Ash v. Corp. of Lloyd's

1992 Carswell Ont 449, 7 C.P.C. (3d) 364, 94 D.L.R. (4th) 378, 9 O.R. (3d) 755, 60 O.A.C. 241

Ash v. Corp. of Lloyd's

C. WILLIAM ASH, C. RUSS BAILEY, MARGARET D. BAILEY, RAY BEDNARZ, RONALD D.BESSE, JAMES E. BIGGAR, SUSAN BIGGAR, FRED BODNAR, RAYMOND BOZEK, VIOLET BOZEK,W. TERRENCE BREITHAUPT, RICHARD BURRI, ROBERT CARROLL, SANDRA CERONI, LOUISCERONI, PETER CLARKE, THOMAS N. DAVIDSON, WERNER DINGFELD, GARY ELLIOTT, JOHNGIBSON, BRADLEY HART, RUTH HART-STEPHENS, HAROLD HIGGINBOTTOM, DIANA HOGARTH,MURRAY HOGARTH, R. LAIRD JENNINGS, EDWARD KSIAZEK, JACQUELIN LEVIN, LAWRENCELEVIN, ANTHONY MARKOWSKI, BARBARA ANN MARTIN, GIAN-CARLO A. MASON, SEANMCDONOUGH, DAVID MCKEE, THOMAS S. MEDLAND, SHERIDAN MONTFORT, JAY B. MOYER,MURRAY NICHOLSON, MURRAY O'NEIL, WILLIAM H. OVERELL, GEORGE PAKOZDI, PETER J.PALMER, STEPHEN F. PALMER, JANE PERRIN, WILLIAM E. PERRIN, MAX H. PICKFIELD,HAL PRINGLE, CLAUDIUS RAMPRASHAD, E.R. REYNOLDS, ROBERT L. ROBINSON, ERNESTROMAIN, HENRI ROTSAERT, SIMONE ROTSEART, PAUL SAUNDERS, RUTH M. SIMPSON,FLORENCE SMITH, IAN TAYLOR, SHARON THIBODEAU, BRIAN TIMMIS, DIANA WALKER, KEITHWALKER, JOHN BRIAN WEBSTER, GARNET WEBSTER, FREDA WEBSTER, NEIL WEBSTER, GRAHAMWRIGHT, WM. YOUNG, MARY LYNN BEAVEN, MICHAEL HEAD, SANDRA HEAD, AND WARREN HURST (plaintiffs (appellants)) v. CORPORATION OF LLOYD'S and BANK OF NOVASCOTIA, CANADA TRUST, CANADIAN IMPERIAL BANK OF COMMERCE, CITIBANK CANADA, HONGKONG BANK OF CANADA, ROYAL BANK OF CANADA and TORONTO-DOMINION BANK and CTCREDIT CORPORATION (defendants (respondents))

C. WILLIAM ASH et al. (plaintiffs (respondents)) v. CORPORATION OF LLOYD'S etal. (defendants (appellants))

Ontario Court of Appeal

Carthy, Osborne and Abella JJ.A.

July 28, 1992

Heard: June 9-11, 1992Judgment: July 28, 1992[FN*]Docket: Docs. C12100; CA C9113

Counsel: Alan J. Lenczner and Glenn A. Smith, for plaintiffs as appellants and respondents.

R. Bruce Smith and Douglas Alderson, for Canadian Imperial Bank of Commerce, Royal Bank of Canada and Toronto-Dominion Bank as appellants.

Martin Sclisizzi, for appellant Bank of Nova Scotia.

Peter Howard and Marjo MacMullin, for respondent Corporation of Lloyd's.

Subject: Civil Practice and Procedure; International; Contracts

Conflict of Laws --- Contracts -- Choice of law -- Where contract specifying law.

Conflict of Laws --- Contracts -- Choice of law -- Forum conveniens -- General.

Injunctions --- Availability of injunctions -- General.

