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THE SOCIETY OF
LLOYD’S, Applicant v. PAUL F. SAUNDERS, also known as P.F. SAUNDERS,
Respondent COMMERCIAL No. 99-CL-3511,
SUPERIOR No. 99-CV-163442 ONTARIO SUPERIOR COURT OF JUSTICE February 7, 2000; February 8,
2000; February 9, 2000, Heard March 7, 2000, Released 2000 Ont. Sup. C.J. LEXIS 433 COUNSEL: [ *1] M.
Hartman, H. G. Chaiton, and G. Benchetrit, for the Applicant. A. J.
Lenczner, S. Block, and G. A. Smith, for the Respondents. JUDGES: SWINTON J. OPINION
BY: SWINTON OPINION:
SWINTON J.: REASONS
FOR JUDGMENT The
Society of Lloyd’s has commenced five “test case”
applications under the Reciprocal Enforcement of Judgments (U.K.) Act, R.S.O.
1990, c. R.6 to register judgments in Ontario which Lloyd’s obtained
in England against certain individuals represented by Lenczner Slaght Royce
Smith Griffin: Gerhard Emil Meinzer (Court File 99-CV-163438), Sheridan
Mary-Jane Montfort (Court File 99-C V-163441), Paul F. Saunders (Court File
99-CV- 163442), Alan Milton Paul Smart (Court File 99-CV-163444), and Donald
Elmer Stringer (Court File 99-CV-163443). Lenczner Slaght represents 88
individuals, listed in Schedule A to the applicant’s factum, all of
whom have agreed to be bound by the decisions in these applications The Act
incorporates the Convention Between Canada and the United Kingdom for the
Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial
Matters, which is set out in the Schedule to the Act. Article IV(1) provides
that registration of a judgment [ *2] shall
be refused or set aside if: (a) the
judgment has been satisfied; … (e)
enforcement of the judgment would be contrary to public policy in the territory
of the registering court; … 3. If at
the date of the application for registration the judgment of the original court
has been partly satisfied, the judgment shall be registered only in respect of
the balance remaining payable at that date. The
respondents have defended the applications on three grounds. They argue that
the registration and enforcement of the U.K. judgments would be contrary both
to natural justice and public policy, and that certain of the U.K. judgments
have been satisfied in whole or in part. The natural justice and public policy
arguments are based on the lack of opportunity for the respondents to litigate
allegations of fraud against Lloyd’s in the United Kingdom to date and
the allegation that Lloyd’s breached the prospectus requirements of
the Ontario Securities Act, R.S.O. 1990, c. S.5. The
respondents filed nine affidavits, and the applicant filed affidavits in reply.
Cross-examinations began on the reply affidavits, and there were a significant
number of refusals. As [ *3] a
result of a motion to compel answers to the refusals, the parties came to a
written agreement on procedure inan effort to expedite the proceeding. They
requested that the Court first determine two issues: assuming that the
respondents’ allegations of fraud are proven, would these allegations
provide a defence to registration of the U.K. judgments on the grounds that
enforcement would be contrary to natural justice or public policy; and assuming
that Lloyd’s was required to deliver a prospectus pursuant to the
Ontario Securities Act and failed to do so, would registration of the U.K.
judgements be contrary to public policy? If both questions were decided in
favour of Lloyd’s position, the parties agreed that the applications
would be allowed and the judgments registered, subject to the issue of whether
certain judgments had been satisfied in whole or in part. Prior to
the hearing of this application, I raised questions about the propriety of the
procedure, and the parties made submissions. Cases in this Court and the Court
of Appeal have determined that a motion under Rule 21 can not be pursued in a
proceeding commenced by way of application, since Rule 21 applies only
where [ *4] the proceedings are commenced by
an action (Zavitz Technology Inc. v. 146732 Canada Inc. (1991), 49 C.P.C. (2d) 26 (Ont.
Ct. (Gen. Div.)); McLeod v. Castlepoint Development Corp. (1997), 31 O. R. (3d) 737
(C.A.)at 753). However, the applicant argued that I should proceed with the
application on its merits, bearing in mind the terms of Rule 38.10. It provides
that a judge hearing an application may grant the relief sought, dismiss or
adjourn the application in whole or in part and with or without terms, or order
that the whole application or any issue proceed to trial and give such
directions as are just. It was the applicant’s submission that if I
ruled against Lloyd’s and held that any of the defences were
available, it would be necessary to determine, pursuant to Rule 38.10, whether
issues relating to fraud, securities legislation, or satisfaction of the
judgment should proceed to trial and, if so, whether the proceeding should be
in a Canadian court, rather than in the United Kingdom. Proceeding
in the manner suggested by the applicant was; in my view, the most efficacious
way to proceed, given the nature of this case, and consistent with the
parties’ agreement. Article
[ *5]
III(1) of the Convention for the Reciprocal Recognition and
Enforcement of Judgments in Civil and Commercial Matters provides that a
judgment creditor may apply to have a judgment registered, and “on any
such application the registering court shall, subject to such simple and rapid
procedures as each Contracting State may prescribe and to the other provisions
of this Convention, order the judgment to be registered” (emphasis
added). Rule 73 of the Ontario Rules sets out a summary procedure for the
registration of a U.K. judgment, commencing by notice of application. Thus, the
goal of the legislation is to provide an expeditious manner for the enforcement
of U.K. judgments. In addition,
this case was transferred to the Commercial List in the spring of 1999.
