Ash v. Corp. of Lloyd's

1991 Carswell Ont 475, 7 C.P.C. (3d) 343, 87 D.L.R. (4th) 65, (sub nom. Ash v. Lloyd's Corp.) 6 O.R. (3d) 235

Ash v. Corp. of Lloyd's

C. WILLIAM ASH et al. v. CORPORATION OF LLOYD'S et al.

Ontario Court of Justice (General Division)

McKeown J.

November 15, 1991

Judgment: November 15, 1991[FN*]Docket: Doc. Toronto 91-CQ-3603

Counsel: Peter Howard and Marjo MacMullin, for applicants Corporation of Lloyd's.

R. Bruce Smith and Fiona Anderson, for applicants Canadian Imperial Bank of Commerce, Royal Bank of Canada, Toronto-Dominion Bank, Canada Trust, Citibank Canada, and Hongkong Bank of Canada.

M. Sclisizzi, for applicant Bank of Nova Scotia.

Alan Lenczner and Glen Smith, for respondents.

Subject: Civil Practice and Procedure; International; Contracts

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 stayed.

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

Pursuant to various indemnity contracts (the "contracts"), the plaintiffs had letters of credit (the "LOCs") issued by the defendant banks in favour of the defendant bank, Lloyd's. Four of the defendants had offices in Ontario and England (the "group 1 banks") while the remaining three had offices in Ontario but not England (the "group 2 banks"). The LOC issued by the defendant CT (the "CT LOC") stated that any dispute arising with respect to the CT LOC was to be submitted to a court in England; all the other LOCs were silent as to jurisdiction. The contracts contained exclusive jurisdiction clauses in favour of Ontario. By their terms, the LOCs were to be presented for payment in England.

In this action the plaintiffs sought a declaration that the contracts were void as having been induced by Lloyd's fraud.

The plaintiffs brought a motion for an interlocutory and permanent injunction restraining the defendants from paying the LOCs at the instance of Lloyd's. The defendants moved for an order staying the plaintiffs' action and the plaintiffs' motion on the grounds that the courts of 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.

Held:

An order was granted staying both the plaintiffs' motion for an interlocutory and a permanent injunction and their action against Lloyd's. An order was granted staying the plaintiffs' motion for an interlocutory and permanent injunction against the group 2 banks. The motion by the group 1 banks to stay or dismiss the plaintiffs' actions was dismissed.

As letters of credit were autonomous from their underlying contract, generally a dispute concerning the contract would not allow the court to enjoin a bank from honouring the letter of credit. However, where a prima facie case of fraud with respect to the contract could be proved, the "autonomy principle" did not apply and the court's interference might be justified.

A stay of an action on the basis of nonconvenient forum was to be granted when the court was satisfied that: (a) there was another forum to whose jurisdiction the plaintiff was amenable in which justice could be done between the parties at substantially less inconvenience or expense, and (b) the stay would not deprive the plaintiff of a legitimate personal or juridical advantage to which he/she was entitled to in the current jurisdiction.

Here, jurisdiction clauses of the contracts were irrelevant because the contracts were autonomous from the LOCs. Also, the governing law of the performance of the LOCs (England) was just one factor to consider in the determination of convenient forum.

With respect to the group 1 banks, an injunction granted by an Ontario court would have the desired effect of preventing the honouring of the LOCs. As there was no proof that justice would be done more conveniently or less expensively in England, Ontario was the convenient forum. With respect to the group 2 banks, an Ontario injunction could not have the effect of preventing the honouring of the LOCs. Therefore, England was the convenient forum. Because of the exclusive jurisdiction provision, England was the convenient forum with respect to the CT LOC.

Neither the allegation that Ontario courts were more liberal with respect to applying the fraud exception to letters of credit nor the fact that Ontario had oral discovery constituted a juridical advantage to the plaintiffs that would disentitle the defendants to a stay; the issue was where could substantial justice better be done? Therefore, a stay was granted with respect to the action against the group 2 banks.

With respect to Lloyd's motion, where a contract contained an exclusive jurisdiction provision, a heavy onus was on the party challenging that jurisdiction. There were several factors for the court to consider when determining whether or not to grant the stay. The fact that the plaintiffs alleged fraud did not make the exclusive jurisdiction clause unenforceable.

Here, as the factors favoured the jurisdiction of England and because the plaintiffs failed to show strong cause as to why the exclusive jurisdiction should not be upheld, the action in Ontario was stayed. There was no reason to consider the doctrine of nonconvenient forum.

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

Canadian Motion Picture Productions Ltd. v. Maynard Film Distributing Co. , [1949] O.R. 736, 4 D.L.R. 458 (H.C.) -- not followed

"Eleftheria" (The), Owners of Cargo Lately Laden on Board Ship or Vessel "Eleftheria" v. Ship or Vessel "Eleftheria", [1969] 2 All E.R. 641, [1970] P. 94, [1969] 1 Lloyd's Rep. 237 (H.L.) -- applied

Etler v. Kertesz, [1960] O.R. 672, 26 D.L.R. (2d) 209 (C.A.) -- referred to

Fairfield v. Low (1990), 44 C.P.C. (2d) 65, 71 O.R. (2d) 599, 28 C.P.R. (3d) 289 (H.C.) -- applied

Heyman v. Darwins Ltd., [1942] A.C. 356, [1942] 1 All E.R. 337 (H.L.) referred to

Immobilien Investments Ltd. v. C.F.J. Investments Inc. (March 16, 1983), Doc. 13760/82, Boland J. (Ont. H.C.) -- applied

