justice Crerar pointed out, the case law on the public policy exception to enforcing foreign judgments is useful in considering the public policy ground under the ICAA/Model Law and the New York Convention. The only nuance is that whereas Beals speaks to the public policy of “Canada”, section 36 of the ICAA refers to the public policy of “British Columbia”. In contrast, the New York Convention (as adopted in the FAAA) refers to “the public policy of that country”, in this case Canada as a whole.

This distinction will generally prove irrelevant, especially where the alleged public policy violation relates to a criminal prohibition. This is because the Criminal Code applies throughout Canada. One may nonetheless envision a disagreement between courts in different provinces/territories as to whether a given award violates public policy at common law. The courts in each province and territory retain the authority to assess common law public policy within their respective jurisdictions.