Ontario – security for costs order in recognition application appealable “because it speaks to the response of Canadian courts to international comity” – #479

In China Yantai Friction Co. Ltd. v. Novalex Inc., 2021 ONSC 3571, Ontario’s Divisional Court granted leave to appeal (i) a decision dismissing an application to order that the award debtor deposit the award amount pending opposition to recognition of the award and (ii) a decision granting an order for security for costs against the non-resident award creditor seeking recognition.  The award debtor had not applied to set aside or suspend the award in Beijing where the award was made and had not argued any of the grounds listed in article 36(1)(a) of the International Commercial Arbitration Act, 2017, SO 2017, c 2, Sch 5 to resist recognition.  The Divisional Court held there was “reason to doubt the correctness of the decision”.  Though the matter involved recognition of an arbitral award issued outside of Canada rather than a court decision, the Divisional Court considered the appeal “important because it speaks to the response of Canadian courts to international comity and our relationship to the courts of other countries”.

Novalex Inc. (“Novalex”) and China Yantai Friction Co. Ltd. (“Friction”) engaged in arbitration which resulted in a November 19, 2019 award (“Award”) requiring Novalex to pay Friction $1,000,000.00 USD under a contract for automobile brake pads it had received but for which it had not paid.  The arbitration appeared to be seated in Beijing given the mention at para. 2 that the Award “issued in Beijing” and the reference at para. 12 to no adjournment request by Novalex due to any set aside proceeding “by a court in China” and reference to article 36(1)(a)(v).  Article 36(1)(a)(v) provides that recognition or enforcement may be refused “only” at the request of the against whom it is invoked, if that party furnishes to the competent court where recognition or enforcement is sought proof that the award has not yet become binding on the parties or has been set aside or suspended by a court of the country in which, or under the law of which, that award was made.

With reference to article 34 of Ontario’s International Commercial Arbitration Act, 2017, SO 2017, c 2, Sch 5 (“ICAA”), the Divisional Court noted that Novalex could have but did not apply to set aside the Award.  The Divisional Court also recorded that Friction had applied to the Ontario Superior Court to have the Award recognized in Ontario under article 35 of the ICAA.

Novalex applied as a respondent under Rule 56.01(1)(a) for an order for security for costs which provided that a court “may make such order for security for costs as is just” where it appears that applicant “is ordinarily resident outside Ontario”.  Friction responded by applying for an order requiring Novalex to post the amount of the Award with the court. 

Hearing both applications together, the court in first instance (i) granted Novalex’ application and ordered Friction to post $76,376.71 as security and (ii) dismissed Friction’s application for deposit of the Award amount.  Friction applied for leave to appeal both orders.

The Divisional Court referred to article 36 for those grounds which a party resisting recognition must establish in order for the court to refuse recognition.

Regarding the standard for its intervention, the Divisional Court stated that setting aside an order for security for costs requires that the judge “made an error of law or exercised his or her discretion on the wrong principles or misapprehended the evidence such that there is a palpable and overriding error”.  See Zeitoun v. Economical Insurance Group, 2008 CanLII 20996 (ON SCDC) para. 40.

Rule 62.02 of Ontario’s Rules of Civil Procedure, RRO 1990, Reg 194 (“Rules”) govern leave to appeal to the Divisional Court.  The Divisional Court relied on Rule 62.02(4)(b) to grant leave which provides that leave to appeal from an interlocutory order shall not be granted unless “there appears to the panel hearing the motion good reason to doubt the correctness of the order in question and the proposed appeal involves matters of such importance that, in the panel’s opinion, leave to appeal should be granted”.

The Divisional Court examined both orders.  First, it noted that Novalex had not argued any of the grounds listed in article 36(1)(a) to resist recognition and, on its face, its opposition “is without merit and could be frivolous”.

[10] In the absence of an allegation that one of these grounds applies, the opposition to recognition would be without substance. There is no suggestion of, or evidence to demonstrate, which, if any, of the requirements listed in Article 36(1)(a) is the foundation for Novalex to oppose recognition. In the absence of such reliance the opposition is without merit and could be frivolous. This is the proposition put by Friction. It does not appear to have been considered by the judge deciding the motions and making the orders from which leave to appeal is now sought. The failure to take account of Article 36(1)(a) is an error in principle. The possibility that opposition to recognition is without merit would be directly relevant to a consideration of whether Novalex should be required to post security for the value of the award”.

Second, the Divisional Court noted that the judge made no reference to article 36(1)(a)(v) and its relationship to Rule 56.01 for security for costs.  In the following passages at para. 12, the Divisional Court emphasized the mention of “[i]f an application for setting aside or suspension of an award has been made”.

