Ontario – agreement to either litigate or arbitrate in another country justifies stay – #312

In Best Theratronics Ltd. v. The ICICI Bank of Canada, 2020 ONSC 2246, Mr. Justice Robert Riopelle stayed litigation in favour of the parties’ agreement to litigate or arbitrate in South Korea but refrained from determining the role or mandatory nature of the agreement to arbitrate. Riopelle J. determined only that the courts of Ontario had no jurisdiction and omitted commenting on the primacy of litigation or arbitration in the parties’ agreement. By his omission, he deferred those issues for the parties to argue, if need be, at a later date before the courts in South Korea.

Further to a solicitation of bids issued by the Republic of South Korea (“South Korea”), through its Public Procurement Services (“PPS”), Best Theratronics Ltd. (“Best”) and PPS entered into a $13.5+ million USD contract for the supply of cyclotrons (“Contract”), a medical device in the field of nuclear medicine.

The Contract consists of two (2) components: a Contract Sheet and a General Provisions of Contract (“GPC”).  The Contract Sheet refers to a bond styled as a counter guarantee bond while the GPC refers to two (2) different bonds, namely a performance bond and a contract guarantee.

Of the three (3) bonds, the litigation concerned the performance bond referred to in the GPC which required that Best establish a performance bond in the amount of not less than 10% of the Contract value. Best responded by having a standby letter of credit (“SBLC”) issued by the ICICI Bank of Canada (“Bank”) with PPS as beneficiary.

The Contract Sheet provides that payments would be made in four (4) instalments with the first two (2) totalling $8.6+ million USD or 65% of the Contract price subject to Best reaching certain benchmarks.  The Contract Sheet further provided that, with respect to that pair of first advances, Best provide a counter guarantee for 110% of each payment, payable to PPS.

Best did not obtain the counter guarantee bond and, in its submissions summarized at para. 10 of the reasons, submitted why it was justified in not doing so.

The issuer of the letter of credit and PPS both denied payment of Best’s invoices for the first advances.  PPS made a demand for payment by the Bank of the $1.3+ million USD guaranteed by the SBLC. Best applied to the Ontario Superior Court and obtained a time-limited temporary injunction preventing the Bank from making payment to PPS. Riopelle J. closed his summary of the facts and procedural history by noting that “[t]o protect its injunction Best started this action in Ontario and was thus able to obtain from this Court extensions of the injunction from time to time”.

(The reasons appear to blend mention of South Korea and PPS as the party to the contracts and the bonds as well as applicant in the action seeking the stay. As much as possible, for ease of reading, this note mentions South Korea when not otherwise required by the reasons).

South Korea applied for (i) an order under Rule 21.01(3)(a) of Ontario’s Rules of Civil Procedure, RRO 1990, Reg 194 dismissing Best’s action and (ii) an order setting aside the injunction.  Best applied to extend the injunction. Riopelle J. stayed the action and continued the injunction.

Article 31 of the GPC entitled “Jurisdiction of the litigation and arbitration” contained a forum selection clause and the opportunity to undertake arbitration.

Article 31 – 1. When legal proceedings are deemed to be necessary for the rights and obligation (sic) in connection with this contract, the First Trial Court for the concerned litigation shall be the court chosen by PPS among the competent courts by the law and one of the following courts:

(1) Seoul Central District Court;

(2) the Competent Court where the head office of PPS belongs.

2. However, the dispute may be settled by arbitration in Korea (sic –“without”?) the necessity of court proceedings, in accordance with the International Arbitration Rules of the Korean Commercial Arbitration Board and under the Laws of Korea only if an agreement is made between the parties to the dispute”.

South Korea and Best agreed the court had jurisdiction simpliciter over litigation involving the Contract. South Korea had the burden of establishing that article 31 was “valid, clear and enforceable”. It argued that the Ontario courts had been “dispossessed” of jurisdiction under the forum selection clause because it granted exclusive jurisdiction to South Korean courts over any litigation arising under the Contract.

Best argued that article 31 was “operationally defective” and outlined concerns raised by its interpretation of article 31. Riopelle J. disagreed. He set out the interpretation given to article 31 by Best and the consequences Best claimed followed that interpretation but resisted both.

[19] Best’s interpretation would require PPS to bring any litigation arising from the contract only in South Korea but permit Best to sue PPS in whatever jurisdiction it desires. It is not logically or commercially reasonable to interpret the forum selection clause to mean that PPS restricts its ability to sue Best exclusively in South Korea, a jurisdiction where Best likely has no substantial assets, and at the same time expose itself to be sued in whatever foreign jurisdiction Best selects. In addition, that raises the possibility of two actions proceeding in separate jurisdictions:  PPS v. Best in South Korea and Best v. PPS elsewhere. Two parallel proceedings on the same subject-matter proceeding in two different jurisdictions enhances the risk of inconsistent findings of fact and of conflicting decisions”.

In addition, Riopelle J. identified further “[i]ndicia in the GPC which support that any adjudication, whether by litigation or by arbitration, must occur in South Korea”. First, the governing laws applicable to performance of the Contract were the laws of South Korea. Second, South Korea was the only country referred to in article 31 for litigation and arbitration.

