Wednesday, 2 January 2013

When is a foreign judgment penal, and thus unenforceable?

In many jurisdictions including all of Canada, courts will not enforce foreign judgments that are shown to be penal in character.  In Dingwall v Foster,   [2012] A.J. No. 817  the Alberta Court of Queen’s Bench  recently considered whether a Nevada  judgment for damages issued after the defendant’s defence had been struck as a discovery sanction is penal and thus unenforceable.     The defendant had defied a court order to attend the discovery.  However, the damages were calculated based on the causes of action for which the plaintiff had sued, namely breach of  fiduciary duties, conversion, and others.   
The defendant had argued that the damage award was analogous to the American contempt order in Pro Swing v Elta Golf [2006] 2 S.C.R. 612 which the Supreme Court of Canada found was penal and thus unenforceable.  In Pro Swing, a trademark infringement case, a previous order had enjoined the defendant from selling certain golf equipment.  Because the defendant continued selling the equipment, the American court issued a contempt order which required the defendant to, among other things, account for the revenues it received from those sales.     
The Alberta Court of Queen’s Bench distinguished the Pro Swing contempt order on the grounds that it required Elta to account for activities it undertook (sales of equipment) in violation of the earlier court order.  By contrast, in Dingwall, the judgment to be enforced did not award damages arising directly from the defendant’s disobedience of a court order (i.e. the failure to obey an order to attend discovery). The damages were based on the original causes of action.    The Court commented that the judgment was indistinguishable from a default judgment arising from a failure to defend, and that it would be paradoxical to enforce the latter (as the law does) but not the former.  
With respect, the Court overstates the difference with the Pro Swing order, and understates the difference with the default judgment.   In Pro Swing, presumably the original claim included a claim for an accounting for sales that would have covered the same sales covered by the contempt order.   In other words, an judgment  for an accounting for those sales might well have been issued even if there had been no contempt.   The contempt order for an accounting thus can reasonably be said to be based on the original cause of action.  In Pro Swing, the Supreme Court stated that contempt orders, either for civil or criminal contempt, will be considered penal and thus unenforceable.  The reasons in Dingwall do not specify  whether the second court order was worded as a contempt order,  but the Nevada court referred to it as an order for sanctions, and it was issued after the defendant had violated a court order to attend discovery.
As for a default judgment issued upon a defendant’s failure to defend an action, such a judgment is issued, not to punish anyone, but instead because the defendant, having failed to defend, is deemed to have admitted that the plaintiff’s allegations are true.  In Foster, by contrast, the judgment flowed from a penalty,  namely the loss of the defendant’s opportunity to defend either liability or the quantum of damages claimed.   Although the judgment does not impose a fine separate and distinct from the damages for breach of fiduciary duties etc., the amount of those damages are quite possibly higher than if the defendant had been permitted to defend liability or the quantum of damages claimed.    Indeed the judgment in Dingwall illustrates the  point perfectly:   it included $45,000,000 in punitive damages which on  appeal in Nevada  were struck out,  as were $15,000,000 of general damages.  It is not hard to imagine that damages may have been lower still if the defendant had had an opportunity, at trial, to defend on liability or quantum of damages.
In conclusion, with respect, the decision in Dingwall is inconsistent with Pro Swing, and it construes too narrowly what judgments should be considered penal and thus unenforceable.

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