While the Omicron variant of COVID-19 spread continues, I have spent most of my time at home reading books, cooking delicious and healthy food, playing the piano and doing workout during the Christmas holiday. Of course, I watch Netflix from time to time. One day, when I was surfing the web, I read a recent Ontario Superior Court of Justice’s decision on the recognition and enforcement of a CIETAC arbitral award (China Yantai Friction Co. Ltd. v. Novalex Inc., 2021 ONSC 7714). I would like to share my case summary of this court decision here. I believe the readers would be happy to learn from this post that a) a foreign arbitral award creditor will not be ordered by Canadian courts to post security for costs simply by virtue of being a non-resident seeking to recognize and enforce an arbitral award in Canada; b) Canada is a country with arbitration-friendly jurisdictions and the Canadian courts respect the principles of international arbitration and cherish their relationship with the courts and tribunals of other countries (See also Specter Aviation c. Laprade, 2021 QCCA 1811).
The Applicant/Appellant, China Yantai Friction is in the business of manufacturing automobile brake pads. Its headquarter is located in China;
The Defendant/Respondent, Novalex is in the business of selling automobile parts in Ontario, Canada.
On September 9, 2014, China Yantai Friction and Novalex signed a Sales Contract, which contains an arbitration clause; Novalex agreed to purchase 105,700 brake pads from China Yantai Friction at a purchase price of $1,065,284.12 USD;
However, Novalex failed to pay for brake pads that China Yantai Friction sold and delivered to it. Novalex stated that several thousands of the brake pads were defective and dangerous to use. China Yantai Friction refused to take back the brake pads and accordingly, the Parties proceeded with the arbitration administered by CIETAC;
Novalex participated fully in the arbitration; one of the three tribunal members was selected by Novalex;
On November 19, 2019, an arbitral award in China Yantai Friction’s favour was issued in Beijing, China by the three members arbitral tribunal administered by CIETAC; the arbitral award was made unanimously by the three members tribunal;
Novalex did not initiate an application in China to set aside the arbitral award;
On January 24, 2020, China Yantai Friction proceeded with an application in the Superior Court of Justice of Ontario for the recognition and enforcement of the arbitral award; the China Yantai Friction’s attorney set the case down for trial unilaterally for a hearing on March 5, 2020;
Novalex responded by filing a Notice of Appearance but then sought a) an adjournment of the Application to enable it to prepare its responding materials to the Application; and b) an order for security for costs.
In response, China Yantai Friction brought a cross-motion for an order that Novalex pay into court the full sum of the arbitral award as a condition of consenting to the requested adjournment;
The preliminary motions related to the Application were not heard until October 26, 2020 as a result of the disruption to court operations caused by the COVID19 pandemic;
On January 28, 2021, the Justice Gibson ordered that China Yantai Friction, post security for costs in the sum of $76,376.71. Justice Gibson also dismissed China Yantai Friction’s request that Novalex, pay into Court a sum of $1 million USD, equivalent to the arbitral award rendered in November 2019 in China Yantai Friction’s favour.
China Yantai Friction appealed the decision rendered by the Justice Gibson; in the appeal, China Yantai Friction submits that the Justice Gibson erred in a) refusing to recognize and enforce the arbitral award; b) ordering Security for Costs in Novalex’s favour; and c) refusing to order Novalex to pay the arbitral award into the Court as a term of Novalex’s request for an adjournment. Novalex denies that the Justice Gibson made any errors.
Main Issue to Analyse
Did the Motion Judge err in making an order for Security for Costs?
A. Standard of Review
As the Supreme Court’s decision on Housen v. Nicolaisen,  2 S.C.R. 235 (SCC) teaches us that the Court will interfere with a decision where:
- On findings of fact, the motion judge has made a palpable and overriding error; and
- The motion judge proceeds on some wrong principle, misdirects himself or herself, or arrives at a decision so clearly wrong as to amount to an injustice; and
- The motion judge has made an error of law which is reversible on a correctness standard.
When it comes to the interpretation of the International Commercial Arbitration Act , the Ontario Court of Appeal teaches us in its decision on Popack v. Lipszyc, 2018 ONCA 635 that the standard of review is correctness, while deference is to be shown to the motion judge when it comes to the application of the statue to the circumstances of the case or the interpretation of an arbitration agreement.