Mackender v. Feldia AG, [1967] 2 Q.B. 590, [1966] 3 All E.R. 847 (C.A.) -- applied

MacShannon v. Rockwear Glass Ltd.; Fyfe v. Redpath Dorman Long Ltd.; Jardine v. British Steel Corp.; Paterson v. Stone Manganese Marine Ltd., [1978] A.C. 795, [1978] 1 All E.R. 625 (H.L.) -- applied

Monro v. Bognor U.D.C., [1915] 3 K.B. 167 (C.A.) -- referred to

Morin v. Anger, 66 O.L.R. 327, [1931] 1 D.L.R. 827 (C.A.) -- followed

N. Bawlf Grain Co. v. Ross, [1917] 55 S.C.R. 232, 37 D.L.R. 620, [1917] 3 W.W.R. 373 -- followed

Offshore International SA v. Banco Central SA, [1976] 3 All E.R. 749, [1977] 1 W.L.R. 399 (Q.B.) -- referred to

Patterson v. Burton, [1950] S.C.R. 578 -- applied

Power Curber International Ltd. v. National Bank of Kuwait SAK, [1981] 3 All E.R. 607, [1981] 2 Lloyd's Rep. 394 (C.A.) -- referred to

Spiliada Maritime Corp. v. Cansulex Ltd., [1986] 3 All E.R. 843 (H.L.) -- applied

United City Merchants (Investments) Ltd. v. Royal Bank of Canada, [1982] 2 All E.R. 720 (H.L.) -- applied

Volkswagen Canada Inc. v. Auto Haus Frohlich Ltd., [1986] 1 W.W.R. 380, 41 Alta. L.R. (2d) 5, 65 A.R. 271 (C.A.) -- applied

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]

Lloyd's Act, 1982 (U.K.), 1982, c. xiv.

Securities Act, R.S.O. 1980, c. 466 [R.S.O. 1990, c. S.5].

Words and phrases considered:

autonomy principle -- letters of credit are governed by this principle which provides that a bank's obligation to honour payment on a letter of credit is independent of the performance of the underlying contract for which credit was issued. This principle gives documentary letters of credit their international commercial utility and efficacy. The principle is incorporated in article 3 of the Uniform Customs and Practice for Documentary Credits (1983 Revision) International Chamber of Commerce (Publication No.400). Where fraud is alleged, the autonomy principle does not apply and a bank may be restrained in certain instances from honouring a letter of credit.

Motions by plaintiffs for interlocutory and permanent injunction; Motions by defendants for order staying plaintiffs' action and plaintiffs' motion on basis that England having exclusive jurisdiction.

McKeown J. (Endorsement):

1 The motions before me are the defendants' motions to stay or dismiss the plaintiffs' action on the grounds that the courts of England have exclusive jurisdiction and, alternatively, that England is the forum conveniens. The defendants rely upon s. 119 of The Courts of Justice Act, 1984, S.O. 1984, c.11. I do not have to determine the choice of law applicable except to the extent it is a factor in determining the forum conveniens. The defendant, the Corporation of Lloyd's ("Lloyd's") also seeks to set aside service ex juris.

2 Although I must only decide the question of jurisdiction, it is necessary to review the nature of the plaintiffs' actions. The plaintiffs are seeking a declaration that the agreements between the plaintiffs and the defendant Lloyd's are void ab initio as having been induced by fraud. The plaintiffs seek a further declaration that the said agreements are void ab initio as having been made in contravention of the Securities Act, R.S.O. 1980, c.466, as amended, and for recission of the agreements based on the grounds of the two declarations.

3 The plaintiffs are also seeking an interlocutory and permanent injunction restraining the defendant banks and CT Credit Corporation from paying upon letters of credit of their clients, the plaintiffs, at the instance of the defendant Lloyd's. There is no allegation that the letters of credit were fraudulently issued by the defendant banks and CT Credit Corporation. The two motions to stay the plaintiffs' action are distinct, separate and raise different considerations.

4 I will commence with the motions by the six Canadian banks, the Bank of Nova Scotia, the Canadian Imperial Bank of Commerce, Citibank Canada, the Hongkong Bank of Canada, the Royal Bank of Canada, the Toronto-Dominion Bank and C.T. Credit Corporation (the "banks") to stay or dismiss the plaintiffs' actions.

The Autonomy of Letters of Credit

5 As a general rule, when a bank is presented with a letter of credit for payment, it is obliged to honour the letter of credit so long as it [is] accompanied by documents which comply on their face with its terms and conditions. Letters of credit are governed by the "autonomy principle" which renders the bank's obligation to honour payment on a letter of credit to be independent of the performance of the underlying contract for which the credit was issued. It is this prin ciple which gives documentary letters of credit their international commercial utility and efficacy -- see United City Merchants (Investments) Ltd. v. Royal Bank of Canada, [1982] 2 All E.R. 720, [1982] 2 W.L.R. 1039 (H.L.) at pp. 1044-1045 [W.L.R.].

6 All of the letters of credit at issue in this case are stated to be made pursuant to the Uniform Customs and Practice for Documentary Credits (1983 Revision) International Chamber of Commerce (Publication No. 400) (the "U.C.P."). Article 3 of the U.C.P. incorporates the autonomy principle and provides the following:

Credits, by their nature, are separate transactions from the sales or other contract(s) on which they may be based and banks are in no way concerned with or bound by such contract(s), even if any reference whatsoever to such contract(s) is included in the credit.

