My top pick for 2021 stands for the proposition that a foreign award creditor will not be ordered to post security for costs simply by virtue of being a non-resident seeking to recognize and enforce an arbitral award. In China Yantai Friction Co. Ltd. v. Novalex Inc., 2021 ONSC 3571, a three-person panel of the Divisional Court of the Ontario Superior Court of Justice (the “Divisional Court”) granted leave to appeal two interlocutory orders, including the order requiring the foreign award creditor China Yantai Friction Co. Ltd. (“Friction”) to post security for costs in the amount of $76,376.71. This case is important because it provides support for Ontario as an “arbitration-friendly” jurisdiction, and, as the Divisional Court noted, “ … it speaks to the response of Canadian courts to international comity and our relationship to the courts of other countries.”
When a foreign party commences proceedings in Ontario, often opposing counsel’s first move is to bring a motion for security for costs under Rule 56.01(1)(a) of the Ontario Rules of Civil Procedure on the grounds that “the plaintiff or applicant is ordinarily resident outside of Ontario.” This is precisely what happened in this case. The decision of the Divisional Court makes it clear that such a motion is not always appropriate in the context of international arbitration. Although not directly addressed by the Divisional Court in its reasons, seeking to recognize and enforce an international award poses unique considerations because the foreign party has already gone through a hearing on the merits, has an award in hand, and the grounds for challenging the enforceability of an international award are very limited. Under Article 36(1) of the UNICTRAL Model Law on International Commercial Arbitration, which is modelled after Article V of the New York Convention and reflected in the laws of every jurisdiction in Canada including as a schedule to Ontario’s International Commercial Arbitration Act, 2017 (“ICAA”), the grounds for refusing recognition or enforcement are limited to matters primarily related to procedural irregularities and public policy. Accordingly, barring such special circumstances, the underlying assumption of Article 36(1) is that an award should be recognized and enforced. The fact that an award creditor must commence proceedings to recognize and enforce the award means that the award debtor is already not complying with the award. This presumption of enforceability should thus not be diminished by requiring the award creditor to post security for costs merely because the award creditor is a not a resident in the jurisdiction. This is not to suggest that an order for security for costs is never appropriate. Rather, a more fulsome analysis is required beyond considerations of the nationality of the award creditor.
The Divisional Court recently released its decision on the appeal, Friction Co. Ltd. v. Novalex Inc., 2021 ONSC 7714. Briefly, the Divisional Court concluded that Justice Gibson, the motion judge, “ … failed to undertake an analysis of the justness of an order for security for costs in these circumstances,” and set aside the order for security for costs. In particular, the Divisional Court found that Justice Gibson:
“ … focused virtually all of his analysis on the fact that Friction is ordinarily resident in China;”
“ … failed to consider the merits of Friction’s Application, the fact that Novalex participated fully in the arbitration by the CIETAC, that the arbitration decision was unanimous amongst the three members of the tribunal, and that one of the members had been selected by Novalex;” and,
“ … gave no consideration to the very narrow grounds for refusing recognition and enforcement of arbitration awards under Article 36(1)(a) of the ICAA within which Novalex must bring itself.”
For earlier Case Notes on this, and related decisions, see the following:
- Ontario – security for costs order in recognition application appealable “because it speaks to the response of Canadian courts to international comity” – #479;
- Ontario – offer to settle in advance of stay application must contain real compromise to justify higher costs – #482; and
- Ontario – court assists parties with stay of action, referral to arbitration, certificate against land and injunction regarding public hearing – #500.