B. The Motion Judge did err in making an order for Security for Costs in the present case.
As stated in paragraph 23 of the decision, “the Motion Judge misdirected himself on factors to be considered in ordering security for costs in Novalex’s favour and thereby arrived at an unjust order. He also erred in failing to provide any reasons for his bald conclusion that there was nothing unjust or punitive in ordering security for costs.”
- According to Rule 56.01 of the Rules of Civil Procedure, a motion for security for costs can only be brought by the defendant. The initial burden of proof is on the defendant as the defendant should prove that the applicant falls within one of the enumerated factors under Rule 56.01 (1).
“56.01 (1) The court, on motion by the defendant or respondent in a proceeding, may make such order for security for costs as is just where it appears that,
(a) the plaintiff or applicant is ordinarily resident outside Ontario;
(b) the plaintiff or applicant has another proceeding for the same relief pending in Ontario or elsewhere;
(c) the defendant or respondent has an order against the plaintiff or applicant for costs in the same or another proceeding that remain unpaid in whole or in part;
(d) the plaintiff or applicant is a corporation or a nominal plaintiff or applicant, and there is good reason to believe that the plaintiff or applicant has insufficient assets in Ontario to pay the costs of the defendant or respondent;
(e) there is good reason to believe that the action or application is frivolous and vexatious and that the plaintiff or applicant has insufficient assets in Ontario to pay the costs of the defendant or respondent; or
(f) a statute entitles the defendant or respondent to security for costs. R.R.O. 1990, Reg. 194, r. 56.01 (1).” (Underlined by the author)
If the Defendant meets the onus, the onus will shift to the Applicant to establish that an order for security for costs would be unjust. Then, the Court has the discretion to grant or refuse an order for security. The Court also has the discretion to determine quantum and the means of payment.
2. It is well established in the Ontario caselaw that the Courts must be vigilant to ensure that the order for security for costs is not used as a litigation tactic to prevent a case from being heard on its merits, even in circumstances where the other provisions of Rules 56 and 61 have been met (Yaiguaje v. Chevron Corporation, 2017 ONCA 827). The judge is required to take a holistic approach to examine all of the circumstances of the case and be guided by the overriding interests of justice to determine whether it is just that the order be made.
In the present case, the Motion Judge focused virtually all his analysis on the facts that China Yantai Friction is ordinarily resident in China, that China Yantai Friction does not have any exigible assets in a reciprocating jurisdiction, and that China Yantai Friction does not provide any evidence to prove that a security for costs order would create such a financial hardship that it would be obliged to abandon its pursuit of an meritorious claim. The Motion Judge therefore concluded that Novalex might be unable to recover a costs award associated with its response to China Yantai Friction’s Application.
3. The Motion Judge did not take a holistic approach to examine all the circumstances of the case. The Court points out that the Motion Judge failed to consider the merits of China Yantai Friction’s Application, the fact that Novalex participated fully in the arbitration administered by CIETAC, that the arbitration decision was unanimous and that one of the tribunal members had been selected by Novalex. In considering the justness of awarding security for costs against China Yantai Friction, the Motion Judge did not appear to weigh that Novalex did not avail itself either of the right to apply to the Superior Court of Justice of Ontario to set aside the arbitral award or of the right to appeal the award to a court in China. Further, the Motion Judge did not consider that Novalex continued to hold $1 million USD worth of brake pads, of which only a tiny fraction was considered problematic.
For the above mentioned reasons, the Court concludes that the Motion Judge erred in principle and his order for security for costs should be set aside.
- Canada is a country with arbitration-friendly jurisdictions and the Canadian courts respect the principles of international arbitration and cherish their relationship to the courts and tribunals of other countries (See also Specter Aviation c. Laprade, 2021 QCCA 1811);
- On July 30, 2021, the Ministry of Justice of the People’s Republic of China released proposed revisions to the PRC Arbitration Law for public consultation. The revised draft proposes a number of changes to the mechanisms for setting-aside and non-enforcement of arbitral awards. It seeks to unify the grounds for setting aside domestic and foreign-related awards. Another key change proposed is that ad hoc arbitration for commercial disputes involving foreign-related elements will be permitted for the arbitrations seated in mainland China.
(Reminder: The purpose of this article is to provide general legal information. It does not contain a full analysis of the law nor does it constitute a legal advice on the points of law discussed. To minimize the legal risk for your business, you must take specific legal advice from a lawyer on any particular matter which concerns you. Thanks for your attention.)