Article 6 of the U.C.P. provides:

A beneficiary can in no case avail himself of the contractual relationships existing between the banks or between the applicant for the credit and the issuing bank.

7 In light of the autonomy of letters of credit, a dispute between the parties to the underlying contract concerning its performance cannot ordinarily justify a refusal by an issuing bank to honour a letter of credit which is accompanied by apparently conforming documents. However, where fraud is alleged, the autonomy principle no longer applies and a bank may be restrained in certain situations from honouring a letter of credit.

The Fraud Exception to the Autonomy of Letters of Credit

8 The "fraud exception" is discussed by Le Dain J. 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. At p. 71 [S.C.R.], Le Dain J. says:

An exception to the general rule that an issuing bank is obliged to honour a draft under a documentary credit when the tendered documents appear on their face to be regular and in conformity with the terms and conditions of the credit has been recognized for the case of fraud by the beneficiary of the credit which has been sufficiently brought to the knowledge of the bank before payment of the draft or demonstrated to a court called on by the customer of the bank to issue an interlocutory injunction to restrain the bank from honouring the draft.

9 It is clear from Angelica, supra, that a Canadian court has jurisdiction to restrain a bank from honouring a letter of credit to prevent a beneficiary from benefiting from his fraud where there is a strong prima facie case of fraud, including fraud in the underlying transaction. Where, however, no such application is made to the court, but the bank has been notified by a plaintiff prior to payment that there has been fraud, provided the fraud has been clearly and obviously set out, the bank cannot honour the letter of credit.

10 The plaintiffs have argued that by allowing an action against a Canadian bank on a letter of credit issued in Canada even though the underlying transaction involved a foreign beneficiary, the Supreme Court of Canada in Angelica, supra, recognized that as between a Canadian plaintiff and a Canadian defendant, the Canadian court has jurisdiction. Consequently, the plaintiffs submit that the Ontario courts have jurisdiction to hear their motion for an interlocutory injunction.

11 Angelica, supra, however, is not a conflict of laws case and does not stand for the proposition that as between a foreign court and a Canadian court, the Canadian court always has jurisdiction to stop payment on letters of credit. In Angelica, supra, unlike this case, there was no dispute over jurisdiction. Both parties were located in Canada, the foreign fraudulent party and the foreign corresponding banks not having even been named in the action, and there was, therefore, no reason to doubt the jurisdiction of the Canadian court. In this case, on the other hand, jurisdiction has been put into issue.

Determining Jurisdiction Over The Banks

12 To determine which court should have jurisdiction to hear the interlocutory injunctions in this matter, it is necessary to examine the letters of credit. Only one letter of credit, the one issued by CT Credit Corporation, contains an exclusive jurisdiction clause and a governing law clause. These clauses provide that the letter of credit shall be governed by and interpreted in accordance with English law and that any dispute with respect to the letter of credit shall be submitted to a court of competent jurisdiction in England. In my view, the indemnity contracts between the plaintiffs and the defendant banks which contain an exclusive jurisdiction clause in favour of Ontario are autonomous contracts and are not relevant to the question of jurisdiction before me.

The Forum Non Conveniens Test

13 Leaving aside the CT Credit Corporation letter of credit for a moment, as the other letters of credit are silent, the test to be applied is the forum non conveniens test. In MacShannon v. Rockwear Glass Ltd.; Fyfe v. Redpath Dorman Long Ltd.; Jardine v. British Steel Corp.; Paterson v. Stone Manganese Marine Ltd., [1978] A.C. 795, [1978] 1 All E.R. 625 (H.L.) at p. 812 [A.C.], the House of Lords determined that to justify a stay of action, the following two conditions must be satisfied, one positive and the other negative:

(a) [T]he defendant must satisfy the court that there is another forum to whose jurisdiction he is amenable in which justice can be done between the parties at substantially less inconvenience or expense, and (b) the stay must not deprive the plaintiff of a legitimate personal or juridical advantage which would be available to him if he invoked the jurisdiction of the English Court.

14 For the sake of determining whether the banks should be granted the stay they have requested, the banks must be divided into two groups. The first group consists of the four Canadian charter banks which have branches in London; namely, the Bank of Nova Scotia, the Canadian Imperial Bank of Commerce, the Royal Bank of Canada and the Toronto-Dominion Bank. The second group consists of the three Canadian banks which do not have any presence in London; namely, C.T. Credit Corporation, Citibank Canada and the Hongkong Bank of Canada.

15 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.

16 Counsel for the defendant banks have submitted that where a letter of credit contains no express provision stating that its terms shall be governed by the laws of a particular jurisdiction, then the letter of credit shall be governed by the law prevailing at the place of performance, i.e., the law of the jurisdiction where presentation is made to the issuing or confirming bank for acceptance or payment (see Offshore International SA v. Banco Central SA, [1976] 3 All E.R. 749, [1977] 1 W.L.R. 399 (Q.B.), Power Curber International Ltd. v. National Bank of Kuwait SAK, [1981] 3 All E.R. 607, [1981] 2 Lloyd's Rep. 394 (C.A.), and Etler v. Kertesz, [1960] O.R. 672, 26 D.L.R. (2d) 209 (C.A.) (at pp. 680 at 683 [O.R.]). As the place of performance of all the letters of credit in this case is England, it is submitted that the letters of credit should be governed by English law. Choice of law, however, is distinct from jurisdiction. Even if the law of England is deemed to govern the letters of credit in this matter, that does not mean that the English courts should necessarily have jurisdiction. The governing law is just one factor to be considered along with all others in the determination of which jurisdiction is the forum conveniens.