Consistent with the Commercial List Practice Direction and the emphasis on case
management for cases on the Commercial List, it appeared appropriate to make a
determination of the legal issues framed by the parties, given that this would
facilitate the resolution of this dispute, either by ending the dispute if the
applicant was correct or by narrowing it, if the respondents were correct. Moreover,
there were not material [*6] facts
in dispute with respect to the legal issues before me. It is noteworthy that
the respondents’ argument rested on the allegation that the procedure
adopted in the United Kingdom was contrary to natural justice, given their
inability, to date, to have a trial on the fraud issue. It was clear at the
outset of this hearing that were they to succeed on that argument, the proper
order would not be a trial of the fraud issue in Ontario, but a refusal to
enforce. Similarly, while the Securities Act and satisfaction issues would
determine the applications if the applicant was correct, directions pursuant to
Rule 38.10 would be necessary if the respondents succeeded, in order to
determine the appropriate process and the jurisdiction to resolve those issues.
Therefore, I proceeded to hear the application, relying on the affidavit
material provided. The
Factual Background Lloyd’s
does not carry on an insurance business. Instead, the function of
Lloyd’s is to regulate and provide services to the Lloyd’s
insurance market.Underwriting is carried out by “Names”
— individuals who underwrite insurance through Lloyd’s
syndicates. All of the respondents here have been Names. Affidavits [*7] filed by the respondents
indicate the way in which some of the Names were recruited by Lloyd’s.
For example, Jacqueline Levin indicates that she was recruited by
Lloyd’s agents in Ontario. She stated that an application for
membership must be made through a Members’ Agent, authorized by
Lloyd’s to recruit members. She also had to attend a Rota Committee
interview in London, England, where she was questioned about becoming a member
of Lloyd’s by a member of the Council of Lloyd’s, the
Society’s governing body. After being accepted, she then signed the
necessary documents in England, and she was given copies. The affidavit of Paul
F. Saunders outlines in more detail the written information he received prior
to becoming a member. To be
accepted for membership, the Names were required to enter into a series of
agreements with the Members’ Agent and Lloyd’s itself,
including the General Undertaking, the Agency Agreement and the
Lloyd’sUnderwriting Members’ Security Agreement. The General
Undertaking bound the Names to comply with directions imposed by
Lloyd’s Council. Like the other documents signed, it mandated that
disputes with Lloyd’s must be heard in the English Courts and be
governed [*8] by the laws of England. For
example, Clause 2.1 reads: The
rights and obligations of the parties arising out of or relating to the
member’s membership of, and/or underwriting of insurance business
at,Lloyd’s and any other matter referred to in this Undertaking shall
be governed by and construed in accordance with the Laws of England. Each Name
must lodge a deposit with Lloyd’s equal to a certain percentage of the
premium income, normally in the form of a letter of credit. As well, Names must
appoint a registered Members’ Agent to act on their behalf, to whom
they delegate the complete control of their affairs at Lloyd’s. The Names
group together in syndicates, which are managed by a Managing Agent, whose name
is often associated with the syndicate. A syndicate is not a legal entity nor a
partnership; rather, it is simply a group of Names who join a particular
syndicate for a particular underwriting year. Each policy of insurance issued
at Lloyd’s consists of individual contracts made on behalf of the
individual Names participating in the syndicate. Each Name is only liable for
his share of the risk, but not for the share of any other Name. However, the
Name has unlimited [*9] liability
to the extent of all his assets in respect of his insurance obligations at
Lloyd’s. A ll premiums received for insurance policies are credited to
a Premiums Trust Fund, which is governed by a Premiums Trust Deed. Its prime
purpose is for the protection of policy holders. Each member is also required
to make annual mandatory contributions to the Central Fund, which exists
primarily to protect policy holders. It is used if claims cannot be satisfied
through the Names’ Lloyd’s funds and personal assets. The
respondents allege that Lloyd’s acted fraudulently in concealing the
magnitude of risks associated with asbestos exposure claims arising in the
United States from about mid-1980. Normally, the accounts of a syndicate are
left open for three years in order to defer the distribution of the profit
until the pattern of claims’ settlement for the syndicate year in
question can be determined with reasonable certainty. Reinsurance to close is
obtained, usually by paying a premium to the following underwriting year of the
same syndicate. This premium is intended to cover the total outstanding claims,
