In Sociedade-de-Fomento Industrial Private Ltd. v. Pakistan Steel Mills Corp. (Private) Ltd, the British Columbia Court of Appeal recently considered the use of a Mareva injunction to enforce an award of an international commercial arbitration. The court over-turned the lower court’s decision which had denied that remedy based upon alleged material non-disclosure. In doing so, the court’s remarks add further support for the regime of international commercial arbitration. The court also issued a caution about applying the principles relating to domestic pre-trial injunctions when enforcement is sought of a foreign arbitral award since that award is already a judgment which deserves to be respected as such, subject to the limited objections to enforcement found in the provincial International Commercial Arbitration Acts and their adoption of the UNCITRAL Model Law.

Background Facts

The appellant SFI is an Indian company and the respondent PSM is a Pakistani state corporation. SCI commenced an international commercial arbitration claim against PSM claiming damages for breach of a contract for the sale of iron ore. In June 2010, SFI obtained an award in the arbitration in an amount equivalent to Cdn. $8.6 million. PSM failed or refused to pay the award despite repeated demands for payment. SFI learned that PSM owned a load of coal which was to be shipped out of Vancouver. In April 2011, SFI filed a petition in the B.C. Supreme Court seeking payment of the amounts owed under the arbitral award. Before the hearing of its petition, SFI applied for and obtained an ex parte Mareva injunction restraining the use of PSM’s assets in British Columbia, including preventing the vessel from leaving British Columbia or PSM from disposing of assets aboard any vessel in British Columbia without first paying into court security for the award.

PSM alleged that SFI had wrongly obtained the ex parte injunction. It said that SFI had not explained to the judge who issued that injunction why it could not enforce the arbitral award in Pakistan, and indeed had wrongly told that judge that it would have challenges in enforcing that award in Pakistan. PSM effectively took the position that the award should be first enforced in Pakistan and only then should it be enforced in another jurisdiction. Since SFI had not yet obtained the recognition of the arbitral award from the B.C. court when it obtained the injunction, that injunction was in the nature of a Mareva injunction and a material non-disclosures about the enforcement of the award in Pakistan meant that the injunction order should be set aside, PSM argued.

The motions judge hearing the motion to set aside the injunction agreed. She held that the failure of SFI to properly explain why it couldn’t enforce the award in Pakistan amounted to material non-disclosure and she set aside the injunction.

Decision of the B.C. Court of Appeal

In allowing the appeal, the Court of Appeal undertook a detailed analysis of the law relating to international commercial arbitrations to demonstrate that the premises of the motion judge’s decision were incorrect.

First, the court noted that the enforcement of international commercial arbitration awards is not based on comity arising from a connection of the dispute or arbitral award to the regime of enforcement, in this case British Columbia. Rather, it is based upon an enforcement regime arising from an international treaty – the New York Convention. That regime requires the contracting states to enforce international arbitral awards made pursuant to the laws of another contracting state. And that enforcement is without regard to any connection of the dispute to the enforcing state, a connection which is presumed to exist for the purpose of enforcement, both for purposes of final enforcement and any interlocutory steps toward enforcement. The court said:

“The New York Convention and the enabling legislation in British Columbia recognize an international arbitration award on the same basis as if it were a domestic award originating in this province. The language of the legislation is not ambiguous in this regard. A real and substantial connection is presumed to exist. It would be illogical to ignore this presumed jurisdictional connection for interlocutory purposes, but recognize it for final judgment purposes. The statutory scheme anticipates an action to enforce the award. There are only limited grounds on which the defendant could dispute the award in a recognition action per art. V of the New York Convention and s. 36 of the International Commercial Arbitration Act. I reiterate that I do not see how a real and substantial connection could exist for some but not all purposes in pursuing the claim through to judgment and enforcement…..I conclude that the recognition and enforcement proceeding is akin to a domestic proceeding, and that the judge ought to have approached the application on the basis that it was akin to a domestic proceeding.” (emphasis added)

 

Second, the court said that the decision to issue a Mareva injunction arising from an award of an international commercial arbitration tribunal depends upon the justice and convenience in doing so. The court stated the following principles that should be applied to that decision:

The overarching factor in granting the injunction is whether doing so achieves a balance of justice and convenience between the parties… Depending on the facts of the case important factors may include the merits of the underlying claim, the risk of dissipation of the asset, the balance of convenience and the interests of third parties…In my view, the following factors militated towards a finding that the injunction was properly ordered: first, the merits of SFI’s claim were very strong, approaching certainty given the limited grounds upon which the claim could be defended; second, the assets were about to leave the jurisdiction; third, the debtor had refused to pay the award over the ten months since it had been made; and, finally, damage to the third party could be alleviated, as it was, by SFI’s fortified undertaking…. On the other side of the equation was the presumably significant inconvenience of arresting and detaining a ship with a valuable commodity on board in circumstances where the commodity’s value exceeded the amount of the Final Award. None of these latter factors persuaded the granting judge to decline the injunction application, nor did they factor into chambers judge’s analysis in a decisive way. (emphasis added)