17 Even though the letters of credit issued by the first group of banks were confirmed, advised and payable at their branches in England in pound sterling and in spite of the fact that English law may govern, I am not convinced that justice would be done either more conveniently or less expensively in England.

18 Keeping in mind that the justice to be done in this case is to prevent Lloyd's from receiving the benefits of its alleged fraud within the meaning of Angelica, supra, I am satisfied that England and not Ontario is the better forum to deal with the letters of credit issued by the second group of banks. An Ontario court, in my view, should not be granted jurisdiction in respect of this group of banks because any injunction which may be issued restraining these banks from honouring the plaintiffs' letters of credit would not have the effect of preventing Lloyds from being paid on these letters of credit. The two confirming banks, Citibank N.A. and the Hongkong and Shanghai Banking Corporation are not parties to this action. As a result, if an interlocutory injunction was issued restraining the second group of banks in Canada from paying the letters of credit of their clients, the plaintiffs, Lloyd's would still be able to present the letters of credit in its favour for payment at the London offices of Citibank N.A. and the Hongkong and Shanghai Banking Corporation and would not be prevented from receiving the benefits of its alleged frauds. Consequently, Citibank N.A. and Hongkong and Shanghai Banking Corporation which are merely "innocent third parties" to this action, would be left out of pocket, not being permitted to collect from the three Canadian banks. This result, however, is not the purpose for which the courts are supposed to stop payment on letters of credit. In Angelica, supra, Le Dain J. stated that an injunction cannot be granted to stop payment on a letter of credit unless it would prevent the beneficiary of the alleged fraud from receiving benefits of its alleged fraud. An injunction to stop payment on a letter of credit is not supposed to prejudice innocent third-party banks.

19 Furthermore, there are other reasons why an Ontario court should not have jurisdiction over the second group of banks. C.T. Credit Corporation's letter of credit contains an exclusive jurisdiction clause in favour of the courts of England. Lloyd's, Citibank N.A., and Hongkong, and Shanghai Banking Corporation have offices in England and no offices in Canada.

Would a Stay Deprive the Plaintiff of a Legitimate Personal or Juridical Advantage?

20 Each of the two conditions in MacShannon needs to be satisfied before a court is entitled to order a stay. I have already indicated why England is the only forum in which justice can be done between the parties in respect to the letters of credit issued by the second group of banks. As I have explained, because an Ontario court's injunction would not prevent Lloyd's from receiving some of the benefits of its alleged fraud, justice cannot be done in Ontario. In order to meet the two-part test in MacShannon, supra, I must also be satisfied that a stay would not deprive the plaintiffs of a legitimate personal or juridical advantage which would be available to them in Ontario. The plaintiffs submit that Canadian courts apply the fraud exception to the autonomy of letters of credit more liberally than English courts and that they would be deprived of this juridical advantage if their motion for an injunction is not heard in Ontario. In my view, the allegation that Canadian courts may be more prepared than English courts to intervene in cases where fraud is alleged and do what is necessary to set aside all arrangements subsequent to the fraudulent transaction is not a juridical advantage in this case. As I have discussed above, Canadian courts are only empowered to grant injunctions with respect to letters of credit which have the effect of preventing the beneficiary of the fraud from receiving some of the benefits of its fraud. Given that an injunction issued by an Ontario court cannot prevent Lloyd's from cashing the letters of credit issued by the second group of banks, the so-called flexibility of the Canadian courts, even if it does constitute a juridical advantage, is not available to the plaintiffs in Ontario.

21 Furthermore, the plaintiffs have submitted that because there is no oral discovery in England, a stay would deprive them of a juridical advantage which would be available to them in Ontario. In my view, the differences in the two systems' discovery procedures is not so drastic as to provide a strong enough reason why a stay should not be ordered in the circumstances.

22 In Spiliada Maritime Corp. v. Cansulex Ltd., [1986] 3 All E.R. 843, the House of Lords held that the fact that the granting of a stay of English proceedings might deprive the plaintiff of a legitimate personal or juridical advantage available to him under the English jurisdiction would not, as a general rule, deter the court from granting a stay or refusing leave if it was satisfied that substantial justice would be done to all the parties in the available appropriate forum. Accordingly, the fact that a foreign forum had a more limited system of discovery or a lower award of damages would not necessarily deter the court from granting a stay or refusing leave. At p. 859, Lord Goff stated the following:

Clearly, the mere fact that the plaintiff has a legitimate personal or juridical advantage in proceedings in England cannot be decisive.

. . . . .

The key to the solution of this problem lies, in my judgment, in the underlying fundamental principle. We have to consider where the case may be tried 'suitably for the interests of all the parties and for the ends of justice'. Let me consider the application of that principle in relation to advantages which the plaintiff may derive from invoking the English jurisdiction. Typical examples are: damages awarded on a higher scale; a more complete procedure of discovery; a power to award interest; a more generous limitation period. Now, as a general rule, I do not think that the court should be deterred from granting a stay of proceedings, or from exercising its discretion against granting leave under RSC Ord 11, simply because the plaintiff will be deprived of such an advantage, provided that the court is satisfied that substantial justice will be done in the available appropriate forum. Take, for example, discovery. We know that there is a spectrum of systems of discovery applicable in various jurisdictions.... Our procedure lies somewhere in the middle of this spectrum. No doubt each of these systems has its virtues and vices; but, generally speaking, I cannot see that, objectively, injustice can be said to be done if a party is, in effect, compelled to accept one of these well-recognized systems applicable in the appropriate forum overseas.

