In Lakah v. UBS, 2019 QCCA 1869, the Québec Court of Appeal denied leave to appeal a Superior Court decision ordering an arbitral party, resisting recognition and enforcement in Canada of an award made in the U.S., to post $1 million as suretyship in Canada pending U.S. annulment proceedings. The Superior Court acknowledged that a stay should be granted only exceptionally “because it impedes one of the key goals of arbitration, which is to avoid protracted litigation”. In the circumstances, the grounds alleged in the U.S. annulment proceedings “appeared serious” on their face and merited a stay of the Canadian recognition and enforcement proceedings but, in light of the $150 million ordered in the challenged arbitral award, a suretyship of $1 million was “relatively modest”.
The November 1, 2019 appeal decision considered the September 11, 2019 decision of Mr. Justice Peter Kalichman, Québec Superior Court, court file no. 500-11056733-195. As of the date this note, the seven (7) page reasons for judgment in first instance were not yet posted online.
Mr. Michel Lakah (“Mr. Lakah”) and UBS AG et al. (“UBS et al.”) were parties to a November 2, 2018 arbitral award (“Arbitral Award”) which ordered Mr. Lakah and others to pay UBS et al. over U.S. $150 million ($151,603,902.00) plus interest calculated at 12% per annum.
Mr. Lakah applied on February 4, 2019 to the U.S. District Court, Southern District of New York, to vacate the Arbitral Award (“Motion to Vacate”). In June 2019, UBS et al. followed applied to the Québec Superior Court in Montréal to recognize and enforce the Arbitral Award (“Enforcement Proceedings”).
Mr. Lakah applied under article 654 of Québec’s Code of Civil Procedure, CQLR c C-25.01 (“C.C.P.”) to stay the Québec Enforcement Proceedings until a final decision issued on the U.S. Motion to Vacate. Mr. Lakah argued that allowing the Enforcement Proceedings to continue would be contrary to the interests of justice because it would waste resources and lead to a patently unfair result if the U.S. District Court granted the Motion to Vacate.
UBS et al. argued that (i) in order to justify a stay, Mr. Lakah had to demonstrate that his request was “somewhat exceptional” and has failed to do so; (ii) Mr. Lakah’s Motion to Vacate has no reasonable chance of success and is part of years of tactics to delay payment; and, (iii) the Québec Superior Court is not bound by the decision of the U.S. District Court on the Motion to Vacate and a suspension would serve nothing because the same debate would take place in Québec either way.
UBS et al. also required that, should a stay issue, Mr. Lakah should provide a suretyship as provided under article 654 C.C.P. Though not mentioned in either the Superior Court or Court of Appeal reasons, the “suretyship” sought under article 654 C.C.P. is defined at article 2333 of the Civil Code of Québec, CQLR c CCQ-1991 (“C.C.Q.”) and developed in articles 2334-2366 C.C.Q.:
“Article 2333 C.C.Q. Suretyship is a contract by which a person, the surety, binds himself towards the creditor, gratuitously or for remuneration, to perform the obligation of the debtor if he fails to fulfil it.”
Kalichman J. first analyzed the stay application then the request for suretyship.
(1) Stay application – Mr. Lakah and UBS et al. both invoked article 654 of the Code of Civil Procedure, CQLR c C-25.01 (“C.C.P.”).
“Article 654 C.C.P. The court may stay its decision in respect of the recognition and enforcement of an arbitration award if an application for the annulment or suspension of the award is pending before the competent authority of the place where or under whose law the arbitration award was made.
If the court stays its decision, it may, on the request of the party applying for recognition and enforcement of the award, order the other party to provide a suretyship.”
Kalichman J. observed that article 654 C.C.P. was modeled on article 36(2) of UNCITRAL Model Law on International Commercial Arbitration (1985), with amendments as adopted in 2006 (“Model Law”) and article 6 of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) (“New York Convention”).
Kalichman J. held that a right to a stay under article 645 C.C.P. is not automatic and that a court has discretion to refuse a stay. Exercising that discretion had to balance the “competing concerns on each side of the debate” which he contrasted as being Mr. Lakah’s reliance on the principle of proportionality and UBS et al.’s reliance on the guiding principles set out at articles 1-7 C.P.C. and the interests of justice.