Riopelle J. applied the test, stated in Douez v. Facebook, Inc., 2017 SCC 33, [2017] 1 SCR 751 paras 28-29, requiring South Korea to establish that the forum selection clause be “valid, clear and enforceable”.  Despite mentioning forum selection clause, Riopelle J. did not limit his consideration of the article 31 to litigation. His analysis gave equal treatment to that article’s agreement to arbitrate in South Korea, mentioning that both litigation and arbitration were to be conducted in South Korea.

[22] Article 31 is inelegant but not unintelligible. The intent is clear: South Korea is to have exclusive jurisdiction over any disputes, whether resolution is sought by litigation or by arbitration. Distilling 31(1) to its ordinary grammatical meaning produces the following:

When legal proceedings are deemed to be necessary … the First Trial Court for the concerned litigation shall be the court chosen by PPS … among … one the following courts …

[23] The only two courts referred to are both in South Korea. The forum is South Korea. The venue is one of the two named-courts in South Korea. Article 31(2) provides that, if the parties agree, the dispute may settle without the necessity of court proceedings by way of arbitration “in Korea” conducted in accordance with international arbitration rules and “under the laws of Korea”.

As a result of his reading of the article 31, Riopelle J. held that the courts of Ontario had no jurisdiction.  In addition, Riopelle J. held that he had discretion not to grant a stay if Best could prove a strong case for not doing so. See Z.I. Pompey Industrie v. Ecu-Line N.V., 2003 SCC 27, [2003] 1 S.C.R. 450 para. 19 for the list of considerations in exercising that discretion. 

Regarding the choice of laws, Riopelle J. addressed Best’s arguments about the role of the United Nations Convention of the International Sale of Goods (“CISG”). Both parties agreed that the Contract was subject to South Korean law and presented expert evidence on aspects of that law. Riopelle J. listed some features at para. 31 of his reasons.

[32] Both Ontario and South Korea are signatories to the United Nations Convention on the International Sale of Goods (the “CISG”). Best’s position is that the contract’s choice of law clause does not specifically exclude the CISG and therefore the applicable law would be the same whether the matter was heard in Ontario or in South Korea. Best also says that the CISG may be a comprehensive code. PPS submits that the CISG is not a comprehensive code and that the court may therefore be required to have recourse to the laws of South Korea for any matters that are outside of the CISG. In its Reply Factum, at para. 24, PPS quotes the following from Franco Ferrari and Marco Torsello, International Sales Law in a Nutshell, (St. Paul: West, 2014):

… the CSIG does not constitute a ‘comprehensive code’. As the CISG’s scope of application is limited, resort to private international law is necessary to identify the law applicable to issues not governed by the CSIG…

 The Reply Factum contains other references to the same effect”.

Riopelle J. determined that, on the record before him, Best had provided no reason to “depart from the presumption that Best should be held to the bargain it made”.

Riopelle J. declined to consider the principle of forum non conveniens as it was moot, given that the Courts of Ontario had no jurisdiction over the subject matter of the dispute.

Regarding Best’s request to extend the injunction, Riopelle J. accepted to extend it to the earliest of three (3) events listed at para. 42(4) of his reasons. Those dates included (i) mere passage of time up until December 20, 2020; (ii) allowing South Korea to apply no later than August 4, 2020 to dismiss the injunction; and (iii) 35 days after a competent South Korea court issued particular orders against South Korea, the Bank or a third financial institution specified in the order.  

urbitral note – First, Riopelle J. took care to pair litigation and arbitration “in South Korea” as indicia relevant to determining whether the courts of Ontario had jurisdiction. South Korea’s application invoked Rule 21.01(3)(a) but Riopelle J. made no binding determination that only litigation justified his decision. He held back from asserting the primacy of either litigation or arbitration. In doing so, he deferred to the parties and the courts of South Korea the debate and decision as to which form of dispute resolution could or must apply.

The omission of any mention of Ontario’s International Commercial Arbitration Act, 2017, SO 2017, c 2, Sch 5 is not unusual when discussing a stay in favour of enforcing an agreement to arbitrate. For other cases invoking Rule 21.01, see the Arbitration Matters notes “Ontario – facts determine jurisdiction and not the characterization of those facts” and “Ontario – clause omitting express referral to arbitration still valid enough to stay litigation”.

Riopelle J. only held that Ontario had no jurisdiction. As with the issue of forum non conveniens, further determinations, including the decision regarding a stay in favour of arbitration, no longer rested with the Ontario courts once their “dispossession” had been confirmed.

Second, Riopelle J. did not directly address the binding nature of the agreement to arbitrate or whether it, in and of itself, could justify a stay of proceedings. Article 31 mentioned arbitration in South Korea but presented it as completing the parties’ agreement on dispute resolution. That is, article 31 does mention litigation but also says the “dispute may be settled by arbitration in Korea”.

Following Riopelle J.’s decision, the discussion, if any, of the role and binding nature of the agreement to arbitrate rests with the courts in South Korea.

Third, in addressing the role of substantive law, Riopelle J. considered Best’s argument that the CISG was a complete code vs South Korea’s argument that the CISG did not address all matters raised by the dispute. Ontario’s seldom-cited International Sales Conventions Act, RSO 1990, c I.10 at section 3(1) only provides that “[t]he United Nations Convention on Contracts for the International Sale of Goods that was opened for signature at Vienna on April 11, 1980, set out in Schedule 1, has force of law in Ontario”.  The Ontario legislation did not diminish South Korea’s argument that the CISG was not a comprehensive code and that South Korean law therefore could be relevant to any matters beyond the CISG.