. . . . .

23 For the foregoing reasons, I am prepared to grant a stay of the plaintiffs' motion for an interlocutory injunction in respect of the second group of banks. If the plaintiffs wish to prevent Lloyd's from being paid on these letters of credit, the plaintiffs who have letters of credit outstanding with the second group of banks can take such action as they deem appropriate in England.

Lloyd's Motion to Stay Ontario Action Based on Exclusive Jurisdiction Clause

24 I will now proceed with the Lloyd's motion. Each of the plaintiffs expressly agreed to England as the exclusive jurisdiction to settle disputes in consideration of becoming or continuing as a member of Lloyd's. The exclusive English jurisdiction language in the general undertakings signed by all the plaintiffs is as follows:

Each party hereto irrevocably agrees that the courts of England have exclusive jurisdiction to settle any dispute and/or controversy of whatsoever nature arising out of or relating to the Member's membership of, and/or underwriting of insurance business at Lloyd's and proceeding to such matters shall be brought in such courts. ...

25 In addition to the general undertakings, each of the plaintiffs have express agreements with a number of different members' agents which contain English jurisdiction clauses providing that "each of the parties hereby irrevocably submits for all purposes of and in connection with this agreement to the exclusive jurisdiction of the courts of England". Each plaintiff also executed the Lloyd's Premiums Trust Deed which also contains an exclusive English jurisdiction clause providing that "the parties hereto irrevocably and unconditionally submit for all purposes of and in connection with this deed to the exclusive jurisdiction of the English courts."

26 Courts have generally encouraged exclusive jurisdiction clauses because there is a certainty in such clauses that the reasonable expectations of the parties can be met by having the place of any dispute set out in the contract. Such clauses are intended to prevent preliminary disputes of the type before me, for there is international unanimity that this fosters certainty in international commercial law. Counsel for the plaintiffs said that these clauses cannot be relied on where the agreements have been induced by fraud. However, there is no allegation that these clauses were induced by fraud. The misrepresentations relate to matters set out in Mr. Lenczner's submissions, none of which goes to the jurisdiction clause.

27 It is agreed by all of the parties that the existence of an exclusive jurisdiction clause places a heavy burden on the party seeking to oppose the clause. In Fairfield v. Low (1990), 44 C.P.C. (2d) 65, 71 O.R. (2d) 599, 28 C.P.R. (3d) 289 (H.C.) at p.603 [O.R.], Doherty J. held the following:

... it is my view that where the parties have agreed upon jurisdiction in a contract which is the subject-matter of the dispute, and where there is no suggestion that the agreement as it relates to jurisdiction offends public policy or was the product of grossly uneven bargaining positions, the court should give effect to the term of the agreement unless the party seeking to have the case heard in another jurisdiction can show that the interests of the parties and the interests of justice favour trial in that other jurisdiction. ...

28 Further, in Volkswagen Canada Inc. v. Auto Haus Frohlich Ltd., [1986] 1 W.W.R. 380, 41 Alta. L.R. (2d) 5, 65 A.R. 271 (C.A.) at p.381 [W.W.R.], Kerans J.A. said the following in respect of enforcing choice of forum terms in contracts:

In our view, the court should honour terms of that sort and give effect to them unless the balance of convenience massively favours an opposite conclusion. We essentially agree with the approach taken by the English court in ... The 'Eleftheria', ... [1969] 2 All E.R. 64.

29 At p. 645 of The "Eleftheria", Owners of Cargo Lately Laden on Board Ship or Vessel "Eleftheria" v. Ship or Vessel "Eleftheria", [1969] 2 All E.R. 641, [1970] P. 94, [1969] 1 Lloyd's Rep. 237 (H.L.), which is also referred to by Doherty J. at pp. 603-605 [O.R.] of Fairfield v. Low, supra, Brandon J. summarized the principles to be applied by an English court in deciding whether to stay an action where the plaintiffs have sued in England in breach of an agreement to refer disputes to a foreign court as follows:

I. ... the English court, assuming the claim to be otherwise within its jurisdiction, is not bound to grant a stay but has a discretion whether to do so or not.

II. The discretion should be exercised by granting a stay unless strong cause for not doing so is shown.

III. The burden of proving such strong cause is on the plaintiffs.

IV. In exercising its discretion the court should take into account all the circumstances of the particular case.

V. In particular, without prejudice to IV, the following matters where they arise may properly be regarded:

(a) In what country evidence on the issues of fact is situated, or more readily available, and the effect of that on the relevant convenience and expense of trial as between the English and foreign courts;

(b) Whether the law of the foreign court applies, and if so, whether it differs from English law in any material respects;

(d) Whether the defendants genuinely desire a trial in the foreign country, or are only seeking procedural advantages;

(e) Whether the plaintiffs would be prejudiced by having to sue in the foreign court because they would --

(i) be deprived of security for that claim;

(ii) be unable to enforce any judgment obtained;

(iii) be faced with a time-bar not applicable in England; or

(iv) for political, racial, religious or other reasons be unlikely to get a fair trial.

30 In light of the foregoing, I am not bound to grant a stay but I must exercise my discretion based on the factors set out above. The onus rests on the plaintiffs to demonstrate strong cause why Ontario is a more appropriate forum than England. The plaintiffs have relied on the allegations of fraud against Lloyd's set out in their statement of claim to overcome the exclusive jurisdiction clauses contained in the various agreements they entered with Lloyd's.

