C. William Ash et al. (plaintiffs/appellants)

v.

Corporation of Lloyd's and Bank of Nova Scotia, Canada Trust,

Canadian Imperial Bank of Commerce, Citibank Canada, Hongkong

Bank of Canada, Royal Bank of Canada, Toronto-Dominion Bank and

CT Credit Corporation (defendants/respondents)

(Nos. C12100; C9113)

Indexed As: Ash et al. v. Lloyd's Corp. et al.

Ontario Court of Appeal

Carthy, Osborne and Abella, JJ.A. July 28, 1992.

Summary:

Thc plaintiffs were underwriting members of Lloyd's Corp. who resided in Ontario. The .plaintiffs sued Lloyd's for a declaration that the agreements between the plaintiffs and Lloyd's were void ab initio because of fraud on the part of Lloyd's. The plaintiffs also claimed against several banks and financial institutions for interlocutory and permanent injunctions preventing payment to Lloyd's under certain letters of credit. Lloyd's and the defendant banks and financial institutions applicd to dismiss or stay the plaintiffs' actions.

The Ontario Court of Appeal dismissed the plaintiffs' appeal but allowed the chartered banks' appeal, holding that the action against the banks should be stayed.

The Ontario Court (General Division), per McKeown, J., in af decision reported (1991), 60.R.(3d) 235; 87 D.L.R.(4th) 65, allowed the applications in part. The court granted a permanent stay of the action against Lloyd's, holding that the English courts had exclusive jurisdiction pursuant to clauses in the underwriting agreements. The court also granted a permanent stay of the action against Citibank Canada, Hongkong Bank of Canada and CT Credit Corp. (the financial institutions) on the basis that an injunction granted in Ontario would not be effective to prevent Lloyd's from calling for payment on the letters of credit issued by those institutions. The court refused to stay the action against the other defendants (the chartered banks), holding that since both the plaintiffs and these banks were residents of Ontario, an interlocutory injunction, if granted, would have the desired effect of preventing Lloyd's from receiving the benefits of its alleged fraud. The plaintiffs appealed the stay of their action against Lloyd's and the financial institutions. The chartered banks appealed the refusal to grant the stay of the action against them.

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

These appeals were heard on June 9, 10 and 11, 1992, before Carthy, Osborne and Abella, JLA., of the Ontario Court of Appeal. The judgment of the Court of Appeal was delivered by Carthy, J.A., and released on July 28, 1992, with supplementary reasons released on October 6, 1992.

Cases Noticed:

Bank of Nova Scotia v. Angelica-Whitewear Ltd. and Angelica Corp., [1987] 1 S.C.R. 59; 73 N.R. 158, dist. [paras. 13-161].

Statutes Noticed:

Courts of Justice Act, S.O. 1984, c. 11, s.

119 [para. 2].

Counsel:

Alan J, Lenczner and Glenn A. Smith, for Ash et al., plaintiffs as appellants and respondents;

R. Bruce Smith and Douglas Aiderson, for Canadian Imperial Bank of Commerce, Royal Bank of Canada and the Toronto Dominion Bank as appellants and for Citibank Canada, Hongkong Bank of Canada, and CT Credit Corporation as respondents;

Martin Sclisizzi, for the Bank of Nova Scotia, appellant;

[I] Carthy, J.A.: We have before us two appeals from orders made by McKeown, J., dated November 15, 1991, and reported at Ash et al, v. Corp. of Lloyd's et al. (1991), 60.R.(3d) 235; 87 D.L.R.(4th) 65. The plaintiffs are underwriting members of Lloyd's who reside in Ontario and launched this action against Lloyd's for a declaration that the agreements between the plaintiffs and Lloyd's are void ab initio by reason of the fraud of Lloyd's. As against the banks, the claim is for an interlocutory injunction until that preventing payment to Lloyd's upon letters of credit issued by the banks on the instructions of one or more of the plain\-tiffs and naming Lloyd's as beneficiary.

