Ontario – Where a respondent debtor to an application to enforce a foreign arbitral award fails to request that the award be set aside on one or more of the grounds in Art. 36 (1) of the UNCITRAL Model Law, an order for security for costs against the applicant creditor under Rule 56.01 may not be correct and leave to appeal should be granted: International Commercial Arbitration Act, 2017

China Yantai Friction Co. Ltd. v Novalex Inc.,
2021 ONSC 3571 https://canlii.ca/t/jfzqb
Divisional Court ,May 18, 2021
(T. Lederer, R. Smith and F. Kristjanson, JJ.)

China Yantai Friction Co. (“Friction”) applied for recognition and enforcement of an arbitral award made in China under the Ontario, International Commercial Arbitration Act, 2017, (“ICCA”). The present decision was a motion for leave to appeal from two orders: (1) requiring Friction to post security for costs; and (2) dismissing Friction’s motion requiring Novalex to post the amount of the arbitral award into court.

The ICCA adopts and codifies the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the UNCITRAL Model Law on International Arbitration, as the law of Ontario.

Art. 36 of the UNCITRAL Model Law set out the limited basis on which recognition of a foreign arbitral can be refused on the claim of the respondent, which are generally summarized as follows:

1. the disability of a party, invalidity of the agreement;
2. failure to give notice to the respondent of the appointment of the arbitrator or of the arbitral proceedings or that the respondent was unable to present his or her case;
3. the award is outside the scope of the submission to arbitration;
4. the arbitration agreement was not observed as to appointment of the tribunal or the procedure of the arbitration; or
5. the award has not yet become binding or was set aside;

There was no evidence before the application judge that Novalex was seeking to set aside or suspend the recognition the arbitral award on any of these grounds.

Lederer J., writing for the Divisional Court, held that the application judge’s failure to consider the grounds for objection to the arbitral award under Article 36 of the UNICTRAL Model Law was an error in principle. If the opposition to the application for recognition was without merit, that would be relevant to motions before the Court.

On the motion for leave to appeal the order for security for costs, Lederer J. noted that a security for costs order could be set aside if the judge has “made an error of law or exercised his or her discretion on the wrong principles or misapprehended the evidence such that there was a palpable and overriding error.”: Mirza v Pervais 2009 CanLii 24912 para.11.

The application judge based the security for costs order on Rule 56.01(a) of the Ontario Rules of Civil Procedure, where an applicant is not ordinarily resident in Ontario. Art. 36(2) of the UNCITRAL Model Law also addresses security for costs, it provides that:

(2) If an application for setting aside or suspension of an award has been made to a court   referred to in paragraph (1)(a)(v) of this article, the court where recognition or enforcement is sought may, if it considers it proper, adjourn its decision and may also, on the application of the party claiming recognition or enforcement of the award, order the other party to provide appropriate security.  [Emphasis added.]

As Novalex was not seeking to set aside or suspend the award, it could not bring itself with the provisions of Art. 36(2). The application judge’s failure to consider this provision was another reason to doubt the correctness of the decision.

The Divisional Court granted leave to appeal both orders but did not specifically deal with the basis for setting aside the order dismissing Friction’s request to pay the amount of the arbitration award into Court. In recognition of the delay the appeal will cause in enforcement, the Court directed the parties to proceed expeditiously to have the appeal heard.