British Court Imposes Duty on Directors of Corporate Contemners to Ensure Freezing Orders are Obeyed

The British courts, which first developed the Mareva injunction remedy, continue to demonstrate their leadership of the common law world in the area of  freezing injunctions.    The High Court of Justice, Queen’s Bench Division, Commercial Court has recently ruled, in Templeton Insurance v. Motorcare Warranties,  that corporate directors who are aware of a freezing order against their company have a duty to take reasonable steps to ensure the order is obeyed, and wilful failure to take such steps is punishable as contempt.  That the director did not know his/her actions constitute a breach of the order is not a defence.   

Here are the facts of the case.  Motorcare sold insurance as an agent for Templeton. Templeton sued Motorcare after  Templeton came to believe Motorcare was providing false financial information. The trial court issued the following injunction:  Motorcare was not to “remove from England and Wales or in any way dispose of, deal with, or diminish the value of,  other than by payment to [Templeton] any of its assets in England and Wales”.  This particular order was issued only against Motorcare, not its directors.  The order also stated “It is a contempt of court for any person notified of this order knowingly to assist in or permit a breach of this order. Any person doing so may be sent to prison, fined or have his assets seized”.   The directors knew of the injunction. Shortly after the trial, Motorcare went into liquidation, and transferred to a successor company called Motorcare Elite all of the Motorcare business, including the network of sales agents, office premises, staff, website, business name, goodwill and so on.  The directors of Motorcare were shareholders in Motorcare Elite.  Templeton then sought an order for committal of the directors for contempt. 

Because the directors were not personally bound by the order,  to prove contempt (criminal, not civil contempt), under  British law one must show the accused’s act constitutes a “wilful interference with the administration of justice”.  Templeton argued that because the accused were directors of the company, there was no need to prove they knowingly breached the order.  The directors claimed not to know that the transfer from Motorcare to Motorcare Elite constituted a breach of the order, and  argued that they cannot be found guilty without proof they knowingly breached the order.  The Court rejected Templeton’s argument as too broad, and the directors’ argument as too narrow. The court held instead that directors who are aware of a freezing order against the company (or undertaking) have a “duty to take reasonable steps to ensure the order is obeyed, and wilful failure to take such steps is punishable as contempt”.  Such failure is wilful unless the directors had a reasonable belief that other officers or directors would take such steps.  The Court found the directors guilty of contempt; the court did not decide the penalty at that hearing but made clear it would consider incarceration.

While Mareva injunctions directed against third parties -- e.g. orders compelling a defendant’s bank to freeze its accounts -- are a potent weapon, the effectiveness of Mareva injunctions directed against a corporate defendant depends largely on whether the risk of a contempt proceeding would influence the officers and directors.  If the officers and directors can take the assets out of the defendant with impunity, the Mareva injunction will be of little practical value. The ruling in Templeton reflects the view that Mareva injunctions are an important part of modern litigation and thus the law should ensure they have practical value.

Under the rules of court in some provinces including Ontario and Manitoba, where a corporation has been found in contempt, a judge may impose sanctions also on an officer or director of the corporation  (For Ontario, see rule 60.11(6) of the Rules of Civil Procedure).  To prove contempt it must be established that the accused  deliberately or wilfully or knowingly did some act which was designed to result in the breach of a court order.  The law in Ontario does not presently impose the same duty imposed in Templeton.     However, Canadian courts have followed Britain’s lead on many aspects of pre-trial remedies, and should consider following Templeton too. 

B.C. Court Finds Enforcement of Arbitral Awards in PRC “Irregular”

The B.C. Supreme Court has recently granted a Mareva injunction on the grounds that enforcement of an arbitral award in the People’s Republic of China (“PRC”) could be problematic, in BlueHorizon Energy Inc. v. Ko Yo Development and Guangan Lotusan Natural GasChemical 2012 BCSC 58. 

The case arose out of the plaintiff’s contract with two Chinese defendants to dismantle a methanol and ammonia plant in Kitimat, B.C., for shipment to the PRC.  A dispute arose in the course of dismantling the plant, the agreement was terminated, and the dispute was referred to arbitration.  At this point the plaintiff had performed about three million dollars worth of work, for which it had not been paid, and a further four million dollars of work remained under the contract. The plaintiff brought a motion for a Mareva injunction restraining the defendants from moving parts of the dismantled plant out of Canada, or requiring them to post security, on the grounds that the defendants have no assets in Canada, and enforcement of an arbitral award in the PRC would be problematic (despite the fact the PRC is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards).  Based on expert evidence from a Hong Kong lawyer, the court found that “enforcement of arbitral awards in the PRC is irregular” (para. 47). 