including those not yet reported in respect of risks signed in the year of
account [*10] and those still outstanding from
all previous years. However, if the closing reserve cannot be calculated with
sufficient certainty, and there are insufficient funds to purchase reinsurance
to close, the syndicate is left open. The
respondents allege that despite the impossibility of determining the liability
in respect of asbestosis, virtually every syndicate closed its 1979 year of account
at December 31, 1981, taking reserves over a series of years in an attempt to
spread the losses over the Names who underwrote the syndicates throughout the
1980’s. Apparently during the 1980’s,
Lloyd’srecruited a considerable number of new Names. The respondents
state that they were generally recruited in 1986 and after, becoming Names in
1987 and subsequent years, although the affidavit of Eric Mellish Lane
indicates that he became a Name in 1979. They believe that Lloyd’s misrepresented
to them the risks to which they were exposed from asbestos and other long tail
risks. Specifically, Lloyd’s knowledge of future enormous and
unquantifiable losses and its failure to disclose this information are alleged
to be fraudulent conduct. So, too, was the publication of Lloyd’s
Global Accounts, which [*11] are
alleged to have contained misleading information about the financial health of
the syndicates. By 1991
or 1992, the insurance market was in crisis. Lloyd’s made cash calls
on the Names and threatened to draw upon their letters of credit.In 1991, a
group of Canadian Names issued a Statement of Claim in Ontario against
Lloyd’s and a number of banks, seeking an injunction to prevent the
banks from paying out on the letters of credit, and preventingLloyd’s
from trying to draw down on the letters of credit. They argued that their
contracts with Lloyd’s were void ab initio as having been induced by
fraud and made in contravention of the Securities Act. Lloyd’sbrought
a motion to stay the action on the basis of forum non conveniens, and was
successful. McKeown J. determined that the proper forum for the determination
of the issues was the United Kingdom because of the choice of law clause in
Lloyd’s General Undertaking. In addition, he determined that the
English courts should take jurisdiction because the proceeding had a more
substantial connection to England (Ash v. Lloyd’s Corp. (1991), 6 O.R. (3d) 235 (Gen.
Div.) at 248). That decision was upheld by the Court [*12] of Appeal ((1992), 9 O.R. (3d) 755 (C.A.); leave to
appeal refused by the Supreme Court of Canada, October 8, 1992). Writing for
the Court of Appeal, Carthy J.A. stated at 758: 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. Lloyd’s
drew down on the Names’ letters of credit, but also made cash calls.
When the respondents did not pay the cash calls, Lloyd’s paid the
losses from the Central Fund, and in 1992 brought an action in the High Court
of Justice of the United Kingdom against many of the respondents for
reimbursement of the amounts paid. One of the defendants, Dr. Gian Carlo Mason
from Hamilton, Ontario, filed a defence and counterclaim denying that there was
money owing [*13] to
Lloyd’s because of the fraudulent conduct and misrepresentations by
Lloyd’s related to asbestos losses. This action has never proceeded to
trial as a result of an order of the Commercial Court of the High Court of
Justice that Lloyd’s was not required to proceed with the Mason case
and could leave it in abeyance while it pursued the Clementson case, which
raised defences relating to European Community law. To date, none of the
CentralFund Writs cases has proceeded. After
1993, a number of cases brought by action groups of Names against Managing
Agents for negligence went to trial or settled. When the Names succeeded,
damages were awarded to them. Some of the respondents here were successful in
these actions. In subsequent litigation, the House of Lords determined that the
litigation recoveries of the Names related to negligent underwriting are part
of the Premiums Trust Funds. Similarly, litigation recoveries related to
negligent advice in portfolio selection are part of the Premiums Trust Funds to
the extent provided in the Premiums Trust Deeds. Lloyd’s is the
Regulating Trustee of Names’ Premiums Trust Funds. In its capacity as
Trustee, Lloyd’s is entitled to those litigation [*14] recoveries and must deal with
them in accordance with the Premiums Trust Deeds (The Society of
Lloyd’s v. Robinson. House of Lords, reasons delivered March 25,
1999). Those funds are currently held by various solicitors for the action
groups in escrow accounts, and there is ongoing dispute about their release. Because
of the chaos in the insurance market and in order to keepLloyd’s
viable, Lloyd’s sought a way to settle all the litigation in the
market and the outstanding claims. In July, 1996, as part of its Reconstruction
and Renewal Plan (“R & R Plan”), Lloyd’s made an
offer to Names worldwide to settle claims in respect to their 1992 and prior
underwriting years. In order to effect the R & R Plan, a contract of
reinsurance was entered into with a group of companies known as “Equitas”.