Third, the enforcement of an international commercial arbitration award in one contracting state does not depend upon whether efforts to enforce the award have been made in another contracting state more connected to the party against whom the award was made. The court did say that the efforts to enforce the award may be relevant to a decision by the court to issue an injunction – or might be made relevant by the applicant submitting evidence about those efforts – but enforcement of the award in British Columbia did not necessarily depend upon enforcement first in Pakistan. The court said:

“The availability of enforcement proceedings in Pakistan was not in my view an entirely irrelevant factor. In some cases, but not this one, a strong case might be made out that there was no risk of dissipation because of other available enforcement proceedings. Such considerations may properly be part of the balance of convenience analysis. Where, in my view, the chambers judge erred was in her implicit assumption that there was an onus on the appellant to turn first to Pakistan’s courts because of the parties’ limited association with British Columbia…” (emphasis added)

The B.C. Court of Appeal acknowledged that the availability of enforcement proceedings in Pakistan could be a factor in determining whether a Mareva injuction should be issued. However, the court held that there had been no misrepresentation about the efforts to enforce the arbitral award in Pakistan and that the motion judge had applied the wrong test to that issue:

“[The motion judge] reviewed the appellant’s disclosure through the lens of her erroneous conclusion that the onus was on the appellant to establish it could not enforce the award in Pakistan. As I have already said that is not the test. In any event, the appellant did not say that the award could not be enforced, rather he stated that enforcement would be “challenging” which implies it could have been enforced, but with some difficulty. The analysis should have been directed more to the question of whether considering all the circumstances, it was just and convenient to grant the injunction. The judge’s balance of convenience analysis ought to have taken into account the delay that would accompany enforcement proceedings in Pakistan, as well as the considerable doubt about the enforcement of that part of the award representing interest under Pakistani law…I cannot agree with the chambers judge that the appellant failed to disclose a material fact. The amplified evidence supports the representation that enforcement of the Final Award would be challenging in Pakistan. There is no amplified evidence that materially alters the balance of convenience analysis done by the granting judge.

Discussion

This decision of the British Columbia Court of Appeal provides a strong endorsement of the enforcement regime relating to international commercial arbitration awards. The New York Convention is all about enforcement of those awards. Virtually the sole purpose of the New York Convention is to provide mechanism for the enforcement of awards in signatory countries. Without that enforcement regime, the Convention is nothing.

The proper place of a Mareva injunction in that enforcement process can be a matter of debate. On the one hand, there is an award already, so that the injunction can be seen as a post-judgment enforcement of the award. On the other hand, the award has not been recognized in the state in which it is now sought to be enforced, in this case British Columbia, so that the Mareva injunction can be seen as pre-judgment enforcement.

The British Columbia Court of Appeal effectively neutralized that debate by holding that the real question is not whether the enforcement is pre or post judgment, but whether it is just and convenient to grant such an injunction. In making that decision, the court pointed to a number of factors that are important from the standpoint of international commercial arbitration.

First, under the International Commercial Arbitration Act of British Columbia (and most Canadian provinces) and the UNCITRAL Model Law, the grounds for refusing to enforce the arbitral award are very limited. So the first question on the injunction motion –is there a strong case on the merits? – has to be answered from that perspective.

Second, the applicant for the injunction does not have to prove that the award can or cannot be enforced in another jurisdiction. While the use and availability of other enforcement remedies may be material to the judge’s decision to grant a Mareva injunction, the applicant does not have to prove that it cannot enforce the award elsewhere. This conclusion shows that the system for the enforcement of international commercial arbitration awards is truly an international system. It is not based upon a presumption that the enforcement of the award is tied to any specific jurisdiction.

See Heintzman and Goldsmith on Canadian Building Contracts, (4th ed.) chapter 10, parts 1 and 2.

Sociedade-de-Fomento Industrial Private Ltd. v. Pakistan Steel Mills Corp. (Private) Ltd, 2014 CarswellBC 1499, 2014 BCCA 205 (B.C.C.A.)

Arbitration – International Commercial Arbitration – Enforcement of Arbitral Awards -Injunctions – Mareva Injunctions

Thomas G. Heintzman O.C., Q.C., FCIArb                                                     June 29, 2014

www.heintzmanadr.com

www.constructionlawcanada.com