The evidence before the Court regarding enforcement of foreign arbitral awards in the PRC – which consisted of  several articles written by experts in arbitration --  provided some anecdotal evidence of controversial refusals to enforce, but did not clearly show a strong tendency to refuse enforcement, particularly on improper or controversial grounds.  One article said enforcement is sometimes delayed for months or longer.  Another said that Chinese law gives the local courts (which are responsible for enforcement) discretion not to enforce even an award that has been confirmed by the Supreme People’s Court, but no examples of the exercise of this discretionary power were disclosed. 

    There was also an article that surveyed twenty refusals of enforcement between 2000 and 2009 (most but not all of which were awards against Chinese parties) on grounds recognized in the New York Convention or because the limitation period for enforcement had expired.  However, there was no evidence as to the proportion these refusals represent in the total number of foreign arbitral awards presented for enforcement in the PRC, nor was there evidence that such refusals are more common in the PRC than in other countries. 

Another article stated that under Chinese law the public policy exception to enforcement (which in the PRC legislation is referred to as “social and public interest”) may be wider than in other countries.  However, another article showed that the application of this defence to enforcement reflects a pro-enforcement philosophy.

The finding in the Blue Horizon case about enforcement may help those who seek alternatives to enforcement of arbitral awards in the PRC.  However, courts outside B.C. would not likely grant a Mareva injunction on the same facts as in Blue Horizon.  The requirements for a Mareva injunction in B.C. are not as stringent as in other parts of Canada.   B.C. law requires only that the plaintiff present a strong prima facie or arguable case on the merits, and that, having regard for all the circumstances, the granting of the injunction be just and equitable.   Unlike in Ontario, B.C. law does not require evidence of fraud or impropriety. 

French Courts Now May Enforce Foreign Judgments for Punitive Damages

France’s highest court, the Court of Cassation, has ruled that foreign judgments awarding punitive damages are enforceable, at least in principle.  This ruling ends France's long-standing blanket prohibition on enforcement.  In France until now, as in some other European countries, damages are available only to compensate for loss, not to deter or punish wrong-doing. 

The judgment in question was awarded by a court in California against a French yacht manufacturer that had failed to disclose to its customer, the plaintiff, the fact the yacht had been damaged and repaired before delivery to the customer.  The court awarded $1,391,650 for general damages and $1,460,000 for punitive damages. 

In France, as in Canada and elsewhere, foreign judgments contrary to public policy are not enforceable. Up until now, in France that meant that judgments for punitive damages are not enforceable at all.  The Court of Cassation ruled that in principle, punitive damages are not contrary to public policy, unless the amount of punitive damages is disproportionate to the amount of the damage sustained and the debtor’s breach of contractual obligations.   In this case, the Court held the amount was “manifestly disproportionate”, and thus declined to enforce the judgment.   Unfortunately the Court did not provide much guidance on what constitutes a disproportionate amount.

French legislators have proposed a revision to the French Civil Code to permit punitive damages, up to twice the amount of the compensatory damages.  However, owing to the recent change of government in France, enactment of that amendment is not expected soon.

This court decision and the proposed legislative amendment are part of a trend in French law toward greater receptivity to foreign legal traditions and philosophies.  Article 14 of the Civil Code permits a French citizen to sue non-resident defendants in French courts regarding contracts made in France, or even those made outside France, which provision is at odds with principles of jurisdiction in a number of countries including Canada .  In 2007, the French Court of Appeal tempered the reach of this provision when it ruled that a French citizen that has agreed to arbitrate a dispute may not avoid arbitration by relying on Article 14 of the Civil Code.   In other words, by agreeing to arbitration the French citizen surrendered his rights under Article 14.  