The Equitas reinsurance contract covered the entire non-life insurance market
for the 1992 and prior underwriting years. Those Names who accepted the offer
waived all claims against Lloyd’s, Equitas, agents and auditors in respect
of 1992 and prior years. While the
offer was accepted by a vast majority of Names worldwide, the respondents did
not do so. Nevertheless, those Names who did not [*15] accept the R & R Settlement Offer still had their
liabilities mandatorily reinsured by Equitas. Lloyd’s compelled them
to contract with Equitas by imposing upon thema replacement managing agent
called “AUA9”, whichLloyd’s then directed to execute
the reinsurance contracts on behalf of the Names. Lloyd’s paid all
Equitas premiums owing, and the rights to collect the Equitas premiums were
then assigned to it. Clause 5.5 of the reinsurance contract provided that each
Name was obliged to pay his premium free and clear from any set-off,
counterclaim or other deduction, including in respect of claims against
Lloyd’s. It also provided for a waiver by the Name to any claim to a
stay of execution on the judgment. The
English Court Proceedings Lloyd’s
then commenced actions to recover the Equitas premiums from those Names who did
not accept the R & R offer, including the respondents here. Various Names
raised numerous defences, arguing that they were not bound because of their
non-acceptance of the R & R settlement offer; thatLloyd’s had
exceeded its power to amend or enact by-laws in creating the R & R scheme;
that the assignment to Equitas from Lloyd’s was improper; that
the [*16] fraud by Lloyd’s gave
rise to a right to rescind the Names’ contract with Lloyd’s;
that fraud by Lloyd’s should give rise to a set-off of the fraud
claims against the premium claims; that a stay of execution should be granted
until the determination of the fraud claims; and that Lloyd’shad
breached Canadian securities legislation. Issues of quantum were also raised. In a
series of test cases managed through the Commercial Court, Lloyd’s
moved under R.S.C. Orders 14 and 14A, which bear some similarity to
Ontario’s Rules 20 and 21 dealing with summary judgment and
determination of a preliminary point of law. Under O.14, r. 3, the English
Court must ask whether there is “an issue or question in dispute which
ought to be tried.” In a
series of judgments, Justices Colman and Tuckey of the Commercial Court wrote
lengthy reasons in which they stated that the defences raised were without
merit. Their decisions were upheld by the Court of Appeal. A brief summary
follows. In The
Society of Lloyd’s v. Leighs (February 20, 1997), Colman J. rejected defences based on
the fact that the Names had not accepted the R & R plan and therefore,
could not be bound by it, and that Lloyd’s had no [*17] title to sue in respect of
moneys payable under the R & R plan. Canadian Names were intervenors in
this proceeding. In a subsequent decision released on April 23, 1997, The
Society of Lloyd’s v. Wilkinson, he determined that even if Lloyd’s had engaged
in fraudulent conduct, the law of rescission would not apply in the
circumstances because of the impossibility of restitutio in integrum. He also
held that Clause 5.5 of the Equitas contract prevented the defendants from
setting off their counterclaim for damages for fraud against Lloyd’s
claim for the Equitas premium, and that there should be no stay of execution
against them with respect to the judgment for the Equitas premium. The
judgements of Colman J. were upheld by the Court of Appeal in The Societyof
Lloyd’s v. Leighs, Lyon and Wilkinson (reasons dated July 31, 1997),
and leave to appeal to the House of Lords was refused. Counsel appeared for 215
Canadian Names, who were granted intervenor status. The Court upheld the
conclusions of Colman J. that the R & R By-law fell within the
Society’s powers,and the directions given to implement it were validly
given; that the Names had not validly rescinded their General [*18] Undertakings and thereby avoided
their contracts with Equitas concluded on their behalf by AUA9; that the Names
were bound by the “no set off” provision in Clause 5.5 of the
Equitas contract, given their agreement, at the time that they became Names, to
be bound by the legislative and regulatory regime of the Society; and that
clause prevented the non-accepting Names from raising claims of fraud against
the Society in answer to a claim by the Society as assignee for the
Name’s premium. Finally, the Court refused to order a stay of
execution. Subsequently,
Tuckey J. determined that there was no defence to the claim for the premiums
based on the allegation that Lloyd’s had failed to comply with Ontario
securities law (The Society of Lloyd’s v. Daly, reasons dated January 27, 1998).
In doing so, he gave full effect to a legal opinion of James C. Baillie, Q.C.,
which had concluded that the actions of Lloyd’s had contravened
Ontario securities law because of the failure to file a prospectus, and thus,
the obligations to Lloyd’s would be unenforceable in Ontario. Tuckey
J. nevertheless held that the enforcement of the contractual obligations in
Englandwas not against public policy, [*19] and thus, there was no defence
available based on Ontario securities law. Subsequently, in March, 1998,
summary judgment was awarded toLloyd’s for the various Equitas premium
amounts. Tuckey J.
granted a stay of execution until the determination of a leave to appeal
application before the Court of Appeal, although he refused to order a general
stay of execution. Leave to
appeal was then sought from the Court of Appeal. In lengthy reasons in Society
of Lloyd’s v. Fraser & Ors, the Court of Appeal denied leave to
appeal from this judgment of Tuckey J. and others (reasons released July 31,
1998). The Court noted that there was no question here of enforcing a contract
that would involve the infringement of an Ontario law, and there was no
infringement of comity. The Court noted that if the Canadian Names were correct
an d their contracts with Lloyd’s were void and unenforceable, then
so, too, would be the insurance contracts which they had entered, because their
contracts’ validity depended upon the validity of the underwriting
membership with Lloyd’s (at 37). Lord Hobhouse concluded that
“no principle of comity or public policy would suffice to justify that
result”. In the course [*20] of
these reasons, he also stated with respect to the procedure that had been
adopted: Trials
are necessary in order to determine triable issues of fact. It is not the
function of the Court on an O.14 hearing to make findings of fact. It is its
function to consider whether the affidavits lodged by the defendants in
response to the O. 14 summons raise triable issues of fact which are capable in
law of providing the defendant with a defence to the claim or part of it. (at
29) As a
result of these decisions, the Equitas judgments are final in the United
Kingdom, as there is no further right to appeal. Lloyd’s now seeks to
enforce them in Ontario. Enforcement
of Foreign Judgements The
leading Canadian case on the enforcement of foreign judgments is DeSavoye v.
