Provincial Limitation Periods and Foreign Arbitral Awards

Foreign companies will certainly pay greater attention to provincial limitation periods in the future, due to the release of the unanimous SCC decision in Yugraneft Corp. v. Rexx Management Corp., 2010 SCC 19. Rothstein J., writing for the SCC, held that a Russian arbitral award was subject to the shorter of two potentially applicable limitation periods in the Alberta Limitations Act, R.S.A. 2000, c. L-12. Albertan company Rexx Management (Rexx) was ordered by a Russian arbitrator to pay Russian oilfield owner Yugraneft Corp. (Yugraneft) $952,614.23 on September 6, 2002. After Rexx did not pay Yugraneft, on January 27, 2006 the latter applied to the Alberta Court of Queen’s Bench to recognize and enforce the award. The main issue in this case was whether the applicable limitation period was two or ten years pursuant to the Limitations Act. Even with the generous application of the discoverability principle, the two year limitation period already expired. As such, Yugraneft argued that the applicable limitation period was ten years. Ultimately, the SCC interpreted article III of the Convention on the Recognition and Enforcement of Foreign Awards, Can. T.S. 1986 No. 43 [pdf] (Convention) to find that the limitation period was two years. The decision is worth reading for its discussion on the interaction of the Convention and domestic procedural rules, as well as the brief discussion on the constitutional jurisdiction to set procedural rules.

How does the International and Domestic Legislation Interact?

Under the International Commercial Arbitration Act, R.S.A. 2000, c. I-5 (ICAA), Alberta is required to recognize and enforce foreign arbitral awards. The ICAA incorporates the Convention and the UNCITRAL Model Law on International Commercial Arbitration, U.N. Doc A/40/17, ann. 1 (1985) [pdf] (Model Law). Whereas the Convention is a set of international rules that has been ratified domestically via legislation, the Model Law is a codification of exemplary “best practices”. According to article III of the Convention, the recognition and enforcement of foreign arbitral awards shall be “in accordance with the rules of procedure in the territory where the award is relied upon”. The first question determined by the SCC was whether limitation periods fall under the “rules of procedure” as defined by the Convention. There must be some legal basis that allows the application of domestic limitation periods under the Convention. Rothstein J. held that this phrase should be interpreted to mean that domestic law, the Limitations Act, applied, and not civil or common law in general. He provided three reasons why local limitation periods are permitted. First, the Convention was designed to be applied in many legal systems, and thus accommodated the differences in domestic law. Second, it is the practice of the Convention’s Contracting States that some sort of time limit is imposed on the recognition and enforcement of foreign arbitral awards. Third, scholarship on article III indicates that the application of local limitation periods was anticipated. Rothstein J. concluded that the lack of explicit restrictions on a Contracting State’s ability to impose a limitation period meant that domestic law on limitation periods is a “rule of procedure” pursuant to article III.

The SCC’s finding that domestic law on limitation periods is a “rule of procedure” is counterintuitive to those of you familiar with Canadian precedent. In Tolofson v. Jensen, [1994] 3 S.C.R. 1022, the SCC held that limitation periods in a conflict of laws context should be treated as substantive in nature. Accordingly, one would assume that Alberta’s limitation periods are not “rules of procedure”, and thus are inconsistent with the Convention. Rothstein J. resolved this inconsistency with his explanation that the question is not whether Canadian law considers limitation periods to be substantive, but whether limitation periods fall within the “rules of procedure” as used in article III. This differentiation seems reasonable, though it is open to criticism. This differentiation ignores the qualification of “rules of procedure”. The actual phrase is: “rules of procedure in the territory where the award is relied upon” [emphasis added]. The phrase in its entirety could be interpreted as meaning that arbitral awards are subject to Alberta’s actual rules of procedure. This interpretation is reasonable given that the Convention was, as Rothstein J. recognized, to be used across several legal systems. Since the phrase “rules of procedure” has different meanings internationally, it is possible that the Convention’s drafters meant to accommodate those differences based on the wording of the entire phrase. Notwithstanding the aforementioned reasons that Rothstein J. used to justify his interpretation, there is also no explicit evidence in the actual Convention that indicates that this phrase was meant to be interpreted in the narrow manner that Rothstein J. adopted. There is no definition of term “rules of procedure” that would indicate that the issue is really the meaning of those three words, as opposed to the interpretation of the whole phrase. Despite these minor criticisms, the SCC seems to have decided the matter reasonably and fairly.