Conflict of laws -- Contracts -- Choice of law -- Where contract specifying law -- Exclusive jurisdiction clause in favour of England -- Underlying transaction involving foreign beneficiary -- Ontario action on securities transactions -- Injunctions and letter of credit -- Ontario action stayed -- Appeal allowed in part.

Conflict of laws -- Stay of proceedings -- Ontario action for rescission of agreement -- Exclusive jurisdiction clause in favour of England -- More substantial connection with England -- Ontario action stayed -- Appeal allowed in part.

The plaintiffs were underwriters of Lloyd's. The plaintiffs had letters of credit issued by the defendant banks in favour of the defendant bank Lloyd's. Four of the defendants had offices in Ontario and in England. The remaining three defendants had offices in Ontario but not in England. The letters of credit issued by the defendant CT stated that any dispute arising with respect to the letters of credit was to be submitted to a court in England. The other letters of credit were silent as to jurisdiction. The indemnity contracts pursuant to which the plaintiffs held the letters of credit contained exclusive jurisdiction clauses in favour of Ontario. By their terms, the letters of credit were to be presented for payment in England.

The plaintiffs sued in Ontario to rescind the agreements on the grounds that they were void for having been induced by Lloyd's by means of fraud and in contravention of the Securities Act, R.S.O. 1980, c.466.

The plaintiffs moved for an interlocutory and permanent injunction to restrain the defendant banks and financial institutions from making payments on the letters of credit.

The defendants moved to stay the plaintiffs' action and the plaintiffs' motion on the grounds that England had exclusive jurisdiction over the matter or, alternatively, that England was the convenient forum. Lloyd's brought a motion for an order staying the action on the basis that the contracts had exclusive jurisdiction clauses in favour of England.

An order was granted staying both the plaintiffs' motion for an interlocutory and permanent injunction and their action against Lloyd's on the basis that the clauses in the agreements between the plaintiffs and Lloyd's assigned exclusive jurisdiction to English courts. An order was granted staying the plaintiffs' motion for an interlocutory and permanent injunction against the three financial institutions who had offices in Ontario but not in England, on the basis that an injunction granted in Ontario would not be effective to prevent Lloyd's from calling for payment on the letters of credit issued by those institutions. The letters of credit of the three institutions were payable by presenting a demand upon the confirming banks in England.

The motion by the defendant four chartered banks, which had a presence in Ontario and in England, to stay or dismiss the plaintiffs' actions was dismissed and the interlocutory injunction against those banks was granted. They and the plaintiffs were Ontario residents. If an interlocutory order was granted, it would prevent Lloyd's from receiving the benefits of its alleged fraud. The plaintiffs appealed.

Held:

The appeal was allowed in part; the action against Lloyd's and the first group of three banks or financial institutions was properly stayed and the action against the chartered banks should be stayed.

The entire action should be examined and the major parties and issues identified. The plaintiff alleged serious fraud against Lloyd's. The banks would be nominal participants at the trial of the fraud action against Lloyd's because no allegations had been made against the banks in the statement of claim. The only relief sought was an interlocutory injunction. In terms of the action against Lloyd's, the reasons of the learned motions court judge for staying the action against Lloyd's were upheld.

In not staying the action against the chartered banks, the learned motions court judge had focused on the effectiveness of an interlocutory injunction against the banks and Lloyd's. Such would not be the issue unless the competing jurisdiction could not afford relief. The banks were amenable to English proceedings and their presence was not necessary to accomplish the result sought. An injunction against Lloyd's to prevent it from calling on the letters of credit would be equally effective. Once it was determined that the action against Lloyd's should be pursued in England, there was nothing of substance to pursue in Ontario. There was no claim against the banks which could form the basis for determination at trial. An interlocutory injunction in Ontario would effectively be interlocutory until a trial in England. Interlocutory orders for English trials should be made in England.