31 The plaintiffs submit that the maxim fraus omnia corrumpit ("fraud breaks everything") as referred to at pp. 81-82 [S.C.R.] of Angelica, supra, applies and that as a result of the alleged fraud by Lloyd's, all the agreements entered into between the plaintiffs and Lloyd's are void ab initio and that the exclusive jurisdiction clauses contained in the various agreements between the plaintiffs and Lloyd's are also void. The plaintiffs rely on Canadian Motion Picture Productions Ltd. v. Maynard Film Distributing Co. , [1949] O.R. 736, 4 D.L.R. 458 (H.C.), wherein MacKay J. applied the English decisions Heyman v. Darwins Ltd., [1942] A.C. 356, [1942] 1 All E.R. 337 (H.L.) and Monro v. Bognor U.D.C., [1915] 3 K.B. 167 (C.A.), which deal with the applicability of submission to arbitration clauses in the face of fraud, and held that where certain aspects of a claim, namely misrepresentation and undue influence, raise the issue of whether the contract has even been entered into at all, that issue cannot go to arbitration in spite of the arbitration clause for the party who denies that he has ever entered into the contract is, therefore, denying that he has ever joined in the submission to arbitration. At pp. 468-469 [D.L.R.], MacKay J. stated:

I am of the opinion, notwithstanding that this may mean that the mere allegation of misrepresentation, fraud or undue influence is sufficient to remove that specific claim from the operation of the arbitration clause, that such is the case. ...

32 Doherty J., however, considered Canadian Motion Picture Productions Ltd., supra, in Fairfield v. Low, supra, and stated the following at p.608 [O.R.]:

... Justice Mackay's equation of contracts which are void ab initio with those which are voidable as having been induced by fraud is, with respect, not sound. Allegations of fraud do not raise the question of whether a contract was ever entered into at all, but rather raise the question of whether the aggrieved person is entitled to void the contract and treat it as if it had never been entered into at all. In the one case, the contract never existed, in the other it existed but is subject to retroactive nullification by the aggrieved party: Fridman, The Law of Contract, supra, ... is best understood as an action based in deceit which induced a contract and not an action in relation to the contract at all.

. . . . .

In any event, Canadian Motion Picture Productions, supra, does not control the result in this case, although I hasten to add that I prefer the view that even if a contract is said to be voidable for fraud, the arbitration (or jurisdiction) clause may, depending on its wording, operate to assist in determining the appropriate forum. ...

[Emphasis added.]

33 In addition to relying on the foregoing statement by Doherty J. in Fairfield v. Low, supra, Lloyd's submits that Morin v. Anger, 66 O.L.R. 327, [1931] 1 D.L.R. 827 (C.A.) stands for the proposition that the allegation of fraud, if proven, would merely render the contract voidable at the election of the defrauded party and not void. At p.830 [D.L.R.], Masten J.A. stated the following:

It is trite law that a contract induced by fraud is voidable, and until the party defrauded makes a clear election to repudiate the transaction the contract stands. ...

This position has been upheld by the Supreme Court of Canada in N. Bawlf Grain Co. v. Ross, [1917] 55 S.C.R. 232, 37 D.L.R. 620, [1917] 3 W.W.R. 373 at p.233 [S.C.R.], where Fitzpatrick C.J. stated the following:

What is only voidable and not void cannot be held as invalid until it has been rescinded. It is not enough to avoid the contract, that nothing is done to affirm it, it must be disaffirmed. In Deposit Life Assurance Co. v. Ayscough, 6 E. & B. 761, the defence was that the contract was induced by fraud and Lord Campbell C.J. said:

It is now well settled that a contract tainted by fraud is not void, but only voidable at the election of the party defrauded. ...

34 Lloyd's also relies on the English decision Mackender v. Feldia AG , [1967] 2 Q.B. 590, [1966] 3 All E.R. 847 (C.A.) as support for the position that fraud does not prevent the exclusive jurisdiction clause from operating to assist in determining the appropriate forum. In Mackender, it was argued that the foreign jurisdiction clause only applies where a contract has been truly created and formed and that owing to the non-disclosure, there was no true contract and that on this basis the contract, including the foreign jurisdiction clause, falls down.

35 The court rejected this argument and held that a plea of illegality or non-disclosure do not automatically void the contract but only makes it voidable and that the foreign jurisdiction clause contained in the contract is not abrogated. At p.598 [A.C.], Lord Denning stated the following:

I can well see that if the issue was whether there ever had been any contract at all, as, for instance, if there was a plea of non est factum, then the foreign jurisdiction clause might not apply at all. But here there was a contract, and when it was made, it contained the foreign jurisdiction clause. Even if there was non-disclosure, nevertheless non-disclosure does not automatically avoid the contract. It only makes it voidable. It gives the insurers a right to elect. They can either avoid the contract or affirm it. If they avoid it, it is avoided in this sense, that the insurers are no longer bound by it. They can repudiate the contract and refuse to pay on it. But things already done are not undone. The contract is not avoided from the beginning but only from the moment of avoidance. In particular, the foreign jurisdiction clause is not abrogated. A dispute as to non-disclosure is 'a dispute arising under' the policy and remains within the clause: just as does a dispute as to whether one side or other was entitled to repudiate the contract: see Heyman v. Darwins Ltd.

