Nov 6, 2020

Third-party litigation funding, enforcement of arbitral awards, admissibility of fresh evidence during court review

International Air Transport Association v. Instrubel, N.V., 2019 SCC 61 (CanLII)

In this article, we discuss three recent Canadian judicial decisions that touch, variously, on third party-litigation funding, the enforcement of international arbitral awards in Canada, and the admissibility of fresh evidence during a Canadian court’s review of an arbitral tribunal’s decision on jurisdiction.

Canada’s top court finds arbitration clause unenforceable

On June 26, 2020, a majority of the Supreme Court of Canada held in Uber Technologies Inc. v. Heller, 2020 SCC 16 that while challenges to arbitral jurisdiction should ordinarily be made to the arbitrator, there is a further exception to this general rule. Specifically, the majority of the Court held that where there is a real prospect that referring such a challenge to an arbitrator could result in the challenge never being resolved, then a court may resolve the challenge.

The arbitration agreement in question provided that disputes under the contract were to be arbitrated in the Netherlands and that the party initiating the arbitration was to pay an upfront fee. Because of this, the majority found that the Arbitration Agreement made arbitration "realistically unattainable" for the plaintiff and was therefore unenforceable.

Canada’s top court finds that third-party litigation financing is not per se illegal

On May 8, 2020, the Supreme Court of Canada issued a unanimous decision in 9354-9186 Québec inc. v. Callidus Capital Corp, 2020 SCC 10, the first case before Canada’s highest court to consider third-party litigation funding. While the dispute related to the provision of such funding specifically in the context of an insolvency, the Court’s holding that third-party litigation funding is not per se illegal applies more broadly. The court stated that third-party funding agreements’ legality remained an evolving topic in the class action context, but expressed no similar reservations with respect to single-party commercial litigation. Accordingly, where parties to international arbitrations seated in Canada are considering third-party funding, the court’s decision provides greater comfort that such funding will not be considered contrary to public policy in Canada. As such, the decision represents a small but incremental step in providing greater access to justice.

Canada’s top court facilitates enforcement of an arbitral award

In its recent decision in International Air Transport Association v. Instrubel, N.V., 2019 SCC 61, the Supreme Court of Canada upheld a decision favorable to foreign parties seeking to enforce arbitral awards in Canada.

In 2013, Instrubel, a Dutch company, sought to enforce in Quebec two arbitral awards issued against various Iraqi entities. To this end, Instrubel obtained from the Superior Court of Quebec a "freezing order" ̶ known as a Writ of Seizure before Judgment by Garnishment ̶ over certain charges (the funds) billed and collected by the International Air Transit Association (the IATA) on behalf of the Iraqi Civil Aviation Authority (the Iraqi CAA). The IATA’s headquarters are located in Montreal.

In 2015, the Iraqi entities brought a motion before the Quebec Superior Court challenging the court’s jurisdiction to issue the writ. The motion judge granted the challenge on the basis that (a) the funds were the property of the Iraqi CAA (and not of the IATA) and (b) the funds were held on deposit in Switzerland, not in Quebec.

Instrubel appealed. The Quebec Court of Appeal held that the Iraqi CAA did not own the funds, but rather that the funds represented a debt owed by the IATA to the Iraqi CAA. The court further held that the situs of the bank account (e, Switzerland), did not change the situs of the debt (ie, Quebec). As such, the IATA was the debtor of a personal right owed to the Iraqi CAA, and this debt could be garnished in Quebec.

On further appeal to the Supreme Court of Canada, six of the seven justices dismissed the appeal "for the reasons of the [Quebec] Court of Appeal save for the matters addressed in obiter." No further reasons were provided.

While the case involved the interpretation of Quebec law (Quebec is the only civil law jurisdiction in Canada), the Supreme Court’s decision nonetheless has broader application. First, the decision reaffirms that Canada is an arbitration-friendly jurisdiction in so far as Canadian courts will support the enforcement of foreign arbitral awards in Canada. Second, given that "freezing orders" similar to the writ, are available in every other Canadian jurisdiction, it follows that such orders could, in certain circumstances, apply to property with a sufficient connection to Canada even where the situs of the property is outside of Canada.

Fresh evidence is not admissible as of right where a court reviews an arbitral decision

In The Russia Federation v. Luxtona Limited, 2019 ONSC 7558, Justice Penny of the Ontario Commercial List Court was recently required to decide whether litigants can adduce fresh evidence in the context of a court application to set aside an arbitration panel’s decision on jurisdiction.

The case involved a contractual dispute between Luxtona Limited and The Russian Federation. Further to an arbitration clause in the contract, Luxtona commenced an arbitration against Russia in which it sought $701 million in damages.

Russia challenged the tribunal’s jurisdiction on the basis that the arbitration clause was inconsistent with Russian law. As a result of this position, both parties adduced voluminous expert evidence on the subject. Ultimately, the tribunal held that it did have jurisdiction. In so finding, the tribunal relied on its own interpretation of Russian law rather than on that of Russia’s expert witness.

Russia subsequently brought an application in the Ontario Superior Court of Justice ̶ further to Articles 16(3) and 34(2) of the UNCITRAL Model Law on International Arbitration (which was adopted in Ontario upon Ontario’s enactment of the International Commercial Arbitration Act) ̶ to set aside the tribunal’s finding as to jurisdiction.

In support of its application, Russia sought to adduce fresh evidence on Russian law and, in particular, fresh evidence to "respond to the incorrect findings" of the tribunal. The admissibility of such fresh evidence was the key issue before Justice Penny.

Prior to the application in question, no Canadian court had ever considered (a) what constituted the evidentiary "record" for an application to set aside a tribunal’s decision on jurisdiction and (b) whether fresh evidence could be adduced in such an application. In so considering, Justice Penny distinguished precedent from the United Kingdom on the subject, as the United Kingdom’s arbitration law differs in material respect from the Model Law.

Ultimately, Justice Penny determined that fresh evidence was not admissible as of right, but would be admissible provided that the evidence satisfied the Supreme Court of Canada’s test as set out in R. v. Palmer, namely, that ‎1) the evidence should generally not be admitted if, by due diligence, it could have been adduced at the earlier proceeding; 2) the evidence must be relevant in the sense that it bears upon a decisive, or potentially decisive, issue; 3) the evidence must be ‎credible in the sense that it is reasonably capable of belief; and 4) the evidence must be such that if believed it could reasonably, when taken with the other ‎evidence adduced at the original hearing, be expected to have affected the result‎ (equivalents of the R. v. Palmer test have been applied by the English Court of Appeal and the Court of Appeal of the Republic of Singapore).

As of the date of writing, Justice Penny’s decision is, for now, the last word in Canada relating to fresh evidence in the context of an application ̶ made further to the Model Law ̶ to set aside a tribunal’s ruling on jurisdiction. The decision will be persuasive (if not binding) in all other provincial or territorial courts. The decision may also be persuasive for courts of foreign jurisdictions that have adopted the Model Law.

A practical takeaway for parties is that they should adduce the best possible evidence before the arbitral tribunal, as they may be precluded from adducing additional evidence later.