Digest of NY Convention Case Law Launched

A new, online searchable digest of case law relating to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“the Convention”) was launched July 2, 2012.  Created jointly by   UNCITRAL, the U.S. law firm Shearman and Sterling LLP, and Columbia Law School, and available at www.newyorkconvention1958.org ,  the digest pulls together case law relating to the application and interpretation of the Convention from fifteen different jurisdictions, including Canada, the U.S., the U.K., India, the People’s Republic of China, the Russian Federation and Brazil.   More jurisdictions may be added later.   The cases are presented as summaries focusing on the court’s decision as to the application and/or interpretation of the  Convention, with a link to the whole decision, although it appears summaries have not yet been prepared for all decisions.   At this point the digest contains over 700 cases.  This digest, called the New York Convention Guide, is  a welcome addition to the research resources for international arbitration.

Chevron Foreign Judgment Case is a Fraud/Denial of Natural Justice Defence Case Writ Large Enormous

     Chevron's defences to enforcement  in Canada of the US$18.3 billion Equadorian judgment are relatively few, and are dwindling.     

      Unlike in some enforcement cases, the trial court's jurisdiction over the defendant will not likely be an issue here.  The plaintiffs originally sued Texaco in 1993 in Federal Court in New York in connection with environmental damage in Equador in the 1970's and 1980's by Texaco (which was purchased by Chevron in 2001).  Texaco resisted on jurisdictional grounds, insisting that the proper forum was Equador and that the courts there would provide a fair trial, and promising to attorn to that jurisdiction.  The jurisdictional battle was hard fought and raged until 2001.  The trial in Equador would be before a judge alone, not a jury, and some believed the Equadorian judiciary was notoriously corrupt.  These facts plus the fact that oil represented a third of the Equadorian government's revenue led some to believe the Equadorian court would side with Texaco. Ultimately, the oil company prevailed and the case was moved to Equador in 2001. The Equadorian court gave judgment against Chevron last year, making this a massive case of buyer's remorse. 

      Chevron denounced the judgment as "illegitimate and unenforceable",  and declared that “We’re going to fight this until Hell freezes over—and then we’ll fight it out on the ice.”    Chevron has employed unprecedented tactics in resisting enforcement.  Shortly before the Equadorian court issued its judgment, Chevron moved pre-emptively to obtain an order from the Federal Court in New York restraining the plaintiffs from enforcing any Equadorian judgment.  (However, this brash move conceivably contributed to the ultimate outcome in Equador.)   Last fall, Chevron persuaded the court to restrain the plaintiffs from enforcing the judgment anywhere in the world. This order was soon set aside on appeal, but I understand an order restraining enforcement in the United States remains in effect.  Because Chevron attempted but failed to get a restraining order with extra-territorial effect, Chevron's prospects for having the order enforced in Canada (if it chooses to pursue this) are diminished.    

      Chevron takes an aggressive stance not only because it has vast financial resources, but also because of indications of serious problems in the trial proceeding,  including some admissions of same allegedly made during the trial by one of the plaintiffs' counsel. He said, “They’re all corrupt,” referring to Ecuadoran judges. “It’s their birthright to be corrupt.”   On another occasion, he allegedly said "The only language that I think this judge is going to understand is one of pressure, intimidation and humiliation".  (The judge in question might not be the same judge who issued the judgment, as a number of judges came and went over the course of the decade-long proceedings.)  Apparently there is also evidence that an environmental assessment report bearing the name of certain expert was not in fact his work, that the report of a court-appointed neutral expert was partially drafted by the plaintiff, and that meetings with judges took place sometimes without representatives of both sides present. 

       However, as the Supreme Court of Canada said in Beals v Saldanha, "the merits of a foreign judgment can be challenged for fraud only where the allegations are new and not the subject of prior adjudication".   Almost certainly Chevron raised these allegations in the proceedings in Equador. 

      If so, Chevron may have to pin its hopes on the denial of natural justice defence.   Chevron was not denied its right to notice of the trial and to participate in it, so Chevron's defence may be limited to bias, specifically bias on the part of the judge who issued the judgment.

      I hope to provide updates and more commentary as the enforcement proceedings progress.

New Arbitration Rules in China

New Arbitration Rules in China

            Several much-needed revisions to the China International Economic and Trade Arbitration Commission(“CIETAC”) Arbitration Rules came into effect this month, giving CIETAC and CIETAC arbitrators more of the powers already held by such institutions as the International Chamber of Commerce, the London Court of International Arbitration, and the Hong Kong International Arbitration Centre.  These revisions are especially welcome because in the People’s Republic of China (“PRC”) enforcement of foreign judgments is highly restricted.  This post highlights the key changes.   