[Emphasis added.] At p.602 [A.C.], Lord Diplock stated:

A claim that a contract is void for illegality does not raise any issue as to whether or not the parties in fact agreed to the terms of the policy, including those in the foreign jurisdiction clause. It concedes that they did, but asserts that their agreement gave rise to no legally enforceable rights or duties. It thus raises no dispute about the consensus ad idem of the parties as to the exclusive jurisdiction of the Belgian courts. ...

36 Mackender, supra, was considered by Doherty J. of Fairfield v. Low, supra, wherein he held the following at p.610 [O.R.]:

The language of Lord Denning M.R. and Lord Diplock applies to the allegations made in the case at bar. I conclude that this action, and the action in British Columbia, are clearly 'proceedings in respect of this agreement'. The jurisdiction clause applies to this dispute and should, in determining this motion to stay these proceedings, be considered in the manner I described earlier in these reasons. On the facts before me, the plaintiff has not established that Ontario is the more appropriate forum.

37 As a result of the foregoing, even if the alleged fraud by Lloyd's were proven at trial, the exclusive jurisdiction clauses contained in the agreements between the plaintiffs and Lloyd's would remain intact and are, therefore, enforceable. Furthermore, a comparison of the factors connecting the matter to Ontario and England shows amoresubstantial connection to England.

What are the Factors in Favour of Ontario?

1) Although the plaintiffs are residents of Ontario, the 70 plaintiffs located in Ontario are only 70 members out of the 35,000 members, 81 per cent of whom are located in England.

2) The plaintiffs allege that the statement of claim as amended seeks to bring an action under the Securities Act which is an Ontario statute.

3) The plaintiffs allege that the law of Ontario in respect of fraud is more favourable to the plaintiffs.

39 On the other hand there are a number of points of contact with England:

1) There are exclusive jurisdiction clauses in favour of England in the 25.8 documents that each member signed. Each plaintiff is on average a member of 22.8 syndicates, and has also signed a general undertaking, a Premium Trust Deed and a member's agreement, all containing exclusive jurisdiction clauses.

2) The choice of law is the same in all the documents and is that of England.

3) The defendant Lloyd's is resident in England.

4) The plaintiffs have invoked English legislation, namely the Lloyd's Act, 1982 (U.K.), 1982, c.xiv and Lloyd's by-laws to support their position.

5) All the fact witnesses on the issues in this action are located in England.

6) The experts are all located in England.

7) The documentation substantiating all the transactions is in England.

8) The members' agents are necessary and proper parties to the action and are resident in England.

9) Similarly, the managing agents are all necessary and proper parties and they reside in England.

10) The relief sought necessarily impacts and involves other members or names, 81 per cent of whom are located in England.

11) There are two proceedings looking into these matters: (a) the Neil investigation into the Feltrim syndicate, and (b) the claim by Thomas Yates Benton which started in July 1991. There is another action outstanding in England with respect to the Oakley Vaughan Underwriting Limited syndicate which involves Lime Street Underwriting Agencies Limited, as the member's agent and the member's agent for all but two of the plaintiffs.

12) The contacts between the plaintiffs and Lloyd's took place substantially in England.

13) The location of the central fund is located in England and is for the protection of the policy holders who are worldwide.

14) There is a public interest in England in matters concerning Lloyd's.

15) There exists in England a Names Association, which is pursuing remedies in England on behalf of members of Lloyd's, with respect to the Feltrim Syndicate.

16) The letters of credit are payable in England and in English money. The defendant Lloyd's can obtain payment on the letters of credit in England.

17) There is absolutely no evidence filed by the plaintiffs that they will be disadvantaged by proceeding in England.

18) There would be a subverting of the arbitration rights set out in the contracts if the matter did not take place in England.

19) The Lloyd's assets are all located in England and, therefore, an injunction involving Lloyd's would be most effective in England.

20) All the other names entered the same agreement and the same general undertaking and it is not fair for some members, i.e., the plaintiffs, to resile from the agreements.

40 As set out above, all the evidence on the issues of fact in this matter is in England and all the experts' members and managing agents, the Lloyd's market and substantially all the documentation is in England. The plaintiffs, however, have submitted that this matter should not be heard in England because of differences in English law. In my view, it would be wrong in principle for me to substitute myself for the trial judge at this juncture and attempt to determine the governing law in this matter. As well, it would be inappropriate for me to attempt to interpret the law of England at this time. As the plaintiffs have not adduced any evidence as to any differences in English law, I am entitled to assume for the purposes of this motion that English and Ontario law are the same. Furthermore, as I have been shown no reason why I should not assume that an English court would not apply Ontario law, I am entitled to assume that if Ontario law were properly pleaded, proven and determined to be applicable, an English court would apply Ontario law. Accordingly, the plaintiffs have failed to prove that they would in any way be prejudiced by having to sue Lloyd's in England and have failed to show "strong cause" within the meaning of The "Eleftheria", supra, why I should not grant Lloyd's motion to stay these proceedings.

41 For the reasons set out above, the plaintiffs have not sufficiently demonstrated why the courts of England should not have jurisdiction to hear both their motion for an interlocutory injunction and their action against Lloyd's.

42 Given the enforceability of the English jurisdiction clauses and because this matter has a more substantial connection with England than Ontario within the meaning of The "Eleftheria", supra, there is no need to consider the doctrine of forum non conveniens and I shall not do so.

43 I must also consider the allegation of the breach of the Securities Act and the plaintiffs' position that the agreements between the plaintiffs and Lloyd's are void ab initio; however, the law is that where there has been a partial performance for a considerable period of time then the breach is not void ab initio.