Morguard Investments Ltd. (1990), 76 D.L.R. (4th) 256 (S.C.C.). There, LaForest J. described the
principle of comity as …
the informing principle of private international law, which has been stated to
be the deference and respect due by other states to the actions of a state
legitimately taken within its territory. Since the state where the judgment was
given had power over the litigants, the
[*21]
judgments of its courts should be respected. (at 268) The
concern in that case was the reciprocal enforcement of judgements by Canadian
provinces, but in the course of his reasons, La Forest J. spoke of the purpose
of private international law rules as “grounded in the need in modern
times to facilitate the flow of wealth, skills and people across state lines in
a fair and orderly manner” (at 269). Article
IV(1)(e) of the Convention permits a court to refuse registration where
enforcement of the foreign judgment would be contrary to the public policy of
the territory. This is a codification of the common law rules. Here, the
respondents argue that enforcement would be contrary to public policy because
it would be contrary to natural justice. Alternatively, the registration would
be contrary to public policy becauseLloyd’s failed to comply with
Ontario securities law in soliciting the respondents as Names. Natural
Justice The
enforcement of a foreign judgment will be refused on public policy grounds only
if it offends a fundamental principle of justice or a deep- rooted tradition of
the forum (J.-G. Castel, Canadian Conflict of Laws, 4th ed. (Toronto:
Butterworths, [*22] 1997) at 171). While natural justice is not mentioned
explicitly as a defence in the Convention, a failure of natural justice has
been held to be an aspect of public policy. Nevertheless, as noted by Sharpe J.
in United States of America v. Ivey (1995 ), 26 O.R. (3d) 533 (Gen. Div.), the defence is
rarely applied in practice (at 550). In a
proceeding to enforce a foreign judgment, the merits of the claims and defences
in the foreign proceeding which led to the judgment are irrelevant (Four
Embarcadero Centre Venture v. Kalen (1988), 65 O.R. (2d) 551 (H.C.J.) at paragraph 63).
Therefore, the concept of natural justice, as a defence to enforcement, relates
to the procedure in the foreign proceedings, and not the merits (at paragraph
67). It is not
enough that the procedures of the foreign court are different from those of the
forum. Generally, the defence of natural justice has resulted in a refusal to
enforce a foreign judgment where the respondent has been denied notice or a
proper opportunity to be heard. However, the English Court of Appeal in Adams
v. Cape Industries plc, [1991] 1 All E.R. 929 refused to enforce
the judgment of a District Court in Texas, in which [*23] default judgement had been given, on the ground that
the judgment was contrary to English views of substantial justice. There, in
determining the damages to be awarded in a class action law suit involving
personal injury claims, the American judge made a total award for the class
without making an objective assessment, on evidence, of the condition of the
plaintiffs (at 1048, 1050). This was held to be contrary to substantial
justice, because the assessment of damages was not made judicially. Here, the
respondents argue that the procedure adopted to date in the United Kingdom has
deprived them of a trial, on the merits, of their claims of fraud against
Lloyd’s, contrary to natural justice. In their submission,
Lloyd’s has proceeded, through the device of the reinsurance contract
with Equitas and Clause 5.5 preventing the legal defence of set-off and stay of
execution, to obtain judgments which will impoverish the respondents and,
practically, prevent them from ever litigating their claims in the U.K. The
reason is said to lie in their inability both to satisfy these judgements, and
then post security for costs in the U.K. and fund the litigation of the fraud
claims there. It is
said [*24] to be the combination of these
actions by Lloyd’swith the utilization of the procedures in Orders 14
and 14A which constitutes the denial of natural justice so as to bring these
cases within the public policy exception. The respondents argue that there is a
fundamental public policy in Ontario that a litigant should have a trial on the
merits of his or her case except in rare circumstances, such as those set out
in Rule 21, where it is plain and obvious that a cause of action or defence can
not succeed. The respondents also invoke the summary judgment jurisprudence
under Rule 20 of the Ontario Rules of Civil Procedure to demonstrate that in
Ontario, there should bea trial if there is a genuine issue of material fact
(see, for example, Aguonie v. Galion Solid Waste Material Inc. (1998), 38 O.R. (3d) 161 (C.A.)
at 173). It is argued that the English Courts do not use such a rigorous test,
and the judges in the English proceedings have made findings of fact in the
Order 14 and 14A proceeding without giving the respondents the benefit of a
trial. Analogous
arguments have been made in two American jurisdictions, in which the English
Courts’ procedure was alleged to have denied [*25] due process (The Society of Lloyd’s v.