[11] Moreover, while in this case, security for costs was ordered to be posted by Friction under r. 56.01(a) (“…the applicant is ordinarily resident outside Ontario”), the statute governing recognition makes particular note of the circumstances in which security for cost may be ordered:

(2) If an application for setting aside or suspension of an award has been made to a court referred to in paragraph (1)(a)(v) of this article, the court where recognition or enforcement is sought may, if it considers it proper, adjourn its decision and may also, on the application of the party claiming recognition or enforcement of the award, order the other party to provide appropriate security.[6]

[12] Novalex has not, and is not, requesting an adjournment of this proceeding to allow for the setting aside of the award by a court in China (see: Article 36(1)(a)(v) quoted above). The order for security for costs and the reasons for it, as reviewed by the judge who heard the application, make no reference to this provision, and its relationship to rule 56.01 of the Rules of Civil Procedure. There is no review or discussion of which, if either, has primacy. This, too, is an error in principle”.

The Divisional Court determined Friction’s application met the terms of Rule 62.02(4)(b).  When stating its determination on a matter involving recognition of arbitral awards, the Divisional Court placed the appeal issues as raising Canadian courts’ response to international comity.

[13] There is reason to doubt the correctness of the decision of the application judge. This matter is important because it speaks to the response of Canadian courts to international comity and our relationship to the courts of other countries”.

urbitral notes – First, as of the date this note, the decision in first instance is not posted online. 

Second, for a decision involving an order to post security for costs when applying to appoint an arbitration, see the earlier Arbitration Matters note “Ontario – applicant seeking court appointment of arbitrator ordered to pay security for costs – #323” regarding Rayman Tiger Inc. v. Unger Tiger Inc., 2020 ONSC 691. Master Michael P. McGraw ordered that an arbitral party, applying for the appointment of an arbitrator, file security for costs related to its application.  Having insufficient assets in Ontario or any reciprocating jurisdiction, the party had to post security in order to engage the court’s assistance for its arbitration.  In ordering $15,000.00 rather than the $37,714.01 sought by respondents, Master McGraw distinguished the complexity of issues and facts of the eventual arbitration from those raised by the narrower application to appoint an arbitrator.

Third, for decisions involving interim decisions issued in arbitration and the courts’ role, if any, in reviewing such awards, see the earlier Arbitration Matters notes:

(i) “Ontario – interim procedural orders “immune from review” during arbitration even when titled “award” – #353” regarding Hristovski v. Hristovski, 2020 ONSC 4021. Madam Justice Francine Van Melle held she had no jurisdiction to hear an appeal of an arbitrator’s pre-merits hearing denial of further document disclosure. Despite use of the term “award” to title the decision, Van Melle J. determined that the denial was an interim procedural order. Unlike an award which disposes of disputes between parties, the order was not eligible for appeal, being “immune from review” under the Arbitration Act, 1991, SO 1991, c 17.  Van Melle J.’s reasons do not assert that interim decisions cannot later be challenged when appealing the final award if an interim decision impacts on the result. As neither party argued whether leave had to be sought/obtained, Van Melle J. made no comment on the issue.

(ii) “Ontario – interpreting agreement to allow appeal of procedural orders is commercially unreasonable – #395” regarding Converaidem, Inc. v. Mulcahy, 2020 ONSC 6747 in which Madam Justice Breese Davies dismissed an attempt to appeal interim procedural orders.  One section of the parties’ agreement to arbitrate described rulings on procedural matters as “awards” and a later section allowed the parties to appeal “awards” on a question of law. Davies J. held that, as a general rule, the same word will be presumed to bear the same meaning throughout a contract but that the presumption of consistent expression may not apply if the resulting meaning is absurd or commercially unreasonable. Her reading of the various sections, individually and together, supported her conclusion that allowing appeals of the challenged procedural orders, despite being termed “awards”, would be commercially unreasonable.

(iii) “Ontario – Court of Appeal reiterates that appeals of interlocutory orders in arbitration challenges are beyond its jurisdiction – #052” regarding DAC Group (Holdings) Limited v. Fuego Digital Media Inc., 2018 ONCA 43. In brief reasons, the Ontario Court of Appeal rebuffed a dissatisfied arbitral party’s attempt to foist jurisdiction on it over a Superior Court decision.  That decision had stayed enforcement of the arbitral award, on conditions, pending a hearing on the merits in Superior Court a few months away.  Madam Justice Mary Lou Benotto qualified such orders as interlocutory, observing that only the Divisional Court had jurisdiction to continue any appellate activity in regard to such Superior Court orders made pending final disposition of the challenge.