CITATION: Friction Co. Ltd. v. Novalex Inc., 2021 ONSC 7714
DIVISIONAL COURT FILE NO.: 169/21
DATE: 20211123
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
Backhouse, Tzimas and Nishikawa JJ.
BETWEEN:
China Yantai Friction Co. Ltd.
Applicants
– and –
Novalex Inc.
Respondent
Paul H. Starkman, Counsel for Applicant
Jason Wadden, Counsel for the Respondent
HEARD by videoconference in Toronto on October 14, 2021
TZIMAS J.
Introduction
[1] This is an appeal of the orders made by Justice Gibson on January 28, 2021, the first being an order that the Appellant, Friction, post security for costs in the sum of $76,376.71, and the second being a dismissal of Friction’s request that the Respondent, Novalex, pay into court a sum of $1 million USD, equivalent to the Arbitral Award made by the China International Economic and Trade Arbitration Commission, (CIETAC) in Friction’s favour.
[2] The arbitration that resulted in the said award was conducted in China in accordance with the arbitration clause contained in the parties’ Sales Contract of September 9, 2014. The underlying dispute related to Novalex’s non-payment for brake pads that Friction sold and delivered to it because in Novalex’s view several thousands of them were found to be defective and dangerous to use. Novalex asked that Friction take the product back and continues to hold the product in storage. Friction refused the return and accordingly, the parties proceeded with the arbitration that issued an award in Friction’s favour.
[3] Friction then proceeded with an application in the Superior Court of Justice of Ontario for the recognition and enforcement of the Arbitral Award. The Notice of Application was issued on January 24, 2020 and Friction’s counsel set it down 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, 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.
[4] The Application was adjourned on March 5, 2020 to April 22, 2020, to allow the said preliminary motions to proceed. As a result of the disruption to court operations caused by the COVID19 pandemic, those preliminary motions were not argued until October 26, 2020. The Motion Judge released his endorsement on January 28, 2021. The Application on its merits has yet to be heard.
[5] In its appeal, Friction contends that the Motion Judge 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 court as a term of the Respondent’s request for an adjournment. It asks that the order for security for costs be set aside and that Novalex pay into court either the full or a part of the sum of $1,571,971.06 CAD, representing the amount of the Arbitral Award. Novalex denies that the Motion Judge made any errors and asks that the orders be upheld. The motions were procedural in nature and were not intended to address the merits of the underlying Application, or more specifically to pronounce on the recognition or enforcement of the Arbitral Award. For the reasons that follow, I find that the Motion Judge erred in principle in ordering security for costs in Novalex’s favour and accordingly, that order should be set aside. The Motion Judge did not err in his refusal to order Novalex to pay the requested funds into court and accordingly, that order is upheld.
Background
[6] The underlying facts are not materially in dispute. Friction is in the business of manufacturing automobile brake pads. Its corporate headquarters are located in China. Novalex is in the business of selling auto parts in Ontario. By Sales Contract dated September 9, 2014, Novalex agreed to purchase 105,700 brake pads from Friction at a purchase price of $1,065,284.12 USD. As Novalex began to receive the product, it discovered that “tens of thousands” of the brake pads were faulty and dangerous to use. Friction denied that there was anything wrong with the brake pads and refused to take them back. According to Novalex the product remains in storage.
[7] As a result of the non-payment by Novalex and other related disputes, in accordance with the Arbitration Clause contained in the Sales Contract, the parties proceeded with an Arbitration before the CIETAC. That resulted in an Arbitral Award in the sum of $1 million USD, ($1,571,971.06 CAD) that was issued on November 19, 2019, in Friction’s favour. In accordance with Article 34 of Ontario’s International Commercial Arbitration Act (the “ICCA”), Novalex had three months from the date of the award to seek to set it aside. According to Novalex, that step would have had to be taken in China and it decided that it would not pursue any further proceedings there.
[8] Friction proceeded to seek enforcement of the Arbitral Award in Ontario by commencing an Application before the Superior Court of Justice, pursuant to Article 36 of the ICCA on January 24, 2020. It is not disputed that Friction selected a return date of March 5, 2020 for the Application without consulting Novalex and without any attempts to set a timetable to allow Novalex to respond to the Application as anticipated by the Rules of Civil Procedure.
[9] Novalex responded by serving and filing a Notice of Appearance on February 7, 2020. It also sought an adjournment of the March 5th date to allow it sufficient time to prepare and file responding materials and to proceed with an orderly hearing of the Application on its merits. As a respondent to the Application, Novalex also sought an order for security for costs in accordance with Rule 56.01 of the Rules of Civil Procedure. Friction responded with a cross-motion to have Novalex post the amount of the Arbitral Award with the Court as a term of the requested adjournment.