It might be that an action could be framed against a bank alone for breach or threatened breach of an implied term of a contract of indemnity that the bank would not pay on the letter of credit in the face of obvious evidence of fraud. If there was such a cause of action, an interlocutory injunction might be granted. In such action, the bank might seek to join the fraudulent party. There might be a choice of forum dispute. Here, the plaintiffs had decided that Lloyd's was a necessary and proper party and had made no substantive claims against the defendant banks. The normal principles and considerations relating to convenient forum should be applied first. If the proper law of the contract was Ontario, then it could be assumed that an English court would give appropriate weight to what was proved as Ontario law.

Costs of the appeal should follow the event in each appeal. The parties were granted leave to make written submissions as to costs of the original motion.

Cases considered:

Angelica-Whitewear Ltd. v. Bank of Nova Scotia, [1987] 1 S.C.R. 59, 73 N.R. 158, 6 Q.A.C. 1, 36 D.L.R. (4th) 161, 36 B.L.R. 140 -- distinguished

Statutes considered:

Courts of Justice Act, 1984, S.O. 1984, c. 11 [R.S.O. 1990, c. C.43] --

s. 119 [R.S.O. 1990, c. C.43, s. 106]

Appeals from orders made by McKeown J. dated November 15, 1991 reported 7 C.P.C. (3d) 343, ante, 87 D.L.R., (4th) 65, (sub nom. Ash v. Lloyd's Corp.) 6 O.R. (3d) 235 (Gen. Div.) granting permanent stay of proceedings against defendant Lloyd's and granting permanent stay of action against three defendant banks or financial institutions having presence in Ontario but not in England, and from order refusing to grant stay of proceedings against four chartered banks who had presence in both Ontario and England.

The judgment of the court was delivered by Carthy J.A.:

1 We have before us two appeals from orders made by McKeown J. dated November 15, 1991 and reported at 7 C.P.C. (3d) 343, ante, 87 D.L.R. (4th) 65, (sub nom. Ash v. Lloyd's Corp.) 6 O.R. (3d) 235 (Gen. Div.). The plaintiffs are underwriting members of Lloyd's who reside in Ontario and launched this action against Lloyd's for a declaration that the agreements between the plaintiffs and Lloyd's are void ab initio by reason of the fraud of Lloyd's. As against the banks, the claim is for an interlocutory injunction until trial preventing payment to Lloyd's upon letters of credit issued by the banks on the instructions of one or more of the plaintiffs and naming Lloyd's as beneficiary.

2 Motions were brought before McKeown J. pursuant to s. 119 of the Courts of Justice Act, 1984, S.O. 1984, c.11 which, taken together, sought to stay the entire proceedings on the ground that England is the proper forum.

3 McKeown J. granted a permanent stay of the action against Lloyd's, principally upon the basis of clauses in the agreements between the plaintiffs and Lloyd's assigning exclusive jurisdiction to the English courts. The plaintiffs appeal as of right from that order.

4 McKeown J. also granted a permanent stay of the action against Citibank Canada, Hongkong Bank of Canada and CT Credit Corporation (the "financial institutions"), upon the ground that an injunction granted in Ontario would not be effective to prevent Lloyd's from calling for payment on the letters of credit issued by those institutions. None of them has a presence in England and their letters of credit are payable by presenting a demand upon Citibank N.A. or Hongkong and Shanghai Banking Corporation, the confirming banks in England. These two confirming banks are not parties to the action. The plaintiffs appeal as of right from that order and also ask the court to add these two confirming banks as parties to the action.

5 McKeown J. refused to stay the order against the four chartered banks, principally upon the ground that they and the plaintiffs are resi dents in Ontario and, if an interlocutory injunction is granted, it would have the desired effect of preventing Lloyd's from receiving the benefits of its alleged fraud. That is an interlocutory order and appropriate proceedings were taken by way of appeal on the part of the chartered banks in the direction of the Divisional Court, eventually being transferred by order to this court to be heard together with the other appeals.

6 Mr. Lenczner has asked us to add an additional plaintiff, Charles Mitchell, and, because his letter of credit was issued by the Bank of Montreal, to add that bank as a defendant. Mr. R. Bruce Smith consented on behalf of the Bank of Montreal and both counsel indicated that their clients are prepared to be bound by the result of these appeals.