Ashenden,
unreported, Case No. 98C5335, U.S. Dist. Ct. (Ill.); The Society of Lloyd’s
v. Grace,
unreported, Index No. 604065/98 (N.Y.S.C.)). In both cases, the arguments were
rejected. I reach a
similar conclusion that the enforcement of the Lloyd’sjudgments in
Ontario is not contrary to natural justice. The Ontario Court of Appeal in Ash,
supra has already determined that England is the proper forum to resolve
disputes between Lloyd’s and the Names, including the claims of fraud
and the effect of Ontario securities legislation on the enforceability of their
contracts. Throughout the English proceedings, the respondents have been given
an opportunity to participate, and their interests have been defended by
counsel. They have participated in motions for directions which have shaped the
process by which the Order 14 and 14A applications were managed and heard in
the Commercial Court. They were afforded an opportunity to raise any and all
defences upon which they sought to rely to resist judgment. For purposes of the
applications, the Courts in England accepted the Names’ positions at
their highest, assuming that the Names would be [ *26] capable of proving fraud and breaches of the
Securities Act at trial. Nevertheless, the Courts concluded that there were no
triable defences in the Equitas actions under English law, the proper law of
the contract. It is
true that there has not yet been a determination, on the merits, of the fraud
claim, but neither has the English procedure precluded the trial of such a
claim. The respondents have chosen not to proceed with their own fraud claim,
nor have they apparently chosen to participate in a test case being pursued by
a number of Names. It involves Sir William Otho Jaffray, and, at the time of
the hearing of these applications, was scheduled to go to trial shortly on a
specific preliminary issue described as the “threshold fraud
point”. In an order of Colman J. dated June 30, 1998, that issue was
defined as “whether Lloyd’s made representations which it knew
to be untrue and/or to which it was reckless whether they were true or false
and whether such misrepresentations were communicated to the Name and if so
when”. Clearly,
the respondents will face some financial hardship in pursuing their fraud claims
in England, because they will have to “pay now and sue
later”. However, [*27] this is not a sufficient basis
on which to deny the enforcement of the judgments in issue. Moreover, while the
respondents argue that they will be required to post security for costs in
England, which they saywill deny them access to the English courts, such orders
are discretionary there, as they are in Ontario (affidavit of Philip Holden,
June 8, 1999, paragraph 11(b)). To date, no order for security for costs has
been made by an English Court. In these circumstances, there has been no denial
of natural justice that would justify refusing enforcement of the judgments. Public
Policy The
second defence to enforcement rests on the argument that Lloyd’s
contravened s.53(1) of the Ontario Securities Act by failing to file a
prospectus when soliciting the participation of the respondents as Names, and
the failure to do so makes enforcement of the judgments contrary to public
policy. “Public
policy” is a term difficult to define. Professor Castel, in his text
on Canadian Conflict of Laws, has stated that, “Public policy is
relative and in conflict of law cases it represents a national policy operating
on the international level” (supra, at 172). Canadian courts [*28] have described the term
“public policy” as including something that offends some
“essential public or moral interest” of the forum, or
“is inconsistent with the good order and solid interests of
society”. Generally, our courts have been very reluctant to employ the
doctrine of public policy (see, for example, Old North State Brewing Co. v.
Newlands Services Inc.
(1998), 41 B.L.R. (2d) 191 (B.C.C.A.) at 205-206; U.S. v. Ivey, supra at 549; Block Brothers Realty
Ltd. v.Mollard
(1981), 122 D.L.R. (3d) 323 (B.C.C.A.) at 329; Canadian Acceptance Corp.Ltd.
v. Matte (1957),
9 D.L.R. (2d) 304 (Sask. C.A.) at 312). The
Ontario Court of Appeal in Boardwalk Regency Corp. v. Maalouf (1992), 6 O.R. (3d) 737 discussed
the doctrine of public policy in detail. The majority determined that a default
judgment for a gambling debt, made in New Jersey, was enforceable in Ontario
despite the Gaming Act, R.S.O. 1990, c. G.2, which rendered void agreements
relating to gaming or wagering. New Jersey was held to be the proper law of the
contract. Notwithstanding the wording of the Ontario legislation, enforcement
of the New Jersey judgment was held not to offend “essential
morality” [*29] (at 743, 748). In reaching that conclusion,
Lacourciere J.A. noted, “Where the foreign law is applicable, Canadian
courts will generally apply that law even though the result be contrary to
domestic law” (at 748). He then went on to adopt a
“contemporary community standard of morality” to determine if
enforcement of foreign gambling debts would be contrary to public policy (at
750). Section
53(1) of the Securities Act provides: No person
or company shall trade in a security on his, her or its own account oron behalf
of any other person or company where such trade would be a distribution of such
security unless a preliminary prospectus and a prospectus have been filed and
receipts therefor obtained from the Director. Section
122 sets out an offence for contravention of the Act, while s. 127 permits the
Commission to make orders in the public interest. I have assumed for purposes
of this argument that Lloyd’s was required to file a prospectus, in
that the membership arrangements would constitute a security under the Act;
that there was a trade in Ontario; and there was a distribution in Ontario of
securities; that there was no prospectus filed; and no exemption [*30] was available to
Lloyd’s. The
Securities Act exists both to protect investors and to ensure the proper
functioning of the Ontario capital markets (see, for example, Committee for
Equal Treatment of Asbestos Minority Shareholders v. Ontario Securities
Commission (1999),
43 O.R. (3d) 257 (C.A.); Quebec (Sa Majeste du Chef) v. Ontario Securities
Commission
(1992), 10 O.R. (3d) 577 (C.A.) at 590). In Pacific Coast Exchange of Canada
v. Ontario Securities Commission (1977), 80 D.L.R. (3d) 529 at 538, the Supreme Court of
Canada noted that the policy of the legislation is to protect the public, quoting
with approval the following passage from Hartt J. in Re Ontario Securities
Commission and Brigadoon Scotch Distributors (Canada) Ltd. (1970), 14 D.L.R. (3d) 38 at 41: …
the basic aim or purpose of the Securities Act, 1966 … is the protection
of the investing public through full, true and plain disclosure of all material
facts relating to securities being issued. There can
be no doubt that the Act expresses important public policy in Ontario. The
issue here is whether that domestic policy should be applied at the
international level. It was the applicant’s [*31] position that the argument based on public policy
should not even be considered by this Court because of the doctrine of issue
estoppel. Since the English courts had determined that enforcement of the
contracts in England was not contrary to public policy, despite the assumption
that there had been no compliance with Ontario securities law, that issue had
already been determined. Issue
estoppel prevents a person from litigating a particular legal issue when that
same issue has been conclusively determined in prior judicial proceedings
involving the same parties or their privies. However, in Heynen v. Frito-Lay
Canada Ltd.