A Brief Foray into Constitutional Law

The SCC briefly touched on the constitutional limits on making comparisons in the procedural rules of different provinces. One intervener, the ADR Chambers Inc., argued that article III prevented the Alberta courts from imposing a limitation period shorter than the longest limitation period available in Canada. The second clause in article III states:

There shall  not be imposed substantially more onerous conditions or higher fees or charges on the recognition or enforcement of arbitral awards to which this Convention applies than are imposed on the recognition or enforcement of domestic arbitral awards.

Since Quebec and British Columbia provide for a ten year limitation period in regards to the recognition and enforcement of arbitral awards rendered within their provinces, it seemed that Alberta was barred from imposing a limitation period less than ten years. The SCC held that this argument contravened the Constitution Act, 1867, because the recognition and enforcement of arbitral awards falls within the provinces’ jurisdiction over property and civil rights in s. 92(13) and the administration of justice in s. 92(14). Correspondingly, legislation in one province on limitation periods does not affect the nature of analogous legislation in another province.

What is the Applicable Limitation Period?

After determining that limitation periods are procedural law for the purpose of the Convention, the SCC had to determine the applicable limitation period. The contest between the two year period in s. 3 and the ten year period in s. 11 was largely determined based on the meaning of “judgment” in s. 11. The relevant provision is as follows:

11 If, within 10 years after the claim arose, a claimant does not seek a remedial order in respect of a claim based on a judgment or order for the payment of money, the defendant, on pleading this Act as a defense, is entitled to immunity. [Emphasis added].

Yugraneft conceded that it was seeking a remedial order under the Limitations Act. Though, it argued that because an arbitral award is analogous to a judgment, an application for the recognition and enforcement of the former is a “claim based on a judgment or order for the payment of money” pursuant to s. 11. The SCC rejected Yugraneft’s argument based on its decision in Dell Computer Corp. v. Union des consommateures, 2007 SCC 34, that arbitration is not part of the judicial system. Further, it found that there was no ambiguity in the Limitations Act on the issue of whether a foreign arbitral award falls under s. 3 or s. 11. Clear legislative intent in other legislation showed that the legislature uses clear, express words when it wants to include foreign arbitral awards as a “judgment”. Since the arbitral award was not a judgment, s. 3 applied. Given that subsections (a)(i) to (a)(iii) of s. 3 were satisfied, Rexx was entitled to immunity from liability.

What are the Business Consequences of this Case of Sour Grapes?

Based on the interaction of the facts and the three part test in s. 3 of the Limitations Act, it is clear that Yugraneft lost its arbitral award due to its own tardiness in bringing an application in Alberta. When it entered into its agreement with Rexx, Yugraneft knew that the latter was located in Alberta. It did not expend any time trying to find the jurisdiction in which Rexx’s assets were located. Further, the application of the three part test in s. 3 is quite generous due to the presence of a discoverability principle in s. 3 that prevents the limitation period from starting until after the plaintiff knows or ought to know that an injury was committed against it. Notwithstanding these facts, it is possible that foreign companies may be more wary when commencing or continuing to engage in business relations with Canadian companies. For example, foreign companies may demand that certain specifications be included in the contract to avoid the ramifications of this decision. Since modern contracts are primarily concerned with risk allocation, Canadian companies may have to put up more money to address the heightened risk that arbitral awards may not be recognized and enforced in Canada. This expensive possibility indicates that a legislative solution may be required. While the SCC seems to have fairly and reasonably decided this case, it is worthwhile for the provinces to look into amending their legislation so that it clearly addresses the rules of procedure in regards to foreign arbitral awards. Otherwise, the costs of doing business abroad may increase for our business community.