Kalichman J. agreed with UBS et al. that a stay should be granted only exceptionally “because it impedes one of the key goals of arbitration, which is to avoid protracted litigation” but disagreed that the request itself was exceptional. “It is the context in which the request for a stay is made that will determine whether or not a stay is warranted”.
Kalichman J. held that a party seeking a stay must demonstrate “at the very least” that it has “arguable grounds to set aside the award and that its request for a stay is not frivolous”. At paras 20-21 Kalichman J. reviewed the grounds raised by Mr. Lakah. He agreed that Mr. Lakah’s arguments, summarized at paras 22-23 of his reasons, “appear to be serious”.
Though he acknowledged that UBS et al. might well prevail on the Motion to Vacate, Kalichman J. refrained from addressing the merits of that other application. Kalichman J. drew a line between his role and that of the U.S. District Court on the Motion to Vacate. He remarked that the Motion to Vacate “is not for this Court to decide” and Mr. Lakah had raised “arguable grounds” which “appear to be serious”. Mr. Lakah’s grounds in the Motion to Vacate were taken on their face and it was clear that Kalichman J. determined none of the merits of the allegations made by Mr. Lakah in the Motion to Vacate.
Kalichman J. considered UBS et al.’s submission that a party can “exceptionally” apply to enforce an arbitral award that had been annulled in the jurisdiction in which it was rendered, referring to the decision of the United States Court of Appeal, Second Circuit in Europcar Italia, S.p.A. v. Maiellano Tours, Inc.  USCA2 379 docket no. 97-7224 (September 2, 1998). Kalichman J. expressed caution and deference to the court seized with the annulment proceedings, preferring to wait for the U.S. District Court to determine the merits of Mr. Lakah’s arguments.
“ If the Banks are correct that this Court is not bound by the NY Court’s decision on the Motion to Vacate, it will certainly be inclined to show it great deference, particularly as it involves the application of a US statute, the Federal Arbitration Act. As the US Court of Appeals (Second Court) held in Europcar Italia v. Maiellana Tours, a “foreign court well-versed in its own law is better suited to determine the validity” of an award rendered in its own jurisdiction. If Mr. Lakah does attempt to raise before this Court, the arguments he presents in the Motion to Vacate, it is in the interests of the proper and efficient administration of justice that this be done after the NY Court has ruled and not before.”
Kalichman J. closed his analysis with what he identified as the key to issuing a stay in the circumstances: the short time period within which the U.S. District Court would render its decision on the Motion to Vacate. Mr. Lakah and UBS et al. agreed that the U.S. District Court would have six (6) months to issue its decision but disagreed on exactly when that delay expired. “Although they do not agree on when the delay expires, they accept that the delay is running and that judgment is expected by no later than December, 2019”.
The Québec Superior Court’s stay would therefore be temporary and avoid prejudice to Mr. Lakah if the Arbitral Award was recognized and enforced in Québec but then later set aside in the U.S. This latter result would be “extremely prejudicial” to Mr. Lakah. As well, a stay would reduce or eliminate the “considerable resources” Mr. Lakah and UBS et al. would incur.
“ The Court recognizes that the decision to be rendered on the Motion to Vacate may provide a different perspective on the appropriateness of a stay and of an order of suretyship. For this reason, the stay will remain in force for sixty (60) days after the NY Court’s decision on the Motion to Vacate, regardless of whether or not the decision is appealed. Needless to say, should the Motion to Vacate be dismissed, Mr. Lakah will have ample opportunity to request that a new stay but put in place. Depending on how the Motion to Vacate is decided, the competing interests that the Court will consider in weighing the merits of such a request, may change considerably.”
Having determined that a short stay was justified, Kalichman J. then turned to determining whether to order a suretyship and, if so, in what amount.
(2) Suretyship – UBS et al. sought a $5 million suretyship. They argued that such an amount was fully justified in light of the amount ordered in the Arbitral Award. Mr. Lakah resisted not only an order for suretyship but also the amount sought. He argued that the amount was “unreasonably high” and “if he cannot provide it, his right to a stay and his right to defend against the Enforcement Proceedings, will be impaired”. Mr. Lakah further argued that, given the amount of the Arbitral Award, a suretyship of $5 million was “of no practical consequence” but did not argue in favour of another, reduced amount.