[10] As set out above, the motions were heard on October 26, 2020.
The Motion Judge’s Disposition and Reasons
[11] On January 28, 2021, the Motion Judge ordered Friction to post security for costs in the amount of $76,376.71 and he dismissed the cross-motion requiring Novalex to post the Arbitral Award into court. The hearing of the Application on its merits was further adjourned “to allow the parties to set a timetable on consent or to return to set a timetable after Friction posts security for costs in the amount directed above. If they are unable to agree [to] a timetable, the parties may contact the Trial Coordinator to set a date for a conference to be held before a judge by Zoom to set a timetable for the progress of the Application.”
[12] In support of the security for costs order, the motion judge set out the test contemplated by Rule 56.01(1)(a) of the Rules of Civil Procedure. He focused his analysis on the finding that Friction is ordinarily resident in China, not in Ontario and that it was appropriate to consider whether or not a respondent will be able to recover its costs from a non-resident. The motion judge underscored the fact that Friction did not tender any evidence to demonstrate that it had exigible assets in a reciprocating jurisdiction that would be sufficient to cover a costs award, that it is impecunious, or that such an order would create such a financial hardship that it would impede it from pursuing an otherwise meritorious Application. He concluded that Friction could not avoid posting security for costs “simply because of the kind of application it has brought.” Finally, the Motion Judge reviewed an Estimated Bill of Costs and determined that the sum of $76,376.71 was a reasonable estimate. He added that this initial assessment was without prejudice to seeking further security.
[13] Regarding Friction’s request for the payment of the Arbitral Award into court, the motion judge concluded that Article 36(2) of the ICAA was not engaged - that security is only available under Article 36 where the respondent has requested an adjournment to pursue proceedings to set aside the award in the jurisdiction where the arbitration occurred. Novalex’s request to adjourn the Application was not for the purposes of allowing another proceeding to unfold in China. Given Novalex’s substantial concern that such a payment would cripple it financially, the motion judge also concluded that the balance of convenience favoured the refusal of such relief. Finally, he noted that the motions before him were preliminary in nature, and that the Applicant was not entitled to an “execution before judgment”.
Issues
[14] Both parties identified three issues for this court. They asked this court to determine whether or not the Motion Judge erred when he: (i) ordered security for costs, (ii) refused to order an advance payment of the Arbitral Award into court; and (iii) failed to consider the provisions of Article 36(1)(a) of the ICAA to recognize and enforce the Arbitral Award.
Analysis
Standard of Review
[15] The Court will interfere with a decision where:
a. On findings of fact, the court below has made a palpable and overriding error; and
b. The 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
c. The court below has made an error of law which is reversible on a correctness standard.
See Valente v. Personal Insurance Co., [2010] O.J. No. 1396 at para. 29-30, and Housen v. Nicolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235 (SCC) at para. 1 and 8-14.
[16] When it comes to the interpretation of the ICAA, in Popack v. Lipszyc, 2018 ONCA 635, at para. 30, the Ontario Court of Appeal stated that the standard of review applicable to the “interpretation of the ICAA, as an issue of law” is correctness. It also noted that deference is to be shown to a court’s determination of mixed questions of fact and law, such as the application of the statue to the circumstances of the case or the interpretation of an arbitration agreement. At para. 40 the Court also noted that the general rule of interpreting the recognition and enforcement provisions of the Convention and Model Law is that “the grounds for refusal of enforcement are to be construed narrowly”.
[17] Against these preliminary observations, I will proceed to consider the issues on appeal in the following order:
a. Did the Motion Judge err in principle when he failed to consider that Novalex’s opposition to recognition of the Arbitral Award is without merit?
b. Did the Motion Judge err in making an order for Security for Costs? and
c. Did the Motion Judge err in his refusal to order the payment of the Arbitral Award into court?
ISSUE 1: Did the Motion Judge err in principle when he failed to consider that Novalex’s opposition to the recognition and enforcement of the Arbitral Award is without merit?
[18] The Motion Judge did not err in principle in failing to consider that Novalex’s opposition to the recognition and enforcement of the Arbitral Award was without merit because the merits of the Application were not before him. The tasks before him were to consider Novalex’s request for an adjournment and security for costs, and Friction’s cross-motion for the advance payment of the arbitral award into court. The Motion Judge was alive to Novalex’s argument that the recognition and enforcement of the award should be refused on the basis of a failure of natural justice and a fraud on the arbitral panel. However, these are matters for the court to consider and decide on the hearing of the Application in accordance with the enforcement provisions of Articles 35 and 36 of the ICCA.
