Be wary of Foreign Abitrations

The Ontario Court of Appeal recently upheld the decision of a lower court judge who refused to permit an Ontario company to back out of arbitration proceedings in Russia even though the President of the Russian company had allegedly threatened to kill an executive of the Ontario company. As a result of the alleged threats, the Ontario company's executive was unwilling to travel to Moscow, as were its witnesses.

In the case of Donaldson International Livestock Ltd. v. Znamensky Selekcionno - Gibridny Center LLC, the Court held that by the time the case came before it, the issue of whether the death threats constituted cause to back out of the arbitration agreement in the commercial contract between the two parties was moot because the arbitration had already been held. In doing so, the Court held that the time to have a trial of the issue concerning the death threats was when the parties were before the motion judge. The case was argued on the basis of a paper record and the motion judge found that it fell short of establishing that the threats were made.

In this case, the Ontario company, a producer of pure-bred pigs, had entered into a contract to sell pigs to the Russian company. The contract contained an arbitration clause which included that any dispute, controversy or claim, which arose out of or was connected to the contract would be settled by the International Commercial Arbitration Court. The contract was governed by and construed in accordance with the law of the Russian Federation; the place of arbitration was agreed to be Moscow, Russia, the language to be used in the arbitral proceedings would be Russian; and the law of the contract would be the law of the Russian Federation.

A dispute arose about the health of the pigs that were sold to the Russian company. One morning at about 5:00 a.m. the Ontario company's executive was awakened by a telephone call from the Russian executive. The Russian executive spoke in Russian, and one of his colleagues was on the line acting as an interpreter.

The Ontario executive alleges that the discussions became increasingly hostile and that the Russian executive shouted twice: "What happens to people that cross me" followed by "I will kill you".

The Ontario company commenced an action in Ontario seeking an injunction prohibiting the Russian company from proceeding with the arbitration in Moscow and declaring that the arbitration clause in the contract was null and void because of the Russian company's "misconduct". By the time the motion was heard, the Russian company had obtained an award in Russia. The Ontario company argued that the arbitral award should not be recognized or enforced in Ontario because of the Russian company's misconduct and that damages for tort of intimidation were outside of the scope of the arbitration agreement.

However, the motion judge denied the injunction and granted the Russian company a stay of the Ontario action.

The Court of Appeal held that the arbitration clause was extremely broad. It included any dispute, controversy or claim, which may arise out of or in connection with the contract. Given the direction that courts have been taking in respect of approach to arbitration clauses, the clause was broad enough to conclude virtually all of the claims advanced in the Ontario action. The fact that one of the claims was against a no-party to the agreement, i.e. the individual who made the alleged threat, was not sufficient to oust the jurisdiction of the arbitration tribunal in Moscow when the entire focus of the action related to issues arising out of the contractual relationship between the parties. Accordingly, the Court refused to interfere with the motion judge's decision to stay the Ontario action.

Accordingly, the lesson here is that at the point of negotiating an agreement with a foreign trading partner, a Canadian company must give careful thought about agreeing to arbitrate a dispute in a foreign country and language using foreign laws.

Regards,

Blair