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30 July 2015
Mareva injunctions (also known as freezing orders) can be a powerful tool to preserve assets pending the enforcement or rendering of an arbitral award. A court's willingness to grant this extraordinary remedy in aid of international arbitration is balanced against procedural safeguards that include the applicant's obligation to provide full and frank disclosure of all material facts in ex parte applications.
Essentially, a Mareva injunction freezes a party's assets, preventing the party from moving its assets out of the relevant jurisdiction or disposing of them altogether pending resolution of the underlying claim. Applications for Mareva injunctions are commonly brought ex parte, in particular in cases involving alleged fraud or where there is an imminent threat of the assets being removed or alienated to avoid execution of an existing or pending arbitral award.
A number of recent Canadian decisions address the availability of Mareva injunctions in the context of international arbitration and the precautions that must be taken by counsel to ensure the injunction is not set aside if challenged by the other side. These decisions provide a good reminder of the efficacy of judicial remedies in bolstering the arbitral process.
Stans Energy Corp v Kyrgyz Republic,(1) which has garnered international attention as a result of both Canadian and Russian courts' involvement in the dispute, provides both a useful example of the effectiveness of Mareva injunctions and a cautionary reminder of the strict obligations on counsel to disclose all material facts relating to a Mareva application. Specifically, after granting and extending Stans Energy Corp's application for a Mareva injunction, the Ontario Superior Court of Justice set aside the injunction due to Stans's failure to disclose the status of ongoing litigation to set aside the arbitral award at its seat. Before turning to Stans Energy Corp v Kyrgyz Republic in more detail, a brief overview of other recent Canadian examples of successful applications for Mareva injunctions provides useful context.
In CE International Resources Holdings LLC v Yeap(2) the British Columbia Supreme Court granted a worldwide Mareva injunction as an interim measure to allow the claimant time to seek substantially the same relief from the arbitrator presiding over the dispute in New York.
The Mareva order allowed CE International Resources Holdings LLC to secure exigible assets owned by the rogue defendant in British Columbia, despite the absence of any other connection of either party to the jurisdiction. The court recognised that without the Mareva injunction, the only assets on which the claimant could execute would likely be lost.
In Sociedade-de-fomento Industrial Private Limited v Pakistan Steel Mills Corporation (Private) Limited(3) the British Columbia Court of Appeal upheld a Mareva injunction to prevent a shipment of coal belonging to Pakistan Steel Mills Corporation (Private) Limited from leaving British Columbia before Sociedade-de-fomento Industrial Private Limited (SFI) could enforce its arbitral award. The court overturned the lower court's decision to set aside the Mareva injunction. The lower court had held that SFI's failure to advise the court that it could enforce the underlying award in Pakistan (the respondent's home country – the arbitration was seated in England) violated its obligation to make full and frank disclosure on its application.(4) The appeal court held that the lower's court's decision was inconsistent with the text and intention of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and that the applicant's failure to disclose its enforcement efforts (or lack thereof) in alternative forums did not amount to a failure to make full and frank disclosure.
Stans Energy Corp v Kyrgyz Republic is an example of the willingness of Canadian courts to grant Mareva injunctions to aid the execution of international arbitral awards, but also serves as a cautionary tale to counsel and parties to ensure full and frank disclosure of all relevant facts in an ex parte application.
Stans owned a mining licence in the Kyrgyz Republic that was cancelled in 2012. Alleging that the cancellation of its licence violated its rights as an investor under the Moscow Convention,(5) Stans initiated arbitration in the Arbitration Court of the Moscow Chamber of Commerce and Industry (MCCI). The Kyrgyz Republic disputed the tribunal's jurisdiction and refused to participate in the arbitration. The tribunal rejected the Kyrgyz Republic's jurisdictional arguments and issued a US$118 million award in favour of Stans.
The Kyrgyz Republic commenced two simultaneous applications to have the award set aside on the basis of its jurisdictional argument – one in the Economic Court of the Commonwealth of Independent States (CIS), which has authority over jurisdictional disputes under the Moscow Convention, and one in the Moscow State Court. The application to the Moscow State Court was dismissed and the Kyrgyz Republic appealed to the Federal Arbitration Court. By the time the Federal Arbitration Court heard the appeal, the CIS court's decision had been released, with the CIS court holding that the MCCI was not a competent forum to decide matters under the Moscow Convention. As such, the Federal Arbitration Court ordered the Moscow State Court to reconsider its decision.
In the meantime, Stans commenced enforcement proceedings in Ontario, Canada against the Kyrgyz Republic, which had not satisfied the arbitral award.