[19] Given that a significant part of Friction’s submissions on this appeal focused on substantive arguments about the interpretation and interaction between Articles 34 through 36 of the ICAA, it is necessary to recall that the issues before the Motion Judge related only to the procedural remedies that were sought. Some explanation about the nature of the Application was necessary to contextualize those remedies sought. But the extent of Friction’s substantive submissions had the effect of conflating the distinction and blurring the parameters to what the Motion Judge had to consider and decide.
[20] Lying behind that conflation is a serious tension between Friction’s determination to have the arbitral award recognized and enforced as soon as possible and Novalex’s right to explain why in its view it could bring itself within the very narrow scope of the exceptions to recognition and enforcement contemplated by Article 36(1)(a) of the ICCA. That tension manifested itself in Friction’s failure to consult Novalex about the hearing date or the associated timetable for responding materials. But then it also informed Friction’s complaint that the Motion Judge erred in law “in failing to consider the factors set out in Article 36(1)(a) of the ICAA, which places the burden on Novalex to provide “proof” in support of the factors set out in Article 36(1)(a)”. But to provide such proof, Novalex would have had to be afforded sufficient time to serve and file a response to the Application.
[21] It is doubtful that this issue would have arisen if Friction had consulted Novalex on the selection of a hearing date for the application and the associated timetable. Instead, in its attempt to push through with the Application as fast as possible it skipped the essential step of consulting Novalex about a hearing date and an associated timetable. In doing so, Friction set the stage for a series of unreasonable motions and remedies by both parties, thus contributing to a very substantive delay in the ultimate determination of the Application on its merits.
[22] In this regard, counsel are strongly reminded that they must consult with each other to select a hearing date that is mutually convenient before they set the date with the court. Various Notices to the Profession and Practice Directions have indicated repeatedly that such an inquiry is required, expected, and is essential to prevent the wasting of the court’s time and resources. Where responding parties or counsel fail to co-operate, the court may set a date unilaterally and costs consequences may also follow the lack of cooperation.
ISSUE 2: Did the Motion Judge err in making an order for Security for Costs?
[23] The Motion Judge misdirected himself on the 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.
[24] Rule 56.01(1) of the Rules of Civil Procedure governs security for costs motions in Ontario. It provides:
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.
[25] A motion for security for costs may be brought by a defendant or a respondent. It is not relief that can be obtained by a plaintiff or an applicant. The initial onus is on the defendant to show that the plaintiff falls within one of the enumerated factors under Rule 56.01(1). If the defendant meets the onus, 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.
[26] It is well recognized that when deciding a motion for security for costs, “judges are obliged to first consider the specific provisions of the Rules governing those motions and then effectively to take a step back and consider the justness of the order sought in all the circumstances of the case, with the interests of justice at the forefront”, see Yaiguaje v. Chevron Corp., 2017 ONCA 827 (ONCA), para. 22. Moreover the Rules explicitly provide that an order for security for costs should only be made where the justness of the case demands it. “Courts must be vigilant to ensure an order that is designed to be protective in nature 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, at para. 23.
[27] Factors relevant to the determination of the justness of a security for costs order include the merits of the case, delay in bringing the motion, and the public importance of the litigation, Yaiguaje, at para. 24. This list of considerations is not intended to be static or rigid; rather, the judge must take a holistic approach, 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.
[28] In this instance, under the heading “Security for Costs”, paragraphs 24 – 33, the Motion Judge identified the requirements of Rule 56.01(1) and went as far as to acknowledge at para. 25 the required two-step analysis: “the defendants or respondents have the onus of satisfying the Court that it appears that the matter comes within one of six categories enumerated in Rule 56.01; and the onus shifts to the plaintiff or applicant to establish that an order for security would be unjust: Shibish v. Scher, 2013 ONSC 4452 at para.6.”.
[29] But rather than follow through with the two-step analysis, the Motion Judge then focused virtually all his analysis on the fact that Friction is ordinarily resident in China and concluded that Novalex might be unable to recover a costs award associated with its response to Friction’s Application. He underscored that concern by highlighting Friction’s failure to tender any evidence that it had any exigible assets in a reciprocating jurisdiction sufficient to cover a costs award, that it is impecunious, or that a security for costs order would create such a financial hardship that it would be obliged to abandon its pursuit of an otherwise meritorious claim, to conclude that Friction could not avoid an order for security for costs.
[30] Then, rather than proceed to undertake a holistic analysis of the justness of the requested order, the Motion Judge dismissed Friction’s concerns with a bald conclusion that there was nothing unjust or punitive to the security for costs order. In doing so, he failed to consider the merits of Friction’s Application, the fact that Novalex participated fully in the arbitration by the CIETAC, that the arbitration decision was unanimous amongst the three members of the tribunal, and that one of the members had been selected by Novalex. In considering the justness of awarding security for costs against Friction, he 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.
