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23 February 2017
The Ontario Superior Court of Justice recently issued another decision in the ongoing saga on the enforcement of arbitral awards against the Kyrgyz Republic by various arbitral creditors.(1)
In Entes v Kyrgyz Republic,(2) the court recognised an international arbitral award for more than $22 million, which was granted in favour of Entes Industrial Plans Construction & Erection Contracting Co Inc in September 2015.
In recognising the award, the court rejected the Krygyz Republic's assertion that the award was contrary to Ontario public policy (Article 36(1)(b)(ii) of the United Nations Commission on International Trade Law (UNCITRAL) Model Law) and confirmed that the so-called 'public policy defence' can be invoked only if enforcing the award would "fundamentally offend the most basic and explicit principles of justice and fairness in Ontario or evidence intolerable ignorance or corruption on the part of the Arbitral Tribunal".
The decision confirms the Canadian courts' adherence to the mandatory nature of the enforcement provisions in the UNCITRAL Model Law and the New York Convention (see, for example, "A friendly place to seek enforcement of international arbitral awards"). Without clear evidence of one of the narrow grounds for refusing enforcement under Article 36 of the UNCITRAL Model Law, the Canadian courts will recognise and enforce international arbitral awards as court judgments. This deference to the arbitral process safeguards the finality of a tribunal's decision and ensures that arbitral creditors can take advantage of the wide range of execution remedies available to judgment creditors.
The Kyrgyz Republic is home to a large mining concession known as the Kumtor Gold Mine. Entes is one of several arbitral creditors attempting to enforce and execute arbitral awards relating to the mine against the republic.
In a previous Ontario Superior Court of Justice decision,(3) four arbitral creditors (Entes, Belokon, Stans Energy Corp and Sistem Muhendislik Insaat Sanayi Veticaret Anonim Sirketi) were denied the right to seize shares in Centerra Gold Inc, an Ontario company held by Kyrgyzaltyn JSC, an entity owned by the Kyrgyz Republic (for further details please see "Ontario court rules arbitral creditors cannot seize shares held by Kyrgyz-owned company"). An appeal by Entes, Belokon, Stans and Sistem was dismissed in December 2016.(4)
In parallel with its execution efforts, Entes sought to have its arbitral award recognised in Ontario. The Kyrgyz Republic defended the application on the basis of Articles 36(1)(a)(ii) and 36(1)(b)(ii) of the UNCITRAL Model Law. During the proceedings, the Kyrgyz Republic abandoned its defence that it had not been given proper notice under Article 36(1)(a)(ii) and focused its efforts solely on Article 36(1)(b)(ii) – the public policy defence.
The Kyrgyz Republic's argument centred on the conduct of Ms Smanalieva, who had been the Kyrgyz Republic's counsel throughout the Entes arbitration. Smanalieva had also provided expert evidence on behalf of Sistem in its attempts to seize Centerra's shares (which had been ongoing since 2012).(5) She had opined that, under Kyrgyz law, the Centerra shares were actually owned by the Kyrgyz Republic and were therefore exigible assets.
The Kyrgyz Republic argued that Smanalieva was in a conflict of interest and had breached her duty of loyalty to the Kyrgyz Republic. Due to a failure of internal communication, the Kyrgyz Republic had not become aware of this conflict of interest until after the award was issued in 2015. The Kyrgyz Republic submitted that enforcing the award in the face of Smanalieva's conflict of interest would be contrary to Ontario public policy.
In granting Entes' application to recognise the award, the court rejected the Kyrgz Republic's contention that Smanalieva's conduct rendered the award contrary to Ontario public policy. Reiterating the narrow scope of Article 36(1)(b)(ii), the court explained that:
"Even accepting the Republic's evidence at its highest, any conflict on the part of Ms. Smanalieva does not rise to the level required to invoke this public policy defence. It is a narrowly construed defence. It must fundamentally offend the most basic and explicit principles of justice and fairness in Ontario or evidence intolerable ignorance or corruption on the part of the Arbitral Tribunal. Examples of public policy grounds for refusing to enforce an arbitral award are fraud, corruption, bribery and similar serious cases." (Citations omitted.)
The court also noted that the republic had not tendered any evidence that the conduct had had an impact on the arbitral award itself, and that Entes should not bear the brunt of the Kyrgyz Republic's internal communications failure.
In summary, the court held that there was no basis to refuse recognition of the award.
The Ontario Superior Court of Justice's comments regarding the application of Article 36 of the UNCITRAL Model Law reaffirm the high bar set for arbitral debtors to avoid recognition and enforcement of their awards in Canada.
Consistent with the model law and previous case law, Entes confirms that only the most egregious circumstances will warrant a refusal to recognise an arbitral award for public policy reasons. Unless the arbitral debtor can demonstrate that an award offends fundamental principles of justice and fairness, the award will be enforced.
For further information on this topic please contact Kalie McCrystal or Craig R Chiasson 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.
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