In Stans Energy Corp. v. Kyrgyz Republic, the Ontario Divisional Court recently refused to uphold a Mareva injunction issued to enforce an arbitral award made in Russia due to the applicant’s failure to fully disclose the proceedings to review that award in Russia.

This decision is of interest on two accounts

First, it is a timely warning about the dangers surrounding full disclosure when seeking enforcement of a foreign arbitral award by way of an ex parte Mareva injunction.

Second, the decision alerts us to the question of whether a foreign arbitral award should be enforced in Canada if the award is set aside by the courts of the country where the award was made. This issue is not canvassed by the Divisional Court, but someday soon it will have to be addressed by Canadian courts.

Background

  1. The Ontario Proceedings

The facts giving rise to this appeal are rather complicated and the following summary seeks to distill the essential ingredients as they appear from the judgment of the court.

In October, 2014, Stans Energy Corp. (the “Stans Energy”) applied to the Ontario Superior Court to enforce an arbitral award of the Arbitration Court of the Moscow Chamber of Commerce and Industry (the “MCCI”). The MCCI had ordered the Kyrgic Republic (the “Republic”) to pay to Stans Energy the sum of US$118 million as compensation for breach of the Stans Energy’s investor rights (the “Award”).

Before the enforcement application came on for hearing in Ontario, on October 10, 2015 Stans Energy moved ex parte for a Mareva injunction freezing the Republic’s shares in a Toronto-based company, Centerra Gold Inc. (“Centerra”), pending the outcome of the enforcement application. That ex parte injunction was granted, and two weeks later that injunction was indefinitely extended by an order of another judge of the Ontario Superior Court. It was those injunctions that were the subject matter of the appeal.

The Republic argued that, on those injunction motions, Stans Energy had not made full disclosure about the procedures in Russia to review and set aside the arbitral award. In addition, on the appeal it tendered new evidence – which the appeal court accepted – that in the meantime the arbitral award had been set aside by a Russian appeal court. Due to the alleged non-disclosure, the Republic argued that the Mareva injunction should be set aside. The Court of Appeal agreed and set aside the injunction.

  1. The Russian Background and proceedings

Stans Energy is a Toronto-based, publicly-traded company which, through subsidiaries owns a mining licence for a mine in the Republic. In June of 2012, that licence was cancelled at the direction of a committee of the Republic’s Parliament. Stans Energy then brought an arbitration proceeding against the Republic, seeking a remedy for the cancellation of its mining licence.

June 2014. The arbitral proceeding was brought by Stans Energy in the Arbitration Court of the Moscow Chamber of Commerce and Industry (the “MCCI”). The Republic asserted that the MCCI had no jurisdiction to conduct the arbitration and refused to participate in the proceeding. In June 2014, the MCCI rejected these arguments and proceeded to issue the Award.

The Republic filed an application with the Economic the Economic Court of the Commonwealth of Independent States (the “CIS Court”) seeking a determination of whether the MCCI had authority to resolve the dispute. However, the CIS court did not have the power to set aside an award. That could only be done by the Russian courts, as the supervisory courts in the seat of the arbitration.

July 1, 2014. The Republic also applied to the Moscow State Court to set aside the Award, based on the jurisdictional argument. That application was dismissed on July 1, 2014. The Republic appealed this dismissal to the Federal Arbitration Court of the Moscow District.

September 23, 2014. The CIS Court issued a decision to the effect that MCCI did not have jurisdiction in this matter. More detailed reasons were issued on October 6, 2014.

September 26, 2014. The Federal Arbitration Court found that the Moscow State Court’s decision was “premature” because the CIS Court had not yet rendered its decision. Therefore, the Federal Arbitration Court ordered the Moscow State Court to reconsider de novo its decision on jurisdiction, in light of the CIS Court’s findings.

April 18 – May 15, 2015.   The Moscow State Court conducted the hearing de novo on April 28-28, 2015. At the conclusion of the hearing, the presiding justice set aside the Award. The hearing of the appeal in the Ontario Divisional Court occurred on May 15, 2015. Just before the hearing of the appeal, the parties obtained the short-form decision of the Moscow State Court setting aside the Award.