[31] Novalex waited until Friction commenced enforcement proceedings in Ontario to raise issues about the award. The Motion Judge did not seem to take into account that it was only by Novalex’s failure to appeal that Friction was put into the position of being the applicant and thereby within the ambit of the security for costs rule. He also gave no consideration to the very narrow grounds for refusing recognition or enforcement of arbitration awards under Article 36(1)(a) of the ICAA within which Novalex must bring itself. Furthermore, he did not consider that Novalex continued to hold $1 million USD worth of brake pads, of which only a tiny fraction was considered flawed or otherwise problematic. While he considered the parameters of Friction’s Application in relation to its cross-motion for an advance payment into court, nothing in his reasons suggest that he brought those considerations forward into his analysis of Novalex’s motion for security for costs.
[32] Insofar as Friction is critical of the Motion Judge’s conclusion that Friction was not entitled to an execution before judgment and describes that as an error in principle, that comment was made in relation to Friction’s own motion for an advance payment and not in relation to Novalex’s security for costs motion.
[33] Having failed to undertake an analysis of the justness of an order for security for costs in these circumstances, the Motion Judge erred in principle and his order for security for costs is set aside.
ISSUE 3: Did the Motion Judge err in his refusal to order the payment of the Arbitral Award into court?
[34] The Motion Judge did not err in his refusal to order the payment of the Arbitral Award into court. Such a payment is contemplated by Article 36(2) of the ICAA in the specific instance where a party commences an application to set aside or suspend an award in the court of the foreign jurisdiction. Article 36 of the ICAA provides as follows:
Article 36 Grounds for refusing recognition or enforcement
(1) Recognition or enforcement of an arbitral award, irrespective of the country in which it was made, may be refused only:
(a) at the request of the party against whom it is invoked, if that party furnishes to the competent court where recognition or enforcement is sought proof that:
(i) a party to the arbitration agreement referred to in article 7 was under some incapacity; or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made; or
(ii) the party against whom the award is invoked was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or
(iii) the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, that part of the award which contains decisions on matters submitted to arbitration may be recognized and enforced; or
(iv) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties or, failing such agreement, was not in accordance with the law of the country where the arbitration took place; or
(v) the award has not yet become binding on the parties or has been set aside or suspended by a court of the country in which, or under the law of which, that award was made; or
(b) if the court finds that:
(i) the subject-matter of the dispute is not capable of settlement by arbitration under the law of this State; or
(ii) the recognition or enforcement of the award would be contrary to the public policy of this State.
(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.
[35] Where Article 36(2) refers to “an application for setting aside or suspension of an award … to a court referred to in paragraph 1(a)(v) of Article 36”, this refers to an application contemplated by Article 34 which is an application in the jurisdiction where the arbitration occurred. In this case, that would mean Novalex seeking to set aside the Arbitral Award by bringing an application in China. The second part of Article 36(2) refers to an application, such as the application in this case in Ontario, for the recognition and enforcement of the award. Where both such applications are underway, and where the enforcement application is adjourned, Article 36(2) provides that the applicant to that enforcement application may also seek an order for security. But apart from this scenario, no other legal vehicle exists in either the ICAA or the Rules of Civil Procedure for an advance payment or for security in favour of the enforcement applicant.
[36] On the facts before this court, there is no dispute that Novalex did not initiate an application in China to set aside the Arbitral Award. Nor did it seek the adjournment in question for that purpose. In the absence of such a move, Friction has no other basis to request a security payment. The Motion Judge was therefore correct to conclude that Article 36(2) was not engaged and there was therefore no basis for requiring Novalex to pay an amount equivalent to the award into court.
[37] Both parties made extensive submissions on Novalex’s financial position and the corresponding implications on the Motion Judge’s exercise of discretion. Since Article 36(2) was not engaged, I do not find it necessary to determine whether or not he erred in his conclusion that in any event the balance of convenience favoured a denial of the requested advance payment. That said, had Novalex’s actions fallen within the parameters of Article 36(2), it is doubtful that the balance of convenience would have favoured the denial of any security.
Conclusion
[38] For all these reasons, the order for security for costs made on January 28, 2021 in favour of Novalex is set aside. The order refusing the advance payment of the Arbitral Award by Novalex, also made on January 28, 2021 is upheld.
[39] Insofar as the parties must still arrive at a timetable for the filing of responding material and the scheduling of the Application, the parties are to follow the Notice to the Profession for Central West dated September 25, 2020, and follow the rules that apply to the scheduling of a long motion. Given the delay in the progress of this case, the trial office should do what it can to provide the parties with a one-day hearing date within the next four to six months.
[40] Finally, insofar as costs are concerned, as the success is divided, each party will pay its own costs.
Tzimas J.
I agree _______________________________
Backhouse J.
I agree _______________________________
Nishikawa J.
Released: November 23, 2021