Ontario – notice requirement satisfied where form of notice reasonably calculated to inform of arbitral proceedings and opportunity to respond – #173

In Tianjin v. Xu, 2019 ONSC 628, Mr. Justice Laurence A. Pattillo dismissed objections to recognition and enforcement based on allegations that respondent did not receive notice and that arbitration did not qualify as “international”.  In doing so, Pattillo J. determined that using the form of notice adopted by the arbitral institution administering the arbitration satisfied the “proper notice” requirement.  To determine what constitutes “proper notice”, he also referred to and adopted as “a reasonable standard” the standard developed by U.S. authorities listed at para. 31 of his reasons.  Pattillo J. also determined that respondent’s domicile at the time she entered into the arbitration agreement qualified the arbitration as international.

Tianjin Huarong Equity Investment Fund Partnership (Limited Partnership) (“Tianjin Huarong”) and Shanghai Liyi Equity Investment Center (Limited Partnership) (“Shanghai Liyi”) (“Applicants”) applied under Ontario’s International Commercial Arbitration Act, 2017, SO 2017, c 2, Sch 5 (“ICAA”) for the court’s recognition and enforcement of a September 11, 2017 award (“Award”) issued in Applicants’ favour against Ms. Shuqin Xu (“Ms. Xu”) further to an arbitration administered by the Chinese International Economic and Trade Arbitration Commission (“CIETAC”).  The Award ordered Ms. Xu, jointly and severally with others, to pay Applicants RMB 51,398,996.30 (approx. CAD$10,187,072.00).

The Award resolved a dispute stemming from an October 29, 2011 investment agreement (“Investment Agreement”) signed between Applicants and Ms. Xu, her husband Mr. Jinlong Huang (“Mr. Huang”), Putian Zhonghong Investment Industrial Co., Ltd. (“Putian Zhonghong”) and Putian Southeast Xiangmi Industry Development Co., Ltd. (“Southeast Xiangmi”).

Under the Investment Agreement, in exchange for a combined payment of RMB 50,000,000.00, Tianjin Huarong and Shanghai Liyi acquired respectively 1.98% and 2.96% of Southeast Xiangmi’s shares.  In the event specific circumstances occurred, Applicants could elect to have a “transaction reversal” which required Ms. Xu, Mr. Huang and Putian Zhonghong to repurchase all Applicants’ shares plus simple interest at 10%. 

In their Investment Agreement, the parties agreed in case of dispute that “either party shall have the right to submit such dispute to China International Economic and Trade Arbitration Commission (Beijing) for arbitration in accordance with the valid arbitration procedures and rules of the Commission at the time”, that the arbitration tribunal will be composed of three (3) arbitrators designated in accordance with the CIETAC rules and that the Award “shall be final and binding for all parties”.

On May 8, 2013, Applicants gave notice to Ms. Xu and Mr. Huang seeking a transaction reversal. Applicants received no reimbursement and, on April 6, 2016, submitted their dispute to CIETAC naming Ms. Xu, Mr. Huang, Putian Zhonghong and Southeast Xiangmi as respondents.  CIETAC sent the Notice of Arbitration to Applicants and Respondents along with a copy of the CIETAC Arbitration Rules effective as of January 1, 2015 (“CIETAC Rules”).  Mr. Huang, Putian Zhonghong and Southeast Xiangmi appeared and participated in the arbitration.  Ms. Xu did not.

Pattillo J.’s reasons detail the many procedural steps taken by CIETAC, the arbitration tribunal and Applicants in the conduct of the arbitration, from CIETAC’s appointment of the three (3) arbitrators, to the commencement of the hearing April 28, 2017 and up to the issuance of the Award on September 11, 2017.

Applicants applied to the Ontario Superior Court on July 30, 2018 to recognize and enforce the Award. Ms. Xu resisted the application, raising two (2) grounds:

(i) Notice – Ms. Xu claimed she had not received notice of the arbitral proceedings and was therefore unable to present her case.  She argued that service should comply with the provisions of the November 1965 Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters; and,

(ii) Jurisdiction – Ms. Xu claimed the arbitration was not an “international commercial arbitration” as defined in the Model Law on International Commercial Arbitration, adopted by the United Nations Commission on International Trade Law on June 21, 1985 (“Model Law”).

At paras 12-21 of his reasons, Pattillo J. identified the sources of the applicable procedure for enforcing international commercial arbitration awards in Ontario.  He referred to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, adopted by the United Nations Conference on International Commercial Arbitration in New York on June 10, 1958 (the “Convention”) and the Model Law, both Schedules to the ICAA, as well as paras 9 and 11 from Yugraneft Corp. v. Rexx Management Corp., [2010] 1 SCR 649, 2010 SCC 19 commenting respectively on the purposes of the Convention and the Model Law.

Applicants filed in court copies of the Investment Agreement and the Award along with certified translations of excerpts of the Investment Agreement and the Award.  They argued that they met the requirements of Article 35 of the Model Law and that there were no grounds for refusing recognition and enforcement of the Award pursuant to Article 36 of the Model Law.

