Canada: Will Supreme Court Of Canada Hear High-Profile International Arbitration Case?

Last Updated: December 17 2008
Article by James Redmond and Barry Leon

The pending Supreme Court of Canada leave to appeal application in Yugraneft v. Rexx Management is, in our view, not only of national importance but of international importance. It goes to the heart of the benefits of international commercial arbitration: the ability to enforce an international arbitration award relatively easily in most countries around the world.

Canadians should be aware of just how significant this case is to international business and should hope that our Supreme Court takes on the case and that it articulates that limitation periods cannot be imposed on applications to recognize and enforce international arbitral awards – not in Canada nor elsewhere.

More than 140 countries, including Canada, are signatories to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, more commonly known as the "New York Convention." This year marks its 50th anniversary.

The New York Convention is widely regarded as one of the most successful international conventions ever. Not only has it been accepted by so many countries, but it has had a huge positive effect on international trade and commerce as well as on international development projects. With international arbitration, businesses everywhere have a reliable method of dispute resolution when they contract with businesses in other countries (sometimes where the court systems lack the honesty, independence, reliability and competence that exist in courts in Canada). A Canadian business can invest in or sell goods or services to a company in a country with the least honest, most corrupt and least competent court system in the world and know that its disputes with the other party can be determined by international arbitrators in a reliable country of their choosing.

More than anything, what makes international arbitration effective is that the New York Convention requires that each signatory country recognize and enforce an international arbitration award made elsewhere, except in very narrow circumstances that are set out in the Convention.

This requirement is repeated in most modern international arbitration statutes through the mechanism of the Model Law on International Commercial Arbitration, which was adopted by the United Nations Commission on International Trade Law (UNCITRAL) in 1985. Canada was the first country to adopt the Model Law, and it is now in force (with minor modifications) in all provinces and territories. In Ontario, for example, the Model Law is appended to and forms the bulk of the International Commercial Arbitration Act. The Model Law requires that the courts of the jurisdiction recognize and enforce international arbitral awards irrespective of the country in which they were made, except in the very narrow circumstances set out (which parallel the New York Convention exceptions).

Yet, on August 5, 2008, the Alberta Court of Appeal carved a huge hole in Canada's commitment by ruling in Yugraneft v. Rexx Management that Alberta will not recognize or enforce a foreign arbitral award unless proceedings for recognition and enforcement are commenced in Alberta within two years.

The Court applied Alberta's basic two-year limitation period (the same as in Ontario; in other provinces, the limitation period is either two years or some other fixed number of years).

If the Alberta decision stands, it will not only severely restrict enforcement of foreign awards in Alberta but likely affect decisions across Canada unless other appellate courts rule differently when the issue comes before them.

Limitation periods exist to ensure that prospective defendants find out about claims against them on a timely basis. As a result, witnesses are more likely to remember relevant details and defendants can preserve evidence and avoid having unhappy surprises come out of the woodwork many years after the event. These policy rationales generally are inapplicable when the defendant has been the subject of a proceeding elsewhere in which the defendant was made aware of the proceeding and had an opportunity to defend it.

A party seeking to enforce an international arbitral award may not learn where in the world the debtor has assets – perhaps hidden assets – until some years after the award. Unsuccessful attempts may have been made to enforce the award elsewhere first. But whether, as a policy matter, a party who is the beneficiary of an arbitral award should be able to have the award enforced in another country after some period of time is not the heart of the issue.

The New York Convention requires its signatories to recognize and enforce, and delay is not one of the specified exceptions to enforcing an international arbitral award.

Some may argue that time restrictions are permitted by the New York Convention. Yes, Article III says that enforcement will be in accordance with local rules of procedure and that the country in which enforcement is sought will not impose "substantially more onerous conditions or higher fees or charges" on the recognition or enforcement of international arbitral awards than it imposes on recognition or enforcement of domestic awards.

But in Canadian law, limitation periods are not procedural; they are substantive law. So imposing a limitation period seems to run contrary to Canada's commitment in the Convention, which is part of the law of Canada.

Further, the Model Law, which has been adopted in international commercial arbitration statutes in Canada, including Alberta, provides no room for a "local rules of procedure" argument. The Model Law, and hence arbitration statutes in Canada, require recognition and enforcement, except in the very narrow circumstances specified.

The Alberta courts searched for a limitation period, failing to recognize that the drafters of the New York Convention, the Model Law and Alberta's International Commercial Arbitration Act chose not to impose a time limitation on applications for recognition and enforcement of international arbitral awards.

There are also reasonable grounds to question the Court of Appeal's reasoning. First, it is questionable whether section 3 of Alberta's Limitations Act, which specifies a two-year limitation for seeking a "remedial order," should be taken to apply to proceedings for recognition and enforcement of an international commercial arbitration award. Second, it is difficult to understand why the Court applied the rules relating to the enforcement of judgments of foreign courts to the recognition and enforcement of international arbitration awards when Alberta has its own specific legislation, the International Commercial Arbitration Act, incorporating as schedules to the Act both the Model Law and the New York Convention.

Even though the Model Law and the New York Convention contain no time limitation for applications to recognize and enforce international arbitration awards, the lower court judge concluded that in the absence of such a provision, he should look outside this legislation for an appropriate limitation period. He selected the two-year limitation for the enforcement of judgments of foreign courts.

The Court of Appeal followed the same course, but failed to explain why those rules should apply when the primary objective of international commercial arbitration legislation is to avoid having international disputes decided by national courts and to provide a uniform means of enforcing international arbitration awards worldwide.

As to the application of the two-year limitation in the Limitations Act for seeking "remedial orders," it seems questionable that the drafters of the Act had international commercial arbitration awards in mind when they defined this term. When the successful party in an international arbitration requests recognition and enforcement of the award, it is not asking the court to determine whether it is entitled to a remedy. That has already been decided by an arbitral tribunal in accordance with the rules governing the arbitration. The party is asking for enforcement of that remedy under the provisions of specific legislation enacted as part of a worldwide regime for international arbitration – a regime that provides that recognition and enforcement can only be refused on very narrow grounds (which grounds do not include any time limit).

Interestingly, at the same time as it was enacting international arbitration legislation, the Alberta legislature enacted domestic arbitration legislation that did include a limitation period, as did other similar provincial statutes. So it cannot be that these legislatures simply forgot about limitation periods for their international arbitration Acts.

A decision by the Supreme Court of Canada will be important in bringing certainty and uniformity across Canada to the permissibility of time constraints on the right to seek recognition and enforcement of international arbitral awards.

A decision by the Supreme Court of Canada may also have global significance.

Canada is not the only country in which limitation periods are being applied to recognition and enforcement applications. At least 50 countries purport to apply some form of limitation period. Two years is the shortest period; but the length, while of practical importance, is not the issue here. The issue is whether any limitation period is allowed under provincial international arbitration statutes (or any other Canadian statutes) or under the New York Convention.

For the Supreme Court of Canada to consider this important issue would be in keeping with its leadership role on international legal issues.

A major opportunity would be lost both for Canada and for global business activity if the Supreme Court declines to grant leave in Yugraneft v. Rexx Management.

This article is based on an article previously published as a web exclusive for Canadian Lawyer.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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