(1999), 179 D.L.R. (4th) 317, the Ontario Court of Appeal stated (at 323): Although
at a high level of generalization, two proceedings might seem to address the
same question, this requirement of issue estoppel is met only if on careful
analysis of the relevant facts and the applicable law the answer to the specific
question in the earlier proceeding can be said to determine the issue in the
subsequent proceeding. The
English Courts have determined that public policy, as it is understood in
English private international law, does not prevent the enforcement [*32] of the Lloyd’s
contracts with the Ontario Names. The English Courts did not decide, nor could
they decide, whether judgments emanating from their jurisdiction would or would
not be enforceable in Ontario, because they were contrary to Ontario public
policy. It is Ontario public policy that must be applied in the interpretation
of Article IV(1)(e) of the Convention found in the Reciprocal Enforcement of
Judgments (U.K.) Act. Therefore, the doctrine of issue estoppel does not apply
here. Nor is there an abuse of process in the respondents’ request
that I determine this issue, despite the conclusions of the English Courts. The
applicant places great weight on Boardwalk Regency, supra, arguing that the case
demonstrates the reluctance of Ontario Courts to refuse enforcement of a
foreign judgment, unless enforcement would be contrary to fundamental moral
values in our society. The respondents argue that the case can be
distinguished, because the gaming contract in issue there was entered into outside
Ontario, and the Court of Appeal concluded that the Ontario legislation was not
meant to have extraterritorial reach (at 742). Moreover, the majority held that
evolving societal attitudes [*33] with
respect to gaming and the relaxation of legal controls on gambling in Canada
suggested that enforcement was not contrary to essential morality. The
respondents emphasize that here, in contrast, Lloyd’s has come into
Ontario and solicited investors without regard to the securities regime of the
province designed to protect those investors through its policy of full, fair
and frank disclosure. Despite
the importance of the public policy found in the Securities Act, there is a
competing and important public policy in issue here — respect for thede
cisions of a foreign judicial system in the interests of international
comity.Having considered all the circumstances, I have concluded that
enforcement of these judgments would not be contrary to public policy as that
term is understood in Canadian conflict of laws jurisprudence. As a
starting point, it is important to remember that the law of the contract here
is English law. The respondent Names all entered into their arrangements with
Lloyd’s in England and accepted, as a term of those arrangements, that
their relationship would be governed by the law of England. While they did not
receive a prospectus in accordance with the [*34] Ontario Securities Act, they did receive a
significant amount of information from Lloyd’s, including documents
which outlined the potential limit of their exposure. This is
not a case where the enforcement of the contract raises serious issues of
morality, as in the examples usually cited to show the type of contracts
contrary to public policy — for example, contracts for slavery or
prostitution. Nor is this a situation where enforcement offends an essential
public interest in Ontario. It is important to note that non- compliance with
the prospectus provisions of the Securities Act does not render the contracts
between Lloyd’s and the Names void as a matter of domestic law.
Section 53(1) prohibits a trade without a prospectus, but does not prohibit a
sale. Thus, Ontario courts have held that a contract for the sale of securities
in contravention of the Act is voidable at the option of the buyer, and a
purchaser can proceed with an investment despite non-compliance with the
prospectus provisions of the Act (Bosse v. The Mastercraft Group Inc. (1995), 80 O.A.C. 185(C.A.) at
195-6). Moreover, the Court of Appeal in Lumley v. Broadway Coffee Co.Ltd., [ 1935] O.R. [*35] 278
stated that a contract for the sale of securities could not be rescinded by the
purchaser, despite non-compliance with the Securities Act, where restitutio in
integrum was not possible. The Court of Appeal has also held in Bosse, supra
that third parties without knowledge of illegality with respect to the main
contract for the sale of a security can reat the sale of the security as
effective. There, financial institutions which had provided mortgages or loans
to finance the purchase of condominium units or limited partnerships in
condominium buildings developed by Mastercraft were ableto rely on their
security interests, despite alleged violations of the Securities Act in the
sale of the units or limited partnerships. Here,
there are important third party interests, both of insured parties and other
Names, which would be adversely affected if the respondents were not boundby
their contracts with Lloyd’s. Indeed, the interests of the insured
parties appear to have been acknowledged by the Canadian Names in the course of
the litigation in England, for Mr. Lenczner argued before the English Courts
that the Canadian Names would continue to be liable for the insurance [*36] business which they had
underwritten. Both Tuckey J. and the English Court of Appeal commented on this
concession in determining that it was not contrary to public policy to enforce
the contracts, despite any contravention of the Ontario securities legislation.