44 The plaintiffs face a number of problems with respect to the Securities Act breach.

1) What is the security?

2) Are the contracts a security?

3) Who is the issuer -- the members' agent or the manager's agent -- possibly the sponsor?

4) It must be determined whether this is an exempt trade. All the plaintiffs have represented to Lloyd's that they have (excluding their homes) assets in excess of £100,000 ($200,000 approximately) and hold themselves out as experienced business people. The exempting provisions of the Securities Act provide that if a party has invested the sum of $150,000 or more then a prospectus need not be provided to such a person. In my view, each plaintiff has invested a sum of $150,000 or more by providing Lloyd's with a letter of credit of at least £70,000 together with an agreement to be personally liable without any limitation.

5) Has there been affirmation of the contract by the plaintiffs? There are no facts before me on which I can make this decision. However there has been no evidence of any interest in this matter from the Ontario Securities Commission. In Ontario, the statutory remedy of recission does not permit the plaintiff to obtain an injunction enjoining payment under a letter of credit unless a prima facie case of fraud is established -- see the unreported reasons of Boland J. dated March 16, 1983 in Immobilien Investments Ltd. v. C.F.I. Investments Inc. (No. 13760/82).

45 Thus, a breach of the Securities Act would not assist the plaintiff in obtaining an injunction enjoining payment under a letter of credit in the absence of fraud.

46 Taschereau J. reviewed the law in Patterson v. Burton, [1950] S.C.R. 578, at p.581:

Where the transaction is a nullity, as it is here, the alleged shareholder need not ask for the recision of the contract, as the case would be between him and the company, if fraud or misrepresentation were established, ... as Sir Lyman Duff said in the McAskill case, at page419: --

The case would, of course, be very different if the appellant were the holder of shares allotted to him pursuant to contract capable of being rescinded on some proper legal ground, such as fraud, but valid and binding until so rescinded. Such a right may be lost by reason of some change in the circumstances making it unjust to permit the exercise of that right, and accordingly it has been held, and has long been settled law, that a registered shareholder, having a right to rescind his contract to take shares on the ground of misrepresentations contained in the company's prospectus, will lose that right if he fails to exercise it before the commencement of winding-up proceedings. The basis of this is that the winding-up order creates an entirely new situation, by altering the relations, not only between the creditors and the shareholders, but also among the shareholders inter se.

He then concluded at p.583:

I have reached the conclusion that although the original contracts were void in view of the McAskill case which is a binding authority, the shareholders, appellants in the present case, must be held to be contributories. By their acts, posterior to the impugned agreements, they have agreed to become shareholders, and from their conduct independent binding agreements have resulted. They have agreed to keep the stock, they now must pay for it. It would indeed be strange for persons, who during over fifteen years have claimed all the benefits of these shares, could now be allowed to repudiate one of liabilities imposed by law upon the shareholders, which is to pay the purchase price.

In the instant case there is conduct under the agreement between the members and Lloyd's which would lead to the same conclusion. The conduct here may be voidable. There is no reason to believe that the English courts would not apply the Securities Act. Furthermore, there are 10 paragraphs in the statement of claim where the plaintiffs rely on the Lloyd's Act, 1982 to create duties and obligations. This is English legislation.

47 Accordingly, an order shall issue permanently staying both the plaintiffs' motion for an interlocutory and permanent injunction and their action against Lloyd's.

48 Furthermore, an order shall issue permanently staying the plaintiffs' motion for an interlocutory and permanent injunction against Citibank Canada, and Hongkong Bank of Canada and C.T. Credit Corporation.

49 The motions of the Bank of Nova Scotia, the Canadian Imperial Bank of Commerce, the Royal Bank of Canada and the Toronto-Dominion Bank to stay or dismiss the plaintiffs' actions are dismissed.

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

Order accordingly.

FN*. The Court of Appeal decision is reported at p. 364, post.

History

Direct History

1 Ash v. Corp. of Lloyd's, 87 D.L.R. (4th) 65, 1991 Carswell Ont 475, 7 C.P.C. (3d) 343, 6 O.R. (3d) 235, 2 W.D.C.P. (2d) 653 (Ont. Gen. Div. Nov 15, 1991)

Reversed by

2 Ash v. Corp. of Lloyd's, 94 D.L.R. (4th) 378, [1993] I.L.Pr. 330, 60 O.A.C. 241, 1992 Carswell Ont 449, 7 C.P.C. (3d) 364, 9 O.R. (3d) 755 (Ont. C.A. Jul 28, 1992)

Additional reasons in

3 Ash v. Corp. of Lloyd's, 95 D.L.R. (4th) 766, 60 O.A.C. 241 at 261, 1992 Carswell Ont 450, 7 C.P.C. (3d) 372, 9 O.R. (3d) 755 at 761 (Ont. C.A. Oct 06, 1992)

AND Leave to appeal refused by

4 Ash v Corp. of Lloyd's, 94 D.L.R. (4th) vii (note), [1992] 3 S.C.R. v (note), 10 O.R. (3d) xvn (note) (S.C.C. Oct 08, 1992)

Negative Judicial Treatments (Canada)

Distinguished in

5 Trepanier v. Kloster Cruise Ltd., 1995 Carswell Ont 851, 23 O.R. (3d) 398, 6 W.D.C.P. (2d) 230 (Ont. Gen. Div. Apr 19, 1995)