7 The motions court judge commences his reasoning by looking at the position of the banks, making a decision in respect of them, and then turning to Lloyd's. I prefer to start by looking at the entire action and identifying the major protagonists and issues. The plaintiffs allege serious frauds against Lloyd's and if the action comes to trial, they and their witnesses will occupy almost all of the court's time. The banks will be nominal participants at that stage since no allegations are made against them in the statement of claim, and the only relief sought is an interlocutory injunction until trial. At the moment they are very prominent in the eyes of the plaintiffs because they offer a means of obtaining an interlocutory injunction to prevent payments being made to Lloyd's. However, interlocutory issues should not determine the choice of forum. The tests that are traditionally applied look to the full dimensions of the entire proceeding and, most particularly, the trial.

8 With a starting point of treating Lloyd's as the engine of the defence and treating the claims against it as the prominent concern in selecting a forum, I endorse the entirety of McKeown J.'s reasons for staying the action against Lloyd's. Even without the exclusive jurisdiction clauses, the contracts are to be performed in England, the alleged wrongful conduct was on the part of a large number of English residents who carry out the day-to-day functions under Lloyd's jurisdiction, and the overall picture is of an overwhelming affinity to England.

9 The plaintiffs argue that the exclusive jurisdiction clauses should be ignored because if there has been fraud in the circumstances surrounding the procurement of the contracts, then the contracts are void ab initio and the clauses relating to forum are of no effect. I agree with McKeown J., and with the authorities he cites, to the effect that an allegation that a contract is void ab initio does not make it so until a final judgment of the court. If the plaintiffs can commence an action with an allegation of fraud which would void the contract and thus vitiate a choice of jurisdiction clause from the outset, then they may succeed on the merits while enjoying their own choice of jurisdiction or fail on the merits while depriving the defendant of the contracted choice. These clauses are too important in international commerce to permit that anomalous result to flow.

10 Therefore, I conclude that the motions judge correctly stayed the action against Lloyd's.

11 The essence of McKeown J.'s reasoning for not staying the action against the chartered banks is found at p. 7 [p. 349, ante] of his reasons:

Regarding the first group of banks, I am satisfied that if an Ontario court decided to issue an injunction restraining each of these banks from honouring the plaintiffs' letters of credit, the Ontario injunction would have the desired effect of preventing Lloyd's from receiving the benefits of its alleged fraud. In my view, given that an Ontario injunction could effectively prevent Lloyd's from being paid on the letters of credit issued by this group of banks and because the plaintiffs and the banks in this group reside in Ontario, Ontario and not England is the forum conveniens.

12 The motions court judge was here concentrating on the effectiveness of an interlocutory injunction against the chartered banks and Lloyd's. That is not the issue unless the competing jurisdiction could not afford relief. All of these banks are amenable to English proceedings and none of them are necessary to accomplish the result which McKeown J. was seeking to effect. An injunction against Lloyd's to prevent it from calling on the letters of credit would be equally effective. Further, once it is determined that the action against Lloyd's should be pursued in England, there is nothing of substance to pursue in Ontario. As stated previously, there is no claim against the banks which could form the basis for a determination at trial. An interlocutory injunction granted in Ontario would effectively be interlocutory until a trial in England. Interlocutory orders for English trials should be made in England.

13 In argument before us, the plaintiffs placed much reliance upon the decision of the Supreme Court of Canada in Angelica-Whitewear Ltd. v. Bank of Nova Scotia, [1987] 1 S.C.R. 59, 73 N.R. 158, 6 Q.A.C. 1, 36 D.L.R. (4th) 161, 36 B.L.R. 140. In that case, Le Dain J. analyzes extensively the autonomy of letters of credit and the necessity to respect them as instruments of international commerce, balanced against the need to prevent a fraudulent beneficiary from improperly benefitting from that autonomy. He concluded that fraud relating to the underlying contracts could be a basis for intercepting payment under the letters of credit and that the party who is wronged has the option of putting the bank on notice of the fraud or of seeking an injunction to prevent payment to the beneficiary. In describing the basis for the alternative forms of relief, he states at p. 84 [S.C.R.]:

