Ontario – Mareva injunction and increased costs ordered where arbitral award funds were core of dispute – #363

In awarding costs on a substantial indemnity basis in Ndrive v. Zhou, 2020 ONSC 4568, Mr. Justice John R. McCarthy drew attention to a defendant’s conduct which “unnecessarily extended and complicatedMareva injunction proceedings in which arbitral award funds were the “core of the dispute between the parties”.  McCarthy J. underlined the importance of Mareva injunctions as a tool in civil litigation “to address the problem posed when a defendant utilizes the time lag between a claim being prosecuted and a plaintiff’s attainment and execution upon a judgment to divest itself of assets which would otherwise be available to satisfy that judgment in whole or in part”.  Also, see notes regarding an arbitrator’s jurisdiction under the Arbitration Act, 1991, SO 1991, c 17 to issue ex parte preservation orders against arbitral parties and an arbitrator’s lack of jurisdiction to issue Mareva injunctions against non-parties.

Plaintiff sought costs on a substantial indemnity basis against defendants Mr. Si Zhou and Aguazion Inc. for a pair of motions Plaintiff brought successfully against them: a Mareva injunction granted May 6, 2020, renewed and extended on May 22, 2020; and, a second motion to vary the initial Mareva injunction, granted on June 19, 2020.  McCarthy J. heard both those motions.

In brief reasons, McCarthy J. endorsed the importance of a Mareva injunction in civil litigation.

[5] It is difficult to overstate the importance of a mareva injunction in civil proceedings.  While not all civil actions involve the recovery of money from an opposing party, a great many do.  And while many defendants in civil proceedings are entities for which payment of a judgment is, if not routine, then certainly common place (to wit insurance companies, municipalities, banks and large corporations), there are just as many or more entities for which the payment of a judgment might prove ruinous, or at the very least, quite devastating financially.  For that reason, making oneself “judgment proof” by putting personal or corporate assets beyond the reach of potential judgment creditors has been a feature of the civil litigation landscape for as long as civil judgments have been rendered”.

In his reasons, McCarthy J. referred to certain actions taken by Mr. Zhou to transfer arbitral award funds out of an account into which they had been initially deposited which McCarthy J. wrote “form the core of the dispute between the parties”.  Though his reasons do not offer much more information about the nature of the parties’ dispute over those “arbitral award funds”, when considering the principle of proportionality McCarthy J. did characterize the dispute as “high stakes litigation over a significant sum of money”. In that context, McCarthy J. commented on the mischief which might prompt issuance of a Mareva injunction.

[6] The mareva injunction is a tool designed to address the problem posed when a defendant utilizes the time lag between a claim being prosecuted and a plaintiff’s attainment and execution upon a judgment to divest itself of assets which would otherwise be available to satisfy that judgment in whole or in part.  A preservation of assets order, also known in commercial parlance as a “freezing order”, is thus of great utility.  It is often the only means by which to preserve exigible assets where other forms of security for payment of a judgment such as liens, charges, cautions or guarantees are unavailable”.

In deciding Plaintiff’s application for costs, McCarthy J. had particular knowledge of the procedural history between the parties, having issued the initial orders.  His comments on Mr. Zhou’s conduct lead him to determine that Mr. Zhou had “unnecessarily extended and complicated the procedure”.  In particular, McCarthy J. found that “the second motion would have been unnecessary had Zhou not mislead the Plaintiff in respect of both his assets and his handling of the arbitral award funds”.

McCarthy J. distinguished between the costs owing for the first motion and those for the second.  He accepted that costs for the first would be in the cause and limited to a partial indemnity rate. 

In choosing to grant costs on a substantial indemnity for the second motion, McCarthy J. commended Plaintiff’s counsel at para. 12 for their efforts in presenting Plaintiff’s case and “coping” with the “new normal” of remote hearings.

I have no doubt that counsel for the Plaintiff worked assiduously to marshal the evidence, research the law and prepare the extensive materials for presentation to the court in a digestible format, all the while mindful of the looming spectre of asset dissipation and coping with the new normal of electronic filings and remote hearings during the current pandemic. They are to be commended for their efforts”.

McCarthy J. issued an order against “Defendant” to pay $52,415.07 forthwith as costs for the second motion.  At para. 1, Mr. Zhou and Aguazion Inc. were styled as “the defendants” but the reasons referred to Mr. Zhou and the order referred to “Defendant” without clarifying whether the singular meant just Mr. Zhou or the plural ought to have been used to include both Mr. Zhou and Aguazion Inc.

urbitral note – First, For a recent, oft-cited Ontario case stating/applying the requirements for a Mareva injunction, see Sibley & Associates LP v. Ross, 2011 ONSC 2951.

Second, regarding an application to set aside an arbitral award granting a Mareva injunction, see Farah v. Sauvageau Holdings Inc., 2011 ONSC 1819.  In the latter case, the court at paras 50-73 determined that arbitrators have no jurisdiction to grant Mareva injunctions affecting the rights of third parties and at paras 74-85 explored the circumstances in which an arbitrator can proceed ex parte.

Third, McCarthy J.’s comments on Mr. Zhou ‘unnecessarily extending and complicating’ the procedure appear to overlap conclusions which likely supported McCarthy J.’s earlier decisions on the Mareva injunctions.  At para. 7, McCarthy J. observed that “[t]he ability and propensity on the part of Zhou to transfer funds was central to the court’s ultimate decision to grant the mareva order”. 

Similar to the conduct which might have justified issuing a Mareva injunction, McCarthy J. drew attention to the manner in which a defendant resists such motions. A defendant can resist a motion but, at a point, that resistance can exceed what is ‘necessary’ and contribute to justifying a higher costs consequence.

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