(i) Notice

Pattillo J. set out the CIETAC Rules on service and the various steps by which CIETAC, the arbitration tribunal and Applicants gave notice to Ms. Xu of the arbitration proceedings.  He pointed readers to Rusk Renovations Inc. v. Dunsworth, 2013 NSSC 179 and Consolidated Contractors Group S.A.L. (Offshore) v. Ambatovy Minerals S.A., 2017 ONCA 939 in which the courts discussed the meaning of notice and being able to present one’s case.  He referred to and adopted as “a reasonable standard to apply to determine what constitutes “proper notice”” the standard developed by U.S. authorities, listed at para. 31 of his reasons.  The U.S. authorities held that “the proper notice requirement will be satisfied where the form of notice given was reasonably calculated to inform the party of the arbitral proceedings and give them an opportunity to respond”.

He reproduced Article 8 of the CIETAC Rules and noted that they did not provide for compliance with the Hague Convention.

[35] In the absence of the CIETAC Rules providing for service in accordance with the Hague Convention, there is no requirement that service of notice of the arbitral proceedings or the arbitrators must be done in accordance with it.

Pattillo J. also excerpted the steps recorded by the arbitration tribunal in the Award which tracked the various efforts of CIETAC, the tribunal and Applicants to give Ms. Xu notice.  See para. 36.  In doing so, he clearly approved the approach adopted by Applicants to follow the procedure set out in the CIETAC Rules for service of documents in the arbitration.  The use of registered mail was accepted as ensuring “proper notice” because that procedure was permitted by the CIETAC Rules adopted by the parties to the Investment Agreement.

[40] The Award together with the evidence of Jie Fang establish that for a period of more than 10 months (May 9, 2016 to March 27, 2017) prior to the hearing of the Arbitration, the Court of Arbitration of CIETAC sent the Case Materials to Xu a total of seven (7) times to her two addresses in China (four of which were by notarized delivery) and three (3) times to her Canadian address in North York (two by notarized delivery). The three addresses were provided by both the Applicants and Southeast Xiangmi, a company in which Xu was a shareholder. The addresses in China were the address for notice agreed to in the Investment Agreement which Xu signed and the address of Southeast Xiangmi, of which Xu was a shareholder.

[41] There is no issue that at all material times, Xu resided at her Canadian address […] Ontario, Canada M2N 4A8. Her response to service on her by mail at that address is to say that during the relative period her ex-husband had commenced divorce proceedings against her in China and she therefore refused delivery of any mail from China. That evidence is not sufficient to overcome the substantial burden that she did not receive proper notice of the Arbitration or the arbitrators.

Pattillo J. provided a clear statement regarding the relative burdens of each party to such applications.

[42] Xu submits that it is incumbent on the Applicants to establish that proper notice of both the appointment of arbitrators and the arbitral proceedings have come to Xu’s attention by providing proof of service by CIETAC in the form of an affidavit or documents from CIETAC establishing notarized delivery. I disagree. Under the Model Law, Article 35(2), to obtain enforcement, the Applicants are required to supply the original award or a copy and if the award is not in the language of the court, the court may request a translation of the award. The onus then shifts to the responding party to establish proof in respect of one of the grounds of defence set out in Article 36. See: Depo Traffic Facilities (Kunshan) Co. v. Vikeda International Logistics and Automotive Supply Ltd., 2015 ONSC 999 (CanLII) at paras. 31 and 32.

(ii) Jurisdiction

Ms. Xu claimed that the arbitration did not meet the definition in Article 1(3) of the Model Law because her place of business was in China.  She argued this based on Applicants’ evidence that she “owned and controlled” Putian Zhonghong and Southeast Xiangmi, Chinese companies based in China, and that CIETAC used the address of Southeast Xiangmi to serve her.

Pattillo J. disagreed.  He pointed to Ms. Xu’s own evidence that her former husband was the directing mind of of the Chinese companies and that she was just a shareholder following his directions.  The fact that her last known address in China was at Southeast Xiangmi did not, by itself, indicate she carried on business there.  He found that, on her own evidence, at the time of entering into the arbitration agreement, she did not have a place of business in China.  Pattillo J. concluded that her “habitual residence” was the “governing factor” and had earlier determined, at para. 41 of his reasons, that she resided in North York, Ontario “at all material times”.  In doing so, he agreed with Applicants’ submissions on Article 1(4)(b).

[47] There is no issue that the arbitration was commercial. The Applicants submit that the arbitration was international as defined by the above definition. Specifically, they submit that as Xu is an individual, reference must be had habitual residence – the place where a person resides for an applicable period of time with intent to stay. In 2011, when the Investment Agreement (which contains the Arbitration Agreement) was entered into, Xu was living in Toronto with the intention of residing indefinitely. At the time of the Arbitration Agreement, therefore, while the Applicants place of business was China, Xu was habitually residing in a different State (Ontario, Canada).

Pattillo J. also provided an alternative to support his finding that the arbitration qualified for enforcement and recognition under the ICAA.

The subject arbitration is an international commercial arbitration as defined in the Model Law. Further, and if I am wrong that the Model Law does not apply, that does not prevent reformulation within the Application to rely on the Convention.