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

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

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

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

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

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

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

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

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

[11] The essence of McKeown, J.'s reasoning for not staying the action against the chartered banks is found at p. 240 O.R. of his reasons:

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

[12] The motions court judge was here concentrating on the effectiveness of an interlocutory injunction against the chartered banks and Lloyd's. That is not the issue unless the competing jurisdiction could not afford relief. Ali of these banks are amenable to English proceedings and none of them are necessary to accomplish the result which McKeown, J., was seeking to effect. An injunction against Lloyd's to prevent it from calling on the letters of credit would be equally effective. Further, once it is determined that the action against Lloyd's should be pursued in England, there is nothing of substance to pursue in Ontario.

As stated previously, there is no claim against the banks which could form the basis for a determination at trial. An interlocutory injunction granted in Ontario would effectively be interlocutory until a trial in England. Interlocutor}, orders for English trials should be made in England.

[13] In argument before us, the plaintiffs placed much reliance upon the decision of the Supreme Court of Canada in Bank of Nova Scotia v. Angelica-Whitewear Ltd. and Angelica Corp., [1987] 1

S.C.R. 59; 73 N.R. 158. In that case Le Dain, J., analyzes extensively the autonomy of letters of credit and the necessity to respect them as instruments of international commerce, balanced against the need to prevent a fraudulent beneficiary from improperly benefitting from that autonomy. He concluded that fraud relating to the underlying contracts could be a basis for intercepting payment under the letters of credit and that the party who is wronged has the option of putting the bank on notice of the fraud or of seeking an injunction to prevent payment to the beneficiary. In describing the basis for the alternative forms of relief, he states at p. 84 S.C.R.:

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

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

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

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

[17] It is therefore my conclusion that the action against the financial institutions was properly stayed and that the action against the chartered banks should be stayed. An order should also go amending the proceedings to add Charles Mitchell as a plaintiff and Bank of Montreal as a defendant to the end that they be bound by this disposition. Citibank N.A. and Hongkong & Shanghai Banking Corporation should not be added. It was reported to us that, in response to the application to add them, they indicated that they took no position. This does not assure the court that the,,' would be bound by the result and therefore the motion to add them is denied.[18] McKeown, J., concluded his reasons:

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

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

Supplementary Reasons

[19] Carthy, J.A.: These reasons are further to those released on July 28, 1992, and in response to written submissions as to costs in this court and on the original motions.

[20] The banks ask that they be paid costs throughout on a solicitor-and-client basis on the strength of reimbursement agreements signed by the plaintiffs which entitle the banks to recover all expenses in connection with the letters of credit. I agree with counsel for the plaintiffs that these proceedings do not constitute a demand for payment on the indemnity agreements. Their force and effect is not before us and it is not appropriate to apply their terms as if they had been the subject of adjudication on the merits. Costs throughout should therefore be on a party-and-party scale.

[21] As to costs of thc appeal the plaintiffs submit that there should be only one set of costs to the financial institutions and banks as respondents to the unsuccessful appeal as all were represented by one counsel.

[22] It is further submitted that there should be only one set of costs awarded to the banks on the successful appeal as one facturn was filed and counsel split the argument. I agree, and the earlier reasons should be read as amended in these two respects, and also to include the costs of the motion before the Chief Justice of Ontario.

[23] As to the costs of the original motions there should be no change to the order made on the motion by the Corporation of Lloyd's; the order made on the motion of Bank of Nova Scotia has been varied on appeal to provide for a permanent stay and the costs of the motion and action should be paid to the Bank of Nova Scotia on a party-and-party basis by the plaintiffs named in the order under appeal; the order made on the motion of the financial institutions and banks has been varied in part on the appeal and the provision as to costs in paragraph 4 of that order should be varied to provide that the plaintiffs named therein shall pay the costs of the motion and action of the three banks on a party-and-party basis. This will result in one set of costs for that motion being divided into four with several obligation for payment.

Plaintiffs' appeal dismissed; chartered banks' appeal allowed.