Tuckey J., for example, stated, So what is being said is that the General
Undertaking is enforceable so far as it made Mr. Daly a member of
Lloyd’s, but should be treated as a matter of English public policy as
unenforceable insofar as membership made him subject to a regime which entitled
Lloyd’s to make him liable to pay premium under the Contract. I do not
think English public policy should give effect to such an anomaly either on the
grounds of comity or common sense. (The Society of Lloyd’s v.
Daley, supra,
unpaginated) While
Tuckey J. approached this question from the perspective of English public
policy, I reach the same conclusion from the perspective of Ontario’s
public policy. There has been no suggestion before me that the policies of
insurance underwritten by the respondents were unenforceable. Therefore, the
respondents will benefit from the reinsurance provided by Equitas, as Equitas
is satisfying [*37] the
insurance obligations which they had agreed to underwrite. To hold them liable
for the Equitas premiums, even if the contracts with Lloyd’s were made
without compliance with Ontario securities legislation,is not inconsistent with
essential public or moral interests in Ontario society.If there has been a
violation of Ontario legislation, there is an institution inplace with
jurisdiction to protect the public interest — the Ontario Securities
Commission — should it decide to act. However, the recognition and
enforcement of the U.K. judgments is not contrary to public policy. Satisfaction
of the Judgments The
respondents argued that 43 of the U.K. judgments have been satisfied in part or
in whole within Article IV(1)(a) and (3) of the Convention. As noted above,
funds have been obtained through actions by some Names in England against their
underwriting agents, and the litigation recoveries are being held in escrow by
a number of solicitors in England. The respondents who were members of these
action groups argue that the funds held in escrow are available to be set off
against the Equitas premium, and should be taken into account in these
proceedings in determining [*38] whether
the judgements are satisfied in whole or in part. The
applicant argues that there has been no satisfaction, as Lloyd’shas
not yet received the escrow monies. Moreover, even when the funds are made
available, the House of Lords has determined in Robinson, supra, that
recoveries related to negligent underwriting are part of the Names’
respective Premiums Trust Funds, and are subject to the Premiums Trust Deeds
(“PTD”). Therefore, the applicant argues that while
Lloyd’s is the Regulating Trustee of each applicable PTD, its position
in that capacity must be distinguished from its position in its personal
capacity. Specifically, the Premiums Trust Funds are to be applied for the
benefit of the beneficiaries of the funds in accordance with the trusts
established by the relevant PTD. The first obligation under the termsof those
funds is to satisfy the claims of those who are insured. Moreover, those deeds
provide that the law of England applies to the PTD, and the English Courts have
exclusive jurisdiction with respect to interpretation. There was
some dispute during the hearing about the admissibility of certain affidavit
material, on which the respondents argued that they [*39] had had no opportunity to cross-examine —
specifically, Mr. Holden’s January 17, 2000 affidavit and Colin
Tyne’s February 3, 2000 affidavit. Ultimately, it was agreed that these
affidavits and that of Michael Freeman of January 27, 2000 would not be relied
upon. Both parties were also agreed that, as of the date of the hearing, the
escrow funds had not been paid to Lloyd’s. For
purposes of this application, it is important to note that there is no legal
right in the respondents to demand that the escrow monies be paid to satisfy
their Equitas premiums. As noted by the Court of Appeal in Patterson v.
Vacation Brokers Inc., [1997] O.J. No. 1685, the issue in a case such
as this is whether the judgment has been satisfied in whole or in part
(paragraph 6). The defence with respect to satisfaction is not meant to allow
the judgment debtor to assert that monies are available or may become available
to satisfy the judgment. It is
undisputed that no monies have yet been paid, and therefore, the Equitas
judgments have not been satisfied, either in whole or in part. Whether
Lloyd’s must exercise its powers as a trustee in a particular manner
once it receives those funds is a question [*40] to be determined by the English Courts. It is not my
task to interpret the Premiums Trust Deeds, nor to determine the manner in
which Lloyd’s should act as trustee. Therefore, there is no defence
available based on satisfaction of the judgments. Conclusion For these
reasons, there is no defence in law to the registration of the judgments in
issue here on the basis of natural justice, public policy or satisfaction,
given the facts before me. The parties are agreed that if I should reach such a
conclusion, the applications should be granted. Therefore, an order is to go
for the registration of the judgments in the five applications that have been
the subject matter of this hearing. If the parties wish to speak to costs, they
may make an appointment with my secretary. K.
Swinton J. |