Similar to the approach taken when issuing the stay, Kalichman J. relied on the facts as presented in the record as part of the circumstances relevant to ordering a suretyship. The distinction this time was that the facts were determinations made by a U.S. Court on contested motions involving Mr. Lakah and UBS et al. as opposed to only allegations stated by Mr. Lakah as part of its upcoming Motion to Vacate.
That decision, by Judge Loretta A. Preska, U.S. District Court, Southern District of New York, in Lakah et al. v. UBS AG et al. (07-cv-2799) (February 14, 2017), granted UBS et al.’s cross-petition to compel international arbitration on the theory of piercing the corporate veil and estoppel. (Kalichman J.’s reasons contain no mention of any appeal of Judge Preska’s decision raising a presumption that it was a final determination on those motions).
Kalichman J. had referred to Judge Preska’s decision earlier in his reasons at para. 20 when considering the stay. He returned to that decision at para. 34 when considering the suretyship. He listed a sampling of section headings drawn from the index to Judge Preska’s decision and concluded that, “[u]nder the circumstances”, a suretyship was “an appropriate means for Mr. Lakah to demonstrate the seriousness of his position before this Court and a guarantee, albeit a relatively modest one, of his ability to satisfy an eventual judgment.”
Kalichman J. remarked that Mr. Lakah provided no evidence that a suretyship was “beyond his means” and called no evidence to support his argument that he lacked the means to satisfy such an order. In doing so, Kalichman J. signaled the burden on a party resisting suretyship. “If he wanted to argue that he lacks the means to satisfy such an order, it was for him to bring evidence, which he chose not to.”
As a result of the above, Kalichman J.:
(i) granted a stay of the Québec Enforcement Proceedings;
(ii) limited that stay to a period of sixty (60) days following the decision of the U.S. District Court on the Motion to Vacate; and,
(iii) ordered Mr. Lakah to provide a suretyship in the amount of $1 million within thirty (30) days of his decision failing which the stay shall cease to have effect. (Note: in the conclusions to his decision in first instance, Kalichman J. used the term “Respondent” to refer to Mr. Lakah).
(a) Appeal Decision – Mr. Lakah applied for leave to appeal the decision, arguing that a suretyship of $1 million was unreasonable in the light of the guiding principles of procedure and, in addition, manifestly erroneous in fact and in law. Mr. Lakah was unsuccessful.
In his November 1, 2019 decision, Mr. Justice Patrick Healy, Québec Court of Appeal, restricted his involvement to an exercise of an appellate court’s limited jurisdiction to intervene in decisions regarding stay applications.
Referring to Lavigne v. 6040993 Canada Inc., 2016 QCCA 1755, paras 33-34, Healy J.A. held that a stay of proceedings is a case management measure and, in principle, cannot be appealed. Relying further on Lavigne v. 6040993 Canada Inc., paras 43-44, Healy J.A. refined that statement, reiterating the Court of Appeal’s earlier statement that an appeal could be allowed provided “exceptional circumstances” existed to prompt a conclusion that the “ruling appears unreasonable”and that a serious prejudice results from the decision.
Healy J.A. held that the refinement found no application in the circumstances.
“ The decision to impose a surety of $1,000,000 is essentially a matter of discretion that is governed by a standard of reasonableness. In an action of more than $150,000,000 a surety in the amount required by the judge cannot possibly be considered unreasonable. Indeed, as the judge said, it is “modest.” There is nothing in this file that could establish prima facie that the judge’s order is inconsistent with the principle of proportionality in civil proceedings and there is nothing that would justify interference with the judge’s exercise of discretion under article 654 C.C.P.”
Regarding consistency with proportionality in civil litigation, Healy J. also referred to Google Canada Corporation v. Elkoby, 2016 QCCA 1171.
Healy J.A.’s reasons are limited to an exercise of appellate intervention in case management measures. Nonetheless, he considered that the $1 million suretyship could not possibly be considered unreasonable or inconsistent with proportionality principles.
urbitral note – Three (3) notes stem from the reasons.