On the issue raised by this appeal, I would draw a distinction between what must be shown on an application for an interlocutory injunction to restrain payment under a letter of credit on the ground of fraud by the beneficiary of the credit and what must be shown, in a case such as this one, to establish that a draft was improperly paid by the issuing bank after notice of alleged fraud by the beneficiary. A strong prima facie case of fraud would appear to be a sufficient test on an application for an interlocutory injunction. Where, however, no such application was made and the issuing bank has had to exercise its own judgment as to whether or not to honour a draft, the test in my opinion should be the one laid down in Edward Owen Engineering -- whether fraud was so established to the knowledge of the issuing bank before payment of the draft as to make the fraud clear or obvious to the bank.

14 The plaintiffs argue before this court that the judgment in Angelica affords them the clear right to pursue an interlocutory injunction against the banks. Since both the plaintiffs and the banks are residents of Ontario, the argument continues that the plaintiffs would be disentitled to relief which was clearly afforded to them by the judgment in Angelica if the present action is stayed as against the banks.

15 In Angelica, the bank was suing companies in the position of the plaintiffs in the present proceedings on an indemnity agreement. The bank had paid the beneficiary and the counterclaim of the defendants asserted that there was fraud in the underlying agreements which should have been apparent to the bank, and that the documentary presentations by the beneficiary were insufficient to justify payment. In fact, the judgment went on the basis of the insufficiency of the documents and not on the fraud allegation. There was, in Angelica, a true lis between the parties and there was no direct issue as to an interlocutory injunction. Nor was there any issue as to choice of forum because the foreign beneficiary was not a party to the proceeding. I have full respect for the entirety of the reasons of Le Dain J., whether obiter or not, but he did not have a factual framework into which to insert the interlocutory injunction that he was discussing. One cannot jump from his reasons to an assertion that an interlocutory injunction is available as a self-supporting cause of action. There must be a lis between the parties which is deserving of a trial before there can be anything that is interlocutory in the proceedings leading to trial.

16 It may be that an action could be framed against a bank alone for breach or threatened breach of an implied term of the contract of indemnity, namely, that the banks would not make payment on the letter of credit in the face of obvious evidence of fraud. If such an action is sustainable, then an interlocutory injunction might be granted as part of the overall proceeding. In such an action, the bank might or might not seek to join the fraudulent party and that might instigate a choice of forum argument. Le Dain J. spoke of relief but he did not speak to where that relief might be sought and who were the necessary parties to the proceeding in which the relief is sought. In the present case, the plaintiffs have decided that Lloyd's is a necessary and proper party to the proceeding and the plaintiffs have made no allegations or substantive claims against the defendant banks. The normal principles and considerations relating to forum conveniens should be applied first and then the chosen forum can consider the comments of Le Dain J. on an interlocutory motion. If the proper law of the contract is Ontario then it can be assumed that an English court will give appropriate weight to what is proved as Ontario law.

17 It is, therefore, my conclusion that the action against the financial institutions was properly stayed and that the action against the chartered banks should be stayed. An order should also go amending the proceedings to add Charles Mitchell as a plaintiff and Bank of Montreal as a defendant to the end that they be bound by this disposition. Citibank N.A. and Hongkong & Shanghai Banking Corporation should not be added. It was reported to us that, in response to the application to add them, they indicated that they took no position. This does not assure the court that they would be bound by the result and therefore the motion to add them is denied.

18 McKeown J. concluded his reasons [p. 363, ante]:

If the parties cannot agree on costs they may make written submissions to me.

We were not told what ensued, but each of the appellants and respondents has asked for costs of the appeal. I would, therefore, order that costs of the appeal follow the event in each of the appeals and if any party feels that costs of the original motion should be adjusted, written submissions may be made.

Appeal allowed in part.

FN*. Supplementary Reasons to this judgment are reported at p. 372, post.