DATE: 2004-07-20

DOCKET: C39099

COURT OF APPEAL FOR ONTARIO

RE: United Laboratories, Inc. (Plaintiff/Respondent) v. Michael Abraham, Paragon Commercial Enterprises Inc. and Mega-Lab Manufacturing Company, Ltd. (Defendants/Appellants)

BEFORE: McMurtry C.J.O, Borins and Simmons JJ.A.

COUNSEL: Larry J. Levine Q.C. and Messod Boussidan for the appellants Blair W. M. Bowen for the respondent

HEARD: July 6, 2004

On appeal from a judgment of Justice S. E. Pepall of the Superior Court of Justice dated October 8, 2002.

ENDORSEMENT

[1] The appellants appeal from a judgment of Pepall J. permitting the respondent to enforce an Illinois judgment against them in Ontario. The respondent obtained the Illinois judgment against the appellants under the Stored Wire and Electronic Communications Transactional Records Access Act, 18 U.S.C. §2701, arising from the appellant Michael Abraham’s conduct in gaining unauthorized access on numerous occasions to the voice mail system of the respondent, which was his former employer.

[2] Although properly served, the appellants did not object to, defend, or otherwise participate in, the Illinois proceedings. Moreover, the appellants concede that the real and substantial connection test was met, that the Illinois judgment was not procured by fraud, and that no breach of natural justice was committed in obtaining it. Nevertheless, the appellants raise three issues on appeal.

[3] First, the appellants contend that the claims forming the subject matter of the Illinois judgment arise out of contracts between the appellant Abraham and the respondent, and that the contracts require that any disputes or claims be submitted to arbitration in accordance with the laws of the Province of Ontario. The appellants submit, particularly because the parties actually submitted their disputes to arbitration/mediation in Ontario, that the governing law and arbitration clauses contained in the contracts either ousted the jurisdiction of the Illinois court or prevented it from properly taking jurisdiction.

[4] The trial judge rejected the appellants’ first submission, essentially because the appellants did not raise their objection in the Illinois proceedings. She said:

Having been properly served with the Illinois proceedings, having received copies of numerous orders in the US action and having full knowledge of the continued progress of the action, the defendants acted at their peril by doing nothing. It is too late to now advance the argument that the parties’ agreement to arbitrate ousted the US Court’s jurisdiction.

[5] We agree with the trial judge’s conclusion. The appellants’ submission relates to the jurisdiction of the Illinois court. In our view, where the proceedings in a foreign court meet the real and substantial connection test, like forum conveniens, which must be raised in the foreign jurisdiction (see Beals v. Saldanha, 2003 SCC 72, [2003] 3 S.C.R. 416 at paras. 35 and 162), objections relating to the governing law and mandatory contractual arbitration provisions should generally be raised at the time of, and as a response to, the foreign proceedings.

[6] Moreover, even if it is open to the domestic court to relieve against the appellants’ failure to object, we see no basis for doing so. In our view, this is not a case where the appellants can assert that they were somehow justified in failing to assert their rights. In particular, we consider that there was good reason to doubt that the arbitration provisions on which the appellants rely had any application to the Illinois proceedings. The Illinois cause of action arises from breach of a statute and is not dependent on the confidentiality provisions in Abraham’s contracts. In addition, the facts underlying the Illinois proceedings relate primarily to events that occurred after the contracts were terminated. In an affidavit Abraham, himself, described the Illinois proceedings as “an unrelated matter”. In the face of these indications that the arbitration provisions may not apply, the appellants still did nothing. We agree with the trial judge’s conclusion that they “acted at their peril” in so doing. Accordingly, we would not give effect to the appellants’ first ground of appeal.

[7] Second, the appellants submit that the Illinois judgment is unenforceable in Ontario because the allegations of hacking into the respondent’s voice mail system were part and parcel of the issues joined in the Ontario arbitration/mediation and should therefore be barred on the basis of res judicata or abuse of process. Once again, we agree with the trial judge's conclusion that the appellants’ submission cannot succeed. The appellants did not raise this issue in the Illinois proceedings. Moreover, the Minutes of Settlement arising from the Ontario arbitration/mediation specifically excepted the Illinois proceedings from the resolution of the disputes between the appellants and the respondents that it contained. We would not, therefore, give effect to the second ground of appeal.

[8] Third, the appellants claim that the damages awarded in the Illinois judgment are penal in nature and should not be enforced. In our view, the trial judge properly relied on United States of America v. Ivey (1995), 1995 7241 (ON SC), 26 O.R. (3d) 533 (Ont. Ct. Gen. Div.) as setting out the scope of penal provisions that will not be enforced. Further, we agree with the trial judge’s conclusion that the damages awarded in the Illinois judgment are compensatory in nature. Accordingly, we would not give effect to the third ground of appeal.

[9] The appeal is therefore dismissed with costs to the respondent on a partial indemnity basis fixed at $12,000 plus assessable disbursements and applicable G.S.T.

_ “R. Roy McMurtry C.J.O.”

_ “S. Borins J.A.”

_ “Janet Simmons J.A.”