In Sistem Muhendislik Insaat Sanayi Ve Ticaret Anonim Sirketi v Kyrgyz Republic (also brought against the Kyrgyz Republic, but unrelated to Stans), the Ontario Superior Court of Justice held that the Kyrgyz Republic had an equitable interest in shares of an Ontario company, Centerra Gold Inc, which were legally held by Kyrgyzaltyn JSC, a state-owned entity. The arbitral creditor obtained a Mareva order preventing Kyrgyzaltyn from moving its shares in Centerra out of Ontario.(6) Based on this decision, and after a public announcement that Kyrgyzaltyn planned to move its Centerra share certificates out of Ontario, Stans applied for its own Mareva injunction to freeze the shares.(7) The Ontario court held that, based on the mandatory nature of the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration (incorporated into the Ontario International Commercial Arbitration Act), Stans had a strong prima facie case for enforcement and was therefore entitled to injunctive relief.
Ten days later, Stans applied to extend its Mareva injunction indefinitely. Kyrgyzaltyn opposed, arguing that Stans had failed to make full and frank disclosure on the original ex parte application by not providing the lower court with a translated copy of the CIS court's decision rejecting the jurisdiction of the MCCI. The court acknowledged the lack of translation, but held that Stans had made it sufficiently clear that the Kyrgyz Republic disputed the tribunal's jurisdiction. As a result, the injunction was extended indefinitely.(8) Kyrgyzaltyn appealed.
By the time the reviewing court heard Kyrgyzaltyn's appeal, the Moscow State Court had set aside Stans's award on the basis that the MCCI had no jurisdiction over the dispute. Stans's appeal of this decision to the Federal Arbitration Court was recently dismissed.
On appeal to the Ontario Divisional Court, Kyrgyzaltyn again argued that Stans should have provided the court with an accurate depiction of the CIS court's ruling and its effect on the Russian proceedings. In addition, Kyrgyzaltyn successfully applied to have the Moscow State Court's decision to set the award aside admitted as fresh evidence and asserted that the injunction should be set aside because there was no longer a valid arbitral award on which to base the relief.
The court agreed that the Moscow State Court's decision to set aside the award also made it necessary to set aside Stans's injunction. Relying on Article 36(1)(v) of the UNCITRAL Model Law, the court implied that since the award had been set aside, there could be no strong prima facie case for enforcement on which to grant the extraordinary relief of a Mareva injunction.
On the issue of full and frank disclosure, the divisional court held that Stans should have provided a translation of the CIS court decision, or at least have disclosed that the CIS court had rejected the MCCI's jurisdiction and that the Federal Arbitration Court had remitted the case to the Moscow State Court for reconsideration on that basis. The divisional court held that these issues were clearly material as to whether Stans had a strong prima facie case for enforcing its award (one of the factors to be satisfied on a Mareva application) and therefore justified setting aside the injunction.(9)
Despite the underlying award being set aside at the seat of arbitration, Stans's application to enforce the award in Ontario remains pending. This is because Article 36(1)(v) of the UNCITRAL Model Law provides enforcing courts with the discretion to enforce an arbitral award that has been set aside in the jurisdiction where it was made. Whether an enforcing court should ever exercise this discretion is the subject of ongoing debate among courts around the world.
Consistent with CE International Resources Holdings LLC and Sociedade-de-fomento, Stans v Kyrgyz Republic demonstrates Canadian courts' inclination to provide arbitral creditors with practical and effective remedies to assist them in enforcing and executing on international arbitral awards. However, when dealing with an extraordinary remedy such as a Mareva injunction, it is imperative that counsel ensure the court has all material facts, including the procedural history of the arbitration at issue, even when that information may not be supportive of the relief sought.
Given the procedural history of Stans Energy Corp v Kyrgyz Republic, arbitration lawyers in Canada and elsewhere will be interested in the outcome of the pending enforcement application in Ontario now that the underlying award has been rejected by the courts of the arbitral seat.
For further information on this topic please contact Sarah McEachern or Kalie McCrystal at Borden Ladner Gervais LLP by telephone (+1 604 687 5744) or email (firstname.lastname@example.org or email@example.com).The Borden Ladner Gervais LLP website can be accessed at www.blg.com.
(6) 2012 ONSC 4983. Recently an order permitting seizure of the shares (Sistem Muhendislik Insaat Sanayi Ve Ticaret Anonim Sirketi v Kyrgyz Republic, 2014 ONSC 2407) was set aside based on failed service to the Kyrgyz Republic (Sistem Mühendislik İnşaat Sanayi Ve Ticaret Anomic Sirketi v Kyrgyz Republic, 2015 ONCA 447).
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