(a) Currency – The order to provide “$1 million” as suretyship does not specify the currency. Despite determining it to be “modest” relative to the U.S. $150 million, Kalichman J. does not specify that it too be paid in U.S. currency. Without further information, the amount is likely meant to be stated in Canadian dollars.
Section 12 of the Federal Currency Act, RSC 1985, c C-52 stipulates that such references be stated in the currency of Canada:
“Section 12 – All public accounts established or maintained in Canada shall be in the currency of Canada, and any reference to money or monetary value in any indictment or other legal proceedings shall be stated in the currency of Canada.”
Article 1564 C.C.Q. mentions legal tender.
“Article 1564 C.C.Q. Where the debt consists of a sum of money, the debtor is released by paying the nominal amount due in money which is legal tender at the time of payment.
He is also released by remitting the amount due by money order, by cheque made to the order of the creditor and certified by a financial institution carrying on business in Québec, or by any other instrument of payment offering the same guarantees to the creditor, or, if the creditor is in a position to accept it, by means of a credit card or a transfer of funds to an account of the creditor in a financial institution.”
(b) Facts stated in the record – For the stay, Kalichman J. resisted addressing the merits of Mr. Lakah’s grounds in the Motion to Vacate, accepting only to identify whether “serious grounds” appeared on the face of the record. Mr. Lakah’s proof of the short timeline of the process at the seat of the arbitration proved to be key in obtaining the stay.
For the suretyship, Kalichman J. also accepted the facts stated in the record to determine the circumstances applicable. He accepted (i) the stated value of the Arbitral Award, which had yet to be recognized and enforced, to determine a reasonable amount for the suretyship and (ii) the determinations of fact in the U.S. Court decision despite Mr. Lakah’s challenges to those determinations made in the Motion to Vacate.
Both Mr. Lakah and UBS et al. were able to prevail respectively on the stay and the suretyship based on facts stated in the record and accepted on their face by the Québec Superior Court and Court of Appeal in their considerations. Despite this willingness to rely on the record, Kalichman J. did identify the evidentiary burden borne by the party resisting an order for suretyship. If the party asserts a difficulty in making payment, that difficulty must be demonstrated and not just asserted.
(c) Suretyship for awards made in and outside Québec – Article 654 C.C.P., the key provision applied in both the Superior Court and Court of Appeal, appears only in those civil procedure rules applicable to international commercial arbitration awards “made outside of Québec”. Its equivalent for those awards made in Québec appears at article 645 C.C.P.
Québec’s C.C.P. contains Book VII entitled “Private Dispute Prevention and Resolution Processes”. That Book contains two (2) sections or ‘titles’: Title I “Mediation”, articles 605-619 C.C.P. and Title II entitled “Arbitration”, articles 620-655 C.C.P.
Title I on “Arbitration” comprises the following sections or ‘chapters’:
Chapter I – “General Provisions” – articles 620-623 C.C.P.
Chapter II – “Appointment of Arbitrators” – articles 624-630 C.C.P.
Chapter III – “Conduct of Arbitration” – articles 631-637 C.C.P.
Chapter IV – “Exceptional Measures” – articles 638-641 C.C.P.
Chapter V – “Arbitration Award” – articles 642-644 C.C.P.
Chapter VI – “Homologation” – articles 645-647 C.C.P.
Chapter VII – “Annulment of Arbitration Award” – article 648 C.C.P.
Chapter VIII – “Special Provisions Applicable to International Commercial Arbitration” – articles 649-651 C.C.P.
Chapter IX – “Recognition and Enforcement of Arbitration Awards Made Outside of Québec” – articles 652-655 C.C.P.
For awards issued within Québec, the process to recognize and enforce them is termed “homologation” and the suretyship rules applicable in article 645 C.C.P. apply. For those issued outside Québec, the process is termed “recognition and enforcement” and the rules in article 654 C.CP. apply.
Note that the article 654 C.C.P. appears in Chapter IX which is expressly limited to awards made “outside” of Québec. The mention of location designates the seat and lex arbitri of the arbitration and the related, exclusive remedy to annul the award in that jurisdiction.
The C.C.P. mentions “suretyship” in Title II at articles 638, 639, 645, 647, 653, 654 and 655 C.C.P.