  1. The Divisional Court’s description of the disclosure

The Divisional court’s findings with respect to the disclosure that was made to the Superior Court on the Mareva motion are pivotal to its decision. Among other things, it said the following:

  1. While Stans Energy provided information about the Russian proceedings in its affidavit evidence and factum, “ [n]owhere in this section, which should have described all of the Appellant’s efforts to challenge the MCCI’s jurisdiction, does the Respondent mention the Appellant’s successes in the CSI Court and the Federal Court of Arbitration of Moscow.”
  2. Stans Energy’s factum “essentially says that the CIS Court delivered an advisory opinion as to the types of tribunals that could arbitrate investor-state disputes in the absence of an explicit arbitration agreement between the parties. What it does not state is that the CIS Court determined that the MCCI was not one of the investor-state tribunals that could arbitrate the dispute in question in the absence of such an agreement. Further, the Respondent did not make it clear that the CIS Court’s decision was by its terms “final and not subject to appeal” and that, under the laws of the country where the arbitration took place, the CIS Court’s interpretation of the Moscow Convention is authoritative.”
  3. The materials which Stans Energy filed on the motion included the short-form decision of the CIS Court, but only in Russian. The English translation of the decision was not provided, even though it was available.
  4. While Stans Energy provided a copy of the original decision of the Federal Arbitration Court in its material, and an English translation, it did not “explain why the Federal Arbitration Court made the order it did — e., because the Moscow State Court did not consider the decision of the CIS Court which called into question the MCCI’s jurisdiction to make the Award. It also failed to explain that if the Moscow State Court found that the MCCI lacked jurisdiction, that Court had the authority to set aside the Award.”
  5. “As of the date of the application before the [Mareva injunction judge], the Award had not yet been set aside, although proceedings leading to that result were underway. Importantly, however, the CIS Court — the body with the lawful authority to determine this issue — had already declared that the MCCI did not have the jurisdiction to make the Award. Based on this decision, a Russian appellate court had ordered the Moscow State Court to reconsider its dismissal of the Applicant’s application to quash the Award. Given the provisions of Articles 35 and 36 of the Model Law, these facts were clearly material to the threshold question before the judge hearing the Mareva injunction motion: whether the Respondent had a strong prima facie case for Ontario courts to recognize and enforce the Award.”
  1. The Divisional Court’s decision on disclosure

The Divisional court held that the disclosure on the Mareva injunction motion was inadequate.

First, it adopted the test of “material fact” for the purposes of disclosure set forth in the Court’s previous decision in Forestwood Co-Operative Homes Inc. v. Pritz,:

“In our view, any fact that would have been weighed or considered by the motions judge in deciding the issues, regardless of whether its disclosure would have changed the outcome, is material.” (underlining added)

Second, and applying this test, the Divisional Court said that the result in the present case:

“could have been problematic: there is no requirement to demonstrate that the fact in question would have influenced the result, but only that it would have been weighed and considered by the judge who granted the injunction…This is the essential fact that was not disclosed to [the Marva injunction judge]: the CIS Court had issued a final and binding decision under the Moscow Convention (the law governing investor-state arbitrations in the country where the arbitration took place) that the MCCI had no jurisdiction to grant the Award. This fact is obviously material to the issue of whether the Respondent had a strong prima facie case for recognition and enforcement of the Award in the courts of Ontario. Recall that under Article 36 (1)(iv) of the Model Law, a court may refuse to recognize and enforce an award if the “arbitral procedure…was not in accordance with the law of the country where the arbitration took place.”

Third, the court addressed the question, raised by the second Superior Court judge who considered the extension of the Mareva injunction, as to whether “an Ontario court cannot get into Russian and Kyrgyz law and decide whether one side has the better case over another person under those laws.” The Divisional court said:

“To the extent that he is suggesting that an Ontario court cannot interpret the Moscow Convention to decide whether the MCCI did have jurisdiction, I would agree. However, to the extent that the court was being asked to consider a determination by a Russian tribunal with the authority to interpret the Moscow Convention as to whether the MCCI had jurisdiction, the Ontario court was required to weigh and consider that determination. That is because it bears directly on the first question that the court must decide — namely, does the Respondent have a strong prima facie case that the Award will be recognized and enforced in Ontario?”