Interim Measures  An arbitral tribunal may now grant interim measures, and also appropriate security.  The new rule does not specify the scope of interim measures, but they might include orders to restrain infringement of a patent.  It does not include conservatory measures (e.g. orders to protect evidence).  As before, a party seeking conservatory measures submits a request to CEITAC, which then forwards the request to a PRC court.

  Unfortunately, the tribunal does not have power to enforce its interim measures, nor do the courts of the PRC.  However, the PRC is currently revising its Civil Procedure Law, and so there is some prospect that the courts will gain such enforcement powers.  

Conciliation  One new rule provides new safeguards of natural justice for parties in situations where, as often happens in the PRC, conciliation occurs during the arbitration process. Up until now, the arbitral tribunal itself would conduct the conciliation.  Parties were concerned that, in the event the conciliation failed and arbitration resumed, the tribunal when making its award might consider information disclosed off the record in the course of the conciliation.  As well, information that one party has provided to the tribunal in a private conciliation meeting might not be disclosed to the other side.  The new rule gives the parties the option to have CIETAC, instead of the tribunal, undertake the conciliation.

Summary Procedure  The fast-track, three-month  summary procedure is now available for cases up to RMB2,000,000 (about US$316,000), up from the old limit of RMB500,000.

Evidence  The rules now permit parties to use oral evidence as well as documentary evidence.  Traditionally,  mainly documentary evidence is used in arbitrations in the PRC.

Selection of Arbitrator  Parties are no longer required to select their arbitrator(s) from the CEITAC Registry of arbitrators.   Also, the rules now provide guidance to the CEITAC in situations where it appoints the arbitrator:  CEITAC must consider the applicable law for the arbitration, the place and language of the arbitration, and the nationalities of the parties.  However, there is no requirement that arbitrators be of different nationalities, as some had hoped.    No longer can an arbitrator unilaterally withdraw; he/she must seek leave to withdraw from CEITAC.

Selection of Place and Language   In the absence of an agreement between the parties, CEITAC now has power to designate the language of the arbitration, which need not be Chinese, and the location of the arbitration, which need not be in the PRC.

Consolidation CEITAC now has power to consolidate two or more arbitrations, if both sides agree.

         

Service of Claims on Defendants in Totalitarian Countries

A recent Ontario Superior Court of Justice decision will complicate, if not stymie, service of a statement of claim abroad,  despite the Hague Convention on the Service of Abroad of Judicial and Extra-Judicial Documents in Civil or Commercial Matters, in countries where political interference in legal proceedings occurs.

In Khan Resources v Atomredmetzoloto JSC, the plaintiff attempted to serve its claim on two Russian defendants under the Hague Convention by way of Russia's Central Authority.   That Central Authority refused to serve the claims, offering no explanation other than to cite Article 13 of that Convention, which allows for refusal to serve a claim if to do so "would infringe its sovereignty or security".  An review and appeal of the Central Authority’s refusal in a Russian court would cost about $100,000 and take a year.  A Russian lawyer with Baker and McKenzie in Moscow said success would be unlikely because the Russian government owns 80% of the defendant companies and would likely interfere in the proceeding.  Russia does not permit any form of service other than through its Central Authority.  The plaintiffs then brought a motion in Ontario for substituted service or an order validating service, on notice to the Russian defendants.  The motions court, having found that the plaintiffs had no practical alternative for service and having found that the defendants had ample notice of the claims, validated the service.    The court observed that "the purpose of the Convention, similar to that of [the rule regarding substituted or validated service], is to facilitate the service of legal documents..., not to enable foreign states to immunize their own subsidiary corporations by arbitrarily refusing to effect service." 

However, on appeal, a judge has recently ruled that where service is to be effected under the Hague Convention, the court has no power to order substituted service or to validate service.  Mr. Justice B.P. O'Marra, observing that when interpreting the court rules, as with any legislation, the court must presume that the rules are intended to conform to Canada's treaty obligations, held that service must be done only by the means permitted by the Hague Convention.  The Court ruled that Article 13, although not referred to in the rules of court (or in any other legislation), has been implemented in Ontario law and thus has the force of law.   


O'Marra J.'s  ruling is under appeal to the Ontario Court of Appeal.