The Divisional Court accordingly concluded:

“It may be that, having considered the CIS Court’s decision, [the judge hearing the ex parte motion for a Mareva injunction judge] would still have granted the injunction. However, that does not affect our conclusion that [that judge] was entitled to know (and the Respondent was obliged to tell him) the full extent of the CIS’s decision so that he could weigh and consider it before deciding whether to grant the Mareva injunction. The Respondent did not make full and frank disclosure when it portrayed the CIS Court’s ruling as merely advice about what type of institutions may arbitrate investor-state disputes.

Discussion

This decision highlights the pitfalls in enforcing foreign arbitral awards, particularly when ex parte remedies are sought and full disclosure is therefore required by the applicant. The applicant for those sorts of remedies must disclose any facts which the motion judge might reasonably consider.

When one is seeking an ex parte order to enforce a foreign arbitral award, it is not enough to provide the Canadian court with a copy of the award, or foreign court decisions dealing with it, in the foreign language. It may not be sufficient to provide a translation. Since the foreign award or court decision is a legal document, a reasonable effort to properly present and explain the award or decision to the Canadian judge must be made. What is required is the proper “portrayal” of the award and those decisions. The applicant must effectively make the arguments that the respondent would have made had it been there. That may place a considerable burden on the applicant. Indeed, in light of this decision, it may be too risky to bring a Mareva injunction to enforce a foreign arbitral award if there are jurisdictional or other serious legal issues relating to the validity of the award. But if such a motion is brought, then the burden of full disclosure is one that must be shouldered by the applicant who wishes to appear unopposed before the court.

The second issue that the present case raises relates to the enforceability in Canada of a foreign arbitral award which has been set aside by the courts of the jurisdiction where the arbitration has been conducted – in this case, Russia. Since the present case did not involve the enforcement of the award, but the issuance of a Mareva injunction as a preliminary step, this issue was not directly addressed. However, the Divisional Court appears to have almost assumed that the Moscow award would not be enforced in Canada because it was set aside by the Russian courts.

This assumption may not always apply. Article 36(1)(v) of the UNCITRAL Model Law attached to, for instance, the Ontario International Commercial Arbitration Act, states that a Canadian court may refuse to enforce an international commercial arbitration award if it is set aside by the court of the jurisdiction of the tribunal, but the court is not prohibited from enforcing it.

There are some famous cases in which the courts in one country have enforced an international commercial arbitration award made in another country, even though the award was set aside by the court in the country where the arbitral award was made. Thus, in Chromalloy Aeroservices v. Arab Republic of Egypt, an award of an Egyptian arbitral tribunal was enforced by the U. S. and French courts even though the award had been set aside by the Egyptian courts. The Dutch courts have enforced a Russian arbitral award even though the award had been set aside by the Russian courts, and the French courts also enforced foreign awards even though those awards had been set aside by the domestic courts.

In the present case, the Divisional Court was undoubtedly correct to hold that whether or not the Russian arbitral award had been set aside by the Russian courts was material to the issuance of the Mareva injunction, since that fact would be relevant, even if not determinative, to whether the award should be enforced. Moreover, the Republic may not have made any submissions as to why the award should be upheld in these circumstances.

There may be several reasons why a party which has obtained a foreign award may seek enforcement of it in Canada even though the award was set aside by the courts of the seat of the arbitration. In the Dutch courts, the unfairness of Russian court proceedings has been asserted as a reason for enforcing a Russian arbitral award notwithstanding a decision of the Russian court setting aside that award. In addition, the grounds for setting aside the arbitral award in the seat of the arbitration may be different than those in the enforcing state.

In any event, the Stans Energy decision is a good primer on the issue of “material non-disclosure” and an alert to the issues that Canadian courts will face when enforcement is sought in Canada of a foreign arbitral award which has been set aside in its home jurisdiction.

See Heintzman and Goldsmith on Canadian Building Contract, 5th ed., chapter 11, part 12

Stans Energy Corp. v. Kyrgyz Republic, 2015 CarswellOnt 8720, 2015 ONSC 3236

Arbitration – International commercial arbitration – enforcement of award – Mareva Injunctions – material non-disclosure

Thomas G. Heintzman O.C., Q.C., FCIArb                             August 20, 2015

www.heintzmanadr.com

www.constructionlawcanada.com